POWERS OF CORPORATION - Powers expressly conferred upon by the Corporation Code, special law or AoI.

- Sources:
Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the
Those provided in the law (Corporation Code)
power and capacity:
Purpose clause of the AoI
To sue and be sued in its corporate name;
Implied powers
Of succession by its corporate name for the period of time stated in the articles of incorporation and the
Those powers which are reasonably necessary to execute the express powers and to accomplish or
certificate of incorporation;
carry out the purposes for which the corporation was formed.
To adopt and use a corporate seal;
To amend its articles of incorporation in accordance with the provisions of this Code;
Classification of implied powers
To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
A. Acts in the usual course of business
accordance with this Code;
 Examples: Borrowing money, making ordinary contracts, executing promissory notes,
In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to
acquiring personal property for use in connection with the business etc.
sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation
 Key: All acts necessary to run a business under ordinary circumstances
if it be a non-stock corporation;
To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and bonds of other corporations, as the transaction of the B. Acts to protect dents owing to a corporation
lawful business of the corporation may reasonably and necessarily require, subject to the limitations C. Embarking in different business
prescribed by law and the Constitution;  A corporation may not engage in a business different from that for which it was created
To enter into merger or consolidation with other corporations as provided in this Code; as a regular and a permanent part of its business.
To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,  Especially true with respect to those particular kinds of corporate activities which are
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations governed by the special laws.
in aid of any political party or candidate or for purposes of partisan political activity;  It is generally held that a corporation may temporarily conduct an outside business
To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and to collect a debt out of its profits.
employees; and D. Acts in part or wholly to protect or aid employees
To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as E. Acts to increase business

stated in the articles of incorporation. A corporation may conduct contests or sponsor radio or television programs,
or promote fairs and other gatherings to advertise and increase its business.
Express powers vs. implied powers
A. POWERS IN GENERAL
EXPRESS IMPLIED
THEORY OF SPECIAL CAPACITIES v. THEORY OF GENERAL CAPACITIES Have to do largely with the main Deals with the means and methods of
business, objects and purposes of the attaining those objects and purposes
1. GENERAL CAPACITY corporation
A corporation is said to hold such powers as are not prohibited or withheld from it by general Determined once and for all by the May change according to time, place and
law (everything is allowed except when prohibited) language of the corporate charter and surrounding circumstances
2. SPECIAL CAPACITY the applicable law
A corporation cannot exercise powers except those expressly or impliedly given (everything Test is whether they are found in the Test is whether they are fairly incidental
is prohibited except when allowed) words of the charter or the law and necessary to carry them out in
ACEBEDO OPTICAL V CA MARCH 31,2000 furtherance of the corporation's business
The fact that private respondent hires optometrists who practice their profession in the course of their
employment in private respondent‘s optical shops, does not translate into a practice of optometry by Incidental or inherent powers
private respondent itself." The Court further elucidated that in both the old and new Optometry Law, it is Powers which a corporation can exercise by the mere fact of its being a corporation or powers
significant to note that there is no prohibition against the hiring by corporations of optometrists. which are necessary to corporate existence and are, therefore, impliedly granted.
No prohibition They exist independently of the express powers.
There is no law that prohibits the hiring by corporations of optometrists or considers the hiring by
corporations of optometrists as a practice by the corporation itself of the profession of optometry.
Ratification of corporate acts
Furthermore, it was ruled that the employment of a qualified optometrist by a corporation is not
Rule: Ultra vires acts may be ratified provided they are NOT illegal
against public policy.
Doctrine of estoppel does not apply
By stockholders (or members)
The fact that petitioner acquiesced in the special conditions imposed by the City Mayor in subject They may ratify and render valid acts done or authorized by the BOD but which
business permit does not preclude it from challenging the said imposition, which is ultra vires or beyond were beyond the powers of the directors, or acts done or authorized by the
the ambit of authority of respondent City Mayor. Ultra vires acts or acts which are clearly beyond the directors at an illegal meeting, or unauthorized acts of others than the directors,
scope of one‘s authority are null and void and cannot be given any effect. The doctrine of estoppel cannot provided the acts done are such as may be done or authorized by the
operate to give effect to an act which is otherwise null and void or ultra vires. stockholders.

EXPRESS, IMPLIED AND INCIDENTAL POWERS, DISTINGUISHED By board of directors (or trustees)
Express powers A transaction if within the powers of a corporation, may be consented to,
ratified, or acquiesced in by the BOD/BOT if it could be authorized by them

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Retroactive effect: Ratification by a corporation of an unauthorized act or contract by its officers or the provisions of the articles of incorporation and the By-Laws.
others relates back to the time of the act or contract ratified, and is equivalent to original authority Section 2 (b) of P.D. No. 732 granting certain rights to the International School, Inc.,
expressly authorized the Board of Trustees, upon consultation with the Secretary of Education and
PILIPINAS V SEC 356 S 193 Culture, to determine the amount of fees and assessments which may be reasonably imposed upon its
students, to maintain or conform to the school standard of education." Such consultation had been
A corporation, under the Corporation Code, has only such powers as are expressly granted to it by
made with the Secretary of Education and Culture who expressed his conformity with the
law and by its articles of incorporation,8 those which may be incidental to such conferred powers,
reasonableness of the assessment of P2,625.00 per student for the whole school year to carry out its
those reasonably necessary to accomplish its purposes and those which may be incident to its
development program. Since the collection of the development fee had been approved by the Board of
existence.
Trustees of the International School, Inc., it was a valid exercise of corporate power by the Board, and
said assessment was binding upon all the members of the corporation.
In the case at bar, the limit of the powers of petitioner as a corporation is very clear, it is
categorically prohibited from "engaging in pawnbroking as defined under PD 114". Construction of powers; rules

Its act of engaging in pawnbroking without license is both ultra vires and illegal, thus ۩ Construing charters: They shall be construed strictly; any ambiguity in the terms of the
cannot be ratified corporate charter must operate against the corporation and in favor of the public.
۩ Determination of powers conferred: The whole instrument is to be taken together.
۩ Grant of corporate franchises: They should be so construed as not to defeat the purpose of
their creation.
LUNETA MOTORS V SANTOS , 5 S 809 ۩ Charters are also to be construed in view of the circumstances, usages, and practices existing at
Under Section 13 (5) of the Corporation Law, a corporation created thereunder may purchase, hold, the time they were granted.
etc., and otherwise deal in such real and personal property is the purpose for which the corporation ۩ Charter susceptible of two meanings: The construction to be adopted is one which works the
was formed may permit, and the transaction of its lawful business may reasonably and necessarily least harm to the State.
require. ۩ Provisions of a general incorporation law may apply to corporations operating under special
Petitioner‘s corporate purposes are to carry on a general mercantile and commercial statutes when no specific provision has been made.
business, etc., and that it is authorized in its articles of incorporation to operate and otherwise deal in
and concerning automobiles and automobile accessories' business in all its multifarious ramification
and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and operate 3. POWER TO HAVE/USE CORPORATE NAME AND SEAL
steamship and sailing ships and other floating craft and deal in the same and engage in the Seal, defined
Philippine Islands and elsewhere in the transportation of persons, merchandise and chattels by water; - A device (as an emblem, symbol, or word) used to identify or replace the signature of an
all this incidental to the transportation of automobiles. individual or organization and to authenticate written matter purportedly emanating from such
The Court finds that Petitoner‘s articles of incorporation are precisely the best evidence individual or organization. It may refer also to the impression of such a device on documents
that it has no authority at all to engage in the business of land transportation and operate a taxicab like certificates of stocks.
service. That it may operate and otherwise deal in automobiles and automobile accessories; that it - A corporation may exist even without a seal.
may engage in the transportation of persons by water does not mean that it may engage in the
business of land transportation — an entirely different line of business. If it could not thus engage in Seal may be altered anytime
the line of business, it follows that it may not acquire a certificate of public convenience to operate a - Any seal adopted and used by the corporation may be altered by it at pleasure. Where a
taxicab service, such as the one in question, because such acquisition would be without purpose and corporation adopts a seal for a special occasion, different from its corporate seal, the seal
would have no necessary connection with petitioner's legitimate business. adopted is the corporate seal only for that time or occasion. .

Seal is not required for the validity of any corporate act

- Under Section 63, certificates of stock issued by corporations are required to be sealed with
TERESA ELECTRIC V PSC 21 S 199 the seal of the corporation. Nevertheless, the use of a corporate seal in certificates of stock
The Articles of Incorporation of Filipinas (paragraph 7) provide for authority to secure from any must be deemed merely directory rather than mandatory.
governmental, state, municipality, or provincial, city or other authority, and to utilize and dispose of - The presence of a seal establishes, prima facie, that the instrument to which it is affixed is the
in any lawful manner, rights, powers, privileges, franchises and concessions — obviously necessary or act of the corporation
at least related to the operation of its cement factory. Moreover, said Articles of Incorporation also
provide that the corporation may generally perform any and all acts connected with the business of LAUREANO INVESTMENT V CA , 272 S 253
manufacturing Portland cement or arising therefrom or incidental thereto.
When Laureano Investment and Development Corporation intervened using the name LIDECO
It cannot be denied that the operation of an electric light, heat and power plant is necessarily
Corporation, the Court held that intervenor LIDECO Corporation and LAUREANO INVESTMENT AND
connected with the business of manufacturing cement. Moreover, it has been established in this case
DEVELOPMENT CORPORATION are two (2) separate and distinct entities. Inasmuch as the documents
that petitioner was in no condition to supply the power needs of Filipinas, because its load capacity
in support of its complaint in intervention -- tax declarations -- are in the names of Laureano Investment
was only 200 kilowatts while Filipinas was in need of 6,000 Kilowatts power to operate its cement and Development Corporation, and it appearing that LIDECO Corporation is not a corporation or
factory partnership duly organized and registered with the SEC, there is, therefore, no way whatsoever that
LIDECO Corporation‘s interests will be adversely affected by the outcome of the instant case.

POWERS V MARSHALL, 9 MAY 1988 LIDECO Corp has no right to intervene

Section 2 of Article 3 of the By-Laws of the International School, Inc. provides: The Board of Trustees, "Lideco Corporation‖ had no personality to intervene since it had not been duly registered as a corporation.
If petitioner legally and truly wanted to intervene, it should have used its corporate name as the law
in addition to the powers conferred by these By-Laws, shall have the right to such powers and do such
requires and not another name which it had not registered. Nowhere in the motion for intervention and
acts as may be lawfully exercised or performed by the corporation, subject to applicable laws and to
complaint in intervention does it appear that ―Lideco Corporation‖ stands for Laureano Investment and

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Development Corporation. Bormaheco, Inc., thus, was not estopped from questioning the juridical derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish
personality of ―Lideco Corporation,‖ even after the trial court had allowed it to intervene in the case. to join him in the suit.

BITONG V CA, 292 S 503

4. POWER TO SUE AND BE SUED Whether or not Bitong was the real party in interest.
- As a rule, suits are to be brought by or against the corporation in his own name.
Sue – It could be gleaned that Bitong was not a bona fide stockholder of the corporation. Several corporate documents
Be sued – to defend its rights disclose that the true party in interest was JAKA. Although her buying of the shares were recorded in the Stock
 Observe substantial and procedural rules and Transfer Book of the corporation, and as provided by Sec. 63 of the Corp Code that no transfer shall be valid
 Complete registered name must be used in the pleadings. except as between the parties until the transfer is recorded in the books of the corporation, and upon its
Other principles recording the corporation is bound by it and is estopped to deny the fact of transfer of said shares, this provision
is not conclusive even against the corporation but are prima facie evidence only.
- Where the corporation is real party-in-interest, neither administrator or a project manager
Parol evidence may be admitted to supply the omissions in the records, explain ambiguities, or show
could sign the certificate against forum-shopping without being duly authorized by resolution of
what transpired where no records were kept, or in some cases where such records were contradicted.
the Board of Directors (Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 [2001]), nor the General The certificate of stock itself once issued is a continuing affirmation or representation that the stock
Manager who has no authority to institute a suit on behalf of the corporation even when the described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the
purpose is to protect corporate assets. (Central Cooperative Exchange Inc. v. Enciso, 162 SCRA absence of evidence to the contrary. However, this presumption may be rebutted. However, the books and records
706 [1988]). of a corporation are not conclusive even against the corporation but are prima facie evidence only. The effect of
entries in the books of the corporation which purport to be regular records of the proceedings of its board of
- When the power to sue is delegated by the by-laws to a particular officer, such officer directors or stockholders can be destroyed by testimony of a more conclusive character than mere suspicion that
may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal there was an irregularity in the manner in which the books were kept.
board resolution. (Citibank, N.A. v. Chua, 220 SCRA 75 (1993)).
- For counsel to sign the certification for the corporation, he must specifically be SPECIAL SERVICES CORP. V CENTRO LA PAZ, 28 APRIL 1983
authorized by the Board of Directors. Metro Drug Distribution Inc. v. Narciso, (2006).
Whether or not Centro La Paz which is merely a Chapter of Union Espiritista de Filipinas, Inc. has a juridical
personality of its own in accordance with the provisions of our laws
Dissolved Corporation de facto may sue or be sued but a corporation
corporation which has been dissolved after the expiration of 3-year winding- Although it was CENTRO that was actively prosecuting the case, in substance, it was representing the mother
up period ceases to exist de jure or de facto. organization, the Union Espiritista Cristiana de Filipinas, Inc., which is the real party in interest and is itself
named in the Complaint. It is an organization that is duly registered with the Securities and Exchange
Unregistered A corporation not duly registered in accordance with law has no Commission, and thus possessed of a juridical personality to sue and be sued.
Admittedly, the trust was not registered in accordance with section 65 of Act 496 (the former Land
corporation legal capacity to sue as such.
Registration Law). The absence of said registration, however, cannot be taken against CENTRO inasmuch as, if
Foreign Neither can a foreign corporation which transacts business in the public auction sale had actually been held, with petitioner as the successful buyer, petitioner could not have
been considered a purchaser for value and in good faith at said sale since it had knowledge of CENTRO's claim,
corporation the Philippines without necessary license from SEC sue in the
particularly when the latter had filed a third-party-claim with the Sheriff of Manila before the scheduled auction
Philippine courts
sale, which knowledge was equivalent to registration of the several "Acknowledgments" in the Registry of Deeds.
The conclusion follows that inasmuch as Estudillo has no interest in the properties in question, there
is nothing that petitioner can levy upon. The power of a Court in the execution of its judgment extends only over
properties unquestionably belonging to the judgment debtor.
TAM V HON MAKASIAR, 29 JANUARY 2001
In general, mandamus may be resorted to only where one's right is founded clearly in law and not when it is
R TRANSPORT CORP V CA, 241 S 76
doubtful. The exception is to be found in criminal cases where mandamus is available to compel the performance
by the public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of discretion on Whether or not there was valid service of summons
his part, he willfully refuses to perform a duty mandated by law. Thus, mandamus may issue to compel a
prosecutor to file information when he refused to do so in spite of the prima facie evidence of guilt. As a general rule, service of summons must be made on the persons named in Section 13, Rule 14 of the Revised
First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their Rules of Court which provides: If the defendant is a corporation organized under the laws of the Philippines or a
difference, we find this resort to an alternative dispute settlement mechanism as not contrary to law, public partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of
policy, or public order. Efforts of parties to solve their disputes outside of the courts are looked on with favor, in its directors.
view of the clogged dockets of the judiciary. Thus service on persons other than those mentioned in said Rule has been held as improper. Through
Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the years, the rule on service of summons has been liberalized. Such liberalization is to give life to the rationale
the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured party. behind Section 13 of Rule 14. Service of summons on persons other than those enumerated in Section 13 of Rule
Since petitioner was neither a payee nor a holder of the bad check, he had neither the personality to sue nor a 14 have been held proper on the theory that those persons served were holding positions of responsibility and
cause of action against Vic Ang Siong. could appreciate the importance of the papers handed them, and could be expected to deliver the papers to the
Petitioner failed to show any proof that he was authorized or deputized or granted specific powers by proper officer. These individuals were considered "agents" within the contemplation of Section 13 of Rule 14.
Concord's board of director to sue Victor Ang Siong for and on behalf of the firm. Petitioner as a minority Thus, the Court holds that service of summons on petitioner's Operations Manager was valid. He is an officer
stockholder and member of the board of directors had no such power or authority to sue on Concord's behalf. Nor who may be relied upon to appreciate the importance of the papers served on him.
can we uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the minority The fact that service was made at petitioner's bus terminal at the address stated in the summons and
stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a not at its office in Makati does not render the service of summons invalid. Petitioner is engaged in the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 transportation business, operating over 100 buses. Its central bus terminal is located at Sucat, Parañaque, from
where it conducts the bulk of its business. It was at that terminal where petitioner's Operations Manager was General Banking Law of 2000 or RA 8791:
found and upon whom service was made.  Any real property acquired by a bank by way of satisfaction of claims under the circumstances
enumerated in the law shall be disposed of by it within a period of 5 years or as may be
5. POWER TO ACQUIRE, DISPOSE, ENCUMBER PROPERTY prescribed by the Monetary Board
 The bank may, after said period, continue to hold the property for its own use, subject to
limitations with respect to ceiling on investments in certain assets.
Art. XII of 1987 Constitution
DIRECTOR OF LANDS V CA, 14 MARCH 1988
Section 2. x x x The exploration, development, and utilization of natural resources shall be under the Alienable public land held by a possessor, personally or through his predecessors-in-interest, openly,
full control and supervision of the State. The State may directly undertake such activities, or it may continuously and exclusively for the prescribed statutory period 30 years under the Public Land Act,
enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or as amended is converted to private property by mere lapse or completion of said period, ipso jure."
corporations or associations at least sixty per centum of whose capital is owned by such citizens. The Court reiterated the time honored principle of non-impairment of vested rights.
Such agreements may be for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may be provided by law. In cases of water The completion by private respondent Iglesia ni Cristo, a corporation sole, of this statutory 30-year
rights for irrigation, water supply fisheries, or industrial uses other than the development of water period has dual significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended
power, beneficial use may be the measure and limit of the grant. and prevailing jurisprudence:

The President may enter into agreements with foreign-owned corporations involving either technical - At this point, the land in question ceased by operation of law to be part of the public domain;
and
or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
- Private respondent could have its title thereto confirmed through the appropriate proceedings
based on real contributions to the economic growth and general welfare of the country. In such as under the Constitution then in force, private corporations or associations were not prohibited from
agreements, the State shall promote the development and use of local scientific and technical acquiring public lands, but merely prohibited from acquiring, holding or leasing such type of land in
resources. x x x excess of 1,024 hectares.

Section 3. x x x Private corporations or associations may not hold such alienable lands of the public Taking the year 1936 as the reckoning point, the 30-year period of open, continuous, exclusive and
domain except by lease, for a period not exceeding twenty-five years, renewable for not more than notorious possession and occupation required by law was completed in 1966. The completion by
twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may private respondent of this statutory 30-year period has dual significance in the light of Section 48[b]
lease not more than five hundred hectares, or acquire not more than twelve hectares thereof, by of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point, the land in
purchase, homestead, or grant. x x x question ceased by operation of law to be part of the public domain; and [2] private respondent could
have its title thereto confirmed through the appropriate proceedings as under the Constitution then
in force, private corporations or associations were not prohibited from acquiring public lands, but
 This must be in consonance with its business. merely prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares.
 Note that for private lands, the corporation must be Filipino-owned. If in 1966, the land in question was converted ipso jure into private land, it remained so in
Power incident to every corporation 1974 when the registration proceedings were commenced. This being the case, the prohibition under
- This power under Section 36(7) which is also expressly conferred under the law has always the 1973 Constitution would have no application. Otherwise construed, if in 1966, private respondent
could have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973
been regarded as an incident to every corporation. A corporation need properties or assets to
Constitution can neither impair nor defeat.
carry on its business.

Power must be necessary to the transaction of its lawful business POWER TO DISPOSE
- Must be done in the ordinary course of business
The power under Section 36(7) is qualified by the phrase ―as the transaction of the lawful business - Subject to the rules involving sale of all or substantially all assets of the corporation.
of the corporation may reasonably and necessary require.
POWER TO ACQUIRE SHARES OR SECURITIES
- Property obtained by a corporation which is foreign to the purposes for which it was  Section 36(7) authorizes a private corporation to acquire shares or securities of other corporations.
organized is an unlawful acquisition.  Such an act does not need the approval of the stockholders if done in pursuance of the purpose or
purposes of the corporation as stated in its articles of incorporation.
- The transfer or sale of shares owned by a corporation in another corporation requires approval  But when the purpose is done solely for investment, the approval of the stockholders as required by
by the board of directors of the seller corporation (Sec. 25) and while a corporation is expressly Section 42 is necessary.
empowered by Section 36(7) to dispose corporate assets, such power is subject to the provisions
of Section 40 on sale or disposition of assets. Limitations of such power
Power to acquire shares in other corporation is subject to specific limitations established by the
Power subject to limitations and restrictions Code, special laws and the Constitution.
- The right or power of private corporations to deal in real as well as personal property is also
subject to limitations or restrictions prescribed by special laws and the Constitution. Examples:
Secs. 2-3, 1987 Constitution

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 The shares must be limited to shares of existing corporations because only natural persons can be  Construed as separate from the legally mandated welfare systems such as SS, GSIS etc.
incorporators.  Such powers are expressly permitted by the Code on the theory that such activities promote
Section 140 on limits set by Congress on stock ownership in corporations better relations between the corporation and its employees.
 Providing gratuity pay for employees is an express power of a corporation under the
Payment in full- When a corporation subscribes to the capital stock of another corporation, it is
required, as a rule, to pay its subscription in full. This is based upon the fact that while a corporation Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising
has an unlimited capacity to contract obligations, it has only a limited capacity to pay. from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA
183, 192 (1995).
Purchase of own stocks
- A corporation may purchase its own stock, however, only when it has ―unrestricted retained b. Power to borrow funds
earnings to cover the shares to be purchased or acquired. (De Leon 2006 at 327)  The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the
6. POWER TO MAKE DONATIONS
corporation to be approved by its Board of Directors.
- Section 36(9) expressly vests in business corporations the authority to contribute for purely
 Loan not in the ordinary course of business: The argument that the obtaining of loan was in
charitable purposes.
Basis of power accordance with the ordinary course of business usages and practices of the corporation is
- Section 36(9) gives recognition to the growing tendency to regard charitable gifts as within the devoid of merit because the prevailing practice in the corporation was to explicitly authorize
scope of corporate authority. an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of
- It is based on the modern view that business corporations are not organized solely as profit-making Appeals, 270 SCRA 503 (1997)
enterprises but also as economic and social institutions with corresponding public responsibility to aid  The argument that the obtaining of loan was in accordance with the ordinary course of
in the betterment of economic and social conditions in the community in which such corporation are business usages and practices of the corporation is devoid of merit because the prevailing
doing business. practice in the corporation was to explicitly authorize an officer to contract loans in behalf of
Limitations to power
 The amount thereof must be reasonable; and the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
 The donations must not be in aid of any political party or candidate or for purposes of partisan
political activity.

PIROVANO V DELA RAMA STEAMSHIP CO. 96 P 335 c. Power to extend or shorten corporate term
Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the Section 37. Power to extend or shorten corporate term. – A private corporation may extend or
defendant corporation, or the scope of the powers that it may exercise under the law, or it is an ultra vires shorten its term as stated in the articles of incorporation when approved by a majority vote of
act, still it may said that the same cannot be invalidated, or declared legally ineffective for the
the board of directors or trustees and ratified at a meeting by the stockholders representing at
reason alone, it appearing that the donation represents not only the act of the Board of Directors
least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
but of the stockholders themselves as shown by the fact that the same has been expressly ratified in
a resolution duly approved by the latter.
members in case of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at his place
By this ratification, the infirmity of the corporate act, it may has been obliterated thereby making the cat of residence as shown on the books of the corporation and deposited to the addressee in the
perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and post office with postage prepaid, or served personally: Provided, That in case of extension of
consummated and no creditors are prejudice, or if there are creditors affected, the latter has expressly given corporate term, any dissenting stockholder may exercise his appraisal right under the
their conformity. conditions provided in this code.

Corporate acts or contracts which are ultra vires and illegal Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of his shares in the following instances:
- The doing of an act which is contrary to law, morals, or public policy or public duty, and are, like similar
transactions between the individuals void. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
- They cannot serve as basis of a court action, nor require validity.
superior to those of outstanding shares of any class, or of extending or shortening the term of
Corporate acts or contracts which are merely ultra vires
corporate existence;

- Those which are not illegal and void ab initio, but are merely within are not illegal and void ab initio, In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
and are not merely within the scope of the articles of incorporation, substantially all of the corporate property and assets as provided in the Code; and
In case of merger or consolidation.
They are merely voidable and may become binding and enforceable when ratified by the stockholders.

7. OTHER POWERS
a. To provide incentives to employees
 Corporate retirement and pension plans

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 CATCH ALL PROVISION OF POWERS OF CORPORATION
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness
Sec. 36(11): To exercise such other powers as may be essential or necessary to carry out its purpose or shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be
purposes as stated in the articles of incorporation. kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission
and attached to the original articles of incorporation. From and after approval by the Securities and Exchange
Requirements for extending or shortening corporate life Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or
 Majority vote of the BoD/T decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of
 Ratification in a meeting by 2/3 of outstanding capital stock or 2/3 of the members, as the case may filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate
of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully
be holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
o Note: The extension or shortening of corporate life actually requires the amendment of increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed
the articles of incorporation. But whereas, in general amendments of the articles can be has been paid either in actual cash to the corporation or that there has been transferred to the corporation property
made by written assent of the stockholder or members, without need of meeting, in the the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease
case provided for under Section 37, a meeting must be duly called for the purpose. of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate
creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
Appraisal right for dissenting stockholder; conflicting opinion approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange
De Leon: Section 37 grants appraisal right to a dissenting stockholder (right of the stockholder in the Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a)
cases provided by law to demand payment of the fair value of his shares) ―in case of extension of
corporate term.
LIMITATIONS
Such right should also be available to a dissenting stockholder if the corporate term is 1. A corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving
shortened as it is expressly recognized in Section 81(1). CLV says otherwise existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable
consideration for such release, as such an act of the corporation constitutes an attempted withdrawal of so
CLV: The appraisal right should not be triggered when it comes to shortening of much capital upon which corporate directors are entitled to rely. (Phil Trust Co. v. Rivera,)
corporate life, 2. A corporation cannot issue stock in excess of the amount limited by its AoI; such issue is ultra vires and the
because there is really no violation of the original contractual intent since. Therefore, the stock so issued is void even in the hands of a bona fide purchaser for value.
inclusion 3. Sec. 38: A reduction or increase of the capital stock can take place only in the manner and under the
of the case of shortening of corporate life under Section 81 should not prevail over the conditions prescribed by law.
specific Note: The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks
provision under Section 37. even if the same has not yet been fully subscribed.

Who may exercise appraisal right Requirements

Note that the appraisal right applies only to a stockholder of a stock corporation.  Majority vote of the members of the BoD
In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right  Ratification by 2/3 vote of the outstanding capital stock, in a meeting duly called for that purpose with
to have his shares bought back at fair value by the corporation. notice previously given
B. TO INCREASE OR DECREASE CAPITAL STOCK  Certificate of said corporate act shall be signed by majority of the members of the Board and the
Chairman and Secretary of the stockholders’ meeting
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No
 Certificate must be accompanied by the Treasurer’s Affidavit certifying compliance with the 25%-25%
corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, requirements as to stock corporation.
two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution Note:
of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place - The corporation must submit proof to the SEC that such decrease will not prejudice the rights of
of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or creditors.
increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post office with postage
- No treasurer’s affidavit is required to be attached in case of decrease of capital stock.
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the Necessity for increasing capital stock
chairman and the secretary of the stockholders' meeting, setting forth: - Increase of corporate assets: An increase of the amount of capital stock may be for the purpose of
(1) That the requirements of this section have been complied with; effecting an increase in the corporate assets by authorizing:
(2) The amount of the increase or diminution of the capital stock; The creation of new shares to be offered and issued at a fixed valuation
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof
The increase of the par value shares authorized to be issues
actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock
or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property,
or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is - Issuance of stock dividends: This is an increase in capital stock without any corresponding increase in
for the purpose of making effective stock dividend therefor authorized; the corporate assets.
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting; Necessity of new subscription for increase
(6) The amount of stock represented at the meeting; and 
An increase in the authorized capital stock cannot be lawfully accomplished without an actual
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness.
increase in the assets of the corporation and additional subscriptions except when such increase
is for the purpose of effecting a stock dividend previously authorized.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 
Where there is no impairment of capital: Unless the rights of creditors will be affected or the capital

If the actual capital is increased by accumulated profits and such profits are distributed to the impaired, the directors may make an equitable distribution of such surplus or so much thereof as
stockholders in the form of stock dividends, the capital stock is increased, for the profits are may not be required in carrying on the business for the best interests of stockholders.
reinvested in the corporation by transferring the same from surplus account to a capital account.

Distribution not mandatory: The distribution to stockholders of surplus remaining after a reduction

If the increase not for the purpose of making effective stock dividends previously authorized: of capital stock is authorized by the Code, BUT cannot be compelled.
The law requires to be stated in the certificate the matters mentioned in Sec. 38, par. 2(3).
Persons entitled to question increase or decrease of capital stock
Effectivity of increase or decrease  By corporation itself
Rule: Only from and after approval and issuance by the SEC of its certificate of filing of increase or  By dissenting stockholders in the absence of an estoppel
decrease of capital stock.  By creditors of the corporation
 By a receiver or assignee representing the creditors
Note: The subscribers to the proposed increase cannot be considered as stockholders and be
accorded the rights as such for the shares subscribed by each.
No appraisal right in decrease in capital stock

Over-issued stock The decrease of the capital stock of a corporation should not trigger the exercise of the appraisal

Also known as spurious stock. right for precisely, the decrease of capital stock would result in returning part of the investments of

An issue of stock by a corporation in excess of the amount prescribed or limited by its articles of the stockholders who dissented.
incorporation is ultra vires and the stock so issued is void even in the hands of a bona fide
purchaser for value. When appraisal right not available to dissenting stockholders in increase of capital stock; reasons

If the proposed stock dividend would result in the issuance of shares of stock in excess of the  The non-granting of appraisal right to dissenting stockholders in case of increase of capital stock
corporation’s authorized capital stock, the over-all issue is null and void. Such dividend declaration
may be rationalized on two grounds:
 may be validly done provided that the corporation simultaneously increases its capital stock and
applies the proposed stock dividends as full payment of the subscriptions to the capital stock  The increase in capital stock does not prevent any stockholder, including a dissenting stockholder
increase. from opting out of the contractual relationship by simply selling his shares in the corporation to any
interested buyer.
 The grant of appraisal right in case of increase of capital stock would defeat the very purpose for
Unauthorized increase of capital stock which the power is exercised, i.e., to raise funds for the operation or even survival of the corporate

An attempted unauthorized increase of capital stock amounts to an over-issue and such stock is business.
absolutely void and cannot be validated by application of the doctrine of estoppel.

Effects: MADRIGAL V ZAMORA, 51 S 355
Subscriptions for such stock are likewise VOID both on the ground of illegality and for want of what clearly emerges from the recorded facts is that the petitioner, awash with profits from its business
consideration. operations but confronted with the demand of the union for wage increases, decided to evade its
Subscribers for or purchasers of such stock acquire none of the rights of stockholders. responsibility towards the employees by a devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union
Remedy of bona fide subscribers: Right of action against the corporation for damages. members, who, by then, had agitated for wage increases.
Subscribers for or purchasers of such shares do not become liable to creditors of the corporation or As such shareholder, the dividends paid to it were its own money, which may then be available
on a winding up as stockholders for unpaid subscriptions, and are not subject to statutory liability for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in
to creditors imposed upon stockholders. which case, such dividends would be the absolute property of the stockholders and hence, out of reach by
creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the
right to a share in such dividends, by way of salary increases, may not be denied its employees.
 Subscribers may recover from the corporation money paid unless they are precluded from such
Accordingly, the Court is convinced that the petitioner's capital reduction efforts were, to begin
relief as parties in pari delicto. with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and
consequently, to justify the mass layoff in its employee ranks, especially of union members.
Ways of increasing (decreasing) authorized capital stock
 Increasing the number of shares authorized to be issued without increasing the par value thereof.
 By increasing the par value of each share without increasing the number thereof PHILTRUST V RIVERA, 44 P 469
 By increasing both number of shares authorized to be issued and the par value thereof. Increase by The Court ruled that defendant was still liable for the unpaid balance of his subscription. It is established
way of stock dividends. doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any
Increase by way of stock dividends unpaid stock subscription in order to realize assets for the payment of its debts.

A corporation may also increase its capital stock by way of stock dividends without touching its A corporation has no power to release an original subscriber to its capital stock from the
unissued shares as long as there are sufficient retained earnings to cover the increase. (Sec. 62(5)) obligation of paying for his shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner an under the conditions
Distribution of surplus on reduction prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with
the statutory regulations is necessary. In the case before us the resolution releasing the shareholders from
their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 much capital from the fund upon which the company's creditors were entitled ultimately to rely and,  close corp–perpetual pre-emptive right deemed imbibed
having been effected without compliance with the statutory requirements, was wholly ineffectual. - outsiders are generally restricted due to the closed nature of the corp
- statutory right
 pre-emptive right can be denied
Class lecture  When additional shares is in compliance with minimum requirement of law for public
 Increase of capital stock ownership of CS of a corp
o Need for capitalization o Commonly corp imbued with public interest
o Creates new shares if under the 2nd method E.g. Marina – 15%
o Business judgment that emanates from the discretion of the board o Shares must be made available to anyone, not only existing SH
o Marketing challenge to the board to determine what method to adopt o Stocks listed in the stock exchange
Amended AI E.g. oil companies – 20%
ACS = P50M / 5M shares @P10 Banks/insurance co –5%
-P10M – original Purpose: to widen ownership of companies whose businesses are imbued with public interest
-P40M – new money

Increased capital stock

-P10M – original
-P40M – new shares
 subject to pre-emptive right – statutory right of existing stockholders to be offered the new shares
arising from the increased capital stock / preferential option to current SH and a statutory obligation of
the corp
P40M – must be first offered to the current SH
 To prevent diminution of equity or interest that SH has over the corp
 For the existing SH to maintain their current equity  DECREASE IN THE CAPITAL STOCK ( the original ACS is reduced)
Equity: extent that the SH has over the ACS ۩ Reduce par value, maintain number of shares, or
۩ Reduce the number of shares, maintain par value, or
E.g. the original 1M shares were already sold
Prior to amendment, X has 500,000 shares. Hence he has control of 50% ۩ Reduce both
 Right to dividends
 Voting rights TRUST FUND DOCTRINE
 Board seats  No reduction shall be allowed if it will prejudice rights of creditors.
If the CS is increased without pre-emptive right, X will own 500,000 of the 5M shares. EXCEPT:
●X’s equity is reduced to 10% without his fault  If there are no existing obligations; or
Purpose: maintain the 50% interest despite the increase in the CS  The value of assets is more than enough to pay debts
- Corp must offer to X such number of new shares equivalent to his interest in the corp
REASONS FOR THE DECREASE
- 50% of the new shares must be offered
 Eliminate surplus capital
- But SH has no obligation to actually buy or subscribe
- Similar to right of first refusal Orig ACS = P10M @ P10/share
- SH may: within 5 years
o Accept 1. It has sold at P800K @ P8M (these were used to buy capital assets and
o Reject the corporation is valued at P100M)
o Accept entirely or partially There are 200 shares worth P2M unsold. (no need to sell since the
o Reject entirely or partially corporation is already wealthy)
- Obligation is subject to terms and conditions that the BOD may require THUS, you can modify the AOI by REDUCING the CS : ACS
o Not a perpetual offer @P8M/800k shares
o Standard period: 1 month from the time the corp decides to sell ۩ REMOVE the unsold shares
o Selling price – may be above par value 2. Orig ACS is P10M/1M shares @P10/ss
- Payment must be immediately made by the SH for such number of shares as were The same were sold. All has been subscribed.
subscribed But, the corporation wants to downscale,
- The initial offer cannot exceed the statutory prescribed percentage (equal to his current Assuming that there exist no corporate debts, and they only need P8M to
interest) run the business
- If period lapses without SH notifying the corp as to a specific course of action, presumption P2m/200k ss(subscribed) this is an excess capital.
is that the pre-emptive right is waived; the corp may now offer the unsubscribed shares to ۩ REDUCE/REMOVE the excess from the ACS
anyone (3rd persons or other existing SH) Since these shares have been paid, it will be paid back to the
o Unless: shareholders by way of liquidating dividends. Distribute to

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 the owners.  Guidelines.
NOTE: pwedeng mag math sa exam.
3. To enable the legal capital to accurately reflect the value of the assets of 
An issuing corporation must also execute and submit a Trust Indenture with a trustee
the corporation bank and an Underwriting Agreement, together with the printed prospectus and titles
FORMULA : ASSETS = LIABILITIES + LEGAL CAPITAL covering the securities for the bonded indebtedness.
EX:
Year 1 No appraisal right granted
Sold all ACS = 1M @ P10/ss  Note that no appraisal right is granted to dissenting stockholders when the corporation
Assets Liabilities Legal capital either validly incurs, creates or increases bonded indebtedness since, the granting of
P 10 M (cash) 0 P10M (paper such appraisal right under such circumstances would drain the corporation of financial
value) resources contrary to the purpose for which the power is exercised to raise funds for
Year 10 corporate affairs.
P 1M 0 P1M
(already torn (you reduce your Note:
equipments, legal capital to be  Where a corporation increases capital stock, stockholders are entitled to a pre-emptive
always repaired) balanced with the right to subscribe to a sufficient number of shares in order to maintain their previous
assets) relative voting power.
 Dissenting stockholders cannot exercise the right of appraisal in this case.

C. Procedure and formalities

o
D. TO INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS The procedure is the same as the procedure for increasing or decreasing the capital stock
o
Refer to SEC 38. EXCEPT that:
Bond, meaning  The certificate need not state Nos 2 and 3 thereof.
 It is a security representing denominated units of indebtedness issued by a corporation
to raise money or capital obliging the issuer to pay the maturity value at the end of a Not required to be accompanied by the sworn statement of the treasurer of the corporation
specified period which should not less than 360 days, where applicable, payment of concerning the amount of the increased capital stock subscribed and paid
interest on stipulated dates. (SEC Interim Guidelines for the Registration of Bonds)
LECTURE
Bonded indebtedness, meaning BORROWING
 SEC has limited such term to cover only indebtedness of the corporation which are secured a. Ordinary Loans
by mortgage on real or personal property. - From a creditor, financial institutions including banks.
 Debentures: are issued on the basis of the general credit of the corporation and are not - Securities: REM, CHEM, pledge
secured by collaterals, and therefore do not constitute bonded indebtedness and will not - Banks have limits
require approval of the stockholders. b. To incur, create increase bonded indebtedness
- Bond issuance or floatation
 Corporate bond, meaning
 It is an obligation to pay a definite sum of money at a future time at a fixed rate of - Eg: commercials papers
interest. Short term : maturity is 1 year
Long term : more than 1 year
 Nature of power
Debtor : Corp
 The power to incur or create liabilities is an inherent power on the part of business Creditor ; public at large (public floatation of debts)
corporations, since it is presumed that they would need to incur or create liabilities as part of the BOND v REDEEMABLE SHARES
normal operations of the business and the pursuit of the purpose of the corporation. - Both incurring debts
- Bond holder is not a shareholder (ordinary debtor-creditor rel’p)
 Note: Non-stock corporations are now expressly authorized to incur, create, or increase - Must first secure secondary license from the SEC
bonded indebtedness. - No security / investment contract can be sold without permit from SEC
 Who can vote: Even holders of non-voting shares (included in ABISIMID) - Bonds must be paid out of the same compensation as shares either cash alone, labor
alone, property other than cash.
 Particular requirements of SEC - Requires BOD – 2/3 OCS
 Under the SEC Interim Guidelines, an application for registration and issuance of bonds - No need to amend the AOI.
can only be filed by the issuing corporation which has a minimum net worth of P25M at the time of However if the bond issuance is done in the ordinary course of business (no need for 2/3
the filing of the application, and must have been in operation for 3 years. OCS)
 In addition, it must fulfill the financial ratios mandated by the SEC in the Interim

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 E. TO DENY PRE-EMPTIVE RIGHTS c) If denied in the articles of incorporation
2 scenarios:
Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to i. Original AOI is already contains expression denying pre-emptive right
their respective shareholdings, unless such right is denied by the articles of incorporation or an a. PAR 7 : ACS
amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in  Is silent construed to have pre-emptive rights.
compliance with laws requiring stock offerings or minimum stock ownership by the public; or to ii. Remedy : Amend the AOI, insert provision denying pre-emptive
shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) a. REQUIREMENT :
of the outstanding capital stock, in exchange for property needed for corporate purposes or in  Board Resolution
payment of a previously contracted debt.
 Concurrence
 All subsequent shares need not be offered anymore to existing stockholders.
Pre-emptive right, meaning

The shareholder’s right to subscribe to all issues or disposition of shares or any class in
proportion to his present stockholdings, the purpose being to enable the shareholder to
retain his proportionate control in the corporation and to retain his equity in the retained
earnings and also in the net assets in the event of dissolution.
DATU BENITO V SEC, 123 S 722
Right of pre-emption of stockholders the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is not invalid

Whenever a capital stock of a corporation is increased and new shares of stocks are issued, even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to
issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is
the new issue must be offered first to the stockholders who are such at the time the increase
necessary to consider it because additional issuance of shares of stocks does not need approval of the
was made in proportion to their existing shareholdings and on equal terms with other stockholders.
holders of the original stocks before subscriptions are received from the general public. Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance,
he was not able to exercise his right of pre-emption over the unissued shares. However, the general rule is

Example: if a stockholder with pre-emptive right owns 20% of the outstanding shares of the that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to
corporation, he may subscribe 20% of any shares of stock issued by the corporation. This additional issues of originally authorized shares. This is on the theory that when a corporation at its
principle is known as the right of pre-emption or pre-emptive right of stockholders. inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An
Reason for the grant of right original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part

The rule on pre-emption aims to safeguard the right of stockholder to preserve unaltered and of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot
unimpaired his proportionate influence and interest in the corporation and the relative value therefore claim a dilution of interest
of his holdings.
DEE V SEC, 199 S 238
Shares to which right not available
The general rule is that pre-emptive right is recognized only with respect to new issues of shares, and not
 Shares to be issued in compliance with laws requiring stock offerings or minimum stock
with respect to additional issues of originally authorized shares. This is on the theory that when a
ownership by the public.
corporation at its inception offers its first shares, it is presumed to have offered all of those which it is
 Shares to be issued in good faith with the approval of stockholders representing 2/3 of the authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a
outstanding capital stock in exchange for property needed for corporate purposes; and definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed
 Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the are later re-offered, he cannot therefore claim a dilution of interest.
OCS in payment of previously contracted debt. Thus, the questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without
notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation
Pre-emptive right as to treasury shares is lodged in the board of directors and no stockholders meeting is required to consider it because additional
 In close corporations, the pre-emptive right of stockholders extends to ALL stock to be issuance of shares of stocks does not need approval of the stockholders. Consequently, no pre-emptive right
issued (old or new) including reissuance of treasury shares, unless the AoI provide of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI.
otherwise. Accordingly, it is clear that since the trial judge in the lower court did not have jurisdiction in
issuing the questioned restraining order, disobedience thereto did not constitute contempt, as it is necessary
GROUNDS FOR DENIAL OF PRE-EMPTIVE RIGHTS: that the order be a valid and legal one. It is an established rule that the court has no authority to punish for
disobedience of an order issued without authority
a) Issuance is in compliance with the laws and regulations
b) Issuance is pursuant to a dacion en pago / barter to which a corporation is a party
o Dacion en pago – obligation is in money but payment is made with a property.
PCGG V SEC, GR NO 82188, JUNE 30 1988
Money=property
DEBT FOR EQUITY SWAP – the corporation issues shares of stocks to pay Issue:
Whether or not the issuance and implementation of the writ of sequestration violates the constitutional
previously incurred obligation. rights of private respondent against impairment of obligation of contracts and deprivation of property
o Creditors becomes stockholders without due process of law.
Barter – property in exchange of property RULING:
o These contracts must be concurred in by 2/3 of the outstanding capital stock No.
The Court sustains petitioner's stand and holds that regional trial courts and the Court of Appeals for that
o Legally equivalent to a waiver of pre-emptive rights.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 matter have no jurisdiction over the Presidential Commission on Good Government in the exercise of its
appropriated for the conduct of its remaining business.
powers under the applicable Executive Orders and Article XVIII, Section 26 of the Constitution and
therefore may not interfere with and restrain or set aside the orders and actions of tile Commission.
Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the
In non-stock corporations where there are no members with voting rights, the vote of at least a
Commission regarding "the Funds, Moneys, Assets and Properties Illegally Acquired or Misappropriated by majority of the trustees in office will be sufficient authorization for the corporation to enter into any
Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, then, Close Relatives, Subordinates, transaction authorized by this section.
Business Associate, Dummies, Agents or Nominees' whether civil or criminal.
Nature of power
REPUBLIC V SANDIGANBAYAN - A sale or other disposition shall be deemed to cover substantially all the corporate property and
The records of the case clearly show that the written notice by UNIMOLCO, the Offeror, of its intention to assets if thereby the corporation would be rendered incapable if:
sell its 196,000 shares of stock was duly received on April 24, 1996 by the President and Chairman of the
Board of ETPI. a) Continuing the business;
Moreover, the purpose of the notice requirement in Article 10 of the ETPI Articles of b) Accomplishing the purpose for which it was incorporated.
Incorporation is to give the stockholders knowledge of the intended sale of shares of stock of the corporation, Requisites
in order that they may exercise their preemptive right. Where it is shown that a stockholder had actual a) A corporation by the action of its board of directors or trustees supported by the vote of
knowledge of the intended sale within the period prescribed to exercise the right, the notice requirement shareholders or members may sell, lease exchange, mortgage, pledge, or otherwise dispose
had been sufficiently met. of all or substantially all of all of its property, and assets including its good will . The
In the case at bar, PCGG had actual knowledge of UNIMOLCO‘s offer to sell its shares of stock. requisites for the validity of such sale, etc. are as follows:
In fact, it issued Resolution No. 96-142 enjoining the sale of the said shares of stock to Smart. Petitioner,
a. Vote of BoD: The sale etc. must be approved by the board of directors or trustees;
thus, cannot feign lack of notice. PCGG had no more authority to enjoin the sale of UNIMOLCO‘s 196,000
shares of stock, as it endeavored to do in Resolution No. 96-142. As correctly found by the Sandiganbayan,
b. Vote of SH: The action of the board of directors or trustees must be authorized by the
since the 196,000 shares of stock had already been adjudicated by final judgment to Benedicto and vote of stockholding representing 2/3 of the outstanding capital stock including holders
UNIMOLCO, PCGG could no longer exercise power and authority over the same of non-voting shares or 2/3 of the members as the case may be; and
b) In a meeting: The authorization must be done at a stockholders’ or members’ meeting duly
called for that purpose after written notice
Note: Non-compliance with the requisites would make the sale null and void.

Requirement under Bulk Sales Law

F. TO SELL OR OTHERWISE DISPOSE ALL OR SUBSTANTIALLY ALL OF CORPORATE ASSETS ۩ Aside from the requirements of Section 40 , the sale of all or substantially all of the corporate assets
Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal of property may require compliance with the Bulk Sales Law.
combinations and monopolies, a corporation may, by a majority vote of its board of directors or ۩ Rule: Under the Bulk Sales Law, the sale, etc. of all or any portion of a stock of goods, merchandise,
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its provisions or materials otherwise than in the ordinary course of business is declared fraudulent and
property and assets, including its goodwill, upon such terms and conditions and for such void as to creditors of the vendor unless specified formalities are observed such as the giving by the
consideration, which may be money, stocks, bonds or other instruments for the payment of money or
vendor to the vendee of a list of creditors to whom said vendor may be indebted.
other property or consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding ۩ Requirement: A written statement, sworn to substantially, of the names and addresses of all
capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the creditors to whom said vendor or mortgagor may be indebted, together with the amount of
members, in a stockholder’s or member’s meeting duly called for the purpose. Written notice of the indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of
proposed action and of the time and place of the meeting shall be addressed to each stockholder or said creditors.
member at his place of residence as shown on the books of the corporation and deposited to the Effect of non-compliance: If no sworn statement then any such sale, transfer or mortgage shall
addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting be fraudulent and void.
stockholder may exercise his appraisal right under the conditions provided in this Code.
- Solidary liability: When the requirement of BSL have not been complied with, both the selling
A sale or other disposition shall be deemed to cover substantially all the corporate property and and buying corporation may be held solidary liable to the creditor of the selling corporation.
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated. Sale of assets without dissolution
- A corporation may sell all its assets without necessarily dissolving or terminating its existence.
After such authorization or approval by the stockholders or members, the board of directors or
- If such sale is made to another corporation and there is no intent to combine, the selling
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or
corporation may continue in a state of suspended animation.
other disposition of property and assets, subject to the rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or members.
Liability of purchasing corporation
Nothing in this section is intended to restrict the power of any corporation, without the authorization - GR: Where one corporation sells or transfers all its assets to another corporation, the latter is
by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of not liable for debts and liabilities of the transferor, provided the latter acted in good faith and paid
any of its property and assets if the same is necessary in the usual and regular course of business of adequate consideration.
said corporation or if the proceeds of the sale or other disposition of such property and assets be -
- XPNs: (purchasing corporation is liable)

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  Where the purchaser is expressly or impliedly agrees to assume such debts - Where the transaction is entered into fraudulently in order to escape liability for such debts.
 Where the transaction amounts to a consolidation or merger of the corporations
 Where the purchasing corporation is merely a continuation of the selling corporation Sale not fraudulent, reasons
 Where the transaction is entered into fraudulently in order to escape liability for such - Sales took place over a month before the filing of the case which said judgment was rendered.
debts - Appellee purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held
at the instance of a bank to which said shares had been pledged as security for an obligation of Insular
Appraisal right of dissenting stockholder Farms in favor of said bank
- Any dissenting stockholder may exercise his appraisal right in case of sale of all or
substantially all of the corporate assets or property. Although the consideration was considered inadequate the same did not result to fraud because the
sale was submitted to and approved by the Securities and Exchange Commission
- It should be noted that the exercise of the appraisal right of any stockholder is predicated on the sale
or other disposition of all or substantially all of the corporate assets . Any disposition which does not Y-I LEISURE PHILS V YU, 8 SEPTEMBER 2015 “BUSINESS ENTERPRISE TRANSFER”
involve all or substantially all of the corporate assets, does not require the approval of the Whether fraud must exist in the transfer of all the corporate assets in order for the transferee to assume the
stockholders or members and would not entitle any dissenting stockholder to exercise his appraisal liabilities of the transferor. -o resolve this issue, a review of the laws and 0urisprudenceconcerning
right. corporate assumption of liabilities must be undertaken.
Background on the corporate assumption of liabilities
Test: To determine if the sale is made in the ordinary course of business, the test is not the amount In the (3)# case of Nell v. Pacific Farms, Inc., The Court first pronounced the rule regarding the transfer of
involved but the nature of the transaction. all the assets of one corporation to another thereafter referred to as the Nell Doctrine as follows:
Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or
LECTURE impliedly agrees to assume such debts;
Sell / dispose of all or substantially all assets (2) Where the transaction amounts to a consolidation or merger of the corporations;
Requirement: (3) Where the purchasing corporation is merely a continuation of the selling corporation and
Majority vote BOD (4) Where the transaction is entered into fraudulently in order to escape liability for such debts.
2/3 SHs The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
BULK SALES LAW not render the latter liable to the liabilities of the transferor. If any of the above cited exceptions are
- Prior written consent of the seller must be obtained otherwise; a creditor may file an present, then the transferee corporation shall assume the liabilities of the transferor.
action to nullify the same. Legal bases of the Nell Doctrine
- It does not apply to bulk sales of merchandise as it is deemed to be a sale in the ordinary An evaluation of our contract and corporation laws validates that the >ell Doctrine is fully supported by
course of business (no need to secure SH and creditors consent) Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity under
Article 1511 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are valid
REORGANIZATION / RESTRUCTURING OF ASSETS
and binding only between the contracting parties and their successors-in-interest. Thus, despite the sale of
- The result of the sale, disposition or lease because following the sales, corp is deemed all corporate assets, the transferee corporation cannot be pre0udiced as it is not in privity with the contracts
incapable of operating the business for which it was organized between the transferor corporation and its creditors.
- Thus the corporation is not really dissolved. Jurisprudential recognition of the business enterprise transfer
 the proceeds may be used to (a) pursue your secondary purpose or (b) embark on Jurisprudence has held that in a business enterprise transfer, the transferee is liable for the debts and
an entirely new primary business (amend the AOI) liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
GENERAL RULE: buyer of assets cannot be liable for obligation of seller because there is no privity of business enterprise transfer have been related by the Court to the application of the piercing doctrine.
relationship (NELL DOCTRINE) While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
EXCEPT: corporation, the transfer should not pre0udice the creditors of the assignor. The only way the transfer can
a) Where the purchaser expressly or impliedly agrees to assume such debts; proceed without pre0udice to the creditors is to hold the assignee liable for the obligations of the assignor.
b) Where the transaction amounts to a consolidation or merger of the corporations; The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes
the assumption of the assignor‘s liabilities, unless the creditors who did not consent to the transfer choose to
c) Where the purchasing corporation is merely a continuation of the selling corporation; and
rescind the transfer on the ground of fraud. -o allow an assignor to transfer all its business, properties and
d) Where the transaction is entered into fraudulently in order to escape liability for such debts. assets without the consent of its creditors and without re7uiring the assignee to assume the assignor‘s
(3rd and 4th pierce the veil, the buyer and seller are one and the same) obligations will defraud the creditors. The assignment will place the assignor‘s assets beyond the reach of its
If asset sale involves payment by way of ss of buyer transferred to seller (DE FACTO MERGER – creditors
exempt from transfer taxes) Fraud is not an essential consideration in a business enterprise transfer
Fraud is not an essential element for the application of the business enterprise transfer which the court
disagrees. The exception of the Nell doctrine provides that the transferee corporation assumes the debts and
liabilities of the transferor corporation because it is merely a continuation of the latter‘s business. A cursory
NELL CO V PACIFIC FARMS, 15 S 415 “NELL DOCTRINE” reading of the exception shows that it does not require the existence of fraud against the creditors before it
GR: Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is takes full force and effect. Indeed, under the Nell Doctrine, the transferee corporation may inherit the
not liable for the debts and liabilities of the transferor. liabilities of the transferor despite the lack of fraud due to the continuity of the latter‘s business.The
purpose of the business enterprise transfer is to protect the creditors of the business by allowing them a
XPNs: remedy against the new owner of the assets and business enterprise. 1therwise, creditors would be left
- Where the purchaser expressly or impliedly agrees to assume such debts; ―holding the bag‖ because they may not be able to recover from the transferor who has ―disappeared with
- Where the transaction amounts to a consolidation or merger of the corporations; the loot‖, or against the transferee who can claim that he is a purchaser in good faith and for value. Based
- Where the purchasing corporation is merely a continuation of the selling corporation; and on the foregoing, as the exception of the Nell doctrine relates to the protection of the creditors of the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 transferor corporation, and does not depend on any deceit committed by the transferee +corporation, then the basis of its Corporate Secretary's Certification of these two resolutions. The partial decision did not
fraud is certainly not an element of the business enterprise doctrine require any further board or stockholder resolutions to make VECCI's sale of these properties valid. Being
Applicability of the business enterprise transfer in the present case regular on its face, the Secretary's Certification was sufficient for private respondent Sureste Properties,
Bearing in mind that fraud is not re7uired to apply the business enterprise transfer, the next issue to be Inc. to rely on. It did not have to investigate the truth of the facts contained in such certification. Otherwise,
resolved is whether the petitioners indeed became a continuation of MADCI‘s business. It is apparent that business transactions of corporations would become tortuously slow and unnecessarily hampered.
the business enterprise transfer rule applies when two requisites concur: Ineluctably, VECCI's sale of Esguerra Building II to private respondent was not ultra vires but a valid
(1) the transferor corporation sells all or substantially all of its assets to another entity< and (2) the execution of the trial court's partial decision.
transferee corporation continues the business of the transferor corporation. Both requisites are present in Based on the foregoing, the sale is also deemed to have satisfied the requirements of Section 40
this case. MADCI was a development company which ac7uired properties in Magalang, Pampanga to be of the Corporation Code.
developed into a golf course however, was then sold to YILPI, and then transferred to YICRI.

Its sale to the petitioners rendered it incapable of continuing its intended golf and country club business. LOPEZ REALTY V FONTECHA, 247 S 183
The MOA cannot prejudice respondent The Court is not persuaded that the subject resolutions had no force and effect in view of the non-approval
The MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to thereof during the Annual Stockholders' Meeting held on March 1, 1982. To strengthen their position,
third persons or settle in full all their claims for refund of payments, should not pre0udice respondent Yu. petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code).
The CA correctly ruled that such provision constituted novation under Article 1295 of the Civil Code. When The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange
there is a substitution of debtors, the creditor must consent to the same< otherwise, it shall not in any way or disposition of all or substantially all of the corporation's assets, including its goodwill. In such a case, the
affect the creditor. In this case, it was established that Yu‘s consent was not secured in the execution of the action taken by the board of directors requires the authorization of the stockholders on record.
MOA. Thus, insofar as the respondent was concerned, the debtor remained to be MADCI. And given that It will be observed that, except for Arturo Lopez, the stockholders of petitioner corporation also
the assets and business of MADCI have been transferred to the petitioners, then the latter shall be liable. sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous
to require the stockholders' approval of the subject resolutions. Thus, even without the stockholders'
approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay.
PNB V ANDRADA ELECTRIC, 381 S 244 Petition is dismissed.
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets, except
G. TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS
when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) Section 42. Power to invest corporate funds in another corporation or business or for any other
where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other
transaction is fraudulently entered into in order to escape liability for those debts.
corporation or business or for any purpose other than the primary purpose for which it was organized
Equally well-settled is the principle that the corporate mask may be removed or the corporate
when approved by a majority of the board of directors or trustees and ratified by the stockholders
veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of
public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
a shield for fraud, illegality or inequity committed against third persons. the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and the time and place of the meeting shall
be addressed to each stockholder or member at his place of residence as shown on the books of the
ISLAMIC DIRECTORATE V CA, 272 S 454 corporation and deposited to the addressee in the post office with postage prepaid, or served
This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this
Group to the IDP Board of Trustees to be null and void. Consequently, the Carpizo Group is bereft of any Code: Provided, however, That where the investment by the corporation is reasonably necessary to
authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property. accomplish its primary purpose as stated in the articles of incorporation, the approval of the
Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private stockholders or members shall not be necessary. (17 1/2a)
respondent INC contracted is a fake Board. Premises considered, all acts carried out by the Carpizo Board,
particularly the sale of the Tandang Sora property, allegedly in the name of the IDP.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo When approval of stockholders or members not necessary
Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or - Where the investment by the corporation is reasonably necessary to accomplish its primary
substantially all assets of the corporation. purpose.
The Tandang Sora property, appears from the records, constitutes the only property of the IDP.
Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling Funds, meaning
squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the
The term funds in Section 42 include any corporate property to be used in furtherance of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained.
business.
These twin requirements were not met as the Carpizo Group which voted to sell the Tandang
Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Thus, idle corporate property may be temporarily leased to make it productive in the
Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from absence of express restrictions in the articles of incorporation or by-laws and the leasing is
all indications, not bona fide members of the IDP as they were made to appear to be. All told, the disputed not used as a scheme to prejudice corporate directors, subject to the requirements of
Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically Section 42.
void ab initio. A non-stock, non-profit foundation may invest its funds in or subscribe to shares of another
domestic corporation. The term "funds" as used in Section 42 include "donations" received
by the corporation from other entities.
ESGUERRA V CA, 3 FEBRUARY 1997
VECCI's sale of all the properties mentioned in the judicially-approved compromise agreement was done on When for secondary purpose

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 The other purposes for which funds may be invested without amending the article of DELA RAMA V MA-AO SUGAR, 7 S 247
incorporation
The law requiring the votes does not apply in the case because of MSCCI‘s contention that since said
must be among those enumerated in the articles of incorporation. PFPC was engaged in the manufacture of sugar bags it was perfectly legitimate for MSCCI either to
o In order to legally engage in any of its secondary purposes, the corporation must comply manufacture sugar bags or invest in another corporation engaged in said manufacture.
with Section 42. SC also quoted the interpretation of Professor Guevara, a well-known authority in
Commercial Law: A private corporation, in order to accomplish its purpose as stated in its articles of
When incident to primary purpose incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire,
A corporation may invest its funds in another business which is incident or auxiliary to its hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any
primary purpose as stated in its AoI without the approval of the stockholders or members as domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need
required under Section 42. the approval of the stockholders; but when the purchase of shares of another corporation is done solely
Even holders of non-voting shares or members, as the case may be, are entitled to vote on for investment and not to accomplish the purpose of its incorporation, the vote of approval of the
the matter. In such a case, a dissenting stockholder shall have no appraisal right. stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the
limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation
Ratification of defective investment shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-
agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock
 Such investment must be authorized by the affirmative vote of the stockholders or members,
of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and
then it is ratified not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of
Voidable acts, may be ratified: trade."
 Mere ultra vires acts or those which are not illegal and void ab initio but are not merely Power to invest corporate funds - A private corporation has the power to invest its corporate
within the scope of the AoI, are merely voidable and may become binding and enforceable funds 'in any other corporation or business, or for any purpose other than the main purpose for which it
when ratified by the stockholders was organized,' provided that 'its board of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-
thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and
LECTURE: provided further, that no agricultural or mining corporation shall in anywise be interested in any other
Investing company purchases shares of stocks of another company or subscribe to bonds issued agricultural or mining corporation. When the investment is necessary to accomplish its purpose or
by another company purposes as stated in its articles of incorporation, the approval of the stockholders is not necessary."

INVESTMENT
- Investing company will derive passive income or investments H. TO ACQUIRE OWN SHARES
- It is a form of auto-increasing profits
REQUIREMENT: Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or
a. BOD majority vote acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
b. 2/3 OCS or membership following cases: Provided, That the corporation has unrestricted retained earnings in its books to
(only if investment is in a business or company with business cover the shares to be purchased or acquired:
unrelated to the business or purpose of the investor) 1. To eliminate fractional shares arising out of stock dividends;
If for a secondary purpose that purpose must be indicated 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in
in AOI. a delinquency sale, and to purchase delinquent shares sold during said sale; and
TO SELL – BOD majority & 2/3 OCS 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
TO BUY - BOD provisions of this Code. (a)

GOKONGWEI V SEC, 89 S 336 Limitations of corporation’s right to purchase its shares

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation 1. That its capital is not thereby impaired
or business or for any purpose other than the main purpose for which it was organized" provided that its 2. That it be for a legitimate and proper corporate purpose
Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling 3. That there shall be unrestricted retained earnings to purchase the same and its capital is not
them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the thereby impaired
corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of 4. That the corporation acts in good faith and without prejudice to the rights of creditors and
shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote stockholders.
of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting Elimination of fractional share
power is necessary. Fractional share: A share which is less than one corporation share.
As stated by Respondent Corporation, the purchase of beer manufacturing facilities by SMC was an Inasmuch as fractional shares cannot be represented at corporate meetings, the corporation may
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to purchase the same from the stockholder concerned.
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Satisfaction of indebtedness to corporations
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
This does not authorize, however, a corporation to arbitrarily purchase the shares it issued to any of
reorganization. its stockholders indebted to it, for the purpose of applying the proceeds thereof to the satisfaction
of its claim against them, and this is particularly true where the consent of such stockholders has
not been secured.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 BOMAN ENVIRONMENTAL V CA, 22 NOVEMBER 1988
Payment of shares of dissenting or withdrawing stockholders
This refers to instances when a dissenting stockholder is given appraisal right and the right to Intra-corporate controversy: Because the parties are stockholder and corporation
withdraw from the corporation.
Purposes not exclusive Fajilan's offer to resign as president and director "effective as soon as my shares and interests are
The enumeration is by no means exclusive since other purposes, which have legitimate business sold and fully paid" implied that he would remain a stockholder until his shares and interests were
fully paid for, for one cannot be a director or president of a corporation unless he is also a
objectives, are acceptable to justify a stock corporation purchasing or acquiring its own shares.
stockholder thereof.
Example of other cases The fact that he was replaced as president of the corporation did not necessarily mean that he
Under Section 9 on treasury shares ceased to be a stockholder considering how the corporation failed to complete payment of the
consideration for the purchase of his shares of stock and interests in the goodwill of the business
With respect to redeemable shares, they may be purchased by the corporation regardless of
the existence of unrestricted retained earnings in the books of the corporation. SEC has jurisdiction
 To effect a decrease in the capital stock of a corporation
 In close corporation, where there is a deadlock respecting the management of The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the
its business, the SEC may order the purchase at their fair value of shares of any corporation has unrestricted retained earnings to cover the payment for the shares, and
stockholder by the corporation regardless of the availability of unrestricted whether the purchase is for a legitimate corporate purpose
retained earnings in its books.
STEINBERG V VELASCO, 52 P 953
Trust fund doctrine
It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and
Generally: Capital stock, property and other assets of a corporation are regarded as equally in trust
in declaring the dividends on the stock was all done at the same meeting of the board of directors,
for the payment of corporate creditors. and it appears in those minutes that the both Ganzon and Mendaros were formerly directors and
resigned before the board approved the purchase and declared the dividends, and that out of the
The assets of a corporation as represented by its capital stock are "trust funds" to be maintained whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the
unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution 330, which were purchased by the corporation, and for which it paid P3,300.
of such assets among the stockholders without provision being first made for the payment of In other words, the directors were permitted to resign so that they could sell their stock
corporate debts and that any such disposition of it is a fraud on the creditors of the corporation to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of
who extend credit to the corporation on the faith of its outstanding capital stock and, therefore, the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid
VOID. for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000
paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is
Note: The prohibition against the distribution of the capital of a corporation as cash dividend is very apparent that the directors did not act in good faith or that they were grossly ignorant of their
also based on the same doctrine duties.
Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the board of directors will not use the assets of the corporation to purchase its
Q: Is acquisition of own shares the only way to eliminate fractional shares? own stock, and that it will not declare dividends to stockholders when the corporation is insolvent

A: No. The BoD may allow the SH to round-up or to pay the corporation to get 1 whole share. If
the SH refuses to buy, the BoD may provide that the corporation shall buy the fractional part of I. TO DECLARE DIVIDENDS
the SH.
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
Q: Can redeemable shares once redeemed be revived? dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
A: No. Same is true with regard to convertible shares (e.g. preferred to common, preferred dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription
disappears) Example: There are 5 incorporators. 1 died and survived by his widow. Can the corp plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder
buy the shares from the widow? For what good corporate purpose? until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued
- The corp can exercise its right of first refusal (applies to transferors thru succession) without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding
In the Minutes, to help the widow to liquidate her shares of stock. (good reputation of the capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are
corporation). If all signed the Minutes, no one can complain afterwards prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in
capital stock, except:
(1) when justified by definite corporate expansion projects or programs approved by the board of
directors; or
2) 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 (3) 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. (n)

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 i. KINDS OF DIVIDENDS
a. CASH Concept of dividends
Dividends payable in cash Dividend: that part or portion of the profits of a corporation set aside, declared and
As soon as cash dividends are publicly declared, the stockholders have the order by the directors to be paid ratably to the stockholders on demand or at a fixed
right to their pro rata shares. time. It is a payment to the stockholders of a corporation as a return upon their
It is the declaration of the dividends which creates both the dividends itself investment.
and the right of the stockholders to demand and receive it. A sum which can be divided among stockholders without touching the capital stock.
Can be declared by mere Board resolution from unrestricted earnings. Dividends, regardless of the form declared, are valued at the amount of the declared
Revocable before announcement to the shareholders. dividend taken from the unrestricted retained earnings of the corporation.

b. STOCK Stock dividend: the amount that the corporation transfers from its surplus profit account to its
It is dividend payable in unissued or increased or additional shares of the capital account. It is the same amount that can loosely be termed as the "trust fund" of the
corporation instead of in cash or in property out of the unrestricted retained corporation.
earnings of the corporation.
A stock dividend may be declared only to the extent of the maximum Note: The power granted to stockholders to demand from the Board the declaration of
number of shares authorized in the articles of incorporation. dividends under Section 43 is one for the few instances under the Code where the
Declaration may be revoked prior to actual issuance stockholders themselves exercise a primary power, instead of the usual ratificatory vote
c. PROPERTY on action taken primarily by the board of directors.
it is dividend distributed to the stockholders in the form of property, real or
personal, such as warehouse receipts, or shares of stock of another Dividends and profits, distinguished
corporation.  Dividends come from profits, while profits are the source of dividends.
If the property does not form part of the surplus or retained earnings of the  Profits are not so dividends until so declared or set aside by the corporation.
corporation, the same cannot be declared as property dividends.  In the meantime, all profits are a part of the assets of the corporation and do not belong
d. STRIP to the stockholders individually.
It is a dividend in the form of a writing or certificate issued to a stockholder Power to declare dividends
entitling him to the payment of money, stock or other benefit at some future time. Stock dividends: 2/3 of OCS in a meeting called for that purpose
It is in the form of a promissory note or a promise to pay and may be issued to
bear interest. Other dividends: Mere majority of the quorum of the BoD
Effect of declaration: Such dividend, when the obligation to pay is absolute, is a
debt absolutely due to the stockholders, although the payment is postponed to a Dividends payable out of unrestricted retained earnings
future date. Under the law, dividends other than liquidating dividends (which are not really dividends as they
are from capital) may be declared and paid out ―the unrestricted retained earnings of the
COJUANGCO V REPUBLIC, 24 APRIL 2009 corporation.
The term "dividend" in its technical sense and ordinary acceptation is that part or portion of the profits of
the enterprise which the corporation, by its governing agents, sets apart for ratable division among the Capital stock which may not be impaired, meaning
holders of the capital stock. It is a payment to the stockholders of a corporation as a return upon their  The capital or capital stock which may not be impaired or depleted by the dividends is not the
investment and the right thereto is an incident of ownership of stock. entire net assets of the corporation; rather, it is the legal capital of the corporation in the strict
In directing the reconveyance to the Republic of the 111,415 shares of PLDT stock owned by PTIC sense, referring to that portion of the net assets directly or indirectly contributed by the
in the name of Prime Holdings, the Court declared the Republic as the owner of said shares and, stockholders as consideration for the stocks issued to them upon the basis of their par or
necessarily, the dividends and interests accruing thereto. issued value.

Contrary to petitioners‘ contention, while the general rule is that the portion of a decision that becomes the Rule as to par value stock
subject of execution is that ordained or decreed in the dispositive part thereof, there are recognized With respect to no par value shares, the entire consideration (including paid-in surplus,
exceptions to this rule, viz: (a).where there is ambiguity or uncertainty, the body of the opinion may be etc) received from the same shall be treated as capital and shall not be available for
referred to for purposes of construing the judgment, because the dispositive part of a decision must find
distribution as dividends
support from the decision‘s ratio decidendi; and (b).where extensive and explicit discussion and settlement
of the issue is found in the body of the decision.
In G.R. No. 153459, although the inclusion of the dividends, interests, and earnings of the 111,415
Dividends from property in which capital is invested
PTIC shares as belonging to the Republic was not mentioned in the dispositive portion of the Court‘s  To engage in "wasting business"
Decision, it is clear from its body that what was being adjudicated in favor of the Republic was the whole  To utilize a lease or patent
block of shares and the fruits thereof, said shares having been found to be part of the Marcoses‘ ill-gotten  To liquidate a business
wealth, and therefore, public money. Wasting assets doctrine
It would be absurd to award the shares to the Republic as their owner and not include the  A wasting assets corporation, the capital of which is necessarily exhausted in the carrying
dividends and interests accruing thereto. An owner who cannot exercise the "juses" or attributes of on of its operations, may rightfully declare and pay dividends out of net income without
ownership -- the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or alienate, making up for the loss of its capital which is thus being constantly diminished.
to recover or vindicate, and to the fruits - is a crippled owner.  When a corporation is created for the purpose of investing its capital in property which
will necessarily be consumed or exhausted in the ordinary course of its operations, so

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 that the depreciation in the value of the property cannot be repaired, it is not subject to NIELSON V LEPANTO, 26 S 540
the same rules as other corporations.
Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed
profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the
Examples of wasting assets corporation: Mining, timber-cutting category of "stock dividends".
A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a
Unrestricted retained earnings, explained stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is

The difference between the total present value of its assets after deducting losses and equivalent to a stock issued in exchange of property, because services are equivalent to property.Likewise a
liabilities and the amount of its capital stock (outstanding capital stock, and not authorized share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash.
capital stock) In other words, it is the shares of stock that are originally issued by the corporation and forming
part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation
Retained earnings = Assets - liabilities and legal capital has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from
the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a
Unrestricted, meaning: Free for dividend distribution to stockholders. person already a stockholder in exchange for services rendered or for cash or property. But a share of stock
coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation.
Thus, stock dividends cannot be issued to a person who is not a stockholder in payment of services
They should not have been reserved or set aside by the board for some other purpose in rendered. And so, in the case at bar, Nielson cannot be paid in shares of stock which form part of the stock
accordance with managerial, legal, or contractual requirements dividends of Lepanto for services it rendered under the management contract.

Limitation on retention of surplus profits

CIR V MANNING 66 S 14
 Stock corporations are prohibited from retaining surplus profits in excess of 100% of their ―A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock dividend is a
paid-in capital stock except when justified by any of the reasons mentioned. (Section 43(2)) conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a
cash dividend.' Congress itself has defined the term 'dividend' in No. 115(a) of the Act as meaning any
 If the requirement which is mandatory is violated, the corporation may be compelled by the
distribution made by a corporation to its shareholders, whether in money or in other property, out of its
SEC to declare dividends to its stockholders. earnings or profits.
 The prohibition on retention of profits provided in Section 43 is applicable to all stock The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock
corporations. dividends in favor of the former, brings the ultimate purpose which the parties to the trust instrument aimed
to realize: to make the respondents the sole owners of Reese's interest in MANTRASCO by utilizing the
 There may be some question as to whether or not the retention of profits is justified by the
periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the said
"reasonable needs of the business." interests, and by making it appear outwardly, through the formal declaration of non-existent stock dividends
 Suffice it to say that the policy of the law to encourage and force the distribution of dividends in the treasury, that they have not received any income from those firms when, in fact, by that declaration
curtails the discretionary power of directors to retain corporate earnings. they secured to themselves the means to turn around as full owners of Reese's shares. In other words, the
respondents, using the trust instrument as a convenient technical device, bestowed unto themselves the full
 Note: No dividends can be declared out of capital, except liquidating dividends distributed at
worth and value of Reese's corporate holdings with the use of the very earnings of the companies. Such
dissolution. (Section 122) package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion
 Dividends (whether cash or stock) can be declared only out of the unrestricted retained reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but exclusively for
earnings, although stock dividends may be issued out of premium surplus (since in the latter expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the respondents'
case, it is nothing but a book-entry procedure). responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the companies
involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese, they were in
ultimate effect and result making a distribution of such earnings to the respondents.
C. H. STEINBERG V VELASCO, 52 P 953 All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of
cash benefits to the respondents.
There is no stipulation or finding of facts as to what was the actual cash value of its accounts receivable.
Neither is there any stipulation that those accounts or any part of them ever have been or will be collected,
and it does appear that after his appointment on February 28, 1924, the receiver made a diligent effort to
MADRIGAL V ZAMORA 151 S 355
collect them, and that he was unable to do so, and it also appears from the minutes of the board of directors
that the president and manager "recommended that P3,000 — out of the surplus account to be set aside for "the dividends received by the company are corporate earnings arising from corporate investment."Indeed, as
dividends payable, and that payments be made in installments so as not to effect the financial condition of found by the Commission, the petitioner had entered such earnings in its financial statements as profits,
the corporation." which it would not have done if they were not in fact profits.
It is very apparent that on June 24, 1922, the board of directors acted on assumption that, Moreover, it is incorrect to say that such profits — in the form of dividends — are beyond the
because it appeared from the books of the corporation that it had accounts receivable of the face value of reach of the petitioner's creditors since the petitioner had received them as compensation for its management
P19,126.02, therefore it had a surplus over and above its debts and liabilities. Thus, in the purchase of its services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends
own stock to the amount of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of paid to it were its own money, which may then be available for wage increments. It is not a case of a
the corporation were diminished P6,300. The corporation did not then have an actual bona fide surplus from corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the
which the dividends could be paid, and that the payment of them in full at the time would "affect the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the
financial condition of the corporation." petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of
Creditors of a corporation have the right to assume so long as there are outstanding debts and salary increases, may not be denied its employees.
liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and
that it will not declare dividends to stockholders when the corporation is insolvent.
REPUBLIC PLANTER’S V AGANA 26 S 451
Under the old Corporation Law in force at the time the contract between the petitioner and the private

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 respondents was entered into, it was provided that "no corporation shall make or declare any dividend except  DECLARATION DATE – date when dividends are declared by the corporation.
from the surplus profits arising from its business, or distribute its capital stock or property other than actual  RECORD DATE - is fixed by the board of directors for determination of stockholders
profits among its members or stockholders until after the payment of its debts and the termination of its entitled to vote; if it does not do so, such date shall be the date of the notice of
existence by limitation or lawful dissolution."Similarly, the present Corporation Codeprovides that the board
of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. meeting.
Thus, the declaration of dividends is dependent upon the availability of surplus profit or  PAYMENT DATE - It is customary for the directors to fix the time for payment of a
unrestricted retained earnings, as the case may be. Dividends are thus payable only when there are profits dividend. But a corporation cannot discriminate among the shareholders as to the
earned by the corporation and as a general rule, even if there are existing profits, the board of directors has time of payment of dividends.
the discretion to determine whether or not dividends are to be declared.
If no time is fixed by the resolution declaring a dividend: it is payable on demand
Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a
certain redemption price.A redemption by the corporation of its stock is, in a sense, a repurchase of it for COJUANGCO ET AL V SANDIGANBAYAN 24 APRIL 2009
cancellation.The present Code allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. The term "dividend" in its technical sense and ordinary acceptation is that part or portion of the
However, while redeemable shares may be redeemed regardless of the existence of unrestricted profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division
retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in among the holders of the capital stock. It is a payment to the stockholders of a corporation as a return
its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made upon their investment and the right thereto is an incident of ownership of stock.
where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation In directing the reconveyance to the Republic of the 111,415 shares of PLDT stock owned by PTIC
to meet its debts as they mature. in the name of Prime Holdings, the Court declared the Republic as the owner of said shares and,
necessarily, the dividends and interests accruing thereto.
Contrary to petitioners‘ contention, while the general rule is that the portion of a decision that
BITONG V CA 292 S 503 becomes the subject of execution is that ordained or decreed in the dispositive part thereof, there are
The records show that the original stock and transfer book and the stock certificate book of Mr. & Ms. were recognized exceptions to this rule, viz: (a).where there is ambiguity or uncertainty, the body of the opinion
in the possession of petitioner before their custody was transferred to the Corporate Secretary, Atty. Augusto may be referred to for purposes of construing the judgment, because the dispositive part of a decision must
San Pedro. On 25 May 1988, Assistant Corporate Secretary Renato Jose Unson wrote Mr.& Ms. about the find support from the decision‘s ratio decidendi; and (b).where extensive and explicit discussion and
lost stock and transfer book which was also noted by the corporation's external auditors, Punongbayan and settlement of the issue is found in the body of the decision.
Araullo, in their audit. Atty. Unson even informed respondent Eugenia D. Apostol as President of Mr. & Ms. In G.R. No. 153459, although the inclusion of the dividends, interests, and earnings of the 111,415
that steps would be undertaken to prepare and register a new Stock and Transfer Book with the SEC. PTIC shares as belonging to the Republic was not mentioned in the dispositive portion of the Court‘s
Incidentally, perhaps strangely, upon verification with the SEC, it was discovered that the general file of the Decision, it is clear from its body that what was being adjudicated in favor of the Republic was the whole
corporation with the SEC was missing. Hence, it was even possible that the original Stock and Transfer Book block of shares and the fruits thereof, said shares having been found to be part of the Marcoses‘ ill-gotten
might not have been registered at all. wealth, and therefore, public money.
This simply shows that as of 1988 there still existed certain issues affecting the ownership of the It would be absurd to award the shares to the Republic as their owner and not include the
JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and Transfer Book dividends and interests accruing thereto. An owner who cannot exercise the "juses" or attributes of
were proper, regular and authorized. JAKA retained its ownership of Mr.& Ms. shares as clearly shown by ownership -- the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or
its receipt of the dividends issued in December 1986. This only means, very obviously, that Mr.& Ms. shares alienate, to recover or vindicate, and to the fruits - is a crippled owner.
in question still belonged to JAKA and not to petitioner. For, dividends are distributed to stockholders
pursuant to their right to share in corporate profits. When a dividend is declared, it belongs to the person
who is the substantial and beneficial owner of the stock at the time regardless of when the distribution profit
was earned.

CIR V CA 301 S 152

Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the
mere issuance thereof is not yet subject to income tax as they are nothing butenrichment through increase in
value of capital investment." As capital, the stock dividends postpone the realization of profits because the
"fund represented by the new stock has been transferred from surplus to capital and no longer available for J. TO ENTER INTO A MANAGEMENT CONTRACT
actual distribution." In a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock
dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet
subject to income tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends

MATERIAL DATES

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 3. Managerial power under the contract
Section 44. Power to enter into management contract. – No corporation shall conclude a management
Delegation of entire supervision and control, prohibited: A management contract cannot
contract with another corporation unless such contract shall have been approved by the board of
directors and by stockholders owning at least the majority of the outstanding capital stock, or by at delegate entire supervision and control over the officers and business of a corporation to
least a majority of the members in the case of a non-stock corporation, of both the managing and the another as this will contravene Section 23.
managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder The board cannot surrender or abdicate its power and duty of supervision and control for
or stockholders representing the same interest of both the managing and the managed corporations otherwise, it becomes a mere instrumentality of the management company.
own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the Note: Some powers may not be delegated to the managing corporation e.g. amendment of the AoI
managing corporation; or (2) where a majority of the members of the board of directors of the of the managed corporation
managing corporation also constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to Rationale for Ratification Requirements on Part of Managed Corporation
vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No That such a management contract is a deviation from the principle under Section 23 that the
management contract shall be entered into for a period longer than five years for any one term. corporate affairs shall be managed by the board of directors, and thereby a departure from such an
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation agreement would require the approval of the stockholders under the principle that it would vary the
undertakes to manage or operate all or substantially all of the business of another corporation, whether contractual corporate arrangements, by allowing basically an outsider to involve itself in the
such contracts are called service contracts, operating agreements or otherwise: Provided, however,
management of corporate affairs.
That such service contracts or operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for such periods as may be provided
by the pertinent laws or regulations Rationale for Ratification Requirements on Part of Managing Corporation.
That the management arrangement is a deviation from the principle also that the board of directors
in the managing corporation assumed office with the understanding that they would devote their
Management contract time and resources for the affairs of the corporation.
 An agreement which a corporation delegates the management of its affairs to another
corporation for a certain period of time.
Other considerations
 Instead of employing other persons to manage the corporation's business, it employs another
corporation. If management company: The ratificatory procedure should not therefore be applicable to a
 A corporation under management is bound by the acts of the managing corporation and is corporation that is organized primarily as a management company, and its entering into a
estopped to deny its authority. management contract is clearly within the primary purpose of the corporation and in accordance
 NO need for amendment of AoI with the contractual understanding with the stockholders of such managing corporation. (Page 263
of CLV’s Textbook)
Management contract with parent corporation
Valid. Cases not covered by Section 44: When it comes to a management contract entered into by the
Purpose: To provide more efficient operation and greater convenience to both. managed corporation under the definition of Section 44, not with another corporation but with a
THUS, a holding company may, in some cases, intervene in the management and affairs partnership or an individual, the same would not be covered by and thereby need not comply with
of its subsidiaries or affiliates PROVIDED the management in those affairs will not affect the ratificatory requirements of Section 44. (Page 263 of CLV’s Textbook)
the separate and continuing existence of the managed corporation.
When invalid: When there is fraud or bad faith AURBACH V SANITARY WARES 180 S 131 (JOINT VENTURE)
In regard to the question as to whether or not the ASI group may vote their additional equity during
Limitations on power elections of Saniwares' board of directors. As in other joint venture companies, the extent of ASI's
1. Ratification of the contract participation in the management of the corporation is spelled out in the Agreement. Section 5(a) hereof
Both managing and managed corporation: Majority votes of quorum of BOD + Majority says that three of the nine directors shall be designated by ASI and the remaining six by the other
stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in consonance with
votes of respective shareholders representing the OCS (not in joined session)
the minority position of ASI.
Interlocking interest: At least one stockholder represents interest in both managing Having entered into a well-defined contractual relationship, it is imperative that the parties
and managed corporation and owns more than 30% ownership of either should honor and adhere to their respective rights and obligations thereunder. Appellants seem to contend
corporation that any allocation of board seats, even in joint venture corporations, are null and void to the extent that
such may interfere with the stockholder's rights to cumulative voting as provided in Section 24 of the
o Additional requirement: 2/3 votes of OCS of managed corporation
Corporation Code.
Interlocking directors: Majority of BOD in both corporations are one and the same. On the one hand, the clearly established minority position of ASI and the contractual allocation of
o Additional requirement: 2/3 votes of OCS of managed corporation board seats cannot be disregarded. On the other hand, the rights of the stockholders to cumulative voting
2. Period of the contract should also be protected.
GR: Must not exceed 5 years
XPN: Contracts which relate to the exploration, development, exploitation or utilization of natural resources -> PNB V PRODUCER’S WAREHOUSE 42 P 608
follow period as provided for by law Under the written contract between them, the Produce Company was the general manager of the defendant's

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 warehouse business, and that it had authority to issue quedans in its name, and as its corporate act and  It refers to an act outside or beyond corporate powers, including those that may ostensibly be
deed. That the quedans in question are duly authenticated, and were duly issued by the defendant to, and in within such powers but are, by general or special laws, prohibited or declared illegal.
the name of, the Produce Company, and when issued were duly endorsed, and delivered to the plaintiff for  It is an act which is not positively forbidden, but impliedly forbidden because not expressly or
value. For aught that appears in the record, the bank was acting in good faith, and the quedans were duly impliedly authorized or necessary or incidental in the exercise of the powers so conferred.
issued, endorsed and delivered to it as collateral in the ordinary course of business. Although there may have
been fraud, there is no allegation or proof that the bank was a party to it, or had any knowledge of it, and Note:
this court has no right to assume that the bank was a party to a fraud. Giving to the quedans their legal If the contract is ultra vires but has been completely performed by both parties, it can no longer be
force and effect, it must follow that at the time the demand was made; the bank was the owner and entitled set aside.
to the possession of the copra therein described. The receipts call for 15,699.34 piculs of copra, but plaintiff If it has been performed by one party and the other party doesn't comply, if he is sued, he cannot
admits that, with its consent, 1,112.15 piculs of copra, of the declared value of P18,350, were delivered to the
raise the defense that the contract is ultra vires because having benefited from the performance of
Produce Company from and out of receipt No. 1255. This would leave 14,587.19 piculs of copra evidenced by
that contract, he will be in estoppel to raise that defense.
the quedans.

Ultra vires acts

NIELSON V LEPANTO, 26 S 540  Acts done beyond the powers of the corporation as provided for in the law or its articles of
By the contract of agency a person binds himself to render some service or to do something in representation incorporation;
or on behalf of another, with the consent or authority of the latter.
Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a Test:If the act is one which is lawful in itself
like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such  The act in question is not in direct and immediate furtherance of the corporation’s business,
pay ore as may be found therein and to market the metallic products recovered therefrom which may prove and is not fairly incident to the express powers and reasonably necessary to their exercise.
to be marketable, as well as to render for Lepanto other services specified in the contract.  Acts or contracts entered into in behalf of the corporation by persons who have no corporate
Moreover, the contract thus entered into pursuant to the offer made by Nielson and accepted by authority; and
Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it  Acts or contracts which are per se illegal as being contrary to law.
shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract  The act is illegal per se
because it had lost its trust and confidence in Nielson.
In the construction of an instrument where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect to all, and if some stipulation of any contract
 Harden Test:
should admit of several meanings, it shall be understood as bearing that import which is most adequate to Even when acts are illegal per se, when only public or government policy is at stake and
render it effectual. no private wrong is committed, the courts will the parties as they are, in accordance with
Thus, by express stipulation of the parties, the management contract in question is not revocable their original contractual expectations.
at the will of Lepanto. The Court ruled that this management contract is not a contract of agency as defined
in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Effects of ultra vires acts which are not illegal
Code. An ultra vires contract, while executory on both sides, cannot be enforced by either
party thereto.
When an ultra vires contract has been fully performed on both sides, neither party can
TUASON V BOLANOS 28 MAY 1954
maintain an action to set aside the transaction or to recover what has been parted with.
There is nothing to the contention that the persent action is not brought by the real party in interest, that is,
by J. Tuason & Co., Inc. The Rules of Court requires that action must be brought in the name of the real Doctrine: The defense of ultra vires cannot be set up or availed of in completed or
party in interest. consummated transaction.
The practice is for an attorney-at-law to bring the action that is to file the complaint, in the name
of the plaintiff. That practice appears to have been followed in this case, since the case is signed by the law
firm of Araneta and Araneta, ―counsel for plaintiff‖ and commences with the statement ―comes plaintiff, When an ultra vires contract has been performed on one side and the other has received
through its undersigned counsel‖. It is true that the complaint also states that the plaintiff is ―represented benefits by reason of such performance, recovery is permitted in most courts on behalf of the
herein by its Managing Partner Gregorio Araneta, Inc. ― another corporation, but there is nothing against former (one who performed) on the ground that it would be unjust to sanction retention of benefits
one corporation being represented by another person, natural or juridical, in suit in court. coupled with refusal to perform.
The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the
theory that it is illegal for two corporations to enter into partnership is without merit, for the true rule is Who may invoke ultra vires
that ―through a corporation has no power to enter into a partnership, it nevertheless enter into a joint a) State
venture with the another where the nature of that venture is in line with the business authorized by its b) Stockholders, except when laches set in
charter.‖
c) Strangers, only if he was directly injured by such act or contract
d) Competitors in business, but only if there is invasion of some legal or equitable right and not
K. ULTRA VIRES ACTS merely on the ground of injurious competition, where such acts are neither public nuisances or
trespasses
Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise e) Creditors, only when the contract is entered into in fraud of creditors
any corporate powers except those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the powers so conferred.
HEIRS OF PAEL V CA 371 S 587
Notwithstanding its belated filing, the motion for intervention of U.P. is granted, albeit the adjudication
Ultra vires, defined thereof shall be limited to a determination of the alleged overlapping or encroachment between U.P.‘s title,
on the one hand, and respondents‘ TCT Nos. 52928 and 52929, on the other hand.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 The Court highlighted the citation in the comment of Intervenor U.P., specifically citing the business, made in connection with their sale, are not ultra vires, and are binding.
decision in Roberto A. Pael et al. v. Court of Appeals, et al., supra, wherein the title of the Paels was declared
to be of dubious origin and a fabrication. Hence, since respondents derive their titles from a defective title,
their titles should also be null and void. PIROVANO V DELA RAMA STEAMSHIP CO 96 P 335
Considering the conflicting claims by U.P. and respondents, the ascertainment of boundaries of Even assuming that the donation was ultra vires, still it cannot be invalidated or declared legally ineffective
the lands they respectively claim becomes imperative. The instant cases have altogether taken more than for that reason alone, it appearing that the donation represents not only the act of the Board but also that of
eight (8) years. The boundaries of the properties covered by the disputed titles of respondents and the the stockholders themselves since they expressly ratified the resolution. By this ratification, the infirmity of
boundaries of the lands covered by the title of U.P. are not discussed therein. Thus, in order to avoid the the corporate act, if any, has been obliterated thereby making the act perfectly valid and enforceable,
institution of new cases and thus obviate further litigation, the case should be remanded to the Court of especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be
Appeals for reception of evidence relevant to determining the boundaries of the conflicting claims between set up against completed or consummated transactions.
U.P. and respondents Chin and Mallari over the property in dispute An ultra vires act may either be an act performed merely outside the scope of the powers granted
to the corporation by its AOI or one which is contrary to law or violative of any principle which would void
any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely
PILIPINAS LOAN V SEC 356 S 193 ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab
A corporation, under the Corporation Code, has only such powers as are expressly granted to it by law and by initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable
its articles of incorporation,those which may be incidental to such conferred powers, those reasonably and thus can be ratified by the stockholders.
necessary to accomplish its purposes and those which may be incident to its existence. In the case at bar, the The defendant corporation, therefore, is now prevented or estopped from contesting the validity of
limit of the powers of petitioner as a corporation is very clear, it is categorically prohibited from "engaging in the donation. This is especially so in this case when the very directors who conceived the idea of granting
pawnbroking as defined under PD 114". Hence, in determining what constitutes pawnbrokerage, the said donation are practically the stockholders themselves, with few nominal exceptions.
relevant law to consider is PD 114. This reference to PD 114 is also in line with Article 2123 of the Civil.
Clearly, the recital in the complaint of Filipinas Pawnshop that Pilipinas Loan is engaged in the
pawnshop business when it is not authorized to do so by its articles of incorporation amounts to fraud, REPUBLIC V ACOJE MINING 7 S 361
detrimental not only to the corporation but also to the stockholders and the public. The billboards of Pilipinas The corporate act was a necessary corollary to promote the interest and welfare of the corporation. This is
loan uses the word ―SANGLAAN‖ which cannot but give the impression to the public that its establishment further bolstered by the fact that the opening of the post was upon the request of the company for the
is more of a pawnshop than a lending institution servicing different kinds of loans. The use of such word by convenience and benefit of its employees, and not an idea of the Director of Posts. Thus, having benefited
petitioner was more calculated to attract customers who will acquire loans on the security of personal from the agreement, the corporation is estopped from raising the defense that the said corporate act by its
properties alone board in conforming to the condition imposed by the Director of Posts is ultra vires.
Neither can the corporation interpose the defense that its liability is only that of a guarantor. A
mere reading of the resolution of the Board of Directors dated August 31, 1949, upon which the plaintiff
CRISOLOGO V CA 117 S 594 based its claim, would show that the responsibility of the defendant company is not just that of a guarantor.
The provision of the Negotiable Instruments Law which holds an accommodation party liable on the The phraseology and the terms employed are so clear and sweeping and that the defendant assumed 'full
instrument to a holder for value, although such holder at the time of taking the instrument knew him to be responsibility for all cash received by the Postmaster.' Here the responsibility of the defendant is not just
only an accommodation party, does not include nor apply to corporations which are accommodation parties. that of a guarantor. It is clearly that of a principal."
This is because the issue or indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is ultra vires. Hence, one who has taken the instrument
with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an REPUBLIC V SECURITY CREDIT AND ACCEPTANCE CORP 19 S 58
accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the In dissolving SCAC, the Court held that the corporation was indeed engaged in the business of banking
indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the without first securing the administrative authority required by RA No. 337.
accommodation of another, he cannot recover against the corporation thereon. Although, admittedly, SCAC has not secured the requisite authority to engage in banking,
By way of exception, an officer or agent of a corporation shall have the power to execute or indorse defendants deny that its transactions partake of the nature of banking operations. Note however that, in
a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically consequence of their propaganda campaign, a total of 59,463 savings account deposits have been made by the
authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have no power to public with SCAC and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out
execute for mere accommodation a negotiable instrument of the corporation for their individual debts or to such persons as SCAC deemed suitable. It is clear that these transactions partake of the nature of
transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since banking, as the term is used in Section 2 of RA No. 337. Indeed, a bank has been defined as: A moneyed
such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved institute founded to facilitate the borrowing, lending, and safe-keeping of money and to deal in notes, bills of
in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that exchange, and credits; an investment company which loans out the money of its customers, collects the
the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts interests, and charges a commission to both lender and borrower is a bank; any person engaged in the
in connection therewith. business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although
but one of these functions is exercised.
The illegal transactions thus undertaken by SCAC to warrant its dissolution is apparent from the
CARLOS V MINDORO SUGAR 57 S 343 fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it
The Philippine Trust Company has full powers to acquire personal property such as the bonds in question. is willful and has been repeated 59,643 times, and that its continuance inflicts injury upon the public, owing
Being authorized to acquire the bonds, it was given implied power to guarantee them in order to place them to the number of persons affected thereby.
upon the market under better, more advantageous conditions, and thereby secure the profit derived from
their sale. It is not, however, ultra vires for a corporation to enter into contracts of guaranty or suretyship
where it does so in the legitimate furtherance of its purposes and business. And it is well settled that where a
corporation acquires commercial paper or bonds in the legitimate transaction of its business it may sell them,
IV. BY-LAWS
and in furtherance of such a sale it may, in order to make them the more readily marketable, indorse or A. FUNCTION
guarantee their payment.
Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1)
Guaranties of payment of bonds taken by a loan and trust company in the ordinary course of its

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 GR: They are not bound by the by-laws of a corporation since the by-laws operate merely as an
month after receipt of official notice of the issuance of its certificate of incorporation by the Securities internal rules among stockholders
and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. XPN: When the third person has knowledge of its provisions either actually or
For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at constructively at the time the transaction in question was entered into.
least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-
stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members A corporate contract cannot be held invalid just because the signatory thereon was not the
voting for them and shall be kept in the principal office of the corporation, subject to the inspection of chairman of the board which allegedly violated the corporation's by-laws. Since by-laws operate
the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the merely as internal rules among the stockholders, they cannot affect or prejudice third persons who
directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities deal with the corporation unless they have knowledge of the same (PMI Colleges v. NLRC [1997])
and Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
NAPKIL V IBC 370 S 653
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the articles of incorporation. The fact that the position of Comptroller is not expressly mentioned among the officers of the IBC in the By-
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Laws is of no moment, because the IBC's Board of Directors is empowered under Section 25 of the
Commission of a certification that the by-laws are not inconsistent with this Code. Corporation Code and under the corporation's By-Laws to appoint such other officers as it may deem
necessary.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
The by-laws may and usually do provide for such other officers," and that where a corporate office
thereto of any bank, banking institution, building and loan association, trust company, insurance is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of
company, public utility, educational institution or other special corporations governed by special laws, directors may also be empowered under the by-lawsto create additional officers as may be necessary.
unless accompanied by a certificate of the appropriate government agency to the effect that such by- Furthermore, as petitioner's appointment as comptroller required the approval and formal action of the IBC's
laws or amendments are in accordance with law. (20a) Board of Directors to become valid, it is clear therefore holds that petitioner is a corporate officer whose
dismissal may be the subject of a controversy cognizable by the SEC under Section 5(c) of P.D. 902-A which
includes controversies involving both election and appointmentof corporate directors, trustees, officers, and
By-laws, defined managers. Had petitioner been an ordinary employee, such board action would not have been required.
 These are rules of action adopted by a corporation for its internal government and for the
government of its stockholders or members and those having the direction, management and
control of its affairs in their relation to the corporation and as among themselves. PI COLLEGES V NLRC 277 S 462
 Inherent power: Power to adopt by-laws by is inherent in every corporation. The contract of employment is valid. The contract remained valid even if the signatory thereon was not the
 Is not binding on extra-corporate parties (except if third parties have prior notice of the by laws) chairman of the board which allegedly violated petitioner‘s by-laws. Since by-laws operate merely as internal
rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation,
Function of by-laws unless they have knowledge of the same. No proof appears on record that private respondent ever knew
 To define rights and duties of corporate officers and directors or trustees, and of stockholders or anything about the provisions of the said by-laws. In fact, petitioner itself merely asserts the same without
members towards the corporation and among themselves with reference to the management of even bothering to attach a copy or excerpt thereof to show that there is such provision. That this allegation
corporate affairs and to regulate transaction of the business of the corporation in a particular way. has never been denied to private respondent nor necessarily signify admission of its existence because
technicalities of law and procedure and the rules obtaining in the courts of law do not strictly apply to
 Source of authority for corporate officers and agents of the corporation
proceeding of this nature
Note: By-laws supplement the AoI.

Binding effect of by-laws LOYOLA GRAND VILLAS V CA 276 S 681

۩ As to corporation and its officers The Supreme Court ruled that the non-filing of the by-laws within the period of 1 month from the issuance
by SEC of the Certificate of Incorporation will not result to the automatic dissolution of the corporation
 By laws, as the self-imposed private laws of a corporation, have substantially the same because the word ―MUST‖ in Sec 46 of the Corporation Code is merely directory not mandatory in meaning.
force and effect as laws of the corporation as have the provisions of its charter insofar as In fact the second paragraph allows the filing of by-laws even prior to incorporation.
the corporation and the persons within it are concerned. This provision of the Code rules out mandatory compliance with the requirement of filing the by-
laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by
 Corporation and its directors (or trustees) and officers are bound by and must comply the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that
with them unless they are changed, amended, or repealed in accordance with Sec. 48. period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the
corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and
 BUT subordinate employees without actual knowledge of the by-laws are not bound related statutes.

۩ As to stockholders or members CITIBANK NA V CHUA 220 S 75

GR: Stockholders or members of a corporation are presumed to know the provisions of the Section 46 (which was relied upon by the CA) starts with the phrase "Every corporation formed under this
corporation's by-laws Code", which can only refer to corporations incorporated in the Philippines. Hence, Section 46, in so far as it
Note: It is required that the original by-laws be approved by at least majority of the OCS refers to the effectivity of corporate by-laws, applies only to domestic corporations and not to foreign
(including non-voting) or of the members, signed by the stockholders or members voting corporations. On the other hand, Section 125 of the same Code requires that a foreign corporation applying
for them, and kept in principal office of the corporation, subject to their inspection for a license to transact business in the Philippines must submit, among other documents, to the SEC, a copy
during office hours. of its articles of incorporation and by-laws, certified in accordance with law. Unless these documents are
submitted, the application cannot be acted upon by the SEC.
۩ As to third persons Since the SEC will grant a license only when the foreign corporation has complied with all the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's  Must not impair obligations of contracts;
by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of the o A by-law may not operate retrospectively if it does thereby disturb or impair
foreign corporations‘ by-laws. It may not have been made in express terms; still it is clearly an approval. any existing contract or vested right.
Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in
the Philippines.  Must be general and uniform in their operation and not directed against particular
individuals;
B. KINDS o It must affect alike, and operate equally as to all stockholders or members
Kinds of by-laws under the same circumstances, and not be directed against particular
 Pre-incorporation by-laws: Adopted and filed, prior to incorporation, with the articles of stockholders or members.
incorporation o If the by-law were to be applied in the case of one stockholder but waived in
By-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall the case of another, then it could be reasonably claimed that the by-law was
be approved and signed by all the incorporators and submitted to the SEC, together with being applied in a discriminatory manner (Gokongwei v. SEC [1979]).
the Articles of Incorporation.
 Must be consistent with the charter or articles of incorporation;
 Post-incorporation by-laws: Every corporation formed under this Code must, within one o A by-law is subordinate to the charter of the corporation and part of its charter
(1) month after receipt of official notice of the issuance of its Certificate of Incorporation is its AoI, thus a by-law which is not consistent with the charter but is in
by the SEC adopt a code of by-laws for its government not inconsistent with this Code. conflict with or repugnant to it, is VOID.
o A by-law can neither enlarge the rights and powers conferred by the charter
C. WHEN TO ADOPT AND FILE nor restrict the duties and liabilities imposed thereby, and in case it attempts
When to adopt by-laws to do so, the charter will prevail
- Pre-incorporation by-laws: Any time prior to incorporation
 Must be reasonable (capable of compliance)
- Post-incorporation by-laws: Within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the SEC o A by-law which disqualifies a competitor from election to the BoD of another
corporation has been held as valid and reasonable (Gokongwei v. SEC [1979]).
o Authority granted to a corporation to regulate the transfer of its stock does not
Effect to failure to file by-laws empower the corporation to restrict the right of a stockholder to transfer his
shares, but merely authorizes the adoption of regulations as to the formalities
- Rule: Non-filing of by-laws on time will not result in the automatic dissolution of the
and procedure to be followed in effecting transfer (Thomson v. Court of
corporation.
Appeals, 298 SCRA 280 [1998]).
o By-laws are intended merely for the protection of the corporation, and
Required: There must be a hearing to determine the existence of the ground.
prescribe regulation, not restriction; they are always subject to the charter of
The penalty is not necessarily revocation but may only be suspension
the corporation. (Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 [1992]).
Waiver of by-laws
Construction and application of by-laws
- Note: Such waiver of by-law is a QUESTION OF FACT.
- Rule on construction: By-laws should be construed and given effect according to the general
rules governing the construction of contracts. - By the corporation May be waived by the corporation both express and implied
- By the stockholders or members
- When strict construction: Only if the by-laws provides for disenfranchisement of members of a - May be waived by the stockholder or member when it is he whose individual rights
corporation and penal in character. are advanced or protected by its provisions.
- Note: The directors or trustees, or officers of corporation may not waive the by-laws
Prospective: By-laws should be made to apply prospectively, not retroactively for the stockholders or members
LOYOLA GRAND VILLAS V CA, 276 S 681
Effectivity of by-laws The Supreme Court ruled that the non-filing of the by-laws within the period of 1 month from the
 By-laws become effective only upon the issuance by the SEC of a certification that they issuance by SEC of the Certificate of Incorporation will not result to the automatic dissolution of the
are not inconsistent with the Code. corporation because the word ―MUST‖ in Sec 46 of the Corporation Code is merely directory not
Note: In case of foreign corporations licensed to transact business in the Philippines, matters mandatory in meaning. In fact the second paragraph allows the filing of by-laws even prior to
relating to their by-laws are governed by the law governing their incorporation. incorporation.
This provision of the Code rules out mandatory compliance with the requirement of filing the
Validity by laws by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of
 They must not be contrary to law and not inconsistent with the Corporation Code; incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the
o Subject to the provisions of the Constitution, the Corporation Code, other by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for
the "government" of the corporation but these are subordinate to the articles of incorporation as well as
special laws, and the AoI.
to the Corporation Code and related statutes.
o A by-law or provision thereof that is contrary to law cannot attain validity
through acquiescence or on the basis of long practice, nor give rise to any
vested right (Grace Christian HS v. CA [1997]) D. CONTENTS
 Must not be contrary to morals and public policy;
Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: Remedy of mandamus: The remedy of mandamus is generally available to compel officers of a
1. The time, place and manner of calling and conducting regular or special meetings of the directors or corporation to perform the duties imposed on them by the by-laws.
trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or Issuance of certificate of stocks
members;  Matter is internal one which the law has left for the corporation to decide.
3. The required quorum in meetings of stockholders or members and the manner of voting therein;  BUT the authority granted to a corporation to regulate the transfer of its stock does not
4. The form for proxies of stockholders and members and the manner of voting them; empower it to restrict the right of a stockholder to transfer his shares, but merely
5. The qualifications, duties and compensation of directors or trustees, officers and employees; authorizes the adoption of regulations as to the formalities and procedure to be followed
6. The time for holding the annual election of directors of trustees and the mode or manner of giving effecting the transfer (Thomson v. CA, [1998])
notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or SEC POLICY ON DATE OF ANNUAL STOCKHOLDER’S MEETING
trustees; AUTHORITY TO ELECT ADDITIONAL BY-LAWS OFFICERS
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
FLEISCHER V BOTICA NOLASCO,47 P583
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate
business and affairs. (21a) The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of
them in favor of whomsoever he pleases, without any other limitation in this respect, than the general
provisions of law.
Place of meeting Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock
Directors' or trustees' meeting: Place determined in by-laws "anywhere in or outside of should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law
the Philippines" should be made to harmonize with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the corporation
Stockholders' meeting: Must always be held at the city or municipality where the by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended
the limits fixed by law in the same section, and has not taken into consideration the provisions of
principal office of the corporation is located or if practicable in the principal office of the
section 35 of Act No. 1459.
corporation As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory to the general
Quorum policy of the laws of the land
 By-laws cannot provide lesser number to constitute a quorum compared that of required The only restraint imposed by the Corporation Law upon transfer of shares is found in
by law for the validity of certain acts. section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as
 A corporation has also the power to prescribe in their AoI or by-laws a number greater between the parties, until the transfer is entered and noted upon the books of the corporation so as to
than the majority of the members of the board of directors or trustees to constitute a show the names of the parties to the transaction, the date of the transfer, the number of the
quorum certificate, and the number of shares transferred." This restriction is necessary in order that the
officers of the corporation may know who are the stockholders, which is essential in conducting
Qualifications of directors elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of
 The qualifications of directors may be fixed in the by-laws provided that the minimum the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights
of shareholders, and in restraint of trade.
legal requirement (owner of at least one share) is met.

GOKONGWEI JR V SEC, 89 S 336

Disqualification for position of director It is recognized by all authorities that 'every corporation has the inherent power to adopt by-laws 'for
 E.g. Being engaged in any business which competes with or is antagonistic to that of the its internal government, and to regulate the conduct and prescribe the rights and duties of its
corporation. members towards itself and among themselves in reference to the management of its affairs.'" At
common law, the rule was "that the power to make and adopt by-laws was inherent in every
Compensation to stockholders or members corporation as one of its necessary and inseparable legal incidents.
 The by-laws may not provide compensation to them, if they are not "directors or trustees, Any person "who buys stock in a corporation does so with the knowledge that its affairs are
officers and employees." dominated by a majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
Election and term of office of directors or trustees by-laws and not forbidden by law."
Rule: Neither can the corporation provide in the by-laws for the manner of election and the term of Under section 22 of the same law, the owners of the majority of the subscribed capital stock
office of directors or trustees which are already provided by law. may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner
has a vested right to be elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate charter and the by-law shall be
Imposition of penalties or sanctions subject to amendment, alteration and modification.
 The corporation has a power to enforce its by-laws properly made, by pecuniary It is a settled that corporations have the power to make by-laws declaring a person
penalties and corporate disabilities proportionate to the violation. employed in the service of a rival company to be ineligible for the corporation's Board of Directors.
".An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a
Note: It has been held that by-laws cannot be enforced by forfeiture of property or stock of the director in a corporation whose business is in competition with or is antagonistic to the other
defaulting member. corporation is valid."

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 GOVERNMENT V EL HOGAR FILIPINO 50 P 399 Previous notice in revocation not necessary: The revocation is valid notwithstanding
that no previous notice was given to stockholders or members of the intention to
The by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187
of the Corporation Law, which expressly declares that the board of directors shall not have the power
propose such revocation.
to force the surrender and withdrawal of unmatured stock except in case of liquidation of the
corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws Implied repeal of by-law
has never been enforced, and in fact no attempt has ever been made by the board of directors to make Rule:
use of the power therein conferred. It appears, however, that no annual meeting of the shareholders  A by-law is impliedly repealed by a subsequent by-law inconsistent with it.
called since that date has been attended by a sufficient number of shareholders to constitute a
quorum, with the result that the provision referred to has no been eliminated from the by-laws, and it Filing and effectivity of amended or new by-laws
still stands among the by-laws of the association, notwithstanding its patent conflict with the law.  A certificate of the appropriate government agency, when required, must
be secured first before the SEC accepts such amended by-laws.

E. AMENDMENT/REJECTION OF BY-LAWS Effectivity: Amended or new by-laws shall only be effective upon the issuance
by the SEC of a certification that the same are not inconsistent with the Code.
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof,
and the owners of at least a majority of the outstanding capital stock, or at least a majority of the If special corporation: If governed by special law, the amended by-laws or new
members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may by-laws shall be effective only upon the approval by BOTH the appropriate
amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the government agency and the SEC.
outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt Prospective: The amended or new by-laws shall be prospectively and not
new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or retroactively
repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the members in BY-LAWS RESOLUTION
non-stock corporations, shall so vote at a regular or special meeting.
Nature and subject matter Permanent rule of action (except if Ordinarily in its operation,
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be
repealed or amended) of the applying usually to a single act or
attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
conduct of the corporation transmission of the corporation or
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with
to some specific person, situation
the Securities and Exchange Commission the same to be attached to the original articles of
or occasion.
incorporation and original by-laws.
Rule in Case of conflict Will prevail over a resolution
The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and Necessity of approval Its other rules and regulations do
23a) not need its approval, unless they
involve matters where the law
requires such approval.
Formalities
 By a vote of the majority of the BOD/BOT and the owners of at least a BYLAWS AOI
majority of the OCS (both voting and non-voting)/members, at a regular or Merely rules and regulations adopted by the The charter or fundamental law of the corporation
special meeting DULY called for the purpose. corporaton
Usually after the incorporation by the Executed before incorporation by the
 THUS, it cannot be done in a referendum. stockholders or members incorporators
Condition subsequent to corporate existence Filing of the same is a condition precedent to
Delegation of power to amend by-law corporate existence
Rule: The owners of 2/3 of the OCS or members may delegate to the BOD or trustees
the power to amend or repeal any by-laws
 Power to amend AoI is non-delegable. SALAFRANCA V PHILAMLIFE, DECEMBER 23, 1998
 HOWEVER, the authority given to the BOD to alter or amend the by-laws Salafranca had already attained the status of a regular employee, as evidenced by his eleven years of
must be so construed as to restrict it from altering or annulling a by-law service with PVHA. Accordingly, petitioner enjoys the right to security of tenure and his services may be
imposing a limitation on its powers. terminated only for causes provided by law. While PVHA has the right to terminate the services of
Salafranca, this is subject to both substantive and procedural grounds. PVHA failed to substantiate
Necessity of meeting: Although not expressly mentioned under the law, the delegation petitioner’s dismissal, rendering the latter’s termination illegal.
of such power must be properly made in a meeting called for that purpose. In an effort to validate the dismissal of Salafranca, respondents posit the theory that the
latter’s position is co-terminous with that of the Board of Directors, as provided for in its amended by-
Revocation of delegated power of BOD or BOT laws. Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being
 The power delegated is deemed revoked whenever the stockholders in the exercise of management prerogative or business judgment. However this right, extensive as it may
owning or representing a majority of the OCS or a majority of the members be, cannot impair the obligation of existing contracts or rights.
in non-stock corporations, shall so vote at a regular or special meeting. PVHA’s insistence that it can legally dismiss Salafranca on the ground that his tenure has

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 expired is untenable. Salaranca, being a regular employee, is entitled to security of tenure; hence, his o Basically same as "actual capital stock"
services may only be terminated for causes provided by law. A contrary interpretation would not find
justification in the laws or the Constitution. If the Court was to rule otherwise, it would enable an 4. Outstanding capital stock
employer to remove any employee from his employment by the simple expediency of amending its by- The portion of the capital stock which is issued and held by persons other than the
laws and providing that his/her position shall cease to exist upon the occurrence of a specified event. corporation itself.
If PVHA wanted to make the Salafranca’s position co-terminous with that of the Board of Code: The total shares of stock issued to subscribers or stockholder, whether or not
Directors, then the amendment must be effective after Salafranca’s stay with PVHA, not during his term. fully or partially paid (as long as there is a binding subscription agreement), except
Obviously, the measure taken by the private respondent in amending its by-laws is nothing but a treasury shares.
devious, but crude, attempt to circumvent Salafranca’s right to security of tenure as a regular employee
guaranteed under the Labor Code. 5. Legal Capital
Amount equal to the aggregate par value and/or issued value of the outstanding capital
(END OF QUIZZ FOR CASES) stock.
Excess not part of legal capital: When par value shares are issued above par, the
premium or excess is not to be considered as part of the legal capital.
VI. CAPITAL STRUCTURE: STOCKS AND STOCKHOLDERS All legal capital if no par value shares: In case of no par value shares, the entire
I. CAPITAL STOCK consideration received forms part of legal capital and shall not be available for
distribution as dividends
CAPITAL STOCK CAPITAL
The amount fixed in the articles of incorporation, to The entire property or assets of the Section 13. Amount of capital stock to be subscribed and paid for the purposes of
be subscribed and paid in or agreed to be paid in by corporation incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in
the stockholders of a corporation, in money, the articles of incorporation must be subscribed at the time of incorporation, and at least
property, services or other means. twenty-five (25%) per cent of the total subscription must be paid upon subscription, the
Abstract: Amount Concrete: Actual corporate property balance to be payable on a date or dates fixed in the contract of subscription without need of
Amount fixed in the articles of incorporation (where Fluctuates or varies from day to day call, or in the absence of a fixed date or dates, upon call for payment by the board of
shares are with par value) and is unaffected by profits
accordingly as there are profits or losses or directors: Provided, however, That in no case shall the paid-up capital be less than five
and losses. appreciation or depreciation of corporate Thousand (P5,000.00) pesos. (n)
assets.
When issued belongs to the stockholders It belongs to the corporation
Always personal Real or personal property TRUST FUND DOCTRINE
CAPITAL STOCK LEGAL CAPITAL
Merely an amount and remains unchanged except as outstanding shares are increased or reduced in PLDT v NTC 593 S 365
number or amount.
ISSUE:
Limits the maximum amount or number of shares that Sets the minimum amount of the corporate Whether or not the value transferred from the unrestricted retained earnings of PLDT to the capital stock
may be issued without formal amendment of the assets which for the protection of account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF.
articles of incorporation corporate creditors, may not be lawfully
distributed to stockholders. RULING:
NO.
Kinds of capital stock In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account
1. Authorized capital stock to its capital account. It is the same amount that can be loosely termed as the "trust fund" of the corporation.
The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of
The amount of capital stock as specified in the articles of incorporation.
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no
When shares have par value: ACS same as capital stock part of the subscribed capital may be returned or released to the stockholder (except in the redemption of
When share have no par value: No ACS, but it has capital stock the amount of which redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed
is not specified in the AOI. capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own
Note: Additional shares may not be issued unless the AOI are amended by vote of shares using the subscribed capital as the considerations therefore.
the stockholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is
Void shares: Share which exceeds the ACS; no rights whatsoever distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the stockholders equity is increased. Furthermore,
the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes
2. Subscribed capital stock for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be
Amount of capital stock subscribed, whether fully paid or not. given to the stockholders subject to the availability and conditioned on a certain level of retained earnings.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the
It connotes an original subscription contract for the acquisition by a subscriber of monetary value of their dividend for capital stock, and the monetary value they forego is considered the
unissued shares in a corporation. actual payment for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired
by shareholders for the monetary value they forego are under the coverage of the SRF and the basis for the
3. Paid-up capital stock latter is such monetary value as declared by the board of directors.
That portion of the subscribed or outstanding capital stock that is actually paid.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 NTC v CA 370 P 538 (1999) The Court partly granted the petition and held that the term ―capital‖ in Section 11, Article XII of the
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone Company Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, i.e.,
vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to be charged by to the total common shares in PLDT.
NTC on PLDT, is ―the capital stock subscribed or paid and not, alternatively, the property and It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
equipment.‖ The fee in question is based on the capital stock subscribed or paid, nothing less nothing common shares of PLDT. In fact, based on PLDT‘s 2010 General Information Sheet (GIS), which is a
more. document required to be submitted annually to the Securities and Exchange Commission, foreigners hold
The ―Trust Fund‖ doctrine considers this subscribed capital as a trust fund for the payment of the debts of 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, words, foreigners hold 64.27% of the total number of PLDT‘s common shares, while Filipinos hold only
no part of the subscribed capital may be returned or released to the stockholder (except in the redemption 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners
of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit
capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution.
shares using the subscribed capital as the consideration therefore. As shown in PLDT‘s 2010 GIS, as submitted to the SEC, the par value of PLDT common shares
In the same way that the Court in PLDT vs. PSC has rejected the ―value of the property and is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
equipment‖ as being the proper basis for the fee imposed by Section 40(e) of the Public Service Act, as preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70
amended by Republic Act No. 3792, so also must the Court disallow the idea of computing the fee on ―the of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while
par value of [PLDT‘s] capital stock subscribed or paid excluding stock dividends, premiums, or capital in foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85%
excess of par.‖ Neither is the assessment made by the National Telecommunications Commission on the of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably
basis of the market value of the subscribed or paid-in capital stock acceptable since it is itself a deviation shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common
from the explicit language of the law. shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.

Gamboa v Teves, 9 October 2012

ISSUE:
Whether or not the term "capital" in Section 11, Article XII of the Constitution has long been
settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting.

AS NATIONALITY BASIS : CONTROL TEST V GRANDFATHER RULE RULING:

NO.
Since a specific class of shares may have rights and privileges or restrictions different from the
CITIZENSHIP OF CORPORATION rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section
A. CONTROL TEST 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without
 Citizenship or nationality of controlling stockholder dictates that of the corporation voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled
 Shares belonging to corporations or partnerships at least 60% of the capital of which is to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially
owned by Filipino Citizens shall be considered as of Philippine Nationality. (SEC.3 OF nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the
FIA, FIRST SENTENCE) common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of
course, if a corporation issues only a single class of shares, at least 60 percent of such shares must
 In the Foreign Investment Act, a corporation or partnership shall be considered as wholly
necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens
a Philippine National when 60% og the Outstanding Capital Stock is owned by Filipino.
must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or
 Aldo used in instances of war such that if it is an enemy corporation, there will be seizure any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino
if assets, termination of license, and taking over by the government over the corporation. citizens clearly breathes life to the constitutional command that the ownership and operation of public
B. GRANDFATHER RULE utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned.
 In instances where the citizenship of the corporation is ib doubt. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares,
 If the percentage of Filipino ownership in the corporation or partnership is less than 60%, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of
ONLY THE NUMBER OF SHARES CORRESPONDING TO SUCH PERCENTAGE shall be public utilities, as mandated by the Constitution.
counted as of Philippine Nationality. ( SEC 3. FIA, first sentence, phrase 2)
 There is a multiple layers of corporate holdings and the corporation has corporate
shareholders.
Express Investment v BayanTel, 5 December 2012
ISSUES:
Voting Control Test v Beneficial Control Test Whether or not the claims of secured and unsecured creditors should be treated pari passu during
rehabilitation.
Gamboa v Teves, 28 june 2011 Whether or not the debt-equity complies with the citizenship requirement under the Constitution.
ISSUE: RULING:

Whether or not the term ―capital‖ in Section 11, Article XII of the Constitution refer to the total YES.
common shares only, or to the total outstanding capital stock (combined total of common and non-voting As between the creditors, the key phrase is "equality is equity." When a corporation threatened by
preferred shares) of PLDT, a public utility. bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not anyone of them
should be given any preference by paying one or some of them ahead of the others. This is precisely the
Held: reason for the suspension of all pending claims against the corporation under receivership. Instead of

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with first case is the ‗liberal rule‘, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and
the receiver who is a duly appointed officer of the SEC. pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‗(s)hares belonging to
Since then, the principle of equality in equity has been cited as the basis for placing secured and corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
unsecured creditors in equal footing or in pari passu with each other during rehabilitation. In legal considered as of Philippine nationality.‘ Under the liberal Control Test, there is no need to further trace
parlance, pari passu is used especially of creditors who, in marshaling assets, are entitled to receive out of the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation
the same fund without any precedence over each other. which is at least 60% Filipino-owned is considered as Filipino.

YES. The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Applying this, two steps must be followed in order to determine whether the conversion of debt to Paragraph 7 of the 1967 SEC Rules which states, ―but if the percentage of Filipino ownership in the
equity in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign corporation or partnership is less than 60%, only the number of shares corresponding to such percentage
ownership of a public utility: First,identify into which class of shares the debt shall be converted, whether shall be counted as of Philippine nationality.‖ Under the Strict Rule or Grandfather Rule Proper, the
common shares, preferred shares that have the right to vote in the election of directors or non-voting combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e.,
preferred shares; Second, determine the number of shares with voting right held by foreign entities prior ―grandfathered‖) to determine the total percentage of Filipino ownership. Moreover, the ultimate Filipino
to conversion. If upon conversion, the total number of shares held by foreign entities exceeds 40% of the ownership of the shares must first be traced to the level of the Investing Corporation and added to the
capital stock with voting rights, the constitutional limit on foreign ownership is violated. Otherwise, the shares directly owned in the Investee Corporation.
conversion shall be respected.
In its Rehabilitation Plan, among the material financial commitments made by respondent In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of
Bayantel is that its shareholders shall "relinquish the agreed-upon amount of common stock[s] as the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases
payment to Unsecured Creditors as per the Term Sheet." Evidently, the parties intend to convert the where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
unsustainable portion of respondent's debt into common stocks, which have voting rights. If we indulge stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or
petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall have control the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
over 77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed by the doubt, the Grandfather Rule will not apply.
Filipinization provision of the Constitution. Therefore, the Court of Appeals acted correctly in sustaining
the 40% debt-to-equity ceiling on conversion.
Narra Nickel v Redmont Consolidated 28 January 2015
Issue: W/N the application by the SC of the grandfather resulted to the abandonment of the ‗control test‘
Narra Nickel v Redmont Consolidated 21 April 2014 Held:
Issue 1: W/N the Grandfather Rule must be applied in this case No. The ‗control test‘ can be applied jointly with the Grandfather Rule to determine the observance of
HELD: foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather
Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases where Rule are not incompatible ownership-determinant methods that can only be applied alternative to each
corporate layering is present. other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized activities, as the mining
First, as a rule in statutory construction, when there is conflict between the Constitution and a statute, operation involved in this case or the operation of public utilities.
the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of
the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control
Corporate layering is admittedly allowed by the FIA, but if it is used to circumvent the Constitution and in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform
other pertinent laws, then it becomes illegal. nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with
that the Grandfather Rule may be applied. Put in another manner, if the subject corporation‘s Filipino
Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied when the 60-40 equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which
Filipino-foreign equity ownership is in doubt. Doubt is present in the Filipino equity ownership of Narra, case, the need to resort to the Grandfather Rule disappears.
Tesoro, and MacArthur since their common investor, the 100% Canadian-owned corporation – MBMI, In this case, using the ‗control test‘, Narra, Tesoro and MacArthur appear to have satisfied the 60-40 equity
funded them. requirement. But the nationality of these corporations and the foreign-owned common investor that funds
them was in doubt, hence, the need to apply the Grandfather Rule.
Under the Grandfather Rule, it is not enough that the corporation does have the required 60% Filipino
stockholdings at face value. To determine the percentage of the ultimate Filipino ownership, it must first
be traced to the level of the investing corporation and added to the shares directly owned in the investee Smartmatic v COMELEC, 8 December 2015
corporation. Applying this rule, it turns out that the Canadian corporation owns more than 60% of the Issue:
equity interests of Narra, Tesoro and MacArthur. Hence, the latter are disqualified to participate in the Whether or not smartmatic JV is a Foreign corporation
exploration, development and utilization of the Philippine‘s natural resources. Held:
Perusing SMTC's GIS proves useful in applying the control test. Upon examination, SMTC's GIS reveals
Issue: Whether or not the petitioner corporations are Filipino and can validly be issued MPSA and EP. that it has an authorized capital stock of P226,000,000.00, comprised of 226,000,000 common stocks 116 at
Pl.00 par value, of which 100% is subscribed and paid. Applying the control test, 60% of SMTC's
Held: No. The SEC Rules provide for the manner of calculating the Filipino interest in a corporation for 226,000,000 shares, that is 135,600,000 shares, must be Filipino-owned. From the above-table, it is clear
purposes, among others, of determining compliance with nationality requirements (the ‗Investee that SMTC reached this threshold amount to qualify as a Filipino owned corporation. Indeed, the
Corporation‘). Such manner of computation is necessary since the shares in the Investee Corporation may application of the control test would yield the result that SMTC is a Filipino corporation. There is then no
be owned both by individual stockholders (‗Investing Individuals‘) and by corporations and partnerships truth to petitioners' claim that SMTC is 100% foreign-owned. Consequently, it becomes unnecessary to
(‗Investing Corporation‘). The said rules thus provide for the determination of nationality depending on confirm this finding through the grandfather rule since the test is only employed when the 60% Filipino
the ownership of the Investee Corporation and, in certain instances, the Investing Corporation. ownership in the corporation is in doubt.

Under the SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The
Agan v PIATCO, 21 January 2004

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 ISSUE: o Watered stocks are subject to Sec. 65 liability; you can hold responsible
Whether or Not the 1997 concession agreement is void, together with its amendments for being corporate officers liable.
contrary to the constitution. 2. No par value shares
 These are shares having no stated value in the article of incorporation.
RULING:  A no par value share has no par value but it has always an issued value, which is the
YES. consideration fixed by the corporation for its issuance.
The 1997 concession agreement is void for being contrary to public policy. The amendments have  Note: BoD can change the issued value of NPV shares unlike PV shares.
the effect of changing it into and entirely different agreement from the contract bidded upon. The  Note further that the law PROHIBITS the selling of stocks WITHOUT consideration.
amendments present new terms and conditions which provide financial benefit to PIATCO which may  NPV shares represent only an aliquot part of the whole number of such shares of
have the altered the technical and financial parameters of other bidders had they know that such terms
the issuing corporation and NOT proportionate interest in the capital stock
were available. The 1997 concession agreement, the amendments and supplements thereto are set aside
measured by value
for being null and void.
The petitioners have local standi. They are prejudiced by the concession agreement as their
Limitations:
livelihood is to be taken away from them. a) Shares which are no par value, cannot have an issued price of less than P5.00;
b) The entire consideration for its issuance constitutes capital so that no part of it should be
distributed as dividends;
c) They cannot be issued as preferred stocks;
II. CLASSIFICATION OF SHARES d) They cannot be issued by banks, trust companies, insurance companies, public utilities and
GR: The shares of stock in a corporation may be divided into classes or series of shares, or both, any building and loan association;
of which classes or series of shares may have such rights, privileges or restrictions thus must be e) The articles of incorporation must state the fact that it issued no par value shares as well as
stated in the AoI in order to be valid. the number of said shares;
XPNs: f) Once issued, they are deemed fully paid and non‐assessable.
a) No share may be deprived of voting rights except those classified and issued as "preferred" o This presumption is rebuttable.
or "redeemable" shares. o Non-assessable: Cannot be declared delinquent (if really not paid), thus it eliminates the risk
b) There shall always be a class or series of shares which have complete voting rights. of delinquency.
c) Any or all the shares or series of shares may have par value or have no par value as may be
provided for in the AoI, except that banks, trust companies, insurance companies, public 2. VOTING V NON-VOTING
utilities, and building and loan associations shall not be permitted to issue no par value shares VOTING AND NON-VOTING SHARES, DISTINGUISHED
of stock. 1. Voting shares
Everything is possible  Share with right to vote
Except:  Each common share shall be equal in all respect to every other common share.
1. Par Common non voting Thus, prohibited acts:
2. No par common non voting i. Issuing multiple voting and non-voting common shares
3. No par preferred/redeemable voting ii. Limiting the maximum number of votes per stockholder irrespective of the number of shares
4. No par preferred/redeemable non voting he holds.
REASON: Preferred and redeemable shares: May be deprived of voting rights
Common shares must always be voting Founder's shares: May be given exclusive right to vote and be voted for in the election of
Preferred or redeemable maybe deprived of voting rights directors for a limited period in which case voting common stocks will have no right to vote
Preferred/redeemable must always be par for directors.
Therefore: Note: Whenever a vote is necessary to approve a particular corporate act, such vote refers
Preferred/redeemable must always be par only to stocks with voting rights except those mentioned under Sec.6, par.6.
Preferred/redeemable may be deprived of voting rights o Rule: "One share, one vote" and NOT "one holder, one vote"
All common shares are voting shares
2. Non-voting shares
 Share without right to vote
 There must be EXPRESS denial of voting rights in AoI; otherwise, they are
1. PAR V NO PAR VALUE SHARES
considered as voting shares.
PAR VALUE AND NO PAR VALUE SHARES, DISTINGUISHED
Rules:
1. Par value shares
i. If stock is originally issued as voting stock, it may not thereafter be deprived of
- Shares with a value fixed in the articles of incorporation and the certificates of
the right to vote without the consent of the holder.
stock.
ii. The law only authorizes the denial of voting rights in the case of redeemable
Purpose: The par value fixes the minimum issue price of the shares.
shares and preferred shares, provided that there shall always be a class or series of
GR: A corporation cannot sell less than the par value but a shareholder may sell the same less
shares which have complete voting rights.
than the par value because it is his.
iii. Where non-voting shares are provided for, the Code requires that there shall
XPN: Corporation can sell REISSUED TREASURY SHARES even below par values.
always be a class or series of shares which have complete voting rights.
o May a corporation issue shares with different par values? YES.
iv. Only preferred and redeemable shares may be denied the right to vote.
o Shares sold below its par value is called watered stocks.
Instances where holders of non-voting shares are allowed to vote

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 These redeemable and preferred shares, when such voting rights are denied, shall VIMC in voting.
nevertheless be entitled to vote on the following fundamental matters: (AASIIMID) RULING:
a) Amendment of articles of incorporation YES.
b) Adoption and amendment of by‐laws SC found no grave abuse of discretion on the part of the SEC in not restraining VIMC. It
c) Sale, lease, exchange, mortgage, pledge or other disposition of all or adopted the SEC resolution stating that the sale of the shares of stock had long been perfected and
substantially all of the corporate property is presumed valid until declared otherwise. As against this presumption, petitioners' prayer for
d) Incurring, creating or increasing bonded indebtedness injunction cannot prevail as the issue of the validity of the sale is still to be resolved by the SEC.
e) Increase or decrease of capital stock Considering that the shares constitute the majority, it is more equitable that the same be
f) Merger or consolidation of the corporation with another corporation or other allowed to vote rather than be enjoined. As it has been ruled the removal of a majority SH from the
management of the corporation and/or the dissolution of a corporation in a suit filed by a minority
corporations
SH is a drastic measure. It should be resorted to only when the necessity is clear. With more
g) Investment of corporate funds in another corporation or business in accordance
reason, the Court will not deprive a SH of his right to vote his shares in the annual SHs' meeting,
with this Code except upon a clear showing of its lawful denial under the articles of incorporation or by-laws of the
h) Dissolution of the corporation. corporation, as it is a right inherent in stock ownership.

Gamboa v Teves, 28 June 2011 3. COMMON V PREFERED

The Court partly granted the petition and held that the term ―capital‖ in Section 11, Article XII of COMMON AND PREFERRED SHARES, DISTINGUISHED
the Constitution refers only to shares of stock entitled to vote in the election of directors of a public 1. Common shares
utility, i.e., to the total common shares in PLDT. -Shares which do not enjoy any preference, thus rights by owners are purely STATUTORY.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the - One which entitles the holder thereof to a pro rata division of profits, if there are any, and in its
common shares of PLDT. In fact, based on PLDT‘s 2010 General Information Sheet (GIS), which is
assets upon dissolution, without any preference or advantage in that respect over other
a document required to be submitted annually to the Securities and Exchange
stockholders or class of stockholders but equally with all other stockholders except preferred
Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDT‘s
stockholders.
common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares - Its holders stand upon equal footing, without extraordinary rights or privileges.
equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control - Common shares have complete voting rights.
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities o They cannot be deprived of said rights except as provided by law.
expressly mandated in Section 11, Article XII of the Constitution. -A corporation may issue more than one class of common stock e.g. "Class A," "Class B"
As shown in PLDT‘s 2010 GIS, as submitted to the SEC, the par value of PLDT common
shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other 2. Preferred shares
words, preferred shares have twice the par value of common shares but cannot elect directors and -One with a stated par value which entitles the holder thereof to certain preferences over the
have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are holders of common stock.
owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, -These entitle the shareholder to some priority on distribution of dividends and assets over those
preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares holders of common shares.
constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-
-Distribute the dividends and assets first as mentioned in the AoI with regard to preferred shares,
voting preferred shares but with the common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.
then whatever is left must be distributed to owners of common shares. Preference may be in
form of:
1. Sum of money
2. Percentage
Castillo v Balinghasay, 18 October 2004  Rule: Preferred and redeemable shares may be issued only with a stated par value.
ISSUE:  There may be more than one class of preferred shares e.g. "first preferred," "second
Whether or not holders of Class ―B‖ shares of MCPI may be deprives of the right to vote preferred"
and be voted for as directors.
 Preference, basis: Those stated in AOI
RULING:  Guaranteed stock: Synonymous with preferred stock on which the payment of
NO. dividend is guaranteed.
The 1992 amendment contains a proviso ―except as otherwise provided for by law‖ the law  Distinction with preferred stock: GS is entitled to arrears in dividends, while PS is
being referred to by the proviso is that which is in force at the time of the amendment, in this case,
not.
was the Corporation Code.
Under Sec. 6 of the Corporation Code, it provides that no share may be deprived of voting  Interest bearing stock: The corporation agrees absolutely to pay interest before
rights except those classified and issued as ―preffered‖ or ―redeemable‖ shares unless otherwise dividends are paid to common stockholders
provided in this code.there is nothing in the articles of incorporation or an iota of evidence on record  When legal: If construed as requiring payment of interest as dividends from net
that shows that Class ―B‖ shares were categorized as either preffered or redeemable shares.
earnings or surplus only.
4. KINDS OF PREFERED SHARES
Kinds of preferred shares
Sales v SEC, 169 S 109
1. Preferred shares as to assets: Shares which gives the holder preference in the distribution of
ISSUE: the assets of the corporation in case of liquidation.
Whether or not SEC acted with grave abuse of discretion in not permanently enjoining
Note: Cumulative and non-cumulative preferred shares can also be applied here.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Does not make the shareholders creditors as they are entitled to dividends only
a) Participating preferred shares when there are profits out of which dividends may be declared.
A share which gives the holder thereof not only the right to receive the stipulated Effect of guarantee: Makes the dividends cumulative, making the profits of one year make
dividends but also to participate with the holders of common shares in the up for the deficiencies of the preceding year or years.
remaining profits pro rata after the common shares have been paid the amount of
the stipulated dividend at the same preferred rate. 5. It is immaterial how or where the holder obtained his stock since the preference
-Entitled to participate with the common shares in excess distribution belongs to the stock and not to the stockholder.
b) Non‐participating preferred shares Thus, the fact that preferred stockholders were formerly corporate creditors gives them no
It is a share which entitles the holder thereof to receive the stipulated preferred greater right as against creditors.
dividends and no more. The balance, if any, is given entirely to the common stocks. Limitations regarding issuance of preferred shares
Not entitled to participate with the common shares in excess distribution 1. Preferred shares deprived of voting rights in the AOI shall still be entitled to vote on the
following matters: (although they shall not be entitled to vote on other matters)
Right of stockholders to assets of corporation a) Amendment of the articles of incorporation;
a) During lifetime of corporation: Stockholders has no right over the assets b) Adoption and amendment of by-laws;
b) When corporation is dissolved: Stockholders acquire rights over the assets c) Sale, lease, exchange, mortgage, pledge or other disposition of all or
PROVIDED THAT there is residual assets after paying the corporation's liabilities. substantially all of the corporate property;
c) How payment is made? Liquidating dividends d) Incurring, creating or increasing bonded indebtedness;
e) Increase or decrease of capital stock;
2. Preferred shares as to dividends: Shares which are entitled to receive dividends on said f) Merger or consolidation of the corporation with another corporation or other
share to the extent agreed upon before any dividends at all are paid to the holders of common corporations;
stock. g) Investment of corporate funds in another corporation or business in accordance
with this Code; and
Note: Participating and non-participating preferred shares can also be applied here. h) Dissolution of the corporation.
2. Preferences of the preferred shares must not be violative of the provisions of the Code.
a) Cumulative preferred shares 3. Preferred shares may be issued only with a stated par value.
Share which entitles the holder thereof not only the payment of current dividends 4. The board of directors may fix the terms and conditions of preferred shares of stock or any
but also to dividends in arrears. series thereof only when:
Rule: If the stipulated dividend is not paid in a given year, it shall be added to the a) Authorized by the AOI; and
dividend which shall be due the following year. b) Such terms and conditions shall be effective upon filing a certificate thereof with
Thus, the accumulated dividends must be paid to the holder of said preferred share the SEC.
before any dividend may be paid to the holders of common stock. ۩ Concurrence of stockholders not required: No need for concurrence of 2/3 of the
b) Non-cumulative preferred shares outstanding capital under Sec. 16.
Share which entitles the holder thereof to the payment of current dividends only in
preference to common stockholders. ۩ No blanket authority for BOD: In fixing the terms and conditions of BOD, they must
Rule: If dividends are not declared in a given year, the right to the dividends for that state the privileges, preferences, restrictions, or rights of the preferred shares.
particular year is extinguished.
There is no need to make up for undeclared dividends 5. FOUNDER’S SHARE
FOUNDERS SHARES Section 7.
3. Cumulative –Participating Preferred Share Founders’ shares. – Founders’ shares classified as such in the articles of incorporation may be given
 The holder is entitled not only to dividends in arrears but also, after receiving his certain rights and privileges not enjoyed by the owners of other stocks, provided that where the
preferred share of dividends, to participation with the holders of common stocks in the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited
remaining profits. period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission.
 Preference among preferred shares The five-year period shall commence from the date of the aforesaid approval by the Securities and
 Rule: Preferred shares of stock enjoy the same preferences or privileges. Exchange Commission.
 This is true when AOI is silent about such classification.

Other rules regarding preferred stockholders Founders' shares, defined

1. Preferences granted to preferred stockholders do not give them a lien upon the  Shares issued to organizers and promoters of a corporation in consideration of
property of the corporation. some supposed right or property.
2. Stock cannot be issued with a fixed interest instead of dividends inasmuch as this will  Such share usually share in profits only after a certain percentage has been paid
make the contract of subscription one of loan. upon the common stock BUT are often given special privileges over the other stock
3. The dividends payable by the corporation may be in the nature of interest. as to voting and as to division of profits
Note: In number 2, fixed interest is prohibited because the preferred shareholder  But if an exclusive right to vote and be voted for as director is granted, it needs:
must also assume the risk of profit or loss. Whereas in this number, there is already
a profit and dividends is just made payable in the form of interest. a) The approval of the SEC, and
4. Dividends are, in terms, guaranteed. b) Cannot exceed 5 years from the date of approval.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 This limitation is non-extendible. 6. Corporation who issued redeemable shares must set up and maintain a sinking fund to
Thus, after the 5-year limitation period, founders shall have equal rights with the cover the redemption price of the redeemable shares at specified dates in the future
holders of common shares.
Notes: Preferred shares are not affected by this limitation. Their status remains even Republic Planters’ Bank v Agana
after the expiration of 5-year perio
ISSUES:
Whether or not the respondent court was correct in ordering petitioner to pay private
respondents the face value of the stock certificates as redemption price.
6. REDEEMABLE PREFERRED SHARES
REDEEMABLE SHARES Section 8 RULING:
NO.
Redeemable shares. – Redeemable shares may be issued by the corporation when expressly so A preferred share of stock is one which entitles the holder thereof to certain preferences
provided in the articles of incorporation. They may be purchased or taken up by the corporation upon over the holders of common stock. The preferences are designed to induce persons to subscribe for
the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the shares of a corporation.
books of the corporation, and upon such other terms and conditions as may be stated in the articles of Preferred shares take a multiplicity of forms. The most common forms may be classified
incorporation, which terms and conditions must also be stated in the certificate of stock representing into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a
said shares. share which gives the holder thereof preference in the distribution of the assets of the corporation
in case of liquidation;the latter is a share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are paid to the holders of common
Redeemable shares stock.There is no guaranty, however, that the share will receive any dividends.
 Shares, usually preferred, which by their terms are redeemable at a fixed date or at The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
the option of: Central Bank made a finding that said petitioner has been suffering from chronic reserve
a) The issuing corporation or deficiency,and that such finding resulted in a directive, issued on January 31, 1973 by then Gov.
b) The stockholder or G.S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the
c) Both at a certain redemption price. petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice of its depositors and
Redemption creditors.Redemption of preferred shares was prohibited for a just and valid reason. The directive
issued by the Central Bank Governor was obviously meant to preserve the status quo, and to
 It is the repurchase, the reacquisition of stock by a corporation which issued the
prevent the financial ruin of a banking institution that would have resulted in adverse
stock in exchange for cash or property, whether or not the acquired stock is
repercussions, not only to its depositors and creditors, but also to the banking industry as a whole.
cancelled, retired or held in the treasury.
Effects of redemption:
a) Redemption, in a sense, is a repurchase of the stock for cancellation.
b) Reacquired redeemable shares are considered retired and no longer issuable, except if TREASURY SHARES
provided otherwise by AoI. Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by purchase, redemption,
Limitations on redeemable shares donation or through some other lawful means. Such shares may again be disposed of for a
1. Redeemable shares may be issued only when expressly provided for in the Articles of reasonable price fixed by the board of directors.
Incorporation;
Note: Common shares are never "redeemed."
Redemption optional with corporation: The redemption rests entirely with the corporation, Treasury shares, defined
and the stockholder is without right to either compel or refuse the redemption of his stock. Shares which have been lawfully issued by the corporation and fully paid for and
later reacquired it either by: (PROF-D)
2. The terms and conditions affecting such shares must be stated both in the articles of Purchase
Incorporation and in the certificates of stock representing such shares; Redemption
Other lawful means
3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, Forfeiture or
unless otherwise provided in the Corporation Code. Donation

4. Redeemable shares may be redeemed regardless of the existence of unrestricted To put simply, these are shares reacquired by the corporation. They are
retained earnings provided that the corporation has, after such redemption, sufficient assets called treasury shares because they remain in the corporate treasury until reissued.
in its books to cover debts and liabilities inclusive of capital stock. More importantly, they have no:
Unrestricted retained earnings: These are surplus profits not subject to encumbrance.
Voting Rights
5. Redemption may not be made where the corporation is: Right to dividends.
a) insolvent; or Note: Treasury shares are not retired shares. They do not revert to the
b) if such redemption would cause insolvency or inability of the corporation to meet its unissued shares of the corporation but are regarded as property acquired by the
debts as they mature. corporation which may be reissued or resold at a price to be fixed by the Board of
Directors.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Preferred to Common – in the absence of an express provision in the AoI
 So how would you retire treasury shares? By decreasing the capital stock of as to that convertibility, preferred shares cannot be converted to
the corporation in accordance of Sec. 38 for the purpose of eliminating the common.
treasury shares.
 Since they do not lose their status as issued shares, they cannot be No Par Value to Par Value – allowed by SEC provided there would be no
treated as new issues when disposed of or reissued. change in the stockholders’ percentage interest in the total assets of the
 Treasury shares are not liability of corporation: Treasury shares are issued corporation.
shares but being in the treasury, they do not have the status of outstanding
shares in the sense that they do not constitute a liability of the corporation. Fractional share
A share with a value of less than one full share

Treasury shares vs. authorized but unissued shares Shares in escrow- Subject to an agreement by virtue of which the share is
The acquisition of the former does not reduce the number of issued deposited by the grantor or his agent with a third person to be kept by the
shares or the amount of capital stock depositary until the performance of certain condition or the happening of a certain
Their sale does not increase the number of issued shares or the amount event contained in the agreement.
of stated capital.
Over‐issued stock- It is a stock issued in excess of the authorized capital stock; it is
Treasury shares vs. retired or cancelled shares null and void.
Former may be sold, the latter has disappeared altogether.
Status of TS on resale differs from that of newly created shares which Street certificate- It is a stock certificate endorsed by the registered holder in blank
cannot be issued for less than the legal minimum consideration. and the transferee can command its transfer to his name from issuing corporation.

Effect of purchase or acquisition Promotional share- This is a share issued by promoters or those in some way
If purchased from stockholders: The transaction in effect is a return to interested in the company, for incorporating the company, or for services rendered
the stockholders of the value of their investment in the company and a in launching or promoting the welfare of the company.
reversion of the shares to the corporation.
The corporation must have surplus profits with which to buy the shares Are classes of shares infinite?
so that the transaction will not cause impairment of the capital. Yes. There can be other classifications as long as they are indicated in the AOI, stock
If acquired by donation from the stockholders: The act would amount to certificate and not contrary to law.
surrender of their stock without getting back their investments that are,
instead voluntary given to the corporation. Who may classify shares then?
Treasury shares need not be sold at par or issued value but may be sold Incorporators: the classes and number of shares which a corporation shall issue are first
at the best price obtainable, provided it is reasonable. determined by the incorporators as stated in the articles of incorporation filed with the SEC.
Board of directors and stockholders: After the corporation comes into existence; they may be
Subject to tax: The sale of treasury shares should be treated as a sale of altered by the board of directors and the stockholders by amending the articles of
ordinary property of the corporation. incorporation pursuant to Sec. 16.
Doctrine of equality of shares: Where the Articles of Incorporation do not provide for any
Limitations on treasury shares distinction of the shares of stock, all shares issued by the corporation are presumed to be
o They may be re‐issued or sold again as long as they are held by the equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec.
corporation as treasury shares. 6).
o Cannot participate in dividends.
o It cannot be represented during stockholder’s meetings. CIR v Manning, 66 S 14
o The amount of URE equivalent to the cost of treasury shares being held
ISSUE:
shall be restricted from being declared and issued as dividends. Whether or not the issuance of the notices of assessment for deficiency income taxes to the
respondents for the year 1958 was proper.
Note: When treasury shares are sold below its par or issued value, there RULING:
can be no watering of stock because such watering contemplates an YES.
original issuance of shares. The declaration by the respondents and Reese's trustees of MANTRASCO's alleged
treasury stock dividends in favor of the former, brings, however, into clear focus the ultimate
Other classifications of stocks purpose which the parties to the trust instrument aimed to realize: to make the respondents the
Convertible shares sole owners of Reese's interest in MANTRASCO by utilizing the periodic earnings of that company
 A share that is changeable by the stockholder from one class and its subsidiaries to directly subsidize their purchase of the said interests, and by making it
to another at a certain price and within a certain period. appear outwardly, through the formal declaration of non-existent stock dividends in the treasury,
GR: Stockholder may demand conversion at his pleasure. that they have not received any income from those firms when, in fact, by that declaration they
secured to themselves the means to turn around as full owners of Reese's shares. In other words,
XPN: Otherwise restricted by the articles of incorporation
the respondents, using the trust instrument as a convenient technical device, bestowed unto
Convertibility of Shares: themselves the full worth and value of Reese's corporate holdings with the use of the very earnings

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 of the companies. Such package device, obviously not designed to carry out the usual stock dividend Whether or not the rescission of Pre-Subscription Agreement would result in unauthorized
purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities and other liquidation.
capital budget items, but exclusively for expanding the capital base of the respondents in
MANTRASCO, cannot be allowed to deflect the respondents' responsibilities toward our income tax RULING:
laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a YES.
portion of their earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and
result making a distribution of such earnings to the respondents. All these amounts are The rescission of the Pre-Subscription Agreement will effectively result in the
consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the unauthorized distribution of the capital assets and property of the corporation, thereby violating
respondents. the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is
not one of the instances when distribution of capital assets and property of the corporation is
allowed. Rescission will, in the final analysis, result in the premature liquidation of the corporation
SMC v Sandiganbayan, 14 September 2000 without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the
ISSUE: Corporation Code.
Whether or not there is a valid delivery of certificates of stock of smc shares and the
dividends thereon to the PCGG.
RULING:
IV. ISSUE
YES.
No grave abuse of discretion on the part of SBN when it ordered petitioners to deliver the
treasury shares to the PCGG and pay their corresponding dividends for the following reasons: V. SUBSCRIPTION
Under the Corporation Code, Treasury shares are shares of stocks which have been issued and fully
Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an
paid for, but subsequently reacquired by, the issuing corporation by purchase, redemption, donation
or through some lawful means. These 26.45M shares or any portion thereof can, therefore, become
existing corporation or a corporation still to be formed
treasury shares, i.e., property of SMC, only if the sale between the UCPB Group and the SMC shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the
Group is allowed; otherwise these shares cannot even begin to be deemed to have been re-acquired parties refer to it as a purchase or some other contract. (n)
by the issuing corporation, the SMC.

Ong v Tiu, 401 S 1

III. TRUST FUND DOCTRINE ISSUE:

Whether or not the pre-Subscription Agreement executed by the Ongs is actually a
NTC v SEC, 511 S 509 subscription contract.
ISSUE:
Whether or not the Court of Appeals erred in holding that the computation of Supervision RULING:
and regulation Fees under Section 40(f) of the Public Service Act should be based on the par value YES.
of the subscribed capital stock. FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the
RULING: Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became
NO. necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000
Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for computation of shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to
the fee to be charged by NTC on PLDT, is ―the capital stock subscribed or paid and not, 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, the
alternatively, the property and equipment.‖ The fee in question is based on the capital stock subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the
subscribed or paid, nothing less nothing more. Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement was in fact a
The ―Trust Fund‖ doctrine considers this subscribed capital as a trust fund for the payment of the subscription contract as defined under Section 60, Title VII of the Corporation Code. A subscription
debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of contract necessarily involves the corporation as one of the contracting parties since the subject
the corporation, no part of the subscribed capital may be returned or released to the stockholder matter of the transaction is property owned by the corporation — its shares of stock. Thus, the
(except in the redemption of redeemable shares) without violating this principle. Thus, dividends subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the
must never impair the subscribed capital; subscription commitments cannot be condoned or Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one
remitted; nor can the corporation buy its own shares using the subscribed capital as the between the Ongs and FLADC, not between the Ongs and the Tius.
consideration therefore.
In the same way that the Court in PLDT vs. PSC has rejected the ―value of the property
and equipment‖ as being the proper basis for the fee imposed by Section 40(e) of the Public Service
Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of computing Baylan v Silang, 73 P 557
the fee on ―the par value of [PLDT‘s] capital stock subscribed or paid excluding stock dividends, ISSUE:
premiums, or capital in excess of par.‖ Neither is the assessment made by the National Whether or not the agreement was a contract of subscription to the capital stock of the
Telecommunications Commission on the basis of the market value of the subscribed or paid-in respondent corporation.
capital stock acceptable since it is itself a deviation from the explicit language of the law.
RULING:
NO.
Ong v Tiu, 401 S 1 Whether a particular contract is a subscription or a sale of stock is a matter of construction
ISSUE: and depends upon its terms and the intention of the parties. In the Unson case just cited, this Court

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 held that a subscription to stock in an existing corporation is, as between the subscriber and the so because nobody can be a shareholder unless he is the owner of a unit and when he ceases to be
corporation, simply a contract of purchase and sale. the owner, he also ceases automatically to be a shareholder.
It seems clear from the terms of the contracts in question that they are contracts of sale The private respondents, therefore, who have not fully paid the purchase price of their units and
and not of subscription. The lower courts erred in overlooking the distinction between subscription are consequently not owners of their units are not members or shareholders of the petitioner
and purchase "A subscription, properly speaking, is the mutual agreement of the subscribers to condominium corporation.
take and pay for the stock of a corporation, while a purchase is an independent agreement between
the individual and the corporation to buy shares of stock from it at stipulated price." In some
particulars the rules governing subscriptions and sales of shares are different. For instance, the Velasco v Poizat, 37 P 802
provisions of our Corporation Law regarding calls for unpaid subscription and assessment of stock ISSUE:
do not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to Whether or not Poizat is liable for his unpaid subscription.
release an original subscriber to its capital stock from the obligation to pay for his shares, is
inapplicable to a contract of purchase of shares. RULING:
YES.
A stock subscription is a contract between the corporation on one side, and the subscriber
Salmon, Dexter and Co. v Unson, 47 P 649 on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme
ISSUE: Court of the United States that a subscription for shares of stock does not require an express
Whether or not the contract entered into by the parties is a Subscription contract. promise to pay the amount subscribed, as the law implies a promise to pay on the part of the
subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is
RULING: subsisting liability from the time the subscription is made, since it requires the subscriber to pay
YES. interest quarterly from that date unless he is relieved from such liability by the by-laws of the
After incorporation, one may become a shareholder by subscription, or by purchasing stock corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as
directly from the corporation, or from individual owners thereof. A distinction is drawn by the he would be to pay any other debt, and the right of the company to demand payment is no less
authorities between a subscription to the capital stock of the corporation after its organization and incontestable.
a sale of shares by it. Whether a particular contract is a subscription or a sale of stock is a matter of The provisions of the Corporation Law (Act No. 1459) give recognition of two remedies for
construction, and depends upon its terms and the intention of the parties. It has been held that a the enforcement of stock subscriptions. The first and most special remedy given by the statute
subscription to stock in an existing corporation is, as between the subscriber and the corporation, consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the
simply a contract of purchase and sale. account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive, of the
Admitting that the terminology of the agreement is not conclusive, and admitting that it is Corporation Law are applicable and must be followed.
a contract between a subscriber and the corporation, and thus simply a contract of purchase and It is generally accepted doctrine that the statutory right to sell the subscriber's stock is
sale, then under the last hypothesis we have to determine if the contract is avoided by merely a remedy in addition to that which proceeds by action in court; and it has been held that the
misrepresentation. ordinary legal remedy by action exists even though no express mention thereof is made in the
In our opinion, a contract different from that which was entered into cannot be made for statute.
the parties and imposed upon Unson. Unson has the right to stand upon the contract he has made.
In our opinion also, there was such a non-disclosure of a material fact as was equivalent to false
representation. This representation was of a character that the party to whom it was made had a
right to rely upon it.
VI. ACQUISITION AND OWNERSHIP OF SHARES IN A
CORPORATION;EXTENT OF PROPRIETARY RIGHT /
Sunset view Condominium v Campos, 104 S 295 DOCTRINE OF LIMITED LIABILITY
ISSUE:
Whether or not a purchaser of a condominium unit in the condominium project managed by Cojuangco v Republic, 12 April 2015
the petitioner, who has not yet fully paid the purchase price thereof, automatically a stockholder of
ISSUE :
the petitioner Condominium Corporation.
Whether or not Cojuangco breach his ―fiduciary duties‖ as an officer and member of the
Board of Directors of the UCPB? Did his acquisition and holding of the contested SMC shares come
RULING:
under a constructive trust in favor of the Republic.
NO.
The share of stock appurtenant to the unit win be transferred accordingly to the purchaser
RULING:
of the unit only upon full payment of the purchase price at which time he will also become the
NO.
owner of the unit. Consequently, even under the contract, it is only the owner of a unit who is a
The thrust of the Republic that the funds were borrowed or lent might even preclude any
shareholder of the Condominium Corporation. Inasmuch as owners is conveyed only upon full
consequent trust implication. In a contract of loan, one of the parties (creditor) delivers money or
payment of the purchase price, it necessarily follows that a purchaser of a unit who has not paid the
other consumable thing to another (debtor) on the condition that the same amount of the same kind
full purchase price thereof is not The owner of the unit and consequently is not a shareholder of the
and quality shall be paid.
Condominium Corporation.
To say that a relationship is fiduciary when existing laws do not provide for such requires
That only the owner of a unit is a stockholder of the Condominium Corporation is inferred
evidence that confidence is reposed by one party in another who exercises dominion and influence.
from Section 10 of the Condominium Act. Pursuant to such statutory provision, ownership of a unit
Absent any special facts and circumstances proving a higher degree of responsibility, any dealings
is a condition sine qua non to being a shareholder in the condominium corporation. It follows that a
between a lender and borrower are not fiduciary in nature. This explains why, for example, a trust
purchaser of a unit who is not yet the owner thereof for not having fully paid the full purchase
receipt transaction is not classified as a simple loan and is characterized as fiduciary, because the
price, is not a shareholder By necessary implication, the "separate interest" in a condominium,
Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or
which entitles the holder to become automatically a share holder in the condominium corporation,
goods to the prejudice of another regardless of whether the latter is the owner.
as provided in Section 2 of the Condominium Act, can be no other than ownership of a unit. This is
Based on the foregoing, a debtor can appropriate the thing loaned without any

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 responsibility or duty to his creditor to return the very thing that was loaned or to report how the Garcia v Lim, 59 P 562
proceeds were used. Nor can he be compelled to return the proceeds and fruits of the loan, for there ISSUE:
is nothing under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor Whether or not it is proper to compensate the defendant-appellant's indebtedness of
can dispose of the thing borrowed and his act will not be considered misappropriation of the thing. P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of his
shares of stock with the plaintiff entity, the Mercantile Bank of China.

RULING:
NO.
According to the weight of authority, a share of stock or the certificate thereof is not
Espiritu v Petron, 24 november 2009 indebtedness to the owner or evidence of indebtedness and, therefore, it is not a credit.
ISSUE: Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the
Whether or not all the Petitioners are liable. American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation
is a trust fund to be used more particularly for the security of creditors of the corporation, who
RULING: presumably deal with it on the credit of its capital stock. Therefore, the defendant-appellant Lim
NO. Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of
the former, there is no sufficient ground to justify compensation.
The "owners" of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. The petitioners here, with the exception of Audie
Llona, are being charged in their capacities as stockholders of Bicol Gas. But the Court of Appeals Magsaysay-Labrador v CA, 180 S 266
forgets that in a corporation, the management of its business is generally vested in its board of ISSUE:
directors, not its stockholders. Stockholders are basically investors in a corporation. They do not Whether or not petitioner‘s ownership in the outstanding capital stock of SUBIC entitles
have a hand in running the day-to-day business operations of the corporation unless they are at the them to a significant vote in the corporate affairs.
same time directors or officers of the corporation. Before a stockholder may be held criminally liable
for acts committed by the corporation, therefore, it must be shown that he had knowledge of the RULING:
criminal act committed in the name of the corporation and that he took part in the same or gave his NO.
consent to its commission, whether by action or inaction.
The finding of the Court of Appeals that the employees "could not have committed the The words "an interest in the subject" mean a direct interest in the cause of action as
crimes without the consent, [abetment], permission, or participation of the owners of Bicol Gas" is a pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the
sweeping speculation especially since, as demonstrated above, what was involved was just one complaint, without the establishment of which plaintiff could not recover.
Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although the KPE manager heard Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,
petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
swap additional captured cylinders, no indication was given as to which Bicol Gas stockholders sheer expectancy of a right in the management of the corporation and to share in the profits thereof
Llona consulted. It would be unfair to charge all the stockholders involved, some of whom were and in the properties and assets thereof on dissolution, after payment of the corporate debts and
proved to be minors. No evidence was presented establishing the names of the stockholders who obligations.
were charged with running the operations of Bicol Gas. The complaint even failed to allege who While a share of stock represents a proportionate or aliquot interest in the property of the
among the stockholders sat in the board of directors of the company or served as its officers. corporation, it does not vest the owner thereof with any legal right or title to any of the property,
his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corporation as a distinct legal
person.
Crisostomo v SEC, 179 S 146
ISSUE:
Whether or not the investment of the Japanese group in UDMC is unconstitutional. Nicolas v CA, 27 March 1998
RULING: ISSUE:
NO. Whether or not petitioner is entitled to management fees.
While 82% of UDMC's capital stock is indeed subscribed by the Japanese group, only 30%
(equivalent to 171,721 shares or P17,172.00) is owned by the Japanese citizens, namely, the RULING:
Yamada spouses and Tomotada Enatsu. 52% is owned by Edita Enatsu, who is a Filipino. NO.
Accordingly, in its application for approval/registration of the foreign equity investments of these To begin with, petitioner has the burden to prove that the transaction realized gains or
investors, UDMC declared that 70% of its capital stock is owned by Filipino citizens, including profits to entitle him to said management fees, as provided in the Agreement. Accordingly,
Edita Enatsu. That application was approved by the Central Bank on August 3, 1988. petitioner submitted the profit and loss statements for the period of June 30, July 31 and August
The investments in UDMC of Doctors Yamada and Enatsu do not violate the 19, 1987, showing a total profit of P341,318.34, of which 20% would represent his management fees
Constitutional prohibition against foreigners practising a profession in the Philippines (Section 14, amounting to P68,263.70.
Article XII, 1987 Constitution) for they do not practice their profession (medicine) in the Unfortunately, the profit and loss statements presented by the petitioner are nothing but
Philippines, neither have they applied for a license to do so. They only own shares of stock in a bare assertions, devoid of any concrete basis or specifics as to the method of arriving at the amounts
corporation that operates a hospital. No law limits the sale of hospital shares of stock to doctors indicated in the documents. In fact, it did not even state when the stocks were purchased, the type
only. The ownership of such shares does not amount to engaging (illegally,) in the practice of of stocks (whether Class ―A‖ or ―B‖ or common or preferred) bought, when the stocks were sold, the
medicine, or, nursing. If it were otherwise, the petitioner's stockholding in UDMC would also be acquisition and selling price of each stock, when the profits, if any, were delivered to the private
illegal. respondent, the cost of safekeeping or custody of the stocks, as well as the taxes paid for each
transaction. With respect to the alleged losses, it has been held that where a profit or loss
statement shows a loss, the statement must show income and items of expense to explain the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 method of determining such loss. However, in the instant petition, petitioner hardly elucidated the petitioners' motion for intervention.
reasons and the factors behind the losses incurred in the course of the transactions.
In short, no evidentiary value can be attributed to the profit and loss statements submitted
by the petitioner. These documents can hardly be considered a credible or true reflection of the
transactions. It is an incomplete record yielding easily to the inclusion or deletion of certain
PRE-INCORPORATION SUBSCRIPTION
matters. The contents are subject to suspicion since they are not reflective of all pertinent and Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation
relevant data. Thus, even assuming the admissibility of these alleged profit and loss statements,
still to be formed shall be irrevocable for a period of at least six (6) months from the date of
they are devoid of any evidentiary weight, for the amounts are conclusions without premises, its
subscription, unless all of the other subscribers consent to the revocation, or unless the
bases left to speculation, conjectures, assertions and guesswork.
incorporation of said corporation fails to materialize within said period or within a longer period
as may be stipulated in the contract of subscription: Provided, That no pre-incorporation
Ramos v CA, 179 S 719 subscription may be revoked after the submission of the articles of incorporation to the Securities
ISSUE: and Exchange Commission.(n)
Whether or not appellate court erred in rendering a summary judgment, in failing to find
that CMS has no right to damages against the petitioner there being no privity of contract between
them, and in refusing to exonerate the petitioner from personal liability for the orders he placed VII. CONSIDERATION FOR STOCKS
with LLL for the account of the Alakor Corporation.
Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the
par or issued price thereof. Consideration for
RULING:
NO.
the issuance of stock may be any or a combination of any two or more of the following:
In the case at bar, the stock purchases of LLL were on a 10-20 day delayed delivery basis. 1. Actual cash paid to the corporation;
Accordingly, after that period lapsed, the Buying Member (LLL) should have advised the Selling 2. Property, tangible or intangible, actually received by the corporation and necessary or
Member CMS in writing. convenient for its use and lawful
As observed by the trial court, Section 1, Article V of the Exchange Rules does not vest on purposes at a fair valuation equal to the par or issued value of the stock issued;
the buyer, respondent LLL, a right to rescind its contract with CMS upon the latter's default. The 3. Labor performed for or services actually rendered to the corporation;
Exchange Rules obligate the buyer to make a demand, and if the selling member fails to deliver the 4. Previously incurred indebtedness of the corporation;
ordered shares despite the demand, the buyer is further obligated to deliver a copy of his demand 5. Amounts transferred from unrestricted retained earnings to stated capital; and
letter to the Chairman of the Floor Trading and Arbitration Committee so that the latter may 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
purchase the shares for the selling member's account. Said rules were held binding on members of Where the consideration is other than actual cash, or consists of intangible property such as
the Exchange. Inasmuch as petitioner placed his order for Benguet shares through a member of the patents of copyrights, the valuation thereof shall
Exchange (LLL), he is indirectly bound by the rules of the Exchange.
initially be determined by the incorporators or the board of directors, subject to approval by the
The defendants' lack of knowledge regarding the truth of the allegation in the complaint,
that the failure of CMS to deliver the Benguet shares on time was due to oversight, did not
Securities and Exchange Commission.
constitute an obstacle to the rendition of a summary judgment by the trial court, for although an Shares of stock shall not be issued in exchange for promissory notes or future service.
averment of lack of knowledge has the effect of a denial, it does not raise a genuine issue. The same considerations provided for in this section, insofar as they may be applicable, may be
used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the
Saw v CA, 195 S 740 board of directors pursuant to authority conferred
ISSUE: upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the
Whether or notthe Honorable Court of Appeals erred in holding that the petitioners cannot stockholders representing at least a majority of the
intervene in Civil Case No. 88-44404 because their rights as stockholders of Freeman are merely outstanding capital stock at a meeting duly called for the purpose. (5 and 16)
inchoate and not actual, material, direct and immediate prior to the dissolution of the corporation.

RULING: Apodaca v NLRC, 172 s 442

NO.
ISSUE:
The petitioners base their right to intervene for the protection of their interests as
Whether or not an obligation arising from non-payment of stock subscriptions to a
stockholders on Everett v. Asia Banking Corp. where it was held: The well-known rule that
corporation can be offset against a money claim of an employee against the employer.
shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the
RULING:
action must be brought by the Board of Directors, has its exceptions.
NO.
Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao
The unpaid subscriptions are not due and payable until a call is made by the corporation
Lian is essentially in personam and, as an action against defendants in their personal capacities,
for payment. Private respondents have not presented a resolution of the board of directors of
will not prejudice the petitioners as stockholders of the corporation. The Everett case is not
respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear
applicable because it involved an action filed by the minority stockholders where the board of
that a notice of such call has been sent to petitioner by the respondent corporation.
directors refused to bring an action in behalf of the corporation. In the case at bar, it was Freeman,
What the records show is that the respondent corporation deducted the amount due to
Inc. that was being sued by the creditor bank.
petitioner from the amount receivable from him for the unpaid subscriptions. No doubt such set-off
On the second assignment of error, Equitable maintains that the petitioners' appeal could
was without lawful basis, if not premature. As there was no notice or call for the payment of unpaid
only apply to the denial of their motion for intervention and not to the main case because their
subscriptions, the same is not yet due and payable.
personality as party litigants had not been recognized by the trial court.
Lastly, assuming further that there was a call for payment of the unpaid subscription, the
After examining the issues and arguments of the parties, the Court finds that the
NLRC cannot validly set it off against the wages and other benefits due petitioner. Article 113 of
respondent court committed no reversible error in sustaining the denial by the trial court of the
the Labor Code allows such a deduction from the wages of the employees by the employer, only in

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 three instances, to wit: No employer, in his own behalf or in behalf of any person, shall make any Nielson and Co. v Lepanto Mining, 26 S 541
deduction from the wages of his employees, except in certain cases. ISSUE:
Whether or not the management contract is a contract of agency.
Fua Cun v Summera, 44 P705 RULING:
NO.
ISSUE: In the performance of this principal undertaking Nielson was not in any way executing
Whether or not the trial court erred in declaring that Chua Soco, through the payment of the P25,000, juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto
acquired the right to two hundred and fifty shares fully paid up, upon which shares the plaintiff holds and third persons. In other words, in performing its principal undertaking Nielson was not acting as
a lien superior to that of the defendant Banking Corporation and ordering that the receipt be returned an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as
to said plaintiff. one who was performing material acts for an employer, for a compensation. It is true that the
RULING: management contract provides that Nielson would also act as purchasing agent of supplies and enter
YES. into contracts regarding the sale of mineral, but the contract also provides that Nielson could not
The claim of the defendant Banking Corporation upon which it brought the action in which the writ of make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore,
attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct that even in these cases Nielson could not execute juridical acts which would bind Lepanto without
connection with the shares of stock in question. At common law a corporation has no lien upon the first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an
shares of stockholders for any indebtedness to the corporation and our attention has not been called to agent. Further, from the statements in the annual report for 1936, and from the provision of
any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and
"no bank organized under this Act shall make any loan or discount on the security of the shares of its manage its mines was principally in consideration of the know-how and technical services that
own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and
shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in
purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the
public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the management contract because it had lost its trust and confidence in Nielson.
bank in accordance with law."
The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock
for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the Trillana v Quezon College, 93 P 383
security of the stock would become largely ineffective. ISSUE:
Whether or not the subscription applied for by Damasa Crisostomo is an enforceable contract.
National Exchange co. v Dexter, 51 P 601 RULING:
NO.
ISSUE: It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was written on
Whether or not the stipulation contained in the subscription to the effect that the a general form indicating that an applicant will enclose an amount as initial payment and will pay the
subscription is payable from the first dividends declared on the shares has the effect of relieving the balance in accordance with law and the regulations of the College. On the other hand, in the letter
subscriber from personal liability in an action to recover the value of the shares. actually sent by Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be
RULING: entered) not only did not enclose any initial payment but stated that "babayaran kong lahat
NO. pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the record to show that the Quezon
In discussing this problem we accept as sound law the proposition propounded by the College, Inc. accepted the term of payment suggested by Damasa Crisostomo, or that if there was any
appellant's attorneys and taken from Fletcher's Cyclopedia as follows: In the absence of restrictions in acceptance the same came to her knowledge during her lifetime. As the application of Damasa
its character, a corporation, under its general power to contract, has the power to accept subscriptions Crisostomo is obviously at variance with the terms evidenced in the form letter issued by the Quezon
upon any special terms not prohibited by positive law or contrary to public policy, provided they are College, Inc., there was absolute necessity on the part of the College to express its agreement to
not such as to require the performance of acts which are beyond the powers conferred upon the Damasa's offer in order to bind the latter. Conversely, said acceptance was essential, because it would
corporation by its character, and provided they do not constitute a fraud upon other subscribers or be unfair to immediately obligate the Quezon College, Inc. under Damasa's promise to pay the price of
stockholders, or upon persons who are or may become creditors of the corporation. the subscription after she had caused fish to be caught. In other words, the relation between Damasa
Pursuant to such, we find that the Philippine Commission inserted in the Corporation Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage whereby the
Law, enacted March 1, 1906, the following provision: "no corporation shall issue stock or bonds except latter offered its stock for subscription on the terms stated in the form letter, and Damasa applied for
in exchange for actual cash paid to the corporation or for property actually received by it at a fair subscription fixing her own plan of payment, — a relation, in the absence as in the present case of
valuation equal to the par value of the stock or bonds so issued." acceptance by the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had not
The prohibition against the issuance of shares by corporations except for actual cash to the ripened into an enforceable contract.
par value of the stock to its full equivalent in property is thus enshrined in both the organic and Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more
statutory law of the Philippine; Islands; and it would seem that our lawmakers could scarely have imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription after she
chosen language more directly suited to secure absolute equality stockholders with respect to their has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in
liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is nature, rendering the obligation void, under article 1115 of the old Civil Code which provides as
self-evident that a stipulation such as that now under consideration, in a stock subcription, is illegal, follows: "If the fulfillment of the condition should depend upon the exclusive will of the debtor, the
for this stipulation obligates the subcriber to pay nothing for the shares except as dividends may conditional obligation shall be void. If it should depend upon chance, or upon the will of a third person,
accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This the obligation shall produce all its effects in accordance with the provisions of this code." It cannot be
is discrimination in favor of the particular subcriber, and hence the stipulation is unlawful. argued that the condition solely is void, because it would have served to create the obligation to pay,
wherein only the potestative condition was held void because it referred merely to the fulfillment of an
already existing indebtedness.

VIII. UNPAID SUBSCRIPTIONS

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Corporation Law, demanded of the appellant to pay the balance of his subscription. The present
1. INTEREST ON UNPAID SUBSCRIPTION action having been filed on October 10, 1935, the defense of prescription is entirely without basis.
Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate VELASCO V POIZAT, 37 P 802
of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. ISSUE:
Whether or not Poizat is liable for his unpaid subscription.
RULING:
2. RIGHT OF UNPAID SHARES YES.
A stock subscription is a contract between the corporation on one side, and the
Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the
delinquent shall have all the rights of a stockholder. Supreme Court of the United States that a subscription for shares of stock does not require an
express promise to pay the amount subscribed, as the law implies a promise to pay on the part of
3. COLLECTION OF UNPAID SUBSCRIPTION the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is
a. CALL: WHEN NECESSARY subsisting liability from the time the subscription is made, since it requires the subscriber to pay
interest quarterly from that date unless he is relieved from such liability by the by-laws of the
Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of corporation. The subscriber is as much bound to pay the amount of the share subscribed by him
subscription, the board of directors of any stock as he would be to pay any other debt, and the right of the company to demand payment is no less
corporation may at any time declare due and payable to the corporation unpaid subscriptions to incontestable.
the capital stock and may collect the same or such percentage thereof, in either case with accrued The provisions of the Corporation Law (Act No. 1459) given recognition of two
interest, if any, as it may deem necessary. remedies for the enforcement of stock subscriptions. The first and most special remedy given by
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose
if any, shall be made on the date specified in the contract of subscription or on the date stated in of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48,
the call made by the board. Failure to pay on such date shall render the entire balance due and inclusive, of the Corporation Law are applicable and must be followed. The other remedy is by
payable and shall make the stockholder liable for interest at the legal rate on such balance, unless action in court.
a different rate of interest is provided in the bylaws, computed from such date until full payment. It is generally accepted doctrine that the statutory right to sell the subscriber's stock is
If within thirty (30) days from the said date no payment is made, all stocks covered by said merely a remedy in addition to that which proceeds by action in court; and it has been held that
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter the ordinary legal remedy by action exists even though no express mention thereof is made in the
provided, unless the board of directors orders otherwise. statute.

GARCIA V SUAREZ, 77 P 441 b. COURT ACTION

ISSUE:
Whether or not the obligation contracted by the appellant to pay the value of his Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the
subscription was demandable from the date of subscription in the absence of any stipulation to corporation from collecting by action in a court of proper jurisdiction the amount due on any
the contrary. unpaid subscription, with accrued interest, costs and expenses.
RULING:
NO.
Section 37 of the Corporation Law provides when the obligation to pay interest arises KELLR V COB GROUP MARKETING, 16 JANUARY 1986
and when payment should be made, but it is absolutely silent as to when the subscription to a ISSUE:
stock should be paid. Of course, the obligation to pay arises from the date of the subscription, but Whether or not the lower courts erred in nullifying the admissions of liability made in 1971
the coming into being of an obligation should not be confused with the time when it becomes by Bax as president and general manager of COB Group Marketing and in giving credence to the
demandable. In a loan for example, the obligation to pay arises from the time the loan is taken; but alleged overpayment computed by Bax.
RULING:
the maturity of that obligation, the date when the debtor can be compelled to pay, is not the date
YES.
itself of the loan, because this would be absurd. The date when payment can be demanded is The lower courts not only allowed Bax to nullify his admissions as to the liability of COB
necessarily distinct from and subsequent to that the obligation is contracted. Group Marketing but they also erroneously rendered judgment in its favor in the amount of its
By the same token, the subscription to the capital stock of the corporation, unless supposed overpayment in the sum of P100,596.72, in spite of the fact that COB Group Marketing was
otherwise stipulation, is not payable at the moment of the subscription but on a subsequent date declared in default and did not file any counterclaim for the supposed overpayment. The lower courts
which may be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing their
Act No. 3518, provides that: The board of directors or trustees of any stock corporation formed, "diverse statements of credits and payments". This contention has no factual basis. That means that
organized, or existing under this Act may at any time declare due and payable to the corporation there was a conference on the COB Group Marketing's liability. Bax in that discussion did not present
unpaid subscriptions to the capital stock. his reconciliation statements to show overpayment.
The board of directors of the Compañia Hispano-Filipino, Inc., not having declared due Bax admitted that Keller sent his company monthly statements of accounts but he could
and payable the stock subscribed by the appellant, the prescriptive period of the action for the not produce any formal protest against the supposed inaccuracy of the said statements. He lamely
collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his capacity as explained that he would have to dig up his company's records for the formal protest. He did not make
receiver and in the exercise of the power conferred upon him by the said section 38 of the any written demand for reconciliation of accounts.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 As to the liability of the stockholders, it is settled that a stockholder is personally liable for VALLEY GOLF CLUB INC V CARAM, 16 APRIL 2009
the financial obligations of a corporation to the extent of his unpaid subscription. ISSUE:
Whether or not a non-stock corporation seize and dispose of the membership share of a
fully-paid member on account of its unpaid debts to the corporation when it is authorized to do so
4. HOW SHARES BECOME DELINQUENT under the corporate by-laws but not by the Articles of Incorporation.

Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of RULING:
subscription, the board of directors of any stock NO.
corporation may at any time declare due and payable to the corporation unpaid subscriptions to It may be conceded that the actions of Valley Golf were, technically speaking, in accord
the capital stock and may collect the same or such percentage thereof, in either case with accrued with the provisions of its by-laws on termination of membership, vaguely defined as these are. Yet
interest, if any, as it may deem necessary. especially since the termination of membership in Valley Golf is inextricably linked to the deprivation
of property rights over the Golf Share, the emergence of such adverse consequences make legal and
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued,
equitable standards come to fore.
if any, shall be made on the date specified in the contract of subscription or on the date stated in
The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which we
the call made by the board. Failure to pay on such date shall render the entire balance due and can cite with approval. Lopez cites: In order that the action of a corporation in expelling a member for
payable and shall make the stockholder liable for interest at the legal rate on such balance, unless cause may be valid, it is essential, in the absence of a waiver, that there shall be a hearing or trial of
a different rate of interest is provided in the bylaws, computed from such date until full payment. the charge against him, with reasonable notice to him and a fair opportunity to be heard in his
If within thirty (30) days from the said date no payment is made, all stocks covered by said defense. If the method of trial is not regulated by the by-laws of the association, it should at least
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter permit substantial justice. The hearing must be conducted fairly and openly and the body of persons
provided, unless the board of directors orders otherwise. before whom it is heard or who are to decide the case must be unprejudiced.
It is unmistakably wise public policy to require that the termination of membership in a
non-stock corporation be done in accordance with substantial justice. No matter how one may
WHEN IS THERE DELINQUENCY precisely define such term, it is evident in this case that the termination of Caram‘s membership
a. When there is failure to pay the subscription on the date provided in the call; or betrayed the dictates of substantial justice.
b. Failure to pay the subscription on the date specified in the subscription agreement.

5. EFFECT OF DELINQUENCY
Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or CATALAGAN GOLF CLUB INC V CLEMENTE, 16 APRIL 2009
to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of ISSUE:
the rights of a stockholder except the right to dividends in accordance with the provisions of this Whether or not the action of Clemente had prescribed pursuant to Section 69 of the
Code, until and unless he pays the amount due on his subscription with accrued interest, and the Corporation Code, and that the requisite notices under both the law and the by-laws had been
costs and expenses of advertisement, if any. rendered to Clemente.
IN REALTION TO
Section 43. Power to declare dividends. - The board of directors of a stock corporation may RULING:
YES.
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
There are fundamental differences that defy equivalence or even analogy between the sale
property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,
of delinquent stock under Section 68 and the sale that occurred in this case. At the root of the sale of
That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on delinquent stock is the non-payment of the subscription price for the share of stock itself. The
the subscription plus costs and expenses, while stock dividends shall be withheld from the stockholder or subscriber has yet to fully pay for the value of the share or shares subscribed. In this
delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock case, Clemente had already fully paid for the share in Calatagan and no longer had any outstanding
dividend shall be issued without the approval of stockholders representing not less than two- obligation to deprive him of full title to his share. Perhaps the analogy could have been made if
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the Clemente had not yet fully paid for his share and the non-stock corporation, pursuant to an article or
purpose. (16a) by-law provision designed to address that situation, decided to sell such share as a consequence. But
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) that is not the case here, and there is no purpose for us to apply Section 69 to the case at bar.
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion It is plain that Calatagan had endeavored to install a clear and comprehensive procedure
projects or programs approved by the board of directors; or (2) when the corporation is to govern the payment of monthly dues, the declaration of a member as delinquent, and the
prohibited under any loan agreement with any financial institution or creditor, whether local or constitution of a lien on the shares and its eventual public sale to answer for the member‘s debts.
foreign, from declaring dividends without its/his consent, and such consent has not yet been Under Section 91 of the Corporation Code, membership in a non-stock corporation "shall be
terminated in the manner and for the causes provided in the articles of incorporation or the by-laws."
secured; or (3) when it can be clearly shown that such retention is necessary under special
The By-law provisions are elaborate in explaining the manner and the causes for the termination of
circumstances obtaining in the corporation, such as when there is need for special reserve for membership in Calatagan, through the execution on the lien of the share. The Court is satisfied that
probable contingencies. the By-Laws, as written, affords due protection to the member by assuring that the member should be
notified by the Secretary of the looming execution sale that would terminate membership in the club.
In addition, the By-Laws guarantees that after the execution sale, the proceeds of the sale would be
EFFECTS OF DELINQUENCY:
returned to the former member after deducting the outstanding obligations. If followed to the letter,
- Delinquent stock shall not vote or be voted upon the termination of membership under this procedure outlined in the By-Laws would accord with
- Not entitled to vote or to representation at any stockholder’s meeting substantial justice.
- Holder cannot be entitled to any rights of a stockholder except the right to dividends
6. DELINQUENCY SALE

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  In case that full payment is received by the corporation for the subscription of the capital stock, the
Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of corporation has the ministerial duty (mandatory) of issuing a CERTIFICATE OF STOCK.
delinquent stock and shall specifically state the amount due on each subscription plus all accrued RULE: No Certificate of Stock shall issue unless fully paid.
interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor  Prior to the issue of a Certificate of Stock, the subscriber cannot exercise his/her RIGHT TO TRANSFER. It
more than sixty (60) days from the date the stocks become delinquent. is merely an inchoate right.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder
either personally or by registered mail. The same shall furthermore be published once a week for
RULE:
two (2) consecutive weeks in a newspaper of general circulation in the province or city where the
principal office of the corporation is located.
 The person of the subscriber as the debtor cannot be substituted by another person.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the
 In the event that a not fully paid subscriber transfers its shares, the same is valid and binding only to the
sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of
immediate parties but it will not bind the corporation. The corporation cannot be compelled to
advertisement and expenses of sale, or unless the board of directors otherwise orders, said
recognize the transfer.
delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full
7. GROUNDS TO QUESTION DELINQUENCY SALE
amount of the balance on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the books of the corporation and a certificate Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be
for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent
the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the
covering such shares. sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action
Should there be no bidder at the public auction who offers to pay the full amount of the balance shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date
on the subscription together with accrued interest, costs of advertisement and expenses of sale, of sale. (47a)
for the smallest number of shares or fraction of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the
in the books of the corporation. Title to all the shares of stock covered by the subscription shall be corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid
vested in the corporation as treasury shares and may be disposed of by said corporation in subscription, with accrued interest, costs and expenses. (49a)
accordance with the provisions of this Code.
Section 71. Effect of 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
A. JUDICIAL
he pays the amount due on his subscription with accrued interest, and the costs and expenses of
B. EXTRA-JUDICIAL – DELINQUENCY SALE
advertisement, if any. (50a)
- Affects all subscription
- Indivisibility doctrine, hence each contract is indivisible. Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not
- Delinquency affects all the shares under the same subscription delinquent shall have all the rights of a stockholder.
- The sale pertains to all the delinquent shares
- The highest bidder shall refer to the payer of the highest amount with the least number of
shares
- A certificate of stock shall then be issued to the highest bidder.
 IN CASE OF ABSENCE OF BIDDERS:
 When there are no bidders and the corporation has Unrestricted Retained earnings
(URE), the corporation may acquire the totality of the delinquent shares.
 EFFECT OF THE REACQUISITION OF DELINQUENT SHARES
 The shares shall be considered as TREASURY SHARES, hence fully paid.

EFFECT OF DELINQUENCY SALE:

 The original subscriber shall be deprived of property rights IX. ISSUANCE OF CERTIFICATE OF STOCK
Section 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber
REMEDY OF THE ORIGINAL SUBSCRIBER:
until the full amount of his subscription together with interest and expenses (in case of delinquent
 The subscriber may question the delinquency sale :
shares), if any is due, has been paid.
o For irregularity of notice
o Irregularity in the conduct of sale
BALTAZAR V LANGAYEN GULF 14 S 522
Judicial sale is considered as an intra-corporate controversy.
ISSUE:
Whether or not a stockholder, in a stock corporation, subscribes to a certain number of
EFFECT IN CASE FULL PAYMENT IS MADE: shares of stock, and he pays only partially, for which he is issued certificates of stock, is he entitled to
vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 has been called for payment or declared delinquent. to control and manage the Embassy Farms despite the fact that AGA who is the source of their
supposed shares of stock in the corporation is not asking for the delivery of the indorsed certificate of
RULING: stock but for the rescission of the memorandum of agreement. Rescission would result in mutual
YES. restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow EBE to manage the
The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. farm.
Summers case, because it was the practice and procedure, since the inception of the corporation, to
issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting
power to shares of stock fully paid. And even though no agreement existed, the ruling in said case does
not now reflect the correct view on the matter, for better than an agreement or practice, there is the
X. RIGHT TO TRANSFER OF SHARES / VALIDITY OF
law, which renders the said case of Fua Cun-Summers, obsolescent. RESTRICTION OF RIGHT
In the cases at bar, the defendant-corporation had chosen to apply payments by its
Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer
stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock
shares must appear in the articles of incorporation and in the by-laws as well as in the certificate
shares certificates for said payments; its call for payment of unpaid subscription and its declaration of
delinquency for non-payment of said call affecting only the remaining number of shares of its capital of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said
stock for which no fully paid capital stock shares certificates have been issued, "and only these have restrictions shall not be more onerous than granting the existing stockholders or the corporation
been legally shorn of their voting rights by said declaration of delinquency" (amended decision). the option to purchase the shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein. If u
pon the expiration of said period, the existing stockholders or the corporation fails to exercise the
INSIGNE V ABRA VALLEY, 29 JUNE 2015 option to purchase, the transferring stockholder may sell his shares to any third person.
A stock certificate is prima facie evidence that the holder is a shareholder of the corporation,28 but
the possession of the certificate is not the sole determining factor of one‘s stock ownership. A
certificate of stock is merely: – FOREST HILLS V VERTEX, 6 MARCH 2013
At the outset, we declare that the question of rescission of the sale of the share is a settled matter
x x x the paper representative or tangible evidence of the stock itself and of the various interests that the Court can no longer review in this petition. While Forest Hills questioned and presented its
therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest arguments against the CA ruling rescinding the sale of the share in its petition, it is not the proper
and status in the corporation, his ownership of the share represented thereby, but is not in law the party to appeal this ruling.
equivalent of such ownership. It expresses the contract between the corporation and the stockholder,
but it is not essential to the existence of a share in stock or the creation of the relation of shareholder As correctly pointed out by Forest Hills, it was not a party to the sale even though the subject of the
to the corporation.29 (Emphasis supplied.) sale was its share of stock. The corporation whose shares of stock are the subject of a transfer
transaction (through sale, assignment, donation, or any other mode of conveyance) need not be a party
To establish their stock ownership, the petitioners actually turned over to the trial court through their to the transaction, as may be inferred from the terms of Section 63 of the Corporation Code. However,
Compliance and Manifestation submitted on April 7, 2010 the various documents showing their to bind the corporation as well as third parties, it is necessary that the transfer is recorded in the
ownership of Abra Valley‘s shares,30 specifically: the official receipts of their payments for their books of the corporation. In the present case, the parties to the sale of the share were FEGDI as the
subscriptions of the shares of Abra Valley; and the copies duly certified by the Securities and seller and Vertex as the buyer (after it succeeded RSACC). As party to the sale, FEGDI is the one who
Exchange Commission (SEC) stating that Abra Valley had issued shares in favor of the petitioners, may appeal the ruling rescinding the sale. The remedy of appeal is available to a party who has "a
such as the issuance of part of authorized and unissued capital stock; the letter dated June 17, 1987; present interest in the subject matter of the litigation and is aggrieved or prejudiced by the judgment.
the secretary‘s certificate dated June 17, 1987; and the general information sheet. A party, in turn, is deemed aggrieved or prejudiced when his interest, recognized by law in the subject
matter of the lawsuit, is injuriously affected by the judgment, order or decree."17 The rescission of the
EMBASSY FARMS V CA, 188 S 492 sale does not in any way prejudice Forest Hills in such a manner that its interest in the subject matter
– the share of stock – is injuriously affected. Thus, Forest Hills is in no position to appeal the ruling
ISSUE: Whether or not there has been an effective transfer of shares of stock from AGA to other rescinding the sale of the share. Since FEGDI, as party to the sale, filed no appeal against its
persons. rescission, we consider as final the CA‘s ruling on this matter
RULING:
NO. There being no delivery of the indorsed shares of stock AGA cannot therefore
effectively transfer to other person or his nominees the undelivered shares of stock. For an effective MAKATI SPORTS CLUB V CHENG, 16 JUNE 2010
transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed ISSUE:
(Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Whether or not MSCI was defrauded by Cheng's collaboration with Mc Foods.
Bilang 68, otherwise known as the Corporation Code of the Philippines, shares of stock may be RULING:
transferred by delivery to the transferree of the certificate properly indorsed. Title may be vested in NO.
the transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. No evidence on record that the Membership Committee acted on Hodreal's letter. SEC. 29.
Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the (a) The Membership Committee shall process applications for membership; ascertain that the
transfer is properly recorded in the books of the corporation. requirements for stock ownership, including citizenship, are complied with; submit to the Board its
In the case at bar the indorsed certificate of stock was not actually delivered to AGA so recommended on applicants for inclusion in the Waiting List; take charge of auction sales of shares of
that EBE is still the controlling stockholder of Embassy Farms despite the execution of the stock; and exercise such other powers and perform such other functions as may be authorized by the
memorandum of agreement and the turn over of control and management of the Embassy Farms to Board. Membership Committee failed to question the alleged irregularities attending Mc Foods‘
AGA on August 2, 1984. purchase price of P1,800,000.00 is P1,400,000.00 more than the floor price – it is not detrimental.
When AGA filed on April 10, 1986 an action for the rescission of contracts with damages Upon payment and the execution of the Deed of Absolute Sale, it had the right to demand
the Pasig Court merely restored and established the status quo prior to the execution of the the delivery of the stock certificate in its name. The right of a transferee to have stocks transferred to
memorandum of agreement by the issuance of a restraining order on July 10, 1987 and the writ of its name is an inherent right flowing from its ownership of the stocks certificate of stock paper
preliminary injunction on July 30, 1987. It would be unjust and unfair to allow AGA and his nominees representative or tangible evidence of the stock itself and of the various interests therein not a stock

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 in the corporation but is merely evidence of the holder‘s interest and status in the corporation, his  Serial number of the certificate
ownership of the share represented thereby MSCI failed to repurchase Mc Foods‘ Class "A" share  Signature of the President and the Corporate Secretary
within the 30 day pre-emptive period and no proof that Cheng personally profited
BACK
 No transfer clause
RURAL BANK OF SALINAS V CA, 210 S510
 Bottom: other provisions or restrictions affecting the rights of the registered owner.
ISSUE:  Upper: blank lines to accommodate endorsements preparatory to the actual transfer.
Whether or not a Mandamus lie against the Rural Bank of Salinas to register in its stock
and transfer book the transfer of 473 shares of stock to private respondents.
PV pogi S.N
RULING: X 1mcommon X to Y
YES. SS Pres No transfer Clause
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to
hear and decide cases involving intracorporate controversies. An intra-corporate controversy has been
defined as one which arises between a stockholder and the corporation. There is neither distinction, BOOK ENTRY SYSTEM
qualification, nor any exception whatsoever. The case at bar involves shares of stock, their  The exercise of rights is valid if the name of the subscriber is entered in the books of the
registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore corporation.
within the power of respondent SEC to adjudicate.  The entry in the books is a prima facie evidence of subscription
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers, because: Restrictions in the traffic of stock must have their source in NOTE: no transfer clause, the COS is void; Right of First Refusal in open corporationt is null and
legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended void.
merely for the protection of the corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the absence of such power, cannot
TRANSFER OF THE CERTIFICATE OF STOCK
ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is based.
 It is a quasi-negotiable instrument
Whenever a corporation refuses to transfer and register stock in cases like the present,  Requires a two-step process to effect transfer:
mandamuswill lie to compel the officers of the corporation to transfer said stock in the books of the
corporation. a) Indorsement
 Signed in favor of the transferee
 “X to Y”

XI. TRANSFER OF SHARES OF STOCK AND REGISTRATION b)

Actual physical deliver
 Physical custody or possession
Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations  Complete but not binding to the corporation as such is a private transaction
shall be divided into shares for which certificates signed by the president or vice president, between the parties.
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation  The same is an onerous/gratuitous unless the by-Laws so requires no further need of
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property another instrument to effect transfer
and may be transferred by delivery of the certificate or certificates indorsed by the owner or his EFFECT: The transferee is deemed to possess all the rights pertaining to shares including
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall DEMAND OF REGISTRATION of the same to the corporation. The corporate books shall
be valid, except as between the parties, until the transfer is recorded in the books of the include the name of the transferee.
corporation showing the names of the parties to the transaction, the date of the transfer, the WHO MAY TRANSFER
number of the certificate or certificates and the number of shares transferred.  The registered owner and his duly authorized representative through: (a) SPA, or (b) Judicial
No shares of stock against which the corporation holds any unpaid claim shall be transferable in appointment.
the books of the corporation.
 It is a tangible evidence of an intangible right inherent to one who has paid the subscription in full
 Personal proof REGISTRATION
 The stock certificate is only necessary to effect a transfer
 The Certificate of Stock is not necessary to the stockholder to exercise his/her rights over the shares TRANSFER (Cancellation of name of
covered in the COS.
the tranferor &
(Indorsemnet +
Entry of name of tranferee
Delivery) &
FORM: Issue new COS)
FACE (FRONT)
 In writing in the name of the corporation
 Name of the subscriber
 Number and classification of shares RIGHT TO TRANSFER
 Rights and/or privileges  It is an unbridled right hence cannot be restricted. Nevertheless, such exercise may be subject to
 Par/stated value reasonable regulations and restrictions.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  E.g. to disqualify aliens from nationalized companies.
 The manner of transfer may likewise be regulated.
 The corporation cannot refuse the registration of the transfer
 A good title passes and thus sufficient to demand registration.
 Imprescriptibly applies.

NECCESSITY OF REGISTRATION:
 FOR THE CORPORATION – to tract changes in ownership of the shares of stock to accord
rights and privileges to the new owner
 FOR THE TRANSFEREE – to exercise rights arising from the shares Q: what if APPARENT TITLE is vested?
 FOR THE GOVERNMENT – to monitor compliance with the citizenship requirement as to (EXCEPTION TO THE EXCEPTION)
the proper assessment of regulatory fees (public utilities)  Indorsement + delivery was made by the transferor but under restriction that it
NOTE: Once the registration is complete, there is a complete cessation of intra-corporate relation does not convey title.
between the transferor and the corporation. There is a new intra-corporate relation between the
transferee and the corporation.
EXAMPLE:
RIGHT TO DEMAND OF THE TRANSFEREE, becomes ministerial once title attaches to the Y needs funds
transferee, may be enforced anytime. Y borrows X’s certificate of stocks to obtain certain loan
X indorses + delivery
HOWEVER, the corporation cannot be compelled by mandamus in favor of one whose TITLE IS Under the law, there is complete transfer.
IN DOUBT. But y sells it to Z, Z demands registration.
SUCH AS:
 Certificate of stock is stolen
 Indorsement is falsified NOTE: Apparent title was vested by negligence of registered owner.
 Transfer is without authority from the registered owner
o The corporation is justified in refusing registration GENERAL RULE: registration is ministerial
o Regardless of the innocence of the subsequent indorsee because no EXCEPT: title is in doubt, the corporation may refuse registration
title passes. COS s not a negotiable instrument (only quasi) EXCEPT: when there is an apparent title and valid on its face, registration is
ministerial.

REMEDY: the original registered owner may proceed against the guilty person, in the
example, Y.
o It is not an intra-corporate controversy anymore because of a valid transfer.
NOTE: even if the original registered owner files for an injunction against the corporation,
Example: it is still not an intra-corporate controversy. The registered owner, X, is no longer a
Y stole the COS and made an indorsement. (this is forgery) stockholder. The title has already passed to the new owner, in this case, Y.
Q: If Y indorsed it to Z who then pays the consideration (not
forgery) EXAMPLE:
Y never acquired title, he therefore cannot pass title. X to Y (forged) (X failed to notify the corporation)
Z now goes to the SEC, the CORPORATION may refuse Y presented the same to the corporation and the latter issued a
new COS in the name of Y.
Y to Z
IF STREET CERTIFICATE, COS indorsed in BLANK, Once registered and new certificate is issued to Y, Z has better
converted to a bearer instrument. title derived from the new COS issued by the corporation. (the
It may be registered by whoever is in possession. There is no basis of the good title is the new certificate of stock which
need for indorsement because delivery is sufficient, UNLESS contains all the hall mark of regularity)
prior notice has been sent to the corporation about the forgery
of the certificate of stock.
Example:
FS VELASCO V MADRID, 10 NOVEMBER 2015
Y stole the COS and made an indorsement. (this is forgery)
all transfers of shares of stock must be registered in the corporate books in order to be binding on the
Q: Y indorsed it to Z who then pays the consideration (not corporation.
forgery) In this regard, the case of Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga38 instructs that an
Z delivered to D, d delivered to E, E delivered to F, F delivered owner of shares of stock cannot be accorded the rights pertaining to a stockholder - such as the right
to G to call for a meeting and the right to vote, or be voted for - if his ownership of such shares is not
G goes to SEC to register; the SEC cannot refuse because
there is a PRESUMPTION OF OWNERSHIP OF THE
CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)
SHARES
UNLESS:
 recorded in the Stock and Transfer Book certificates and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute
In the case at bar, records reveal that at the time Madrid called for the November 18, 2009 c learly involve's controversies "between and among stockholders, " as to the Abej os' right to sell and
Meeting, as well as the actual conduct thereof, he was already the owner of 74.98% shares of stock of dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's
FSVCI as a result of his inheritance of Angela's 70.82% ownership thereof. However, records are shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling
bereft of any showing that the transfer of Angela's shares of stock to Madrid had been registered in shareholders of the corporation, with the right to elect the corporate officers and the management and
FSVCFs Stock and Transfer Book when he made such call and when the November 18, 2009 Meeting control of its operations. Such a dispute and case clearly fag within the original and exclusive
was held. Thus, the CA erred in holding that Madrid complied with the required registration of jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A, above-quoted. The restraining order
transfers of shares of stock through mere reliance on FSVCI's GIS dated November 18, 2009. issued by the Regional Trial Court restraining Telectronics agents and representatives from enforcing
In this relation, it is noteworthy to point out that the submission of a GIS of a corporation their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming
before the SEC is pursuant to the objective sought by Section 2640 of the Corporation Code which is to control of the corporation and discharging their functions patently encroached upon the SEC's
give the public information, under sanction of oath of responsible officers, of the nature of business, exclusive jurisdiction over such specialized corporate controversies calling for its special competence.
financial condition, and operational status of the company, as well as its key officers or managers, so
that those dealing and who intend to do business with it may know or have the means of knowing
facts concerning the corporation's financial resources and business responsibility.
The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC CHEMPHIL EXPORT V CA, 251 S 257
is insufficient proof that they are shareholders of the company. ISSUE:
mere inclusion in the General Information Sheets as stockholders and officers does not Whether or not the attachment of shares of stock, in order to bind third persons, must be
make one a stockholder of a corporation, for this may have come to pass by mistake, expediency or recorded in the stock and transfer book of the corporation.
negligence. As professed by respondent-appellee, this was done merely to comply with the reportorial RULING: NO.
requirements with the SEC. This maybe against the law but "practice, no matter how long continued, Section 7(d), Rule 57 of the Rules of Court was complied with by the consortium (through
cannot give rise to any vested right. the Sheriff of the trial court) when the notice of garnishment over the Chemphil shares of Garcia was
served on the president of Chemphil on July 19, 1985. Indeed, to bind third persons, no law requires
that an attachment of shares of stock be recorded in the stock and transfer book of a corporation. The
MUSNI PUNO V PUNO ENTERPRISES, 11 SEPTEMBER 2009 statement attributed by the Regional Trial Court to the Supreme Court in Samahang Magsasaka, Inc.
ISSUE: vs. Gonzalo Chua Guan, G.R. No. L-7252, February 25, 1955 (unreported), to the effect that "as
Whether or not there was an automatic transfer of shares of stovk. between two attaching creditors, the one whose claim was registered first on the books of the
RULING: corporation enjoys priority," is an obiter dictum that does not modify the procedure laid down in
NO. Section 7(d), Rule 57 of the Rules of Court.
Upon the death of a shareholder, the heirs do not automatically become stockholders of the Therefore, ruled the Court of Appeals, the attachment made over the Chemphil shares in
corporation and acquire the rights and privileges of the deceased as shareholder of the corporation. the name of Garcia on July 19, 1985 was made in accordance with law and the lien created thereby
The stocks must be distributed first to the heirs in estate proceedings, and the transfer of the stocks remained valid and subsisting at the time Garcia sold those shares to FCI (predecessor-in-interest of
must be recorded in the books of the corporation. Section 63 of the Corporation Code provides that no appellee CEIC) in 1988.
transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation.16 During such interim period, the heirs stand as the equitable owners of the stocks, the
executor or administrator duly appointed by the court being vested with the legal title to the stock.17 RAZON V IAC, 207 S 234
Until a settlement and division of the estate is effected, the stocks of the decedent are held by the ISSUE:
administrator or executor. Consequently, during such time, it is the administrator or executor who is Whether or not petitioner have right over the ownership of the 1,500 shares of stock in E.
entitled to exercise the rights of the deceased as stockholder. Razon, Inc.
Thus, even if petitioner presents sufficient evidence in this case to establish that he is the RULING:
son of Carlos L. Puno, he would still not be allowed to inspect respondent‘s books and be entitled to NO.
receive dividends from respondent, absent any showing in its transfer book that some of the shares In the instant case, there is no dispute that the questioned 1,500 shares of stock of E.
owned by Carlos L. Puno were transferred to him. This would only be possible if petitioner has been Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the
recognized as an heir and has participated in the settlement of the estate of the deceased. records show that during his lifetime Chuidian was ellected member of the Board of Directors of the
Corollary to this is the doctrine that a determination of whether a person, claiming corporation which clearly shows that he was a stockholder of the corporation. From the point of view
proprietary rights over the estate of a deceased person, is an heir of the deceased must be ventilated of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the
in a special proceeding instituted precisely for the purpose of settling the estate of the latter. The petitioner who claims ownership over the questioned shares of stock must show that the same were
status of an illegitimate child who claims to be an heir to a decedent‘s estate cannot be adjudicated in transferred to him by proving that all the requirements for the effective transfer of shares of stock in
an ordinary civil action, as in a case for the recovery of property. The doctrine applies to the instant accordance with the corporation's by laws, if any, were followedor in accordance with the provisions of
case, which is one for specific performance — to direct Respondent Corporation to allow petitioner to law.
exercise rights that pertain only to the deceased and his representatives. The petitioner failed in both instances. The petitioner did not present any by-laws which
could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the
corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of the
ABEJO V DELA CRUZ, 149 S 643 Corporation Law are made applicable to the instant case.
ISSUE: The law is clear that in order for a transfer of stock certificate to be effective, the certificate
Whether or not the trial court have jurisdiction over aforesaid case. must be properlyindorsed and that title to such certificate of stock is vested in the transferee by the
RULING: delivery of the duly indorsedcertificate of stock. Since the certificate of stock covering the questioned
YES. 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the
The very complaint of the Bragas for annulment of the sales and transfers as filed by them petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The
in the regular court questions the validity of the transfer and endorsement of the certificates of stock, petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of
claiming alleged pre-emptive rights in the case of the Abejos' shares and alleged loss of thio his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 procedure required by law or the proper conduct of business even among friends. To reiterate,
certificate of stock which has been lost, stolen or destroyed. The notice shall state the
indorsement of the certificate of stock is a mandatory.
name of said corporation, the name of the registered owner and the serial number of
said certificate, and the number of shares represented by such certificate, and that after
RIVERA V FLORENDO, 144 S 643 the expiration
ISSUE: of one (1) year from the date of the last publication, if no contest has been presented to
Whether or not the respondent court of first instance have no jurisdiction over the petition said corporation regarding said certificate of stock, the right to make such contest shall
for mandamus and receivership "as well as in placing the corporate assets under provisional be barred and said corporation shall cancel in its books the certificate of stock which
receivership in the guise of a writ of preliminary mandatory injunction. has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock,
RULING: unless the registered owner files a bond or other security in lieu thereof as may be
YES. required, effective for a period of one (1) year, for such amount and in such form and
It has already been settled that an intracorporate controversy would call for the with such sureties as may be satisfactory to the board of directors, in which case a new
jurisdiction of the Securities and Exchange Commission. On the other hand, an intra-corporate certificate may be issued even before the expiration of the one (1) year period provided
controversy has been defined as "one which arises between a stockholder and the corporate. There is herein: Provided, That if a contest has been presented to said corporation or if an action
no distinction, qualification, nor any exemption whatsoever." is pending in court regarding the ownership of said certificate of stock which has been
This Court has also ruled that cases of private respondents who are not shareholders of the
lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall
corporation, cannot be a "controversy arising out of intracorporate or partnership relations between
and among stockholders, members or associates; between any or all of them and the corporation,
be suspended until the final decision by the court regarding the ownership of said
partnership or association, of which they are stockholders, members or associates, respectively." certificate of stock which has been lost,stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which shall have issued
WON V WACK-WACK GOLF AND COUNTRY CLUB, 104 P 466 certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
Issue: above-described. (R.A. 201a)
Whether or not the plaintiff is entitled to the registration of the transferred share of stock.
RULING:
NO. 1st. Follow the procedure as stated in the BY-LAWS
The certificate in question contains a condition to the effect that no assignment thereof 2nd. If silent, follow the CORPPRATION CODE
"shall be effective with respect to the club until such assignment is registered in the books of the club, i. Affidavit of loss shall be given to the Secretary
as provided in the By-Laws." The decisive question that arises is whether the plaintiff was bound, ii. The secretary PUBLISHES LOSS in a newspaper
under said condition and By-Laws of the defendant or any statutory rule for that matter, to present iii. No new CERTIFICAT shall issue within 1 year
and register the certificate assigned to him in 1944 within any definite or fixed period. The defendant 1. UNLESS: a BOND is posted.
has not made herein any pretense to that effect; but it contends that from the moment the certificate  If the corporation receives notice of claim, no new certificate shall be
was assigned to the plaintiff, the latter's right to have the assignment registered commenced to exist. issued until a FINAL JUDGMENT settling the ownership dispute has been
This contention is correct, but it would not follow that said right should be exercised immediately or rendered.
within a definite period. The existence of a right is one thing, and the duration of said right is another.
Example: if there are two conflicting claims regarding the ownership of a
On the other hand, it is stated in the appealed order of dismissal that the plaintiff sought
COS, the Secretary shall not issue a new certificate of stock.
to register the assignment on April 13, 1955; whereas in plaintiff's brief it is alleged that it was only in
February, 1955, when the defendant refused to recognize the plaintiff. If, as already observed, there is REMEDY: the corporation will file for INTERPLEADER.
no fixed period for registering an assignment, how can the complaint be considered as already barred
by the Statute of Limitations when it was filed on April 26, 1955, or barely a few days (according to
the lower court) and two months (according to the plaintiff), after the demand for registration and its ADDITIONAL NOTES ONLY:
denial by the defendant. Plaintiff's right was violated only sometime in 1955, and it could not REMEDIES AVAILABLE WHEN CORPORATION REFUSES TO ISSUE CERTIFICATE OF STOCK:
accordingly have asserted any cause of action against the defendant before that. a) File a suit for specific performance of an express or implied contract
b) File for an alternative relief by way of damages where specific performance cannot be granted
XII. LOST OR DESTROYED CERTIFICATE c) File a petition for mandamus to compel the issuance of the certificate where the conditions, facts
and circumstances of the particular case bring it within the legal rules which govern the granting of
Section 73. Lost or destroyed certificates. - The following procedure shall be followed for the the writ
issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen d) rescind the contract of subscription if the corporation wrongfully refuses to deliver a certificate,
or destroyed: and sue to recover back what has been paid.
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed, the Class lecture
number of shares represented by such certificate, the serial number of the certificate Subscription
and the name of the corporation which issued the same. He shall also submit such other - A special kind of contract of sale (in writing)
information and evidence which he may deem necessary; o Seller: Corporation (issuer): maker of security
2. After verifying the affidavit and other information and evidence with the books of the o Subscriber: agrees to take and pay for a definite number of shares from the
corporation, said corporation shall publish a notice in a newspaper of general ACS
circulation published in the place where the corporation has its principal office, once a - Mandatory/unconditional/not subject of novation  pay in full the consideration
week for three (3) consecutive weeks at the expense of the registered owner of the - He is a debtor of the corporation

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 - Default will not authorize rescission of the subscription contracttt 1. Judicial action
- Civil Code will apply suppletorily 2. Extra-judicial – conduct delinquency sale/auction
Kinds (as to time of perfection: **Contract is essentially indivisible  partial payment made by delinquent subscriber is
1. Pre-incorporation subscription applied pro-rata to all shares subscribe dtherein
 A condition pre-requisite to the registration to the SEC [minimum capital stock HIGHEST BIDDER- offers the highest price for the smallest number of shares
requirement]
 Irrevocable e.g.
Revocation is allowed A P8M for 800,000 shares
i. Unanimous consent of all initial subscribers upon the demand of one of them B P10M for 800,000 shares highest bidder
ii. If the corp is not registered/formed within 6 months from date of contract C P10M for 1M shares
-a right no need to be unanimous
i. No revocation if the AOI and Treasurer’s Affidavit are passed to the SEC Options of the corp:
o But the SEC can permit revocation 1. Cancel shares not covered by the bid
2. Post-incorporation subscription *provided there are no corporate debts
 After the corp has been registered/granted franchise 2. Compromise with the original subscriber
 Authority to dispose of shares is upon the BoD a. Forfeit
As long as they pertain to original or new shares, legally they are subscriptions b. Issue shares not covered by the bid – since they have been paid
WATERED SHARES:
i. Issuance of/subscription thereto is gratuitous
ii. Issued as stock dividends but in the absence of URE
iii. Issuance at less than par or stated value OWNERSHIP OF STOCK RELATES TO CERTAIN ADJUNCT RIGHTS
Form of payment allowed
1. Cash
RIGHT TO PARTICIPATE IN THE MANAGEMENT OF THE CORPORATION
*Promissory notes – payment is not certain not allowed
2. Checks G.R. management:BOD
- only if allowed in the by-laws or by the authority of the BoD
- deemed issued if encashed SH: exercise residual management powers.
3. Property other than cash To vote pursuant to the Corporation Code, AOI, By-Laws
- only if needed by the corp for its business Stockholders implicitly leave the management to the director
- the BoD must appraise to determine how many shares may be issued and to prevent watering
down the shares 1) RIGHT TO VOTE
- must be approved by the SEC BY ALL SHARES
4. Labor/service
- must be actually rendered to the corp UNLESS
- must be appraised by the BoD
*must only be for past, never for future services a. Class of share is non-voting as stated in the AOI(such as preferred or redeemable)
Legal fees – subject to judicial determination; supersedes contractual stipulations by the parties b. Delinquent shares
5. Previously incurred indebtedness of the corp (dacion en pago)  right to vote and be voted is suspended
- a creditor can assail on the ground of undue preference esp. in times of insovency c. Shares are subject to Appraisal
6. URE as stock dividend  Stockholders who want to withdraw from the corporation . May demand the surrender
7. Conversion of rights by virtue of the AOI/By-laws/Subscription contract value of the shares of stocks
When to pay: d. Treasury shares
1. Upon stipulation  not part of the outstanding capital stock. Thus it has no active rights.
a. If by installment – demand not necessary
2. If silent, due upon call: demand to all who have balances Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as
Call: a formal written demand through the resolution stating therein the: long as such shares remain in the Treasury.
• Balance
• Interest and penalties VOTING: WHO MAY EXERCISE?
• Due date
• Warning that failure to pay will cause delinquency
Effect of delinquency: COCOFED, ET AL VS REPUBLIC, 11 FEBRUARY 2010
• Suspended voting rights ISSUE:
• Disqualified to be elected as director Whether or not the arguments of the Oppositors herein have merits.
o Dividend rights: suspended performance RULING:
 Subscriber is entitled, but delivery to him NO.
Anent the 1st contention, it is not tenable because in fact this conversion is a business strategy to
Action by the corp:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

preserve and conserve the value of the Government‘s interest in the CIIF SMC shares. As to the 2nd argument, it Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings
is also untenable because it is not within the Courts to determine wisdom of other agencies of the government. As of stockholders or members. Proxies shall in writing, signed by the stockholder or member and
to the 3rd argument, likewise untenable because FIRST, there is really no disposal of SMC shares and SECOND,
filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the
there is no yet government assets to talk about because the ownership thereto is still to be determined, hence,
those shares are akin to properties subject of attachment. As to the 4th contention, PCGG need not obtain the
proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and
acquiescence of the owners of those sequestered shares with respect to any of its acts intended to preserve such effective for a period longer than five (5) years at any one time.
assets. Otherwise, it would be impossible for it to perform its function as provided by law. And as to the 5th
argument, it is also of no merit because the Court has the discretion where to deposit those net dividends, whether
THREE MEANING:
it be on Development Bank of the Philippines/ Land Bank of the Philippines or the UCPB.
1st. Legal authority conferred by the stockholder upon another to attend meeting or
vote therein.
- Agency granted to the agent (always act within given authority and abide all
REPUBLIC VS COCOFED, 372 S 462 instruction)
ISSUE:
Whether or not PCGG may vote the sequestered UCPB shares while the main case for their reversion to 2nd. Instrument representing or manifesting the legal authority
the State is pending in the Sandiganbayan.  form: in the form as stated under the By-LAws, if any,
RULING:  that if the corporation code:
YES. o written
The SC holds that the government should be allowed to continue voting those shares inasmuch as they o submitted to the cororate secretary on the day of the
were purchased with coconut levy funds since those are prima facie public in character or, at the very least, are meeting to be attended.
"clearly affected with public interest." o Valid only for that meeting unless longer period is
provided.
The general rule is that the registered owner of the shares of a corporation exercises the right and the o Maximum is 5 years.
privilege of voting. This principle applies even to shares that are sequestered by the government, over which the
3rd. Person given the delegated authority to attend and vote in behalf of the
PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the other hand, it is
authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly
stockholder.
ill-gotten wealth, if it is able to satisfy the two-tiered test. Unfortunately, this test is not applicable under  Mmmmm
the circumstances of this case. ۩ PROXY is merely an extension of the privilege to vote in behalf of the
Hence, the Court granted PCGG the right to vote the sequestered shares because they appeared to be assets principal but cannot be voted for.
belonging to the government itself. o If no authority, the corporation is not bound
o UNLESS, the principal is stopped. In e.g, when there is an
apparent authority.
۩ PROXY SOLICITATION- requires permit from the SEC.
LEE VS CA, 205 S 752
ISSUE: b) VOTING TRUST AGREEMENT
Whether or not despite the execution of the Voting Trust Agreement, the summons be served upon the
petitioners who were officers and directors of ALFA (the trustor). Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a
RULING: voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
NO. other rights pertaining to the shares for a period not exceeding five (5) years at any time:
There is no dispute as to the most immediate effect of a voting trust agreement on the status of a Provided, That in the case of a voting trust specifically required as a condition in a loan
stockholder who is a party to its execution from legal titleholder or owner of the shares subject of the voting trust agreement, said voting trust may be for a period exceeding five (5) years but shall
agreement, he becomes the equitable or beneficial owner. automatically expire upon full payment of the loan. A voting trust agreement must be in
Note that in order to be eligible as a director, what is material is the legal title to, not beneficial writing and notarized, and shall specify the terms and conditions thereof. A certified
ownership of, the stock as appearing on the books of the corporation copy of such agreement shall be filed with the corporation and with the Securities and
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stocks Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The
covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the
certificate or certificates of stock covered by the voting trust agreement shall be
said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one
cancelled and new ones shall be issued in the name of the trustee or trustees stating that
share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have
retained their status as officers of ALFA which was the case before the execution of the subject voting trust
they are issued pursuant to said agreement. In the books of the corporation, it shall be
agreement. There appears to be no dispute from the records that DBP has taken over full control and management noted that the transfer in the name of the trustee or trustees is made pursuant to said
of the firm. voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same effect as
certificates of stock.
A. Personally by the Stockholder The voting trust agreement filed with the corporation shall be subject to
 in a meeting called for that purpose or examination by any stockholder of the corporation in the same manner as any other
 by mere written assent corporate book or record: Provided, That both the transferor and the trustee or trustees
B. Or by Representation may exercise the right of inspection of all corporate books and records in accordance
a) PROXY with the provisions of this Code.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  The VTA is a management controlling device where the power to vote is concentrated to one
Any other stockholder may transfer his shares to the same trustee or trustees person thus permits BLOCK VOTING.
upon the terms and conditions stated in the voting trust agreement, and thereupon shall
be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of e.g.
circumventing the law against monopolies and illegal combinations in restraint of trade SMC
or used for purposes of fraud. 33% voting stock: sequestered by PCGG
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as 20% is Danding’s
well as the certificates of stock in the name of the trustee or trustees shall thereby be He became Chairman. He invited investors like Kirin Beer (Japanese) who
deemed cancelled and new certificates of stock shall be reissued in the name of the bought shares of 15% then executed a VTA with Danding, who now has 35%.
transferors.
SMC Retirement Plan Inc. – 15%, also with a VTA with Danding, now have 50%
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise.

NOTE: THE RIGHT TO EXECUTE A VTA CANNOT BE RESTRICTED SINCE IT IS A PROPERTY

 Is a special instrument of an express trust whereby the trustor is the
RIGHT.
stockholder and for the period provided, the trustee is empowered to exercise
right to vote for the shares.
VTA cannot be used to circumvent Constitutional Provisions.
 A contract by succession/accession as other stockholders may have a joint
VTA by subsequently surrendering their CERTIFICATES of STOCKS to the
corporate secretary for the same VTA 01) For mining corporations
A 20%
B Filipino Stockholders 20%
VALIDITY: C 20%
X – Australian 40%
Q: Can C execute a VTA in favor of X?
 valid for FIVE (5) years but is subject to renewal.
A: NO! By doing such, it would vest voting rights to a disqualified
 If executed to secure a loan of the trustor with the trustee, the VTA
person.
is valid until FULL PAYMENT of the loan. (the shares of stocks may
be used as a security)
FORM:
o Public instrument NIDC VS AQUINO, 163 S153
o Copy must be sent to SEC (for registration to bind the corporation; the ISSUE:
registration is with the annotation that it is pursuant to a VTA) and the Whether or not the NIDC and PNB acquired ownership over the assets of Batjak despite
Corporate Secretary (for the cancellation of the old COS in the name of the a voting trust agreement between Batjak‘s stockholders and NIDC.
trustor and to issue a new COS in the name of the trustee) RULING:
YES.
 TRUSTEE: What was assigned to NIDC was the power to vote the shares of stock of the stockholders
o May VOTE of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the
o May be voted for (possessor of the legal title) agreement. The power entrusted to NIDC also included the authority to execute any agreement or
document that may be necessary to express the consent or assent to any matter, by the stockholders.
Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made
NOTE: The VTA dichotomizes the aspects of ownership whereby legal title is
of any transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was
held by the trustee and the beneficial title is held by the trustor. constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock
in Batjak. Under the provision on termination what was to be returned by NIDC as trustee to
IN THE VTA, THERE ARE TWO CERTIFICATES Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of stock
belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never
I. STOCK CERTIFICATE delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement. A voting trust
o Legal title to the trustee transfers only voting or other rights pertaining to the shares subject of the agreement or control over
o May be assigned by the trustee by indorsement and delivery the stock hence the acquisition by PNB-NIDC of the properties in question was not made or effected
II. VOTING TRSUT CERTIFICATE under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just
and valid obligation of Batjak.
o Equitable title to the trustor
o Executed by the trustee in the same form as the stock certificate
o Trustor has no right to vote as such right remains to the trustee during the
period of the VTA. LAMBERT VS FOX, 26 P 588
 Upon the expiration of the VTA, all the rights conveyed shall be restored to the trustor. The
ISSUE:
certificate of the trustee will be cancelled and a new certificate will be issued to the trustor
Whether or not the suspension of the power to sell the stock is valid and legal.
or to a new transferee.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 RULING: Where the articles of incorporation provide for non-voting shares in the cases allowed by this
YES. Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:
The suspension of the power to sell has a beneficial purpose, results in the protection of
1. Amendment of the articles of incorporation;
the corporation as well as of the individual parties to the contract, and is reasonable as to the length
of time of the suspension. We do not here undertake to discuss the limitations to the power to
2. Adoption and amendment of by-laws;
suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
this particular case is legal and valid corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights.
REPRESENTATIVE CAPACITY
TREASURY SHARES WITH RESPECT TO VOTING RIGHTS
 Guardians
 Administration (deceased or absentee) Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as
o Without need of proxy or VTA as long as JUDICIALLY APPOINTED such shares remain in the Treasury.
Section 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully
Section 55. Right to vote of pledgors, mortgagors, and administrators. - In
paid for, but subsequently reacquired by the issuing corporation by purchase, redemption,
case of pledged or mortgaged shares in stock corporations, the pledgor or
donation or through some other lawful means. Such shares may again be disposed of for a
mortgagor shall have the right to attend and vote at meetings of stockholders,
reasonable price fixed by the board of directors.
unless the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate
corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.

 If the Shares of Stocks is registered in the name of 2 persons, they are considered as
ONE UNIT.
Section 56. Voting in case of joint ownership of stock. - In case of shares of
stock owned jointly by two or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary, unless there is a written
proxy, signed by all the co-owners, authorizing one or some of them or any
other person to vote such share or shares: Provided, That when the shares are
owned in an "and/or" capacity by the holders thereof, any one of the joint
owners can vote said shares or appoint a proxy therefor.

o E.g.: 1 million shares in the name of A & B,

o Either A will say YES/ B will say NO.
o If A and/or B, either may vote but if both are present-ONE NIT.
o If A in trust for B, A (trustee) votes. Trsut is sufficient.
o A 1m mortgaged /to B pledged, A still has the right to vote for the shares (no
transfer of absolute title) In mortgage or pledge, it cannot be recorded in the
books as it does not transfer an absolute title but only the possession is
transferred.

NON-VOTING SHARES
SECTION 6:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 MANDATORY MEETINGS: (as required by the corporation code)
MEETINGS
RIGHT TO VOTE IN MEETINGS 1. Election
HOW OFTEN? a. Quorum : majority of those entitled to vote, personally/by representation
Section 51. Place and time of meetings of stockholders of members. - Stockholder's or member's Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in
meetings, whether regular or special, shall be held in the city or municipality where the principal office the by-laws, a quorum shall consist of the stockholders representing a majority of
of the corporation is located, and if practicable in the principal office of the corporation: Provided, That the outstanding capital stock or a majority of the members in the case of non-stock
Metro Manila shall, for purposes of this section, be considered a city or municipality. corporations.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or members, if 2. Grant of compensation to directors
within the powers or authority of the corporation, shall be valid even if the meeting be improperly held a. Majority of the board
or called, provided all the stockholders or members of the corporation are present or duly represented 3. Remove director
at the meeting. a. 2/3 of the Stockholders
4. Ratify contracts of Self Dealing Directors
i. By-laws – as often as stipulated and on the date stipulated therein a. 2/3 of the Stockholders
a. Annual Stockholders’ Meeting – held on the day fixed in the By-Laws 5. Ratify contract of a disloyal Director
ii. If the By-Laws is silent, follow the SEC Rules a. 2/3 of the Stockholders
a. FIRST TUESDAY after the first Monday of the year. 6. Adopt or amend by-laws
o Regular annual stockholders’ meeting and election a. Majority of the board
7. To delegate power to adopt or amend
MEETING OF STOCKHOLDERS / MEMBERS a. 2/3 of the stockholders
8. Extend corporate term
Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be a. 2/3 of the stockholder
regular or special 9. Increase capital stock
Section 50. Regular and special meetings of stockholders or members. - Regular meetings of a. 2/3 of the stockholder
stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any 10. Incur bonded indebtedness
date in April of every year as determined by the board of directors or trustees: Provided, That written a. 2/3 of the stockholders
notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks 11. Sale of all or substantially all of the assets of the corporation
prior to the meeting, unless a different period is required by the by-laws. a. 2/3 of the stockholders
Special meetings of stockholders or members shall be held at any time deemed necessary or 12. Investment
as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to a. 2/3 of the stockholders
all stockholders or members, unless otherwise provided in the by-laws. 13. Declare stock dividends
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. a. 2/3 of the stockholders
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange 14. Ratify ultra vires acts
Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue a. 2/3 of the stockholders
an order to the petitioning stockholder or member directing him to call a meeting of the corporation by 15. Fix value of no par value shares
giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member a. 2/3 of the stockholders
shall preside thereat until at least a majority of the stockholders or members present have chosen one of 16. Merger or consolidation
their number as presiding officer. a. 2/3 of the stockholders
17. Dissolve (voluntary petition)
a. 2/3 of the stockholder
I. REGULAR
 Every two (2) weeks
II. SPECIAL WHO PRESIDES?
 At least one (1) week before the said meeting
 Called whenever exigencies require.
 Notice for such meeting must be issued to the stockholders or members. Section 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or
 For PUBLIC CORPORATION: PUBLISH trustee as well as of the stockholders or members, unless the by-laws provide otherwise.
 If there was no proper notice, any stockholder may question the meeting and all matters
resolved therein.
o If the stockholder cannot change the results or will not invalidate the resolution, the
WHO COULD ATTEND AND VOTE?
stockholder has the REMEDY of (a) Damages for Denial of the right to Notice and be
present to the meeting.
o The Corporate secretary shall be liable Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

formally organize by the election of a 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. Any two (2) or more positions may be held concurrently by the same person,
except that no one shall act as president and secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the
by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5)
years at any one time.

SALES VS SEC, 13 JANUARY 1989

ISSUE:
Whether or not SEC acted with grave abuse of discretion in not permanently enjoining VIMC in voting.
RULING:
NO.
SC found no grave abuse of discretion on the part of the SEC in not restraining VIMC. It adopted the
SEC resolution stating that the sale of the shares of stock had long been perfected and is presumed valid until
declared otherwise. As against this presumption, petitioners' prayer for injunction cannot prevail as the issue of
the validity of the sale is still to be resolved by the SEC.
Considering that the shares constitute the majority, it is more equitable that the same be allowed to
vote rather than be enjoined. As it has been ruled the removal of a majority SH from the management of the
corporation and/or the dissolution of a corporation in a suit filed by a minority SH is a drastic measure. It should
be resorted to only when the necessity is clear. With more reason, the Court will not deprive a SH of his right to
vote his shares in the annual SHs' meeting, except upon a clear showing of its lawful denial under the articles of
incorporation or by-laws of the corporation, as it is a right inherent in stock ownership.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 CORPORATE BOOKS AND RECORDS  STOCK AGENT
 Licensed for that particular act by the SEC
A. BOOKS TO BE KEPT  Necessary for corporations if stock is sold at a stock exchange.
- record of all business transactions and minutes of all meetings of stockholders or members, or of the board
Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and
of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how
carefully preserve at its principal office a record of all business transactions and
authorized, the notice given, whether the meeting was regular or special, if special its object, those present
minutes of all meetings of stockholders or members, or of the board of directors or
and absent, and every act done or ordered done at the meeting.
trustees, in which shall be set forth in detail the time and place of holding the meeting,
how authorized, the notice given, whether the meeting was regular or special, if
STOCK AND TRANSFER BOOK
special its object, those present and absent, and every act done or ordered done at
- Contains the following:
the meeting. Upon the demand of any director, trustee, stockholder or member, the
1. All stocks in the names of the stockholders alphabetically arranged
time when any director, trustee, stockholder or member entered or left the meeting
2. The installment paid and unpaid on all stock for which subscription has been made,
must be noted in the minutes; and on a similar demand, the yeas and nays must be
and the date of payment of any installment
taken on any motion or proposition, and a record thereof carefully made. The protest
3. A statement of every alienation, sale or transfer of stock made
of any director, trustee, stockholder or member on any action or proposed action
4. Such other entries as the by-laws may prescribe
must be recorded in full on his demand.
WHERE KEPT?
The records of all business transactions of the corporation and the minutes of any
- Kept in the principal office of the corporation or in the office of its stock transfer agent and
meetings shall be open to inspection by any director, trustee, stockholder or member
shall be open for inspection to any director or stockholder of the corporation at reasonable
of the corporation at reasonable hours on business days and he may demand, in
hours on business day
writing, for a copy of excerpts from said records or minutes, at his expense.
WHO MAY MAKE PROPER ENTRIES?
Any officer or agent of the corporation who shall refuse to allow any director,
- Corporate Secretary trustees, stockholder or member of the corporation to examine and copy excerpts
RIGHT TO INSPECT AND EXAMINE CORPORATE BOOKS AND RECORDS from its records or minutes, in accordance with the provisions of this Code, shall be
liable to such director, trustee, stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable under Section 144 of this Code:
2. PUBLIC AND INSPECTABLE Provided, That if such refusal is made pursuant to a resolution or order of the board of
 Corporate books and records required by law, rules and regulations to be submitted directors or trustees, the liability under this section for such action shall be imposed
before the SEC. upon the directors or trustees who voted for such refusal: and Provided, further, That
 Unless such laws, rules and regulations restricts access thereto, these books and records it shall be a defense to any action under this section that the person demanding to
are open to the public at large. examine and copy excerpts from the corporation's records and minutes has
 Once submitted, it takes the public character of documents improperly used any information secured through any prior examination of the
 Once submitted, it’s a prima facie proof of regularity records or minutes of such corporation or of any other corporation, or was not acting
 Secondary rule applicable in good faith or for a legitimate purpose in making his demand.
3. NON-PUBLIC AND INSPECTABLE Stock corporations must also keep a book to be known as the "stock and transfer
 Books and Records regulated by the Corporation Code book", in which must be kept a record of all stocks in the names of the stockholders
 Refers to the following: alphabetically arranged; the instalments paid and unpaid on all stock for which
a. MINUTES OF MEETINGS(BOARD/STOCKHOLDERS/MEMBERS) subscription has been made, and the date of payment of any instalment; a statement
 It is not an exact verbatim transcript of meetings. of every alienation, sale or transfer of stock made, the date thereof, and by and to
 Summary of all matters taken up and approved whom made; and such other entries as the by-laws may prescribe. The stock and
 Once approved, considered an accurate depiction of all incidents approved or transfer book shall be kept in the principal office of the corporation or in the office of
discussed during said meeting its stock transfer agent and shall be open for inspection by any director or stockholder
 Principal reference: of the corporation at reasonable hours on business days.
 To determine who among the directors may be held liable (sec 65) No stock transfer agent or one engaged principally in the business of registering
 To determine who among the stockholders may exercise their Appraisal transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
Right as a dissenting Stockholder. (Only those SHs present during thr said Philippines unless he secures a license from the Securities and Exchange Commission
meeting because it us based on the record that such SH cast its dissenting and pays a fee as may be fixed by the Commission, which shall be renewable
vote) annually: Provided, That a stock corporation is not precluded from performing or
b. RECORDS OF ALL BUSINESS TRANSACTION making transfer of its own stocks, in which case all the rules and regulations imposed
 All records that are maintained and updated on stock transfer agents, except the payment of a license fee herein provided, shall be
 All communications related to those on file except confidential communication. applicable.
 To allow SHs/members to determine transactions that the board has entered into
in favor of the company.
c. STOCK AND TRANSFER BOOK  MEMBERSHIP BOOKS – for non-stock corporations which is signed
 Alphabetical listing if all subscribers and shares subscribed to , name, class of by the members upon admission.
shares, total subscription, amount paid, balance, consideration.
 If fully paid, an entry regarding the issue of COS must be reflected. TERELAY V YULO
 Generally by the Corporate Secretary or the Stock and Transfer Agent Issue:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Whether the law requires substantial shareholdings before a stockholder can exercise the right of inspection corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific
Held: provisions take from the stockholder the burden of showing propriety of purpose and place upon the
No. The submission that the respondent's ―insignificant holding‖ of only .001% of the petitioner's stockholding corporation the burden of showing impropriety of purpose or motive. It appears to be the general rule that
did not justify the granting of her application for inspection of the corporate books and records is unwarranted. stockholders are entitled to full information as to the management of the corporation and the manner of
The Corporation Code has granted to all stockholders the right to inspect the corporate books and records, and expenditure of its funds, and to inspection to obtain such information, especially where it appears that the
in so doing has not required any specific amount of interest for the exercise of the right to inspect. Ubi lex non company is being mismanaged or that it is being managed for the personal benefit of officers or directors or
distinguit nee nos distinguere debemos. When the law has made no distinction, we ought not to recognize any certain of the stockholders to the exclusion of others."
distinction.
Neither could the petitioner arbitrarily deny Yulo's right to inspect the books and records based on the fact
that her inspection would be used for a doubtful or dubious reason. Under Section 74 (3), the only time when PHILPOTTS VS PHIL MFG CO
the demand to examine and copy the books and minutes could be refused is when the corporation puts up as a ISSUE:
defense to any action that the ―person demanding had improperly used any information secured through any Whether or not the right to inspect records and transactions of the corporation is permitted.
prior examination of the records and minutes of such RULING:
YES.
Now it is our opinion, and we accordingly hold, that the right of inspection given to a stockholder
YUJUICO V QUIAMBAO in the provision above quoted can be exercised either by himself or by any proper representative or attorney
Issue: in fact, and either with or without the attendance of the stockholder. This is in conformity with the general
Whether the RTC is correct in ruling that the act of refusing to allow inspection of the stock and transfer book rule that what a man may do in person he may do through another; and we find nothing in the statute that
of a corporation is not a punishable offense under the Corporation Code would justify us in qualifying the right in the manner suggested by the respondents.
Held: This conclusion is supported by the undoubted weight of authority in the United States, where it
No. A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records is generally held that the provisions of law conceding the right of inspection to stockholders of corporations
and the stock and transfer book of a corporation under the second and fourth paragraphs of Section 74 of the are to be liberally construed and that said right may be exercised through any other properly authorized
Corporation Code can only be maintained against corporate officers or any other persons acting on behalf of person. As was said in Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in the sense
such corporation. The submissions of the petitioners during the preliminary investigation, however, clearly that only a stockholder may enjoy it; but the inspection and examination may be made by another.
suggest that respondents are neither in relation to STRADEC. In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to
While Section 74 of the Corporation Code expressly mentions the application of Section 144 only in relation to say that there are some things which a corporation may undoubtedly keep secret, notwithstanding the right
the act of ―refusing to allow any director, trustees, stockholder or member of the corpoation to examine and of inspection given by law to the stockholder; as for instance, where a corporation, engaged in the business of
copy excerpts from the corporation's records or minutes,‖ the same does not mean that the latter section no manufacture, has acquired a formula or process, not generally known, which has proved of utility to it in the
longer applies to any other possible violations of the former section. manufacture of its products. It is not our intention to declare that the authorities of the corporation, and
It must be emphasized that Section 144 already purports to penalize violations of ―any provision‖ of the more particularly the Board of Directors, might not adopt measures for the protection of such process form
Corporation Code ―not otherwise specifically penalized therein.‖ Hence, the Court found no reason why publicity. There is, however, nothing in the petition which would indicate that the petitioner in this case is
Section 144 cannot be made to apply to violations of the right of stockholders to inspect the stokc and transfer seeking to discover anything which the corporation is entitled to keep secret; and if anything of the sort is
book of a corporation under Section 74 (4) given the already unequivocal intent of the legislature to penalize involved in the case it may be brought out at a more advanced stage of the proceedings.
violations of a parallel right- the right of a stockholder or member to examine the other records and minutes of
a corporation under Section 74 (2).
d. FINANCIAL STATEMENTS
GOKONGWEI V SEC Section 75. Right to financial statements. - Within ten (10) days from receipt of a
ISSUE: written request of any stockholder or member, the corporation shall furnish to him
Whether or not respondent SEC gravely abuse its discretion in denying petitioner's request for an its most recent financial statement, which shall include a balance sheet as of the
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel end of the last taxable year and a profit or loss statement for said taxable year,
Corporation. showing in reasonable detail its assets and liabilities and the result of its operations.
RULING: At the regular meeting of stockholders or members, the board of directors or
YES. trustees shall present to such stockholders or members a financial report of the
The stockholder's right of inspection of the corporation's books and records is based upon their operations of the corporation for the preceding year, which shall include financial
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the
statements, duly signed and certified by an independent certified public
corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial
accountant.
ownership, or a ownership. This right is predicated upon the necessity of self-protection. It is generally held
by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as However, if the paid-up capital of the corporation is less than P50,000.00, the
such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane financial statements may be certified under oath by the treasurer or any responsible
thereto or in the interest of the corporation. In other words, the inspection has to be germane to the officer of the corporation.
petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the
interest of the corporation.
"The right to examine the books of the corporation must be exercised in good faith, for specific and  Written request which must be filed ahead with the Corporate Treasurer
honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or
 Verbal request is insufficient
for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for
 Copies of the FS must be furnished at least within 10 days at the expense of the
mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good
faith and his purpose and motives in seeking inspection. Thus, it was held that "the right given by statute is
requesting SH
not absolute and may be refused when the information is not sought in good faith or is used to the detriment of
the corporation." But the "impropriety of purpose such as will defeat enforcement must be set up the What constitutes FS:
1. Profit and Loss Statement

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 2. Statement of Assets and Liabilities
3. Balance Sheets
4. Statement of financial condition
 duly audited.
Note: no open to the public at large but accessible only only to the
members and stockholders.
 Members and SH have an unbridled right to demand examination as an
offshoot of the right of ownership of shares of stocks.
 Cannot be restricted by the AOI but may be regulated by the AoI and By-
Laws which cannot be more onerous than those provided for by law.
a. Maybe done directly or through an agent
 Must possess written authority
 The power to delegate cannot be restricted.
b. Time of Inspection is at any time on any business day at a reasonable
hour
 Covers the RIGHT TO MAKE COPIES AND TAKE TRANSCRIPTS
 The purpose is to protect investment
 The corporate secretary cannot refuse the examination ir
inspection
 If there is refusal, such is prejudicial to the SH
o SH may appeal to the BOD
o If BOD affirms, 3-Fold Liability (criminal, civil, admin)

 BOD may raise the following as a Defense:

 That the requesting SH is not prompted by a legitimate
purpose
 Not acting in good faith
 Misused information obtained from previous
inspection.
01) Then the right to inspect and examine is asserted , pendencies of criminal case committed by
the SH which includes falsification or tampering will NOT deprive the SH of such right (Sy v
Sy)
o Gokongwei Case: to inspect the Books of Account of A foreign Subsidiary Corporation
 The right may only be asserted upon proof that:
a. The subsidiary os wholly owned by the parent corporation
-the SHs of thr parent corporation are indirectly the SHs of the subsidiary
corporation (they have interest)
b. The Books and Records are in the possession of the parent company.

4. NON-PUBLIC NON-INPECTABLE
 Confidential information that must be kept secret
PURPOSE OF LIMITED ACCESS:
I. To protect the business interest
 Certain trade secrets cannot be revealed to anyone because it gives the
corporation a competitive edge in the industry
II. Because the law requires confidentiality
 For Banks- even a controlling SH cannot examine the bank deposit because the
law requires the same.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 PROCEDURE:
1. Within 30days from the approval of the corporate act objected to , a written
APPRAISAL RIGHT demand for the appraisal must be filed by the SH
o Forward to BOD.
INSTANCES OF APPRAISAL 2. Within 10 days from demand , dissenting SH must physically surrender certificate of
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and stock to the corporate secretary for annotation that such shares are subject to the
demand payment of the fair value of his shares in the following instances: Right of first refusal.
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of o Failure shall be deemed as a waiver of the appraisal right.
any stockholder or class of shares, or of authorizing preferences in any respect superior to those of Section 86. Notation on certificates; rights of transferee. - Within ten (10)
outstanding shares of any class, or of extending or shortening the term of corporate existence; days after demanding payment for his shares, a dissenting stockholder
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of shall submit the certificates of stock representing his shares to the
the corporate property and assets as provided in the Code; and corporation for notation thereon that such shares are dissenting shares.
3. In case of merger or consolidation. His failure to do so shall, at the option of the corporation, terminate his
rights under this Title. If shares represented by the certificates bearing
 Right to withdraw from the corporation by demanding payback of thr value of their SS. such notation are transferred, and the certificates consequently
 Available under the following instances: cancelled, the rights of the transferor as a dissenting stockholder under
a) SH is a fully paid SH this Title shall cease and the transferee shall have all the rights of a
b) SH expressed a dissenting vote in the following actions: regular stockholder; and all dividend distributions which would have
02) AMENDNENT TO ARTICLES OF AOI accrued on such shares shall be paid to the transferee.
 Amendments that would restrict rights currently enjoyed by the OCS.
E.g. denial of pre-emptive rights 3. Within 30 days but not more than 60 days , the corporation must pay the value f the
Declaring preferred ss as non-voting shares of stocks of the dissenting stockholder.
 Grants privileges not currently enjoyed by OCS FIXING OF VALUE:
E.g. increasing CS originally are common creating new shares as i. Value stipulated upon by the parties
preferred. ii. Value fixed by the law
 Shortening or extending corporate term. -value of the day prior to the act objected to, which is the amendment
03) SALE OF ALL OR SUBSTANTIALLY ALL OF THE CORPORATE ASSETS iii. Value fixed by the court in an appropriate action
04) METGER OR CONSOLIDATION iv. Extrajudicial remedy through an adhoc committee of 3 appraisers
05) INVESTMENT IN ANOTHER CORPORATION OR BUSINESS 1-representative for the corp
06) ADDITIONAL INSTANCES AS MAY BE PROVIDED BY THE ARTICLES AND BY 1-representativr of the SH.
LAWS. 1-appointed by the two representatives.
c) Corporation has UNRESTRICTED RETAINED EARNING to pay for the surrendered value of the Rule: Their findings are considered final and executory. Within 30 days,
shares of ss the corporation is obliged to pay.
 Its for the protection of the trust fund of the corporation. 4. Payment
REQUIREMENT FOR EXERCISE OF APPRAISAL RIGHT(SECS 82 AND 86) Section 83. Effect of demand and termination of right. - From the time of demand
for payment of the fair value of a stockholder's shares until either the abandonment
Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder
of the corporate action involved or the purchase of the said shares by the
who shall have voted against the proposed corporate action, by making a written demand on
corporation, all rights accruing to such shares, including voting and dividend rights,
the corporation within thirty (30) days after the date on which the vote was taken for payment
shall be suspended in accordance with the provisions of this Code, except the right
of the fair value of his shares: Provided, That failure to make the demand within such period
of such stockholder to receive payment of the fair value thereof: Provided, That if
shall be deemed a waiver of the appraisal right. If the proposed corporate action is
the dissenting stockholder is not paid the value of his shares within 30 days after the
implemented or affected, the corporation shall pay to such stockholder, upon surrender of the
award, his voting and dividend rights shall immediately be restored.
certificate or certificates of stock representing his shares, the fair value thereof as of the day
prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.  Once the value or amount is fixed, payment must be made
If within a period of sixty (60) days from the date the corporate action was approved by the  Except (valid grounds for non-payment):
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value  Corporation abandon the corporate act (dissent
of the shares, it shall be determined and appraised by three (3) disinterested persons, one of rendered useless)
whom shall be named by the stockholder, another by the corporation, and the third by the  SEC disapproved the corporate act
two thus chosen. The findings of the majority of the appraisers shall be final, and their award  SEC has determined that SH is not entitled to appraisal.
shall be paid by the corporation within thirty (30) days after such award is made: Provided,  If found that SH transferred his shares to another
That no payment shall be made to any dissenting stockholder unless the corporation has  Upon proof that corporation has no Unrestricted
unrestricted retained earnings in its books to cover such payment: and Provided, further, That Retained Earning
upon payment by the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.  EFFECTS OF NON-PAYMENT:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  All rights of dissenting SH is suspended from the
moment of demand shall be restored
 Once right is exercised, the corporation tajes back the
Shares of stock, similar to the exercise of the power of
eminent domain
Section 84. When right to payment ceases. - No demand
for payment under this Title may be withdrawn unless
the corporation consents thereto. If, however, such
demand for payment is withdrawn with the consent of
the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or
disapproved by the Securities and Exchange
Commission where such approval is necessary, or if the
Securities and Exchange Commission determines that
such stockholder is not entitled to the appraisal right,
then the right of said stockholder to be paid the fair
value of his shares shall cease, his status as a stockholder
shall thereupon be restored, and all dividend
distributions which would have accrued on his shares
shall be paid to him.

5. REACQUISITION of the shares of stock

Effect: when shares has been paid and taken back by the corporation , such
shares considered TREASURY SHARES.

Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be
borne by the corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter. In the case of an action to
recover such fair value, all costs and expenses shall be assessed against the corporation,
unless the refusal of the stockholder to receive payment was unjustified.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 each of the board of directors or trustees of the constituent corporations of the plan of
merger or consolidation, the same shall be submitted for approval by the stockholders or
MERGER AND CONSOLIDATION members of each of such corporations at separate corporate meetings duly called for the
purpose. Notice of such meetings shall be given to all stockholders or members of the
MERGER respective corporations, at least two (2) weeks prior to the date of the meeting, either
 Union of two or more corporations whereby the separate personality of others will be absorbed by one personally or by registered mail. Said notice shall state the purpose of the meeting and
of them (SURVIVING CORPORATION) shall include a copy or a summary of the plan of merger or consolidation. The affirmative
A+B= A vote of stockholders representing at least two-thirds (2/3) of the outstanding capital
CONSOLIDATION stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of
 Union of two or more corporations resulting into a an entirely new corporation. the members in the case of non-stock corporations shall be necessary for the approval of
A+B=C such plan. Any dissenting stockholder in stock corporations may exercise his appraisal
REASONS: right in accordance with the Code: Provided, That if after the approval by the
a. BUSINESS stockholders of such plan, the board of directors decides to abandon the plan, the
-same line of business to increase profitability appraisal right shall be extinguished.
-to gain edge over all other conpetitors. Any amendment to the plan of merger or consolidation may be made, provided
b. LEGAL MANDATE such amendment is approved by majority vote of the respective boards of directors or
-like BSP, theaw requires minimum capitalization for banks (5.2billion paid up capital trustees of all the constituent corporations and ratified by the affirmative vote of
stock) stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of
-statutory merger two-thirds (2/3) of the members of each of the constituent corporations. Such plan,
۩ requires specific and express governmental approval together with any amendment, shall be considered as the agreement of merger or
consolidation.

THE FOLLOWING ARE THE NECESSARY STEP IN OBTAINING GOVERNMENTAL APPROVAL:

2) ARTICLES OF MERGER OR CONSOLIDATION
1) PLAN OF MERGER OR CONSOLIDATION Section 78. Articles of merger or consolidation. - After the approval by the stockholders or
members as required by the preceding section, articles of merger or articles of consolidation shall
Section 76. Plan or merger of consolidation. - Two or more corporations may merge into a single be executed by each of the constituent corporations, to be signed by the president or vice-
corporation which shall be one of the constituent corporations or may consolidate into a new single president and certified by the secretary or assistant secretary of each corporation setting forth:
corporation which shall be the consolidated corporation. 1. The plan of the merger or the plan of consolidation;
The board of directors or trustees of each corporation, party to the merger or consolidation, shall 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock
approve a plan of merger or consolidation setting forth the following: corporations, the number of members; and
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as 3. As to each corporation, the number of shares or members voting for and against such plan,
the constituent corporations; respectively.
2. The terms of the merger or consolidation and the mode of carrying the same into effect; CONTENTS:
3. A statement of the changes, if any, in the articles of incorporation of the surviving  Approved plans
corporation in case of merger; and, with respect to the consolidated corporation in case of  Certification as to who voted in favour or against
consolidation, all the statements required to be set forth in the articles of incorporation for  Statement of financial conditions including capital stocks
corporations organized under this Code; and -submit to SEC for approval
4. Such other provisions with respect to the proposed merger or consolidation as are deemed -obtain a favourable recommendation of the government regulator
necessary or desirable.
ONTENTS: ۩ Because corporate combination may be:
 unlawful combination
 Identity of parties  monopoly
 Means and measures tobcarry out the merger/consolidation  other instances of anti-trust practices
o Contract Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation,
o Must stipulate necessary to fulfill the merger or consolidation. signed and certified as herein above required, shall be submitted to the Securities and Exchange
 Amendments to the AOI of the surviving corporation Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation
A + B = A of banks or banking institutions, building and loan associations, trust companies, insurance
ACS:P1B. (100mss) ACS:P100M. 10mss companies, public utilities, educational institutions and other special corporations governed by
\ / special laws, the favourable recommendation of the appropriate government agency shall first be
SHs--------------- Common SHs of A obtained. If the Commission is satisfied that the merger or consolidation of the corporations
If Consolidation – plan must contain all contents of AOI for every new corporation. concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a
 Majority vote of the BOD certificate of merger or of consolidation, at which time the merger or consolidation shall be
 2/3 of the Outstanding Capital Stock. effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe
Section 77. Stockholder's or member's approval. - Upon approval by majority vote of

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this In legal parlance, however, human beings are never embraced in the term "assets and
Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to liabilities." Moreover, BPI‘s absorption of former FEBTC employees was neither by operation of law nor
be heard. Written notice of the date, time and place of hearing shall be given to each constituent by legal consequence of contract. There was no government regulation or law that compelled the merger
corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed of the two banks or the absorption of the employees of the dissolved corporation by the surviving
as provided in this Code. corporation. Had there been such law or regulation, the absorption of employees of the non-surviving
entities of the merger would have been mandatory on the surviving corporation. In the present case, the
merger was voluntarily entered into by both banks presumably for some mutually acceptable
3) SEC ISSUES CERTIFICATE OF MERGER OR CONSOLIDATION consideration. In fact, the Corporation Code does not also mandate the absorption of the employees of
 The merger or consolidation now binds all third persons the non-surviving corporation by the surviving corporation in the case of a merger.
and the Republic of the Philippines Significantly, too, the Articles of Merger and Plan of Merger dated April 7, 2000 did not
 Signifies an express approval contain any specific stipulation with respect to the employment contracts of existing personnel of the
FCA – 30 days without PCC decision shall be deemed approved. non-surviving entity which is FEBTC. Unlike the Voluntary Arbitrator, this Court cannot uphold the
EFFECT OF APPROVAL (MERGER/CONSOLIDATION): reasoning that the general stipulation regarding transfer of FEBTC assets and liabilities to BPI as set
Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the forth in the Articles of Merger necessarily includes the transfer of all FEBTC employees into the
following effects: employ of BPI and neither BPI nor the FEBTC employees allegedly could do anything about it. Even if
1. The constituent corporations shall become a single corporation which, in case of it is so, it does not follow that the absorbed employees should not be subject to the terms and conditions
merger, shall be the surviving corporation designated in the plan of merger; and, in case of of employment obtaining in the surviving corporation.
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation; BABST VS CA
3. The surviving or the consolidated corporation shall possess all the rights,
ISSUE:
privileges, immunities and powers and shall be subject to all the duties and liabilities of a
Whether or not BPI consent to the assumption by DBP of the obligations of ELISCON.
corporation organized under this Code; RULING:
4. The surviving or the consolidated corporation shall thereupon and thereafter YES.
possess all the rights, privileges, immunities and franchises of each of the constituent Indeed, there exist clear indications that BPI was aware of the assumption by DBP of the
corporations; and all property, real or personal, and all receivables due on whatever account, obligations of ELISCON. In fact, BPI admits that the Development Bank of the Philippines (DBP), for a
including subscriptions to shares and other choses in action, and all and every other interest time, had .proposed a formula for the settlement of Eliscon's past obligations to its creditors, including
of, or belonging to, or due to each constituent corporation, shall be deemed transferred to the plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not acceptable (long before
and vested in such surviving or consolidated corporation without further act or deed; and the filing of the complaint at bar).
5. The surviving or consolidated corporation shall be responsible and liable for all Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting
the liabilities and obligations of each of the constituent corporations in the same manner as if was an authority to represent the bank, such that when he failed to object to the substitution of
such surviving or consolidated corporation had itself incurred such liabilities or obligations; and debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer
any pending claim, action or proceeding brought by or against any of such constituent was not so empowered, BPI could have subsequently registered its objection to the substitution,
especially after it had already learned that DBP had taken over the assets and assumed the liabilities
corporations may be prosecuted by or against the surviving or consolidated corporation. The
of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of
rights of creditors or liens upon the property of any of such constituent corporations shall not
ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the
be impaired by such merger or consolidation. proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its
a. There shall only be a single entity arising from the merger or consolidation desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be
b. There shall only be a single entity imbued with powers, rights and privileges subject to remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to
obligations and liabilities pay only arises upon the principal debtor's failure or refusal to pay.
c. The absorbed corporation loses their separate and distinct personality. In the case at bar, there was no indication that the principal debtor will default in payment.
In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized
 The corporation is not dissolved; they become part of
capital stock was increased by the government. More importantly, the National Development Company
somebody else took over the business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that
 All assets, rights, privileges, franchises are automatically transferred to the surviving or purpose the amount of P4,015,534.54 for payment to BPI. The original obligation having been
consolidated corporation without need of executing a separate instrument, act or deed. extinguished, the contracts of suretyship executed separately by Babst and MULTI, being accessory
o Subject to contrary stipulation in the plan obligations, are likewise extinguished.
 There shall also be transfer of debts and liabilities without any further acts or deeds,
EXCEPT: those that were excluded in the plan.
NON-STOCK CORPPRATIONS

BPI VS BPI EMPLOYEES
Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of
ISSUE: its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of
Whether or not the FEBTC employees were automatically absorbed by petitioner upon the
this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an
merger between FEBTC and BPI covered by the Union Shop Clause found in the existing CBA between
incident to its operations shall, whenever necessary or proper, be used for the furtherance of the
petitioner and respondent Union.
RULING:
purpose or purposes for which the corporation was organized, subject to the provisions of this Title.
NO. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 incorporation or the by-laws otherwise provide.
A. PURPOSE
Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable,  The corporation may refuse admission to one who fails to qualify provided that due
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or process was observed, substantial and procedural.
similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, NOTE: only individuals (natural persons) may be members
subject to the special provisions of this Title governing particular classes of non-stock corporations.
Section 91. Termination of membership. - Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-laws.
 Charity, scientific etc..
Termination of membership shall have the effect of extinguishing all rights of a member
 The same may have primary and secondary purposes, provided that the secondary purpose/s must
in the corporation or in its property, unless otherwise provided in the articles of
be consistent to its primary purpose and does not contradict its nature as a non-stock.
incorporation or the by-laws.
(NOTE: STOCK- purpose is profit and the primary and secondary purposes may not be related)

B. MANAGEMENT AND COMPOSITION

RIGHTS OF MEMBERS
Section 92. Election and term of trustees. - Unless otherwise provided in the articles of I. RIGHT TO VOTE AND BE VOTED UPON
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more
than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited,
soon as organized, so classify themselves that the term of office of one-third (1/3) of their number broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless
shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.
board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Unless otherwise provided in the articles of incorporation or the by-laws, a member may
Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall vote by proxy in accordance with the provisions of this Code. (n)
hold office only for the unexpired period. Voting by mail or other similar means by members of non-stock corporations may be authorized by
No person shall be elected as trustee unless he is a member of the corporation. the by-laws of non-stock corporations with the approval of, and under such conditions which may
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock be prescribed by, the Securities and Exchange Commission.
corporation may be directly elected by the members.
 The bylaws of the corporation may deny cumulative voting and proxy voting
 Minimum of five (5) and may exceed 15 o There is no right of :
 Definite number must be stated 1- Dividends
 Absolute prohibition
C. TERM  There is no return of the contribution
 1 year statutory term/ 3years maximum 2- Pre-emptive
 The BOT may be divided into 1/3 where some have a term of more than 1 year but election is still 3- Appraisal
annual.
 It may be in a staggered basis. II. RIGHT TO INSPECTION AND EXAMINATION
DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS
A Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with
B 1/3 (1 year) the provisions of this Code, its assets shall be applied and distributed as follows:
C 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
D adequate provision shall be made therefore;
E 1/3 (2years) 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and
F which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in
G accordance with such requirements;
H 1/3 (3 years) 3. Assets received and held by the corporation subject to limitations permitting their use only for
I charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or
conveyed to one or more corporations, societies or organizations engaged in activities in the
D. QUALIFICATIONS Philippines substantially similar to those of the dissolving corporation according to a plan of
FOR MEMBERSHIP distribution adopted pursuant to this Chapter;
 Subject to absolute discretion of the corporation such that the state cannot interfere 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
 Members shall meet all the qualifications and none of the disqualifications accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the
 COMMON QUALIFICATION: articles of incorporation or the by-laws, determine the distributive rights of members, or any class or
o Payment of membership fees for admission and for the maintenance of status classes of members, or provide for distribution; and
in good standing. 5. In any other case, assets may be distributed to such persons, societies, organizations or
 Purely personal hence intransmissible. (transfer cannot be made without the approval of corporations, whether or not organized for profit, as may be specified in a plan of distribution
the corporation) adopted pursuant to this Chapter. (n)
Section 90. Non-transferability of membership. - Membership in a non-stock corporation
and all rights arising therefrom are personal and non-transferable, unless the articles of

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the
process of dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution
and directing the submission thereof to a vote at a regular or special meeting of members having
voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and
the date, time and place of such meeting shall be given to each member entitled to vote, within the
time and in the manner provided in this Code for the giving of notice of meetings to members. Such
plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members
having voting rights present or represented by proxy at such meeting.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 SPECIAL CORPORATIONS church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

RELIGIOUS CORPORATIONS
Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one ALIENATION OF PROPERTY
or more persons. Such corporations may be classified into corporations, sole and religious
Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold
societies.
real estate and personal property for its church, charitable, benevolent or educational purposes,
Religious corporations shall be governed by this Chapter and by the general provisions on non-
and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real
stock corporations insofar as they may be applicable.
property held by it by obtaining an order for that purpose from the Court of First Instance of the
province where the property is situated upon proof made to the satisfaction of the court that notice
i. CORPORATION SOLE/FREAK CORPORATION of the application for leave to sell or mortgage has been given by publication or otherwise in such
Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the manner and for such time as said court may have directed, and that it is to the interest of the
affairs, property and temporalities of any religious denomination, sect or church, a corporation sole corporation that leave to sell or mortgage should be
may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of granted. The application for leave to sell or mortgage must be made by petition, duly verified, by
such religious denomination, sect or church. the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole,
and may be opposed by any member of the religious denomination, sect or church represented by
 Constituted from the moment of filling of the AOI unless the rules of the church proscribes the corporation sole: Provided, That in cases where the rules, regulations and discipline of the
otherwise. religious denomination, sect or church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and
ARTICLES OF INCORPORATION personal property, such rules, regulations and discipline shall control, and the intervention of the
courts shall not be necessary.
Section 111. 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  In the encumbrance of church property, an order from the RTC must first be secured.
or church must file with the Securities and Exchange Commission articles of incorporation setting NOTE:
forth the following: Religious corporations are geared towards the promotion of tenets of the
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of church and management of the property of the church.
his religious denomination, sect or church and that he desires to become a corporation sole; The corporation is a mere trustee of the members.
2. That the rules, regulations and discipline of his religious denomination, sect or church Constitutional requirements may be relaxed based on the citizenship of the
are not inconsistent with his becoming a corporation sole and do not forbid it; members
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is ii. RELIGIOUS SOCIETIES / CORPORATION AGGREGATE
charged with the administration of the temporalities and the management of the affairs, Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod,
estate and properties of his religious denomination, sect or church within his territorial or district organization of any religious denomination, sect or church, unless forbidden by the
jurisdiction, describing such territorial jurisdiction; constitution, rules, regulations, or discipline of the religious denomination, sect or church of which
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a
priest, minister, rabbi of presiding elder is required to be filled, according to the rules, meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the
regulations or discipline of the religious denomination, sect or church to which he belongs; administration of its temporalities or for the management of its affairs, properties and estate by
and filing with the Securities and Exchange Commission, articles of incorporation verified by the
5. The place where the principal office of the corporation sole is to be established and affidavit of the presiding elder, secretary, or clerk or other member of such religious society or
located, which place must be within the Philippines. religious order, or diocese, synod, or district organization of the religious denomination, sect or
The articles of incorporation may include any other provision not contrary to law for the church, setting forth the following:
regulation of the affairs of the corporation. 1. That the religious society or religious order, or diocese, synod, or district organization
 Once filed, the designation to the position must be attached to the AOI. is a religious organization of a religious denomination, sect or church;
 There is no need to strictly comply with the contents of the AOI pursuant to the non-establishment 2. That at least two-thirds (2/3) of its membership have given their written consent or
clause. have voted to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or
Section 112. Submission of the articles of incorporation. - The articles of incorporation must be district organization desiring to incorporate is not forbidden by competent authority or by the
verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, constitution, rules, regulations or discipline of the religious denomination, sect, or church of
rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, which it forms a part;
certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, 4. That the religious society or religious order, or diocese, synod, or district organization
rabbi or presiding elder, duly certified to be correct by any notary public. desires to incorporate for the administration of its affairs, properties and estate;
From and after the filing with the Securities and Exchange Commission of the said 5. The place where the principal office of the corporation is to be established and
articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents located, which place must be within the Philippines; and
mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or 1.The names, nationalities, and residences of the trustees elected by the religious
presiding elder shall become a corporation sole and all temporalities, estate and properties of the society or religious order, or the diocese, synod, or district organization to serve for the
religious denomination, sect or church theretofore administered or managed by him as such chief first year or such other period as may be prescribed by the laws of the religious society
archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a or religious order, or of the diocese, synod, or district organization, the board of trustees
corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or to be not less than five (5) nor more than fifteen (15).

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Even if the transformation of IEMELIF from a corporation sole to a corporation aggregate was legally
 Minimum of 5 members defective, its head or governing body, i.e., Bishop Lazaro, whose acts were approved by the Highest
Consistory of Elders, still did not change. A corporation sole is one formed by the chief archbishop,
ARTICLES OF INCORPORATION: bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect, or church, for
o Must be based on what the church prescribes the purpose of administering or managing, as trustee, the affairs, properties and temporalities of such
o Amendments must be in accordance with the rules of the church religious denomination, sect or church. As opposed to a corporation aggregate, a corporation sole
 If silent, the corporation code will apply consists of a single member, while a corporation aggregate consists of two or more persons. If the
 Majority vote + transformation did not materialize, the corporation sole would still be Bishop Lazaro, who himself
performed the questioned acts of removing Juane as Resident Pastor of the Tondo Congregation. If the
 2/3 of the Outstanding Capital Stock
transformation did materialize, the corporation aggregate would be composed of the Highest Consistory
 Existence is perpetual of Elders, which nevertheless approved the very same acts. As either Bishop Lazaro or the Highest
Consistory of Elders had the authority to appoint Juane as Resident Pastor of the IEMELIF Tondo
NOTE: Congregation, it also had the power to remove him as such or transfer him to another congregation.
 Whether sole or corporation aggregate, the state has no power to dissolve the
corporation or interfere with the religious affairs
EDUCATIONAL
 Organized as non-stock without prejudice to those already existing prior to 1982 as Stock
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit Corporation.
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for  50% of the membership should belong to Filipinos
religious, charitable, or educational purposes shall be exempt from taxation. o The corporation may be 100% foreign owned when
 the incorporators are missionaries or
(2) No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly,  expatriates and their families.
for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the general
such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or provisions of this Code. (n)
government orphanage or leprosarium. Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of
Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution.
IEMELIF VS LAZARO
Issue:
Whether a corporation sole be converted into a corporation aggregate by mere amendment of its articles MEMBERS OF THE BOARD
of incorporation. Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall
Held: not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in
Yes.The Corporation Code provides no specific mechanism for amending the articles of incorporation of multiples of five (5).
a corporation sole. But, as the RTC correctly held, Section 109 of the Corporation Code allows the Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
application to religious corporations of the general provisions governing non-stock corporations.
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify
Although a non-stock corporation has a personality that is distinct from those of its members who
established it, its articles of incorporation cannot be amended solely through the action of its board of
themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter
trustees. The amendment needs the concurrence of at least two-thirds of its membership. If such elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the
approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office
the corporation technically belongs, needs to get the concurrence of two-thirds of its membership. The for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The
one member, here the General Superintendent, is but a trustee, according to Section 110 of the powers and authority of trustees shall be defined in the by-laws.
Corporation Code, of its membership. There is no point to dissolving the corporation sole of one member For institutions organized as stock corporations, the number and term of directors shall be governed by the
to enable the corporation aggregate to emerge from it. Whether it is a non-stock corporation or a provisions on stock corporations.
corporation sole, the corporate being remains distinct from its members, whatever be their number. The  Minimum of 5, maximum of 15 but in multiples of 5
increase in the number of its corporate membership does not change the complexion of its corporate  There is a n option to follow the usual rules for non-stock corporations and divide the membership
responsibility to third parties. The one member, with the concurrence of two-thirds of the membership
into a Board of 1/5 at staggered terms
of the organization for whom he acts as trustee, can self-will the amendment.
PRUPOSE
 To confer degree
IEMELIF V JUANE  nothing in the secondary purpose must contradict the primary purpose
Issue:  secondary franchise:
Whether the transformation of IEMELF from corporation sole to an aggregate one is valid. o DEP-ED – Basic
Held: o TESDA – technical/vocational
Yes.Juane maintains that the "IEMELIF" that filed the Complaint before the MeTC had no personality o CHED – tertiary
to eject him from the subject property. The Church has remained a corporation sole, since its  Higher educational learning must have basic education and later apply to CHED for accreditation,
transformation to a corporation aggregate was legally defective. Juane, thus, claims that he is now the thus requires the amendment of the AOI.
corporation sole, who is entitled to the physical possession of the subject property as owner thereof. In
fact, on the basis of these same arguments.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation.

SECTION 4. (1) The State recognizes the complementary roles of public and private institutions in the
educational system and shall exercise reasonable supervision and regulation of all educational institutions.

(2) Educational institutions, other than those established by religious groups and mission boards, shall be
owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the
capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity
participation in all educational institutions.

The control and administration of educational institutions shall be vested in citizens of the Philippines.

No educational institution shall be established exclusively for aliens and no group of aliens shall comprise
more than one-third of the enrollment in any school. The provisions of this subsection shall not apply to
schools established for foreign diplomatic personnel and their dependents and, unless otherwise
provided by law, for other foreign temporary residents.

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner
provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided by law including restrictions on dividends and
provisions for reinvestment.

(4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used
actually, directly, and exclusively for educational purposes shall be exempt from tax.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 CLOSE CORPORATION 2. For a classification of directors into one or more classes, each of whom may be voted
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one for and elected solely by a particular class of stock; and
whose articles of incorporation provide that: 3. For a greater quorum or voting requirements in meetings of stockholders or directors
(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not than those provided in this Code.
more than a specified number of persons, not exceeding twenty (20); The articles of incorporation of a close corporation may provide that the business of the
(2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer corporation shall be managed by the stockholders of the corporation rather than by a board of
permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering directors. So long as this provision continues in effect:
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close 1. No meeting of stockholders need be called to elect directors;
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall
corporation which is not a close corporation within the meaning of this Code. be deemed to be directors for the purpose of applying the provisions of this Code; and
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock 3. The stockholders of the corporation shall be subject to all liabilities of directors.
exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to The articles of incorporation may likewise provide that all officers or employees or
be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Section 103. Amendment of articles of incorporation. - Any amendment to the articles of
Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. incorporation which seeks to delete or remove any provision required by this Title to be contained
 Basically a stock corporation however, it has the FOLLOWING CHARACTERISTICS: in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles
a) Limited stockholders that cannot go beyond 20, regardless of the number of the of incorporation shall not be valid or effective unless approved by the affirmative vote of at least
Shares of stocks in the capital stock two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such
b) Ownership or acquisition is subject to a valid qualification and restrictions greater proportion of shares as may be specifically provided in the articles of incorporation for
 Purpose: To maintain its character as a close corporation amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the
c) Prohibited from listing or trading its shares of stocks in the market. purpose.
 Note that market is a venue for public disposition.
 It must be in the AOI.
 If at any time during the term of the corporation, at least 2/3 is acquired by 1- MANAGEMENT
an outsider, its close characteristic is automatically terminated even in the TWO WAYS:
absence of the amendment of the AOI. (if this happens, subsequent a. ORDINARY BOARD – the number of the board must be stated in the AOI.
amendment of the AOI must be made or reacquire the shares from the b. VESTED IN ALL STOCKHOLDERS –the same must be provided in the AOI.
outsider)
Close corporations are in essence an incorporated partnership due to the close intimate Accessions
affinity of one a other. o Still binding even without a meeting
o Done through an informal accession
Dulay enterprise vs ca o If it has become a practice, none of the stockholders may question.
UNLESS objected in WRITING.
ISSUE:
Whether or not the doctrine of piercing the veil of corporate entity is applicable. Section 101. When board meeting is unnecessary or improperly held. - Unless
RULING: the by-laws provide otherwise, any action by the directors of a close
NO. corporation without a meeting shall nevertheless be deemed valid if:
Petitioner Corporation is classified as a close corporation and consequently a board 1. Before or after such action is taken, written consent thereto is signed by all
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the the directors; or
corporation for the action of its president. At any rate, corporate action taken at a board meeting 2. All the stockholders have actual or implied knowledge of the action and
without proper call or notice in a close corporation is deemed ratified by the absent director unless the make no prompt objection thereto in writing; or
latter promptly files his written objection with the secretary of the corporation after having knowledge 3. The directors are accustomed to take informal action with the express or
of the meeting which, in his case, petitioner Virgilio Dulay failed to do. implied acquiescence of all the stockholders; or
It is relevant to note that although a corporation is an entity which has a personality
4. All the directors have express or implied knowledge of the action in
distinct and separate from its individual stockholders or members,the veil of corporate fiction may be
pierced when it is used to defeat public convenience justify wrong, protect fraud or defend crime. The
question and none of them makes prompt objection thereto in writing.
privilege of being treated as an entity distinct and separate from its stockholder or members is If a director's meeting is held without proper call or notice, an action taken
therefore confined to its legitimate uses and is subject to certain limitations to prevent the commission therein within the corporate powers is deemed ratified by a director who
of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business failed to attend, unless he promptly files his written objection with the
conduit of a person, the law will regard the corporation as the act of that person. secretary of the corporation after having knowledge thereof.

ARTICLES OF INCORPORATION
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the qualifications for owning or holding the
same and restrictions on their transfers as may be stated therein, subject to the provisions of the
following section;

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 2- SHARES OF STOCKS
Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in
otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall close corporations shall extend to all stock to be issued, including reissuance of treasury shares,
not be more onerous than granting the existing stockholders or the corporation the option to purchase whether for money, property or personal services, or in payment of corporate debts, unless the
the shares of the transferring stockholder with such reasonable terms, conditions or period stated articles of incorporation provide otherwise.
therein. If upon the expiration of said period, the existing stockholders or the corporation fails to
exercise the option to purchase, the transferring stockholder may sell his shares to any third person. PROVISIONAL DIRECTOR
Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation
or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders
 Eligibility requirement may be imposed and must be maintained all throughout. are so divided respecting the management of the corporation's business and affairs that the votes
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. - required for any corporate action cannot be obtained, with the consequence that the business
1. If stock of a close corporation is issued or transferred to any person who is not and affairs of the corporation can no longer be conducted to the advantage of the stockholders
entitled under any provision of the articles of incorporation to be a holder of record of its stock, generally, the Securities and Exchange Commission, upon written petition by any stockholder,
and if the certificate for such stock conspicuously shows the qualifications of the persons shall have the power to arbitrate the dispute. In the exercise of such power, the Commission
entitled to be holders of record thereof, such person is conclusively presumed to have notice of shall have authority to make such order as it deems appropriate, including an order: (1)
the fact of his ineligibility to be a stockholder. cancelling or altering any provision contained in the articles of incorporation, by-laws, or any
2. If the articles of incorporation of a close corporation states the number of persons, stockholder's agreement; (2) cancelling, altering or enjoining any resolution or act of the
not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act
certificate for such stock conspicuously states such number, and if the issuance or transfer of of the corporation or its board of directors, stockholders, officers, or other persons party to the
stock to any person would cause the stock to be held by more than such number of persons, the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the
person to whom such stock is issued or transferred is conclusively presumed to have notice of corporation regardless of the availability of unrestricted retained earnings in its books, or by the
this fact. other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7)
3. If a stock certificate of any close corporation conspicuously shows a restriction on granting such other relief as the circumstances may warrant.
transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have A provisional director shall be an impartial person who is neither a stockholder nor a creditor of
notice of the fact that he has acquired stock in violation of the restriction, if such acquisition the corporation or of any subsidiary or affiliate of the corporation, and whose further
violates the restriction. qualifications, if any, may be determined by the Commission. A provisional director is not a
4. Whenever any person to whom stock of a close corporation has been issued or receiver of the corporation and does not have the title and powers of a custodian or receiver. A
transferred has, or is conclusively presumed under this section to have, notice either (a) that he is provisional director shall have all the rights and powers of a duly elected director of the
a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to corporation, including the right to notice of and to vote at meetings of directors, until such time
him would cause the stock of the corporation to be held by more than the number of persons as he shall be removed by order of the Commission or by all the stockholders. His compensation
permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer shall be determined by agreement between him and the corporation subject to approval of the
of stock Commission, which may fix his compensation in the absence of agreement or in the event of
is in violation of a restriction on transfer of stock, the corporation may, at its option, disagreement between the provisional director and the corporation.
refuse to register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock,
though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of APPRAISAL RIGHT IN REGULAR CORPPRATIONS VS WITHRAWAL RIGHT OF A STOCKHOLDER OF
the close corporation, or if the close corporation has amended its articles of incorporation in A CLOSE CORPORATION
accordance with this Title. Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without
6. The term "transfer", as used in this section, is not limited to a transfer for value. prejudice to other rights and remedies available to a stockholder under this Title, any stockholder
7. The provisions of this section shall not impair any right which the transferee may have of a close corporation may, for any reason, compel the said corporation to purchase his shares at
to rescind the transfer or to recover under any applicable warranty, express or implied. their fair value, which shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided,
That any stockholder of a close corporation may, by written petition to the Securities and
 The right to transfer is not absolute because the same may be subjected to restrictions.
Exchange Commission, compel the dissolution of such corporation whenever any of acts of the
 For third persons in whose favor a transfer is made, it is conclusive upon the corporation
directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or
provided that it is stated in the AOI or the By-Laws of the corporation.
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate
 Usually, transfers do not bind the corporation
assets are being misapplied or wasted..
 Mandamus will not lie to compel the registration of the disqualified
possessor, unless the corporation has given its consent.
 It is non-transferrable if made in favor of third persons beyond the number of stockholders or
member stated in the AOI.
 In e.g. if the AOI provides for a maximum of 15 then a transfer it to be made
such that it has increased the members to 16. No transfer may be made.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 VESAGSA VS CA
ISSUE:
DISSOLUTION Whether or not SEC has jurisdiction.
Section 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code RULING:
may be dissolved voluntarily or involuntarily. YES.
Petitioners' attempt to impress upon this court that the club has never been a
corporation is devoid of merit. It must fail in the face of the Commission's explicit finding that the
 Extinguishment of legal personality of the corporation. club was duly registered and a certificate of incorporation was issued in its favor. It ought to be
METHODS: remembered that the question of whether the club was indeed registered and issued a certification
1. Mere expiration of the term (DEATH BY OLD AGE) or not is one which necessitates a factual inquiry. On this score, the finding of the Commission, as
the administrative agency tasked with among others the function of registering and administering
Section 120. Dissolution by shortening corporate term. - A voluntary dissolution may be corporations, is given great weight and accorded high respect. We therefore have no reason to
effected by amending the articles of incorporation to shorten the corporate term pursuant to disturb this factual finding relating to the club's registration and incorporation.
the provisions of this Code. A copy of the amended articles of incorporation shall be Moreover, by their own admission contained in the various pleadings which they have
submitted to the Securities and Exchange Commission in accordance with this Code. Upon filed in the different stages of this case, petitioners themselves have considered the club as a
approval of the amended articles of incorporation of the expiration of the shortened term, as corporation. This admission, under the rules of evidence, binds them and may be taken or used
the case may be, the corporation shall be deemed dissolved without any further proceedings, against them.Since the admission was made in the course of the proceedings in the same case, it
subject to the provisions of this Code on liquidation. does not require proof, and actually may be contradicted only by showing that it was made through
palpable mistake or that no such admission was made.
 It is the lapse of the term of the corporation
 Ipso facto terminate the corporate life
 Either the original, extended or shortened term. b. When there are creditors who can be affected
i) SHORTENED TERM - When a petition has been filed, hearing must be conducted upon notice
- Usually to cut further losses the corporation may suffer or when the by publication in a newspaper of general circulation of the ORDER
original purpose or vision did not materialize. issued by the SEC.
- require the amendment of the AOI - The purpose of the hearing:
(a) does not require the express approval of the SEC o For creditors to prove their claim
(b) it is deemed effective at the time of the filing  Existence
 When the corporation is dissolved, a notice of dissolution must be published in a  Validity
newspaper of general circulation for notice of the creditors and other interested parties. - This however does not prevent the dissolution of the corporation.
 The SEC must ensure that the petition is not used to evade
2. Voluntary petition for dissolution (SUICIDE WITH PERMISION) obligations of the corporation.
 May be done at any time for any cause  Required approval:
2 KINDS o Majority of the Board of directors
a. When no creditors are affected o 2/3 of the shareholders or members
- When at the time that the petition was filed, the petitioner has no
outstanding liabilities or has reserved properties for the payment of Section 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a
creditors. corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed
- Debts or liabilities are not subject to question with the Securities and Exchange Commission. The petition shall be signed by a majority of
its board of directors or trustees or other officers having the management of its affairs,
Section 118. Voluntary dissolution where no creditors are affected. - If dissolution of a verified by its president or secretary or one of its directors or trustees, and shall set forth all
corporation does not prejudice the rights of any creditor having a claim against it, the claims and demands against it, and that its dissolution was resolved upon by the affirmative
dissolution may be effected by majority vote of the board of directors or trustees, and by vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
a resolution duly adopted by the affirmative vote of the stockholders owning at least two- stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or
thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members members called for that purpose.
of a meeting to be held upon call of the directors or trustees after publication of the If the petition is sufficient in form and substance, the Commission shall, by an order reciting
notice of time, place and object of the meeting for three (3) consecutive weeks in a the purpose of the petition, fix a date on or before which objections thereto may be filed by
newspaper published in the place where the principal office of said corporation is any person, which date shall not be less than thirty (30) days nor more than sixty (60) days
located; and if no newspaper is published in such place, then in a newspaper of general after the entry of the order. Before such date, a copy of the order shall be published at least
circulation in the Philippines, after sending such notice to each stockholder or member once a week for three (3) consecutive weeks in a newspaper of general circulation published
either by registered mail or by personal delivery at least thirty (30) days prior to said in the municipality or city where the principal office of the corporation is situated, or if there
meeting. A copy of the resolution authorizing the dissolution shall be certified by a be no such newspaper, then in a newspaper of general circulation in the Philippines, and a
majority of the board of directors or trustees and countersigned by the secretary of the similar copy shall be posted for three (3) consecutive weeks in three (3) public places in
corporation. The Securities and Exchange Commission shall thereupon issue the such municipality or city.
certificate of dissolution. Upon five (5) day's notice, given after the date on which the right to file objections as fixed
in the order has expired, the Commission shall proceed to hear the petition and try any issue

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  Quo Warranto – forbids the Respondent from continuing with a particular act.
made by the objections filed; and if no such objection is sufficient, and the material  CORPORATION IS DEEMED DISSOLVED WHEN THE JUDGMENT OF REVOCATION
allegations of the petition are true, it shall render judgment dissolving the corporation and BECOMES FINAL.
directing such disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation. NOTE: under the FRIA, when the corporation is subject to liquidation.
o HOWEVER, mere insolvency will not justify dissolution.
WHEN IS THE CORPORATION DISSOLVED?
1) Mere expiration of the term VIGILA V PCCR
 Deemed dissolved on the day after the last day of the corporate term Issue:
2) When no creditors Whetherthe executed releases, waivers and quitclaims are valid and binding notwithstanding the
 Deemed dissolved as of the date of filing of the petition for dissolution with revocation of Certificate of Incorporation.
the SEC Held:
3) When there are creditors Yes. The executed releases, waivers and quitclaims are valid and binding notwithstanding the
 Deemed dissolved upon the finality of the SEC Order revocation of MBMSI‗s Certificate of Incorporation. The revocation does not result in the termination of
 Requires notice of dissolution published in a newspaper of general circulation. its liabilities. Section 122 of the Corporation Code provides for a three-year winding up period for a
corporation whose charter is annulled by forfeiture or otherwise to continue as a body corporate for the
purpose, among others, of settling and closing its affairs.
Even if said documents were executed in 2009, six (6) years after MBMSI‗s dissolution in 2003, the
3. Involuntary Dissolution same are still valid and binding upon the parties and the dissolution will not terminate the liabilities
 The corporation as a franchise grantee of the government upon commission of an act which incurred by the dissolved corporation pursuant to Sections 122 and 145of the Corporation Code.
is in violation of the said grantee. Furthermore, Section 145 of the Corporation Code clearly provides that "no right or remedy in favor of
 It is initiated by the state or any of its government agency or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be
Section 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and removed or impaired either by the subsequent dissolution of said corporation." Even if no trustee is
Exchange Commission upon filing of a verified complaint and after proper notice and hearing appointed or designated during the three-year period of the liquidation of the corporation, the Court
on the grounds provided by existing laws, rules and regulations. has held that the board of directors may be permitted to complete the corporate liquidation by
continuing as "trustees" by legal implication.
GROUNDS THAT THE SEC MAY USE TO INITIATE DISSOLUTION:
The corporation is deemed dissolved upon the finality of the Order of
the SEC if no motion to lift the order was filed with the SEC En Banc EFFECTS OF DISSOLUTION:
within 30 days after the issuance of the order of dissolution 1) The corporation loses its legal personality but retains limited corporate personality
1) Willful defiance or disobedience of orders of the SEC or Regulator including a a. To prosecute or defend suits/ to sue and be sued
Cease and desist Order b. To enter into contracts to wind up and settle its affairs and close the business
 Note: members of the BOD have the duty of obedience, thus any violation of c. To convey or transfer title over its property.
said orders are deemed a violation of its franchise. i) Transfer legal title
2) Non-User or Continuous inoperation ii) Beneficial title is retained by the
3) Failure to file reportorial requirements - Creditors, and
 Refers to periodic reports required by law to be submitted to the SEC. - Stockholders or members for the residue
i) General information Sheet 2) After dissolution, a corporation can no longer enter into contracts or perform acts
ii) Audited Financial Statement for the perpetuation or continuation of the business.
iii) Report on election THE FOLLOWING ARE EXAMPLE OF ACTS THAT CANNOT BE PERFORMED:
iv) Report on Annual stockholder or members meetings 1. Cannot sell shares of stocks (purpose is to finance the business)
 Whether stock or non-stock, it must be within 5 years. 2. Cannot amend the Articles of Incorporation
4) Failure to file by-Laws 3. Cannot conduct regular election
 By laws are required to be filed within 30 days from the receipt of the 4. Cannot purchase property if the purpose is to perpetuate the business
certificate of incorporation. (see Loyola grand villas Case) 5. Cannot declare dividends if the dividends are earned out of the regular business
6. Cannot enter into new contracts of lease or renew existing contract if the same is for the purpose of
OFFICE OF THE SOLICITOR GENERAL MAY USE TO INITIATE DISSOLUTION IN A QUO perpetuating the business
WARRANTO PROCEEEDING BEFORE THE SPECIAL COMMERCIAL COURT:
5) Serious misrepresentation (PD 902-A) THE FOLLOWING ARE EXAMPLE OF ACTS THAT CAN STILL BE PERFORMED:
 As to what it can do or is doing to the great damage and prejudice of its 1) Conduct meetings of the Board of Directors and Stockholders or members for the purpose of deciding
Stockholders and members and to the public at large. matters for the winding up of the affairs of the corporation
2) Purchase new properties for the purpose of liquidation or for the payment of creditors
6) Guilty of fraud in procuring the certificate of incorporation (PD902-A)
3) Declare dividends in the form of liquidating dividends (remainder after payment to creditors)
7) Revocation of the certificate of incorporation of a de facto corporation. 4) Enter into new contracts of lease or renew existing one for the purpose of liquidation
 The 5-7 grounds are exclusively vested to the special commercial courts. 5) Commence new case for damages provided it is filed within the liquidating period alleging that the
 The SEC and the OSG has concurrent jurisdiction corporation is organized under Philippine Laws and is undergoing dissolution

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

METHODS OF CORPORATE LIQUIDATION
Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it
would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but
not for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From
and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member
who is unknown or cannot be found shall be escheated to the city or municipality where such assets are
located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

This may be exercised by the:

A. Corporation itself
 BOD are required to transform themselves from managers to liquidators.
 The BOD may still use the name of the corporation in its transaction for winding up and dissolution
purposes
 It has a limited period of 3 years within which to use the name of the corporation. After that period
has lapsed, the corporation is deemed extinguished for all intents and purposes.
B. Trustee
 For as long as necessary for the complete dissolution of the corporation.
 Transactions are in the name of the receiver or trustee.
 Voluntarily named or chosen by the corporation itself during the 3 year liquidating period or prior
to that.
 If there is failure to name a trustee, the BOD may be the trustee
C. Receiver
 Judicially appointed having the same powers as that of a trustee
 Both the trustee and the receiver may distribute assets of corporation for the benefit of the
creditors.

NON-STOCK CORPORATION
- Members have no legal or reasonable expectancy to the distribution of the assets of the
corporation after dissolution
- The same is permitted only when the AOI or by-laws itself permits the distribution to members
- Absences of such, remaining properties are :
(a) transferred to another non-stock corporation with the same purpose or
(b) To the city or municipality where the principal place of business is located.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 FOREIGN CORPORATION - OUTSIDE
o Totally den
Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign o Totally denied legal recognition
corporation is one formed, organized or existing under any laws other than those of the Philippines and whose o Subjected to certain conditions for limited recognition
laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right o Applied in the Philippines
to transact business in the Philippines after it shall have obtained a license to transact business in this country  CONDITIONS:
in accordance with this Code and a certificate of authority from the appropriate government agency.  Must apply and obtain license to do business in the Philippines
o Mandatory before foreign corporation may maintain
Section 124. Application to existing foreign corporations. - Every foreign corporation which on the date of the domicile
effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, o Legal capacity to do business
shall continue to have such authority under the terms and condition of its license, subject to the provisions of o Necessary when doing, engaging or transacting business
this Code and other special laws. in the Philippines
Five (5) acts of doing Business:
INCORPORATION TEST A. Soliciting orders, purchases, products anywhere in the Philippines
 This is a separate test provided by the Corporation Code in determining the nationality of foreign a. EXCEPT: if solicitation is done through an independent contractor who
corporations maintains separate and distinct personality, the corporation is NOT doing
 Under this test a corporation is DOMESTIC when business in the Philippines.
o It is formed and organized under Philippine law, specifically the Corporation Code B. Opening offices in the Philippines
 While a corporation is FOREIGN when a. Branch or
o It is formed and organized under law other than Philippine Law b. Liaison
Air transportation law
 Thus, it is possible to have a foreign corporation where the entirety of the capital stock and -China Airline Branch
Incorporators are Filipino citizens such as when a corporation is formed and organized under -HSBC Maybank
Hong Kong law but its stockholders are Filipinos.
C. Appointing agent or representative domiciled in the Philippines for 180 days in one
Who is a PHILIPPINE NATIONAL? (1) year. (6months)
Under the FOREIGN INVESTMENT ACT - deemed to be intending to fix residence in the Philippines.
- it may be continuous or cumulative
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; of a domestic partnership or D. Participating in the management of the local business, either sole, partnership,
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the corporation whereby such participation must be active such that it amounts to control
Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned when:
and held by citizens of the Philippines; or a corporation organized abroad and registered as doing business in  The corporation is deemed to have control when it has the power to impose
the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock policies in the business, appoint ts management, offices including
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other capitalization.
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent  EXCEPT: if the participation is limited to exercise of rights as a Stockholder,
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its thus deemed NOT doing business.
non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at  Example: PROPRIETARY RIGHTS of STOCKHOLDERS
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations o Voting rights as a participation in the management
must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the o This is not enough if it is for stockholders meeting
Board of Directors of each of both corporations must be citizens of the Philippines, in order that the  Voting for directors: doing business
corporation, shall be considered a "Philippine national." [as amended by Republic Act No. 8179]
E. Entering into a contract implying its intent to engage in continuity of commercial
The following are PHILIPPINE NATIONAL dealings for its principal or main body of business.
1. A corporation formed and organized abroad where 100% of its capital stock belongs to Filipino - The determining factor is not on the number of contracts entered but the NATURE of
Citizens these contracts.
2. Corporation formed and organized abroad to manage and administer retirement pension or similar - a single contract amount to DOING business since it involves a loan contract granted by
benefits where at least 60% of the beneficiaries are Filipino Citizens (treated as domestic an unlicensed foreign bank. This contract is in line with the business of the bank.
corporation)
3. Corporation formed and organized abroad where it owes shares of stocks in a SEC registered APPLICATION FOR A LICENSE
company for as long as for both corporations, 60% of the capital Stock is owned and controlled by Section 125. Application for a license. - A foreign corporation applying for a license to transact business in the
Filipino citizens and 60% of the BOD are Filipino citizens. Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and
by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if
Outside of the FIA necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall
GENERAL RULE: The Corporation is treated as such only within the state and jurisdiction it is created. It is a specifically set forth the following:
Corporation only where it is formed.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 1. The date and term of incorporation; And the doctrine of estoppel to deny corporate existence applies to foreign as well as to
2. The address, including the street number, of the principal office of the corporation in the domestic corporations. One who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person
country or state of incorporation;
contracting with a foreign corporation from later taking advantage of its noncompliance with the
3. The name and address of its resident agent authorized to accept summons and process in all statutes chiefly in cases where such person has received the benefits of the contract.
legal proceedings and, pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in the transaction of
its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in REQUIREMENTS: (application with the SEC)
the certificate of authority issued by the appropriate government agency; 1. Authentic copy of the AOI including all amendments thereto
6. The names and addresses of the present directors and officers of the corporation; 2. Authenticated copy of the By-Laws
7. A statement of its authorized capital stock and the aggregate number of shares which the 3. Financial statements
corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and 4. Certificate of members of the board, officers or managers
series, if any; 5. Instrument appointing the Resident Agent in the Philippines
8. A statement of its outstanding capital stock and the aggregate number of shares which the
corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if RESIDENT AGENT – refers to a natural or juridical person domiciled in the
any; Philippines with the authority to accept or receive summons, other paper,
9. A statement of the amount actually paid in; and processes by Philippine courts or tribunals for and in behalf of the foreign
10. Such additional information as may be necessary or appropriate in order to enable the corporation
Securities and Exchange Commission to determine whether such corporation is entitled to a license to Section 127. Who may be a resident agent. - A resident agent may be either an
transact business in the Philippines, and to determine and assess the fees payable. individual residing in the Philippines or a domestic corporation lawfully transacting
Attached to the application for license shall be a duly executed certificate under oath by the authorized business in the Philippines: Provided, That in the case of an individual, he must be
official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or of good moral character and of sound financial standing.
state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is
an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in
English under oath of the translator shall be attached thereto.  Service to the RA is deemed a service to the foreign corporation
The application for a license to transact business in the Philippines shall likewise be accompanied by a  Subject to review and scrutriny by the SEC
statement under oath of the president or any other person authorized by the corporation, showing to the  If th RA fails to qualify, dies, withdraws or resign, the Foreign corppration
satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases must execute and undertaking that service to SEC is service to the foreign
that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation.
corporation as of the date not exceeding one (1) year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply
with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no
application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Section 128. Resident agent; service of process. - The Securities and Exchange
Commission without previous authority from the appropriate government agency, whenever required by law. Commission shall require as a condition precedent to the issuance of the license to
transact business in the Philippines by any foreign corporation that such corporation file
with the Securities and Exchange Commission a written power of attorney designating
GMBH V ISNANI some person who must be a resident of the Philippines, on whom any summons and
other legal processes may be served in all actions or other legal proceedings against such
ISSUE:
Whether or not the petitioner has capacity to sue and be sued in the Philippines despite the
corporation, and consenting that service upon such resident agent shall be admitted and
fact that petitioner is duly licensed by the SEC to set up and operate a RAH in the country and that it held as valid as if served upon the duly authorized officers of the foreign corporation at
has continuously operated as such for the last 9 years. its home office. Any such foreign corporation shall likewise execute and file with the
RULING: Securities and Exchange Commission an agreement or stipulation, executed by the
YES. proper authorities of said corporation, in form and substance as follows:
It is clear that petitioner is a foreign corporation doing business in the Philippines. Hence, "The (name of foreign corporation) does hereby stipulate and agree, in consideration of
Petitioner is covered by the Omnibus Investment Code of 1987. Petitioner does not engage in its being granted by the Securities and Exchange Commission a license to transact
commercial dealings or activities in the country because it is precluded from doing so by P.D. No. 218, business in the Philippines, that if at any time said corporation shall cease to transact
under which it was established. business in the Philippines, or shall be without any resident agent in the Philippines on
Nonetheless, it has been continuously, since 1983, acting as supervision, communications whom any summons or other legal processes may be served, then in any action or
and coordination center for its home office's affiliates in Singapore, and in the process has named its proceeding arising out of any business or transaction which occurred in the Philippines,
local agent and has employed Philippine nationals like private respondent Romana Lanchinebre (an
service of any summons or other legal process may be made upon the Securities and
employee).
Exchange Commission and that such service shall have the same force and effect as if
From this uninterrupted performance by petitioner of acts pursuant to its primary purposes
and functions as a regional/area headquarters for its home office, it is clear that petitioner is doing
made upon the duly-authorized officers of the corporation at its home office."
business in the country. Moreover, private respondents are estopped from assailing the personality of Whenever such service of summons or other process shall be made upon the Securities
petitioner. and Exchange Commission, the Commission shall, within ten (10) days thereafter,
The rule is that a party is estopped to challenge the personality of a corporation after having transmit by mail a copy of such summons or other legal process to the corporation at its
acknowledged the same by entering into a contract with it. home or principal office. The sending of such copy by the Commission shall be

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 o Before it can be withdrawn, the SEC must ensure that the foreign corporation paid its
necessary part of and shall complete such service. All expenses incurred by the debts or obligation in the Philippines.
Commission for such service shall be paid in advance by the party at whose instance the
service is made.
In case of a change of address of the resident agent, it shall be his or its duty to Section 136. Withdrawal of foreign corporations. - Subject to existing laws and
immediately notify in writing the Securities and Exchange Commission of the new regulations, a foreign corporation licensed to transact business in the Philippines may
address. be allowed to withdraw from the Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued by the Securities and Exchange
NOTE: the foreign corporation is required to identify the kind of business it seeks to Commission unless all the following requirements are met;
pursue or for which the license is sought 1. All claims which have accrued in the Philippines have been paid,
 Originally, only one business was allowed. compromised or settled;
 Pay the fees 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
 Once paid, the SEC shall conduct investigation, if done, the SEC issues LICENSE Philippine Government or any of its agencies or political subdivisions have been
(constitutes the fi9rst franchise) which is the consent of the state for foreign corporation paid; and
to exist subject to a second license or permit before it can undertake its business. 3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the Philippines.
Section 126. Issuance of a license. - If the Securities and Exchange Commission is
satisfied that the applicant has complied with all the requirements of this Code and other special
laws, rules and regulations, the Commission shall issue a license to the applicant to transact REVOCATION
business in the Philippines for the purpose or purposes specified in such license. Upon issuance of o Initiated by SEC
the license, such foreign corporation may commence to transact business in the Philippines and o Common ground: violation of license engaging in business outside what was agreed
continue to do so for as long as it retains its authority to act as a corporation under the laws of the upon
country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended o The foreign corporation is subject to Philippine Law, Court rules and regulations.
or annulled in accordance with this Code or other special laws.
Section 134. Revocation of license. - Without prejudice to other grounds provided by
Within sixty (60) days after the issuance of the license to transact business in the special laws, the license of a foreign corporation to transact business in the Philippines
Philippines, the license, except foreign banking or insurance corporation, shall deposit with the may be revoked or suspended by the Securities and Exchange Commission upon any of
Securities and Exchange Commission for the benefit of present and future creditors of the licensee the following grounds:
in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of 1. Failure to file its annual report or pay any fees as required by this Code;
bonds or other evidence of indebtedness of the Government of the Philippines, its political 2. Failure to appoint and maintain a resident agent in the Philippines as required
subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, by this Title;
shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of 3. Failure, after change of its resident agent or of his address, to submit to the
stock in domestic corporations registered in the stock exchange, or shares of stock in domestic Securities and Exchange Commission a statement of such change as required by this
insurance companies and banks, or any combination of these kinds of securities, with an actual Title;
market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within 4. Failure to submit to the Securities and Exchange Commission an authenticated
six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall copy of any amendment to its articles of incorporation or by-laws or of any articles of
require the licensee to deposit additional securities equivalent in actual market value to two (2%) merger or consolidation within the time prescribed by this Title;
percent of the amount by which the licensee's gross income for that fiscal year exceeds five million 5. A misrepresentation of any material matter in any application, report, affidavit
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of or other document submitted by such corporation pursuant to this Title;
additional securities if the actual market value of the securities on deposit has decreased by at least 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
ten (10%) percent of their actual market value at the time they were deposited. The Securities and lawfully due to the Philippine Government or any of its agencies or political
Exchange Commission may at its discretion release part of the additional securities deposited with subdivisions;
it if the gross income of the licensee has decreased, or if the actual market value of the total 7. Transacting business in the Philippines outside of the purpose or purposes for
securities on deposit has increased, by more than ten (10%) percent of the actual market value of which such corporation is authorized under its license;
the securities at the time they were deposited. The Securities and Exchange Commission may, from 8. Transacting business in the Philippines as agent of or acting for and in behalf of
time to time, allow the licensee to substitute other securities for those already on deposit as long as any foreign corporation or entity not duly licensed to do business in the Philippines; or
the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the 9. Any other ground as would render it unfit to transact business in the
securities deposited. In the event the licensee ceases to do business in the Philippines, the Philippines.
securities deposited as aforesaid shall be returned, upon the licensee's application therefor and
upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no Section 135. Issuance of certificate of revocation. - Upon the revocation of any such
liability to Philippine residents, including the Government of the Republic of the Philippines. license to transact business in the Philippines, the Securities and Exchange Commission
shall issue a corresponding certificate of revocation, furnishing a copy thereof to the
appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at its
License – may be subject to surrender or forfeiture registered office in the Philippines a notice of such revocation accompanied by a copy of
SURRENDER the certificate of revocation.
o Corporation’s withdrawal of license in the Philippines

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 HOW MANY LAWS ARE APPLICABLE?
A.Philippine laws DOING BUSINESS
B.Incorporation law
FOREIGN CORPORATION
Section 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines ACTION
shall be bound by all laws, rules and regulations applicable to domestic corporations of the same WITH LICENSE WITHOUT LICENSE
class, except such only as provide for the creation, formation, organization or dissolution of X cannot seek aid of Philippine
 The FC can seek redress in
corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, courts or agencies
the Philippine Courts
members, or officers of corporations to each other or to the corporation. EXCEPT:
D Allege, formed and organized,
O licensed to do business in the a. it initiates violation of the RPC
I Philippines. or any Penal Laws of the
Benefit of a license N Attach license issued by the Philippines.
 Not a condition prerequisite to do business but as a prerequisite to establish residence or domicile G SEC. b. the corporation is merely
to imbue the corporation with legal capacity and confer the same with rights and privileges similar TO SUE  In the absence defending itself.
to those enjoyed by domestic corporations. B thereof, a motion to dismiss c. Defendant is guilty of
U on the ground of LACK OF estoppels by transacting with the
AMENDMENT OF LICENSE S CAPACITY may be filed foreign corporation knowing it to
I against the FC. be without license
Section 131. Amended license. - A foreign corporation authorized to transact business in the Philippines -in these cases, the foreign
shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the N
E corporation need not show
Philippines other or additional purposes, by submitting an application therefor to the Securities and capacity to sue
Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases. S
S it may be impleaded it may still be held
as a defendant or respondent liable for transaction done
AETNA CASUALTY V PACIFIC STAR it must be alleged that the within the Philippines.
defendant foreign corporation
ISSUE:
is formed and organized ,
Whether or not Aetna Casualty & Surety Company, a foreign corporation not doing business TO BE SUED
in the Philippines, can claim damages against defendant.
licensed to do business in the
RULING: Philippines.
YES. Attach license issued by the
It is settled that if a foreign corporation is not engaged in business in the Philippines, it may SEC.
not be denied the right to file an action in Philippine courts for isolated transactions.
The object of Sections 68 and 69 of the Corporation Law was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of
business without taking the steps necessary to render it amenable to suit in the local courts. It was
HOW JURISDICTION OVER AN UNLICENSED FOREIGN CORPORATION BE ACQUIRED?
never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, from securing redress in the Philippine courts.
A. PERSONAL SERVICE TO THE UNLICENSED FOREIGN CORPORATION
Aetna Casualty & Surety Company is not transacting business of insurance in the  The summons is issued by the court then sent to the DFA and the DFA will forward it to the
Philippines for which it must have a license. The contract of insurance was entered into in New York, embassy nearest to the principal place of business of the unlicensed foreign corporation. Said
U.S.A., and payment was made to the consignee in its New York branch. embassy will transmit the summons to a superior court who will serve the same to the foreign
Since, Aetna Casualty & Surety Company is not engaged in the business of insurance in the corporation.
Philippines but is merely collecting a claim assigned to it by the consignee, it is not barred from filing  Usually, the return arrives within or after a year
the instant case although it has not secured a license to transact insurance business in the Philippines. B. SUMMON BY PUBLICATION IN A NEWSPAPER OF GENERAL CIRCULATION
The case is remandedto the trial court for further proceedings to determine the liability of  Refers to a newspaper of general circulation abroad in the place where the foreign corporation’s
the defendants-appellees. last known address coupled with the service of the summons by registered mail.
C. BY FACSIMILE OR ELECTRONIC MAIL
 This is may be utilized provided that it can generate PROOF OF RECEIPT
o E-COMMERC LAW
Section 133. Doing business without a license. - No foreign corporation transacting business in the  Under this law, allows third party authentication authority.
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in  THIRD PARTY AUTHENTICATION AUTHORITY
any action, suit or proceeding in any court or administrative agency of the Philippines; but such  Refers to entities providing digital services to ensure that
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on documents has not been altered and the same is in fact been
any valid cause of action recognized under Philippine laws. received by the intended recipient
 REQUISITES:
o Reliability
o Authenticity
o Integrity

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  Issues digital certificate containing therein the date of transmission, PDIC V CITIBANK
date of receipt and may even specify if the same has been read or
ISSUE:
not. Whether or not a branch of a bank has a separate legal Personality.
 EXAMPLE: yahoo mail, the 3rd PAA is VERISIGN. (try it. There’s a RULING:
free trial) NO.
A branch has no separate legal personality. This Court is of the opinion that the key to the
D. ANY OTHER MEANS AS MAY BE CONSIDERED PRACTICABLE WITH LEAVE OF COURT resolution of this controversy is the relationship of the Philippine branches of Citibank and BA to their
 In here, you may have yourself as counsel, appointed by the court as a SPECIAL SHERIFF then respective head offices and their other foreign branches.
personally issue the summons to the foreign corporation abroad in its principal place of business. The Court begins by examining the manner by which a foreign corporation canestablish its
BETTER REMEDY: file a case abroad in its principal place of business and have a lawyer licensed to practice presence in the Philippines. It may choose to incorporate its own subsidiary asa domestic corporation,
there. in which case such subsidiary would have its own separate andindependent legal personality to conduct
business in the country. In the alternative, it maycreate a branch in the Philippines, which would not
N be a legally independent unit, andsimply obtain a license to do business in the Philippines.
O ACTION FOREIGN CORPORATION
In the case of Citibank and BA, it is apparent that they both did not incorporate a separate
T domestic corporation to represent its business interests in the Philippines. Their Philippine branches
LICECNSE IS NOT NECESSARY are, as the name implies, merely branches, without a separate legal personality from their parent
D However, limited to the following: company, Citibank and BA. Thus, being one and the same entity, the funds placed by the respondents
O A. ISOLATED TRANSACTIONS in their respective branches inthe Philippines should not be treated as deposits made by third parties
I  Arises from any contract involving the foreign subject to deposit insurance under the PDIC Charter.
N corporation where said contract do not arise or is not Deposit insurance is superfluous and entirely unnecessary when, as in this case, the
TO SUE
G related at all to its main body of business institution holding the funds and the one which made theplacements are one and the same legal entity.
B. PROTECTION OF ITS INTELLECTUAL PROPERTY RIGHTS
B  Rights in rem
CMD V CA
U  Patent, copyrights, industrial design, transfer technology,
geographical integration. ISSUE:
S Whether or not private respondent ITEC is an unlicensed corporation doing business in the
I X Philippines, and if it is, whether or not this fact bars it from invoking the injunctive authority of our
N It cannot be sued. courts.
E TO BE SUED The foreign corporation may file a Motion to Dismiss on the Ground RULING:
S of LACK OF JURISDICTION YES.
S Generally, a "foreign corporation" has no legal existence within the state in which it is
foreign. This proceeds from the principle that juridical existence of a corporation is confined within the
territory of the state under whose laws it was incorporated and organized, and it has no legal status
beyond such territory. Such foreign corporation may be excluded by any other state from doing business
STEELCASE INC V DESIGN INTERNTIONAL within its limits, or conditions may be imposed on the exercise of such privileges.
ISSUE: The purpose of the law in requiring that foreign corporations doing business in the
Whether or not Steelcase is not doing business in the Philippines without license. Philippines be licensed to do so and that they appoint an agent for service of process is to subject the
RULING: foreign corporation doing business in the Philippines to the jurisdiction of its courts. The object is not to
YES. prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile
Based on this list, the Supreme Court said that the appointment of a distributor in the for the purpose of business without taking steps necessary to render it amenable to suit in the local
Philippines is not sufficient to constitute "doing business" unless it is under the full control of the courts.
foreign corporation. If the distributor is an independent entity which buys and distributes products, The implication of the law is that it was never the purpose of the legislature to exclude a
other than those of the foreign corporation, for its own name and its own account, the latter cannot be foreign corporation which happens to obtain an isolated order for business from the Philippines, and
considered to be doing business in the Philippines. thus, in effect, to permit persons to avoid their contracts made with such foreign corporations.
Applying these rules, the Supreme Court said that DISI was founded in 1979 and is With the abovestated precedents in mind, we are persuaded to conclude that private
independently owned and managed. In addition to Steelcase products, DISI also distributed products of respondent had been "engaged in" or "doing business" in the Philippines for some time now. This is the
other companies including carpet tiles, relocatable walls and theater settings. The dealership inevitable result after a scrutiny of the different contracts and agreements entered into by ITEC with
agreement between Steelcase and DISI had been described by the owner himself as a buy and sell its various business contacts in the country, particularly ASPAC and Telephone Equipment Sales and
arrangement. This clearly belies DISI‘s assertion that it was a mere conduit through which Steelcase Services, Inc.
conducted its business in the country. From the preceding facts, the only reasonable conclusion that can
be reached is that DISI was an independent contractor, distributing various products of Steelcase and
FACILITIES MGMT V DELA OSA
of other companies, acting in its own name and for its own account. As a result, Steelcase cannot be
considered to be doing business in the Philippines by its act of appointing a distributor as it falls under ISSUE:
one of the exceptions under R.A. No. 7042. Whether or not the mere act by a non-resident foreign corporation of recruiting Filipino
A foreign corporation doing business in the Philippines without a license may maintain suit workers for its own use abroad is in law doing business in the Philippines.
in the Philippines against a domestic corporation or person who is party to a contract as the domestic RULING:
corporation or person is deemed estopped from challenging the personality of the foreign corporation. YES.
"Under the rules and regulations promulgated by the Board of Investments which took effect
Feb. 3, 1969, implementing Rep. Act No. 5455, which took effect Sept. 30, 1968, the phrase 'doing
business' has been exemplified with illustrations, among them being as follows: "the performance

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 within the Philippines of any act or combination of acts enumerated in section 1(1) of the Act shall was initiated by the Manila office through its Mr. T. Hojo. In a follow-up letter dated August 3, 1976,
constitute 'doing business' therein. In particular, 'doing business' includes: "(1)Soliciting orders, Hojo committed the firm to a price reduction of $200,000.00 and submitted the proposed contract forms.
purchases (sales) or service contracts. Concrete and specific solicitations by a foreign firm, not acting As reflected in the letterhead used, it was Marubeni Corporation, Tokyo, Japan which
independently of the foreign firm, amounting to negotiation or fixing of the terms and conditions of assumed an active role in the initial stages of the negotiation. Petitioner Marubeni Nederland B.V. had
sales or service contracts, regardless of whether the contracts are actually reduced to writing, shall no visible participation until the actual signing of the October 28, 1976 agreement in Tokyo and even
constitute doing business even if the enterprise has no office or fixed place of business in the there, in the space reserved for petitioner, it was the signature. of "S. Adachi as General Manager of
Philippines. "(2)Appointing a representative or distributor who is domiciled in the Philippines, unless Marubeni Corporation, Tokyo on behalf of Marubeni Nederland B.V." which appeared.
said representative or distributor has an independent status, i.e., it transacts business in its name and
for its own account, and not in the name or for the account of the principal. "(4)Opening offices, whether
called 'liaison' offices, agencies or branches, unless proved otherwise. "(10)Any other act or acts that SBMA V UIG TAIWAN
imply a continuity of commercial dealings or arrangements, and contemplate to that extent the ISSUE:
performance of acts or works, or the exercise of some of the functions normally incident to, or in the Whether or not respondents had the capacity to sue and possess material interest to
progressive prosecution of, commercial gain or of the purpose and objective of the business institute an action against petitioners.
organization." RULING:
YES.
As a general rule, unlicensed foreign non-resident corporations cannot file suits in the
LA CHEMISE LACOSTE V FERNANDEZ Philippines as provided in Section 133 of the Corporation Code. A corporation has legal status only
ISSUE: within the state or territory in which it was organized. For this reason, a corporation organized in
Whether or not petitioner has the capacity to sue. another country has no personality to file suits in the Philippines. In order to subject a foreign
RULING: corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from
YES. the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in
The petitioner is a foreign corporation not doing business in the Philippines. The marketing the Philippines.
of its products in the Philippines is done through an exclusive distributor, Rustan Commercial However, that the licensing requirement was ―never intended to favor domestic corporations
Corporation. The latter is an independent entity which buys and then markets not only products of the who enter into solitary transactions with unwary foreign firms and then repudiate their obligations
petitioner but also many other products bearing equally well-known and established trademarks and simply because the latter are not licensed to do business in this country.‖ After contracting with a
tradenames. In other words, Rustan is not a mere agent or conduit of the petitioner. foreign corporation, a domestic firm is estopped from denying the former‘s capacity to sue.
The court finds and concludes that the petitioner is not doing business in the Philippines. In this case, SBMA is estopped from questioning the capacity to sue of UIG. In entering into
Rustan is actually a middleman acting and transacting business in its own name and or its own account the LDA with UIG, SBMA effectively recognized its personality and capacity to institute the suit before
and not in the name or for the account of the petitioner. More important is the nature of the case which the trial court.
led to this petition. What preceded this petition for certiorari was a letter-complaint filed before the The petition is partially granted. the writ of preliminary injunction is lifted and the case is
NBI charging Hemandas with a criminal offense, i.e., violation of Article 189 of the Revised Penal Code. to the rtc for trial on the merits.
If prosecution follows after the completion of the preliminary investigation being conducted by the
Special Prosecutor the information shall be in the name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party since a criminal offense is essentially an act against the TIME V REYES
State. ISSUE:
It is the latter which is principally the injured party although there is a private right Whether or not the petition will prosper.
violated. Petitioner's capacity to sue would become, therefore, of not much significance in the main case. RULING:
We cannot allow a possible violator of our criminal statutes to escape prosecution upon a far-fetched YES.
contention that the aggrieved party or victim of a crime has no standing to sue. In upholding the right The dismissal of the present petition is asked on the ground that the petitioner foreign
of the petitioner to maintain the present suit before our courts for unfair competition or infringement of corporation failed to allege its capacity to sue in the courts of the Philippines.
trademarks of a foreign corporation, we are moreover recognizing our duties and the rights of foreign The Court failed to see how these doctrines can be a propos in the case at bar, since the
states under the Paris Convention for the Protection of Industrial Property to which the Philippines petitioner is not maintaining any suit‖ but is merely defending one against itself; it did not file any
and France are parties. complaint but only a corollary defensive petition to prohibit the lower court from further proceeding
with a suit that it had no jurisdiction to entertain.
Petitioner‘s failure to aver its legal capacity to institute the present petition is not fatal, for a
MARUBENI NETHERLANDS V TENSUAN foreign corporation may by writ of prohibition, seek relief against the wrongful assumption of
ISSUE: jurisdiction. And a foreign corporation seeking a writ of prohibition against further maintenance a suit,
Whether or not petitioner Marubeni Nederland B.V. can be considered as "doing business" in on the ground of want jurisdiction, is not bound by the ruling of the court in which the suit was
the Philippines and therefore subject to the jurisdiction of our courts. brought, on the motion to quash service of summons, that it has jurisdiction‖.
RULING: The writs applied for are granted: the respondent Court of First Instance of Rizal is declared
YES. without jurisdiction to take cognizance of its Civil Case No. 10403; and its orders issued in connection
The Court reiterated that there is no general rule or principle that can be laid down to therewith are hereby annulled and set aside. Respondent court is further commanded to desist from
determine what constitutes doing or engaging in business. Each case must be judged in the light of its further proceedings in Civil case No. 10403 aforesaid.
peculiar factual milieu and upon the language of the statute applicable.
It ruled that petitioner can be sued in the regular courts because it is doing business in the
Philippines. The applicable law is Republic Act No. 5455 as implemented by the following rules and VAN ZUIDEN V GTVL INDUSTRIES
regulations of the Board of Investments which took effect on February 3, 1969. In said Act, it ISSUE:
enumerates acts that shall constitute ―doing business‖ which includes. Whether or not petitioner, an unlicensed foreign corporation, has legal capacity to sue before
It cannot be denied that petitioner had solicited the lime plant business from DBT through Philippine courts.
the Marubeni Manila branch. Records show that the "turn-key proposal for the 300 T/D Lime Plant" RULING:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 YES. together with a financial statement of its assets and liabilities, certified by any independent certified public
An unlicensed foreign corporation not doing business in the Philippines can sue before accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the
Philippine courts. In the present case, the series of transactions between petitioner and respondent
Securities and Exchange Commission may require. Such report shall be submitted within such period as may
cannot be classified as "doing business" in the Philippines under Section 3(d) of RA 7042.
An essential condition to be considered as "doing business" in the Philippines is the actual
be prescribed by the Securities and Exchange Commission. (n)
performance of specific commercial acts within the territory of the Philippines for the plain reason that
the Philippines has no jurisdiction over commercial acts performed in foreign territories. Section 142. Confidential nature of examination results. - All interrogatories propounded by the Securities and
Here, there is no showing that petitioner performed within the Philippine territory the Exchange Commission and the answers thereto, as well as the results of any examination made by the
specific acts of doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an Commission or by any other official authorized by law to make an examination of the operations, books and
office here in the Philippines, appoint a representative or distributor, or manage, supervise or control a records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same
local business. While petitioner and respondent entered into a series of transactions implying a to be made public or where such interrogatories, answers or results are necessary to be presented as evidence
continuity of commercial dealings, the perfection and consummation of these transactions were done before any court. (n)
outside the Philippines.
Further, the series of transactions between petitioner and respondent transpired and were Section 143. Rule-making power of the Securities and Exchange Commission. - The Securities and Exchange
consummated in Hong Kong. There was no single activity which petitioner performed here in the Commission shall have the power and authority to implement the provisions of this Code, and to promulgate
Philippines pursuant to its purpose and object as a business organization. Moreover, petitioner‘s desire
rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the
to do business within the Philippines is not discernible from the allegations of the complaint or from its
prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or
attachments. Therefore, there is no basis for ruling that petitioner is doing business in the Philippines.
Considering that petitioner is not doing business in the Philippines, it does not need a
officers. (n)
license in order to initiate and maintain a collection suit against respondent for the unpaid balance of
respondent‘s purchases. Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00)
pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days
but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a
corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the
TITLE XVI - MISCELLANEOUS PROVISIONS Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, appropriate action against the director, trustee or officer of the corporation responsible for said violation:
means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a
whether or not fully or partially paid, except treasury shares. (n) corporation provided in this Code. (190 1/2 a)

Section 138. Designation of governing boards. - The provisions of specific provisions of this Code to the Section 145. Amendment or repeal. - No right or remedy in favor of or against any corporation, its
contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation,
their by-laws, designate their governing boards by any name other than as board of trustees. (n) stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.
Section 139. Incorporation and other fees. - The Securities and Exchange Commission is hereby authorized to (n)
collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission. (n)
Section 146. Repealing clause. - Except as expressly provided by this Code, all laws or parts thereof
Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the inconsistent with any provision of this Code shall be deemed repealed. (n)
Constitution, the National Economic and Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation or by business or industry Section 147. Separability of provisions. - Should any provision of this Code or any part thereof be declared
to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever invalid or unconstitutional, the other provisions, so far as they are separable, shall remain in force. (n)
deemed necessary, a report of its findings, including recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in
vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by
individuals related to each other by consanguinity or affinity or by close the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered
business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by
combinations in restraint or trade, or to implement national economic policies declared in laws, rules and the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code,
regulations designed to promote the general welfare and foster economic development. said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years
In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with from the effectivity of this Code within which to comply with the same. (n)
a public interest and in formulating proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the size of the enterprise, the Section 149. Effectivity. - This Code shall take effect immediately upon its approval.
economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the Approved, May 1, 1980
activity, the export potential, as well as other factors which are germane to the realization and promotion of
business and industry.

Section 141. Annual report or corporations. - Every corporation, domestic or foreign, lawfully doing business
in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations,

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 SECURITIES AND EXCHANGE COMMISSION D. All entities engaged in securities transactions
PRESIDENTIAL DECREE No. 902-A March 11, 1976  Securities transactions involving shares of stocks or bonded indebtedness by
REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWER AND corporations
PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE  SECURITIES DEALER – one who buys and sells shares of stocks for his own account
PRESIDENT "Dealer" means many person who buys sells securities for his/her own account in the
ordinary course of business.
ENTITIES SUBJECT TO SUPERVISON OF THE SEC
A. Corporations, associations(non-stock), partnerships (incorporated)  SECURITRIES BROKER – one who is engaged in the buying and selling of shares of stocks
Section 3. The Commission shall have absolute jurisdiction, supervision and control over all for the account of others
corporations, partnerships or associations, who are the grantees of primary franchise and/or a "Broker" is a person engaged in the business of buying and selling
license or permit issued by the government to operate in the Philippines; and in the exercise of its securities for the account of others.
authority, it shall have the power to enlist the aid and support of any and all enforcement agencies
of the government, civil or military.  STOCK EXCHANGE – facilities for trading shares of stocks.
"Exchange" is an organized market place or facility that brings together buyers and sellers
B. Investment houses and executes trade of securities and/or commodities.
 Entities engaged in underwriting securities
o Securities underwriting is the process by which investment banks raise
investment capital from investors on behalf of corporations and governments NOTE: the Corporation code, PD 902-A and all other laws – grant the SEC the power to
that are issuing securities. Investment bankers engaged in securities promulgate implanting rules and regulations (rule-making power)
underwriting raise capital for corporations through the structuring and sale of COMPOSITION
securities such as bonds and stocks. Section 4. Administrative Agency. – 4.1. This Code shall be administered by the Security and Exchange
Commission (hereinafter referred to as the "Commission") as a Collegial body, composed of a chairperson and
o SECURITY UNDERWRITER – one who guarantees dispositions of any class of (4)
securities within the Philippines. Commissioners, appointed by the President for a term of (7) seven years each and who shall serves as such
until their successor shall have been appointed and qualified. A Commissioner appointed to fill a vacancy
"Underwriter" is a person who guarantees on a firm commitment and/or declared best
occurring prior to the expiration of the term for which his/her predecessor was appointed, shall serve only for
effort basis the distribution and sale of securities of any kind by another company. the unexpired portion of their terms under Presidential Decree No. 902-A. Unless the context indicates
otherwise, the term "Commissioner" includes the Chairperson.
o If the investment house is also a bank, there will be a co-regulation between  The SEC is composed of :
the SEC and the BSP o 1 chairperson who must be a member of the bar
o And 4 commissioners
WHAT ARE SECURITIES?
"Securities" are shares, participation or interests in a corporation or in a commercial QUALIFICATIONS
enterprise or profit-making venture and evidenced by a certificate, contract, instruments,  The law requires that majority of the members are members of the Philippine Bar.
whether written or electronic in character. It includes: 4.2. The Commissioners must be natural-born citizens of the Philippines, at least forty (40) years of age for the
(a) Shares of stocks, bonds, debentures, notes evidences of Chairperson and at least thirty-five (35) years of age for the Commissioners, of good moral character, or
indebtedness, asset-backed securities; unquestionable integrity, of known probity and patriotism, and with recognized competence in social and
(b) Investment contracts, certificates of interest or participation in a profit economic disciplines: Provided, That the majority of Commissioners, including the Chairperson, shall be
sharing agreement, certifies of deposit for a future subscription; members of the Philippine Bar.
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;  The SEC is a policy-making body which may issue, suspend or revoke certificate of incorporation,
(e) Certificates of assignments, certificates of participation, trust conduct investigation, issue subpoena, compel attendance of witnesses, deputize pnp and other
certificates, voting trust certificates or similar instruments government agencies to aid in investigation or impose administrative fines and penalties.
(f) Proprietary or nonproprietary membership certificates in corporations;
and POWERS AND FUNCTIONS (Sec 5 RA 8799 in rel. sec 6 PD 902-A)
(g) Other instruments as may in the future be determined by the Powers and Functions
Commission.
The Commission shall have the powers and functions provided by the Securities Regulation Code, Presidential
Decree No. 902-A, as amended, the Corporation Code, the Investment Houses Law, the Financing Company
Act, and other existing laws.
C. Financing Companies
 Entity organized in the business of granting or lending loans for financing of properties or Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall have, among others,
equipments, goods or merchandise. the following powers and functions:
 If the same is also engaged in consumer loans, there will also be a co0regulation between (a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees
the SEC and the BSP. of primary franchises and/or a license or permit issued by the Government;

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and size and location, in the light of national or regional requirements for such activities with the view to promote,
other government agencies on all aspects of the securities market and propose legislation and amendments conserve or rationalize investment;
thereto; h) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of Industry,
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and National Economic and Development Authority or any other appropriate government agency, the application
licensing applications; for registration of any corporation, partnership or association or any form of organization falling within its
(d) Regulate, investigate or supervise the activities of persons to ensure compliance; jurisdiction, if their establishment, organization or operation will not be consistent with the declared national
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; economic policies.
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; i) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance corporations, partnerships or associations, upon any of the grounds provided by law, including the following:
on and supervise compliance with such rules, regulations and orders; 1. Fraud in procuring its certificate of registration;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or 2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage
military as well as any private institution, corporation, firm, association or person in the implementation of its to the general public;
powers and functions under this Code; 3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which
(i) Issue cease and desist orders to prevent fraud or injury to the investing public; would amount to a grave violation of its franchise;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent 4. Continuous in operation for a period of at least five (5) years;
provisions of and penalties prescribed by the Rules of Court; 5. Failure to file by-laws within the required period;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or 6. Failure to file required reports in appropriate forms as determined by the Commission within the prescribed
members thereof under its supervision; period;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and j) To exercise such other powers as implied, necessary or incidental to the carrying out the express powers
in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, granted to the Commission or to achieve the objectives and purposes of this Decree.
tax returns, and books of accounts of any entity or person under investigation as may be necessary for the In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be conducted by
proper disposition of the cases before it, subject to the provisions of existing laws; the Commission or by a Commissioner or by such other bodies, boards, committees and/or any officer as may
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of be created or designated by the Commission for the purpose. The decision, ruling or order of any such
corporations, partnerships or associations, upon any of the grounds provided by law; and Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en banc
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The
which are necessary or incidental to the carrying out of, the express powers granted the Commission to Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases
achieve the objectives and purposes of these laws. falling within its jurisdiction.
Under Section 5.2 of the Securities Regulation Code, the Commission’s jurisdiction over all cases enumerated The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the
under Section 5 of PD 902-A has been transferred to the Courts of general jurisdiction or the appropriate Supreme Court by petition for petition for review in accordance with the pertinent provisions of the Rules of
Regional Trial Court. The Commission shall retain jurisdiction over pending cases involving intra-corporate Court.
disputes submitted for final resolution which should be resolved within one (1) year from the enactment of
the Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases
filed as of 30 June 2000 until finally disposed.
SEC v UNIVERSAL RIGHTFIELD

Considering that only Sections 2, 4, and 8 of PD 902-A, as amended, have been expressly repealed by the Issue:
Securities Regulation Code, the Commission retains the powers enumerated in Section 6 of said Decree, unless Whether or not the Order of Revocation was issued by SEC without affording URPHI due process due to
absence of notice and hearing
these are inconsistent with any provision of the Code.
Held:
Sec 6 PD 902-A SC granted the petition as meritorious stating that there is not dispute that the violation of reportorial
Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following requirements under Sec 17.1 of the Amended IRR of the SRC is a ground for suspension or revocation of the
powers: registration of securities pursuant to Sec 13.1 and 54.1 of the SRC to wit:
a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has 13.1. The Commission may reject a registration statement and refuse registration of the securitythereunder, or
jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply; revoke the effectivity of a registration statement and the registration of the security thereunder after due notice
b) To punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that:
provisions of, and penalties prescribed by, the Rules of Court; a) The issuer:
xxx xxxxxx
c) To compel the officers of any corporation or association registered by it to call meetings of stockholders or
(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the
members thereof under its supervision; Commission of which the issuer has notice in connection with the offering for which a registration statement
d) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent has been filed;
stockholders or members; 54.1. If, after due notice and hearing, the Commission finds that: (a) There is a violation of this Code, its rules,
e) To issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission or its orders; (b) Any registered broker or dealer, associated person thereof has failed reasonably to supervise,
and in appropriate cases order search and seizure or cause the search and seizure of all documents, papers, with a view to preventing violations, another person subject to supervision who commits any such violation;
files and records as well as books of accounts of any entity or person under investigation as may be necessary (c) Any registrant or other person has, in a registration statement or in other reports, applications, accounts,
for the proper disposition of the cases before it; records or documents required by law or rules to be filed with the Commission, made any untrue statement of a
f) To impose fines and/or penalties for violation of this Decree or any other laws being implemented by the material fact, or omitted to state any material fact required to be stated therein or necessary to make the
Commission, the pertinent rules and regulations, its orders, decisions and/or rulings; statements therein not misleading; or, in the case of an underwriter, has failed to conduct an inquiry with
g) To authorize the establishment and operation of stock exchanges, commodity exchanges and such other reasonable diligence to insure that a registration statement is accurate and complete in all material respects;or
similar organization and to supervise and regulate the same; including the authority to determine their number, (d) Any person has refused to permit any lawful examinations into its affairs, it shall, in its discretion, and

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 subject only to the limitations hereinafter prescribed, impose any or all of the following sanctions as may be
appropriate in light of the facts and circumstances: TWO-TIERED TEST
(i) Suspension, or revocation of any registration for the offering of securities; A. RELATIONSHIP TEST
SC further held that the essence of due process is simply giving an opportunity to be heard, or as applied to - It must be shown that the controversy involves the corporation in relation to the state
administrative proceedings, an opportunity to explain one's side or an opportunity to seek a reconsideration of with respect to the franchise
the action or ruling complained of. - Thus quo warranto proceeding seeking the revocation of the certificate of Incorporation
is cognizable under the Special Commercial Court.
- Intra-corporate controversy arises when the relationship is between corporation to the
SEC v PFEC
public at large, stockholders, members and to the officers.
Issue:
Whether or not SEC committed grave abuse of discretion in issuing Cease and Desist Order  Note: there must be a specific allegation as to the acts of fraud committed
Held: under the name of the corporation
Yes. SEC should comply before issuing such order on the following. First, it must conduct proper  Intra-corporate controversies include actions for damages, breach of
investigation or verification. Second, there must be finding that the act or practice, unless restrained, will contract and other similar reliefs against the corporation for any deceit
operate as fraud on investors. In the case, the first requirement was not complied. The clarificatory perpetuated by its agents in the name of the corporation.
conference undertaken by petitioner regarding respondent's business operations cannot be considered  Example is the sale of unlicensed investment contract or
proper investigation. It was merely an initial stage of such process, considering that after it issued the said pyramiding schemes perpetuated by a registered corporation.
order following the clarificatory conference, petitioner still sought verification from BSP on the nature of  All cases involving corporation, its directors, trustees,
respondent's business activity. offices, shareholders or members.
 Thus an action for illegal dismissal of the corporation’s
officers which is a corporate act is intra-corporate
ORIGINAL AND EXCLUSIVE JURISDICTION OF THE TRIAL COURT controversies.

5.2. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A WHO ARE CORPORATE OFFICERS?
is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, 1. Those positions provided in the
That the corporation code such as directors,
Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall trustees and the president.
exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases involving 2. Those created under the articles of
intracorporate disputes submitted for final resolution which should be resolved within one (1) year from the incorporation and the corporate by-laws.
enactment of this Code. The Commission shall retain jurisdiction over pending suspension of + note that mere enabling resolution giving
payment/rehabilitation cases filed as of 30 June 2000 until finally disposed. authority to the board of directors or some other
officer such as the President to create other
positions as deemed necessary or convenient is
not valid. These positions cannot be created.
ORENDAIN V BF HOMES
 In creating positions, the articles must specify the position
ISSUE: including the qualifications thereof.
Whether or not a simple reconveyance suit is within the jurisdiction of the RTC.
 Case of Posadas. Strange case. The complaint was filed before the
RULING:
YES.
RTC for simple money claims. When the corporation filed its
It is the RTC which has jurisdiction. Clearly, the controversy involves matters purely civil in answer, the same was treated as a intra-corporate controversy
character and is beyond the ambit of the limited jurisdiction of the SEC. The better policy in determining which because the answer contained specific allegations placing the same
body has jurisdiction over a case would be to consider not only [1] the status or relationship of the parties but within the ambit of intra-corporate controversy. It is strange
also [2] the nature of the question that is the subject of their controversy.‖ because remember that the allegations in the initiatory pleading
More so, the first element requires that the controversy must arise out of intra-corporate or determines jurisdiction.
partnership relations between any or all of the parties and the corporation, partnership or association of which  Also an intra-corporate controversy is election controversies
they are stockholders, members or associates; between any or all of them and the corporation, partnership or including pre-proclamation, election protest, and solicitation of
association of which they are stockholders, members or associates, respectively; and between such corporation, proxies among others.
partnership or association and the State insofar as it concerns their individual franchises.
The second element requires that the dispute among the parties be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate controversy.
The determination of whether a contract is simulated or not is an issue that could be resolved by
applying pertinent provisions of the Civil Code. Section 5 of PD No. 902-A does not apply in the instant case.
The LSFSIPI is neither an officer nor a stockholder of BF Homes, and this case does not involve
intra-corporate proceedings. In addition, the seller Orendain, is being sued in his individual capacity for the
unauthorized sale of the property in controversy. In addition, jurisdiction over the case for reconveyance is
clearly vested in the RTC as provided in paragraph (2), Section 19, B.P. Blg. 129.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 WHEN DOES INTRA-CORPORATE RELATIONSHIP BEGIN? SHOULD THE RTC DISMISS A CASE INVOLVING AN INTRA-CORPPRATE CONTROVERSY?
CORPORATION WITH ITS DIRECTORS, TRUSTEES, STOCKHOLDERS, OR MEMBERS A: no! RTC is a court of general jurisdiction. The RTC will return the case to the Office of the Clerk of Court and
the Clerk of Court will forward it to the Special Commercial Court.
I. When the name of the subscriber is entered in the corporate books IN CITIES:
II. Upon perfection of the subscription The OCC will conduct raffle of the case but limited to the courts designated as the special
III. In case of refusal of the corporation and there is nothing left for the subscriber to do, commercial courts.
making it ministerial upon the corporation to enter the name of the transferee in the
corporate book, then the intra-corporate relationship already exist In case of a single sala court not designated as a special commercial court, that court will forward the case to
IV. For non-stock, from the moment that the person is admitted the nearest special commercial court belonging to the same judicial region.
V. In case there is transfer of share, perfected upon endorsement and delivery, upon
registration of the transfer. Transferee-corporation relationship exists. A. DEVICES OR SCHEMES AMOUNTING TO FRAUD OR MISREPRESENTATION
 When in doubt as to the title of the transferee, action to compel registration
will not prosper since it involves the corporation and a stranger. (No intra- FABIA v CA
corporate relationship)
ISSUE:
VI. If no doubt into the title, an action to compel registration or mandamus may lie. There is Whether or not SEC have jurisdiction over the case?
already a Stockholder-corporation relationship. Itvis already a Ministerial duty of the RULING:
corporation to register and enter the name of the transferee. YES.
The jurisdiction of the SEC to "intra-corporate disputes" defined as any act or omission of the Board
WHEN DOES IT END? of Directors/Trustees of corporations, or of partnerships, or of other associations, or of their stockholders,
I. Upon payment of the corporation to the stockholder who exercises its officers, or partners, including any fraudulent devices, schemes or representations, in violation of any law or
appraisal right rules and regulations administered and enforced by the Commission. Petitioner was the President as well as a
II. When the name of the transferor is deleted and the name of transferee’s Director and stockholder in private respondent MTCP, who was charged with the misappropriation or diversion
name is registered in the corporate book. Transferor’s relationship with the of corporate funds after having failed to liquidate the amount he had received as cash advances from the
corporation ended company. The charge against petitioner is for estafa, an offense punishable under The Revised Penal Code
 In case of dissolution, the relationship of the corporation and the (RPC), and prosecution for the offense is presently before the regular courts. However, jurisdiction is
determined not from the law upon which the cause of action is based, nor the type of proceedings initiated, but
stockholder is not severed. The stockholders apparently remain as
rather, it is gleaned from the allegations stated in the complaint. It is evident from the complaint that the acts
such with thr dissolved corporation. charged are in the nature of an intra-corporate dispute as they involve fraud committed by virtue of the office
III. In case of non-stock, upon expulsion, termination or transfer of membership. assumed by petitioner as President, Director, and stockholder in MTCP, and committed against the MTCP
corporation. This sufficiently removes the action from the jurisdiction of the regular courts, and transposes it
STOCKHOLDERS BETWEEN AND AMONG THEMSELVES into an intra-corporate controversy within the jurisdiction of the SEC. The fact that a complaint for estafa, a
I. Parent company and subsidiary (intra-corporate) felony punishable under the RPC, has been filed against petitioner does not negate and nullify the intra-
NOTE: a dispute between two corporations is an INTER-CORPPRATE DISPUTE. corporate nature of the cause of action, nor does it transform the controversy from intra-corporate to a criminal
one. Accordingly, as the matter involves an intra-corporate dispute within the jurisdiction of the SEC, the issue
of whether prior non-accounting precludes a finding of probable cause for the charge of estafa no longer finds
B. NATURE OF THE ACTION TEST relevance.
In order for you to determine this, you must ask the question : WOULD THE CASE SURVIVE EVEN However, in conformity with RA 8799, The Securities Regulation Code, amending PD 902-A, which
WITHOUT THE RELATIONSHIP? has effectively transferred the jurisdiction of the Securities and Exchange Commission over all cases
If YES : it is NOT covered by the special commercial court because the relationship is enumerated under Sec. 5 of PD 902-A to the courts of general jurisdiction or the appropriate Regional Trial
Courts.
merely incidental.
If NO: ITIS covered by the special commercial court:
Such as:
 Enforcement of rights and obligations between the parties under the B. CONTROVERSIES ARISING OUT OF INTRA0CORPORATE OR PARTNERSHIP RELATIONS
Corporation code, the Articles of Incorporation and the corporate by-laws.
o NOTE: if such rights and obligations are not under the AGUIRRE v FQB7
Corporation Code, AO or By-laws, the same cannot be ISSUE:
enforced in the special commercial court the same not Whether the RTC has jurisdiction over an intra-corporate dispute involving a dissolved corporation.
being an intra-corporate controversy. RULING:
 Derivative suit YES.
- Common law right of a stockholder, member, director or trustee Intra-corporate disputes remain even when the corporation is dissolved. Jurisdiction over the subject
- It is an exception to the business judgment rule (Villanueva,2013) matter is conferred by law. R.A. No. 8799 conferred jurisdiction over intra-corporate controversies on courts of
- May be brought against a corporate director who has committed a general jurisdiction or RTCs, to be designated by the Supreme Court. Thus, as long as the nature of the
breach of trust either by his fraud, ultra vires acts or negligence. controversy is intra-corporate, the designated RTCs have the authority to exercise jurisdiction over such cases.
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or
 Delinquency
partnership relations, and (b) the nature of the question subject of the controversy must be such that it is
 Judicial – sum of money, back rentals intrinsically connected with the regulation of the corporation or the enforcement of the parties‘ rights and
Grounds: obligations under the Corporation Code and the internal regulatory rules of the corporation.
 Irregularity in the notice Examining the case before us in relation to these two criteria, the Court finds and so holds that the
 Irregularity in the conduct of the sale

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 case is essentially an intra-corporate dispute. It obviously arose from the intra-corporate relations between the even if awarded to a stockholder, is outside or merely incidental to the central operations of an educational
parties, and the questions involved pertain to their rights and obligations under the Corporation Code and institution. Petitioners thus convincingly argue that "the controversy is not one where petitioners are bringing
matters relating to the regulation of the corporation. We further hold that the nature of the case as an intra- the action as stockholders but rather as operators of the canteen under an agreement with said Board. In short,
corporate dispute was not affected by the subsequent dissolution of the corporation. the cause of action here is for damages arising from a violation of a contract of management operation of the
College canteen by defendant Dizon. Certainly, the present controversy cannot qualify as an intra-controversy,
its root being a contractual breach separate and distinct from the corporate relationship between petitioners
and Corregidor College, Inc., which, it must be noted, was not even named as a defendant in the original
complaint. It was therefore patent error for the Court of Appeals to immediately rule that the present case
GO LIM V DISTINCTION PROPERTY belongs to the SEC just because petitioners alleged that they are stockholders of Corregidor College, Inc.
ISSUES: Under Section 3 of Presidential Decree 902-A, the jurisdiction of the SEC is limited to matters
Whether or not the HLURB has jurisdiction over the complaint filed by the petitioners. intrinsically connected with the regulation of corporations, partnerships and associations and those dealing
RULING with the internal affairs of such entities. P.D. 902-A does not confer in the SEC absolute jurisdiction and control
NO. over all matters affecting corporations. To uphold the appellate court's ruling would remove without legal
Jurisdiction over the subject matter of a case is conferred by law and determinedby the allegations in imprimatur from the regular courts all controversies over matters involving or affecting corporations.
the complaint which comprise a concise statement of theultimate facts constituting the plaintiff's cause of
action. The nature of an action, aswell as which court or body has jurisdiction over it, is determined based on
theallegations contained in the complaint of the plaintiff, irrespective of whether or notthe plaintiff is entitled to
recover upon all or some of the claims asserted therein. The averments in the complaint and the SUNSETVIEW CONDOMINIUM
character of the relief sought are the ones tobe consulted. Once vested by the allegations in the complaint, ISSUES:
jurisdiction alsoremains vested irrespective of whether or not the plaintiff is entitled to recover uponall or some Whether or not the Securities & Exchange Commission has jurisdiction over cases for collection of
of the claims asserted therein. Thus, it was ruled that the jurisdiction ofthe HLURB to hear and decide cases is assessments assessed by the Condominium Corporation on condominium units the full purchase price of which
determined by the nature of the cause ofaction, the subject matter or property involved and the parties.In this has not been paid.
case, the complaint filed by petitioners alleged causes of action thatapparently are not cognizable by the RULING:
HLURB considering the nature of the action andthe reliefs sought. NO.
Section 5 of the Condominium Act expressly provides that the shareholding in the Condominium
Corporation will be conveyed only in a proper case. It provides that any transfer or conveyance of a unit or an
apartment, office or other space therein, shall include the transfer or conveyance of the undivided interests in
STRATEGIC ALLIANCE V STAR INFRASTRUCTURE the common areas or, in a proper case, the membership or shareholding in the condominium corporation. It is
ISSUE: clear then that not every purchaser of a condominium unit is a shareholder of the condominium corporation.
Whether or not the RTC has jurisdiction over the case. The Condominium Act leaves to the Master Deed the determination of when the shareholding will be
RULING: transferred to the purchaser of a unit.
YES. Pursuant to the above statutory provision, ownership of a unit is a condition sine qua nonto being a
In addition to being conferred by law, it bears emphasizing that the jurisdiction of a court or tribunal shareholder in the condominium corporation. The private respondents, therefore, who have not fully paid the
over the case is determined by the allegations in the complaint and the character of the relief sought, purchase price of their units and are consequently not owners of their units are not members or shareholders of
irrespective of whether or not the plaintiff is entitled to recover all or some of the claims asserted therein. the petitioner condominium corporation.
Moreover, pursuant to Section 5.2 of Republic Act No. 8799, otherwise known as the Securities Regulation Code, Inasmuch as the private respondents are not shareholders of the petitioner condominium
the jurisdiction of the SEC over all cases enumerated under Section 5 of Presidential Decree No. 902-A has been corporation, the instant case for collection cannot be a controversy arising out of intra corporate or partnership
transferred to RTCs designated by this Court as SCCs pursuant to A.M. No. 00-11-03-SC promulgated on 21 relations between and among stockholders, members or associates; between any or all of them and the
November 2000. corporation, partnership or association of which they are stockholders, members or associates, respectively"
It should be noted that the SCCs are still considered courts of general jurisdiction. Section 5.2 of R.A. which controversies are under the original and exclusive jurisdiction of the Securities & Exchange Commission,
No. 8799 directs merely the Supreme Court's designation of RTC branches that shall exercise jurisdiction over pursuant to Section 5 (b) of P.D. No. 902- A. The subject matters of the instant cases according to the allegations
intra-corporate disputes. Nothing in the language of the law suggests the diminution of jurisdiction of those of the complaints are under the jurisdiction of the regular courts.
RTCs to be designated as SCCs. The assignment of intra-corporate disputes to SCCs is only for the purpose of
streamlining the workload of the RTCs so that certain branches thereof like the SCCs can focus only on a
particular subject matter.
C. CONTROVERSIES IN THE ELECTION OR APPOINTMENT/ DISMISSAL OF CORPORATE OFFICER
The RTC exercising jurisdiction over an intra-corporate dispute can be likened to an RTC exercising
its probate jurisdiction or sitting as a special agrarian court. The designation of the SCCs as such has not in any
way limited their jurisdiction to hear and decide cases of all nature, whether civil, criminal or special COSARE V BROADCOM ASIA
proceedings. Issue:
Whether or not the case instituted by Cosare was an intra-corporate dispute that was within the original
jurisdiction of the RTC, and not of the Las.
Held:
PEREYRA V IAC
NO.
ISSUE: As regards the issue of jurisdiction, the Court has determined that contrary to the ruling of the CA, it is the LA,
Whether or not the Securities and Exchange Commission has jurisdiction over the case. and not the regular courts, which has the original jurisdiction over the subject controversy. An intra-corporate
RULING: controversy, which falls within the jurisdiction of regular courts, has been regarded in its broad sense to pertain
NO. to disputes that involve any of the following relationships: (1) between the corporation, partnership or
While it is true that petitioners herein are stockholders of Corregidor College, Inc., the. complaint in association and the public; (2) between the corporation, partnership or association and the state in so far as its
Civil Case No. 774-G did not stem directly from such relationship, but rather from the award to petitioners of franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and
the management and operation of its canteen at a monthly rental of P80.00. The management of a canteen, its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates,

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 themselves.29 Settled jurisprudence, however, qualifies that when the dispute involves a charge of illegal the Foreign Department of the Bank she performs tasks integral to the operations of the bank and her length of
dismissal, the action may fall under the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls service with the bank totaling 28 years speaks volumes of her status as a regular employee of the bank. In fine,
termination disputes and claims for damages arising from employer-employee relations as provided in Article as a regular employee, she is entitled to security of tenure; that is, her services may be terminated only for a
217 of the Labor Code. Consistent with this jurisprudence, the mere fact that Cosare was a stockholder and an just or authorized cause. This being in truth a case of illegal dismissal, it is no wonder then that the Bank
officer of Broadcom at the time the subject controversy developed failed to necessarily make the case an intra- endeavored to the very end to establish loss of trust and confidence and serious misconduct on the part of
corporate dispute. private respondent but, as will be discussed later, to no avail.
In Matling Industrial and Commercial Corporation v. Coros, the Court distinguished between a "regular
employee" and a "corporate officer" for purposes of establishing the true nature of a dispute or complaint for
illegal dismissal and determining which body has jurisdiction over it. Succinctly, it was explained that "[t]he
D. PETITIONS FOR ECLARATION IN THE STATE OF SUSPENSION OF PAYMENTS
determination of whether the dismissed officer was a regular employee or corporate officer unravels the
conundrum" of whether a complaint for illegal dismissal is cognizable by the LA or by the RTC. "In case of the
regular employee, the LA has jurisdiction; otherwise, the RTC exercises the legal authority to adjudicate. EXPRESS INVESTMENT V BAYANTEL
Applying the foregoing to the present case, the LA had the original jurisdiction over the complaint for illegal ISSUES:
dismissal because Cosare, although an officer of Broadcom for being its AVP for Sales, was not a "corporate Whether or not the claims of secured and unsecured creditors should be treated pari passu during
officer" as the term is defined by law. We emphasized in Real v. Sangu Philippines, Inc. the definition of rehabilitation.
corporate officers for the purpose of identifying an intra-corporate controversy. RULING:
YES.
As between the creditors, the key phrase is "equality is equity." When a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not anyone of them
REAL V SANGU PHIL
should be given any preference by paying one or some of them ahead of the others. This is precisely the reason
ISSUE: for the suspension of all pending claims against the corporation under receivership. Instead of creditors vexing
Whether or not petitioner‘s complaint for illegal dismissal constitutes an intra-corporate controversy the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a
and thus, beyond the jurisdiction of the Labor Arbiter. duly appointed officer of the SEC.
RULING: Since then, the principle of equality in equity has been cited as the basis for placing secured and
NO. unsecured creditors in equal footing or in pari passu with each other during rehabilitation. In legal parlance,
With the elements of intra-corporate controversy being absent in this case, we thus hold that pari passu is used especially of creditors who, in marshaling assets, are entitled to receive out of the same fund
petitioner‘s complaint for illegal dismissal against respondents is not intra-corporate. Rather, it is a termination without any precedence over each other.
dispute and, consequently, falls under the jurisdiction of the Labor Arbiter pursuant to Section 217 of the Labor
Code.
With the foregoing, it is clear that the CA erred in affirming the decision of the NLRC which
dismissed petitioner‘s complaint for lack of jurisdiction. In cases such as this, the Court normally remands the ROBINSON’S BANK V GAERLAN
case to the NLRC and directs it to properly dispose of the case on the merits. "However, when there is enough Issue:
bases on which a proper evaluation of the merits of petitioner‘s case may be had, the Court may dispense with Whether the proper remedy of the petitioner was to file a petition for review instead of a mere motion for
the time-consuming procedure of remand in order to prevent further delays in the disposition of the case." ‗It is intervention.
already an accepted rule of procedure for us to strive to settle the entire controversy in a single proceeding, Held:
leaving no root or branch to bear the seeds of litigation. If, based on the records, the pleadings, and other The nature of TIDCORP‗s Petition in CA-G.R. SP No. 104141 is such that the other creditors like RBC must be
evidence, the dispute can be resolved by us, we will do so to serve the ends of justice instead of remanding the allowed to participate in the proceedings. They have an interest in the controversy where a final decree would
case to the lower court for further proceedings."We have gone over the records before us and we are convinced necessarily affect their rights. Indeed, the appellate court, on its own, should have seen that the rights of RBC
that we can now altogether resolve the issue of the validity of petitioner‘s dismissal and hence, we shall proceed stand to be adversely affected by the remedies prayed for by TIDCORP. Thus, the CA could have ordered RBC
to do so. to file its comment in CA-G.R. SP No. 104141 and allowed to participate therein. Just as the trial court allowed
RBC and TIDCORP to participate in the proceedings below, the CA should have likewise allowed RBC to
participate in the proceedings before it. This is only fair and logical considering that, as admitted by TIDCORP,
RBC is already a party in the rehabilitation case, and that the instant Petition for Review is merely a
MATLING V COROS
continuation of the proceedings below. To disallow the participation of RBC constitutes an evasion of the
ISSUE: appellate court‗s positive duty to observe due process, a gross and patent error that can be considered as grave
Whether or not the case is considered as an intra corporate controversy. abuse of discretion.46 Likewise, when an adverse effect on the substantial rights of a litigant results from the
RULING: exercise of the court‗s discretion, certiorari may issue.47 If not, this Court possesses the prerogative and
NO. initiative to take corrective action when necessary to prevent a substantial wrong or to do substantial justice.
It appears that private respondent was appointed Accounting Clerk by the Bank on July 14, 1963. From that While TIDCORP is correct in arguing that intervention is not the proper mode for RBC coming to the CA since
position she rose to become supervisor. Then in 1982, she was appointed Assistant Vice-President which she it is already a party to the rehabilitation proceedings, this merely highlights the former‗s error in not allowing
occupied until her illegal dismissal on July 19, 1991. The bank‗s contention that she merely holds an elective the latter to participate in the proceedings in CA- G.R. SP No. 104141 just as it underscores the appellate
position and that in effect she is not a regular employee is belied by the nature of her work and her length of court‗s blunder in not ordering that RBC be allowed to comment or participate in the case so that they may be
service with the Bank. As earlier stated, she rose from the ranks and has been employed with the Bank since given the opportunity to be heard on TIDCORP‗s allegations and accusations. And while RBC chose the wrong
1963 until the termination of her employment in 1991. As Assistant Vice President of the Foreign Department mode for interposing its comments and objections in CA-G.R. SP No. 104141, this does not necessarily warrant
of the Bank, she is tasked, among others, to collect checks drawn against overseas banks payable in foreign the outright denial of its chosen remedy; the Court is not so rigid as to be precluded from adopting measures to
currency and to ensure the collection of foreign bills or checks purchased, including the signing of transmittal insure that justice would be administered fairly to all parties concerned. If TIDCORP must pursue its Petition
letters covering the same. It has been stated that "the primary standard of determining regular employment is for Review, then RBC should be allowed to comment and participate in the proceedings. There is no other
the reasonable connection between the particular activity performed by the employee in relation to the usual solution to the impasse. Finally, the CA committed another patent error in declaring that RBC‗s proper remedy
trade or business of the employer. Additionally, "an employee is regular because of the nature of work and the was not to move for intervention, but to file a Petition for Review of the trial court‗s June 6, 2008 Order. It failed
length of service, not because of the mode or even the reason for hiring them." As Assistant Vice-President of to perceive the obvious fact that there is nothing about the trial court‗s order that RBC questioned; quite the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 contrary, it sought to affirm the said order in toto and simply prayed for the dismissal of TIDCORP‗s Petition PNB V EPCIB
for Review. There is thus no legal and logical basis for its conclusion that RBC should have resorted to a ISSUE:
Petition for Review just the same. Whether or not the rehabilitation proceedings is merely a temporary suspension of payments of
obligations falling due by the distressed corporation and not cancellation or repudiation of those contractual
obligations.
PANLILIO V RTC RULING:
NO.
ISSUE: The mere fact that the ASB Group averred that it has sufficient assets to cover its obligations does
Whether or not the suspension of "all claims" as an incident to a corporate rehabilitation also not make it "solvent" enough to prevent it from filing a petition for rehabilitation. A corporation may have
contemplate the suspension of criminal charges filed against the corporate officers of the distressed corporation. considerable assets but if it foresees the impossibility of meeting its obligations for more than one year, it is
RULING: considered as technically insolvent. The period referred to the corporation‘s inability to pay its obligations; when
NO. such inability extends beyond one year, the corporation is considered technically insolvent. Said inability may
The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the be established from the start by way of a petition for rehabilitation, or it may be proved during the proceedings
corporation, especially since they are charged in their individual capacities. Such being the case, the purpose of for suspension of payments, if the latter was the first remedy chosen by the ailing corporation. If the corporation
the law for the issuance of the stay order is not compromised, since the appointed rehabilitation receiver can opts for a direct petition for rehabilitation on the ground of technical insolvency, it should show in its petition
still fully discharge his functions as mandated by law. It bears to stress that the rehabilitation receiver is not and later prove during the proceedings that it will not be able to meet its obligations for longer than one year
charged to defend the officers of the corporation. If there is anything that the rehabilitation receiver might be from the filing of the petition.
remotely interested in is whether the court also rules that petitioners are civilly liable. Such a scenario, Appointment of an interim receiver becomes automatic. By that statutory provision, it is clear that
however, is not a reason to suspend the criminal proceedings, because as aptly discussed in Rosario, should the the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the
court prosecuting the officers of the corporation find that an award or indemnification is warranted, such award actions for claims against respondent corporations. Petitioner bank‘s preferred status over the unsecured
would fall under the category of claims, the execution of which would be subject to the stay order issued by the creditors relative to the mortgage liens is retained, but the enforcement of such preference is suspended.
rehabilitation court. The penal sanctions as a consequence of violation of the SSS law, in relation to the revised
penal code can therefore be implemented if petitioners are found guilty after trial.
However, any civil indemnity awarded as a result of their conviction would be subject to the stay
order issued by the rehabilitation court. Only to this extent can the order of suspension be considered obligatory
upon any court, tribunal, branch or body where there are pending actions for claims against the distressed
corporation.

PACIFIC WIDE V PERTO AZUL

ISSUE:
Whether or not the terms of the rehabilitation plan are unreasonable and in violation of the non-
impairment clause.
RULING:
NO.
An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation plan, and
Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation provides the requisites thereof. The
Court finds nothing onerous in the terms of PALI‘s rehabilitation plan. The Interim Rules on Corporate
Rehabilitation provides for means of execution of the rehabilitation plan, which may include, among others, the
conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of
assets or of the controlling interest.
The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings
of fact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would not be prejudicial to
the interest of PWRDC as a secured creditor. There is nothing unreasonable or onerous about the 50% reduction
of the principal amount when, as found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits
of PALI from its creditors at deep discounts of as much as 85%. Meaning, PALI‘s creditors accepted only 15% of
their credit‘s value. Stated otherwise, if PALI‘s creditors are in a position to accept 15% of their credit‘s value,
with more reason that they should be able to accept 50% thereof as full settlement by their debtor. They also
find no merit in PWRDC‘s contention that there is a violation of the impairment clause. Section 10, Article III of
the Constitution mandates that no law impairing the obligations of contract shall be passed. This case does not
involve a law or an executive issuance declaring the modification of the contract among debtor PALI. or have
opposed the plan or whether or not their claims have been scheduled.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 (a) Identification of the debtor, its principal activities and its addresses;
RA 10142 (b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its
PURPOSE: obligations as they become due;
To provide measures for debt and release the corporation from financial suffering (c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the form of relief
Section 3. Nature of Proceedings. - The proceedings under this Act shall be in rem. Jurisdiction over all requested;
persons affected by the proceedings shall be considered as acquired upon publication of the notice of the (f) Schedule of the debtor's debts and liabilities including a list of creditors with their
commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner addresses, amounts of claims and collaterals, or securities, if any;
prescribed by the rules of procedure to be promulgated by the Supreme Court. (g) An inventory of all its assets including receivables and claims against third parties;
The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared (h) A Rehabilitation Plan;
policies of this Act and in accordance with the rules of procedure that the Supreme Court may promulgate (i) The names of at least three (3) nominees to the position of rehabilitation receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act and the rules of
procedure as may be promulgated by the Supreme Court.
RUBBY INDUSTRIAL CORP v CA
Defined REHABILITATION as one which contemplates a continuance of corporate life and activities in an effort A group of debtors may jointly file a petition for rehabilitation under this Act when one or more
to restore and reinstate the corporation to its former position of successful operation and solvency. of its members foresee the impossibility of meeting debts when they respectively fall due, and
the financial distress would likely adversely affect the financial condition and/or operations of
the other members of the group and/or the participation of the other members of the group is
RUBBERWORLD PHILIPPINES v NLRC essential under the terms and conditions of the proposed Rehabilitation Plan.
The rehabilitation of a financially distressed corporation benefits its employees, creditors, stockholders and in
larger sense, the general public. And in considering whether to rehabilitate or not, the SEC gives preference to  This is a debtor-initiated proceeding whereby the debtor is the corporation itself filing for a petition
the interest of the creditors including the employees. The reason is that shareholders can recover their to the court
investments only upon liquidation of the corporation and only if there are assets remaining after all corporate  REQUIREMENTS: (concurring allegations)
creditors are paid. o Majority vote of the Board of directors
o 2/3 of the capital stock or of the members
METROPOLITAN BANK AND TRUST CO v ASB HOLDINGS, INC
A. PETITION TO INITIATE VOLUNTARY PROCEEDINGS BY DEBTOR
The purpose of rehabilitation proceedings is to enable the company to gain new lease on life and thereby allows
REQUIREMENT:
creditors to be paid their claims from its earnings. Rehabilitation contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the financially distressed corporation to its former position of
a. The filing of the petition must be approved or authorized in meetings duly called for that purpose
successful operation and solvency. This is in consonance with the state‘s objective to promote a wider and more by:
meaningful equitable distribution of wealth to protect investment and the public.  Majority vote of the Board of directors
 Stockholders representing at least 2/3 of the outstanding capital stock or members

b. The petition shall be verified to establish the insolvency of the debtor and the viability of its
DEBT RELIEF MEASURES
rehabilitation and include whether as an attachment or as part of the body of the petition, as a
A. COURT SUPERVISED REHABILITATION
minimum the following:
REHABILITATION shall refer to the restoration of the debtor to a condition of successful operation and
 Identification of the debtor, its principal activities and its addresses;
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan, more if the debtor continues as a going  Statement of the fact of and the cause of the debtor's insolvency or inability to pay its
concern than if it is immediately liquidated. obligations as they become due;
 he specific relief sought pursuant to this Act;
2 KINDS OF COURT SUPERVISED REHABILITATION  The grounds upon which the petition is based;
 Other information that may be required under this Act depending on the form of relief
I. VOLUNTARY PETITION requested;
Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by the  Schedule of the debtor's debts and liabilities including a list of creditors with their
owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership, addresses, amounts of claims and collaterals, or securities, if any;
or in case of a corporation, by a majority vote of the board of directors or trustees and  An inventory of all its assets including receivables and claims against third parties;
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the  A Rehabilitation Plan;
outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds  The names of at least three (3) nominees to the position of rehabilitation receiver; and
(2/3) of the members, in a stockholder's or member's meeting duly called for the purpose, an  Other documents required to be filed with the petition pursuant to this Act and the rules
insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for of procedure as may be promulgated by the Supreme Court.
rehabilitation with the court and on the grounds hereinafter specifically provided. The petition
shall be verified to establish the insolvency of the debtor and the viability of its rehabilitation,
and include, whether as an attachment or as part of the body of the petition, as a minimum the
following:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

COMPLIANCE with the Corporate Requirements: o Any creditor or group of creditors with a claim of or the aggregate of
SOBREJUANITE v ASB DEV CORP whose claim is at lease P1,000,000 (1million) or at least 25% of the
subscribed capital stock, whichever is higher may initiate involuntary
When a petition for corporate rehabilitation is filed, the first duty of a court is to determine whether the petition
proceedings against the debtor by filing for rehabilitation with the court if:
is sufficient as to FORM and SUBSTANCE; and only when the court is satisfied as to form and substance, that
it issues an order staying enforcement of all claims, whether for money or otherwise and whether such
o There is no genuine issue of fact or law on the claims of the petitioners
enforcement is by court action or otherwise, against debtor, its guarantors and sureties not solidarily liable with and that the due and demandable payments thereon have not been made
the debtor. for at least 60 days or that the debtor has failed generally to meet its
liabilities as they fall due; or
o A creditor, other than the petitioners has initiated foreclosure proceedings
CHAS REALTY AND DEV CORPO v TAVERA against the debtor that will prevent the debtor from paying its debts as
What is required in the filing of the petition for rehabilitation is that said corporate acts proposed therein have they become due or will render it insolvent.
been duly approved or consented to by the directors and stockholders in consonance with existing laws. This
requirement is designed to avoid a situation where a rehabilitation plan cannot ultimately be seen through A. PETITION TO INITIATE INVOLUNTRAY PROCEEDINGS
because of the refusal of directors or stockholders to cooperate in the full implementation of the plan. The creditor-initiated petition for rehabilitation shall be verified to
establish the substantial likelihood that the debtor may be rehabilitated, and include:
PACIFIC WIDE REALTY AND DEV CORP v PUERTO AZUL LAND INC.
 identification of the debtor its principal activities and its address;
 the circumstances sufficient to support a petition to initiate
An indispensable requirement in the rehabilitation of a distressed corporation is the REHABILITATION PLAN.
involuntary rehabilitation proceedings under Section 13 of this Act;
The Interim Rules on Corporate Rehabilitation provides for means of execution of the rehabilitation plan such
as conversion of debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of  the specific relief sought under this Act;
assets or the controlling assets.  a Rehabilitation Plan;
 the names of at least three (3) nominees to the position of
rehabilitation receiver;
II. INVOLUNTARY  other information that may be required under this Act depending on
the form of relief requested; and
 Other documents required to be filed with the petition pursuant to
Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any
this Act and the rules of procedure as may be promulgated by the
creditor or group of creditors with a claim of, or the aggregate of whose claims
Supreme Court.
is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent
(25%) of the subscribed capital stock or partners' contributions, whichever is
ACTION ON THE PETITION
higher, may initiate involuntary proceedings against the debtor by filing a
NOTE: when the petition is insufficient, the court may in its discretion, give the
petition for rehabilitation with the court if:
petitioners a reasonable period of time within which to amend or supplement the petition or to
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and
submit such documents as may be necessary or proper.
that the due and demandable payments thereon have not been made for at least
In such case, the 5 working days provided shall be reckoned from the DATE OF
sixty (60) days or that the debtor has failed generally to meet its liabilities as they
FILING OF THE AMENDED OR SUPPLEMENTAL PETITION OR THE SUBMISSION OF SUCH
fall due; or
DOCUMENTS
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings
against the debtor that will prevent the debtor from paying its debts as they
 Within 5 days from the date of filing, the court is required to issue an order
become due or will render it insolvent.
whether or not the petition is SUFFICIENT in form and substance
Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition
 CORRECTIVE ORDER – issued by the court directing the petitioner to clarify
for rehabilitation shall be verified to establish the substantial likelihood that the
material allegations in the petition within 5 days or from the finding that it is
debtor may be rehabilitated, and include:
sufficient in form and substance
(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary
rehabilitation proceedings under Section 13 of this Act;  COMMENCEMENT ORDER – signifies that the proceeding is now formally
(c) the specific relief sought under this Act; began
(d) a Rehabilitation Plan; - It must be published in a newspaper of general circulation at least once a
(e) the names of at least three (3) nominees to the position of rehabilitation week for 2 consecutive weeks.
receiver; - Publication vests the special commercial courts with jurisdiction to all
(f) other information that may be required under this Act depending on the form interested parties.
of relief requested; and  GENERAL RULE: there shall be no separate notices that will be sent to individual
(g) other documents required to be filed with the petition pursuant to this Act creditors
and the rules of procedure as may be promulgated by the Supreme Court.  EXCEPT: (petitioner is debtor) service by personal deliver of the copy of
the petition may be done when the creditor holds at least 10% of the
 This is a creditor-initiated petition total liabilities of the debtor; (petitioner is creditor) service by personal
 REQUIREMENT: (to vest the petitioner with legal standing) delivery to the debtor within 5 days.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 (d) he is, or was, within two (2) years from the filing of the petition, an
WHAT MUST BE INCLUDED IN THE COMMENCEMENT ORDER? underwriter of the outstanding securities of the debtor;
Appointment of a rehabilitation receiver (e) he is related by consanguinity or affinity within the fourth civil degree to any
REHABILITATION RECEIVER individual creditor, owners of a sale proprietorship-debtor, partners of a
Shall refer to the person or persons, natural or juridical, appointed as partnership- debtor or to any stockholder, director, officer, employee or
such by the court pursuant to this Act and which shall be entrusted underwriter of a corporation-debtor; or
with such powers and duties as set forth herein. (f) he has any other direct or indirect material interest in the debtor or any of
Tasked to assist the rehabilitation court to draft, finalize, secure the the creditors.
approval and confirmation of a rehabilitation plan Any rehabilitation receiver, member of the management committee or persons employed
or contracted by them possessing any conflict of interest shall make the appropriate
QUALIFICATIONS OF A REHABILITATION RECEIVER: disclosure either to the court or to the creditors in case of out-of-court rehabilitation
A. Section 28, 29 proceedings. Any party to the proceeding adversely affected by the appointment of any
Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified natural or person with a conflict of interest to any of the positions enumerated above may however
juridical person may serve as a rehabilitation receiver: Provided, That if the waive his right to object to such appointment and, if the waiver is unreasonably withheld,
rehabilitation receiver is a juridical entity, it must designate a natural person/s who the court may disregard the conflict of interest, taking into account the general interest of
possess/es all the qualifications and none of the disqualification’s as its the stakeholders.
representative, it being understood that the juridical entity and the representative/s
are solidarily liable for all obligations and responsibilities of the rehabilitation C. INDEPENDENT JUDGEMNET
receiver.
REHABILITATION PLAN
Section 29.Qualifications of a Rehabilitation Receiver. - The shall refer to a plan by which the financial well-being and viability of
rehabilitation receiver shall have the following minimum an insolvent debtor can be restored using various means including,
qualifications: but not limited to, debt forgiveness, debt rescheduling,
(a)A citizen of the Philippines or a resident of the Philippines in the reorganization or quasi-reorganization, dacion en pago, debt-equity
six (6) months immediately preceding his nomination; conversion and sale of the business (or parts of it) as a going
(b)Of good moral character and with acknowledged integrity, impartiality and concern, or setting-up of new business entity as prescribed in
independence; Section 62 hereof, or other similar arrangements as may be approved
(c)Has the requisite knowledge of insolvency and other relevant by the court or creditors.
commercial laws, rules and procedures, as well as the relevant Detailed framework seeking to address the financial difficulty of the
training and/or experience that may be necessary to enable him to corporation
properly discharge the duties and obligations of a rehabilitation Provide relief to various creditors such as:
receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest CONTENTS OF THE REHABILITATION PLAN:
may be waived, expressly or impliedly, by a party who may be  Debt restructuring
prejudiced thereby.  Debt condonation
 Debt for equity conversion
Other qualifications and disqualification’s of the rehabilitation  Sale of all or some of the assets of the corporation
receiver shall be set forth in procedural rules, taking into  Sale of all or some of the business
consideration the nature of the business of the debtor and the need  Increase in the capital structure
to protect the interest of all stakeholders concerned.  Infusion of fresh capital
o WHITE KNIGHT RESCUE – someone who offers to provide
fresh capital in exchange of shares of stocks or assets (like
B. The Rehabilitation Receiver must not suffer from conflict of interes an ordinary lender) of the corporation.
Conflict of Interest. - No person may be appointed as a rehabilitation receiver, member of
a_ management committee, or be employed by the rehabilitation receiver or the Contain the date for the initial hearing / Set the case for initial hearing, which shall not be more
management committee if he has a conflict of interest. than forty (40) days from the date of filing of the petition for the purpose of determining
An individual shall be deemed to have a conflict of interest if he is so situated as to be whether there is substantial likelihood for the debtor to be rehabilitated
materially influenced in the exercise of his judgment for or against any party to the
proceedings. Without limiting the generality of the foregoing, an individual shall be Purpose of the initial hearing – to determine who among the oppositors are entitled to
deemed to have a conflict of interest if: protection (bona fide creditors)
(a) he is a creditor, owner, partner or stockholder of the debtor;
(b) he is engaged in a line of business which competes with that of the debtor; STAY OR SUSPENSION ORDER
(c) he is, or was, within five (5) years from the filing of the petition, a director, (1) Suspend all actions or proceedings, in court or otherwise, for the enforcement of
officer, owner, partner or employee of the debtor or any of the creditors, or the claims against the debtor;
auditor or accountant of the debtor; CLAIMS - shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated or

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, ADMINISTRATIVE EXPENSES
including, but not limited to; (1) all claims of the government, whether national or local,  These expenses are however not suspended
including taxes, tariffs and customs duties; and (2) claims against directors and officers  These are expenses incurred after the issuance of the commencement order.
of the debtor arising from acts done in the discharge of their functions falling within the  Include: those reasonable and necessary expenses:
scope of their authority: Provided, That, this inclusion does not prohibit the creditors or (1) Incurred or arising from the filing of a petition under the provisions of this Act;
third parties from filing cases against the directors and officers acting in their personal (2) Arising from, or in connection with, the conduct of the proceedings under this
capacities. Act, including those incurred for the rehabilitation or liquidation of the debtor;
(3) Incurred in the ordinary course of business of the debtor after the
(2) Suspend all actions to enforce any judgment, attachment or other provisional commencement date;
remedies against the debtor; (4) For the payment of new obligations obtained after the commencement date to
finance the rehabilitation of the debtor;
(3) Prohibit the debtor from selling, encumbering, transferring or disposing in any (5) Incurred for the fees of the rehabilitation receiver or liquidator and of the
manner any of its properties except in the ordinary course of business; and professionals engaged by them; and
(6) That are otherwise authorized or mandated under this Act or such other
(4) Prohibit the debtor from making any payment of its liabilities outstanding as of the expenses as may be allowed by the Supreme Court in its rules.
commencement date except as may be provided herein. - Includes the compensation of the rehabilitation officer and such other experts he
may employ
EXCEPTION TO THE STAY OR SUSPENSION ORDER - Employee’s compensation accrued after the issuance of the commencement order
likewise constitutes as admin expense of the corporation and must therefore pay
(a) to cases already pending appeal in the Supreme Court as of commencement date the same. For the unpaid salaries prior to the commencement orders, they ay not be
Provided, That any final and executory judgment arising from such appeal shall be paid yet.
referred to the court for appropriate action; Section 56.Treatment of Employees, Claims. Compensation of employees required
to carry on the business shall be considered an administrative expense. Claims of
(b) subject to the discretion of the court, to cases pending or filed at a specialized court separation pay for months worked prior to the commencement date shall be
or quasi-judicial agency which, upon determination by the court is capable of resolving considered a pre- commencement claim. Claims for salary and separation pay for
the claim more quickly, fairly and efficiently than the court: Provided, That any final and work performed after the commencement date shall be an administrative expense.
executory judgment of such court or agency shall be referred to the court and shall be
treated as a non-disputed claim;

(c) to the enforcement of claims against sureties and other persons solidarily liable with Effectivity and Duration of Commencement Order
the debtor, and third party or accommodation mortgagors as well as issuers of letters of Unless lifted by the court, the Commencement Order shall be for the effective for the duration of
credit, unless the property subject of the third party or accommodation mortgage is the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be
necessary for the rehabilitation of the debtor as determined by the court upon successfully rehabilitated. In determining whether there is substantial likelihood for the debtor to be
recommendation by the rehabilitation receiver; successfully rehabilitated, the court shall ensure that the following minimum requirements are met:

(d) to any form of action of customers or clients of a securities market participant to (a) The proposed Rehabilitation Plan submitted complies with the minimum contents prescribed by
recover or otherwise claim moneys and securities entrusted to the latter in the ordinary this Act;
course of the latter's business as well as any action of such securities market participant
or the appropriate regulatory agency or self-regulatory organization to pay or settle such (b) There is sufficient monitoring by the rehabilitation receiver of the debtor's business for the
claims or liabilities; protection of creditors;

(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor (c) The debtor has met with its creditors to the extent reasonably possible in attempts to reach
pursuant to a securities pledge or margin agreement for the settlement of securities consensus on the proposed Rehabilitation Plan;
transactions in accordance with the provisions of the Securities Regulation Code and its
implementing rules and regulations; (d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the
underlying assumptions and the goals stated in the petitioner's Rehabilitation Plan are realistic
(f) the clearing and settlement of financial transactions through the facilities of a clearing reasonable and reasonable or if not, there is, in any case, a substantial likelihood for the debtor to
agency or similar entities duly authorized, registered and/or recognized by the be successfully rehabilitated because, among others:
appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as
well as any form of actions of such agencies or entities to reimburse themselves for any (1) there are sufficient assets with/which to rehabilitate the debtor;
transactions settled for the debtor; and
(2) there is sufficient cash flow to maintain the operations of the debtor;
(g) Any criminal action against individual debtor or owner, partner, director or officer of
a debtor shall not be affected by any proceeding commend under this Act. (3) the debtor's, partners, stockholders, directors and officers have been acting in good
faith and which due diligence;

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 (4) the petition is not s sham filing intended only to delay the enforcement of the rights of  The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan
the creditor's or of any group of creditors; and  The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Rehabilitation Plan
(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;  The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would
(e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially have received if the debtor were under liquidation
false or misleading statement;

(f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least Paripassu
three-fourths (3/4) of its total obligations to the extent reasonably possible and made a good faith
effort to reach a consensus on the proposed Rehabilitation Plan if the petitioner/s is/are a creditor or Equality in equity – all creditors are treated alike
group of creditors, that/ the petitioner/s has/have met with the debtor and made a good faith effort Courts are duty bound to serve equitable interest of all creditors.
to reach a consensus on the proposed Rehabilitation Plan; and PREFERRED CREDITORS MAY BE CONSTRAINED to yield their preferred or delimit theirsecured
status
(g) The debtor has not committed acts misrepresentation or in fraud of its creditor/s or a group of Does not violate non impairment clause as it has novatory effects
creditors. Governing norm not preference 9f credits

ACTION AT THE INITIAL HEARING:

(Must be set not more than 40 days from date of filing of the petition)
The court shall: 2. PETITION FOR APPROVAL OF PRE-NEGOTIATED PLAN
1. Determine the creditors who have made timely and proper filing of their notice of claims
2. Hear and determine any objection to the qualifications of the appointment of the rehabilitation - rehabilitation plan as already approved by both the debtor and its creditors extrajudicially
receiver and if necessary appoint a new one - the court is left to confirmthe plan and ensure its strict implementation through the Rehabilitation Receiver
3. Direct the creditors to comment on the petition and the rehabilitation plan and to submit the - approval is dependent on :
same to the court and to the rehabilitation receiver within a period of not more than 20days. a. Debtors consent
4. Direct the rehabilitation receiver to evaluate the financial condition of the debtot and to prepare B. It is with the approvlof not less than 50% of the secured crediyors, not less than50% of the unsecured
and submit to the court within 40 days from initial hearing of the report. creditors provided the total comprises 2/3 of the outstandixng liabilities

3. OCRA- OUT OF COURT RESTRUCTURING AGREEMENT/REHABILITATION PLAN

 After the first hearing, the RR , will conduct meetings with creditors for him to illicit proposal or - court renders only provisional assistnce.
agreement to the rehabilitation plan - creditors and debtors are still negotiating a debt restructuring or rehabilitation plan outside of courg
Show:
Effect of Failure to File Notice of Claim.
A creditor whose claim is not listed in the schedule of debts and liabilities and who fails Debtors consent
to file a notice of claim in accordance with the Commencement Order but subsequently files a Consent of the creditors representing : 67% secured, 75% unsecured provided the total amounts to
belated claim shall not be entitled to participate in the rehabilitation proceedings but shall be 85%of liabilities
entitled to receive distributions arising therefrom. The court may still exercise its cram down power
STANDSTILL ORDER – STATUS QUO OREER
WHAT WILL THE COURT DO? Valid for not more than 120 days
A. CONFIRM THE PLAN None may enforce their claim
-EFFECT:
- serves as a novation of all existing contract involving the property or assets of the 4. PETITION FOR LIQUIDATION
debtor corporation
NOTE: Prior to approval, the RR must prove to the court that the Rehabilitation plan has been - Proper when there is no viable chance of restoring the financial health
approved by the creditors. KINDS:
VOLUNTARY – initiated by debtor
B. ACTUALLY APPROVE THE REHABILITAION PLAN Majority of the BOD and 2/3 outstanding capital stock
- in the event that an objection was raised but the court finds out that such objection is without INVOLUNTARY – by the creditor ; same allegations except that the inability to pay period is upto 90 days.
basis. Same proceedings, but instead of a commencementorder issue liquidation order; liquidator seizes
assets , becomes owner then distributes
Ultimate objective: effect complete cessation of corporate life and termination of corporate
personality by distributing the assets.
CRAM DOWN POWER
- Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the
Rehabilitation plan if all of the following circumstances are present:
 The Rehabilitation Plan complies with the requirements of the FRIA

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 SECURITIES REGULATION CODE
■ ELEMENTS OF AN INVESTMENT CONTRACT:
SECURITIES  There is a contract, arrangement or scheme
 For investment of money or property
I. OVERVIEW OF THE FINANCIAL MARKET  In a commercial or common enterprise (profit making)
Financial markets:  The investor is led to expect action of profit
A. Capital market – financial intermediary  Derived solely or principally through the effort of third person or another.
a) Equities capital market – shares of stock  Cash transaction whereby a promise of return is made.
b) Debt capital market – bonds  It is a passive income derived from the use of one’s property.
B. Non-capital market
a) Foreign Exchange Market
b) Commodities market – agricultural products, metals, oil. SEC vs W.J. HOWEY Co. 328 US 293
- Governed by RA 8799 Synopsis of Rule of Law. A ―security‖ is a document that provides proof of a monetary investment in a
- Blue sky law common enterprise with profits earned exclusively through the work of others
- Guarantees full disclosure of all relevant information that an investor may deem necessary to guide
him in a specific course of action. Facts. Howey owned a large citrus grove and solicited investors to participate in his business venture.
- Coverage: Howey would implement a land sale contract for a small portion of the grove to the investor while also
- Any company subject of registration statement required by the SeC. having them enter into a service contract for cultivation of that land. The service contract granted
Howey the complete right to possession due to the investor not taking part in cultivation of any sort.
- Company whose shares are listed in the stock exchange
Once harvested, the investor would get an account for the produce yielded by the strip they invested
- Company with assets valued at or not less than P50million, with at least 200 shareholders, of at least in, however the fruit was marketed exclusively by Howey. Howey utilized various agencies of
200 shareholders have 100 shares each. interstate commerce when endorsing this arrangement but failed to register the contracts and
―securities‖ with the SEC. This led to the SEC bringing an action seeking an injunction against the
II. REGISTRATION OF SECURITIES use of interstate commerce on the grounds that Howey established sales of unregistered securities,
violating § 5(a) of Securities Act of 1933. Trial court denied the injunction, saying that the contract
SECURITIES CONTRACT - any contract showing participation in any profit-making enterprise arrangement did not provide sales of securities. The court of appeals affirmed. The SEC sought
certiorari.
SECURITIES
Issue. Is the term security referencing any document(s) that provide evidence of a monetary
investment in a common enterprise whose profits come only through the labors of others?
Section 3. Definition of Terms. - 3.1. "Securities" are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether Held. (Murphy, J.) Yes. As defined by § 2(a)(1) of the Act, a ―security‖ includes the documents traded
for investment or conjecture, having substance over form, regulating the type of a specific document or
written or electronic in character. It includes:
agreement. Howey is offering an arrangement to invest money in and obtain a portion of the profits of
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities; a large citrus fruit operation. Therefore, the documents in this case are representative of shares in the
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, company. The court rejects the court of appeals‘ idea that due to the business being unpredictable and
certifies of deposit for a future subscription; promotional in nature, that this deal did not represent the sale of securities. Transference of
(c) Fractional undivided interests in oil, gas or other mineral rights; something with tangible value is not enough to exclude the agreementfrom the 1933 Act. Reversed.
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates Discussion. This case has been quoted for its defining of the terms ―investment contracts‖ and
or similar instruments ―securities‖. A common enterprise is required to bring a promotional investment deal within the scope
(f) Proprietary or nonproprietary membership certificates in corporations; and of § 5(a). In this case, it is obvious that investors were purchasing the land in order to receive a larger
(g) Other instruments as may in the future be determined by the Commission. payout down the line without having to do any work. This mirrors the sale of stock.

SHARES OF STOCKS/EQUITIES SEC vs PROSPERITY.COM INC. 25 JANUARY 2012

1. BONDS – indentures or mortgaged, as long as it evidences indebtedness incurred by the FACTS: Prosperity.Com, Inc. (PCI) sold computer software and hosted websites. To make a profit, PCI
corporation from subscribers. Not secured by specific assets in favor of the bond holder but consist devised a scheme in which for the price of US$234.00, a buyer would acquire from it an internet
of general promise to pay based on maturity. website of a 15-mega byte (MB) capacity. At the same time, by referring to PCI his own down-line
buyers, a first-time buyer could earn commission, interest in real estate, and insurance coverage. To
benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own
♤ REGULAR BONDS –security is over the general or free assets of the corporation or rights that a downlines. These second tier of buyers could in turn build up their own downlines. For each pair of
corporation may have in another person such as a mortgage bond. downlines, the buyer-sponsor receives at US$92.00 commission. But referrals in a day by the buyer-
sponsor should not exceed 16 since the commissions due from excess referrals inure to PCI, not to the
♤ JUNK BONDS – issued by the corporation that has a very low credit rating which is unreliable. buyer-sponsor. SEC ruled that PCI's scheme constitutes an investment contract and, following the
The risk of default is higher. The bonds are issu3d at high interest rat3. Securities Regulation Code, it should have first registered such contract or securities with the SEC.

2. ALL INVESTMENT CONTRACTS – apply the Howeys Test (Sec vs Howey us case) ISSUE: Whether or not PCI's scheme constitutes an investment contract

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  No investment contract or security shall be offered for sale without a license (primary
RULING: No. An investment contract is a contract, transaction, or scheme where a person invests his market transaction)
money in a common enterprise and is led to expect profits primarily from the efforts of others. The  No transaction involving registered securities or investment contracts shall be made
United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that, without reporting or registering with the SEC. 9secondary market transaction)
for an investment contract to exist, the following elements, referred to as the Howey test must concur:
(a) a contract, transaction, or scheme; (b) an investment of money; (c) investment is made in a common III. WHAT SECURITIES ARE REQUIRED TO BE REGISTERED
enterprise; (d) expectation of profits; and (e) profits arising primarily from the efforts of others.
Section 8. Requirement of Registration of Securities.–
In this case, PCI's clients do not make such investments. They buy a product of some value to them: 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines,
an internet website of a 15-MB capacity. The client can use this website to enable people to have without a registration statement duly filed with and approved by the Commission. Prior
internet access to what he has to offer to them. The buyers of the website do not invest money in PCI to such sale, information on the securities, in such form and with such substance as the
that it could use for running some business that would generate profits for the investors. The price of Commission may prescribe, shall be made available to each prospective purchaser.
US$234 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using the
computer facilities and technical skills. 8.2. The Commission may conditionally approve the registration statement under such
terms as it may deem necessary.
The commission, interest in real estate, and insurance coverage are incentives to downline sellers to
bring in other customers. These can hardly be regarded as profits from investment of money under the
8.3. The Commission may specify the terms and conditions under which any written
Howey test. The CA is right in ruling that the last requisite in the Howey test is lacking in the
marketing scheme that PCI has adopted. Evidently, it is PCI that expects profit from the network
communication, including any summary prospectus, shall be deemed not to constitute
marketing of its products. PCI is correct in saying that the US$234 it gets from its clients is merely a an offer for sale under this Section.
consideration for the sale of the websites that it provides.
8.4. A record of the registration of securities shall be kept in Register Securities in which
shall be recorded orders entered by the Commission with respect such securities. Such
POWER HOMES UNLIMITED VS SEC register and all documents or information with the respect to the securities registered
Facts: therein shall be open to public inspection at reasonable hours on business days.
Power Homes (P) was engaged in managing real estate properties for subdivision & allied purposes
and in the purchase, exchange, and/or sale of such through network marketing. Manero & Munsayac 8.5. The Commission may audit the financial statements, assets and other information of
requested SEC (R) to investigate P‘s business since he attended a seminar conducted by P where the firm applying for registration of its securities whenever it deems the same necessary to
latter claimed to sell properties that were inexistent and without any broker‘s license & desires to insure full disclosure or to protect the interest of the investors and the public in general
know if network marketing is legitimate. P submitted to R copies of its marketing course module and
letters of accreditation/authority or confirmation from Crown Asia, Fil-Estate Network and Pioneer 29
Realty Corporation after a conference held by R. R found P to be engaged in the sale or offer for sale or
distribution of investment contracts, which are considered securities under Sec. 3.1 (b) of R.A. No. PRIMARY MARKET TRANSACTION
8799 (The Securities Regulation Code), but failed to register them in violation of Sec. 8.1 of the same
Act. R then issued a CDO to P to enjoin the latter from engaging in the sale, offer or distribution of the REGISTRATION STATEMENT
securities.  Application for license before one can sell ornoffer for sell securities in the market.
 Refers to documents or set of documents which serves as the application for license to
Issue:
sell or offer for sell of the securities itself
Whether P‘s business constitutes investment contracts which should be registered with R before its
sale or offer for sale or distribution to the public.
 It contains a detailled information on the history of the corporation, financial data
relating to the shares or the securities themselves such as when was the corporation
Ruling: formed, who are the incorporators, amount of the capital, information as to the
Yes. The court ruled that P failed the Howey Test. It requires a transaction, contract, or scheme amendments of the AOI, types of the shares and akl others in specifics.
whereby a person:  Signed by the key officers of the corporation POO (operation) , PEO ( Executive), PAO (
(1) makes an investment of money administration) PFO (finacial ) (p-principal)
(2) in a common enterprise  Attached thereto is a copy of the resolution of the BOD authorizing the filling of the
(3) with the expectation of profits application for registration. If owned by a stockholder, a certification to that effect must
(4) to be derived solely from the efforts of others. likewise be attached.
 Annexed is any report made by a third person called the DUE DILLIGENCE
Any investment contract covered by the Howey Test must be registered under the Securities Act, DUE DILLIGENCE REPORT – report, evaluation or review of the corporation and
regardless of whether its issuer was engaged in fraudulent practices. R.A. No. 8799 defines an
individual contract or security offered conducted by a finacial rating companies or
Investment contract as a contract, transaction or scheme whereby a person invests his money in a
acounting firms.
common enterprise and is led to expect profits not solely but primarily from the efforts of others. In
the case at bar, P‘s business involves security contracts wherein an investor enrolls in P‘s program by
paying US$234. This entitles him to recruit two (2) investors who pay US$234 each and out of which
amount he receives US$92. A minimum recruitment of four (4) investors by these two (2) recruits, who
then recruit at least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.

RULE PERTAINING TO SECURITUES

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  The right of an existing owner of shares to transfer
 Involves shares which are already owned by an existing stockholder thus the selller
IV. EXEMPT SECURITIES owner is not the corporation.
 All must register with the Sec for monitoring in the changes in ownership over the shares
SECURITIES EXEMPT FROM REGISTRATION: and determine violations of the SRC.
Section 9. Exempt Securities. – REGISTRATION IS REPORTING – in this case public interest is most likely to be affected.
9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the
following classes of securities:
NESTLE VS CA, 2013 S 504
(a) Any security issued or guaranteed by the Government of the Philippines, or by any political
subdivision or agency thereof, or by any person controlled or supervised by, and acting as an FACTS: San Miguel Corporation and Nestle S.A. are the two major stockholders of Neslte. Nestle
instrumentality of said Government. increased its authorized capital stock and was approved by SEC. Thereafter, some unissued stocks
(b) Any security issued or guaranteed by the government of any country with which the Philippines were sold to San Miguel and Nestle. Nestle filed a complaint with the SEC, seeking to exempt the firm
maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis from the registration requirement of Section 4 of the Revised Securities Act and from payment of the
fee referred to in Section 6(c). The provision states that a corporation may be exempted from the
of reciprocity: Provided, That the Commission may require compliance with the form and content
requirement of registration if its issues additional capital stock among its own stockholders
for disclosures the Commission may prescribe. exclusively. Nestle argued that issuance of additional capital stock means issuance of increased
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper authorized capital stock. SEC held that for purposes of granting a general or particular exemption
adjudicatory body. from the registration requirements, a request for exemption and a fee equivalent to 0.1% of issued
(d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and value or securities or stocks are required.
regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board,
or the Bureau of Internal Revenue. ISSUE: Whether or not Nestle is entitled to exemption.
(e) Any security issued by a bank except its own shares of stock.
RULING: Nestle is not exempted from the fee provided for in Section 6 (c) of the Revised Securities
9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of Act. Section 6(a) (4) permits greater opportunity for the SEC to implement the statutory objective of
securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the protecting the investing public by requiring proposed issuers of capital stock to inform such public of
public interest and for the protection of investors. the true financial conditions and prospects of the corporation. When capital stock is issued in the
course of and in compliance with the requirements of increasing its authorized capital stock under
Section 38 of the Corporation Code, the SEC as a matter of course examines the financial condition of
 Securities issued by the Republic of the Philippines or any of its instrumentalities the corporation. Under the ruling issued by the SEC, an issuance of previously authorized but still
 Securities offered for sale in the Philippines by a foreign government as long as the unissued capital stock may, in a particular instance, be held to be an exempt transaction by the SEC
Philippine-based securities may be sold in its territory under Section 6(b) so long as the SEC finds that the requirements of registration under the Revised
 Created and offered for sale by a court in a bankruptcy or insolvency or liquidation Securities Act are "not necessary in the public interest and for the protection of the investors" by
reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential
proceedings
buyers are very limited in number and are in a position to protect themselves. The construction of a
 Securities supervised or regulated by :
statute by the executive officers of the government is entitled to great respect and should be accorded
 HLURB great weight by the courts
 IC
 BIR
 HOUSING AND REULATORY COMMISSION
- Real Estate developments TIMESHARE REALTY VS LAO, 544 S 254
- Condominium FACTS OF THE CASE
- Subdivision 1. On October 6, 1996, herein petitioner, Timeshare Realty, sold to Ceasar M. Lao and Cynthia V.
- House and lot Cortez (respondents), one timeshare of Laguna de Boracay for US$7,500.00 payable in eight months
and fully paid by the respondents.
 INSURANCE COMMISSION
- All kinds of insurance contracts 2. Sometime in February 1998, the SEC issued a resolution to the effect that petitioner was without
 BUREAU OF INTERNAL REVENUE authority to sell securities, like timeshares, prior to February 11, 1998. It further stated in the
- Warrants or distraint (property seized) resolution/order that the Registration Statement of petitioner became effective only on February 11,
- Tax credit certificates 1998. It also held that the 30 days within which a purchaser may exercise the option to unilaterally
- Securitiies issued by banks except its own shares of rescind the purchase agreement and receive the refund of money paid applies to all purchase
stocks. agreements entered into by petitioner prior to the effectivity of the Registration Statement.
 These exemption is by reason of the fact that these are trusted entities.
3. Petitioner sought a reconsideration of the aforesaid order but the SEC denied the same in a letter
 They are non-speculative in character (return of investment is guaranteed) dated March 9, 1998.
 Public interest will not be further served by requiring registration.
4. On March 30, 1998, respondents wrote petitioner demanding their right and option to cancel their
SECONDARY MARKET TRANSACTION Contract, as it appears that Laguna de Boracay is selling said shares without license or authority
from the SEC. For failure to get an answer to the said letter, respondents this time, through counsel,

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 reiterated their demand through another letter dated June 29, 1998. But despite repeated demands, such capital stock.
petitioner failed and refused to refund or pay respondents. (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal
property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a
ISSUE
single purchaser at a single sale.
Whether the issuance by the SEC of an authority to sell securities in favor of Timeshare Realty, at a (g) The issue and delivery of any security in exchange for any other security of the same issuer
later date, will have the effect of ratifying those transactions entered into, at an earlier date, without pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make
such license to sell said securities. such conversion: Provided, That the security so surrendered has been registered under this Code or was,
when sold, exempt from the provision of this Code, and that the security issued and delivered in
RULING exchange, if sold at the conversion price, would at the time of such conversion fall within the class of
No. The provisions of B.P. Blg. 178 do not support the contention of petitioner that its mere securities entitled to registration under this Code. Upon such conversion the par value of the security
registration as a corporation already authorizes it to deal with unregistered timeshares. Corporate surrendered in such exchange shall be deemed the price at which the securities issued and delivered in
registration is just one of several requirements before it may deal with timeshares: such exchange are sold.
(h) Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other
Section 8. Procedure for registration. - (a) All securities required to be registered under trading market.
subsection (a) of Section four of this Act shall be registered through the filing by the issuer or by any
(i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or
dealer or underwriter interested in the sale thereof, in the office of the Commission, of a sworn
in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no
registration statement with respect to such securities, containing or having attached thereto, the
following:
expense is incurred, or no commission, compensation or remuneration is paid or given in connection
xxxx with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking
(36) Unless previously filed and registered with the Commission and brought up to date: of such subscription is to comply with the requirements of such law as to the percentage of the capital
stock of a corporation which should be subscribed before it can be registered and duly incorporated, or
(a) A copy of its articles of incorporation with all amendments thereof and its existing by-laws or its authorized, capital increase.
instruments corresponding thereto, whatever the name, if the issuer be a corporation. (j) The exchange of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
Prior to fulfillment of all the other requirements of Section 8, petitioner is absolutely proscribed (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any
under Section 4 from dealing with unregistered timeshares, thus: twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
Section 4. Requirement of registration of securities. - (a) No securities, except of a class exempt under (i) Bank;
any of the provisions of Section five hereof or unless sold in any transaction exempt under any of the
(ii) Registered investment house;
provisions of Section six hereof, shall be sold or offered for sale or distribution to the public within the
Philippines unless such securities shall have been registered and permitted to be sold as hereinafter
(iii) Insurance company;
provided. (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political
subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in
trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as qualified buyers, on the basis of
V. EXEMPT TRANSACTIONS such factors as financial sophistication, net worth, knowledge, and experience in financial and business
matters, or amount of assets under management.
Section 10. Exempt Transactions. – 10.1. The requirement of registration under Subsection 8.1 shall not apply
10.2. The Commission may exempt other transactions, if it finds that the requirements of registration under this
to the sale of any security in any of the following transactions:
Code is not necessary in the public interest or for the protection of the investors such as by the reason of the
small amount involved or the limited character of the public offering.
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice
(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of
identifying the exemption relied upon on such form and at such time as the Commission by the rule may
offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the
prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one percent
provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such
(1%) of the maximum value aggregate price or issued value of the securities.
debt.
(c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by
the owner therefore, or by his representative for the owner’s account, such sale or offer for sale or offer
for sale, subscription or delivery not being made in the course of repeated and successive transaction of
NESTLE VS CA, 2013 S 504
a like character by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security. FACTS:
(d) The distribution by a corporation actively engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security holders as a stock dividend or other On February 21, 1983, the Authorized Capital Stock (ACS) of petitioner Nestle was increased from
P300 million divided into 3 million shares with a par value of P100 per share, to P600 million divided
distribution out of surplus.
into 6 million shares with a par value of P100 per share. Nestle underwent the necessary procedures
(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no involving Board and stockholders approvals and the necessary filings to secure the approval of the
commission or other remuneration is paid or given directly or indirectly in connection with the sale of increase of ACS. It was approved by respondent SEC.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Revised Securities Act. Thus, one of the requirements under the current regulations of the SEC in
Nestle issued 344,500 shares out of its previously authorized but unissued capital stock exclusively to respect of filing a certificate of increase of authorized capital stock, is submission of ―a financial
its principal stockholders San Miguel Corporation and to Nestle S.A. San Miguel Corporation statement duly certified by an independent CPA as of the latest date possible or as of the date of the
subscribed to and completely paid up 168,800 shares, while Nestle S.A. subscribed to and paid up the meeting when stockholders approved the increase/decrease in capital stock or thereabouts. When all
balance of 175,700 shares of stock. or part of the newly authorized capital stock is proposed to be issued as stock dividends, the SEC
requirements are even more exacting; they require, in addition to the regular audited financial
In 1985, petitioner Nestle filed a letter to SEC seeking exemption of its proposed issuance of statements, the submission by the corporation of a ―detailed or Long Form Report of the certifying
additional shares to its existing principal shareholders, from the registration requirement of Section 4 Auditor.‖ Moreover, since approval of an increase in authorized capital stock by the stockholders
of the Revised Securities Act and from payment of the fee referred to in Section 6(c) of the same Act to holding 2/3 of the outstanding capital stock is required by Section 38 of the Corporation Code, at a
wit: stockholders meeting held for that purpose, the directors and officers of the corporation may be
expected to inform the shareholders of the financial condition and prospects of the corporation and of
―Sec. 6. Exempt transactions. — a) The requirement of registration under subsection (a) of Section the proposed utilization of the fresh capital sought to be raised.
four of this Act shall not apply to the sale of any security in any of the following transactions: xxx
xxx xxx On the other hand, issuance of previously authorized but theretofore unissued capital stock by the
corporation requires only Board of Directors approval. Neither notice to nor approval by the
(4) The distribution by a corporation, actively engaged in the business authorized by its articles of shareholders or the SEC is required for such issuance. There would be no opportunity for the SEC to
incorporation, of securities to its stockholders or other security holders as a stock dividend or other see to it that shareholders (especially the small stockholders) have a reasonable opportunity to inform
distribution out of surplus; or the issuance of securities to the security holder or other creditors of a themselves about the very fact of such issuance and about the condition of the corporation and the
corporation in the process of a bona fide reorganization of such corporation made in good faith and not potential value of the shares of stock being offered.
for the purpose of avoiding the provisions of this Act, either in exchange for the securities of such
security holders or claims of such creditors or partly for cash and partly in exchange for the securities An issuance of previously authorized but still unissued capital stock may be held to be an exempt
or claims of such security holders or creditors; or the issuance of additional capital stock of a transaction by the SEC under Section 6(b) so long as the SEC finds that the requirements of
corporation sold or distributed by it among its own stockholders exclusively, where no commission or registration under the Revised Securities Act are ―not necessary in the public interest and for the
other remuneration is paid or given directly or indirectly in connection with the sale or distribution of protection of the investors‖ by reason, inter alia, of the small amount of stock that is proposed to be
such increased capital stock.‖ issued or because the potential buyers are very limited in number and are in a position to protect
themselves.
Nestle argued that Section 6(a) (4) of the Revised Securities Act embraces ―not only an increase in the
authorized capital stock but also the issuance of additional shares to existing stockholders of the Petitioner Nestle‘s second claim for exemption is from payment of the fee provided for in Section 6 (c)
unissued portion of the unissued capital stock―. of the Revised Securities Act. Petitioner claims that to require it now to pay one-tenth of one percent
(1%) of the issued value of the 344,500 shares of stock proposed to be issued, is to require it to pay a
SEC denied petitioner‘s requests and ruled that the proposed issuance of shares did not fall under second time for the same service on the part of the SEC.
Section 6 (a) (4) of the Revised Securities Act, since Section 6 (a) (4) is applicable only where there is
an increase in the authorized capital stock of a corporation. We think it clear that the fee collected in 21 February 1983 by the SEC was assessed in connection
with the examination and approval of the certificate of increase of authorized capital stock then
MR was denied and appeal to CA was also denied. Thus this Petition for Review. submitted by petitioner. The fee, on the other hand, provided for in Section 6 (c) which petitioner will
be required to pay if it does file an application for exemption under Section 6 (b), is quite different;
ISSUE: WON petitioner Nestle‘s application for exemptions should be granted. this is a fee specifically authorized by the Revised Securities Act, (not the Corporation Code) in
connection with the grant of an exemption from normal registration requirements imposed by that
RULING: Act. We do not find such fee either unreasonable or exorbitant.

No. Under Sec 38 of the Corporation Code, a corporation engaged in increasing its authorized capital
stock, with the required vote of its Board of Directors and of its stockholders, must file a sworn
statement of the treasurer of the corporation showing that at least 25% of ―such increased capital
stock‖ has been subscribed and that at least 25% of the amount subscribed has been paid either in
actual cash or in property transferred to the corporation. The corporation must issue at least 25% of
the newly or contemporaneously authorized capital stock in the course of complying with the
requirements of the Corporation Code for increasing its authorized capital stock.

After approval by the SEC of the increase of its authorized capital stock, and from time to time
thereafter, the corporation, by a vote of its Board of Directors, and without need of either stockholder
or SEC approval, may issue and sell shares of its already authorized but still unissued capital stock to
existing shareholders or to members of the general public.

In the case at bar, since the 344,500 shares of Nestle capital stock are proposed to be issued from
already authorized but still unissued capital stock and since the present authorized capital stock of
6,000,000 shares with a par value of P100.00 per share is not proposed to be further increased, the
SEC and the CA correctly rejected Nestle‘s petition.

When capital stock is issued in the course of and in compliance with the requirements of increasing its
authorized capital stock under Section 38 of the Corporation Code, the SEC examines the financial
condition of the corporation, and hence there is no real need for exercise of SEC authority under the

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 VII. REGISTRATION STATEMENT
VI. PUBLIC COMPANIES
The registration statement shall include any prospectus required or permitted to be delivered under
Subsections 8.2, 8.3, and 8.4.
PHILIPPINE VETERANS BANK V CALLANGAN 3 AUGUST 2011 8.2. The Commission may conditionally approve the registration statement under such terms as it may
FACTS: On March 17, 2004, respondent Justina F. Callangan, the Director of the Corporation Finance deem necessary.
Department of the Securities and Exchange Commission (SEC), sent the Bank a letter, informing it
that it qualifies as a ―public company‖ under Section 17.2 of the Securities Regulation Code (SRC) in 8.3. The Commission may specify the terms and conditions under which any written communication,
relation with Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC. The Bank including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section.
is thus required to comply with the reportorial requirements set forth in Section 17.1 of the SRC.
8.4. A record of the registration of securities shall be kept in Register Securities in which shall be
The Bank responded by explaining that it should not be considered a ―public company‖ because it is a recorded orders entered by the Commission with respect such securities. Such register and all
private company whose shares of stock are available only to a limited class or sector, i.e., to World documents or information with the respect to the securities registered therein shall be open to public
War II veterans, and not to the general public.
inspection at reasonable hours on business days.
In a letter dated April 20, 2004, Director Callangan rejected the Bank‘s explanation and assessed it a
total penalty of One Million Nine Hundred Thirty-Seven Thousand Two Hundred Sixty-Two and CONTENTS:
80/100 Pesos (P1,937,262.80) for failing to comply with the SRC reportorial requirements from 2001 to
2003. The Bank moved for the reconsideration of the assessment, but Director Callangan denied the 12.1. All securities required to be registered under Subsection 8. I shall be registered through the filing by the
motion in SEC-CFD Order No. 085, Series of 2005 dated July 26, 2005. When the SEC En Banc also issuer in the main office of the Commission, of a sworn registration statement with the respect to such
dismissed the Bank‘s appeal for lack of merit in its Order dated August 31, 2006, prompting the Bank securities, in such form and containing such information and document as the Commission prescribe. The
to file a petition for review with the Court of Appeals (CA). registration statement shall include any prospectus required or permitted to be delivered under Subsections
8.2, 8.3, and 8.4.
On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC ruling, with the
modification that the assessment of the penalty be recomputed from May 31, 2004.
12.2. In promulgating rules governing the content of any registration statement (including any prospectus
made a part thereof or annex thereto), the Commission may require the registration statement to contain such
The CA also denied the Bank‘s motion for reconsideration, opening the way for the Bank‘s
petition for review on certiorari filed with this Court.
information or documents as it may, by rule, prescribe. It may dispense with any such requirements, or may
require additional information or documents, including written information from an expert, depending on the
On June 16, 2010, the Court denied the Bank‘s petition for failure to show any reversible error necessity thereof or their applicability to the class of securities sought to be registered.
in the assailed CA decision and resolution.
12.3. The information required for the registration of any kind, and all securities, shall include, among others,
ISSUE: Whether or not the reportorial requirements of the SEC are applicable to Banks. the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local
ownership.
HELD: The Securities and Exchange Commission (SEC) required the Bank to comply with the
reportorial requirements under Section 17.1 of SRC since it qualifies as a ―public company‖ under
Section 17.2 of the SRC. The Bank argued that it is a private company and not a public company SIGNATORIES
because its shares are available only to a limited class or sector. The Supreme Court held that ―public
company,‖ as contemplated by the SRC, is not limited to a company whose shares of stocks are
12.4. The registration statement shall be signed by the issuer’s executive officer, its principal operating officer,
publicly listed; even companies like the Bank, whose shares are offered only to a specific group of its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or
people, are considered a public company, provided they meet the requirement as required under the persons performing similar functions accompanied by a duly verified resolution of the board of directors of
SRC. the issuer corporation. The written consent of the expert named as having certified any part of the registration
statement or any document used in connection therewith shall also be filed. Where the registration statement
shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy
of any part of the registration statement contributed to by such selling shareholders shall be filed.

GROUNDS FORR REJECTION BY SEC OF THE REGISTRATION STATEMENT:

Issuing corporation is judicially insolvent
Any of the incumbent director or officer has been convicted by final judgement in a local
or foreign tribunal for the violation of local or foreign securities law or of moral
turpitude.
The statement contains false or misleading statement or omits to include material or
relevant information.

APPROVAL
 Once none of the grounds are present, the SEC will issue a license/permit.

TWO PRONGED:

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

  Permit as to the security itself (Registered Security)
 Authority to sell or dispose to the public (IPO) Section 56. Civil Liabilities on Account of False Registration Statement.
56.1. Any person acquiring a security, the registration statement of which or any part
thereof contains on its effectivity an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make such
PHILIPPINE VETERANS BANK V CALLANGAN 3 AUGUST 2011
statements not misleading, and who suffers damage, may sue and recover damages
Issue: from the following enumerated persons, unless it is proved that at the time of such
Whether or not the Order of Revocation was issued by SEC without affording URPHI due process due acquisition he knew of such untrue statement or omission:
to absence of notice and hearing
Held: (a) The issuer and every person who signed the registration statement:
SC granted the petition as meritorious stating that there is not dispute that the violation of
reportorial requirements under Sec 17.1 of the Amended IRR of the SRC is a ground for
Page812
(b) Every person who was a director of, or any other person performing
suspension or revocation of the registration of securities pursuant to Sec 13.1 and 54.1 of the SRC to similar functions, or a partner in, the issuer at the time of the filing of the
wit: registration statement or any part, supplement or amendment thereof with
13.1. The Commission may reject a registration statement and refuse registration of the respect to which his liability is asserted;
securitythereunder, or revoke the effectivity of a registration statement and the registration of the
security thereunder after due notice and hearing by issuing an order to such effect, setting forth its (c) Every person who is named in the registration statement as being or about
findings in respect thereto, if it finds that: to become a director of, or a person performing similar functions, or a partner
a) The issuer: in, the issuer and whose written consent thereto is filed with the registration
xxx xxxxxx statement;
(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any
order of the (d) Every auditor or auditing firm named as having certified any financial
Commission of which the issuer has notice in connection with the offering for which a registration
statements used in connection with the registration statement or prospectus.
statement has been filed;
54.1. If, after due notice and hearing, the Commission finds that: (a) There is a violation of this Code,
its rules, or its orders; (b) Any registered broker or dealer, associated person thereof has failed (e) Every person who, with his written consent, which shall be filed with the
reasonably to supervise, with a view to preventing violations, another person subject to supervision registration statement, has been named as having prepared or certified any
who commits any such violation; part of the registration statement, or as having prepared or certified any report
(c) Any registrant or other person has, in a registration statement or in other reports, applications, or valuation which is used in connection with the registration statement, with
accounts, records or documents required by law or rules to be filed with the Commission, made any respect to the statement, report, or valuation, which purports to have been
untrue statement of a material fact, or omitted to state any material fact required to be stated therein prepared or certified by him.
or necessary to make the statements therein not misleading; or, in the case of an underwriter, has
failed to conduct an inquiry with reasonable diligence to insure that a registration statement is (f) Every selling shareholder who contributed to and certified as to the
accurate and complete in all material respects;or accuracy of a portion of the registration statement, with respect to that portion
(d) Any person has refused to permit any lawful examinations into its affairs, it shall, in its discretion, of the registration statement which purports to have been contributed by him.
and subject only to the limitations hereinafter prescribed, impose any or all of the following sanctions
as may be appropriate in light of the facts and circumstances:
(g) Every underwriter with respect to such security.
(i) Suspension, or revocation of any registration for the offering of securities;
SC further held that the essence of due process is simply giving an opportunity to be heard, or as
applied to administrative proceedings, an opportunity to explain one's side or an opportunity to seek a
reconsideration of the action or ruling complained of.
What the law prohibits is not the absence of previous notice but the absolute absence thereof and the
lack of opportunity to be heard.
WHO COULD BE SUED
The due notice of revocation given to URPHI through the SEC Order dated July 27, 2004. Due notice
simply means the information must be given or made to a particular person or to the public within a 56.1. Any person acquiring a security, the registration statement of which or any part thereof
legally mandated period of time so that its recipient will have the opportunity to respond to a contains on its effectivity an untrue statement of a material fact or omits to state a material fact
situation or to allegations that affect the individual's or public's legal rights or duties. required to be stated therein or necessary to make such statements not misleading, and who
Furthermore, the SC notes that SEC has both regulatory and adjudicative functions. The revocation of
suffers damage, may sue and recover damages from the following enumerated persons, unless
registration of securities and permit to sell them to the public is not an exercise of the SEC's quasi-
it is proved that at the time of such acquisition he knew of such untrue statement or omission:
judicial power, but of its regulatory power.
The case used by URPHI which is the Globe Telecom ruling is different from the case at hand. The SC
in Globe Case ruled that the fined imposed by the NTC without notice and hearing was null and void (a) The issuer and every person who signed the registration statement:
due to the denial of petitioner's right to due process. The revocation of URPHI's registration of
securities and permit to sell them to the public cannot be considered a penalty but a withdrawal of a (b) Every person who was a director of, or any other person performing similar
privilege, which regulatory power the SEC validly exercised after giving it due notice and opportunity functions, or a partner in, the issuer at the time of the filing of the registration statement
to be heard or any part, supplement or amendment thereof with respect to which his liability is
asserted;

VIII. FALSE REGISTRATION STATEMENT (c) Every person who is named in the registration statement as being or about to

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 become a director of, or a person performing similar functions, or a partner in, the liability from the issuer. However, the right of the issuer to recover from the guilty parties the
issuer and whose written consent thereto is filed with the registration statement; amount it has contributed under this Section shall not be prejudiced.

(d) Every auditor or auditing firm named as having certified any financial statements
used in connection with the registration statement or prospectus.

(e) Every person who, with his written consent, which shall be filed with the
registration statement, has been named as having prepared or certified any part of the
registration statement, or as having prepared or certified any report or valuation which
is used in connection with the registration statement, with respect to the statement,
IX. LIMITATIONS ON ACTION FOR FALSE REGISTRATION STATEMENT
report, or valuation, which purports to have been prepared or certified by him.
Section 62. Limitation of Actions. – 62.1. No action shall be maintained to enforce any
(f) Every selling shareholder who contributed to and certified as to the accuracy of a liability created under Section 56 or 57 of this Code unless brought within two (2) years
portion of the registration statement, with respect to that portion of the registration after the discovery of the untrue statement or the omission, or, if the action is to enforce
statement which purports to have been contributed by him. a liability created under Subsection 57.1 (a), unless, brought within two (2) yeas after the
violation upon which it is based. In no event shall an such action be brought to enforce a
(g) Every underwriter with respect to such security. liability created under Section 56 or Subsection 57.1 (a) more than five (5) years after the
security was bona fide offered to the public, or under Subsection 57.1 (b0 more than five
(5) years after the sale.

62.2. No action shall be maintained to enforce any liability created under any other
DEFENSES provision of this Code unless brought within two (20 years after the discovery of the facts
56.2. If the person who acquired the security did so after the issuer has made generally available constituting the cause of action and within five (5) years after such cause of action
to its security holders an income statement covering a period of at least twelve (12) months accrued.
beginning from the effective date of the registration statement, then the right of recovery under
this subsection shall be conditioned on proof that such person acquired the security relying upon
such untrue statement in the registration statement or relying upon the registration statement and
not knowing of such income statement, but such reliance may be established without proof of the TRADING IN SECURITIES
reading of the registration statement by such person
SAFEGUARDS / REQUIREMENTS

DAMAGES MARGIN REQUIREMENTS AND RESTRICTIONS ON BORROWING

Section 63. Amount of Damages to be Awarded. –
MARGIN REQUIREMENTS:
63.1. All suits to recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought Section 48. Margin Requirements. –
before the Regional Trial Court, which shall have exclusive jurisdiction to hear and decide such 48.1. For the purpose of preventing the excessive use of credit for the purchase or carrying of
suits. The Court is hereby authorized to award damages in an amount not exceeding triple the securities, the Commission, in accordance with the credit and monetary policies that may be
amount of the transaction plus actual damages. promulgated from time to time by the Monetary Board of the Bangko Sentral ng Pilipinas, shall
prescribed rules and regulations with respect to the amount of credit that may be extended on any
Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness security. For the extension of credit, such rules and regulations shall be based upon the following
in the violation of this Code or the rules and regulations promulgated thereunder. standard:
The Court is also authorized to award attorney’s fees not exceeding thirty percentum (30%) of the An amount not greater than the whichever is the higher of –
award.
(a) Sixty-five per centum (65%) of the current market price of the security, or
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and
severally liable for the payment of damages. However, any person who becomes liable for the (b) One hundred per centum (100%) of the lowest market price of the security during the
payment of such damages may recover contribution from any other person who, if sued preceding thirty-six (36) calendar months, but not more than seventy-five per centum (75%) of
separately, would have been liable to make the same payment, unless the former was guilty of the current market price.
fraudulent representation and the latter was not.
However, the Monetary Board may increase or decrease the above percentages, in order to
63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer, held achieve the objectives of the Government with due regard for promotion of the economy and
liable under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally to the total prevention of the use of excessive credit.
liability adjudged herein. In no case shall the principal stockholders, directors and other officers
of the issuer or persons occupying similar positions therein, recover their contribution to the Such rules and regulations may make appropriate provision with respect to the carrying of

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 undermargined accounts for limited periods and under specified conditions; the withdrawal
of funds or securities; the transfer of accounts from one lender to another; special or different 49.3. To lend or arrange for the lending of any security carried for the account of any customer without
margin requirements for delayed deliveries, short sales, arbitrage transactions, and securities the written consent of such customer or in contravention of such rules and regulations as the
to which letter (b) of the second paragraph of this subsection does not apply; the methods to Commission shall prescribe.
be used in calculating loans, and margins and market prices; and similar administrative
adjustments and details.
1. MARGIN TRADING
48.2. No member of an Exchange or broker or dealer shall, directly or indirectly, extend or maintain  A kind of trading that allows a broker to advance for the customer/investor part of the purchase
credit is extended and maintain credit or arrange for the extension or maintenance of credit to or for price of the security and to keep it as collateral for such advance.
any customer:  Buying or selling of securities or credit furnished by a broker
 present excessive extension of credit
(a) On any security unless such credit is extended and maintained in accordance with the  regulated by the SEC and BSP
rules and regulations which the Commission shall prescribe under this Section including rules LIMITATIONS
setting credit in relation to net capital of such member, broker or dealer; and not exceeding 65% of the current market value; or
equal to 100% of the lowest market price over the last 36 months but not more than 75%
(b) Without collateral or any collateral other than securities, except (I) to maintain a credit of the Current market value
initially extended in conformity with rules and regulations of the Commission and (ii) in cases NOTE: whichever is higher
where the extension or maintenance of credit is not for the purpose of purchasing or carrying  The amount of credit furnished is reduced to the maximum allowed by law.
securities or of evading or circumventing the provisions of paragraph (a) of this subsection.
REMEDIES OF THE INVESTOR:
48.3 Any person not subject to Subsection 48.2 hereof shall extend or maintain credit or arrange for  make additional deposit or
the extension or maintenance of credit for the purpose of purchasing or carrying any security, only in  reduce volume of transaction
accordance with such rules and regulations as the Commission shall prescribe to prevent the
excessive use of credit for the purchasing or carrying of or trading in securities in circumvention of the
other provisions of this Section.. Such rules and regulations may impose upon all loans made for the ABACUS SECURITIES v AMPIL
purpose of purchasing or carrying securities limitations similar to those imposed upon members, What is the obligation of the broker to his client? A: The primary obligation of the broker is to ensure
brokers, or dealers by Subsection 48.2 and the rules and regulations thereunder. This subsection and his account‘s compliance with the law. The brokers and dealers. Note: In securities trading, the
the rules and regulations thereunder shall not apply: brokers are essentially the counterparties to the stock transactions at the Exchange. Since the
principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus
(a) To a credit extension made by a person not in the ordinary course of business; (b) to a loan made. Brokers have a right to be reimbursed for sums advanced by them with the express or implied
to a dealer to aid in the financing of the distribution of securities to customers not through the authorization of the principal.
medium of an Exchange; or (c) To such other credit extension as the Commission shall exempt
from the operation of this subsection and the rules and regulations thereunder upon specified The Issue
terms and conditions for stated period. whether the pari delicto rule was applicable to the present case;

Pari Delicto Pari Delicto

RESTRICTIONS ON BORROWING Sections 23 and 25 and Rule 25-1, otherwise known as the ―mandatory close-out
rule,‖[1] clearly vested an obligation, not just a right, in petitioner. That obligation was
Section 49. Restrictions on Borrowings by Members, Brokers, and Dealers. – It shall be unlawful for to cancel or otherwise liquidate a customer‘s order, if payment was not received within
any registered broker or dealer, or member of an Exchange, directly or indirectly; three days from the date of purchase. Subsequent to an unpaid order, the broker
should require its customer to deposit funds in the account sufficient to cover each
49.1. To permit in the ordinary course of business as a broker or dealer his aggregate indebtedness purchase, prior to the execution of the transaction. These duties were imposed upon
including customers’ credit balances, to exceed such percentage of the net capital (exclusive of fixed the broker to ensure faithful compliance with the margin requirements of the law,
assets and value of Exchange membership) employed in the business, but not exceeding in any case which forbade the broker from extending undue credit to a ―cash‖ customer.
to thousand percentum (2,000%), as the Commission may be rules and regulations prescribe as Respondent Liable for the First Respondent Liable for the First
But Not for the Subsequent Trade But Not for the Subsequent Trade
necessary or appropriate in the public interest or for the protection of investors.
Nonetheless, these margin requirements were applicable only to transactions
entered into by the parties subsequent to the initial trades of April 10 and 11, 1997.
49.2. To pledge, mortgage, or otherwise encumber or arrange for the pledge, mortgage, or Thus, petitioner could still collect from respondent to the extent of the difference
encumbrance of any security carried for the account of any customer under circumstances: (a) That between his outstanding obligation as of April 11, 1997, less the proceeds from the
will permit the commingling of his securities, without his written consent, with the securities of any mandatory sellout of the shares pursuant to the RSA Rules. Its right to collect was
customer; (b) That will permit such securities to be commingled with the securities of any person justified under the general law on obligations and contracts.[2]
other than a bona fide customer; or (c) that will permit such securities to be pledged, mortgaged or Petitioner could not be denied the right to collect, as the initial transactions had
encumbered, or subjected to any lien or claim of the pledgee, for a sum in excess of the aggregate been entered into pursuant to the instructions of respondent. His obligation for stock
indebtedness of such customers in respect of such securities. However, the Commission, having due transactions made and entered into on April 10 and 11, 1997, remained outstanding.
regard to the protection of investors, may, by rules and regulations, allow certain transactions that may Those transactions were valid, and the obligations he incurred in regard to his stock
otherwise be prohibited under this subsection. purchases on those dates subsisted. At the time, there was yet no violation of the RSA.
Petitioner committed a fault only when it failed 1) to liquidate the transactions on

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 April 14 and 15, 1997, or the fourth day following the stock purchases; and 2) to
complete its liquidation no later than ten days after, by applying the proceeds as 3.5. "Associated person of a broker or dealer" is an employee therefor whom, directly
payment for his outstanding obligation.[3]
exercises control of supervisory authority, but does not include a salesman, or an agent or a
Elucidating further, since the buyer was not able to pay for the transactions that
had taken place on April 10 and 11 -- that is, at T+4 -- the broker was duty-bound to
person whose functions are solely clerical or ministerial.
advance the payment to the settlement banks, without prejudice to its right to collect
from the client later on.[4] 3.6. "Clearing Agency" is any person who acts as intermediary in making deliveries upon
It should be clear that Congress had imposed the margin requirements to payment effect settlement in securities transactions.
protect the general economy, not to give the customer a free ride at the expense of the
broker.[5] Not to require respondent to pay for his April 10 and 11 trades would put a 3.7. "Exchange" is an organized market place or facility that brings together buyers and sellers
premium on his circumvention of the laws and would enable him to enrich himself and executes trade of securities and/or commodities.
unjustly at the expense of petitioner.
By failing to ensure his payment of his first purchase transactions within the
period prescribed by law, thereby allowing him to make subsequent purchases,
petitioner effectively converted his cash account into a credit account. The extension 2. Securities brokers and associated persons or agents must be licensed separately.
or maintenance of credits on nonmargin transactions, however, were specifically  Broker are required to inhibit if they represent a buyer or seller of the same security at the same time .
prohibited under Section 23(b). Thus, petitioner was remiss in its duty and could not  Except: remedies:
be said to have come to court with ―clean hands,‖ insofar as it intended to collect on There is consent of the parties.
transactions subsequent to the initial trades of April 10 and 11, 1997.
Respondent Equally Guilty Respondent Equally Guilty 3. CHINESE WALL
for Subsequent Trades for Subsequent Trades
 information barrier within an organization that was erected to prevent exchanges or communication that
On the other hand, respondent was found to be equally guilty of entering into
transactions in violation of the RSA and RSA Rules. The Court was not prepared to
could lead to conflicts of interest
accept his self-serving assertions of being an ―innocent victim‖ in all the transactions.
Obviously, he knowingly speculated on the market by taking advantage of the ―nocash-out‖
arrangement extended to him by petitioner. 4. Prohibition against Insider trading
It was respondent‘s privilege to gamble or speculate, as he apparently did by
Section 25. Regulation of Option Trading. – No member of an Exchange shall, directly or indirectly endorse or
asking for extensions of time and refraining from giving orders to his broker to sell, in
the hope that the prices would rise. Sustaining his argument would have amounted to
guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered
relieving him of the risks of his own speculation and saddling petitioner with the on a securities exchange. The terms "put", "call", "straddle", "option", or "privilege" shall not include any
consequences after the result turned out to be unfavorable.[6] His conduct as an registered warrant, right or convertible security.
investor was precisely the sort deplored by the law. Thus, with respect to his
counterclaim for damages for having been allegedly induced by petitioner to generate
additional purchases despite his outstanding obligations, the Court held that he
deserved no legal or equitable relief. 1. OPTION – An option is a financial derivative that represents a contract sold by one party (the
In the final analysis, both parties had acted in violation of the law and did not option writer) to another party (the option holder). The contract offers the buyer the right, but not
come to court with clean hands as regards the transactions subsequent to the initial the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price
one made on April 10 and 11, 1997. In this case, the pari delicto rule applied only to (the strike price) during a certain period of time or on a specific date (exercise date)
transactions entered into after those initial trades.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transactions - A stock option is a contract between two parties in which the stock option buyer
(sold the stocks) on the fourth day after (at T+4) and completed its liquidation not (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at
later than ten days following the last day for the customer to pay (effectively at T+14). a predetermined price from/to the option seller (writer) within a fixed period of time.
Respondent‘s outstanding obligation, therefore, was to be determined on the basis of
the closing prices -- at T+14 -- of the stocks purchased.
- The two types of stock options are puts and calls. Call options confers the buyer the
right to buy the underlying stock while put options give him the rights to sell them.

2. PUT – Put options give the holder the right to sell an underlying asset at a specified price (the
strike price). The seller (or writer) of the put option is obligated to buy the stock at the strike price.
BROKER/DEALERS: CHINESE WALLS;SELF-REGULATORY ORGANIZATION; STOCK Put options can be exercised at any time before the option expires. Investors buy puts if they think
EXCHANGE the share price of the underlying stock will fall, or sell one if they think it will rise. Put buyers - those
who hold a "long" - put are either speculative buyers looking for leverage or "insurance" buyers who
want to protect their long positions in a stock for the period of time covered by the option. Put
3.2. "Issuer" is the originator, maker, obligor, or creator of the security.
sellers hold a "short" expecting the market to move upward (or at least stay stable) A worst-case
scenario for a put seller is a downward market turn. The maximum profit is limited to the put
3.3. "Broker" is a person engaged in the business of buying and selling securities for the
premium received and is achieved when the price of the underlyer is at or above the option's strike
account of others.
price at expiration. The maximum loss is unlimited for an uncovered put writer.
To obtain these rights, the buyer must pay an option premium (price). This is the amount of cash
3.4. "Dealer" means many person who buys sells securities for his/her own account in the
the buyer pays the seller to obtain the right that the option is granting them. The premium is paid
ordinary course of business.
when the contract is initiated.

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 MANIPULATION ON SECURITY PRICES; DEVICES AND PRACTICES
3. CALL- Call options provide the holder the right (but not the obligation) to purchase an underlying
asset at a specified price (the strike price), for a certain period of time. If the stock fails to meet the Section 24. Manipulation of Security Prices; Devices and Practices. –
strike price before the expiration date, the option expires and becomes worthless. Investors buy 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker,
calls when they think the share price of the underlying security will rise or sell a call if they think it directly or indirectly:
will fall. Selling an option is also referred to as ''writing'' an option.
(a) To create a false or misleading appearance of active trading in any listed security
4. STRADDLE/SPREAD - is a neutral strategy in options trading that involve the simultaneously traded in an Exchange of any other trading market (hereafter referred to purposes
buying of a put and a call of the same underlying stock, striking price and expiration date. of this Chapter as "Exchange"):
- Long straddle options are unlimited profit, limited risk options trading
strategies that are used when the options trader thinks that the underlying securities will (i) By effecting any transaction in such security which involves no change in the
experience significant volatility in the near term. beneficial ownership thereof;
- Short straddles are used when little movement is expected of the underlying
stock price. (ii) By entering an order or orders for the purchase or sale of such security with the
knowledge that a simultaneous order or orders of substantially the same size, time
and price, for the sale or purchase of any such security, has or will be entered by or
for the same or different parties; or

(iii) By performing similar act where there is no change in beneficial ownership.

(b) To affect, alone or with others, a securities or transactions in securities that: (I)
Raises their price to induce the purchase of a security, whether of the same or a
different class of the same issuer or of controlling, controlled, or commonly
controlled company by others; or (iii) Creates active trading to induce such a
purchase or sale through manipulative devices such as marking the close, painting
the tape, squeezing the float, hype and dump, boiler room operations and such
other similar devices.

(c) To circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market operations
of any one or more persons conducted for the purpose of raising or depressing the
price of the security for the purpose of inducing the purpose of sale of such
security.

(d) To make false or misleading statement with respect to any material fact, which
he knew or had reasonable ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any security listed or traded in an
Exchange.

(e) To effect, either alone or others, any series of transactions for the purchase
and/or sale of any security traded in an Exchange for the purpose of pegging, fixing
or stabilizing the price of such security; unless otherwise allowed by this Code or
by rules of the Commission.

24.2. No person shall use or employ, in connection with the purchase or sale of any security
any manipulative or deceptive device or contrivance. Neither shall any short sale be effected
nor any stop-loss order be executed in connection with the purchase or sale of any security
except in accordance with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest for the protection of investors.

24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the
public interest and the protection of investors, may, by rules and regulations, allow certain
acts or transactions that may otherwise be prohibited under this Section.

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 Elements of a Manipulation Violation
a) Initiate a series of transactions in a security; MARKING THE CLOSE
b) Designed to raise or lower the security's price or to give the appearance of trading;  Placing actual or fictitious orders or fictitious quotations on NASDAQ or exchange
c) With the intent of affecting the price of the security (motive/manipulative purpose). listed stocks at or near the close of the trading day so as to frequently cause the
stock to close at a price higher than the prior sales price.
BOILER ROOM OPERATIONS  “Buying or selling securities at the close of the market in an effort to alter the closing
 Refers to the use of high pressure sales tactics to sell stocks to clients who are "cold price of the security.”
called", or called randomly, most likely after being picked out of a phone directory.
 Dishonest brokers set up "boiler rooms" where a small army of high-pressure HYPE AND DUMP
salespeople use banks of telephones to make cold calls to as many potential  “Buying at increasingly higher prices and selling in the market at the higher prices
investors as possible. and vice versa” such as selling at lower prices and then buying at such lower prices.
 Schemes involve the touting of a company’s stock (typically small, so-called
WASH SALE “microcap” companies) through false and misleading statements to the
 A wash sale occurs when a customer enters a purchase order and a sale order at the marketplace. These false claims could be made on social media such as Facebook
same time through the same broker/dealer. The ownership of the stock does not and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump
change. This would normally be done to create the appearance of activity in a schemes often occur on the Internet where it is common to see messages posted
security. that urge readers to buy a stock quickly or to sell before the price goes down, or a
telemarketer will call using the same sort of pitch. Often the promoters will claim to
DAISY CHAIN have “inside” information about an impending development or to use an “infallible”
 Is a financial scam conducted by a group of investors in the public equities market. combination of economic and stock market data to pick stocks. In reality, they may
These investors team up to increase the value of an equity security, and then flip be company insiders or paid promoters who stand to gain by selling their shares
their ownership of that equity to unsuspecting investors who are chasing an upward after the stock price is “pumped” up by the buying frenzy they create. Once these
trend. fraudsters “dump” their shares and stop hyping the stock, the price typically falls,
 A series of manipulative transactions on a security intended to create an impression and investors lose their money.
of a high trading volume, suggesting interest in assets or securities that may not
actually be there. This tends to increase the share price, which in turn encourages SHORT SALE
other investors to buy the security. When other investors become interested, the  A short sale is a transaction in which an investor sells borrowed securities in
manipulating traders dump the security at an artificially high price. anticipation of a price decline and is required to return an equal number of shares
at some point in the future. A short seller makes money if the stock goes down in
PAINTING THE TAPE price, while a long position makes money when the stock goes up.
 Is a form of market manipulation whereby market players attempt to influence the  Sale of security that does not belong to the seller usually by brokers having custody
price of a security by buying and/or selling it among themselves so as to create the of security for and in behalf of a client.
appearance of substantial trading activity in the security.
 Illegal practice by traders who manipulate the market by buying and selling a MATCHED ORDER
security to create the illusion of high trading activity and to attract other traders  Matched order occurs when a customer enters a purchase order and a sale order at
who may push up the price. the same time, at the same price. In the case of matched orders the customer
 Two common objectives among market manipulators of painting the tape are to generally places the order through different broker/dealers. Matched orders may
lure unsuspecting investors into a security, or achieve a high closing price for it. also occur using more than one customer and the same broker/dealer. Matched
purchase and sale transactions for the purpose of creating the false appearance of
 Unusual trading volume in a security may attract investors to it. Cabals of market active trading are manipulative per se.
manipulators who have painted the tape in a security generally expect to make  Prohibited if “both the buy and sell orders are entered at the same time with the
significant profits by offloading their holdings in it - which are usually acquired at same price and quantity by different colluding parties.”
much lower prices - to investors unaware of the stock manipulation. These investors
are literally left "holding the bag" once the manipulation ceases and the stock STOP-LOSS ORDER
declines steeply in price.  An order placed with a broker to sell a security when it reaches a certain price. A
stop-loss order is designed to limit an investor’s loss on a position in a security.
 High closing activity attempts to create an artificial price for a security by boosting
its price substantially at market close, since closing prices are widely reported in SQUEEZING THE FLOAT
the media and are closely watched by investors. Since most portfolios and  “Taking advantage of a shortage of securities in the market by controlling the
securities are valued on the basis of their closing prices, manipulators use this tactic demand side and exploiting market congestion during such shortages in a way as to
to achieve a higher market value for their holdings rather than their intrinsic worth. create artificial prices.”

FRAUDULENT TRANSACTIONS
Section 26. Fraudulent Transactions. – It shall be unlawful for any person, directly or indirectly, in

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 connection with the purchase or sale of any securities INSIDER’S DUTY TO DISCLOSE WHEN TRADING
to:
26.1. Employ any device, scheme, or artifice to defraud; Section 27. Insider’s Duty to Disclose When Trading. – 27.1. It shall be unlawful for an insider to
26.2. Obtain money or property by means of any untrue statement of a material fact of any sell or buy a security of the issuer, while in possession of material information with respect to the
omission to state a material fact necessary in order to make the statements made, in the light issuer or the security that is not generally available to the public, unless: (a) The insider proves
of the circumstances under which they were made, not misleading; or that the information was not gained from such relationship; or (b) If the other party selling to or
26.3. Engage in any act, transaction, practice or course of business which operates or would buying from the insider (or his agent) is identified, the insider proves: (I) that he disclosed the
operate as a fraud or deceit upon any person. information to the other party, or (ii) that he had reason to believe that the other party otherwise is
also in possession of the information. A purchase or sale of a security of the issuer made by an
insider defined in Subsection 3.8, or such insider’s spouse or relatives by affinity or consanguinity
PASTRA v CA within the second degree, legitimate or common-law, shall be presumed to have been effected
As regards the SECs power over petitioners stock transfer fees, the OSG argues that the power to while in possession of material nonpublic information if transacted after such information came
determine said fees was necessarily implied in the SECs general power under Section 40 of The into existence but prior to dissemination of such information to the public and the lapse of a
Revised Securities Act to regulate and supervise the operations of transfer agents such as petitioners reasonable time for market to absorb such information: Provided, however, That this presumption
member-corporations. The OSG adds that petitioners discretion to increase its fees was not purely a shall be rebutted upon a showing by the purchaser or seller that he was aware of the material
management prerogative and was properly the subject of regulation considering that it significantly nonpublic information at the time of the purchase or sale.
affects the market for securities.[9]
We find the instant petition bereft of merit. The Court notes that before its repeal, Section 47 of The 27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not been
Revised Securities Act clearly gave the SEC the power to enjoin the acts or practices of securities-
generally disclosed to the public and would likely affect the market price of the security after
related organizations even without first conducting a hearing if, upon proper investigation or
being disseminated to the public and the lapse of a reasonable time for the market to absorb the
verification, the SEC is of the opinion that there exists the possibility that the act or practice may
cause grave or irreparable injury to the investing public, if left unrestrained. Section 47 clearly
information; or (b) would be considered by a reasonable person important under the
provided, circumstances in determining his course of action whether to buy, sell or hold a security.

SEC. 47. Cease and desist order.The Commission, after proper investigation or verification, motu 27.3. It shall be unlawful for any insider to communicate material nonpublic information about the
proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without issuer or the security to any person who, by virtue of the communication, becomes an insider as
the necessity of a prior hearing if in its judgment the act or practice, unless restrained may cause defined in Subsection 3.8, where the insider communicating the information knows or has reason
grave or irreparable injury or prejudice to the investing public or may amount to fraud or violation of to believe that such person will likely buy or sell a security of the issuer whole in possession of
the disclosure requirements of this Act and the rules and regulations of the Commission. (Emphasis such information.
supplied.)
xxxx 27.4. (a) It shall be unlawful where a tender offer has commenced or is about to commence for:
Said section enforces the power of general supervision of the SEC under Section 40 of the then Revised
Securities Act.
(i) Any person (other than the tender offeror) who is in possession of material nonpublic
information relating to such tender offer, to buy or sell the securities of the issuer that are sought
SEC v CA or to be sought by such tender offer if such person knows or has reason to believe that the
To constitute, however, a violation of the Revised Securities Act that can warrant an imposition of a
information is nonpublic and has been acquired directly or indirectly from the tender offeror,
fine under Section 29(3), in relation to Section 46 of the Act, fraud or deceit, not mere negligence, on those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer,
the part of the offender must be established. Fraud here is akin to bad faith which implies a conscious or any insider of such issuer; and
and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is unlike that
of the negative idea of negligence in that fraud or bad faith contemplates a state of mind affirmatively (ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be
operating with furtive objectives. Given the factual circumstances found by the appellate court, sought by such tender offer, and any insider of such issuer to communicate material nonpublic
neither FIDELITY nor CUALOPING, albeit indeed remiss in the observance of due diligence, can be information relating to the tender offer to any other person where such communication is likely to
held liable under the above provisions of the Revised Securities Act. We do not imply, however, that result in a violation of Subsection 27.4 (a)(I).
the negligence committed by private respondents would not at all be actionable; upon the other hand,
as we have earlier intimated, such an action belongs not to the SEC but to those whose rights have (b) For purposes of this subsection the term "securities of the issuer sought or to be sought by
been injured. such tender offer" shall include any securities convertible or exchangeable into such securities or
any options or rights in any of the foregoing securities.
ONAPAL v CA
HELD: The written trading contract in question is not illegal but the transaction between the
petitioner and the private respondent purportedly to implement the contract is in the nature of a WHO IS AN INSIDER :
gambling agreement and falls within the ambit of Article 2018 of the New Civil Code, which is quoted (a) The issuer;
hereunder: (b) A director or officer (or any person performing similar functions) of, or a person controlling
If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into the issuer; gives or gave him access to material information about the issuer or the security that
with the intention that the difference between the price stipulated and the exchange or market price
is not generally available to the public;
at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null
and void. The loser may recover what he has paid.
(d) A government employee, director, or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an issuer or a security that
is not generally available to the public; or

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 (e) A person who learns such information by a communication from any forgoing insiders. Petitioner is not exempted from the RSA implementing rules.
MATERIAL NON-PUBLIC INFORMATION Section 5(a)(3) of RSA exempts from registration the securities issued by banking or financial
Any information that will affect the price of securities once made known to the institutions. Nowhere does it state or even imply that petitioner, as a listed corporation, is exempt
public. from complying with the reports required by the assailed RSA Implementing Rules.
 Results of election The exemption from the registration requirement enjoyed by petitioner does not necessarily connote
 Financial statement that [it is] exempted from the other reportorial requirements.
 Expansion programs The full disclosure Rules do not amend Section 5(a)(3) of the Revised Securities Act, because they do
 Mining Permits or similar grants not revoke or amend the exemption from registration of the securities enumerated. They are
 Merger/consolidation reasonable regulations imposed upon petitioner as a banking corporation trading its securities in the
stock market.
 Objective facts, verifiable pertaining to bonds or shares.
The mere fact that in regard to its banking functions, petitioner is already subject to the supervision
of the BSP does not exempt the former from reasonable disclosure regulations issued by the SEC.
RULE: These regulations are meant to assure full, fair and accurate disclosure of information for the
When there is an emerging material information, submit a disclosure report and protection of investors in the stock market. Imposing such regulations is a function within the
publish the same in a newspaper of general circulation. jurisdiction of the SEC.

FACTS OF SPECIAL SIGNIFICANCE

 Information that a prudent person may consider in making a decision.
 Subjective facts PROTECTION OF SHAREHOLDER’S INTEREST

Period covered in the prohibition of an insider to buy/sell TENDER OFFER

Date of filing of the disclosure Section 19. Tender Offers. – Any person or group of persons acting in concert who intends to acquire at least
Date of publication 15% of any class of any equity security of a listed corporation of any class of any equity security of a
After lapse of a reasonable period to allow the public to absorb the information corporation with assets of at least fifty million pesos (50,000,000.00) and having two hundred(200) or more
Before 10 days stockholders at least one hundred shares each or who intends to acquire at least thirty percent(30%) of such
Common 30 days equity over a period of twelve months(12) shall make a tender offer to stockholders by filling with the
6 months Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information
required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall
DEFENSES: publish all request or invitations or tender offer or requesting such tender offers subsequent to the initial
 Disclosure to the other party in the transaction solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with
 Insider has reasonable ground to believe that the other party also knows of the the Commission and sent to the issuer not alter than the time copies of such materials are first published or
information he knows sent or given to security holders.
 Insider did not know the material information (a) Any solicitation or recommendation to the holders of such a security to accept or reject a tender
offer or request or invitation for tenders shall be made in accordance with such rules and
STRONG v REPIDE regulations as may be prescribe.
(b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be
With the factual circumstances of this case, it became the duty of Repide, acting in good faith, to state
the facts before making the purchase of Strong‗s shares. That Repide was one of the directors of
withdrawn by or on behalf of the depositor at any time throughout the period that tender offer
Philippine Sugar Estates was but one of the facts upon which liability is asserted. remains open and if the securities deposited have not been previously accepted for payment, and
He was not only a director, but he owned three-fourths of the shares of its stock, and was, at the time at any time after sixty (60) days from the date of the original tender offer to request or invitation,
of the purchase of the stock, administrator general of the company with large powers except as the Commission may otherwise prescribe.
Page823 (c) Where the securities offered exceed that which person or group of persons is bound or willing
and engaged in the negotiations which finally led to the sale of the company‗s lands at a price which to take up and pay for, the securities that are subject of the tender offers shall be taken up us nearly
greatly enhanced the value of the stock. He was the negotiator for the sale of the Dominican lands and as may be pro data, disregarding fractions, according to the number of securities deposited to each
was acting substantially as the agent of the shareholders of Philippine Sugar Estates by reason of his depositor. The provision of this subject shall also apply to securities deposited within ten (10) days
ownership of the shares in the company. after notice of increase in the consideration offered to security holders, as described in paragraph
Because of such ownership and agency, no one knew as well as he does about the exact condition of (e) of this subsection, is first published or sent or given to security holders.
the negotiations. He was the only one who knew of the probability of the sale of the Dominican lands (d) Where any person varies the terms of a tender offer or request or invitation for tenders before
to the government and of the probable purchase price. Under these circumstances, Repide employed
the expiration thereof by increasing the consideration offered to holders of such securities, such
an agent to purchase the stock of Strong, concealed his own identity and his knowledge of the state of
person shall pay the increased consideration to each security holder whose securities are taken up
negotiations and their probable result. The concealment of his identity while procuring the purchase
of the stock, by his agent, was in itself strong evidence of fraud on the part of Repide. and paid for whether or not such securities have been taken up by such person before the variation
of the tender offer or request or invitation.
19.2. It shall be lawful for any person to make any untrue statement of material fact or omit to state any
DISCLOSURE REGULATIONS FOR PUBLICLY-LISTED SHARES material fact necessary in order to make th statements made in the light of the circumstances under which they
UNION BANK v SEC(2001) are made, not mis-leading, or to engaged to any fraudulent, deceptive or manipulative acts or practices, in
Issue: connection with any tender offer or request or invitation for tenders, or any solicitation for any security
Whether or not RSA Implementing Rules 11(a)-1, 34(a)-1 and 34(c)-1 applies to Union Bank. holders in opposition to or in favor of any such favor of any such offer, request, or invitation. The
Held: Commission shall, for the purposes of this subsection, define and prescribe means reasonably designed to

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

prevent, such acts and practices as are fraudulent, deceptive and manipulative.

 published or advertised offer by persons to acquire or purchase the outstanding equities

of public companies to gain control.
Atlas and Bacnotan sold their
KINDS:
01) VOLUNTARY ATLAS BACNOTAN CEMCO UCHC shares to CEMCO after
UCHC was formed by these three
 Made anytime for terms and conditions set by the offeror.
corporations. UCHC (CEMCO
indirectly) and CEMCO(directly)
02) MANDATORY :
and National Life are stockholders
SECURITIES REGULATION CODE of Union Cement. Nat’l Life claims
o The person or group of person acquires a total of 15% of the outstanding equities of that they should also be given the
public company in a single transaction; or same offer with that of A & B. see
o 30% of the outstanding equities of public companies over 12 months in a series of ruling above
transaction. (CREEPING TRANSACTION); or
o Whether in a single or series of transaction, a person or group of person acquires majority
of the outstanding equities in the company. UCHC CEMCO

IMPLEMENTING RULES AND REGULATION OF SRC:

A person or group of persons, in a single or a series of transaction acquire 35% of the outstanding
equities; or
Majority of the outstanding equity fixed at 51%
UNION CEMENT CORP
NAT’L LIFE
CEMCO v NATIONAL LIFE
Issue:
Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a
listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed
company, through its purchase of the shares in UCHC, a non-listed company.
TRANSACTION OF DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
YES.
Tender offer is a publicly announced intention by a person acting alone or in concert with other Section 23. Transactions of Directors officers and Principal Stockholders. –
persons to acquire equity securities of a public company.[12] A public company is defined as a 23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any
corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and class of any equity security which satisfies the requirements of subsection 17.2, or who is a director or an
with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or after ten
company.[13] Stated differently, a tender offer is an offer by the acquiring person to stockholders of a
days after he becomes such a beneficial owner, director, or officer, a statement form the Commission and, if
public company for them to tender their shares therein on the terms specified in the offer.[14] Tender
offer is in place to protect minority shareholders against any scheme that dilutes the share value of
such security is listed for trading on an exchange, also with the exchange of the amount of all the equity
their investments. It gives the minority shareholders the chance to exit the company under reasonable security of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar
terms, giving them the opportunity to sell their shares at the same price as those of the majority month thereafter, if there has been a change in such ownership at the close of the calendar month and such
shareholders. changes in his ownership as have occurred during such calendar month.
The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC
shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender 23.2. For the purpose of preventing the unfair use of information which may have been obtained by such
offer rule. beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him from
The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control any purchase or sale, or any sale or purchase, of any equity security of such issuer within any period of less
of the listed company and for the purpose of protecting the minority stockholders of a listed than (6) months unless such security was acquired in good faith in connection with a debt previously
corporation. Whatever may be the method by which control of a public company is obtained, either contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security
through the direct purchase of its stocks or through an indirect means, mandatory tender offer purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such
applies. As appropriately held by the Court of Appeals: profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of the
―What is decisive is the determination of the power of control. The legislative intent behind the
issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60)
tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of
control of the listed company through the purchase of shares. Control may [be] effected through a
days after request or shall fail diligently to prosecute the same thereafter, but not such shall be brought more
direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender than two years after the date such profit was realized. This Subsection shall not be construed to cover any
offer must occur. The bottomline of the law is to give the shareholder of the listed company the transaction were such beneficial owner was not such both time of the owner or the sale, or the sale of
opportunity to decide whether or not to sell in connection with a transfer of control.xxx‖ purchase, of the security involved, or any transaction or transactions which the Commission by rules and
regulations may exempt as not comprehended within the purpose of this subsection.

23.3. It shall be unlawful for any such beneficial owner, director or officer, directly or indirectly, to sell any
equity security of such issuer if the person selling the principal: (a) Does not own the security sold: or (b) If

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

owning the security, does not deliver not deliver it against such sale within 20 days thereafter, or does not
within five days after such sale deposit in the mails or the unusual channels of transportation; but no person 55.3. The Commission may only agree to a settlement offer based on its findings that such settlement is in the
shall be deemed to have violated this subsection if he proves not withstanding the exercise of good faith he public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may
was unable to make such delivery in such time, or that to do so would cause undue inconvenience or expense. be made without a determination of guilt on the part of the person making the offer.

23.4. The provisions of subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and the 55.4. The Commission shall adopt rules and procedures governing the filing, review, withdrawal, form of
provisions of Subsection 23.3 shall not apply to any sale, of an equity security not then or thereafter held by rejection and acceptance of such offers.
him and an investment account, by a dealer in the ordinary course of his business and incident to the
establishment or maintenance by him of a primary or secondary market, otherwise than on an Exchange, for B. CIVIL LIABILITIES
such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the Section 58. Civil Liability of Fraud in Connection with Securities Transactions. – Any person who engages in
public interest, define and prescribe terms and conditions with respect to securities held in an investment any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission
account and transactions made in the ordinary course of business and incident to the establishment or thereunder, shall be liable to any other person who purchases or sells any security, grants or refuses to grant
maintenance of a primary or secondary market. any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case
may be, for the damages sustained by such other person as a result of such act or transaction.
LIABILITIES Section 59. Civil Liability for Manipulation of Security Prices. – Any person who willfully participates in any act
or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at
A. ADMINISTRATIVE SANCTIONS a price which was affected by such act or transaction, and the person so injured may sue to recover the
Section 54. Administrative Sanctions. – damages sustained as a result of such act or transaction.
54.1. If, after due notice and hearing, the Commission finds that: (a) There is a violation of this Code, its rule,
or its orders; (b) Any registered broker or dealer, associated person thereof has failed reasonably to supervise, Section 60. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans. – 60.1. Any
with a view to preventing violations, another person subject to supervision who commits any such violation; person who engages in any act or transactions in willful violation of any rule or regulation promulgated by the
(c) Any registrant or other person has, in a registration statement or in other reports, applications, accounts, Commission under Section 11 or 16, which the Commission denominates at the time of issuance as intended
records or documents required by law or rules to be filed with the Commission, made any untrue statement of to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation, fictitious
a material fact, or omitted to state any material fact required to be stated their or necessary to make the transactions, undue speculation, or other unfair or abusive practices with respect to commodity future
statements therein not misleading; or, in the case of an underwriter, has failed to conduct an inquiry with contracts, shall be liable to any other person sustaining damages as a result of such act or transaction.
reasonable diligence to insure that a registration statement is accurate and complete in all material respects; or
(d) Any person has refused to permit any lawful examinations into its affairs, it shall, in its discretion, and 60.2. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the elements
subject only to the limitations hereinafter prescribed, impose any or all of the following sanctions as may be of proof required for recovery and any limitations on the amount of damages that may be imposed.
appropriate in light of the facts and circumstances:
(i) Suspension, or revocation of any registration for the offering of securities; Section 61. Civil Liability on Account of Insider Trading. –
61.1. Any insider who violates Subsection 27.1 and any person in the case of a tender offer who
(ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more than One million pesos (P1,000,000.00) violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a
plus not more than Two thousand pesos (P2,000.00) for each day of continuing violation; security while in possession of material information not generally available to the public, shall be
liable in a suit brought by any investor who, contemporaneously with the purchase or sale of
(iii) In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from being an officer, member securities that is the subject of the violation, purchased or sold securities of the same class unless
of the Board of Directors, or person performing similar functions, of an issuer required to file reports under such insider, or such person in the case of a tender offer, proves that such investor knew the
Section 17 of this Code or any other act, rule or regulation administered by the Commission; information or would have purchased or sold at the same price regardless of disclosure of the
information to him.
(iv) In the case of a violation of Section 34, a fine of no more than three (3) times the profit gained or loss
avoided as result of the purchase, sale or communication proscribed by such Section, and 61.2. An insider who violates Subsection 27.3 or any person in the case of a tender offer who
violates Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material
(v) Other penalties within the power of the Commission to impose. nonpublic information, shall be jointly and severally liable under Subsection 61.1 with, and to the
same extent as, the insider, or person in the case of a tender offer, to whom the communication was
54.2. The imposition of the foregoing administrative sanctions shall be without prejudice to the filing of directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security.
criminal charges against the individuals responsible for the violation.
AMOUNT AND KINDS OF DAMAGES
54.3. The Commission shall have the power to issue writs of execution to enforce the provisions of the Section
and to enforce payment of the fees and other dues collectible under this Code. Section 63. Amount of Damages to be Awarded. –
63.1. All suits to recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought
Section 55. Settlement Offers. – 55.1. At any time, during an investigation or proceeding under this Code, before the Regional Trial Court, which shall have exclusive jurisdiction to hear and decide such
parties being investigated and/or charged may propose in writing an offer of settlement with the Commission. suits. The Court is hereby authorized to award damages in an amount not exceeding triple the
amount of the transaction plus actual damages.
55.2. Upon receipt of such offer of settlement, the Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public interest. Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)

 in the violation of this Code or the rules and regulations promulgated thereunder. Section 55. Settlement Offers. –
55.1. At any time, during an investigation or proceeding under this Code, parties being investigated and/or
The Court is also authorized to award attorney’s fees not exceeding thirty percentum (30%) of the charged may propose in writing an offer of settlement with the Commission.
award.
55.2. Upon receipt of such offer of settlement, the Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public interest.
SOLIDARY LIABILITY
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and 55.3. The Commission may only agree to a settlement offer based on its findings that such settlement is in the
severally liable for the payment of damages. However, any person who becomes liable for the public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may
payment of such damages may recover contribution from any other person who, if sued be made without a determination of guilt on the part of the person making the offer.
separately, would have been liable to make the same payment, unless the former was guilty of
fraudulent representation and the latter was not. 55.4. The Commission shall adopt rules and procedures governing the filing, review, withdrawal, form of
rejection and acceptance of such offers.
63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer, held
liable under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally to the total
liability adjudged herein. In no case shall the principal stockholders, directors and other officers  Neither an admission of guilt nor profession of innocence but abides to certain terms and
of the issuer or persons occupying similar positions therein, recover their contribution to the conditions that may be imposed.
liability from the issuer. However, the right of the issuer to recover from the guilty parties the  May be entered by any person under investigation by the SEC either on going or potential.
amount it has contributed under this Section shall not be prejudiced.
CONTENTS:
LIMITATION OF ACTIONS Stipulation to pay the fine or indemnity to the SEC
Other obligations that the SEC may impose including submission of records.
Section 62. Limitation of Actions. – 62.1. No action shall be maintained to enforce any liability
created under Section 56 or 57 of this Code unless brought within two (2) years after the FACTORS TO CONSIDER IN ACCEPTING SETTLEMENT
discovery of the untrue statement or the omission, or, if the action is to enforce a liability created
Timing of the settlement
under Subsection 57.1 (a), unless, brought within two (2) yeas after the violation upon which it is
Public Interest – it is the overriding consideration based on public policy considerations
based. In no event shall an such action be brought to enforce a liability created under Section 56
or Subsection 57.1 (a) more than five (5) years after the security was bona fide offered to the
EFFECT OF ACCEPTANCE:
public, or under Subsection 57.1 (b0 more than five (5) years after the sale.
It is a compromise agreement between the SEC and the person under investigation whereby
both parties are strictly bound by the terms of the settlement offer
62.2. No action shall be maintained to enforce any liability created under any other provision of
Investigation shall be concluded at whatever stage
this Code unless brought within two (20 years after the discovery of the facts constituting the
Records are confidential and kept under the seal of the SEC
cause of action and within five (5) years after such cause of action accrued. Extinguishes administrative liabilities (bars imposition thereto)
Extinguishes criminal as well as civil liability
o NOTE: MA’AM said, the same may be broken by a COURT SUBPOENA.
C. CRIMINAL LIABILITY
Section 73. Penalties. – Any person who violates any of the provisions of this Code, or the rules and
regulations promulgated by the Commission under authority thereof, or any person who, in a registration Ma’am : BYE CLASS
statement filed under this Code, makes any untrue statement of a material fact or omits to state any material C:LASS:MAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
fact required to be stated therein or necessary to make the statements therein not misleading, shall, upon AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAMMMMMMMMMMMMMM
conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos
(P5,000,000.00) or imprisonment of not less than seven (7) years nor more than twenty-one (21) years, or both 
in the discretion of the court. If the offender is a corporation, partnership or association or other juridical
entity, the penalty may in the discretion of the court be imposed upon such juridical entity and upon the
officer or officers of the corporation, partnership, association or entity responsible for the violation, and if
such officer is an alien, he shall in addition to the penalties prescribed, be deported without further
proceedings after service of sentence.

D. SETTLEMENT OF OFFERS / NODO CONTENDERE OR CONSENT DECREE

CORPORATION LAW FINALS NOTES SAGSAGO,JJNC (series of 2017)