Merger and consolidation

Merger and Consolidation

• Two (2) or more corporations may merge into a single corporation which shall be one of the
constituent corporations or may consolidate into a new single corporation which shall be the
consolidated corporation. [§75]
• MERGER is a union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business.
• CONSOLIDATION is the union of two or more existing entities to form a new entity called the
consolidated corporation. [PNB v. Andrada Electric & Engineering Company, G.R. No. 142936,
April 17, 2002]
• It is a combination by agreement between two or more corporations by which their rights,
franchises, and property are united and become those of a single, new corporation, composed
generally, although not necessarily, of the stockholders of the original corporations. [McLeod v.
NLRC, G.R. No. 146667, January 23, 2007]

The parties to a merger or consolidation are called CONSTITUENT CORPORATIONS.

• In consolidation, all the constituents are dissolved and absorbed by the new consolidated
enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both
cases, however, there is no liquidation of the assets of the dissolved corporations, and the
surviving or consolidated corporation acquires all their properties, rights and franchises and their
stockholders usually become its stockholders.
• The surviving or consolidated corporation assumes automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have consented or not to such merger or
consolidation. [McLeod v. NLRC, G.R. No. 146667, January 23, 2007]

The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following: a.
The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;
b.The terms of the merger or consolidation and the mode of carrying the same into effect;
c. A statement of the changes, if any, in the articles of incorporation of the surviving corporation
in case of merger; and, in case of consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this Code; and
d. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable. [§75]

Upon approval by a majority vote of 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 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 respective corporations in the same manner as giving notice of regular or special meetings
under Section 49 of the Code. The notice shall state the purpose of the meeting and include a
copy or a summary of the plan of merger or consolidation. [§76]

• The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of
the members in the case of nonstock corporations shall be necessary for the approval of such
plan. Any dissenting stockholder may exercise the right of appraisal in accordance with the
Code: Provided, That if after the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the right of appraisal shall be extinguished. [§76]

• Any amendment to the plan of merger or consolidation may be made:

Provided, That such amendment is approved by a majority vote of the respective boards of
directors or trustees of all the constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-
thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or consolidation. [§76]

After the approval by the stockholders or members as required by the preceding section, articles
of merger or articles of consolidation shall be executed by each of the constituent corporations,
to be signed by the president or vice president and certified by the secretary or assistant
secretary of each corporation setting forth:
(a) The plan of the merger or the plan of consolidation;
(b) As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members;
(c) As to each corporation, the number of shares or members voting for or against such plan,
respectively;
(d) The carrying amounts and fair values of the assets and liabilities of the respective
companies as of the agreed cut-off date;
(e) The method to be used in the merger or consolidation of accounts of the companies;
(f) The provisional or pro forma values, as merged or consolidated, using the accounting
method; and
(g) Such other information as may be prescribed by the Commission. [$77]

The articles of merger or of consolidation, signed and certified as required by the Code, shall be
submitted to the Commission for its approval: Provided, That in the case of merger or
consolidation of banks or banking institutions, loan associations, trust companies, insurance
companies, public utilities, educational institutions, and other special corporations governed by
special laws, the favorable recommendation of the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger or consolidation of the corporations
concerned is consistent with the provisions of the Code and existing laws, it shall issue a
certificate approving the articles and plan of merger or of consolidation, at which time the
merger or consolidation shall be effective. [§78]
A merger does not become effective upon the mere agreement of the constituent corporations.
All the requirements specified in the law must be complied with in order for merger to take
effect. [Bank of Commerce v. RPN, G.R. No. 195615, April 21, 2014]

• The issuance of the certificate of merger is crucial because not only does it bear out SEC's
approval but also marks the moment whereupon the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but
its rights, and properties as well as liabilities shall be taken and deemed transferred to and
vested in the surviving corporation. [Poliand Industrial Limited v. National Development
Company, G.R. NO. 143866, August 22, 2005]

Consolidation becomes effective not upon mere agreement of the members but only upon
issuance of the certificate of consolidation by the SEC. When the SEC, upon processing and
examining the articles of consolidation, is satisfied that the consolidation of the corporations is
not inconsistent with the provisions of the Corporation Code and existing laws, it issues a
certificate of consolidation which makes the reorganization official. The new consolidated
corporation comes into existence and the constituent corporations dissolve and cease to exist.
[Lozano v. De los Santos, G.R. No. 125221, June 19, 1997]
A de facto merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring corporation.
The acquiring corporation would end up with the business enterprise of the target corporation;
whereas, the target corporation would end up with basically its only remaining assets being the
shares of stock of the acquiring corporation. [Bank of Commerce v. RPN, G.R. No.
195615, April 21, 2014]

The merger or consolidation shall have the following effects:

a. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
b.The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
c. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and shall be subject to all the duties and liabilities of a corporation
organized under the Code; [579]

The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
and franchises of each constituent corporation; and all real or personal property, all receivables
due on whatever account, including subscriptions to shares and other choses in action, and
every other interest of, belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation without further act or
deed; and
e.The surviving or consolidated corporation shall be responsible for all the liabilities and
obligations of each constituent corporation as though such surviving or consolidated corporation
had itself incurred such liabilities or obligations; and any pending claim, action or proceeding
brought by or against any constituent corporation may be prosecuted by or against the surviving
or consolidated corporation. The rights of creditors or liens upon the property of such constituent
corporations shall not be impaired by the merger or consolidation. [879]

NO WINDING UP
Ordinarily, in the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation
of their assets, because the surviving corporation automatically acquires all their rights,
privileges and powers, as well as their liabilities. Associated Bank v. CA, G.R.No. 123793,
June 29, 1998]

EMPLOYMENT CONTRACTS
• This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts.
Consequently, the surviving corporation becomes bound by the employment contracts entered
into by the absorbed corporation. These employment contracts are not terminated. They subsist
unless their termination is allowed by law.

• The merger of a corporation with another does not operate to dismiss the employees of
the corporation absorbed by the surviving corporation. This is in keeping with the nature
and effects of a merger as provided under law and the constitutional policy protecting
the rights of labor. The employment of the absorbed employees subsists. Necessarily,
these absorbed employees are not entitled to separation pay on account of such merger
in the absence of any other ground for its award. [Philippine Geothermal Employees Union
v, Unocal Philippines, G.R. No. L190187, September 28,2016]

APPRAISAL RIGHT

APPRAISAL RIGHT
• Appraisal right means that a stockholder who dissented and voted against the proposed
corporate action, may choose to get out of the corporation by demanding payment of the fair
market value of his shares.

• When a person invests in the stocks of a corporation, he subjects his investment to all the risks
of the business and cannot just pull out such investment should the business not come out as
he expected. He will have to wait until the corporation is finally dissolved before he can get back
his investment, and even then, only if sufficient assets are left after paying all corporate
creditors. His only way out before dissolution is to sell his shares should he find a willing buyer.
If there is no buyer, then he has no recourse but to stay with the corporation.

• However, in certain specified instances, the Code grants the stockholder the right to get out of
the corporation even before its dissolution because there has been a major change in his
contract of investment with which he does not agree and which the law presumes he did not
foresee when he bought his shares. Since the will of two-thirds of the stocks will have to prevail
over his objections, the law considers it only fair to allow him to get back his investment and
withdraw from the corporation. [Cua v. Tan, G.R. Nos. 181455-56, December 4, 2009]

When Exercised
• Any stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of the shares in the following instances:
a.In case an amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
b.In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code;
c. In case of merger or consolidation; and
d. In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation. [§80]

How Exercised
• The dissenting stockholder who votes against a proposed corporate action may exercise the
right of appraisal by making a written demand on the corporation for the payment of the fair
value of shares held within thirty (30) days from the date on which the vote was taken: Provided,
That failure to make the demand within such period shall be deemed a waiver of the appraisal
right. If the proposed corporate action is implemented, the corporation shall pay the stockholder,
upon surrender of the certificate or certificates of stock representing the stockholder's shares,
the fair value thereof as of the day before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action. [§81]

If, within sixty (60) days from the approval of the corporate action by the stockholders, the
withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3) disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and the third by the two (2) thus chosen. The
findings of the majority of the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided, That no payment shall be
made to any dissenting stockholder unless the corporation has unrestricted retained earnings in
its books to cover such payment: Provided, further, That upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer the shares to the corporation.
[§81]

From the time of demand for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said shares by the
corporation, all rights accruing to such shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of the Code, except the right of such stockholder
to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not
paid the value of the said shares within thirty (30) days after the award, the voting and dividend
rights shall immediately be restored. [§82]

Notation on Certificates and Rights of Transferee

• Within ten (10) days after demanding payment for shares held, a dissenting stockholder shall
submit the certificates of stock representing the shares to the corporation for notation that such
shares are dissenting shares. Failure to do so shall, at the option of the corporation, terminate
the rights.
• If shares represented by the certificates bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the transferor as a dissenting stockholder
under this Title shall cease and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions which would have accrued on such shares shall be paid to the
transferee. [§85]

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders.

• Under the doctrine, the capital stock, property, and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors, who are preferred in the distribution of
corporate assets. The creditors of a corporation have the right to assume that the board of
directors will not use the assets of the corporation to purchase its own stock for as long as the
corporation has outstanding debts and liabilities. There can be no distribution of assets among
the stockholders without first paying corporate debts. Thus, any disposition of corporate funds
and assets to the prejudice of creditors is null and void. [Turner v. Lorenzo Shipping
Corporation, G.R. No.
157479, November 24, 2010]

When Right to Payment Ceases

• No demand for payment may be withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with the consent of the corporation, or if the
proposed corporate action is abandoned or rescinded by the corporation or disapproved by the
Commission where such approval is necessary, or if the Commission determines that such
stockholder is not entitled to the appraisal right, then the right of the stockholder to be paid the
fair value of the shares shall cease, the status as the stockholder shall be restored, and all
dividend distributions which would have accrued on the shares shall be paid to the stockholder.
[§83]

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. [$84]

Derivative Suit

DERIVATIVE SUIT
• A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce
corporate rights against the corporation's directors, officers or other insiders.
• The directors or officers, as provided under the by-laws, have the right to decide whether or
not a corporation should sue. Since these directors or officers will never be willing to sue
themselves, or impugn their wrongful or fraudulent decisions, stockholders are permitted by law
to bring an action in the name of the corporation to hold these directors and officers
accountable. [Ang v. Sps. Ang, G.R. No. 201675, June 19, 2013]

• A derivative suit has been the principal defense of the minority shareholder against abuses by
the majority. It is a remedy designed by equity for those situations where the management,
through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps
to assert the corporation's rights. [Commart (Phils.) V.
SEC, G.R. No. 85318, June 3, 1991]

• An individual stockholder is permitted to institute a derivative or representative suit on behalf of

the corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as a nominal party,
with the corporation as the real party in interest. [Republic Bank v. Cuaderno, G.R. No. L-22399,
March 30, 1967]

• Where corporate directors are guilty of a breach of trust, not of mere error of judgment or
abuse of discretion, and intracorporate remedy is futile or useless, a stockholder may institute a
suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the corporation and indirectly upon the
stockholders. The stockholder's right to institute a derivative suit is not based on any express
provision of The Corporation Code but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties. [Bitong v. CA, G.R. No. 123553, July 13, 1998]

A stockholder may sue for mismanagement, waste or dissipation of corporate assets because of
a special injury to him for which he is otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its protection. [Bitong v CA, G.R.
No. 123553, July 13, 1998]

Requisites
• A stockholder or member may bring an action in the name of a corporation or association, as
the case may be, provided, that:
1. He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
2. He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
3. No appraisal rights are available for the act or acts complained of;
4. The suit is not a nuisance or harassment suit; and
5. The action brought by the stockholder or member must be in the name of the corporation or
association. /Villamor v. Umale, G.R. No. 172843,
September 24, 2014)

Among the basic requirements for a derivative suit to prosper is that the minority shareholder
who is suing for and on behalf of the corporation must allege in his complaint before the proper
forum that he is suing on a derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. /Western Institute of Technology v. Salas, G.R.
No. 113032,
August 21, 1997]

• It is a condition sine qua non that the corporation be impleaded as a party because not only is
the corporation an indispensable party, but it is also the present rule that it must be served with
process. The reason given is that the judgment must be made binding upon the corporation and
in order that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporations must
be joined as party because it is its cause of action that is being litigated and because judgment
must be a res ajudicata against it. /Asset Privatization Trust v. CA, G.R. No. 121171, December
29, 1998]

Jurisdiction
• By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the
Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated
on 21 November 2000. [Yu v. Yukayguan, G.R. No. 177549, June 18, 2009)

Reasons for Disallowance

1. The universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit
of the stockholders. In other words, to allow shareholders to sue separately would conflict with
the separate corporate entity principle;
2. The prior rights of the creditors may be prejudiced. The stockholders may not directly claim
those damages for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities;
The filing of such suits would conflict with the duty of the management to sue for the protection
of all concerned;
4. It would produce wasteful multiplicity of suits; and
5. It would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act. [Asset Privatization Trust v. CA, G.R.
No. 121171, December 29, 1998]

Mutually Exclusive
• A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole
body of shareholders when injury is caused to the corporation that may not otherwise be
redressed because of failure of the corporation to act.
• Thus, the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is
injury to the corporation, or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the corporation or to
prevent the dissipation of its assets.
• In contrast, a direct action is one filed by the shareholder individually (or on behalf of a class of
shareholders to which he or she belongs) for injury to his or her interest as a shareholder.
• The two actions are mutually exclusive: i.e., the right of action and recovery belongs to either
the shareholders direct action or the corporation derivative action. Cua
v. Tan, G.R. Nos. 181455-56, December 4, 2009)

Suit by the Majority

• Due to their control over the board of directors, the majority should not ordinarily be allowed to
resort to derivative suits. Where a corporation under the effective control of the majority is
wronged, board-sanctioned litigation should take precedence over derivative actions.
After all, the law expressly vests the power to sue in the board of directors, and a remedy
based on equity, such as the derivative suit, can prevail only in the absence of one
provided by statute.
• In other words, majority stockholders who have undisputed corporate control cannot resort to
derivative suits when there is nothing preventing the corporation itself from filing the case. [Ago
Realty & Development Corporation v. Ago, G.R. Nos. 210906 & 211203, October 16, 2019] read
Ago Realty case

Damages
• The stockholders who filed a derivative suit cannot claim damages for themselves because in
such kind of action, the injury caused was to the corporation primarily. To allow them to claim
damages for themselves would result in the appropriation by, and distribution among
them of a part of the corporate assets before dissolution of the corporation and
liquidation of its debts and liabilities, which is not allowed by law. [Perez]

Derivative suit is a remedy of last resort.

Non stock corporation

NONSTOCK CORPORATION
• For purposes of the Code and subject to its provisions on dissolution, a nonstock corporation
is one where no part of its income is distributable as dividends to its members, trustees, or
officers:
Provided, That any profit which a nonstock corporation may obtain incidental to its operations
shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for
which the corporation was organized, subject to the provisions of the Title.
• The provisions governing stock corporations, when pertinent, shall be applicable to nonstock
corporations, except as may be covered by specific provisions of the Title. [§86]

Purposes
• Nonstock corporations may be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination thereof, subject to the special
provisions of the Title governing particular classes of nonstock corporations. [$87)

Nontransferability of Membership
• Membership in a nonstock corporation and all rights arising therefrom are personal and non-
transferable, unless the articles of incorporation or the bylaws otherwise provide. [$89]

Right to Vote
• The right of the members of any class or classes to vote may be limited, broadened, or denied
to the extent specified in the articles of incorporation or the bylaws. Unless so limited,
broadened, or denied, each member, regardless of class, shall be entitled to one (1) vote
• Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote
by proxy, in accordance with the provisions of the Code. The bylaws may likewise authorize
voting through remote communication and/or in absentia. [$88]

Members and Place of Meetings

• The corporation shall, at all times, keep a list of its members and their proxies in the form the
Commission may require. The list shall be updated to reflect the members and proxies of record
twenty (20) days prior to any scheduled election.
• The bylaws may provide that the members of a nonstock corporation may hold their regular or
special meetings at any place even outside the place where the principal office of the
corporation is located:
Provided, That proper notice is sent to all members indicating the date, time and place of the
meeting: Provided, further, That the place of meeting shall be within Philippine territory. [$92)

Termination of Membership
• Membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the bylaws. Termination of membership shall extinguish all rights of a member
in the corporation or in its property, unless otherwise provided in the articles of incorporation or
the bylaws. [§90]
• Membership in a non-stock corporation is a property right and as such, public policy demands
that its termination must be done in accordance with substantial justice. Since the termination of
membership is inextricably linked to the deprivation of property rights over the share, the
emergence of such adverse consequences make legal and equitable standards come to fore.
[Valley Golf and Country Club v. Reyes, G.R. No. 190641,November 10, 2015]

Election and Term of Trustees

• The number of trustees shall be fixed in the articles of incorporation or bylaws which may or
may not be more than fifteen (15). They shall hold office for not more than three (3) years until
their successors are elected and qualified. Trustees elected to fill vacancies occurring before
the expiration of a particular term shall hold office only for the unexpired period.
• Except with respect to independent trustees of nonstock corporations vested with public
interest, only a member of the corporation shall be elected as trustee.
• Unless otherwise provided in the articles of incorporation or the bylaws, the members may
directly elect officers of a nonstock corporation. [§91]

Rules of Distribution
• The assets of a nonstock corporation undergoing the process of dissolution for reasons other
than those set forth in Section 139 of the Code, shall be applied and distributed as follows:
a.
All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
adequate provision shall be made therefor;
b.
Assets held by the corporation upon a condition requiring return, transfer or conveyance, and
which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed
in accordance with such requirements;
C.
Assets received and held by the corporation subject to limitations permitting their use only for
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 (1) or more corporations, societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving corporation according to a plan of
distribution adopted; [$93]

d. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the bylaws, to the extent that
the articles of incorporation or the bylaws determine the distributive rights of members, or any
class or classes of members, or provide for distribution; and
e.
In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution
adopted. [593]

Plan of Distribution of Assets

• A plan providing for the distribution of assets, consistent with the provisions of the Title, may
be adopted by a nonstock corporation in the process of dissolution in the following manner:
a. 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;
b. Each member entitled to vote shall be given a written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and place of such meeting within the time
and in the manner provided in the Code for the giving of notice of meetings; and
C. 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. /§94]

October 14
CLOSE CORPORATION
• A close corporation, within the meaning of the Code, is one whose articles of incorporation
provides that:
a. all the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20);
b. all the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by the Title; and
c. the corporation shall not list in any stock exchange or make any public offering of its stocks of
any class.
• Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of the Code. [§95]

Close Corporation
• Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of the
Code.
• The provisions of the Title shall primarily govern close corporations:
Provided, That other Titles in the Code shall apply suppletorily, except as otherwise provided
under the Title. [$95]

Rationale
• Where business associates belong to a small, closely knit group, like a family, they usually
prefer to keep the organization exclusive and would not welcome strangers. Since it is
through their efforts and managerial skills that they expect the business to grow and prosper, it
is quite understandable why they would not trust outsiders to come in and interfere with their
management thereof, and much less share whatever fortune, big or small that the business may
bring. [Perez]

Rationale
• The concept of a close corporation organized for the purpose of running a family business or
managing family property has formed the backbone of Philippine commerce and industry.
Through this device, Filipino families have been able to turn their humble, hard-earned life
savings into going concerns capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of hard work.

A family corporation should serve as a rallying point for family unity and prosperity, not as a
flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of
mutual aid and security that are the original driving forces behind the formation of family
corporations and use these tenets in order to facilitate more civil, if not more amicable,
settlements of family corporate disputes. [Gala v. Ellice Agro-Industrial Corporation, G.R. No.
156819, December 11, 2003]

Articles of Incorporation
• The articles of incorporation of a close corporation may provide for:
a. A classification of shares or rights, the qualifications for owning or holding the same, and
restrictions on their transfers, subject to the provisions of the following section;
b.
A classification of directors into one (1) or more classes, each of whom may be voted for and
elected solely by a particular class of stock; and
C.
Greater quorum or voting requirements in meetings of stockholders or directors than those
provided in the Code. [596]

Articles of Incorporation
• The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board of
directors. So long as this provision continues in effect, no meeting of stockholders need be
called to elect directors: Provided, That the stockholders of the corporation shall be deemed to
be directors for the purpose of applying the provisions of the Code, unless the context clearly
requires otherwise: Provided, further, That the stockholders of the corporation shall be subject
to all liabilities of directors.

• The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders, instead of by
the board of directors. [$96]

Restrictions on Transfer of Shares.

• Restrictions on the right to transfer shares must appear in the articles of incorporation, in the
bylaws, as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated. 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 their shares to any third person. [597)

Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions

a.
If a stock of a close corporation is issued or transferred to any person who is not eligible to be a
holder thereof under any provision of the articles of incorporation, and if the certificate for such
stock conspicuously shows the qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be
a stockholder.
b. If the articles of incorporation of a close corporation states the number of persons, not
exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for
such stock conspicuously states such number, and the issuance or transfer of stock to any
person would cause the stock to be held by more than such number of persons, the person to
whom such stock is issued or transferred is conclusively presumed to have notice of this fact.
[$98]

c. If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the

corporation's stock and the transferee acquires the stock in violation of such restriction, the
transferee is conclusively presumed to have notice of the fact that the stock was acquired in
violation of the restriction.

d. Whenever a person to whom stock of a close corporation has been issued or transferred has
or is conclusively presumed under this section to have notice of: (1) the person's ineligibility to
be a stockholder of the corporation; or (2) that the transfer of stock would cause the stock of the
corporation to be held by more than the number of persons permitted under its articles of
incorporation; or (3) that the transfer violates a restriction on transfer of stock, and the
corporation may, at its option, refuse to register the transfer in the name of the transferee. [$98]

e. The provisions of subsection (d) shall not be applicable if the transfer of stock, though
contrary to subsections (a), (b) or (c), has been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its articles of incorporation in accordance
with the Title.

f. The term "transfer", as used in this section, is not limited to a transfer for value.

g. The provisions of this section shall not impair any right which the transferee may have to
either rescind the transfer or recover the stock under any express or implied warranty. [598]

Agreements by Stockholders
a. Agreements duly signed and executed by and among all stockholders before the
formation and organization of a close corporation shall survive the incorporation and
shall continue to be valid and binding between such stockholders, if such be their intent,
 to the extent that such agreements are consistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except those
required by the Title to be embodied in said articles of incorporation.
b. A written agreement signed by two (2) or more stockholders may provide that in
exercising any voting right, the shares held by them shall be voted as provided or as
agreed, or in accordance with a procedure agreed upon by them.
c. No provision in a written agreement signed by the stockholders, relating to any phase of
corporate affairs, shall be invalidated between the parties on the ground that its effect is
to make them partners among themselves. [599]
d. A written agreement among some or all of the stockholders in a close corporation shall
not be invalidated on the ground that it relates to the conduct of the business and affairs
of the corporation as to restrict or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed on directors by the Code.
e. Stockholders actively engaged in the management or operation of the business and
affairs of a close corporation shall be held to strict fiduciary duties to each other and
among themselves. The stockholders shall be personally liable for corporate torts unless
the corporation has obtained reasonably adequate liability insurance. [§99]

When a Board Meeting is Unnecessary or

Improperly Held

• Unless the bylaws provide otherwise, any action taken by the directors of a close corporation
without a meeting called properly and with due notice shall nevertheless be deemed valid it:
a.Before or after such action is taken, a written consent thereto is signed by all the directors; or
b. All the stockholders have actual or implied knowledge of the action and make no prompt
objection in writing; or
c. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
d. All the directors have express or implied knowledge of the action in question and none of
them makes a prompt objection in writing.

• An action within the corporate powers taken at a meeting held without proper call or notice, is
deemed ratified by a director who failed to attend, unless after having knowledge thereof, the
director promptly files his written objection with the secretary of the corporation. [§100]

Preemptive Right
• The preemptive right of stockholders in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation provide
otherwise. [§101]

Amendment of Articles of Incorporation

• Any amendment to the articles of incorporation which seeks to delete or remove any provision
required by the Title or to reduce a quorum or voting requirement stated in said articles of
incorporation shall require the affirmative vote of at least two-thirds (2/3) of the outstanding
capital stock, whether with or without voting rights, or of such greater proportion of shares as
may be specifically provided in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the purpose.

Deadlocks
• Notwithstanding any contrary provision in the close corporation's articles of incorporation,
bylaws, or stockholders' agreement, if the directors or stockholders are so divided on the
management of the corporation's business and affairs that the votes required for a corporate
action cannot be obtained, with the consequence that the business and affairs of the corporation
can no longer be conducted to the advantage of the stockholders generally, the commission,
upon written petition by any stockholder, shall have the power to arbitrate the dispute.
• In the exercise of such power, the Commission shall have authority to make appropriate
orders, such as: (a) cancelling or altering any provision contained in the articles of incorporation,
bylaws, or any stockholder's agreement; (b) cancelling, altering or enjoining a resolution or act
of the corporation or its board of directors, stockholders, or officers; (c) directing or prohibiting
any act of the corporation or its board of directors, stockholders, officers, or other persons party
to the action; (d) requiring the purchase at their fair value of shares of any stockholder, either by
the corporation regardless of the availability of unrestricted retained earnings in its books, or by
the other stockholders; (e) appointing a provisional director; (t) dissolving the corporation; or (g)
granting such other relief as the circumstances may warrant.

PROVISIONAL DIRECTOR
• A provisional director shall be an impartial person who is neither a stockholder nor a creditor of
the corporation or any of its subsidiaries or affiliates, and whose further qualifications, if any,
may be determined by the Commission.
• A provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver.
• A provisional director shall have all the rights and powers of a duly elected director, including
the right to be notified of and to vote at meetings of directors until removed by order of the
Commission or by all the stockholders.
• The compensation of the provisional director shall be determined by agreement between such
director and the corporation, subject to approval of the Commission, which may fix the
compensation absent an agreement or in the event of disagreement between the provisional
director and the corporation.
[§103]

Withdrawal of Stockholder or
Dissolution of Corporation
• In addition and without prejudice to other rights and remedies available under this Title, any
stockholder of a close corporation may, for any reason, compel the corporation to purchase
shares held at fair value, which shall not be less than the 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
Commission, compel the dissolution of such corporation whenever A) any of acts of the
directors, officers, or those in control of the corporation is illegal, fraudulent, dishonest,
oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever B)
corporate assets are being misapplied or wasted. [§104)

Educational Corporations

Incorporation
• Educational corporations shall be governed by special laws and by the general provisions of
the Code. [§105]

Board of Trustees
• Trustees of educational institutions organized as nonstock corporations shall not be less than
five (5) nor more than fifteen (15): Provided, That the number of trustees shall be in multiples of
five (5).
• Unless otherwise provided in the articles of incorporation or bylaws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classity themselves that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only tor the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and authority of trustees shall
be defined in the bylaws.
• For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations. [9106)

Religious Corporation

RELIGIOUS CORPORATION
• A religious corporation is one that provides in its charter that it shall be devoted for the
propagation and practice of religious belief.
• The mere fact that a corporation is under the control of members of a particular church does
not make it a religious corporation.
Nor does the fact that a board of trustees of a corporation college is to be elected by an
association of churches, constitute it as a religious corporation.
[Perez]

• Religious corporations may be incorporated by one or more persons.

Such corporations may be classified into corporations sole and religious societies.
• Religious corporations shall be governed by the Chapter and by the general provisions on
nonstock corporations insofar as applicable. [§107]

Corporation Sole
• For the purpose of administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a corporation sole may be formed
by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious
denomination, sect, or church. [§108]
• A corporation sole consists of one person only, and his successors (who will always be one at
a time), in some particular station, who are incorporated by law in order to give them some legal
capacities and advantages, particularly that of perpetuity, which in their natural persons they
could not have had.
[Roman Catholic Apostolic Administrator of Davao v. Land Registration Commission, G.R. No.
L-3451, December 20, 1957]

Corporation Sole: Articles of Incorporation

• In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file with the Commission
articles of incorporation setting forth the following: a.
That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder represents
the religious denomination, sect, or church which desires to become a corporation sole;
That the rules, regulations and discipline of the religious denomination, sect or church are
consistent with becoming a corporation sole and do not forbid it;
That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged with the
administration of the temporalities and the management of the affairs, estate and properties of
the religious denomination, sect or church within the territorial jurisdiction, so described
succinctly in the articles of incorporation;
[5109]

d. The manner by which any vacancy occurring in the office of chief archbishop, bishop, priest,
minister, rabbi, or presiding elder is required to be filled, according to the rules, regulations or
discipline of the religious denomination, sect or church; and
e.
The place where the principal office of the corporation sole is to be established and located,
which place must be within the territory of the Philippines.
• The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.
[§109]

Corporation Sole: Articles of Incorporation

• The articles of incorporation must be verified, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi, or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of appointment of
such chief archbishop, bishop, priest, minister, rabbi, or presiding elder, duly certified to
be correct by any notary public.
• From and after filing with the Commission of the said articles of incorporation, verified by
affidavit or affirmation, and accompanied by the documents
temporalities, estate and properties of the religious denomination, sect or church theretofore
administered or managed as such chief archbishop, bishop, priest, minister, rabbi, or presiding
elder shall be personally held in trust as a corporation sole, for the use, purpose, exclusive
benefit and on behalf of the religious denomination, sect or church, including hospitals, schools,
colleges, orphan asylums, parsonages, and cemeteries thereof. /§110)

• A corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent, or educational purposes, and
may receive bequests or gifts for such purposes. Such corporation may sell
or mortgage real property held by it by obtaining an order for that purpose
from the Regional Trial Court of the province where the property is situated
upon proof that the notice of the application for leave to sell or mortgage
has been made through publication or as directed by the Court, and that it
is in the interest of the corporation that leave to sell or mortgage be
granted. The application for leave to sell or mortgage must be made by
petition, duly verified, by 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
the corporation sole: Provided, That in cases where the rules, regulations,
and discipline of the 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
personal property, such rules, regulations and discipline shall govern, and
the intervention of the courts shall not be necessary. $111

Corporation Sole: Property

• With regard to petitioner, which likewise is a non-stock corporation, the case is different,
because it is a registered corporation sole, evidently of no nationality and registered mainly to
administer the temporalities and manage the properties belonging to the faithful of said church
residing in Davao. We would find undeniable proof that the members of the Roman Catholic
Apostolic faith within the territory of Davao are predominantly Filipino citizens. The clergy and
lay members of this religion fully covers the percentage of Filipino citizens required by the
Constitution. [Roman Catholic Apostolic Administrator of Davao v. Land Registration
Commission, G.R. No. L-8451, December 20, 1957]

• The fact that the appellant religious organization has no capital stock does not suffice to
escape the Constitutional inhibition, since it is admitted that its members are of foreign
nationality. The purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit natural resources
shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino citizens. [RD of Rizal
v. Ung Siu Si Temple, G.R. No. L-6776, May 21, 1955]

Corporation Sole: Property

• The Iglesia Ni Cristo, as a corporation sole or a juridical person, is disqualified to acquire or
hold alienable lands of the public domain because of the constitutional prohibition already
mentioned and because the said church is not entitled to avail itself of the benefits of section
48(b) [of the Public Land Act] which applies only to Filipino citizens or natural persons. A
corporation sole (an "unhappy freak of English law") has no nationality. [Republic v. Villanueva,
G.R. No. L- 55289, June 29, 1982]

Judicial confirmation of imperfect title

Corporation Sole: Vacancies

• The successors in office of any chief archbishop, bishop, priest, minister, sole on their
accession to office and shall be permitted to transact business as such upon filing a copy of
their commission, certificate of election, or letters of appointment, duly certified by any notary
public with the Commission.
• During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or
presiding elder of any religious denomination, sect or church incorporated as a corporation sole,
the person or persons authorized by the rules, regulations or discipline of the religious
denomination, sect or church represented by the corporation sole to administer the temporalities
and manage the affairs, estate, and properties of the corporation sole shall exercise all the
powers and authority of the corporation sole during such vacancy. [§112)

Corporation Sole: Dissolution

• A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the
Commission a verified declaration of dissolution, setting forth:
a. The name of the corporation;
b. The reason for dissolution and winding up;
The authorization for the dissolution of the corporation by the particular religious denomination,
sect or church; and
d. The names and addresses of the persons who are to supervise the winding up of the affairs
of the corporation.
• Upon approval of such declaration of dissolution by the Commission, the corporation shall
cease to carry on its operations except for the purpose of winding up its affairs. [§113]

Conversion to Corporation Aggregate

• There is no point to dissolving the corporation sole of one member to enable the corporation
aggregate to emerge from it. Whether it is a non-stock corporation or a corporation sole, the
corporate being remains distinct from its members, whatever be their number. The increase in
the number of its corporate membership does not change the complexion of its corporate
responsibility to third parties. The one member, with the concurrence of two-thirds of the
membership of the organization for whom he acts as trustee, can self-will the amendment. He
can, with membership concurrence, increase the technical number of the members of the
corporation from "sole" or one to the greater number authorized by its amended articles. [Iglesia
Evangelica Metodista En Las Islas Filipinas v. Lazaro, G.R. No. 184088, July 6, 2010]

Religious Societies
• Unless forbidden by competent authority, the Constitution, pertinent rules, regulations, or
discipline of the religious denomination, sect or church of which it is a part, any religious society,
religious order, diocese, synod, or district organization of any religious denomination, sect or
church, may, upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties, and estate by filing with the
Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or diocese, synod, or district
organization of the religious denomination, sect or church, setting forth the following: [§114]

a. That the religious society or religious order, or diocese, synod, or district organization is a
religious organization of a religious denomination, sect or church;
b. That at least two-thirds (2/3) of its membership has given written consent or has voted to
incorporate, at a duly convened meeting of the body;
C.That the incorporation of the religious society or religious order, or diocese, synod, or district
organization is not forbidden by competent authority or by the Constitution, rules, regulations or
discipline of the religious denomination, sect or church of which it forms part;
d. That the religious society or religious order, or diocese, synod, or district organization desires
to incorporate for the administration of its affairs, properties and estate; §114]

e. The place within the Philippines where the principal office of the corporation is to be
established and located; and
f. The names, nationalities, and residence addresses of the trustees, not less than five (5)
nor more than fifteen (15), elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization. [§114]

ONE PERSON CORPORATION

• A One Person Corporation is a corporation with a single stockholder:
Provided, That only a natural person, trust, or an estate may form a One Person
Corporation.
• Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and
non-chartered government-owned and -controlled corporations may not incorporate as One
Person Corporations: Provided, further, That a natural person who is licensed to exercise a
profession may not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws. [§116]
• The provisions of the Title shall primarily apply to One Person Corporations.
Other provisions of the Code apply suppletorily, except as otherwise provided in the Title. [§115]

Articles of Incorporation
• A One Person Corporation shall file articles of incorporation in accordance with the
requirements under Section 14 of the Code. It shall likewise substantially contain the following:
a. If the single stockholder is a trust or an estate, the name, nationality, and residence of the
trustee, administrator, executor, guardian, conservator, custodian, or other person exercising
fiduciary duties together with the proof of such authority to act on behalf of the trust or estate;
and
b. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage
and limitation of the authority. [§118]
• The One Person Corporation is not required to submit and file corporate bylaws. [§1197

A One Person Corporation shall indicate the letters "OPC" either below or at the end of its
corporate name. [§120]
• The single stockholder shall be the sole director and president of the One Person Corporation.
[§121]
• A One Person Corporation shall not be required to have a minimum authorized capital
stock except as otherwise provided by special law
[§1171
• The One Person Corporation is not required to submit and file corporate bylaws. [§119]

Corporate Officers
• Within fifteen (15) days from the issuance of its certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate secretary, and other officers as it may deem
necessary, and notify the Commission thereof within five (5) days from appointment.
• The single stockholder may not be appointed as the corporate secretary.
• A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a
bond to the Commission in such a sum as may be required: Provided, That the said
stockholder/treasurer shall undertake in writing to faithfully administer the One Person
Corporation's funds to be received as treasurer, and to disburse and invest the same according
to the articles of incorporation as approved by the Commission. The bond shall be renewed
every two (2) years or as often as may be required. [$122]

Corporate Secretary
• In addition to the functions designated by the One Person Corporation, the corporate secretary
shall: a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder,
which notice shall be given no later than five (5) days from such occurrence;
c. Notify the Commission of the death of the single stockholder within five (5) days from such
occurrence and stating in such notice the names, residence addresses, and contact details of all
known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the election of a new director, amendment of the
articles of incorporation, and other ancillary and/or consequential matters. (§123)

Nominee and Alternate Nominee

• The single stockholder shall designate a nominee and an alternate nominee who shall, in the
event of the single stockholder's death or incapacity, take the place of the single stockholder as
director and shall manage the corporation's affairs.
• The articles of incorporation shall state the names, residence addresses and contact details of
the nominee and alternate nominee, as well as the extent and limitations of their authority in
managing the affairs of the One Person Corporation.
• The written consent of the nominee and alternate nominee shall be attached to the application
for incorporation. Such consent may be withdrawn in writing any time before the death or
incapacity of the single stockholder. [§124]

Nominee and Alternate Nominee

TERM
• When the incapacity of the single stockholder is temporary, the nominee shall sit as director
and manage the affairs of the One Person Corporation until the stockholder, by self
determination, regains the capacity to assume such duties.
• In case of death or permanent incapacity of the single stockholder, the nominee shall sit as
director and manage the affairs of the One Person Corporation until the legal heirs of the single
stockholder have been lawfully determined, and the heirs have designated one of them or have
agreed that the estate shall be the single stockholder of the One Person Corporation.
• The alternate nominee shall sit as director and manage the One Person Corporation in case of
the nominee's inability, incapacity, death, or refusal to discharge the functions as director and
manager of the corporation, and only for the same term and under the same conditions
applicable to the nominee. [§125]

CHANGE
• The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the Commission the names of the new nominees and their corresponding written
consent. For this purpose, the articles of incorporation need not be amended. [$126/

Minutes Book
• A One Person Corporation shall maintain a minutes book which shall contain all actions,
decisions, and resolutions taken by the One Person Corporation. [§127)
• When action is needed on any matter, it shall be sufficient to prepare a written resolution,
signed and dated by the single stockholder, and recorded in the minutes book of the One
Person Corporation. The date of recording in the minutes book shall be deemed to be the date
of the meeting for all purposes under the Code. [§128]
Reportorial Requirements
• The One Person Corporation shall submit the following within such period as the Commission
may prescribe: a.
a. Annual financial statements audited by an independent certified public accountant:
Provided, That if the total assets or total liabilities of the corporation are less than Six
Hundred Thousand Pesos (P600,000.00), the financial statements shall be certified
under oath by the corporation's treasurer and president.
b. A report containing explanations or comments by the president on every qualification,
reservation, or adverse remark or disclaimer made by the auditor in the latter's report;
c. A disclosure of all self-dealings and related party transactions entered into between the
One Person Corporation and the single stockholder; and
d. Other reports as the Commission may require. [§129]

For purposes of this provision, the fiscal year of a One Person Corporation shall be that set forth
in its articles of incorporation or, in the absence thereof, the calendar year.

• The Commission may place the corporation under delinquent status should the corporation fail
to submit the reportorial requirements three (3) times, consecutively or intermittently, within a
period of five
(5) years. [§129]

Liability of Single Shareholder

• A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed.
• Where the single stockholder cannot prove that the property of the One Person Corporation is
independent of the stockholder's personal property, the stockholder shall be jointly and severally
liable for the debts and other liabilities of the One Person Corporation.
• The principles of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations. [§130]

Conversion from OPC

• A One Person Corporation may be converted into an ordinary stock corporation after due
notice to the Commission of such fact and of the circumstances leading to the conversion, and
after compliance with all other requirements for stock corporations under the Code and
applicable rules. Such notice shall be filed with the Commission within sixty (60) days from the
occurrence of the circumstances leading to the conversion into an ordinary stock corporation. If
all requirements have been complied with, the Commission shall issue a certificate of filing of
amended articles of incorporation reflecting the conversion. [§132]

Conversion from OPC

• In case of death of the single stockholder, the nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate within seven (7) days from receipt of either an
affidavit of heirship or self-adjudication executed by a sole heir, or any other legal document
declaring the legal heirs of the single stockholder and notify the Commission of the transfer.
Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the Commission
of their decision to either wind up and dissolve the One Person Corporation or convert it into an
ordinary stock corporation.

• The ordinary stock corporation converted from a One Person

Corporation shall succeed the latter and be legally responsible for all the latter's outstanding
liabilities as of the date of conversion. [§132]

Dissolutions

DISSOLUTION
• Dissolution means that the corporation ceases to be a juridical person and consequently can
no longer continue transacting its business.
• However, for the purpose only of winding-up its affairs and liquidating its assets, its corporate
existence continues for a period of three years from such dissolution. [Aquino-Tambasacan]

Voluntary Dissolution: No Creditors Affected

• If dissolution of a corporation does not prejudice the rights of any creditor having a claim
against it, the dissolution may be effected by majority vote of the board of directors or trustees,
and by a resolution adopted by the affirmative vote of the stockholders owning at least majority
of the outstanding capital stock or majority of the members of a meeting to be held upon the call
of the directors or trustees. [§134]

Voluntary Dissolution: No Creditors Affected

• At least twenty (20) days prior to the meeting, notice shall be given to each shareholder or
member of record personally, by registered mail, or by any means authorized under its bylaws
whether or not entitled to vote at the meeting, in the manner provided in Section 50 of the Code
and shall state that the purpose of the meeting is to vote on the dissolution of the corporation.
Notice of the time, place, and object of the meeting shall be published once prior to the date of
the meeting in a newspaper published in the place where the principal office of said corporation
is located, or if no newspaper is published in such place, in a newspaper of general circulation
in the Philippines. [§134]

Voluntary Dissolution: No Creditors Affected

• Within fifteen (15) days from receipt of the verified request for dissolution, and in the absence
of any withdrawal within said period, the Commission shall approve the request and issue the
certificate of dissolution. The dissolution shall take effect only upon the issuance by the
Commission of a certificate of dissolution.
• No application for dissolution of banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, NSSLAs, pawnshops, and other financial intermediaries shall
be approved by the Commission unless accompanied by a favorable recommendation of the
appropriate government agency. [§134]

Voluntary Dissolution: Creditors Affected

• Where the dissolution of a corporation may prejudice the rights of any creditor, a verified
petition for dissolution shall be filed with the Commission. The petition shall be signed by a
majority of the corporation's board of directors or trustees, verified by its president or secretary
or one of its directors or trustees, and shall set forth all claims and demands against it, and that
its dissolution was resolved upon by the affirmative vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the
members at a meeting of its stockholders or members called for that purpose. [§135]

The petition shall likewise state:

a. the reason for the dissolution;
b. the form, manner, and time when the notices were given; and C.
the date, place, and time of the meeting in which the vote was made.

• The corporation shall submit to the Commission the following:

1. a copy of the resolution authorizing the dissolution, certified by a majority of the board of
directors or trustees and countersigned by the secretary of the corporation; and
2. a list of all its creditors. [§135]

Voluntary Dissolution: Creditors Affected

• If the petition is sufficient in form and substance, the Commission shall, by an order reciting the
purpose of the petition, fix a deadline for filing objections to the petition which date shall not be
less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such
date, a copy of the order shall be published at least once a week for three (3) consecutive
weeks in a newspaper of general circulation published in the municipality or city where the
principal office of the corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall be posted for three
(3) consecutive weeks in three (3) public places in such municipality or city. [§135]

Upon five (5) days' 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 raised in
the objections filed; and if no such objection is sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving the corporation and 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.

• The dissolution shall take effect only upon the issuance by the Commission of a certificate of
dissolution. [§135]

Dissolution by Shortening Corporate Term

• A voluntary dissolution may be effected by amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of the Code. A copy of the amended articles of
incorporation shall be submitted to the Commission in accordance with the Code.
• Upon the expiration of the shortened term, as stated in the approved amended articles of
incorporation, the corporation shall be deemed dissolved without any further proceedings,
subject to the provisions of the Code on liquidation.
• In the case of expiration of corporate term, dissolution shall automatically take effect on the
day following the last day of the corporate term stated in the articles of incorporation, without the
need for the issuance by the Commission of a certificate of dissolution. [§136]

Withdrawal of Request for Dissolution

• A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number of
incorporators, directors, trustees, shareholders, or members necessary to request for
dissolution as set forth in the foregoing sections. The withdrawal shall be submitted no later than
fifteen (15) days from receipt by the Commission of the request for dissolution. [§137]

Withdrawal of Request for Dissolution

• Upon receipt of a withdrawal of request for dissolution, the Commission shall withhold action
on the request for dissolution and shall, after investigation:
a. make a pronouncement that the request for dissolution is deemed withdrawn;
b. direct a joint meeting of the board of directors or trustees and the stockholders or members
for the purpose of ascertaining whether to proceed with dissolution; or
c. issue such other orders as it may deem appropriate. [§137]

A withdrawal of the petition for dissolution shall be in the form of a motion and similar in
substance to a withdrawal of request for dissolution but shall be verified and filed prior to
publication of the order setting the deadline for filing objections to the petition. [§137]

Involuntary Dissolution
• A corporation may be dissolved by the Commission motu proprio or upon filing of a verified
complaint by any interested party. The following may be grounds for dissolution of the
corporation:
a. Non-use of corporate charter as provided under Section 21 of the Code; b.
Continuous inoperation of a corporation as provided under Section 21 of the Code;
c. Upon receipt of a lawful court order dissolving the corporation;
d. Upon finding by final judgment that the corporation procured its incorporation through fraud;
[§138]

Effects
• The dissolution of the corporation simply prohibits it from continuing its business. However,
despite such dissolution, the parties involved in the litigation are still corporate actors. The
dissolution does not automatically convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate existing causes of action, which
arose because of the corporate ties between the parties. Thus, a cause of action involving an
intra-corporate controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation. [Aguirre v FQB+7, G.R. No. 170770, January 9,
2013]

Effects
• The rights and remedies against, or liabilities of, the officers shall not be removed or impaired
by reason of the dissolution of the corporation. Corollarily then, a stockholder's right to inspect
corporate records subsists during the period of liquidation. [Chua v. People, G.R. No. 216146,
August 24, 2016]

Action for Dissolution

• Although as a rule, minority stockholders of a corporation may not ask for its dissolution in a
private suit, and that such action should be brought by the Government through its legal officer
in a quo warranto case, at their instance and request, there might be exceptional cases wherein
the intervention of the State, for one reason or another, cannot be obtained, as when the State
is not interested because the complaint is strictly a matter between the stockholders and does
not involve, in the opinion of the legal officer of the Government, any of the acts or omissions
warranting quo warranto proceedings, in which minority stockholders are entitled to have such
dissolution. /Financing Corporation of the Philippines v. Teodoro, G.R. No. L-4900, August 31,
1953]

LIQUIDATION
• Liquidation is a necessary consequence of the dissolution of corporation.
• Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of
settling the affairs of said corporation, which consists of adjusting the debts and claims, that is,
of collecting all that is due the corporation, the settlement and adjustment of claims against it
and the payment of its just debts. [Yu v. Yukayguan, G.R. No. 177549, June 18, 2009]

Liquidation
• Except for banks, which shall be covered by the applicable provisions of Republic Act No.
7653, otherwise known as the "New Central Bank Act",
, as amended, and Republic Act No. 3591, otherwise known as the Philippine Deposit Insurance
Corporation Charter, as amenaed, every corporation whose charter expires pursuant to its
articles of incorporation, is annulled by forfeiture, or whose corporate existence is terminated in
any other manner, shall nevertheless remain as a body corporate for three (3) years after the
effective date of dissolution, for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, dispose of and convey its property, and distribute
its assets, but not for the purpose of continuing the business for which it was established. [§139]

Liquidation
• The manner of liquidation or winding up may be provided for in the corporate by-laws and this
would prevail unless it is inconsistent with law. It may be undertaken by the corporation itself,
through its Board of Directors; or by trustees to whom all corporate assets are conveyed for
liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.

• WINDING UP the affairs of the corporation means the collection of all assets the payment of
all its creditors, and the distribution of the remaining assets, any among the stockholders thereof
in accordance with their contracts, or if there be no special contract, on the basis of their
respective interests. [Yu v. Yukayguan, G.R. No. 177549, June 18, 2009]

Winding up is also liquidation.

Liquidation
• Still in the absence of a board of directors or trustees, those having any pecuniary interest in
the assets, including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations with the Securities and Exchange
commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns. [Clemente v. CA, G./ No. 82407, March
27, 1995]

Liquidation
• This continuance of its legal existence for the purpose of enabling it to close up its business is
necessary to enable the corporation to collect the demands due it as well an to allow its
creditors to assert the demands against it. If this were not so, then a corporation that became
involved in liabilities might escape the payment of its just obligations by merely surrendering its
charter, and thus defeat its creditors or greatly hinder and delay them in the collection of their
demand. This course of conduct on the part of corporations the law in justice to persons dealing
with them does not permit. The person who has a valid claim against a corporation, whether it
arises in contract or tort should not be deprived of the right to prosecute an action for the
enforcement of his demands by the action of the stockholders of the corporation in agreeing to
its dissolution. The dissolution of a corporation does not extinguish obligations or liabilities due
by or to it. [Rebollido v, CA, G.R. No. 81123, February 28, 1989]

Liquidation
• This extended authority necessarily excludes the purpose of continuing the business for which
it was established. The reason for this is simple: the dissolution of the corporation carries with it
the termination of the corporation's juridical personality. Any new business in which the
dissolved corporation would engage in, other than those for the purpose of liquidation, will be a
void transaction because of the non-existence of the corporate party. [Rich v. Paloma, G.R. No.
210538, March 7, 2018]

Liquidation
• 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. 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. (§139]

Liquidation
• It is to be noted that the time during which the corporation, through its own officers, may
conduct the liquidation of its assets and sue and be sued as a corporation is limited to three
years from the time the period of dissolution commences; but that there is no time limited within
which the trustees must complete a liquidation placed in their hands.
It is provided only that the conveyance to the trustees must be made within the three-year
period. It may be found impossible to complete the work of liquidation within the three-year
period or to reduce disputed claims to judgment. Suits by or against a corporation abate when it
ceases to be an entity capable of suing or being sued; but trustees to whom the corporate
assets have been conveyed may sue and be sued as such in all matters connected with the
liquidation. By the terms of the statute, the effect of the conveyance is to make the trustees the
legal owners of the property conveyed, subject to the beneficial interest therein of creditors and
stockholders. [Alabang Development Corporation v. Alabang Hills Village Association, G.R. No.
187456, June 2, 2014]

Liquidation
• After payment of all corporate debts and liabilities, the remaining assets, if any, must be
distributed to the stockholders in proportion to their interests in the corporation. This share of
each stockholder in the assets upon liquidation is called liquidating dividend. [Aquino
Tambasacan]
• The creditor of a dissolved corporation may follow its assets once they passed into the hands
of the stockholders. [Tan v. CIR, G.R. No.
15778, April 23, 1962]

Liquidation
• Except as otherwise provided for in Sections 93 and 94 of the Code, upon the winding up of
corporate affairs, any asset distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated in favor of the national government.

• Except by decrease of capital stock and as otherwise allowed by the Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment of
all its debts and liabilities. [§139]

• EXCEPTIONS: Decrease of capital stock [§139]; Exercise of appraisal right [$801; Deadlock in
close corporations [§103]; Repurchase of shares for legitimate purpose [§40), Dividend
distribution [§42]

FOREIGN CORPORATION
• For purposes of this Code, a foreign corporation is one formed, organized or existing under
laws other than those of the Philippines' and whose laws allow Filipino citizens and corporations
to do business in its own country or State.
• It shall have the right to transact business in the Philippines after obtaining a license for that
purpose in accordance with the Code and a certificate of authority from the appropriate
government agency.
[§140]
• Every foreign corporation which, on the date of the effectivity of the Code, is authorized to do
business in the Philippines under a license issued to it shall continue to have such authority
under the terms and conditions of its license, subject to the provisions of the Code and other
special laws. [§141]

Foreign Corporation
• 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 within its limits, or conditions may be imposed on the exercise of such privileges.
[Communication Materials and Design v. CA, G.R. No. 102223, August 22, 1996]

Foreign Corporation
• The object of the statute was to subject the foreign corporation doing business in the
Philippines to the jurisdiction of its courts. The object of the statute 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. [Marshall-Wells Company v. Henry W. Elser & Co., G.R. No. 22015, September 1,
1924]

DOING BUSINESS
• Doing business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the purpose and object of its
organization.
[The Mentholatum Co. v. Mangaliman, G.R. No. L-47701, June 27, 1941]

• It is a rule generally accepted that one single or isolated business transaction does not
constitute "doing business" within the meaning of the law, and that transactions which are
occasional, incidental and casual, not of a character to indicate a purpose to engage in business
do not constitute the doing or engaging in business contemplated by law. In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character. General Corporation of the Philippines v. Union
Insurance Society of Canton, G.R. No. 2684, September 14, 1950]

Doing Business
TWO GENERAL TESTS:
1. SUBSTANCE TEST
• The true test for doing business seems to be whether the foreign corporation is continuing the
body of the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another.

2. CONTINUITY TEST
• The term doing business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and object of
its organization.
[Agilent Technologies Singapore (Pte) Ltd. v. Integrated Silicon Technology Philippines
Corporation, G.R. No. 154618, April 14, 2004]

Doing Business
• The phrase "doing business" shall include:
a. soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches;
b. appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180) days or more;
c. participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and
d. any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization. [§3(d), Foreign Investments Act of 1991]

Doing Business
• The phrase "doing business" shall not be deemed to include:
a. mere investment as a shareholder by a foreign entity in domestic corporations duly registered
to do business, and/or the exercise of rights as such investor;
b. nor having a nominee director or officer to represent its interests in such corporation;
c. nor appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account. [§3(d), Foreign Investments Act of 1991]

• There are other statutes defining the term "doing business" in the same tenor as those above-
quoted, and as may be observed, one common denominator among them all is the concept of
"continuity." [MR Holdings v. Bajar, G.R. No. 138104, April 11, 2002]

Doing Business
• The phrase "doing business" shall include:
a. soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches;
b. appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180) days or more;
c. participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and
d. any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization. [§3(d), Foreign Investments Act of 1991]

Application for a License

• A foreign corporation applying for a license to transact business in the Philippines shall submit
to the Commission a copy of its articles of incorporation and bylaws, certified in accordance with
law, and their translation to an official language of the Philippines, if necessary. The application
shall be under oath and, unless already stated in its articles of incorporation, shall specifically
set forth the following:
a. The date and term of incorporation;
b. The address, including the street number, of the principal office of the corporation in the
country or State of incorporation;
c. The name and address of its resident agent authorized to accept summons and process in all
legal proceedings and all notices affecting the corporation, pending the establishment of a local
office; [$142]

Application for a License

• A foreign corporation applying for a license to transact business in the Philippines shall submit
to the Commission a copy of its articles of incorporation and bylaws, certified in accordance with
law, and their translation to an official language of the Philippines, if necessary. The application
shall be under oath and, unless already stated in its articles of incorporation, shall specifically
set forth the following:
a. The date and term of incorporation;
b. The address, including the street number, of the principal office of the corporation in the
country or State of incorporation;
c. The name and address of its resident agent authorized to accept summons and process in all
legal proceedings and all notices affecting the corporation, pending the establishment of a local
office; [$142]

Application for a License

i.A statement of the amount actually paid in; and
j. Such additional information as may be necessary or appropriate in order to enable the
Commission to determine whether such corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the fees payable.

• Attached to the application for license shall be a certificate under oath duly executed by the
authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the
laws of the country or State of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in good standing.

If the certificate is in a foreign language, a translation thereof in English under oath of the
translator shall be attached to the application. [§142]

Application for a License

• The application for a license to transact business in the Philippines shall likewise be
accompanied by a statement under oath of the president or any other person authorized by the
corporation, showing to the satisfaction of the Commission and when appropriate, other
governmental agencies that the applicant is solvent and in sound financial condition, setting
forth the assets and liabilities of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application. [§142]

Application for a License

• 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 Commission without previous authority from the appropriate government
agency, whenever required by law. [§142]

Issuance of a License
• If the Commission is satisfied that the applicant has complied with all the requirements of the
Code and other special laws, rules and regulations, the Commission shall issue a license to
transact business in the Philippines to the applicant for the purpose or purposes specified in
such license.
• Upon issuance of the license, such foreign corporation may commence to transact business in
the Philippines and continue to do so for as long as it retains its authority to act as a corporation
under the laws of the country or State of its incorporation, unless such license is sooner
surrendered, revoked, suspended, or annulled in accordance with the Code or other special
laws. [§143]

Issuance of a License
• Within sixty (60) days after the issuance of the license to transact business in the Philippines,
the licensee, except foreign banking or insurance corporations, shall deposit with the
Commission for the benefit of present and future creditors of the licensee in the Philippines,
securities satisfactory to the Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or -controlled corporations and entities, shares of
stock or debt securities that are registered under Republic Act No. 8799, otherwise known as
"The Securities Regulation Code", shares of stock in domestic corporations listed in the stock
exchange, shares of stock in domestic insurance companies and banks, any financial
instrument determined suitable by the Commission, or any combination thereof with an actual
market value of at least Five hundred thousand pesos (P500,000.00) or such other amount that
may be set by the Commission [§143]

Issuance of a License
• Within six (6) months after each fiscal year of the licensee, the Commission shall require the
licensee to deposit additional securities or financial instruments equivalent in actual market
value to two percent (2%) of the amount by which the licensee's gross income for that fiscal
year exceeds Ten million pesos (P10,000,000.00).

• The Commission shall also require the deposit of additional securities or financial instruments
if the actual market value of the deposited securities or financial instruments has decreased by
at least ten percent (10%) of their actual market value at the time they were deposited. The
Commission may, at its discretion, release part of the additional deposit if the gross income of
the licensee has decreased, or if the actual market value of the total deposit has increased, by
more than ten percent (10%) of their actual market value at the time they were deposited. [§143]

Issuance of a License
• The Commission may, from time to time, allow the licensee to make substitute deposits for
those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to
collect the interest or dividends on such deposits.
• In the event the licensee ceases to do business in the Philippines, its deposits shall be
returned, upon the licensee's application and upon proof to the satisfaction of the Commission
that the licensee has no liability to Philippine residents, including the Government of the
Republic of the Philippines.
• For purposes of computing the securities deposit, the composition of gross income and
allowable deductions therefrom shall be in accordance with the rules of the Commission. [§143]

Resident Agent
• A resident agent may be either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided, That an individual resident
agent must be of good moral character and of sound financial standing: Provided, further, That
in case of a domestic corporation who will act as a resident agent, it must likewise be of sound
financial standing and must show proof that it is in good standing as certified by the
Commission. [§144]

Service of Process
• As a condition to the issuance of the license for a foreign corporation to transact business in
the Philippines, such corporation shall file with the Commission a written power of attorney
designating a person who must be a resident of the Philippines, on whom summons and other
legal processes may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at its home office.
[§145]
Service of Process
• Such foreign corporation shall likewise execute and file with the Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in form and substance as
follows:
• "The (name of foreign corporation) hereby stipulates and agrees, in consideration of being
granted a license to transact business in the Philippines, that if the corporation shall cease to
transact business in the Philippines, or shall be without any resident agent in the Philippines on
whom any summons or other legal processes may be served, then service of any summons or
other legal process may be made upon the Commission in any action or proceeding arising out
of any business or transaction which occurred in the Philippines and such service shall have the
same force and effect as if made upon the duly authorized officers of the corporation at its home
office."
[§145]

Service of Process
• Whenever such service of summons or other process is made upon the Commission, the
Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or
other legal process to the corporation at its home or principal office. The sending of such copy
by the Commission shall be a necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance by the party at whose
instance the service is made.
• It shall be the duty of the resident agent to immediately notify the Commission in writing of any
change in the resident agent's address.
[§145]

Law Applicable
• A foreign corporation lawfully doing business in the Philippines shall be bound by all laws,
rules and regulations applicable to domestic corporations of the same class, except those which
provide for the creation, formation, organization or dissolution of corporations or those which fix
the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation. [§146]

Amendments to AOl or Bylaws

• Whenever the articles of incorporation or bylaws of a foreign corporation authorized to transact
business in the Philippines are amended, such foreign corporation shall, within sixty (60) days
after the amendment becomes effective, file with the Commission, and in the proper cases, with
the appropriate government agency, a duly authenticated copy of the amended articles of
incorporation or bylaws, indicating clearly in capital letters or underscoring the change or
changes made, duly certified by the authorized official or officials of the country or State of
incorporation. Such filing shall not in itself enlarge or alter the purpose or purposes for which
such corporation is authorized to transact business in the Philippines. [§147)

Amended License
• A foreign corporation authorized to transact business in the Philippines shall obtain an
amended license in the event it changes its corporate name, or desires to pursue other or
additional purposes in the Philippines, by submitting an application with the Commission,
favorably endorsed by the appropriate government agency in the proper cases. [§148]

Merger or Consolidation
• One or more foreign corporations authorized to transact business in the Philippines may
merge or consolidate with any domestic corporation or corporations if permitted under Philippine
laws and by the law of its incorporation: Provided, That the requirements on merger or
consolidation as provided in the Code are followed. [§1491

Merger or Consolidation
• Whenever a foreign corporation authorized to transact business in the Philippines shall be a
party to a merger or consolidation in its home country or State as permitted by the law
authorizing its incorporation, such foreign corporation shall, within sixty (60) days after the
effectivity of such merger or consolidation, file with the Commission, and in proper cases, with
the appropriate government agency, a copy of the articles of merger or consolidation duly
authenticated by the proper official or officials of the country or State under whose laws the
merger or consolidation was effected: Provided, however, That if the absorbed corporation is
the foreign corporation doing business in the Philippines, the latter shall at the same time file a
petition for withdrawal of its license in accordance with the Title. [§149]

Doing Business Without a License

• No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. [§150]
• It is not the lack of prescribed license, but "doing business" in the Philippines without such
license which deprives the foreign corporation of access to our courts. (Perez]

Doing Business Without a License

• The principles regarding the right of a foreign corporation to bring suit in Philippine courts may
thus be condensed in four statements:
1. if a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts;
2. if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction;
3. if a foreign corporation does business in the Philippines without a license, a Philippine citizen
or entity which has contracted with said corporation may be estopped from challenging the
foreign corporation's corporate personality in a suit brought before Philippine courts; and
4. if a foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction. Agilent Technologies Singapore (Pte) Ltd. v.
Integrated Silicon Technology Philippines Corporation, G.R.
No. 154618, April 14, 2004}

Doing Business Without a License

• The law simply means that no foreign corporation shall be permitted "to transact business in
the Philippine Islands," as this phrase is known in corporation law, unless it shall have the
license required by law, and, until it complies with the law, shall not be permitted to maintain
any suit in the local courts. [Marshall-Wells Company v. Henry W. Elser & Co., G.R. No. 22015,
September 1, 1924]

• Where the law denies to a foreign corporation the right to maintain suit unless it has previously
complied with a certain requirement, then such compliance, or the fact that the suing
corporation is exempt therefrom, becomes a necessary averment in the complaint.
[Atlantic Mutual Insurance Company v. Cebu Stevedoring Co., G.R. No.
L-18961, August 31, 1966]

Doing Business Without a License

• A foreign corporation doing business in the Philippines with or without license is subject to
process and jurisdiction of the local courts. If such corporation is properly licensed, well and
good. But it shall not be allowed, under any circumstances, to invoke its lack of license to
impugn the jurisdiction of our courts. [Marubeni Nederland v. Tensuan, G.R. No. 61950,
September 28, 1990]

Doing Business Without a License

• An unlicensed foreign corporation doing business in the Philippines may bring suit in Philippine
courts against a Philippine citizen or entity who had contracted with and benefited from said
corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped from
challenging the personality of a corporation after having acknowledged the same by entering
into a contract with it. This doctrine of estoppel to deny corporate existence and capacity applies
to foreign as well as domestic corporations. The application of this principle prevents a person
contracting with a foreign corporation from later taking advantage of its noncompliance with the
statutes chiefly in cases where such person has received the benefits of the contract. [Agilent
Technologies Singapore (Pte) Ltd. v. Integrated Silicon Technology Philippines Corporation,
G.R. No.
154618, April 14, 2004]

Revocation of License
• Without prejudice to other grounds provided under special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or suspended by the
Commission upon any of the following grounds:
a.Failure to file its annual report or pay any fees as required by the Code;
b.Failure to appoint and maintain a resident agent in the Philippines as required by the Title;
c.Failure, after change of its resident agent or address, to submit to the Commission a
statement of such change as required by the Title;
d. Failure to submit to the Commission an authenticated copy of any amendment to its articles
of incorporation or bylaws or of any articles of merger or consolidation within the time prescribed
by the Title; [§151]

Revocation of License
e. A misrepresentation of any material matter in any application, report, affidavit or other
document submitted by such corporation pursuant to the Title;
f. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions;
g. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
h. Transacting business in the Philippines as agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
i. Any other ground

Withdrawal
• Subject to existing laws and regulations, a foreign corporation licensed to transact business in
the Philippines may be allowed to withdraw from the Philippines by filing a petition for
withdrawal of license. No certificate of withdrawal shall be issued by the Commission unless all
the following requirements are met:
a. All claims which have accrued in the Philippines have been paid, compromised or settled;
b. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions, have been paid; and
C.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. [§153]

Basic Securities Law

Securities Regulation Code

Purpose
• The purpose of these laws is to protect the public against the imposition of unsubstantial
schemes and the securities based thereon. It is said that the name given the law indicates the
evil against which it is directed, namely, speculative schemes which have no more basis than a
few feet of the blue sky. [People v. Fernandez, G.R. No. L-45655, June 15, 1938]

• The Securities Act, often referred to as the "truth in securities" Act, was designed not only to
provide investors with adequate information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to obtain capital through honest
presentation against competition from crooked promoters and to prevent fraud in the sale of
securities. [PSE v. CA, G.R. No. 125469, October 27, 1997]
SECURITIES
• 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 written or
electronic in character. It includes:
a. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed
securities;
b. Investment contracts, certificates of interest or participation in a profit sharing agreement,
certifies of deposit for a future subscription;
c. Fractional undivided interests in oil, gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
f. Proprietary or nonproprietary membership certificates in corporations; and
g. Other instruments as may in the future be determined by the Commission. [$3.1]

DEBENTURE
• A debenture is a promissory note or bond backed by the general credit of a corporation and
usually not secured by a mortgage or lien on any specific property. [Aquino-Tambasacan]

ASSET-BACKED SECURITIES
• Asset-backed securities refer to the certificates issued by a special purpose entity, the
repayment of which shall be derived from the cash flow of the assets in accordance with the
plan for securitization. [S3, Securitization Act of 2004]

INVESTMENT CONTRACT
• An investment contract refers to a contract, transaction or scheme whereby a person invests
his money in a common enterprise and is led to expect profits primarily from the efforts of
others. It is presumed to exist whenever a person seeks to use the money or property of others
on the promise of profits. [Virata v. Ng Wee, G.R. No. 220926, July 5, 2017]
• The United States Supreme Court held in Securities and Exchange commission V.
WJ. Howey Co. that, for an investment contract to exist, the following elements, referred to as
the HOWEY TEST must concur:

1. a contract, transaction, or scheme;

2. an investment of money;
3. investment is made in a common enterprise; expectation of profits; and
5. profits arising primarily from the efforts of others. (SEC v. Prosperity.com, G.R. No. 164197,
January 25, 2012)

DERIVATIVE
• Derivative is a financial instrument whose value changes in response to changes in a specified
interest rate, security price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or similar variable or underlying factor. It is settled at a future date.
• OPTIONS are contracts that give the buyer the right, but not the obligation, to buy or sell an
underlying security at a predetermined price called the exercise or strike price, on or before a
predetermined date, called the expiry date.
• WARRANTS are rights to subscribe or purchase new or existing shares in a company on or
before a predetermined date. [IRR]

PROPRIETARY CERTIFICATE
• Proprietary share or certificate is an evidence of interest, participation or privilege in a
corporation which gives the holder of the share or certificate the right to use the facilities
covered by such certificate and to receive dividends or earnings from the corporation. Upon the
liquidation of the corporation, the holder shall have proportionate ownership rights over its
assets.

NONPROPRIETARY CERTIFICATE
• Non-proprietary share or certificate is an evidence of interest, participation or privilege over a
specific property of a corporation that allows the holder of the share or certificate to use such
property under certain terms and conditions. The holder, however, shall not be entitled to
dividends from the corporation or to its assets upon its liquidation. [IRR]

Intra-Corporate Dispute
RELATIONSHIP TEST
• Intra-corporate disputes include the following relationships:
1. between the corporation, partnership or association and the public;
2. between the corporation, partnership or association and its stockholders, partners, members,
or officers;
3. between the corporation, partnership or association and the State insofar as its franchise,
permit or license to operate is concerned; and
4. among the stockholders, partners or associates themselves. [Strategic Alliance Development
Corporation v. Star Infrastructure Development Corporation, G.R. No. 187872, November 17,
2010]

NATURE OF THE CONTROVERSY TEST

• Under the nature of the controversy test, the dispute must not only be rooted in the existence
of an intra-corporate relationship, but must also refer to the enforcement of the parties'
correlative rights and obligations under the Corporation Code as well as the internal and
intra-corporate regulatory rules of the corporation. [Strategic Alliance Development
Corporation v. Star Infrastructure Development Corporation, G.R. No. 187872, November 17,
2010]

• The combined application of the relationship test and the nature of the controversy test has,
consequently, become the norm in determining whether a case is an intra-corporate controversy
or is purely civil in character. [Strategic Alliance Development Corporation v. Star Infrastructure
Development Corporation, G.R. No. 187872, November 17, 2010]
• The Commission's jurisdiction over all cases enumerated under section 5 of Presidential
Decree No. 902-A [intra-corporate disputes] is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court. [§5.2]