corporation - right to inspect.pdf

CORPORATION CODE by DEAN NILO DIVINA 2015

AZARRAGA|BELANDO|BONGALON|DAVID|DIZON|GARVIDA|LIWANAG|LLANTO |MARANAN|MELOSANTOS|MINA |QUIBOD

1

A. CORPORATION

1. Definition

What is a corporation?

Section 2. Corporation defined. – A corporation is an artificial

being created by operation of law, having the right of succession

and the powers, attributes and properties expressly authorized by

law or incident to its existence.

This definition gives us the essential attributes of a

corporation. What are these?

Based on these attribute of a corporation, how do we

distinguish a corporation from a single

proprietorship?

A Single Proprietorship (parang si Zacky Single lol) is not

an artificial being because the proprietor has no legal

personality from its business. It is not created by law.

Whatever the assets and liabilities of the single

proprietorship are likewise the obligations and liabilities of

the proprietor and vice versa.

If in case a Single Proprietor wants to file a suit or a

legal action, (the suit is related to its business) how

should the caption ____ (umubo si pete) would be?

Let’s say Juan Dela Cruz doing business under the

trade name and style of Mabango Flower Shop.

Juan Dela Cruz doing business under the trade name and

style of Mabango Flower Shop vs. Defendant. Juan dela

Cruz and Mabango Flower Shop are one and the same. In

contrast with the action involving Juan Dela Cruz himself

it must be captioned as Juan Dela Cruz vs. Defendant

Who is liable in a suit filed against a corporation

which is not registered with the SEC but only

represented by one person?

Let’s take the case of University Publishing

Corporation vs Albert, it is an old case.

Albert is a commentator, an authority in criminal law,

entered into a contract with UPC, for UPC to publish his

commentary, but UPC did not pay royalties to Albert, so

Justice Albert filed an action for the payment of the

royalties but during the pendency of the case, J. Albert

died so the judgment was rendered in favor of his estate,

but when the judgment was about to be enforced, they

discovered that there is no such corporation registered

with the SEC.

Against whom the judgment may be enforced?

The Supreme Court said that the one who represent an

unincorporated corporation is akin to Single Proprietorship.

So there is no corporation by estoppel if there is only one (1)

person because there is a corporation by estoppel if there are

two persons or more assume to be a corporation.

The one who represents an unincorporated corporation, he

alone is the one liable just like a Single Proprietor.

The SC said the one who represented UPC, is the real party in

interest, the judgment may be enforced against him even if he

was not impleaded as a formal party defendant.

In 2010, BA Finance vs. ___ ******* interrupted******

Dean: While looking for the file, Alex can you please

distinguish a corporation from a partnership.

Alex: ***Keeps on reciting *** (Umubo na naman si pete)

Dean: I’m listening, multitasking.

After several minutes……

Dean: I was lying when I said I’m listening.

Class: LOL

**************

Right now there is no one man corporation, it’s just a proposal.

To repeat, in a Single Proprietorship, the assets of the

proprietor may be held to answer for the obligation of the

business, as if it is the personal obligation of the proprietor

because here, there is no separate legal personality.

2. Attributes of the Corporation

Distinguish a Corporation from a Partnership. Based on the

definition, the first one is 1. Artificial being.

Is a Partnership also an artificial being?

Yes, it is also a juridical person

So both corporation and partnership are legal being in the

sense that they have a legal personality separate and distinct

from the persons composing it. Second is created by law, a

corporation is created by law while a Partnership it is by

agreement.

When does a Partnership arise or created?

It is created from the moment of meeting of the minds of

the persons to contribute money, industry and property to

a common fund with the intention of dividing the profits

among themselves.

What is the purpose of registration of Articles of

Partnership with the SEC?

To get a license or permit and you cannot operate a

business unless registered with SEC.

What about a Corporation?

It is not created from the moment the five (5)

incorporators signed the AOI; likewise it is not created

upon filing of AOI with the SEC but it acquires legal

personality from the moment that SEC issued a certificate

of incorporation.



2

It is created by operation of law, what law?

Corporation Code

Can a corporation be created by some other law?

Yes, by special law

When you say law, it may be a general law which is the

corporation code or Special law passed by Congress to create a

GOCC.

Third (3rd) the right to succession, do you mean the

corporation is immortal?

In Partnership, there is no right of succession because the

death of one of the partners will dissolve the Partnership.

The right of the succession of the corporation is the power

to exist continuously because it can extend the corporate

term.

Fourth (4th), Attribute, what does it mean? Briefly,

does it mean that a corporation can only exercise

those powers authorized by law, by the AOI or

incident to its existence?

Yes.

How about the Partnership? What is the limitation of

what the Partnership can do?

Based on what the Articles of Partnership provides.

Is the corporation delimited only by what is not

contrary to law, morals, good customs, public policy

and public order? Can a corporation enter into a

contract or transaction for as long as it is not

contrary to law, morals, good customs, public policy

and public order?

It is a question of whether or not the action or transaction

of the corporation is consistent with the powers conferred

to it by law.

While in Partnership, there is no limitation provided that

it is not contrary to law, morals, good customs, public

policy and public order.

What is the term of the corporation?

The term specified in the AOI but not to exceed fifty (50)

year and can be extended

In Partnership, can we say that the term is

indefinite?

Yes. It is indefinite unless there is a ground to dissolve.

Who exercises the powers of the corporation?

Corporation – generally, it is the Board of Directors

(BOD). In Partnership, it is the General partner. In the

absence of designation any partner may perform the

powers. In corporation, generally it is the BOD because

under the law there are powers reserved for the

stockholders (SH) only, or joint by the SH and the BOD.

What about transferability of interest?

In Corporation, the SH can sell or transfer his or her share

in the corporation even without the consent of other SH or

the corporation. Whereas in the Partnership, it cannot do

so without the consent of the Partnership because the

personal qualification of the partner is taken into account.

Can a corporation require that its consent must be

secured before a SH can sell his share? Is that

restriction reasonable?

No, it is contrary to law.

What restriction can the corporation require?

The right of first refusal. It must be embodied in the AOI.

Distinguish the limitation as to liability of the

corporation from Partnership.

Dean: Did you graduate with honors?

Nikki: No Dean.

How about you April?

April: No Sir! (Dean Feble accent)

So it is the non-latin honors are the one excelling. Stephanie

(Teff) also did not graduate with honors in… in…. in… Science,

I think in Science.

Tituh Kaye: Econ…… Econ……… Econ………

**********

So let’s continue

SH - they cannot be held liable beyond their subscription while

the partners, if the assets of the Partnership are not sufficient

to satisfy the obligation to the creditors, they can be held liable

personally.

BAR: Is that an absolute rule that the liability of the

SH is limited only to his subscription?

No. the exception is if he is a director, officer or agent, he

can be made personally liable.

************

DISCUSSION

Section 2 defines the corporation and at the same time gives all

its attributes.

If five (5) persons, (let’s say Zacky, Brynn, Peter, Dustin

and Reggie – dream team in Dota 2) put up a corporation

named BLACK LION CORPORATION and registered it with

SEC, now we have six (6) persons composing the corporation,

so the corporation has personality separate from the five (5)

Black Lions composing it.



3

The corporation can invoke the right against illegal search and

seizure (Stonehill v. Diokno), but it cannot invoke the right

against self-incrimination (PASECO vs. PCGG)

FILIPINAS BROADCASTINGNETWORK v. AGO

MEDICAL AND EDUCATIONAL CENTER

Can a corporation be entitled to moral damages?

In 2004, Justice Carpio, in this case, one of the

broadcasters of Filipinas Broadcasting Network uttered

libelous remarks over a radio against AGO Medical and

Education center. Ago Medical is a medical center in

Legazpi Albay. On air, the said broadcaster said that AGO

Medical is the dumping ground of intellectual misfits.

Held: Under the New Civil Code, in case of libel, oral

defamation or slander, the aggrieved person be entitled to

moral damages. The SC through Justice Carpio said that

the NCC makes no distinction between natural and

juridical person. The law authorizes recovery of damages

to any person victim of libel, defamation or slander,

whatever kind of person whether natural or juridical.

In one case, a corporation is not entitled to moral damages

because, not being a natural person, it cannot experience

physical suffering or sentiments with the exception that if the

corporation has a reputation that is debased, resulting to

humiliation in the business realm.

MERALCO v. TEAM ELECTRONICS (2007)

Can a corporation sue for Moral Damages if it is a

victim of tort?

Yes.

The corporation was a tenant in a building, its electrical

connection or supply was disconnected by Meralco

because of the alleged meter tampering, so it sued Meralco

for Moral damages. It lost the case because it did not

establish the connection between the tortious act or

conduct and the injury sustained. Therefore, if the

corporation can establish the connection not on account of

libel, the corporation may be entitled to moral damages.

BAR: Let’s say the President of McDonalds Corporation was

spreading rumors that the hamburger of Jollibee is made from

the meat of cat. So the president of Jollibee was not able to

sleep, he suffered from sleepless nights, anxiety and depression

because of the libellous remark uttered against Jollibee. So he

filed an action for damages against McDo.

Will the suit prosper based on the allegation of the

complaint?

No. The aggrieved party is the corporation not the

president because the corporation has separate legal

personality.

Can the corporation be entitled to damages?

Yes, the case of AGO.

It is not correct to say that the corporation cannot be criminally

prosecuted because it can be if the imposable penalty is not

imprisonment like fine, forfeiture of license, revocation of

franchise, in this context, the corporation can be criminally

prosecuted.

Can the corporation be held liable for tort?

Yes.

The corporation has separate legal personality from the

persons composing the corporation, therefore the properties of

the corporation are neither the properties of the SH vice versa.

The obligations of the corporation are not enforceable against

the SH vice versa.

The cause of action of the corporation can be enforced by the

SH vice versa.

STRONGHOLD INSURANCE v. CUENCA (2013) penned

by Bersamin

The assets of the corporation levied on attachment.

So a writ of preliminary attachment was issued

against the property of the corporation and the

Stockholders of the corporation filed a petition before

the Court of Appeals to set aside the attachment, on

the ground that it was fraudulently and irregularly

issued by the RTC. So assuming that it was

irregularly issued, can the petition be granted?

No, because the assets of the corporation were levied and

not the assets of the SH. So if there is any person who

should file a petition to set aside the attachments, it is the

corporation, not the SH.

- According to J. Bersamin, the SH are not the real

party in interest and the petition is dismissed

outright.

- The principle will not change even though the SHs

control the corporation.

If you will grant a loan to a corporation, how will

you make that the controlling SH be liable, if the

basic principle in Corporation law that ownership of

shares is not enough reason to disregard the

separate legal personality?

In practical application, you require a Surety or Guaranty

agreement from the SH, he will not be liable as a SH but a

surety or guarantor of the obligation.

The case of EPG, the issue is whether or not the obligation of

the corporation extends to the president because the president

own and controls the 90% of the corporation. The SC held that

the obligation of the corporation do not extend to the president



4

because there is no foul play on the part of the President and

the act of resisting the claim if UP is not tantamount to bad

faith.

NOT YET ASKED IN THE BAR: THE CASE OF NISCE

Nisce is the owner of the Philippine Rabbit. It obtained a loan

from Equitable Bank, secured by mortgage of real property of

Nisce. The latter made as money market placement’ Nisce

defaults; Equitable bank and PCIB merged to form EPCIB, so

because of the merger, EB acquires the rights, assets and

obligations of PCIB. EB threatened to foreclose but Nisce

argued that his money placement should be set off by the EB.

The SC said the fact that EB was the surviving bank with the

merger with PCIB which eventually resulted in Equitable PCI

bank becoming eventually the parent company of the

subsidiary PCIB, it is not enough reason to disregard the

separate legal personality.

Last case, LIM vs CA – Pastor Lim’s wife wanted to include

the corporate properties as far as the settlement of the estate

just because the deceased is the controlling SH. The SC said

that the titles are in the name of the corporation, ownership is

conclusively in favor of the corporation. The fact that Pastor

Lim controls the corporation during his lifetime is not enough

reason to disregard the separate legal personality. Only shares

of stock but not the properties of the corporation.

What do you understand by this Doctrine of Piercing

the Veil of Corporate Fiction?

The doctrine that allows the State to disregard, for certain

justifiable reasons, the fiction of the legal personality to

the corporation separate from the persons who composed

it.

Bear in mind that the Doctrine of Corporate Legal Entity

is only a fiction to promote public convenience. If this doctrine

is misused or abused, then the State shall disregard the

separate legal personality, pierce the corporation, and shall

treat the corporation and the stockholders composing it as one

and the same entity.

What are the areas in which the doctrine of Piercing

of The Corporate Veil applies?

1. In cases where the fiction is used to defeat

convenience.

2. In case of Fraud.

3. Alter-ego or instrumentality cases where the

corporation is used as an instrumentality or alter-ego

of another corporation.

ALTER-EGO OR INSTRUMENTALITY TEST has three

elements:

1. Control in shareholdings, control in finances and then

control in business policy and practices such that the

corporation has no mind of its own with respect to the

transaction

2. When the control is used to perpetuate fraud or breach

the duty in violation of the right of another

3. The control and the breach of duty are the proximate

causes of the harm suffered by a third person

So don’t forget these three elements because many of the bar

questions can be answered by applying these elements.

Now, if you pierce the corporate fiction, does it mean

that the corporation is dissolved?

No

Does it mean that you have to pierce the corporate

fiction in all other transaction involving the

corporation?

No.

So only in the transaction where the three elements were

present. The fact that you pierced the corporate fiction with

respect to one transaction does not mean that you have to

pierce the doctrine of corporate fiction in other cases or

transaction if these elements are not present.

BAR: You said that the State allows disregarding, for certain

justifiable reasons, the fiction of the legal personality. When

you mean State means court right? When the court pierces

the veil of corporate fiction over a corporation if it

does not acquire jurisdiction? This was asked in 2014.

There are four cases in your outline. KUKAN v. REYES

(2010), GOLD LINE TOURS v. LACSA (2012), LIVESEY

v. BISWANGER PHIL., PACIFIC REHOUSE v. CA

(2014).

It depends on the facts of the case. This is because right

now you have these cases and they are even steven

meaning two cases holding the principle that a court may

pierce the veil of corporate fiction even if it does not have

jurisdiction and two cases where the SC said that courts

cannot pierce the veil of corporation if it does not acquire

jurisdiction

PACIFIC REHOUSE CORP. v. CA (2014)

ABC Bank has a wholly-owned subsidiary, XYZ Stock

Brokerage Firm. XYZ sold the shares of stock of Juan dela Cruz

without his consent. Juan filed and action to recover the shares

but the same cannot be recovered anymore because these have

been sold to a third party who acquired the shares in good

faith. So it was substituted for a money judgment. The court

directed the Stock Brokerage firm to pay the equivalent value

of the shares sold to third persons. It became final and

executory so Juan moved for an issuance of writ of execution

which was granted but could not levy the assets of Stock



5

Brokerage Firm. So he decided to file for the issuance for alias

writ of execution against ABC Bank. Now the RTC issued the

alias writ of execution against the assets of ABC Bank because

ABC Bank owns 99.9% of XYZ Firm and the counsel or

representative of ABC is the same counsel representing XYZ.

Can it enforce judgment against ABC? Did RTC act

correctly in piercing the veil of the corporate fiction?

This question is worth 10 points.

An alias writ of execution could not be enforced against its

parent company because the court has not acquired

jurisdiction over the latter (it was not made a party

defendant) and while the parent company owns and

controls the brokerage firm, there is no showing that the

control was used to violate the rights of the plaintiff.

GOLD LINE TOURS v. LACSA (2011)

Maria, a graduate of a nursing school in Albay, went to Manila

to review for the boards. She boarded a bus owned by Travel

Tour Express. Unfortunately the bus collided with a passenger

jeepney and metals were detached from the passenger jeepney

which punctured her heart causing instantaneous death. The

heirs of Maria filed a case against Travel Tour. Judgment was

rendered with respect to the civil action of the case. When the

judgment became final and the heirs of Maria attempted to

enforce the judgment, they levied to the bus owned, however,

by Gold Line Tours. The Gold Line Tours filed a third party

claim asserting ownership, title, and interest over the bus. It

turns out that both Gold Line and Travel Tour Express are

family corporations owned by the same family, with

interlocking directors, officers and have overlapping finance

just that Gold Line was not brought to the court’s jurisdiction.

Can the judgment of the court be enforced upon Gold

Line Tours?

Yes.

What makes Pacific Rehouse different from the Gold

Line case?

So we have cases with different rulings. In the first, the

court cannot pierce the corporate veil because the

corporation was not brought to the jurisdiction of the

court while the second case, Court said that you can pierce

the veil of corporate fiction as long as the RTC has

reasonable opportunity to assess the evidence and evaluate

the same, there is a basis to hold these two corporations as

one and the same entity.

So although at the outset, it was not brought to the court’s

jurisdiction.

We discussed the circumstances which, by themselves, are

sufficient to disregard the separate legal personality of a

corporation.

The first principle is that ownership of the controlling

shares is NOT enough reason to disregard the separate legal

personality of the corporation.

If ABC Corporation owns 99.9% of XYZ Corporation

because XYZ is the subsidiary of ABC, can Juan

enforce the debts of XYZ against ABC just because it

owns XYZ?

No because ownership of the controlling shares per se is

not enough reason to disregard separate corporate

personality.

Otherwise, if such is enough reason for two corporations to

be treated as one and the same entity then basically all

subsidiaries would be treated as the same as parent

companies and we all know that many corporations put up

subsidiaries like BDO. BDO has subsidiaries. They have

BDO Generali (insurance business). So can the policy

holders of BDO Generali enforce their claim against BDO

Bank just because BDO owns 99.9% on the shares of

Generali? The answer is no.

Now, the liability of XYZ will be compressed (?) to those

transactions related to its related operations and not

extend all the way to the parent company.

Remember earlier, when we discussed the elements of

instrumentality test, we said that the control must be

exercised in three areas – shares, finances, business values

and practices. So if the subsidiary has independent

operations, then it should have a separate legal personality

from the parent company.

PNU v. RITRATTO GROUP (2001)

BAR: This was asked three, four years ago. PNB has the

wholly-owned subsidiary in HK, PNB International Finance

Ltd. It is situated in World Wide House along Central HK so

this is where the Filipinos congregate every weekend so there

are many businesses there owned by corporations in the PH

and one of them is PNB International. So this PNB

International Finance granted LC/TR transactions or

accommodations in favor of Ritratto group secured by a

mortgage on the property of PNB in the PH and the parties to

the mortgage agreement were PNB, as agent of PNB

International Finance Ltd, and Ritratto group. The loan was

not paid prompting PNB to initiate foreclosure proceedings. To

stop the foreclosure, Ritratto Group filed an action in Manila to

compute the debts and payments made by the Ritratto Group

claiming that certain payments were made but were not

credited to its account. The action there was to re-compute the

interest payment to determine the standing obligation of

Ritratto Group and in the meantime, praying for the issuance

of writ of preliminary injunction or TRO. But the case was filed

against PNB period.

Will the suit prosper?



6

No. This is because the suit was filed against PNB – parent

company of PNB International. The fact that PNB is the

parent company of PNB International does not make them

one and the same entity. The loan was granted by PNB

International Finance Ltd. And not by PNB therefore the

action must be filed against the subsidiary PNB

International and not the parent company.

How should the complaint be captioned?

The case should be filed against PNB as agent of PNB

International Finance Ltd and not PNB as parent company

of PNB International Finance Ltd. (I had an ah moment

here hahaha). If it filed an action against PNB as an agent,

then the suit is effective because the suit is ____ filed

against PNB International, the one that granted the loan in

favor of Ritratto Group.

Okay, another circumstance to disregard separate entity is

interlocking directors and similarity of business. So if

two corporations have common directors, common

stockholders, these are NOT enough reasons to treat them as

one and the same entity, or their similarity of business even if

both admit interlocking directors or common officers, still not

enough reason to disregard separate entity of the corporations

DBP v. HYDRO RESOURCES CORP. (2013)

DBP together with PNB foreclosed mortgage on the property of

Marinduque Mining Company. After foreclosure, it

consolidated title over the assets, it set up a new mining

company called Nonoc Mining and then transferred the

foreclosed assets of DBP to Nonoc. Nonoc engaged a contractor

to help Nonoc in its project. The consultant was only paid in

part by Nonoc so he filed an action against both Nonoc and

DBP claiming that they are one and the same entity because

DBP owns controlling shares of Nonoc and they have common

directors and SH.

Can the consultant enforce the collection against

DBP?

The SC said no citing the principles of interlocking

directors, common stockholders, or controlling share are

not enough reason to disregard the separate legal entity of

the corporation

DOCTRINE OF PIERCING THE CORPORATE VEIL

This is a favorite topic in the bar as you all know and every year

SC renders decision involving separate legal entity and piercing

the corporate veil. Every year without fail and that is why we

have to know these decisions, jurisprudence because you have

to answer based on the similarity with the facts decided by the

SC. While this is a basic principle, knowing this is not enough

to answer the questions correctly so it has to be answered

based on the similarity with the facts of a pertinent case.

As said earlier, this is a doctrine that allows the State to

disregard for certain justifiable reasons the notion or fiction

that a corporation has a legal personality separate and distinct

from its stockholders, directors, and officers composing it.

Since this is a doctrine, this is a principle of law. And principle

of law which shaped by jurisprudence (?). Now, is there a

provision in the Corporation Code about piercing the veil of

corporate fiction? There is none, right? Is there a law on the

doctrine of separate legal entity? None.

The Doctrine of Separate Legal Entity is a principle emanating

from the attribute of the corporation that it is a judicial need

and as such the legal personality is separate and distinct from

the persons composing it.

Now, the Doctrine of Piercing the Corporate Veil is an

application of the principle in a sense that if the fiction is

misused or abused, the fiction must yield to the reality.

If a corporation is set up, as we said, there are six persons – the

corporation and the 5 incorporators composing it. So this is the

veil that separates the corporation from the stockholder. That’s

why we have seen in the previous discussions that the

properties, right and obligations of the corporation do not go

beyond the veil and cannot extend to the stockholders. Now,

the moment that the fiction is misused or abused, the fiction is

pierced and when it is pierced, there is no more shroud that

separates the corporations from stockholders. They become as

one and the same entity. So this is a principle of law which is

also based on another principle of law.

So second phrase, it allows the State… Can the Sheriff

pierce the corporate fiction?

There are two cases in the outline where the sheriff, on his

own, pierced the veil of corporate fiction and he was charged

administratively.

DALISAY v. CRUZ

Just when the blah blah blah of the corporation and the sheriff

on his own, pierced the corporate veil to enforce the judgment

against the president of the corporation. He was charged

administratively and fired. Nineteen years later, people never

learn from the history. Another sheriff in ___ v. GORIS

(2009), levied on the vehicle of the president to answer for a

judgment against the corporation on the ground that,

according to him, the vehicle was used by the president for the

official use of business.

The Supreme Court said that it is not for the sheriff to

pierce the corporate fiction. It is a judicial function which

cannot be usurped by the sheriff.

Now you know that the State can pierce the corporate veil.

Which agency, instrumentality, or ___ can pierce the

corporate fiction?

Courts – all of them

Can the court pierce the veil of corporate fiction

without acquiring jurisdiction?



7

There are 4 cases that answer this question.

KUKAN INTERNATIONAL CORPORATION v. REYES.

Juan de la Cruz entered into a contract with Kukan

Corporation to set-up signages in buildings in Makati but he

was not paid his fees. So he filed an action for collection against

the corporation. Judgment by default rendered against Kukan

and attained finality. Juan de la Cruz sought to execute the

judgment. However, what were levied were not the properties

of Kukan Corporation but Kukan International Corporation. So

Kukan International filed a third party claim to the court. The

lawyer of Juan de la Cruz filed a motion to pierce the veil of

corporate veil of Kukan International Corporation on the

ground that Kukan International and Kukan International

Corporation are one and the same entity.

Can the court render judgment against Kukan

International Corporation?

SC SAID NO because the court must acquire jurisdiction

over Kukan International Corporation involving a cause of

action fully litigated by the court in a full blown trial

because jurisdiction is not acquired by mere motion.

Jurisdiction is acquired by service of summons and other

recognized modes.

GOLD LINE TOURS v. HEIRS OF MARIA

CONCEPCION LACSA

Lacsa board on a bus and was on her way to Ago Medical

Center where she met an accident and died. Judgment was

rendered against the bus company but the court levied the

properties of the sister company of Gold Line Tours.

The SC said that as long as the RTC has reasonable opportunity

to evaluate the evidence presented. And based on the evidence

presented, there is sufficient basis to warrant the conclusion

that two corporations are one and the same entity, then the veil

can be pierced.

The real party in interest, even though not impleaded as a party

defendant in the case can be substituted.

The SC took judicial notice that the two bus companies are

owned by one and the same family and they have common

officers. Moreover, it is common knowledge in the Albay region

that they are one and the same entity.

LIVESY v. BINSWANGER

There is a compromise agreement between ABC Corp and Juan

de la Cruz and judgment was rendered based on the agreement.

but before the agreement is imposed, ABC closed but it re-

emerged in the form of XYZ Corporation engaged in the same

line of business and has the same directors. A writ of execution

was issued by the Court upon motion to levy the properties of

XYZ Corporation.

The issue whether the writ of execution was valid against XYZ

Corporation even if it was not impleaded as a party to the case.

The SC said yes because of the circumstances when ABC Corpo

closed and XYZ suddenly emerged.

PACIFIC REHOUSE CORPORATION v. CA

An unsatisfied writ of execution against a subsidiary company

cannot be enforced against its parent company because the

court has not acquired jurisdiction over the said parent

company.

These 4 decisions are conflicting decisions. And the funny

thing is that these decisions did not make reference to each

other. The Lacsa case did not mention the Kukkan case.

To answer the question, look closely at the facts of each cases.

If the question is similar to the lacsa case, apply the lacsa case.

If there is no abuse or misuse or if there is no third party

abused, or if the issue can be resolved in other ways, forget

about piercing the veil of corporate fiction.

In one case, PHILIPPINE TEXTILE v. CREDIT, one

manufactures yarn and the other one sells it. The issue is

whether the employees of Filipina Credit should form part of

the Collective Bargaining Agreement of Philippine Textile. The

SC said no need because no third party prejudiced.

SC added one test: Test by Objective. The doctrine of piercing

the veil will only apply if the stockholders are being made liable

for the debts of the Corporation. So the end result of piercing

the veil is to make the stockholders liable for the debt of the

Corporation. If that is not the end result, forget about the

doctrine. Conversely, if the Corporation is being made liable for

the debts of the stockholders, do not apply the doctrine.

FRANCISCO MOTORS v. COURT OF APPEALS

A lawyer purchased motors from the Francisco Motors. He

rendered services for Francisco Motors but he was not paid. He

said that his fees should be applied or offset to the purchase

price. The SC did not apply the doctrine here because the end

result is that the Corporation is being held liable for the debt of

the stockholders.

What are the areas where the doctrine applies?

1. Defeat of public convenience

2. Used in case of fraud

3. Alter ego or instrumentality test

Defeat of public convenience – like when the veil is used to

evade a contractual duty

VILLA REY TRANSIT v. FERRER

Villarama sold buses to Tranco and its certificate of public

convenience. The contract stipulates that Villarama should not

engage in the same line of business. Villarama did not engage

in the same line of business but he formed a corporation

engaged in the same line of business the stockholders being his

spouse and children.



8

The SC said that the corporation was set up to evade a

contractual obligation and the veil was pierced.

Used in case of Fraud

AC RANSOM v. NLRC

A group of laborers filed a complaint against AC Ransom for

the payment of monetary benefits. During the pendency of the

case, the stockholders of AC set up a run-away corporation

called Rosario Corporation. It is engaged in the same line of

business and the assets of AC was transferred to Rosario

corporation.

The SC said that Rosario was created to evade the obligation of

AC to its laborers and the veil was pierced.

Alter ego test

3 elements

Control test

The subsidiary corporation is completely under the control

and dominion of the parent company. It is so organized

and controlled as to make it merely an instrumentaliy or

adjunct of the parent corporation.

If you pierce the corporate veil, it does not mean that the

corporation is extinguished. It does not also mean that in

all transactions of the corporation, the veil should be

pierced. It just means that the veil can be pierced if all the

elements of the control test are present.

Fraud test

The control was used to commit fraud or evade a duty in

violation of the plaintiff’s right

Harm test

The control and breach of duty are the proximate cause of

the harm or injury suffered by a third party.

BAR: What are the effects if the veil of corporate

fiction is pierced?

The corporation and the stockholders are treated as one

and the same

LANUZA v. BF CORPORATION

BF corporation was the contractor of Shangri-La corporation to

construct a building in Ortigas. BF was not paid so it filed an

action for collection ag. Included in the suit are the officers and

directors because the complaint alleges that there was bad faith

on the part of the said offices and directors. Shangri La moved

to suspend the case because the construction agreement

between them contains an arbitration clause which means that

resort to court should be preceded by arbitration.

Lanuza and the other directors are not parties to the

construction agreement. It is only between the 2 corps

Can Lanuza be compelled to arbitrate even when the

agreement is between the two corporations?

SC: if the complaint alleges bad faith or gross negligence

on the part of the officers and directors, and the same is

proven, then there is no more distinction between the

persons composing the corporation and the corporation

In this case, it was proven that there was bad faith and the

directors and the corporation was regarded as one and the

same. Hence, the arbitration agreement should continue

against them even if they are not parties to the arbitration

agreement.

What is the liability of a third party mortgagor?

Only to the value of the mortgaged property. he is not

liable beyond the value of the property because he merely

lend his properties to secure the obligation of another

EXCEPTION:

The case of Heirs of Fe Tan Uy v. International Exchange

Bank (2013)

ABC obtained a loan from the bank secured by a mortgage

given by XYZ corporation. ABC Corp did not pay the loan. The

bank forclosed the mortgage of XYZ. After foreclosing, there

was a deficiency. Should the deficiency be enforced against

either ABC or XYZ or only ABC? the SC said that ABC and XYZ

are one and the same entity because they have a common

president. The same president who signed the loan agreement

of ABC and the mortgage agreement of XYZ. Both are family

corporation. There was overlapping of finances and operations.



9

B. CLASSES OF CORPORATIONS

Sec. 3. Classes of corporations. - Corporations formed or

organized under this Code may be stock or non-stock corporations.

Corporations which have capital stock divided into shares and are

authorized to distribute to the holders of such shares dividends or

allotments of the surplus profits on the basis of the shares held are

stock corporations. All other corporations are non-stock corporations.

1. Stock and Non-stock

What is a Stock Corporation?

It’s a corporation with capital stock, divided into shares,

authorized to distribute dividends to stockholders on the

basis of their shares.

What about non-stock corporations?

Section 3 of the Corporation Code says “All the rest are

non-stock corporations”.

So Sec. 3 defines stock corporations as corporations with

capital stock, divided into shares, authorized to distributed

dividends or surplus profits to stockholders on the basis of

their shares. And all the rest are non-stock corporations.

Section 87 defines the purposes of non-stock

corporations

It’s not for profit okay (okay dean sure). It’s a non-stock,

non-profit corporation.

BAR: A stock corporation has two basic

characteristics: (1) It has capital stock divided into

shares (2) Its authorized to distribute dividends.

Oraaayt, the articles of incorporation of ABC Corp

provides that the authorized capital stock is 1

BILLION PESOS (INSERT DR. EVIL HERE), is that

VALID?

Go back to the definition of a stock corporation, and

compare. It’s lacking. It’s not enough that it says “1

BILLION” capital stock. It must be divided INTO one

million shares with a par value of 10 PESOS. So the

product between the shares and the par value is your

authorized capital stock.

How about this? The articles of incorporation of ABC

corp states that it has 1 BILLION PESOS divided into

1 BILLION SHARES, par value 1 pesos. It is engaged

in the business of managing golf courses, and issues

shares to members, allowing them to enjoy the

facilities of the corporation. It is SILENT(silence daw

sabi ni dean) on the power of the corporation to

declare dividends. And their articles further provide

that upon dissolution, their assets shall be donated to

a charitable institution. STOCK OR NON-STOCK?

It is a stock corporation sir.

Even though it’s silent on the declaration of

dividends?

Yes. Because its silence does not mean it is prohibited.

What would make it non-stock is if it is prohibited to

declare dividends.

If it is silent, Sec. 43 is DEEMED READ into the articles of

incorporation. And under Sec. 43, the corporation can

declare dividends in case of surplus profit.

Second, before dissolution, there is nothing that prohibits

the corporation from distributing dividends. And after

dissolution anyway, the assets are divided to the

stockholders and the stockholders may freely assign it to a

charitable institution.

For as long as we have two elements: (1) capital stock

divided into shares; (2) authorized to distribute surplus

profits to the stockholders, it is a STOCK corporation.

Now, if Sec. 87 enumerates the purposes of the non-

stock corporation, what is not allowed for a non-

stock corporation? What are the purposes not

allowed? It says charitable, religious, civic, cultural,

literary, social, educational, and so on, so what are

the ones not allowed?

It cannot be organized for profit or organized for partisan

political activity or political purposes. That’s why

NONSTOCK, NONPROFIT.

Does that mean the non-stock corporation cannot

earn profit?

As long as the profits are not distributed to the members,

and are used in the furtherance of the purpose of the

corporation.

UST is a non-stock, non-profit corporation, and yet it

is in the TOP 500 corporations in terms of profit, and

there’s nothing wrong with that, as long as the profits

are not distributed to the members and used to

further or promote the purposes of the corporation.

Last question before we resume our lecture. How do

we distinguish a public from a private corporation?

A public corporation is organized to govern a portion of

the state, while the private corporation is organized for

private ends.

Is a GOCC necessarily a public corporation?

If the corporation is owned by the state does it make it a

public corporation?

Just because it is owned by the government does not make

it a public corporation. A public corporation is organized

for the government of a portion of the State.



10

Is Boy Scouts of the Philippines a Public

Corporation?

It is a public corporation. Justice Teresita Castro said it

was. Because it was created by charter, it was owned and

controlled by the government. Congress cannot enact a law

to create a private corporation. But subsequently, there

were more private individuals that owned shares. So from

government owned, they became privately owned. The

BSP’s argument was that since it is now privately owned,

they are no longer subject to COA audit. So BSP refused to

cooprate with COA. “We used to be owned by the

government, but now we’re owned by private individuals,

so now you don’t have jurisdiction over us”.

So if it is not controlled and owned by the government, is it

automatically a private corporation if it is no longer owned

by the government? Justice De Castro said there is another

kind of corporation, that organized for a public purpose,

found in the civil code.

2. De Jure, De Facto, Corporation by Estoppel, Corporation by

Prescription

DE FACTO CORPORATION

Sec. 20. De facto corporations. - The due incorporation of any

corporation claiming in good faith to be a corporation under this Code,

and its right to exercise corporate powers, shall not be inquired into

collaterally in any private suit to which such corporation may be a

party. Such inquiry may be made by the Solicitor General in a quo

warranto proceeding.

It exists in fact, but not in law. In the sense that the state

reserves the right to question its existence owing to an

infirmity in its incorporation.

It is allowed by law to exist, but the State reserves the right to

question its corporate existence because of defects in its

creation. So far as the state is concerned it does not exist, but

exists in fact.

And then you have corporations by estoppel, which is a group

of persons who assume themselves to be a corporation, and

they’re precluded from denying the existence of the ostensible

corporation with respect to third persons relying on their

representations. They are liable as general partners for the

liabilities and damages incurred by the ostensible corporation.

What are the elements of a De Facto Corporation?

(1) A VALID LAW under which it is incorporated

(2) Bona Fide attempt to incorporate

(3) Exercise of Corporate Powers

The First Element: Valid Law under which it is

incorporated

If the law is declared unconstitutional, then it does not give rise

to a de facto corporation.

BAR: Congress enacted a law to create a private

corporation. And that private corporation, after its

creation, was allowed to exercise corporate powers.

Is this a De Jure, De Facto, or Corporation by

Estoppel?

Is it DE JURE? It’s not. Is it DE FACTO? Likewise, no.

Because there is no valid law under which it was

incorporated. The law creating it is unconstitutional

because congress cannot enact a special law to create a

private corporation. They can only enact a law to create a

GOCC.

A Group of Lawyers decided to put up a corporation

to engage in the practice of the law profession. They

stated in their AOI that the primary purpose is to

engage in the practice of the law profession and the

one who processed the papers of the corporation

belongs to the same fraternity, and he turned a blind

eye and had the AOI approved by the director of the

SEC. As a consequence the SEC issued a Certificate of

Incorporation. Is that a De Jure or a De Facto

corporation? Or neither de jure nor de facto?

Neither, right? It cannot be organized for the practice of a

profession.

The Second Element: Bona Fide Attempt to

Incorporate

As long as there are no Articles of Incorporation signed by the

parties, there is no De Facto Corporation.

If the AOI is not filed with the SEC?

No De Facto Corporation.

If the AOI is signed, and filed with the SEC, but not approved

by them, and no Certificate of Incorporation issued? It is NOT

a De Facto Corporation.

You cannot say that there was a Bona Fide attempt to

incorporate until the SEC at least issues a Certificate of

Incorporation.

So bona fide attempt is not tantamount to good faith

right?

It is tantamount to the actual issuance by the SEC of the

CERTIFCATE OF INCORPORATION.

So what if five persons sign the articles of

incorporation, subscribe to shares of stock of the

proposed corporation, gave the subscription fees to

the lawyer, and the lawyer pocketed the money, and

he issued to the five incorporators a FALSE or

SPURIOUS Certificate of Incorporation? Is it De Jure

or De Facto?



11

It’s NEITHER. There was no Certificate of Incorporation

issued by the SEC.

In these cases, if it’s neither de jure or de facto, is

there a corporation by estoppel?

A Corporation by Estoppel is a group of persons who

assume themselves to be a corporation when they are not

legally authorized for that purpose. Therefore in these

cases where there is representation by a group of persons

that they are a corporation, when they are not legally

authorized for that purpose, then there is a corporation by

estoppel.

So these persons are precluded or estopped from denying

the existence of the ostensible corporation and they are

liable as general partners for all the liabilities and damages

caused or incurred by the ostensible corporation.

So what are the liabilities of these incorporators?

So it’s not de jure, not de facto, but by estoppel. On the

assumption that there was representation to a third person

that they are a corporation. So what is their liability? Are

they all liable as general partners? The answer is no.

There ought to be an OVERT ACT or REPRESENTATION

that they are a corporation so the doctrine of Corporation

by Estoppel can apply. So if there is no overt act, he is just

a mere passive subscriber he is not liable as a general

partner.

EXCEPT, in the case of Philippine Fishing Gear. Here

there was no overt act or representation but the passive

subscriber reaped the benefit from his association with his

partners in another transaction. With respect to the

transaction, there was no overt act, but he obtained the benefit

from the association with these affiliates in other transactions.

So if you reap the benefits as a result of association with other

persons, it makes you liable likewise as a general partner

Does the Good Faith or Bad Faith of the persons who

made the representations that they were a

corporation important in determining whether it is a

Corporation by Estoppel or not?

So five lawyers put up a corporation, it’s their first time, so

they subscribed to shares of the corporation, they signed

the articles of incorporation, and then they paid the fees to

the lawyer, in the hope that the lawyer would process it.

But then the lawyer pocketed the money, and issued a

FALSE or SPURIOUS Certificate of Incorporation. But

believing in good faith that they’re really authorized, they

entered into contracts, let’s say for the purchase of office

equipment for their new office. Is it a corporation by

estoppel? Because 2 out of 5 believed in good faith that

they were really authorized? The answer is no because the

good faith or bad faith is immaterial to determine a

corporation by estoppel. The point is, two or more persons

assume themselves to be a corporation and they were not

legally authorized to do so. That would make them liable

as general partners for the liabilities and damages incurred

by such ostensible corporation.

What about the liabilities of a De Facto Corporation?

They have the same liabilities as a de jure corporation.

How about the liabilities of the directors, officers,

and stockholders of the De Facto Corporation? Are

they liable as general partners?

The answer is no. The liability as general partners only

applies to Corporations by Estoppel and not to a De Facto

Corporation. So whatever are the liabilities, rights, of

directors and officers and stockholders of a de jure

corporation are the same rights, duties, and obligations of

directors, officers, and shareholders of De Facto

Corporations. It is the same as a de jure corporation except

that the state reserves its right to question the corporate

existence through a quo warranto proceeding.

The liabilities of stockholders are limited to their

subscription agreement to the corporation, unless they are

also directors or officers.

BAR: What are the liabilities of A, B, C, D, and E in a

De Facto Corporation?

It depends on the acts they perform. As directors, or

officers, or stockholders. If only as stockholders, then

they’re only liable to the extent of their subscription. If

they’re directors, they can be personally liable in six cases,

which we’ll discuss later on.

The existence of a De Facto Corporation cannot be

attacked collaterally. It can only be attacked in a direct

proceeding, a Quo Warranto proceeding.

ABC Corp is a De Facto corporation, it sold

merchandise to XYZ Corp. XYZ did not pay ABC, and

so the latter filed a collection suit against the former.

XYZ moved to dismiss the complaint on the ground

that ABC, as a de facto corporation, cannot sue or be

sued. Will you grant the motion to dismiss?

No. For two reasons:

A De Facto corporation has the power to sue and be sued,

just like a de jure corporation.

Second, the existence of a de facto corporation cannot be

questioned in a collateral proceeding like in this collection

suit. There must be a direct proceeding, initiated by the

state through the Solicitor General, to oust the corporation

from exercising corporate powers.

CORPORATION BY ESTOPPEL

Sec. 21. Corporation by estoppel. - All persons who assume to act

as a corporation knowing it to be without authority to do so shall be

liable as general partners for all debts, liabilities and damages incurred



12

or arising as a result thereof: Provided, however, That when any such

ostensible corporation is sued on any transaction entered by it as a

corporation or on any tort committed by it as such, it shall not be

allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such,

cannot resist performance thereof on the ground that there was in fact

no corporation.

Can you sue a corporation by estoppel independently

of the persons assuming themselves to be a

corporation?

Who do you sue? The ostensible Corporation or the

persons or both?

But I thought that in the case of ostensible

corporations, those who assume themselves as a

corporation are liable as general partners? If they

are liable as general partners, so how can you

enforce the liability of those who assume themselves

as a corporation unless you implead them as party

defendants?

Is it ostensible corporation or the persons or both?

Both sir.

Can they have assets? How? How can they have

assets when they are not a corporation?

It is considered as a corporation only for equity purposes,

only because of its representation that the persons forming

it are a corporation.

Can it acquire assets?

The case of Macasaet vs. Francisco. A newspaper

which the plaintiff thought was registered with the SEC

was sued together with the publisher, editor. The lawyer of

the newspaper company filed a motion to drop Abante

Tonight (Abante Tonight?) as party-defendant because

they were not registered in the SEC. The court denied the

motion. Because a corporation by estoppel cannot be sued

or be sued independently of the persons comprising the

corporation. The SC said the RTC did not abuse its

discretion by denying its motion to drop the ostensible

corporation as a party defendant. So that is your authority

to say that the ostensible corporation , if you do not

register w/ the sec, you may be sued. Supreme Court said

it also possesses certain attributes.

If you do not plead the ostensible corporation, how

do you make it liable for damages and liabilities

incurred?

IN my notes, I said that what happens now if judgment is

later on rendered against the ostensible corporation, how

do you enforce the judgment against the ostensible

corporation that presumably will never have any capacity.

So you sue the persons comprising the ostensible

corporation, but not the corporation by estoppel right?

That’s not how the SC viewed it.

For Bar purposes, if the question is, can you sue an

ostensible corporation, the answer is YES. Macasaet

vs Francisco.

Recently the SC imposed *** possessed certain attributes,

similar to a corporation. It can be sued, it can be made liable

for damages and liabilities it incurred as a corporation.

Alright, in a corporation ______ (***Tengene Pete I’ve

repeated this part so many times and I couldn’t understand

what Dean was saying dahil sa imbyernong ubo mo!) and the

persons who assumed themselves to be a corporation, are a

corporation by estoppel right? So regardless of the good faith

or bad faith of these persons

In the last meeting we said that, if five persons sign the articles

of incorporation and gave the subscriptions to the treasurer in

trust and then included the filing fee and they were duped into

believing that the SEC issued a Certificate of Incorporation,

and a Falsified Certificate was issued to them, and in good faith

they conducted their operations even though they were not

registered, we said that’s not a de jure corporation, not even a

de facto corporation, because there was no attempt to

incorporate. It is a corporation by Estoppel, and those who

assume themselves to be a corporation are liable as general

partners.

BAR: If the corporation fails to materialize, (ubo ubo)

is there a partnership created among the

incorporators?

If the corporation fails to materialize and their

articles of incorporation are not filed with the SEC, is

there a partnership created among the

incorporators?

In the PIONEER INSURANCE CASE, we have to make

the distinction between those who assume themselves to

be a corporation, since they are liable as general partners,

but does that mean there’s a partnership created among all

of the incorporators?

The Supreme Court said that the failure of the

incorporators to organize does not necessarily give rise to

a partnership, unless the parties intend to form a

partnership in case of failure of incorporation. IN a

partnership, two or more persons bind themselves to

contribute money or property with the intention of

dividing the profits among themselves, and that is NOT

the same as a corporation. There has to be intention to

organize as a partnership in case the corporation fails to

materialize. Otherwise, only the passive and active

subscribers will be liable as general partners, without

having to create a partnership with intent. The others are

not liable to share in the losses incurred by those who

actively held themselves to be a corporation.



13

In the case of Lozano vs De Los Santos (June 1997), there

can be no Corporation by Estoppel unless there is a third

person who relied on the representation that it is a corporation.

There were two associations of Jeepney drivers and operators

in Mabalacat, Pampanga, and they agreed to unify to create a

consolidated corporation. They agreed that the election of

directors and officers, and the directors elected shall run the

consolidated corporation. They held their election, and typical

of the Philippines, the losing party cried “Cheating!”. The other

group refused to recognize the election. Thus a suit was filed

with the RTC acting as a Special Commercial Court. The

QUESTION is whether or not it falls as an INTRA-

CORPORATE CONTROVERSY.

There was an attempt to bring it under the rules on intra-

corporate controversies on the argument that there was a

corporation by Estoppel among them. So the proposed

consolidated corporation, at the least, is a Corporation by

Estoppel and they argued that there is an intra-corporate

relationship between the partners.

The SC said NO, if the representations made are between them,

and it did not involve a third party, there can be NO

CORPORATION BY ESTOPPEL. Also keep in mind that only

the aggrieved party may invoke the doctrine of Corporation by

Estoppel.

He who obtained the benefits from the transaction

cannot invoke the Doctrine of Corporation by

Estoppel.

In the case of INTERNATIONAL EXPRESS TRAVEL

AND TOURS VS CA, Henri Kahn, on behalf of the Philippine

Football Federation, purchased airline tickets, from Travel and

Tours, for Philippines athletes who will compete in the SEA

games. The tickets were not paid. Travel and Tours filed a

collection case against Kahn, and Kahn invoked the doctrine of

Corporation by Estoppel. Curiously, the Philippine Football

Federation, while registered with the SEC, is still not a

corporation, because under the law creating Sports

Federations, it is not enough that they register with the SEC, it

must also be accredited by the appropriate governing agency.

So the law requires Sports Federations to be registered with the

SEC AND ACCREDITATION with the appropriate governing

agency, TO BE ABLE TO ACQUIRE LEGAL PERSONALITY.

The PFF did not have accreditation from the appropriate

governing agency, so it is not a De Jure corporation but a

Corporation by Estoppel. Here, only Henri Kahn represents

PFF, and he who represents an unincorporated corporation is

the one personally liable. Likewise, the SC said that Kahn

cannot invoke the doctrine because he was the one who

benefited from the transaction. Only the aggrieved party and

NOT the of

fender may invoke the Doctrine of Corporation by Estoppel.

BAR: Orayt, this was asked in the bar. Juan dela Cruz was

invited by four persons to invest in a financing company.

Because Juan had a considerable investment in the supposed

financing company, he was made the president of the proposed

corporation. He believed in good faith that the Articles and

other documents were filed with the SEC. So Juan dela Cruz,

with Pedro Reyes (bigla singit new name ha) entered into

various transactions with various clients. Thereafter he

discovered that no Articles were filed, no certificate of

incorporation issued. So they hurriedly remedied it and had a

Certificate of Incorporation issued from the SEC. Three months

after the issuance of the Certification, the corporation collapsed

because of insolvency.

What are the liabilities of Juan dela Cruz and Pedro

Reyes? Can they invoke (1) De Facto Corporation; (2)

Corporation by Estoppel against those investors who

made placements with the corporation and did not

get their return on investments?

As to the first question, is there a De Facto

Corporation?

There is. The Certificate of Incorporation was allowed to

issue. But is the doctrine of De Facto Corporation available

as a defense? No. Because that could only be raised in a

direct proceeding and not in a collateral proceeding.

What about the defense of Corporation by Estoppel?

It is not available. They were the ones who claimed the

benefit. They are not the aggrieved party.

How about the liabilities of Juan dela Cruz and Pedro

Reyes? Are they personally liable?

It depends. There are six cases where a director of the

corporation may be held personally liable, and they are:

(1) Assenting to a patently unlawful act;

(2) Gross Negligence or Bad Faith in directing the affairs;

(3) Acquiring Interest in conflict with their duty as a

director or officer of the corporation resulting in damage

thereof;

(4) Issuance of Watered Down stocks;

(5) By Agreement to be held liable with the corporation;

(6) By Express provision of law. Unless these are present,

the insolvency of the corporation does not make them

personally liable.

That’s an affirmation of my discussion *fake giggling by

the class*.

3. Domestic and Foreign

What is a Domestic Corporation?

One formed, organized, and existing, under Philippine

laws.



14

Foreign Corporation?

One formed, organized, and existing, under laws other

than Philippine law, AND whose laws allows Filipino

Citizens to conduct business in their own country or state.

Sec. 123. Definition and rights of foreign corporations. - For

the purposes of this Code, a foreign corporation is one formed,

organized or existing under any 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 it shall have obtained a

license to transact business in this country in accordance with this

Code and a certificate of authority from the appropriate government

agency.

Under Sec. 123, there are two features of a foreign corporation.

1. Formed, organized, existing under FOREIGN LAWS;

AND

2. The element of RECIPROCITY whose laws allows

Pinoys to do business in its own country or state.

What if there is no element of Reciprocity? Is it still a

foreign corporation?

Yes. As long as it is formed, organized, existing under a

foreign law. BUT, if the foreign corporation’s laws do not

allow Pinoys to do business in its own country, it cannot be

given a license to do business in the Philippines. But it

does not detract from the fact that it is still a foreign

corporation because the test to determine is its PLACE OF

INCORPORATION.

If ABC corporation is organized in the USA,

composed fully of Filipino citizens, what is it?

It’s a foreign corporation because it is formed, organized,

existing under foreign laws.

But is it a Philippine National? Can ABC corporation

invest in the equity of a Public Utility company?

Yes. A foreign corporation composed entirely of Pinoys is a

Philippine National if it is registered as “doing business” in

the Philippines.

To determine nationality, the test is not the place of

incorporation but the NATIONALITY of the

CONTROLLING STOCKHOLDERS, in case of investment

in nationalized activities. The definition of a Philippine

National under the Foreign Investment Act, in case of a

foreign corporation, it is composed entirely of Filipinos,

and registered to “do business” in the Philippines. Thus, it

can invest in public utilities.

4. Open and Close

Is a Family corporation a closed corporation?

Not necessarily. The SC held that what makes it a Closed

Corporation is whether it has ALL the characteristics of a

closed corporation in the ARTICLES OF

INCORPORATION. In the case of San Juan Steel vs CA,

there were 5 incorporators/subscribers and the Husband

and Wife owned 98.7% of the corporation. Does that make

it a closed corporation? NO. Because it MUST have the

characteristics of a Closed Corporation to be considered as

such.

What are the characteristics of a Closed Corporation?

(1) The AOI provides that the number of stockholders

should not exceed TWENTY.

(2) Subject to RESTRICTIONS on transfers, as specified

in the AOI, Bylaws, and stock certificate

(3) Not available for listing in the stock exchange or

public offering.

BAR (1986): What do you mean by a Corporation

“Going public” and “Going Private”?

Not in the corporation code but asked pa rin sa bar.

Tinopak daw si examiner. May kalog ang isip.

GOING PRIVATE means adopting the features of a Closed

Corporation. GOING PUBLIC means making shares

available in the Stock Exchange and made available for

public trading. (pero kay Pete iba ang Going Public nya.

Chos)

5. Parent and Subsidiary

The Parent Corporation controls another corporation, it owns

shares in that corporation, and elects the directors in the other

corporation.

Holding Company vis-à-vis Parent Corporation

The Holding company is organized for the purpose of

investing in equity of various corporations. Just like JG

Summit of the Gokongwei’s or SM Investments of the Sy’s.

On the other hand, the parent company is not necessarily

organized for the purpose of investing in equity since the

parent company may have a private purpose.

So Baket ba kailangan ng Holding Company?

To achieve synergy in various corporations. At the same

time to limit liability with the operations of the various

companies. The best examples of synergy are contracts

between companies with interlocking directors. Under Sec.

33, except in case of Fraud and if it is reasonable under the

circumstances, a contract between two corporations with

interlocking directors is not good right? For example,

when Philippine Airlines was controlled by Ramon Ang of

San Miguel, where did they get the fuel supply? From

Petron (owned by San Miguel).

6. Corporation Sole and Corporation Aggregate

7. Public and Private



15

8. Government-Owned and Controlled Corporation

What is a Public Corporation?

It is a corporation formed and organized for the

government of a portion of the State. It has a political

purpose. E.G. Cities, municipalities.

Are all GOCC’s considered public corporations?

NO. These GOCC’s may not be organized for the

government of a portion of the State. Like DBP, it’s a

GOCC but it does not exercise control over a portion of the

State.

What about the Boy Scouts of the Philippines?

In the Case of Boy Scouts of the Philippines vs CA, penned

by Justice De Castro. According to her, the BSP is a public

corporation. The Boy Scouts were created by Special Law,

it has a charter of its own, and because of its charter, it was

owned and controlled by the government. Thereafter, it

somehow became controlled by private individuals. And

since it is now controlled by private individuals, the BSP

now claims it is no longer a GOCC and not subject to COA

audit. Ayaw nila ma-audit eh. Binay daw kasi. Anyways,

the SC said that just because it is not anymore owned and

controlled by the government does not mean it is already a

private corporation. The SC said there is still ANOTHER

kind of corporation under Sec. 44 of the NEW CIVIL

CODE. These are corporations ORGANIZED FOR A

PUBLIC PURPOSE. Thus, since it was organized for a

public purpose, it is subject to COA audit.

TWO KINDS OF GOCC

There are two kinds: Chartered and Non-Chartered.

What’s the practical distinction between the two?

A chartered GOCC means there is a law creating the

GOCC, thus it is governed primarily by the special law

creating it. The Corporation Code is only suppletory. If it is

a NON-chartered GOCC, the governing law is the

Corporation Code.

Who has jurisdiction over employees of chartered

GOCCs?

The Civil Service Commission

Non-chartered GOCCs?

The Labor Arbiter and NLRC.

Example: Philippine National Bank. It was created by special

law, and thus governed by its charter. Before it was privatized

and acquired by Lucio Tan, it was a GOCC.

In the case of GONZALES v. PNB (1983), Ramon Gonzales

(the Oliver Lozano of his time, public advocate sya etc) wanted

to inspect the books of PNB, to investigate the Behest loans it

granted but he wasn’t a stockholder of PNB. So he bought one

share of stock (barat lang), and invoked his stockholder’s right

of inspection of the corporate books under the Corporation

Code. After examining the charter of PNB, the SC said that its

charter limits those allowed to examine the books of PNB, only

allowing the President, the Governor of the Central Bank, and

the Secretary of Finance, and only those authorized by the

board. IT did not include stockholders. Thus, the charter of

PNB prevails over the general law of the Corporation Code. But

of course it is not anymore applicable today since PNB is no

longer a GOCC but a private corporation.

BAR: Why is there no private corporation organized

by Congress?

Under the constitution, Congress, except by general law,

cannot pass a law for the creation of a private corporation.

So if you want to create a private corporation, do so by

general law (Corporation Code). That’s why there was a

bar question regarding the creation of a private

corporation through congressional act, asking if it is a De

Facto Corporation. The answer is that it is neither De Jure

nor De Facto. IT cannot be de facto because there is no

valid law under which it is incorporated since Congress

cannot enact a law to create a private corporation. It can

only create, by law, a GOCC.

What about the Philippine National Red Cross?

Red Cross was created by special law, there’s a charter.

The case cropped up because of a petition filed by former

congressman Dante Liban against Senator Dick Gordon.

According to LIban, Gordon is deemed to forfeit his Senate

seat by virtue of his assumption of the chairmanship of

Red Cross. Citing the Constitution, he argued that no

SINator or TONGressman shall occupy, during his term of

office, a position in government including GOCCs. Liban

said that the PNRC is a GOCC, since it was created by

special law. Therefore, Dick’s insertion as the Chairman of

PNRC violated the Constitution and he should forfeit his

Senate seat.

The SC said that PNRC is NOT a GOCC. Because the funds

of Red Cross did not come from the Govenrment. It comes

from donations.

Does that mean the law creating Red Cross is

unconstitutional?

The SC initially said it is. But upon intervention of PNRC

in the Motion for Recon, the SC said that it is SUI

GENERIS and valid. Let’s forget muna about the rules

daw, lets recognize PNRC for what it is, an important ally

of the govt in providing humanitarian service to all people.

Let’s close our eyes muna to the legal principles. PNRC

does not need to re-organize anymore as a private

corporation.



16

So what happens if an employee of PNRC is removed?

In one case, an officer of Red Cross was misappropriating

its funds so he was terminated. The SC said that the

termination dispute should be handled by the CSC, since

the PNRC has a charter of its own.

What makes a corporation a GOCC?

If it’s a stock corporation, it must be 51% owned by the

government.

In the case of CARANDANG v. DESIERTO (Jan 2011),

Benedicto owned 72.4% of the outstanding capital stock of

RPN and ceded these to the PCGG and the Government.

Later on, he recanted and said that his shares represented

only 32.4% of RPN’s stock and not 72.4%. So what does

the government own in this sequestered corporation?

During the pendency of this issue, the GM was removed,

thus giving rise to the question of jurisdiction between the

CSC and LA over his termination. The SC said that

pending conclusive determination as to the government’s

shares, it is not considered yet a GOCC. Thus to be

considered a GOCC, it must be conclusively proven that

the government owns at least 51% of the outstanding

capital stock.

FUNA v. MANILA ECONOMIC AND CULTURAL

OFFICE

Is MECO a GOCC?

In the case of, the SC laid the requisites of a GOCC. It is

our cultural office in Taipei, Taiwan that acts as our

“embassy” there since under the One China Policy we only

recognize the People’s Republic of China (CHINA) and not

Taiwan, so we don’t have any diplomatic ties with Taiwan.

MECO collects fees. Friend daw ni Dean D. ang head ng

MECO now hahaha. So the issue here is whether the fees

collected by MECO are subject to COA audit. The SC said

MECO is NOT a GOCC, because it is organized as a non-

stock corporation and their funds don’t come from the

government, the fees collected by it partake of

governmental funds and thus subject to COA audit. Pag-

gusto, gagawa ng paraan, pag-ayaw may dahilan. Pag may

alak, may balak! So MECO is not a GOCC but the fees it

collects partake of the nature of governmental funds and

subject to COA audit.



17

C. NATIONALITY OF CORPORATIONS

1. Place of Incorporation Test

2. Control Test

3. Grandfather Rule

General Rule is that we don’t apply control test, we only

follow control test in times of war and in case of investment in

economic activities reserved in whole or in part to Filipinos.

We follow instead Sec. 123 of the code which is the place of

incorporation.

So the nationality is determined by the place of incorporation

except in case of investment in economic activities which are

considered nationalized or in times of war, in which case we

follow the control test and the grandfather rule.

Before the case of Nara vs Redmont, we only follow the

control test in determining the nationality of the corporation in

investment in activities reserved for Filipinos.

General Rule: We apply Incorporation Test to determine

Nationality of Corporation

Exception: In case of investment in economic activities which

are considered nationalized or in times of war.

But in the case of Nara vs Redmont, the Supreme Court said,

that we apply cumulatively both the control test and the

grandfather rule to determine the nationality of the

corporation engaged in nationalized activities.

What are examples of economic activities that are

reserved for Filipinos that is why in these cases we

follow the control test?

Mass Media 100% Reserved for Filipinos

Rice and Corn

100% Reserved for Filipinos

Small Scale mining


Security Agency

100% for Filipinos

Watchman and Detective agencies


Recruitment

Agency 75% Reserved for Filipinos

Advertising 70% Reserved for Filipinos

Large Scale Mining


Banks

60% for Filipinos except if foreign banks under the foreign bank liberalization law certain banks are now allowed to own 100%.

Retail

100% reserved for Filipinos but if the

foreigner has a capital of 2.5 Million

Dollars and up. Foreigners are allowed

to own 100%. So below 2.5million

dollars, it is reserved for Filipinos.

Exceptions are high end products like

louis vuitton, hermes, Gucci. You can’t

expect hermes to be owned by

Filipinos, otherwise it is not hermes. In

the moment you have a foreigner, you

are subjected to the 2.5 million dollar

requirement. Exceptions to repeat are

High end products which have 30

thousand dollars per store and

convenience store like 7/11 which

should have _____(unclear figure,

hindi dahil sa ubo ni pete) thousand

dollars per store.

GAMBOA v. TEVES

ABC Corporation is Family Corporation, its

authorized capital stock consists of common shares

60% owned by Filipinos, 40% from the foreigners.

And then suddenly the corporation decided to issue

preferred shares. And all the preferred shares are to

be given to Foreigners the non-voting preferred

shares. Is this issuance of the non- voting preferred

shares given to foreigners allowed?

In the First case the Supreme Court said that the term

Capital is limited to only Voting shares, so if the preferred

shares are voting they are included in the term Capital

stock, if they are not voting they are not included.

In the Motion for Reconsideration, the Supreme

Court clarified it further. What happens now when a

corporation issues a mixture of shares whether

voting or non-voting?

The Supreme Court said the 60-40 Filipino ownership

participation must be mirrored in all classification

shares. So across the board whether common,

preferred, voting or non-voting, the 60-40 Filipino

Foreign ownership limit must be mirrored in all

classification shares. So both economic rights and

voting rights must reside in the Filipinos by 60%.

Why?

The Rationale given by the Supreme Court under the

Constitution is that the state must adopt a self-reliant

economy effectively controlled by Filipinos. And the

term control applies to both voting rights and

economic rights.



18

The control test will only apply in case of investment in

economic activities reserved for Filipinos. So we have

enumerated the activities that are reserved for Filipinos except

for one.

What about a financial technical assistant

agreement? May a corporation owned by foreigners

provide financial, and technical assistance to a

mining company?

The answer is yes, so if the intention is to provide financial

or technical assistance to a mining company or a natural

resource exploration company. That corporation may be

owned by Foreigners.

But a corporation that participated in the exploitation,

utilization, development, exploration of natural resources, you

then have to apply or follow the 60-40 limit. So that

corporation can only own up to 40% of a corporation engaged

in mining activity.

Same principle also applies in investment of public utilities.

Under the Constitution, mining, public utility and corporations

engaged in exploration of natural resources. The constitution

in all these 3 cases provide that 60% of the capital of these

corporations must be owned by Filipinos.

How do you define Capital? Is it similar to

outstanding capital stock, because when we say

outstanding capital stock, it includes both common

and preferred shares; is this how you construe

Capital?

The Supreme Court said NO, the term capital is limited to

voting shares only.

For example, let’s say a mining company has 200,000

outstanding shares with par value 1 peso and then divided into

100,000 common and 100,000 preferred shares. Now let’s say

that 80,000 of the common shares are owned by foreigners

and 20,000 of the 100,000 common shares are owned by

Filipinos. And the entire preferred shares are owned by

Filipinos and the preferred shares are non-voting. Is this

corporation in compliance with the corporation code

that at least 60% of capital are owned by Filipinos?

200,000 outstanding shares consisting of 100,000

common and 100,000 preferred. Preferred shares are

non-voting. Out of the 100,000 common shares,

80,000 are owned by foreigners 20,000 are owned by

Filipinos. But all the preferred shares are owned by

Filipinos. If you compute, it will be 120,000

outstanding shares for Filipinos consisting of 20,000

common, 100,000 preferred. And 80,000 of the

200,000 shares are owned by foreigners, is this

compliant with the Constitution? Because 60% or

120,000 of the 200,000 is 60% and 80,000 of

200,000 is 40%. Is this compliant with the

Constitution?

The Supreme Court said NO, because it is important for

the Filipinos to own 60% of the common shares. OR the

preferred shares if they are voting. So 60% of the

outstanding capital stock is owned by the Filipinos, it’s not

compliant with the Constitution that requires 60% of the

Capital and NOT outstanding capital stock to be owned by

Filipinos.

Now why is it that the term Capital is limited to

voting shares?

Because as we said earlier, under the Constitution, the

state must adopt a self-reliant economy effectively

controlled by Filipinos. And control in the corporation is

translated to the ability to elect the directors who would

run the corporation. So unless the Filipinos have the

control in the election of directors, unless they have 60%

of ownership in the corporation to elect the directors, then

you can say that the Filipinos are in control

Now, in the Motion for Recon, supposing we make the

preferred shares non-voting, let’s say for example the question

we asked earlier. At the outset we have 100,000 common

shares, 60,000 Filipinos 40,000 preferred shares and then the

articles of incorporation amended to include only preferred

shares. 100,000 new preferred shares issued only to foreigners

and they are non-voting. because they are non-voting, is this

still in compliant with the Constitution?

Let’s have a second example.

100k = Outstanding Shares, all common shares then 60k =

owned by Filipinos

40k = owned by foreigners. So the 60-40 allocation is complied

with. Now subsequently, the AOI was amended to include the

issuance of non-voting preferred shares. Now all the non-

voting preferred shares are to be given to Foreigners.

Now, if we follow the term capital in the first case, then these

corporations comply with the Constitution. Because non-voting

preferred shares are not included in the term capital and the

Filipinos own 60% the Voting shares.

That’s why in the Motion for Recon, the Supreme Court said

that it is not the intention of the framers of the Constitution.

So now, if the corporation will issue a mixture of shares,

common and preferred, voting or non-voting. The 60-40

allocation must be mirrored in all classification of shares. So to

breathe more life to the provision of the Constitution that

Filipinos must control the Corporation. Both economic rights

and voting rights must reside in Filipinos.

(now, I had the chance to talk to marvic leonen about this case,

we came from a conference in manila sponsored by Philippine

Asssosiation of Law Schools. We talked about Gamboa vs Teves

case, and I said, Justice, what about those corporations where

the losses, 60% of the outstanding capital stock, do we apply

the same definition? That it should be limited only to voting



19

shares? Of course he didn’t answer because whether voting or

non-voting it will have to be 60-40. And I said what about

advertising? Recruitment agency? Do we follow 60-40 or 75-25

or 70-30? What about in advertising, 70-30, do we mirror all

shares? But before he could answer me, nag landing na yung

plane. So that’s not clear yet. Because the SC decision on

Gamboa vs Teves pertains to Public Utility. The ruling in Nara

vs redmont pertains to Mining. So we have no case yet on

advertising or recruitment, realty or other corporations

engaged in nationalized activities, let’s wait for the SEC ruling)

Let’s move on the different kinds of test to determine

nationality of Corporation.

Under Section 123 of the Corporation Code we follow the place

of the incorporation test, regardless the composition of the

stockholders. So a corporation owned by foreigners if

organized under the Philippines, is a Philippine National with

respect to economic activities that are NOT reserved for

Filipinos.

But, as we said earlier, if it is Nationalized Activities, we follow

the Control Test and the Grand Father Rule.

When do we apply the Control Test?

Under the control test, the nationality of the controlling

Stockholder determines the nationality of the corporation

and for as long as 60% of the Capital of the Investing

Corporation is owned by Filipinos, then the entire shares

of that investing corporation will form as Filipino owned.

So we don’t follow the Grand Father Rule Generally if on its

face 60% of the investing corporation is owned by Filipinos

40% by foreigners

(DRAWS SOMETHING ON THE WHITE BOARD)

ABC (100k shares)

XYZ Foreigners

(60%) (40%)

Filipinos Foreigners

(60%) (40%)

Is ABC a Philippine National?

ABC corporation has 100k outstanding shares, lets say

they are all common shares and ABC is owned 60% by

XYZ and the Foreigners own 40k.

But XYZ is

60% owned by Filipinos,

40% owned by foreigners

So is ABC in compliance with the Constitution that

requires 60% of Capital must be owned by Filipinos?

Yes, because under the Control test, for as long as the

investing corporation is owned by Filipinos, the entire

shares recorded in the name of XYZ, the investing

corporation should be recorded as Filipino owned. And

therefore, despite the fact that foreigners own 40% of XYZ,

XYZ is 60k shares considered as Filipino owned.

But, what if it is like this. (DRAWS SOMETHING AGAIN)

ABC (100k shares)

XYZ Foreigners

(90%) (10%)


(50%) (50%)

If the capital of the investing corporation is not 60% owned by

Filipinos, we follow the Grand Father Rule. All the shares

corresponding to percentage owned by Filipinos shall be

recorded as Filipino owned and the shares corresponding to

the percentage owned by foreigners are recorded as foreign

owned.

Therefore, so you have 45k ownership by foreigners in the XYZ

Corporation plus the 10k ownership from ABC then you have

55k ownership by foreigners. Therefore, not in compliance with

the Consttution.

This is how the Grandfather Rule was played in the first case of

Nara vs Redmont.

Now what about this one. (DRAWS SOMETHING ON THE

WHITE BOARD)

ABC Mining Company(100k shares)

XYZ Foreign Corp

(60%) (40%)


(60%) (40%)

So on its face, it appears to have complied with the

60-40 limit right? But the SC in this case applied the

Grandfather Rule. Why?



20

Because the subscriptions of the Filipinos are not paid. So

on paper, 60-40 nga, di naman binayaran. And then there

is an agreement between the Filipinos and the foreign

corp. to fund the operations of the mining company.

So the SC applied the Grandfather Rule in cases wherein there

is doubt on whether or not the Filipinos really own 60% of the

capital of the public utility of the mining company.

So for the first time in the case of Nara vs Redmont, the SC

applied the control test and the Grandfather rule. It was just a

DOJ opinion, now this opinion has found its way in

Jurisprudence in Nara vs Redmont.

And before the Motion for recon, we always thought that only

the control test applies, and the grandfather will apply if it is

less than 60% owned by Filipinos in the investment Corp.

ORYT, the SC in the motion for recon said and clarified that

these 2 test do not contradict each other, they can be

cumulatively applied.

Conclusion:

You apply control test if on its face, the 60-40 allocation is

complied with. BUT, if there is doubt on whether or not the

Filipinos really own 60% of these corporations, then you can

resort to the Grandfather Rule.

There are 2 ways in using the Grandfather rule.

FIRST: if the investing corporation is less than 60% owned by

Filipinos then the shares corresponding to the percentage

owned by Filipinos recoded as Filipino owned and the shares

corresponding to the percentage of foreigners will be recorded

as foreign owned.

SECOND: on its face, the 60-40 allocation is complied with,

and yet there is a doubt on whether or not the Filipinos really

own 60% of the Corporation. Then we have to resort to the

grandfather rule.

So there is nothing wrong in corporate layering, you can have

many corporate layers as long as the combined totals of the

investing and the investee corporation must show that 60% of

Capital are owned by Filipinos, and if there is a doubt. You

apply the Grandfather rule,

REVIEW:

Gamboa v. Teves (2011):

The 60-40 capital requirement of public utilities where

interpreted. The term “capital” is limited to voting shares. If

shares are allowed to vote, they form part of capital. However,

if the shares are not allowed to vote, they are not considered

“capital.”

RATIO: It makes reference to a constitutional provision

wherein the State should adopt a self-reliant economy

effectively controlled by Filipinos. In the corporate setting,

“control” means the ability to elect the directors that will run

the affairs of the corporation.

Gamboa v. Teves (2012; Motion for Reconsideration)

There is no more qualification needed for shares to be

considered “capital” The 60-40 must be mirrored across the

board in ALL classification of shares. (ex: Voting shares must

be 60-40, non-voting shares must be 60-40, preferred shares:

60-40,)

RATIO: There are instances where even non-voting shares may

still be allowed to vote:

Dean’s Mnemonics: A2SICMID (when you’re sick, call a

doctor [MD]): Amendment of the AOI, Amendment of the by-

laws, Sale, lease or other disposition of corporate property,

Increase of bonded indebtedness, Increase of Capital Stock,

Merger or Consolidation, Investment of Corporate funds in

another corporation and Dissolution

Narra v. Redmond: For the first time, the SC applied BOTH

the Control Test and the Grandfather test. Before this case,

either the Control Test or the Grandfather Test was applied.

Apply the Control Test IF: The Nationality of the

corporation is determined by the nationality of the controlling

stockholder. As long as 60% of the Investing corporation is

owned by Filipinos, then the entire shareholdings of the

Investing Corporation shall be considered owned by Filipinos.

Apply the Grandfather Rule ONLY IF:

1.) A corporation is engaged in a nationalized activity and its

shares are owned by a corporation.

2.) The Filipino ownership in such a corporate stockholder is

less than 60%;

3.) The ownership of Filipino citizen in the Investing

Corporation is in Doubt, meaning if the 60-40 is complied with

in paper but there are doubts on the extent of beneficial

ownership in such corporation. Any doubt will trigger the

application of the rule.

4.) If the ownership of the corporation is hidden by using a

layer of corporations (ex: Corp1 is owned by Corp 2; Corpo 2 is

owned by Corpo 3, and so on.) In such a case, you trace the

ultimate owner or the “grandfather” of the corporation. The

combined totals of the investee and the investing corporations

should indicate or establish that Filipinos own 60% of the

capital of such corporate stockholder. Otherwise, the 60-40

requirement cannot be complied with.



21

D. INCORPORATION and ORGANIZATION

BAR: What are the qualifications of incorporators?

- Not less than 5, not more than 15

- Natural persons of legal age

- Majority of them must be Philippine residents

- Must own at least 1 share of stock in his name in the

books of the corp.

1. Not less than 5, not more than 15.

Are there exceptions?

Corporation sole and non-stock, non-profit corporations.

They are now entitled to have more than 15 incorporators.

What about mergers of banks?

The law says, 21 directors are allowed. Now this is 21

directors not 21 incorporators.

So there are only 2 exceptions which are Corporation sole and

non-stock nonprofit corporations because the law allows more

than 15 trustees or incorporators for non-stock nonprofit

corporations.

2. Natural persons

BAR: Is there an exception?

Yes, in case of cooperative, which can be the incorporator

of a rural bank

Can juridical persons be incorporators?

No, but can be subscribers. For example BDO organized a

subsidiary. For example with BDO would like to organize

an insurance company, so BDO Generali. Let’s say BDO

Generali is 99.9% owned by BDO and at the same time you

have 5 incorporators or natural persons. So how can BDO

own 99.9% of BDO Generali if under the law you need to

have natural persons as incorporators?

Nothing wrong here, because BDO, while cannot be an

incorporator, can be a subscriber. So it can own 99.9% of the

outstanding capital stock of BDO generali. The 5 persons can

be nominees of BDO.

3. Majority of them must be Philippine residents.

Just count how many are incorporators natural persons, so

majority must be Philippine Residents.

Is Citizenship a requirement?

Not a requirement as long as majority of them are Philippine

residents except if it is engaged in nationalized activities. If it

is nationalized, obviously you cannot have foreigners as

incorporators of mass media, rice and corn etc. etc.

Now what about partly nationalized?

Then foreigners can be incorporators to the extent of the

allowable equity participation.

A public utility company 40% are owned by

foreigners and 60% are owned by Filipinos. 3

foreigners were elected to the board of the Public

Utility corp. Is this a violation of the constitution?

No, foreigners can be elected to the board to the extent of

the allowable foreign equity.

Can they be elected officer of the mining company?

No, while they can be elected or incorporators to the

extent of allowable equity participation, they cannot be

appointed as officers because under the anti – dummy law.

The foreigner cannot be appointed to any executive

positions of any corporation engaged in a nationalized

activity whether wholly or partly.

4. Must own at least 1 share of stock in his name in

the books of the corp.

BAR: How do you distinguish Incorporators from

Stockholder/Subscribers?

INCORPORATORS STOCKHOLDERS/

SUBSCRIBERS

Incorporators are

mentioned in the Articles of

Incorporation as those

originally forming part of

the corporation

Subcribers need NOT be

mentioned in the AOI as

originally forming part of the

corporation

Incorporators should not be

less than 5 not more than 15

EXPN: 1.) Corporation

Sole and

2.) Merger or Consolidation

of Banks

Limited by the number of the

Authorized capital stock of the

corporation

Incorporators must be a

Natural Person

EXPN: Incorporators of

Cooperatives/Rural Banks

may be a natural/juridical

person

May either be a natural person

or a juridical person

Majority of the

Incorporators must be

Filipino Residents

No citizenship requirement

EXPN: Corporations engaged

in a Nationalized Activity



22

Discuss the step by step procedure in forming a

corporation/ if you have a client who wants to put up

a corporation, what will your advice be?

1. Determine the Incorporators

2. Execute the Articles of Incorporation

- It must conform with the form prescribed by the

corporation code

3. Execute the By laws

- May be submitted together with the AOI or 1

month after incorporation

4. Treasurer’s Affidavit

- Showing that 25% of the total subscriptions have

been paid

5. Verification Slip

- stating that the proposed name is not identical or

confusingly similar to other corporate names

6. Undertaking to Change Corporate Name

- In case the SEC finds out that the coporate name

is identical with another corporation

7. Payment of fees

8. In case of Banks and other special Corporations, the

favourable recommendation from the appropriate

government agency.

9. Issuance by the SEC of the Certificate of

Incorporation

- Certificate includes: Certificate of Filing of the

AOI and the Certificate of Filing of the By-laws

1. Promoter

Promoter - an agent of the 5 Incorporators before the

incorporation or the agent of the Corporation after

incorporation. They promote the idea of the Corporation

Is the Corporation liable for the contracts entered

into by the Promoter?

NO. Unless the Corporation ratifies or affirms as its own

those contracts.

Principal duties of an agent

1. Account and

2. Remit any profit earned in the course of the agency

2. Number and Qualifications of Incorporators

An incorporator is always a corporator but a corporator is not

an incorporator.

BAR: Distinguish Corporator from incorporator. Corporator is

hardly used now, now- subscriber or stockholder.

First, as regards number, incorporator not less than 5 not more

than 15 except corporation sole and non-stock non-profit

corporation. Subscribers, no limit on the number of

subscribers to the extent allowed by authorized shares of the

corporation.

On natural persons, incorporators shall be natural persons.

Exception: cooperative for rural bank. Subscriber can be

juridical or natural persons.

Legal age, same requirements.

Majority of the incorporators must be residents. No such

requirement for subscribers.

Incorporators are mentioned in the articles and whose names

are mentioned as forming part originally of the corporation.

Subscribers are not really part of the corporation.

SAMAHAN NG MGA OPTOMETRISTS NG PILIPINAS

CASE:

May a corporation engage in a practice of

profession?

No, limited to natural persons under the Constitution.

Isabela Optical(?) hired optometrists. Isabela optical

manufactures and sells lenses and eye glasses and in the course

of its business, hired optometrists who examine eyesight of

patients to determine appropriate lenses or eyeglasses. They

applied for a permit in Iloilo but blocked by the Samahan on

the ground that Isabela Optical by hiring optometrists is

engaged in the practice of a profession.

SC: No, it is only incidental to the primary purpose of

manufacturing and selling lenses and eye glasses. You cannot

manufacture the appropriate lenses or eye glasses without

examining the eyesight or vision of the patients. The

corporation itself being a juridical person cannot examine

eyesight so it has to hire optometrists to carry out that primary

purpose. Therefore, hiring of optometrists is not tantamount to

the exercise of a profession.

Steps in putting up a corporation

1. Number of incorporators, not less than 5 not more

than 15.

2. AOI must conform to the form prescribed by the

Code. One of the grounds to reject AOI is non-

conformity by the form prescribed by the Code.

3. Execution of the by-laws, there are 2 ways:

1. As part of incorporation

2. Within 1 month after incorporation



23

2005 BAR: If the corporation does not submit by laws one

month after incorporation, it is a de-facto corporation.

In practice, the SEC requires a copy of the by-laws along with

the AOI. So don’t resort to the 2nd option.

4. Affidavit of treasurer which is under oath that at least

25% of the authorized capital stock has been

subscribed and 25% of the total subscription must be

paid in money or property.

5. Verification slip, you can now reserve corporate name

online. You conduct a verification to determine if your

proposed corporate name is not similar or confusingly

similar to any corporate name registered in the SEC.

The system will tell you if it is. In case of similarity,

you can get an override from the SEC Official.

Undertaking of the proposed corporation that in the

event name is approved is similar to existing

registered corporate name, the corporation

undertakes to change such corporate name.

Dean’s former case: My Health clinic vs My Health Clinic. The

SEC approved the corporate name. Remedy, file a petition to

SEC to revoke or direct the corporation to change such

corporate name because it is confusingly similar to a previously

registered corporate name. SEC granted petition on the

strength of the undertaking that the corporation will change

corporate name in the event that it is similar to that already

registered with the SEC. It’s what you call fall back mechanism.

When I was with the bank, Equitable PCI Bank. The president

was on his way from Cabanatuan to Manila. He saw “Equitable

Disco Club”. You cannot preclude the use of a trademark or

tradename for goods not related to the certificate of

registration unless it will affect its goodwill.

6. If special corporation, example bank, special

endorsement from the agency concerned.

7. Pay the filing fee

8. Issuance the certificate of incorporation

9. Filing of AOI and by laws

10. You have two years to organize

3. Corporate Name

REFRACTORIES CORPORATION vs. CA

SC: Elements so that a corporation may bar the proposed

corporate name

1. Complainant corporation must have a prior right over

the corporate name

How is prior right acquired? By registration, so the

complainant corporation must have registered first.

2. The proposed corporate name of the applicant

corporation must be similar or confusingly or

deceptively similar with the name registered with the

SEC or the name itself is deceptive or contrary to law.

BAR: A single proprietorship would like to adopt the

name ABC Marketing Incorporated. Is that valid?

No. You cannot adopt the name of a corporation, you

cannot use the name incorporated or corporation or their

abbreviation.

Problem: SEC Official to Dean “Nilo your corporation

Equitable PCI Bank does not contain the word corporation or

incorporated or the abbreviation”. If you change any provision

(amendment) of the plan of merger, you have to go back to the

board and the SHs. Luckily, the SEC official is a friend. It’s

good to have many friends.

How come in the signage of BDO, We don’t see BDO Inc? It’s

just BDO. Because it’s not marketing savvy to include Inc in

your signage.

National, Maharlika, Barangay – words reserved for the

government.

National Bookstore – not the name of the corporation

registered with SEC. Not the name of the corporation but the

name of the bookstore.

Principles on corporate name:

1. A change of corporate name is not a mode of

dissolution.

2. Does the corporation have the obligation to inform its

customers or clients about change of corporate name?

SC: No, there is no provision in the Corporation Code

or any law for that matter that obligates the

corporation to do so. It is not a matter of legal

obligation.

Javier case applies to a private or non-public

company. If it is a public company, it is required to

disclose to the PSE and SEC any material change

involving or affecting the company. A change of

corporate name is definitely a material change that

needs to be disclosed to PSE and SEC.

4. Corporate Term

What is the term of a corporation?

It is the term specified in the AOI but not to exceed 50

years.

What is the remedy available to a corporation in case

of a failure to extend corporate term due to

inadvertence?



24

Fire the corporate secretary! haha.

REINCORPORATE! Same corporators, same authorized

capital stock, same everything including the corporate

name. The trustees of the defunct corporation may

authorize the adoption of that corporate name. The

trustee will simply authorize the new corporation to

adopt the same corporate name.

Are the assets of the defunct corporation transferred

automatically?

No. Expiration of the term automatically dissolves the

corporation. Next step? SC: the SHs from the defunct

corporation may assign (not sale or conveyance) their right

to the properties of the defunct corporation as their

subscriptions to the newly incorporated corporation.

Note: The term of the corporation may only be extended during

the term of the corporation and not when the term has expired.

Is that subject to tax?

Every corporation has a different registration number. The

defunct and the new have different registration numbers.

No taxable gain. Last year, Kim Henares issued a

regulation not to process reincorporation without affidavit

from the incorporators that taxes have been paid. So that

remedy is no longer economically viable. It is still a valid

legal option but you have to deal with the issue of taxation.

Pay the tax otherwise SEC will not approve it.

5. Minimum Capital Stock and Subscription Requirement

What is the minimum subscribed and minimum

authorized capital stock for a corporation?

Unless otherwise required by special law, there is no

minimum amount of authorized capital stock. Provided,

that the paid up capital is not less than 5,000 pesos.

Is it possible to fully subscribe and pay up the

authorized capital stock?

Yes.

You said that at least 25% of the authorized capital

stock must be subscribed and at least 25% of the total

subscription must be paid in cash or property. Is it

important that each subscriber must pay 25% of the

subscription?

No. As long as 25% of the TOTAL subscription is paid in

cash or property.

In what other cases may you require to pay at least

25% of the subscription?

1. Upon incorporation

2. Increase in capital stock

Let’s say the authorized capital stock is 1 billion

pesos divided into 1 billion shares, par value of 1

peso. Let’s say the subscribed capital stock is 500

million shares, par value of 1 peso. Of course it’s

enough that you subscribe to 25% of 1 billion, so in

the example let’s say the subscribed capital stock is

500 million, so 1/2 of the authorized capital stock. We

said that the paid up capital stock should be 25% of

your subscribed, right? Let’s make it, let’s say 200

million shares, par value of 1 peso. Let’s say one of

the subscribers is A, he subscribed to 50 million

shares and then paid 20 million. That’s more than

25% right? Supposing the corporation will issue

additional shares from the remaining 500 million

unissued portion of the authorized capital stock and

A would like to subscribe to 50 million shares more

from the unissued portion of the authorized capital

stock, is he required to pay 25% of the subscription?

Issuance of shares taken from the unissued portion of the

authorized capital stock is not subject to 25% payment

requirement. So the only 2 cases when you are required to

pay 25% of the subscription are upon incorporation and

increase in the authorized capital stock. EXCEPT,

according to SEC, if the corporation is insolvent or about

to be insolvent, in which case, you have to pay 25% of the

subscription.

Issuance of shares or subscription to the unissued portion of

the original authorized capital stock is not subject to the 25%

payment requirement. The price, terms and conditions of

payment, may be determined by the Board of Directors, which

can be less than 25%. It can be 10% payment only, and the

balance at a later date, depending on the contract of

subscription. EXCEPTION is, to repeat, if the corporation is

insolvent, or about to become insolvent, according to the SEC,

you have to pay 25% of the subscription.

Let’s say if A subscribed to 50 and paid 20, when does

he pay the balance of the subscription?

Either the due date, which is the date specified in the

contract of subscription, or if there is no due date, upon

call, or demand by the board.

BAR: Let’s say the due date is June 1, 2015. On June 1,

he did not pay. On June 15, the Corporation declared

cash dividends. Is he entitled?

Yes, he is entitled to dividends. Because unpaid shares are

not delinquent shares and holders of unpaid shares under

Section 72 of the Corporation Code have all the rights

corresponding to the subscribed shares.

Section 72. Rights of unpaid shares. – Holders of subscribed shares

not fully paid which are not delinquent shall have all the rights of a

stockholder.



25

Can you apply the dividends to unpaid subscription

even if the subscription contract is silent?

No. The right to offset only applies to delinquent stocks

not unpaid shares.

BAR: Supposing on June 30 the Corporation called a

stockholder’s meeting to elect the directors of the

corporation. Can A vote the shares? Second, is he

qualified to be elected as a director?

Yes to both questions. Because, again, unpaid shares are

not delinquent shares, they have all the rights

corresponding to the subscribed shares.

Therefore, the question is, when do shares become

delinquent?

They become delinquent if not paid within 30 days from

due date. After 30 days, the shares are no longer entitled

to vote, receive stock dividends. In respect to cash

dividends, it shall be applied against unpaid subscription.

Let’s clarify that, first, we are clear that unpaid shares are not

delinquent shares.

Next question is, how many unpaid shares of A are entitled to

receive dividends? The answer is, 50 million shares, right? The

standing of a shareholder in a corporation is measured by

subscription. So even though he paid only 20 million, he is

entitled to receive dividends for the entire 50 million shares.

How many shares can he vote during the election of directors?

Same, 50 million shares. So again, let’s keep it in mind, the

standing of a stockholder is measured or dependent on his

subscription and not based on what he actually paid, until his

shares become delinquent.

Next point, may the corporation apply dividends against

unpaid subscription or unpaid shares? The answer is no, unless

of course the contract of subscription allows set-off. In which

case it is set-off by agreement of the parties, or conventional

set-off but not legal set-off.

Now why is it that the corporation cannot apply

dividends against unpaid subscription?

Because Section 43 is very clear. It can only apply

dividends against unpaid subscription only on delinquent

stocks not on unpaid shares.

Section 43. Power to declare dividends. - The board of directors of a

stock corporation may declare dividends out of the unrestricted

retained earnings which shall be payable in cash, in property, or in

stock to all stockholders on the basis of outstanding stock held by

them: Provided, That any cash dividends due on delinquent stock shall

first be applied to the unpaid balance on the subscription plus costs

and expenses, while stock dividends shall be withheld from the

delinquent stockholder until his unpaid subscription is fully paid:

Provided, further, That no stock dividend shall be issued without the

approval of stockholders representing not less than two-thirds (2/3) of

the outstanding capital stock at a regular or special meeting duly called

for the purpose.

Stock corporations are prohibited from retaining surplus profits in

excess of one hundred (100%) percent of their paid-in capital stock,

except: (1) when justified by definite corporate expansion projects or

programs approved by the board of directors; or (2) when the

corporation is prohibited under any loan agreement with any financial

institution or creditor, whether local or foreign, from declaring

dividends without its/his consent, and such consent has not yet been

secured; or (3) when it can be clearly shown that such retention is

necessary under special circumstances obtaining in the corporation,

such as when there is need for special reserve for probable

contingencies.

As we said, the balance of the subscription must be paid on due

date. Due date is either the date specified in the contract of

subscription, if any. Or if there is no due date specified in the

contract, then upon call by the Board. So “call” in corporate

jargon or parlance means demand. Demand is not necessary to

put the obligor in default if the contract specifies the due date.

According to the SEC, it is one of those cases where demand is

not necessary to put the obligor in default, when the law so

provides.

Okay next point, supposing the corporation will issue shares

from the unissued portion of the authorized capital stock, no

longer from the subscribed capital but the unissued portion, is

that subject to stockholder’s approval? So there’s this case in

your outline, the case of Ruby Industrial, penned by Bersamin,

so is that subject to stockholder’s approval? In our scenario

earlier, in case he subscribes to the additional 50 million

shares, taken from the remaining 500 million unissued shares,

is that subject to stockholder’s approval, and the answer is no.

Right? Because it is only the increase in capital stock that you

are required to secure stockholder’s approval. But issuance of

shares from the unissued portion of authorized capital stock

only requires board approval. And when we say board

approval, it means majority of the quorum of the Board of

Directors because it is not one of those cases under the law

which requires majority of the entire board.

However, according to the Supreme Court, the issuance of

shares from the unissued portion of authorized capital stock is

subject to registration requirement under the SRC because as

you all know, shares of stock are securities right? And

securities cannot be distributed or sold to the public unless

registered with the SEC. And by registration, as you have taken

up in SRC, when you say registration of securities, when you

say registered with the SEC, it’s a different concept from

registration of mortgage and sale, right? When you say

securities are registered, it means that the corresponding

registration statement has been filed with and approved by the

SEC and the sale or distribution of those securities, as stated in

the registration statement, has been approved by the SEC. So

that’s the only case subject to, not stockholder’s approval, not



26

majority of the entire board, but simply majority of the

quorum.

Which is part of the so called Trust Fund Doctrine?

The total subscription - those subscriptions are considered

funds held in trust for the benefit of the corporate creditors.

Trust Fund Doctrine means that those subscriptions should be

untouched and unimpaired. They are funds held for the benefit

of the creditors, so it cannot be used, it cannot be distributed to

the stockholders because it is a fund held for the benefit of the

creditors. As you also know, the Trust Fund Doctrine has been

expanded to include not just subscriptions but even properties.

So properties of the corporation cannot be distributed to the

stockholders except in cases allowed by law and equity. The

moment you distribute the properties to stockholders, other

than those cases allowed by law and equity, you violate likewise

the Trust Fund Doctrine. So these properties are, again, held in

trust for the benefit of the creditors.

Now when are you allowed to distribute properties to the

stockholders? What’s the most common form or distribution of

properties to stockholders?

Dissolution right? Dissolution, liquidation, reduction of capital

stock, redemption of redeemable shares and when you pay

dissenting stockholders in the exercise of his appraisal right.

Now you have authorized capital stock, what does it

mean?

It is the maximum number of shares that the corporation may

issue without amending the Articles of Incorporation. It

doesn’t represent the maximum amount of capital the

corporation may raise because shares of stock, as you know,

can be issued for an amount higher than par value.

Let’s give an example. The authorized capital stock is 1 billion,

par value is 1 peso. So 1 billion is not the maximum amount

that the corporation may raise, but it represents the maximum

number of shares that the corporation may issue without

amending the AOI. So if the corporation wants to issue more

than 1 billion, the over-issuance would be void. So you have to

amend the articles to be able to issue additional shares. Now, if

the share is issued for 10 pesos, then your authorized capital

stock and fully subscribed would be more than 1 billion but

would be 10 billion pesos. So as you know, the par value is only

the minimum value for which the shares may be issued,

otherwise they will be called watered shares.

Also the term “capital stock” has a precise meaning under the

Corporation Code. As held in the case of MISCI-NACUSIP

Local Chapter v. National Wages and Productivity

Commission, the term capital stock is the portion of the

authorized capital stock subscribed and ACTUALLY PAID UP.

So for example, if a wage order says that “employer whose paid

up capital is impaired by 25%, not obligated to pay minimum

wage,” so when it says paid up capital stock, you don’t include

the properties received by the corporation. You don’t include

the assets of the corporation because as we said the term

“capital stock” has a precise meaning under the Code. In our

example, under Section 43 of the Corporation Code, if the

surplus profit is 100% in excess of the PAID IN CAPITAL, any

excess should be distributed right? Now the term uses PAID

UP CAPITAL, does that include the properties or assets of the

corporation? No, because PAID UP capital stock differs from

capital of the corporation.

The definition of capital in Gamboa v. Teves, to repeat, only

applies to nationalized activities right? Particularly mining,

natural resources, and public utilities. The factual backdrop of

Gamboa v. Teves applies to public utility. But it can likewise be

applied to mining, as we saw in Narra v. Redmont. Narra v.

Redmont also made reference to Gamboa v. Teves, definition of

capital, and to corporations engaged in exploitation,

exploration, development of natural resources.

A foreign corporation could provide financial agreements and

technical service agreements to mining companies, that will

not be a violation of the law. It’s only when the foreign

corporation participates in exploration, exploitation and

development of natural resources that it could be subjected to

the 60-40 foreign ownership requirement.

6. Articles of Incorporation

a. Nature and Functions of Articles

The AOI contains the power of the corporation and under

Section 45 of the CC, the corporation cannot exercise powers

other than those conferred upon it by the CC, the AOI, and

powers implied or incidental to it. So therefore, it’s important

to know the powers of the corporation as contained in the AOI.

Because any act of the corporation, any activity of the

corporation that is outside or contrary to express, implied or

incidental powers of the corporation is ultra vires under

Section 45. So the enumeration of corporate powers under the

AOI serves also as a limitation on what the corporation can do.

So the powers are also limitations because outside these

powers, that would be ultra vires.

The AOI is the fundamental law of the corporation. It defines

the relation of the corporation between it and the State, the

corporation and its stockholders.

There’s one question in the bar regarding shares owned by a

stockholder. So the stock and transfer book of the corporation

indicated that Juan dela Cruz only owns 300 common shares

but the AOI provides that he owns X number of founder shares

and X number of common shares. So which one prevails? The

entries in the stock and transfer book or the AOI? The SC said

in Lanuza v.CA that it’s the AOI because it is the instrument or

document that defines the relation between the corporation

and the State and the corporation and the stockholders.

As regards form, well it has to be in official language, Filipino is

the official language, so the AOI may be in Tagalog or Filipino.

I have seen one in Spanish, UST. I’m not so happy you know



27

why? Because we amended, for the first time, the Articles of

Incorporation of UST because of a circular issued by Kim

Henares that the phrase “non-stock, non-profit corporation”

must be in the AOI, otherwise, it’s not tax-exempt. We argued,

not necessarily! Under the Constitution, as long as the property

is actually, directly and exclusively used for educational

purpose, you are not subject to tax. But no, now it has to be

seen in the AOI that it is a non-stock, non-profit corporation.

So that’s why we have to amend the Articles of Incorporation of

UST, and it was successfully amended from Spanish to English.

And we did not have to resort to Google Translator. Very

convenient noh. We were in Brazil for a family vacation, in Rio

no, and the driver has an app in his meter which translates

from Portuguese to English so we can understand each other….

b. Contents

The contents. On the first part, there’s your purpose or

purposes. As you all know there is only one primary purpose

and there can be many secondary purposes. You cannot have

more than one primary, it’s an inconsistency. You can only

have one primary but you can have various secondary

purposes. As long as these purposes are capable of being

lawfully combined. So there can be as many as possible, as

many as you want. As long as they are capable of being lawfully

combined. And what is your test to determine if they are

capable of being lawfully combined? If there is no law that

prohibits the combination of these purposes in the AOI. Now,

can it be a bank and insurance company at the same time? You

cannot because under the law, a bank cannot engage in

insurance business or vice versa. So you cannot have your

primary purpose as a bank and your secondary purpose an

insurance. What banks do is to put up a subsidiary, a

corporation engaged in insurance.

However, we have to correlate the prerogative of the

corporation to have various purposes with Section 42 of the

Corporation Code, in the sense that if the funds of the

corporation are devoted to the secondary purpose or purposes,

then the Corporation Code requires the corporation to go back

to the stockholder and secure their approval by atleast 2/3s of

the OCS. And any stockholder not in favor of the proposed

investment of corporate funds in the secondary purpose, then

he can exercise his appraisal right. So it’s very clear. While the

CC acknowledges and recognizes the prerogative of the

corporation to have many purposes in its AOI, there can only

be one primary and many secondary purposes. But the funds of

the corporation should be devoted to the primary purpose or

any undertaking incidental to the primary purpose. If they

invest in a secondary purpose, it requires not just board

approval by majority vote but likewise, stockholders

representing 2/3s of the OCS.

As you have learned in Corpo, Section 42 likewise allows a

corporation to invest the funds in another business right? So

either invest the funds in a secondary purpose or in another

business. But as we will see later the Articles of Incorporation

must be amended to make the business AS A SECONDARY

PURPOSE otherwise it would be ultra vires.

Domicile or place of business

BAR: Where is the residence of the corporation?

The principal office as specified in the AOI. Not the place

of actual operations. (Hyatt v. Goldstar) In this case, the

AOI stated the principal office is Makati, and then they

relocated to Mandaluyong. Where’s the venue for a civil

action? As you all know the venue is the domicile or

residence of the plaintiff/defendant, at the option of the

plaintiff. In this case, if you will consider the domicile of

the corporation as the venue, where do you file the action,

is it in Makati, the principal office, or Mandaluyong, the

place of actual operation? The SC said that it is the place

specified in the AOI and not the place of actual operation.

Otherwise, it will be very easy on the part of the

corporation to evade service of summons because all it will

have to do is to keep on changing its area of operations.

Now what about Metro Manila? Metro Manila, as you all

know, is allowed under the CC, until 2006, the SEC made a

declaration that it has to be specific, the city/municipality.

What happens now to those corporations with AOIs stating

that their principal place of business is Metro Manila? Well, in

the case, it would be the area of actual operations because there

are many cities/municipalities in Metro Manila. According to

the SC, if Metro Manila is still the principal place of office in

the AOI, because it was approved before 2006, then the place

of operations is the residence of the corporation. But in 2012,

the SEC REQUIRED all corporations to amend their AOI which

provided for Metro Manila as their principal office, in order to

indicate the specific address.

Assuming that there are five directors; can the

articles and the by-laws decrease it to two?

No, because the law provides that the number of directors

should not be less than five.

Is it possible for the number of directors in a quorum

to be less than majority? Let us say that the number

of directors is fifteen and the articles provided that

the quorum for certain corporate acts will be seven.

Section 25 provides that unless the articles of

incorporation or the by-laws provide for a greater

majority, a majority of the number of directors or trustees

as fixed in the AOI shall constitute quorum for the

transaction of corporate business, every decision of at least

a majority of directors or trustees present in a meeting at

which there is quorum shall be valid as a corporate act,

except for the election officer which shall require the

majority vote of a majority of all the members of the

board.



28

Unless the by-laws provide a GREATER number, quorum

shall be the majority of the number of directors as fixed in

the AOI. There is no prerogative for the by-laws to reduce

for quorum purposes the number of directors to less than

majority.

If the AOI substantially conforms to the requirement

of the Code, does the SEC have the power to reject the

AOI? The requirements are not fully complied with

but substantially complied with, does the SEC have

the discretion to reject the AOI?

Sections 17 and 10 of the Corporation Code clearly

provides that substantial compliance is enough. It is

enough that the AOI substantially complies with the form

prescribed by the Corporation Code. This is also found in

Section 10. The SEC has no discretion to reject the AOI if it

substantially complies with the form prescribed by the

Corporation Code.

Let us say the term of the Corporation is about to

expire. For example, UCPB is a sequestered

corporation. 90% of its outstanding capital stock is

voted by PCGG under the public character test. Under

the public character test, shares acquired through

public funds can be voted by the Government.

Supposing that the term of UCPB is about to expire

and every time they hold a stockholders meeting

there will be picket from farmers demanding release

of their coco-levy funds and this will be captured by

media and it will give the impression of chaos in the

bank. The bank decided that the extension of the

corporate term be approved by the majority of the

board and by the written assent of PCGG because

anyway that is majority or more than 2/3 of the

outstanding capital stock. Will that be a valid

compliance with the requirements for the extension?

Section 16 provides Amendment of Articles of

Incorporation. - Unless otherwise prescribed by this

Code or by special law, and for legitimate purposes, any

provision or matter stated in the articles of incorporation

may be amended by a majority vote of the board of

directors or trustees and the vote or written assent of the

stockholders representing at least two-thirds (2/3) of the

outstanding capital stock, without prejudice to the

appraisal right of dissenting stockholders in accordance

with the provisions of this Code, or the vote or written

assent of at least two-thirds (2/3) of the members if it be a

non-stock corporation.

Section 37 reads that: A private corporation may extend or

shorten its term as stated in the articles of incorporation when

approved by a majority vote of the board of directors or

trustees and ratified at a meeting by the stockholders

representing at least two-thirds (2/3) of the outstanding capital

stock or by at least two-thirds (2/3) of the members in case of

non-stock corporations.

You cannot extend a corporate term by mere referendum or

written assent of the stockholders.

So even though under Section 23, it is enough that majority of

the directors are Philippine residents, when you check the

contents of the articles you must likewise indicate the

nationality of the incorporators and directors, whether or not

involved in a nationalized activity.

For stock corporation, the outstanding capital stock, the

amount subscribed, the amount paid-up, the names of the

stockholders, subscribers and the secondary purpose of the

corporation.

Now regarding the non-stock corporation, it says there the

amount of contribution. If the non-stock, non-profit

corporation is also a foundation, then the minimum capital is 1

million pesos. That is the price you have to pay for including

the word foundation as part of the corporate name.

A foundation is essentially, a non-profit, non-stock

corporation, right? Because you only have two kinds: stock or

non-stock. A foundation cannot be a stock corporation because

it is not organized for profit but to have the word foundation as

part of the corporate name, the SEC prescribes that the

minimum capital should be 1 million.

Why?

It is because foundations have been used for fraudulent

purposes. It has become the instrument or vehicle for money

laundering.

Dean: But then I realized that 1 million is small pa din

compared to the amount being funded to various NGOs or

foundations. I mean Napoles is just one of them, there are

many and there is someone even bigger than Napoles. Napoles

is peanuts compared to this guy. There are many Napoles. But

of course, as a lawyer, my lips are sealed. I will not discuss the

details but there are many. Napoles is not even a little player.

So that is the extent of corruption and the organized villains of

our country. Anyway, so we pray for them. That is what we do

as Thomasians, we pray for them to come to the right path.

c. Amendment

So the example I gave earlier was UCPB. In UCPB, they have

not called a single stockholders’ meeting for the last 13 years,

until 6 months ago. Because every time they call a stockholders’

meeting, there will be picket among the coconut farmers

demanding the release of their cocolevy funds. The rallies and

pickets would be covered by the media and would convey the

impression that there is something wrong in the bank. So the

management decided that there will be no more stockholders’

meeting unless absolutely necessary. 6 months ago, when the

term of the corporation was about to expire, I was asked a

question: Can we extend the term of UCPB by the mere written

assent of PCGG who has voting right of more than 2/3 of the

outstanding capital stock?



29

Of course I said that under Section 37 in relation to 16 of the

corporation code, we cannot do so because amendment of the

articles with regard to the extension of the Corporate Term has

to be made in corporate meetings.

But just the same I was tasked to talk to the SEC chair if I could

convince the SEC chair to relax the rules given the peculiar

situation of the UCPB. I was able to convince the SEC chair to

dispense with the stockholders meeting. I said that the survival

of the bank is at stake every time we call a stockholders’

meeting but then she retired. Before we could implement the

extension of the Corporate Term by mere Referendum, she

retired. She was replaced by Teresita Herbosa. Tesa Herbosa is

much stricter so I didn’t bother talking to her because I do not

want to exhaust my good will on an account that does not give

me money anyway. UCPB is for free. So I might as well exhaust

my good will for clients that pay me, right?

So I said we have no choice but to hold a stockholders’ meeting.

I checked the by-laws and the notice said that it would be by

publication. So I said that we will make it discreet, we will

make it low key (Thor’s brother?), we can publish the notice of

the meeting in a newspaper not widely read. The by-laws of the

bank provide that it should be general circulation. But looking

at the previous SC decisions, when it says of general

circulation, it does not have to mean the widest circulation. It

means it caters to the general interest of the community, as

long as there is a descent subscriber base. It need not be a

prominent newspaper, so we can publish it in Tiktik, Abante….

So we published it.

But despite the fact that we published it in a least known

newspaper, still more than 1000 attended. Sometimes, you

create your own ghost. Why? Because that is the most peaceful

stockholders’ meeting that I have attended in my whole life. I

already attended a lot of corporate meetings and I have seen so

many intra-corporate fights. We were expecting fireworks from

the farmers. But none! Within 1 minute we were done.

Because there were only 2 items in the agenda: 1) certification

as to quorum; and 2) extension of the corporate term. So

somebody made the motion and that the articles be amended

to read as follows and the corporate term be extended to this

day… Second the Motion. Is there any motion to adjourn?

Move to adjourn, mister chairman. Alright, adjourn!! (*Dean

pounds the table with conviction* Dean: Oops, Sorry!)

So what is important under section 16 are the following: Unless otherwise prescribed by this Code or by special law, and for

legitimate purposes, any provision or matter stated in the articles of

incorporation may be amended by a majority vote of the board of

directors or trustees and the vote or written assent of the stockholders

representing at least two-thirds (2/3) of the outstanding capital stock,

without prejudice to the appraisal right of dissenting stockholders in

accordance with the provisions of this Code, or the vote or written

assent of at least two-thirds (2/3) of the members if it be a non-stock

corporation.

But the key issue is: do you need to call a

stockholders’ meeting every time you approve an

amendment of the articles?

If the amendment requires a stockholders’ meeting under the

Corporation Code or the By-laws, then written assent is not

enough. But if it is not required in the Corporation Code or in

the By-laws that a meeting be called for that purpose, then any

matter in the AOI may be amended by a vote of at least the

majority of the board and written assent of the stockholders

representing at least 2/3 of the outstanding capital stock.

Let us do are survey. What are the corporate acts under the

Corporation Code that have to be approved in a meeting

called for that purpose? Some not really part of amendment

but just the same needs to be in a meeting called for that

purpose…

1. Section 24 – Election of Directors

2. Section 28 – Removal of Directors (replacement of

the removed director)

3. Section 29 – Filling up of vacancy

4. Section 30 – Compensation of directors

5. Section 37 – Power to Extend or Shorten Corporate

Term

6. Section 38 – Increase of Decrease of Capital Stock;

incur, create or increase bonded indebtedness

7. Section 39 – Pre-emptive right

Now this is debatable. What if the AOI would be

amended to deny pre-emptive right? Do you need

to have a meeting? So, Sec. 39 on pre-emptive

right. So if the AOI will be amended to deny pre-

emptive right, it is clear in the case of ___ vs.

United Shipping Corporation, that that kind of

amendments may justify appraisal rights under

Sec. 81 of the Corporation Code because any kind

of amendment in the AOI, there is the effect of

changing or restricting the rights of the

stockholders as in the instance of exercising

appraisal right and if you deny the stockholders

the right to subscribe to additional shares in the

corporation, you are restricting the right of the

stockholder. Well, the big consideration is a

stockholder can exercise appraisal right only by

dissenting as against the proposed corporation

act because you cannot exercise appraisal right if

he is absent or if he abstains. But should the

dissent be in a meeting or may the dissent be by

expressing likewise which is agreement to the

proposed corporate act? There is no case in the

Philippines but for foreign jurisprudence:

Appraisal right can be exercised even without

having to call a meeting. So long as he dissents.



30

For example, if the amendment is to deny pre-

emptive right, it can be routed among the

stockholders and as the beliefs(?) are being

routed to the stockholders, a stockholder may

dissent on the proposed amendment. Of course,

your safe bet is to call a stockholders’ meeting.

But there is this foreign jurisprudence that it

need not be in a stockholders’ meeting. The

dissent could be articulated in some other way.

(But that is already going too far, that is going to

deep already)

8. Section 40 – Sale of all or substantial corporate assets

9. Section 42 – Invest corporate funds in another

purpose (secondary purpose)

10. Section 43 – Stock dividends

11. Section 44 – Power to enter into management

contract

**Section 46 – adoption of by-laws

When you adopt the by-laws obviously you do not need to hold

a stockholders’ meeting because when you adopt that is prior to

incorporation.

12. Section 48 – Amendment of by-laws

13. Section 76 – merger or consolidation

14. Section 117 – Dissolution

*So other than these corporate acts, it may be done by mere

referendum even if it is amendment of AOI.

And you always include this as part of your answer: In

case of banks, insurance company, public utility, educational

corporations and other special corporations governed by

special law, the favorable endorsement of the appropriate

government agency must be obtained.

Now, with respect to amendment, you have to submit the

original and amendment articles of incorporation and not just

the highlighted portion. You must submit both and underscore

the changes made. You also have to indicate that as approved

by the board on this date and approved the stockholders on

this date.

Why does it have to be done that way?

First, that is what the law says and for practical purposes.

When is it effective?

Upon the approval of the SEC or the inaction of the SEC

within 6 months from application for reasons not

attributable to the corporation. So you have express

approval or approval by inaction but the inaction must be

for causes beyond or not attributable to the corporation.

d. Non-amendable Items

BAR: Can you amend the names of the incorporator? Can

you amend the date of incorporation? Can you amend the

name of the Notary Public before whom all the incorporators

appeared? What is common denominator to all these?

All these things may not be amended because these are matters

of accomplished fact. Matters of accomplished fact cannot be

amended.

Remember this case? A female incorporator had a falling out

with his husband and it must have been so bad that he wanted

to remove any association with his husband. So she petitioned

the SEC to have his name changed as an incorporator to drop

the name of his husband. Of course, the SEC rejected it because

you cannot amend the name of the incorporator. So the SEC

suggested that if you want you can change your name as

subscriber or stockholder in the stock and transfer book of the

corporation.

e. Grounds for disapproval of AOI and Amendments

1. Does not conform substantially to the form prescribed

by the Corporation Code;

2. The purposes are contrary to the Constitution, the law,

morals, good custom, public order, public policy;

3. The treasurer’s affidavit with respect to the amount of

subscribed capital stock is false; and

4. The required percentage of Filipino ownership in case

prescribed by law, the constitution are not complied with.

Are the grounds under section 17 exclusive?

They are not exclusive because under P.D. 902-A, there

are other grounds for rejection of the AOI or its

amendment such as:

1. If there is fraud in procuring the AOI;

2. Misrepresentation as to the purposes of the

Corporation;

3. Non-compliance with the laws, rules and regulations

administered by the SEC;

4. Non-submission of the reports required by the SEC;

and

5. Non-payment of the filing fees.

7. Registration and Issuance of Certificate of Incorporation

BAR: When does the corporation acquire legal personality?

Upon issuance of certificate of incorporation, not upon the

filing of the articles, not upon the payment of filing fees. From

that time on, the group of persons, associated persons, become

a body politic with all the rights privileges and attributes of a

corporation.

Section 9 however failed to take into account corporations

created by special laws; pertains only to corporations created



31

under the corporation code because corporations created by

special law acquire legal personality upon the effectivity of the

law. (E.g. _____, Philippine national red cross, Philippine

national railways)

You have the case of Travel Tours Express vs CA, with regard to

sports federations, it is not enough that they are registered with

the SEC, not enough that they are approved for incorporation,

in addition to registration, they only acquire legal personality

from the time of accreditation by the appropriate government

agency as such sports federations.

BAR: A subscribed with the shares of stock of the proposed

corporation by contributing real property and the same was

considered as treasury trust, pending incorporation Y surfaced

and claimed ownership over the property that A contributed.

He files an action for reconveyance against the proposed

corporation. Will the suit prosper?

Answer: It will not because the corporation has not acquired

legal personality yet. Pending issuance of the certificate of

incorporation, it is a mere association of persons without any

legal personality. It acquires legal personality and therefore the

power to sue and be sued only upon issuance of the certificate

of incorporation.

Next question, who does he sue then?

The (treasury trust?) who received the property in trust for

the corporation.

8. Adoption of By-Laws

a. Nature and Functions of By-laws

b. Requisites of Valid By-laws

By laws are set of rules and regulations for the internal

government of the corporation. It is the implementing rules

and regulations. Not everything can be captured in the articles,

so the internal governance of the corporation has to be spelled

out in the by-laws. In case of conflict between AOI and by-laws,

AOI prevails.

c. Binding effect

Under sec. 46, is the submission of by-laws as a condition

precedent to acquire legal personality applicable to foreign

corporations?

Section 46. Adoption of by-laws. – Every corporation formed under

this Code must, within one (1) month after receipt of official notice of

the issuance of its certificate of incorporation by the Securities and

Exchange Commission, adopt a code of by-laws for its government not

inconsistent with this Code. For the adoption of by-laws by the

corporation the affirmative vote of the stockholders representing at

least a majority of the outstanding capital stock, or of at least a

majority of the members in case of non-stock corporations, shall be

necessary. The by-laws shall be signed by the stockholders or members

voting for them and shall be kept in the principal office of the

corporation, subject to the inspection of the stockholders or members

during office hours. A copy thereof, duly certified to by a majority of

the directors or trustees countersigned by the secretary of the

corporation, shall be filed with the Securities and Exchange

Commission which shall be attached to the original articles of

incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws

may be adopted and filed prior to incorporation; in such case, such by-

laws shall be approved and signed by all the incorporators and

submitted to the Securities and Exchange Commission, together with

the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the

Securities and Exchange Commission of a certification that the by-laws

are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the

by-laws or any amendment thereto of any bank, banking institution,

building and loan association, trust company, insurance company,

public utility, educational institution or other special corporations

governed by special laws, unless accompanied by a certificate of the

appropriate government agency to the effect that such by-laws or

amendments are in accordance with law.

Citibank vs. Chua

Citibank was a defendant in a collection case in Cebu and

during pretrial conference the lawyer was not equipped with a

board resolution authorizing it to appear on behalf of Citibank.

He presented an authorization from the EBP and Country

Manager of Citibank who under the by-laws is empowered to

hire lawyers to represent the corporation. Is it necessary to

submit a SPA to authorize a lawyer to represent the

corporation or will the authority given by the EBP manager

who under the by-laws is empowered to hire lawyers for the

corporation suffice?

SC said not necessarily, the SPA can be dispensed when there is

a by-laws provision authorizing...

The SPA in case of corporations is in the form of a board

resolution.

The other question is, what if the corporation is a foreign

corporation and the by-laws were not submitted with the SEC

prior to incorporation, can the provision in the by-laws be

invoked, adopted and relied on?

SC said in Citibank vs. Chua, the requirement of submitting by-

laws as a condition to acquire legal personality is applicable

only to domestic corporations. As clear in the phrase

"corporations created under this code".

The by-laws of the foreign corporation are submitted to the

SEC only for the purpose of securing a license and not to

acquire legal personality.

Binding effects of by-laws

There are two cases in your outline, PMI College vs. NLRC and

Chinabank vs. CA

In Chinabank vs CA, valley golf and country club issued a stock

certificate to Juan dela Cruz. Juan dela Cruz obtained a loan

secured by a pledge on the stock certificate. Failed to pay and



32

pledge was foreclosed. Chinabank was the winning bidder.

Corporation refused to transfer ownership over the stocks

because of the provision in the by-laws granting first lien to the

corporation in case of non-payment of dues and assessments.

Who is entitled?

The court said that the provision in the by-laws is not binding

on Chinabank because the latter is a third person. Exception is

when the third person has actual knowledge of the provision.

The SC added that a corporation may refuse to transfer

ownership only when it has unpaid claims and the term unpaid

claims means and is limited to UNPAID SUBSCRIPTION.

Other obligations such as dues and assessments does not

preclude transfer of shares.

d. Allowable provisions

What about the provision in the by-laws that dues

are first lien on the shares?

SC said that this provision is not self-executory. It does not

authorize the corporation to sell the delinquent shares not

delinquent in terms of subscription but delinquent in payment

of dues. It does not authorize the sale of the shares. There must

be a complementing pledge or chattel mortgage agreement to

authorize the corporation to sell the shares and apply the

proceeds to the payment of dues and assessments and other

obligations owing. This is different with condominium units. In

the latter, it can be sold for non-payment of dues and

assessments if the deed of restrictions authorized the sale. In

case of shares, by-laws provision is not enough but must be

complemented by a pledge or chattel mortgage agreement.

PMI vs. NLRC

A has been teaching for three semesters. On the fourth

semester, the school refused to honor the employment because

the employment contract was signed not by the chairman who

under the by-laws is the only one authorized to sign

employment contracts. But he had been teaching for three

semesters and it is only now that they raise as issue the lack of

authority.

SC said, admission by estoppel, A is not bound by the provision

in the by-laws being a third person.

The most favorite topic in the BAR, five times asked. The case

of Gokongwei vs SEC. What is the effect of a provision in the

by-laws intended to disqualify any person from being elected in

the board for having interest adverse or in conflict with the

business of the corporation?

John Gokongwei accumulated enough shares in San Miguel

Corp. enough for a boardship. San Miguel learned of the plan

so they amended the by-laws in general terms, because if

specific it would be invalid for being discriminatory, stating

that any person having interest in conflict with the corporation

cannot be elected in the board. The SEC approved. It went up

to the SC. Is that provision in the by-laws invalid? Can the by-

laws disqualify a competitor from being elected to the board?

SC said it is a valid provision. The fiduciary duty of a director

may be compromised if he sits in the board of two competing

corporations. He may acquire vital sensitive information from

one and share it to the other to the detriment of the former.

What if there is a provision in the by-laws disqualifying a

competitor from being elected to the board?

No. Because you have section 33 or 32? It allows corporations

with interlocking directors.

But is it valid to include a non-compete clause in the

by-laws?

Yes. All corporations, public corporations i know have

incorporated the ruling in Gokongwei in their by-laws such that

it is now a standard provision or clause in the by-laws to

disqualify persons who are in conflict with the corporation to

be elected in the board.

What about the argument that it deprives a stockholder of its

rights as a stockholder?

SC said if you join the Corp as a minority, you have to accept

the fact that you are subject to the will of the majority. The

manner by which you exercise your rights is dictated by the

majority.

The Sy family, before they acquired Equitable PCI Bank,

wanted a seat in the board. BDO acquired enough shares for

the boardship. Equitable PCI was concerned that if they let

them sit in the board they may ____ up the entire bank. So we

wanted to exclude them. What case do we use? First we used

LEE VS CA. The shares were not in their names. They were in

the names of the brokers. That is what you call scripless

trading. Yung certificate blank indorsement. Their names were

not in the books, of course the law says "in their own name in

the books". The shares were held in trust by their brokers, not

in their own names. Second ground, they represent interest

adverse to the bank. They sit in the board of BDO a competitor.

So they were not able to take the board seat. The following

year, they were smart enough. They did not include the SY's as

nominees to the board, no Henry Sy, no Teresita Sy but

prominent business personalities. So what did I do? Pursuant

to the case of Gokongwei that before you can disqualify a

nominee, you must give him due process, I required them to

sign a questionnaire under oath to disclose their company

affiliations. BOOM! I discovered that one is the director of this,

a company owned by the Sy family and this and this owned by

the Sy family and so on..... So I discovered that the nominees

are all of the Sy family so we disqualified them. Now before

there was another stockholders' meeting, they bought out

everybody including the Go's SSS GSIS so they now own

Equitable PCI. They merged it with Banco de Oro. That's the

story.

(Then puro kwento na about the building in divisoria and bla

bla bla.)



33

Tell me whether the provision in the by-laws is valid

or void.

1. Directors of the corporation may or should be elected from

stockholders representing majority of the outstanding capital

stock.

- Not valid. This is because they have to be elected from

among all the stockholders

2. The meeting of board may be held in UST.

- Valid

3. All officers are not required to be directors of the

corporation.

- Not valid.

4. The annual compensation of directors as such directors shall

not exceed 10 % of the gross income of the corporation for the

income tax in the preceding year.

- Not valid. It’s not gross income. Should be net.

5. Proxies must be submitted a day before the stockholders’

meeting.

- Valid.

6. Proxies must be submitted 30 days before the stockholders’

meeting otherwise the proxy is void.

- Valid (this is the by-laws of San Miguel) as long as it is

submitted any day before the meeting.

7. By-laws authorized the board to create a corporate office.

- Only the by-laws can create corporate offices. The board

cannot create a corporate office. This is the decision of SC

in the case of _____

8. Can the by-laws require that proxies must be authorized?

- Valid. Par 3 of Section 47

9. A director may be removed by his co-directors by a vote of at

least majority of the directors in case of non-payment of dues

and assessments and for absences.

- Not valid. Only stockholders can remove a director.

There are two ways to adopt by-laws.

1. Filing with the articles of incorporation; or

2. Within a month after the incorporation

Although we said in our previous discussions that the SEC now

requires submission of by-laws prior to incorporation. But for

BAR PURPOSES, the submission of by-laws during one

month after incorporation is still allowed by the Corporation

Code.

What’s the distinction then?

If the by-laws should be adopted prior to incorporation, then

all incorporators must sign the by-laws.

If it adopted during one month from incorporation, only the

stockholders holding in favor of the by-laws and by-laws

adopted during one month of incorporation should be

approved by SH representing at least majority outstanding

capital stock.

AMENDMENTS

Amendments, as you know, should be approved by the BOD

that is majority vote and stockholders representing at least

majority of the outstanding capital stock.

When you go to practice don’t forget if you amend AOI, the

matter or item amended has to be mirrored in the by-laws.

Example: Corporate name. Don’t just approve or amend the

corporate name yet not to amend in the by-laws.

There’s one transaction we handled. The AOI of the client was

amended. BTW the client is Century Properties, the owner of

Grand Tower, Azure, Milano, and other high-end condo

projects. So anyway… We need a backdoor receiver’s 25 shares

of a dormant listing company.

Let’s say ABC company is listed but dormant.

So how do you make shares of your company listed without

issuing a public offering? You can file the shares of the

dormant listing company. This is what you call backdoor

listing. So you buy the shares of a dormant listing company and

then you amend the AOI to make it your company.

So ABC Company is listed but it’s dormant. Century bought

the shares of the stockholder’s of ABC Company so now they

become publicly traded and they amended the AOI of the ABC

Company to the Century Properties. So corollary, while the

Articles were amended, they changed the name of ABC to

Century, the by-laws were not. So the by-laws still ABC

Company but the AOI says Century Properties. So make sure

that when you amend the AOI, make the corresponding

changes to be mirrored in the by-laws. You have to amend

likewise the by-laws.

So in this case, you need 2/3 for the AOI but you only need a

majority of the outstanding capital stock to amend the by-laws

for the board approval by majority in both cases whether

amendment of AOI or by-laws.

The 2/3 requirement pertains to what? The delegation of

authority by the stockholders to the board and this was asked

in the bar. So the stockholders, may, by 2/3 of vote of

outstanding capital stock may delegate the authority to amend

the by-laws solely for directors but the power delegated may be

revoked by the vote of stockholders representing at least

majority of the outstanding capital stock.

Adoption of by-laws within one month of incorporation –

stockholders holding majority of the outstanding capital stock



34

WITHOUT board. The board is required to certify the copy of

the by-laws as approved by the stockholders.

Amendment of by-laws - at least majority of the board and

stockholders holding majority.

Delegation of authority by stockholders to the board - 2/3 of

the outstanding capital stock

Revocation of the authority delegated to the stockholders – just

majority of the outstanding capital stock

In all cases, such may be made in a meeting called for the

purpose.

Should the delegation of authority be embodied in a

stockholders’ resolution or can it be in the by-laws?

When I was a corporate secretary of Equitable, I reduced

the number of votes to disqualify a creditor. Under the by-

laws of the bank, we needed 2/3 to disqualify a creditor. So

anyone, if you are a creditor you can be disqualified by the

board by a vote of 2/3. So 2/3 is quite a big number so we

decided to reduce it to majority. The problem is we don’t

have majority of outstanding capital stock neither a

stockholder owns an outstanding capital stock but we

could call the board. And I saw a provision in the by-laws

that the stockholders have delegated to the board the

authority to amend the by-laws. So on the strength of that

provision, I amended the by-laws solely upon the instance

of the board without stockholders’ approval. I submitted

the papers to the SEC. It was approved.

It went up to the En Banc. The en banc cited a 1964 SEC

Opinion (before effectivity of the Corporation Code)

stating that the delegation of authority must be embodied

in a stockholders’ resolution.

How can that be? It’s already in the by-laws why should

the delegation of authority be in a stockholders’

resolution? So we filed a petition for review before the CA

under the Rule 43 because you’re not allowed to file MR

with the SEC but before the decision of the CA,

nagbentahan na ng shares… so it was not resolved but it is

interesting no? This is jurisprudence.

To me, the most favorable consideration is: Is that by-laws

that delegated to the board the authority to amend the by-

laws approved by the SH voting 2/3? If it is then it should

be a valid delegation and need not be in a SH resolution.

Of course after this, I knew why. The SEC Commissioner

who voted against us is a consultant of SM. So the Director

who approved the amendments is our consultant. The

commissioner who overruled the director is a counsel of

SM.

For BAR PURPOSES, the answer is as long as the

delegation of authority has been approved by the SH

representing at least 2/3 of the outstanding capital stock,

then by the strength of that authority, the board alone may

amend the by-law. This is clear under Section 48 of the

Corporation Code.

Section 48. Amendments to by-laws. – The board of directors or

trustees, by a majority vote thereof, and the owners of at least a

majority of the outstanding capital stock, or at least a majority of the

members of a non-stock corporation, at a regular or special meeting

duly called for the purpose, may amend or repeal any by-laws or adopt

new by-laws. The owners of two-thirds (2/3) of the outstanding capital

stock or two-thirds (2/3) of the members in a non-stock corporation

may delegate to the board of directors or trustees the power to amend

or repeal any by-laws or adopt new by-laws: Provided, That any power

delegated to the board of directors or trustees to amend or repeal any

by-laws or adopt new by-laws shall be considered as revoked whenever

stockholders owning or representing a majority of the outstanding

capital stock or a majority of the members in non-stock corporations,

shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such

amendment or new by-laws shall be attached to the original by-laws in

the office of the corporation, and a copy thereof, duly certified under

oath by the corporate secretary and a majority of the directors or

trustees, shall be filed with the Securities and Exchange Commission

the same to be attached to the original articles of incorporation and

original by-laws.

The amended or new by-laws shall only be effective upon the issuance

by the Securities and Exchange Commission of a certification that the

same are not inconsistent with this Code.



35

E. BOARD OF DIRECTORS AND TRUSTEES

1. Doctrine of Centralized Management

As you all know, under Section 23 of the Corporation Code,

corporate powers, business transacted, property held by the

BOD.

Section 23. The board of directors or trustees. – Unless otherwise

provided in this Code, the corporate powers of all corporations formed

under this Code shall be exercised, all business conducted and all

property of such corporations controlled and held by the board of

directors or trustees to be elected from among the holders of stocks, or

where there is no stock, from among the members of the corporation,

who shall hold office for one (1) year until their successors are elected

and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the

corporation of which he is a director, which share shall stand in his

name on the books of the corporation. Any director who ceases to be

the owner of at least one (1) share of the capital stock of the

corporation of which he is a director shall thereby cease to be a

director. Trustees of non-stock corporations must be members thereof.

A majority of the directors or trustees of all corporations organized

under this Code must be residents of the Philippines.

We have this doctrine – centralized management – so the

stockholders regardless of number they can be 5, 15, or

thousands SH, will have to delegate the power to run the

corporation to a centralized body called Board of Directors. So

BOD is the body who exercises the power of a corporation.

Under Section 23, there is a qualification unless otherwise

provided meaning there are certain cases where the law

conferred corporate powers only to the SH and there are

corporate powers exercised jointly by the board and the SH.

But other than these, corporate powers are exercised by the

BOD. They decide what is best for the corporation. Questions

on policy and management are left to the sound discretion of

the BOD.

BAR QUESTION: A general counsel of the corporation and

the lawyer who handled the case for the corporation entered

into a compromise agreement with a party in a civil case

without approval of the board. Is this compromise agreement

binding?

No, because general counsel does not have the power. It has

to be the board unless authorized by the by-laws or board to

enter into a compromise agreement but the lawyer himself

without authority from the board or the by-laws cannot

approve any compromise agreement.

2. Business Judgment Rule

This means that questions of policy and management are left to

the discretion of the board and the actions of the board are not

reviewable by the courts and they cannot be interfered with by

the courts and the stockholders for as long as the board acts in

good faith and not contrary to law.

Can the stockholders pass a resolution repudiating

the resolution adopted by the board on questions of

policy and management?

No. SH cannot interfere with the board on how to run

corporate affairs.

REMEDY of SH: Remove the director by 2/3 of vote and

elect new directors but never to supplant BOD’s judgment

because the powers were not granted to them by law. It is

to the BOD.

Can the court interfere on purely business matters?

No. For as long as the board acts in good faith and not

contrary to law, their (BOD) actions are not reviewable by

the courts.

If the Board made a mistake, they erred in making an

investment or in buying this property that they

thought would increase in value but six months after

the value decreased; can they be made liable for

damages?

No. Under Section 23, 34, and 31 of Corporation Code they

are not liable. They are only liable in case of gross

negligence or bad faith in directing the affairs of the

corporation.

Simple negligence and error in judgment are all part of the

administrative _________. So directors are not infallible.

There are no certainties that they will not make mistakes or

they will not err in the exercise of their judgment. What is

important is that they act in good faith and not contrary to law

and if they do make a mistake, their actions are not reviewable

by the courts and even by the SH.

Can the board create positions?

Yes. The board also may create a department. The board

may create ordinary positions, appoint ordinary officers.

What the board cannot do and cannot be justified by the

business judgment rule, as held in the case of Filipinas

Port Services v. Go and asked in the bar, is to create an

executive committee that would function like an executive

committee under the Corporation Code neither can they

create corporate offices.

So they cannot create officers and committees which, by

law, can only be created by the by-laws.

Now, you know very well that the board cannot

create corporate offices, but they can create ordinary

office. What does this mean?

The distinction is not in the importance of the position or

office in the corporation. The importance lies with the

jurisdiction in case of removal or incrimination dispute.

So the holder of a corporate office is considered a

corporate officer and any issue about the removal,



36

appointment of a corporate officer is an intra-corporate

controversy cognizable by the RTC acting as a special

commercial court.

Whereas an officer holding of a by-laws position and

therefore he is not a corporate officer and considered as

ordinary, and in case of election, removal, or appointment

disputes, it becomes a labor issue or dispute cognizable by

Labor Arbiters and not the RTC acting as a special

commercial court.

What makes an office a corporate office?

It’s not anymore WON it is appointed by the board. The

test is: Is that office specified in the by-laws?

If it is in the by-laws, it becomes a corporate office. If not,

it is not a corporate office but just an ordinary office.

There is a recent case. Is the office of the dean a corporate

office? Now it is not the Dean of the Faculty of Civil Law but

another dean somewhere in the north. So the test is WON it is

in the by-laws. In this case, it is not in the by-laws. So where

can the Dean go in case he’s been removed? Go to the LA, not

RTC as a special commercial court.

EASYCALL v. KING (2005)

Let’s say Vice President for Nationwide Expansion

(although sabi ni Dean is Director for Nationwide

Expansion). Is it a corporate office if he was only

appointed by a managing director?

So he is appointed by the managing director, not even by

the board. The title is hifalutin, right? But he is not a

corporate officer because his position is not in the by-laws.

GARCIA v. EASTERN TELECOM (2009)

Vice President and Head of Business Support

Services and Human Resource Departments (sabi ni

Dean VP for Personnel and Business Management)?

He is because his position is in the by-laws of the

corporation.

As said earlier, it is not the question of the meaning of the

position. When we say ordinary office, we don’t say that you’re

less important compared to those who hold a corporate office.

It is to say that in case of removal, then the one who has

jurisdiction over the dispute will be the determined by the

distinction between one holding a corporate office and one who

holds an ordinary office.

_____v. Joson 2012

Can the board be authorized by the by-laws to create

corporate office?

Before this ruling, as I told you, once you’re appointed by the

board, automatically you’re a corporate officer. But the test, as

I said, is the inclusion in the by-laws.

So what if the by-laws authorized the board to create a

corporate office and the board pursuant to this, it did

create a corporate office? Is the officer holding an ordinary

or corporate office? SC said it’s ordinary.

So the remedy is not for the by-laws to authorize the

board. The remedy is for the by-laws to be amended to

make the office a corporate office.

What about the executive committee? Can the board

create an executive committee functioning as such

under Section 35 of the Corporation Code that can act

on matters with the board’s competence?

No. It is beyond the authority of the board.

No amount of business judgment rule can justify the creation

of the executive committee which by law states can only be

created by the by-laws.

The SC clarified, however, if the committee is called executive

committee but the function is not the same in Section 35, then

the board can create it under the business judgment rule. So

kahit na it is called an execom but management function lang

pala.

So what is so important under Execom in Section 35?

Execom under 35 is just like a mini-board which can act

on matters within board’s competence. Whatever the

board can do, execom can also do except in those 5 cases

under 35. This is why the board cannot create another

board. It must be the by-laws that will create another

board but of course, not less than 3 must come from the

member of the board.

BAR: The corporation has been losing money for

many years and to motivate the SH, directors, and

officers, the board adopted series of resolutions

invoking the business judgment rule. So in good

faith. In first resolution, it says pay dividends to the

SH. Second, pay bonuses to all directors. Third, pay

bonuses to officers. So can they be justified by the

good faith of the board?

And of course in business judgment rule is subject to

the condition that the board acts in good faith. Now,

can the company declare dividends if it is losing?

No it cannot. Under Section 43 of the Corporation Code, a

corporation can only declare dividends if there is surplus

profit.

Can the director authorize payment of compensation

for themselves?

No because compensation of directors as such directors is

valid only if authorized by the by-laws or approved by the

SH owning or representing majority of the outstanding

capital stock under Section 30.



37

What about payment of bonuses to officers if the

company is losing?

It is unreasonable.

So all of the resolutions cannot be justified by the business

judgment rule.

NOT YET ASKED IN THE BAR: PROVIDENT

INTERNATIONAL v. VENUS (2008)

There are two functions in the BOD.

Let’s say the first set sided with the minority and the majority

directors filed an affidavit with the SEC that the stock and

transfer book (STB) is lost. So on the strength of the affidavit,

SEC issued a replacement STB but in truth and in fact, it is not

lost. It is in the possession of the corporate secretary.

Once the new STB is obtained by the board, the board passed a

resolution that all entries in the old book are void and all

entries in the new book are valid invoking the business

judgment rule.

Is the invocation of the business judgment rule valid

to make all entries in the old void and the in the new

book, valid? Can the SEC recall that erroneously

registered STB?

SC: If the book is not lost, no amount of business

judgment can justify the request for additional STB.

The erroneously STB can be recalled by the SEC. It does

not require court intervention. It falls within the general

authority of the SEC over all corporations.

Can the SEC decide WON the entries in the new book

be valid?

No, because they become intra-corporate controversies

cognizable by RTC acting as special commercial court.

3. Tenure, Qualifications and Disqualifications of Directors or

Trustees

There's no quorum during the regular annual stock

holder's meeting to elect BOD. Therefore the

incumbent BOD shall continue to serve in a hold-over

capacity. During the hold over period, a director

resigns; can the remaining directors constituting the

quorum fill such vacancy?

No. The BOD holds the position merely in a hold over

capacity. The reason/cause for such vacancy is expiration

of the term and not resignation. Therefore only the

stockholders can fill the vacancy in the board. The case of

Africa v. Valle Golf and Country Club.

Is there a difference between term and tenure?

Term is the 1year period in which he has the right to hold

office- the length of time during which a person has an

official or political office.

Tenure -if it exceeds 1year period until his successor has

been elected - the amount of time that a person holds a

job, office, or title.

Directors shall have all the qualifications under Sec. 23 and the

by-laws, and none of the disqualifications under Sec. 27 and

the by-laws.

One of the qualifications is ownership of a share in the books of

the corporation.

Let's say ABC Corp obtained a loan from XYZ Bank

secured by a voting trust agreement on the shares of

A in ABC Corp. A is the controlling stockholder of

ABC Corp, so by signing a voting trust agreement in

favor of XYZ Bank , A conveyed the legal title to his

shares in ABC Corp in favor of XYZ Bank. The loan

was not paid, promptly XYZ filed an action for

collection. Summons is served on A. Is A still

qualified to act as director of ABC Corp.?

A can no longer act as director of ABC Corp. the moment

the director loses legal title over his shares, automatically

he ceases to be a director of the corporation. The case of

Lee v. CA.

CONTENTS OF THE BY LAWS

Section 47. Contents of by-laws. - Subject to the provisions of the

Constitution, this Code, other special laws, and the articles of

incorporation, a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or

special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special

meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and

the manner of voting therein;

4. The form for proxies of stockholders and members and the manner

of voting them;

5. The qualifications, duties and compensation of directors or trustees,

officers and employees;

6. The time for holding the annual election of directors of trustees and

the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all

officers other than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock

certificates; and

10. Such other matters as may be necessary for the proper or

convenient transaction of its corporate business and affairs.

You must make a distinction between item #1 and #2 - time

place and manner v. time and manner. Place is not specified in

#2, and it's because the place of meeting for stockholders is

provided for by law - city or municipality where the principal

office of the business of the corporation is located.



38

QUORUM

Section 25. Corporate officers, quorum. – Immediately after their

election, the directors of a corporation must formally organize by the

election of a president, who shall be a director, a treasurer who may or

may not be a director, a secretary who shall be a resident and citizen of

the Philippines, and such other officers as may be provided for in the

by-laws. Any two (2) or more positions may be held concurrently by the

same person, except that no one shall act as president and secretary or

as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the

duties enjoined on them by law and the by-laws of the corporation.

Unless the articles of incorporation or the by-laws provide for a greater

majority, a majority of the number of directors or trustees as fixed in

the articles of incorporation shall constitute a quorum for the

transaction of corporate business, and every decision of at least a

majority of the directors or trustees present at a meeting at which there

is a quorum shall be valid as a corporate act, except for the election of

officers which shall require the vote of a majority of all the members of

the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

Under Section 25, Quorum means majority of the directors as

stated in the AOI. Not fixed in the by-laws but fixed in the AOI.

Unless there is a higher number required in the AOI to

constitute a quorum, majority of the entire board is sufficient

to transact business.

If you see the phrase the BOD as distinguished from majority

of the BOD, the phrase BOD simply means majority of the

quorum. So this language is evident in Sec43-44 of the Code

regarding Declaration of Dividends, as compared to Sec 37-38,

40, 42. If the act is not provided for or is not covered by the

Corporation Code or the by-laws, then majority of the the

quorum is sufficient to transact business.

Can the by-laws prescribe lesser number?

No. It can be greater number but not lesser number.

PENA VS CA.

3 would have been a quorum of 5, but not if the by-laws

provide that 4 out of 5 constitutes a quorum. This involves loan

secured by mortgage. Loan was not paid mortgage was

foreclosed. Then the right to redeem was assigned to

another and the assignee wants to file an action for

ejectment against the mortgagor.

Was there a valid assignment of the right to rede

em considering that 3 out of 5 were present and

approved the assignment of the right to

redemption?

SC said it is invalid because the by-laws prescribed a

greater number and likewise under Sec 40 if what is

assigned is the right to redeem involving the only

property of the corporation that amounts to a sale of

substantially all the corporate assets and that requires

not only board approval but likewise votes of the

stockholder representing at least 2/3 of the outstanding

capital stocks.

PROXY

It should be in writing and signed by the stockholder, filed

before the meeting, but the by-laws may prescribe additional

requirements for the sufficiency of proxy.

By laws may for example require that the proxy be notarized.

So a voting trust agreement is required to be notarized under

Sec. 59. The proxy is not required to be notarized under Sec. 58

and yet the by-laws may require that the proxy be notarized.

The only requirement under the Code is that proxy must be

submitted before the meeting, which could be an hour before

the meeting.

Now the by-laws may prescribe a longer period for submission

of proxy, San Miguel for example they require that it be

submitted 10days prior to meeting, public companies 5 days

before the stockholders meeting. It cannot be belated or later

that that period, otherwise the stockholder whose proxy has

been rejected may not have enough time to seek redress or gain

relief. So for a public company, minimum no. of days for

submission of proxy is not less than five days before the

stockholders meeting, so it cannot be any day earlier, to give

time to the course to value the proxy and to enable the

stockholder to seek redress in cases of unjust, improper, and

unlawful rejection of the proxies.

COMPENSATION OF DIRECTORS

As a GR, directors as such are not entitled to compensation

because they are not presumed to render services gratuitously.

The presumption is the return of their investment is enough

compensation.

Are there exceptions? Are there cases were a director

as such director maybe entitled to compensation?

Yes, if the by-laws fix the compensation of the director.

OFFICERS OF THE CORPORATION

It talks about manner of appointment, term of corporate

officers.

Can the by-laws then make the term of the corporate

officers 1 year and subject to renewal every year?

The Corporation Code covers only corporate officers, the code

does not cover ordinary officers. Because ordinary officers are

employees and in case of appointment, removal,

disputes/controversies, they partake of labor disputes

cognizable by the Labor Arbiter.

So the Corporation Code does not cover it, but only corporate

officers - the president, secretary, treasurer and other officers

whose offices are defined under the by-laws.



39

So can the by-laws fix their term to 1 year?

YES. It is common in public companies, every year they

appoint corporate officers, and in fact this is allowed under

Sec.47.

Then you have manner of calling stock holders meeting. It

requires notice, the mode of giving notice. The notice has to be

by publication because it is difficult to prove notice by mail, or

personal notice of stockholders meeting. Many cases where the

SC rejected or invalidated Stockholders meeting for the failure

to notify one stockholder, because all stockholders must be

notified of such meeting. Regardless even if the number of

shares is/are significant or not, it is not a valid reason/excuse,

not to notify all stockholders. You cannot say that anyway the

vote of the stockholder is not required anyway.

Bottom line is that all stockholders must be notified, quorum

and vote required by the by laws- subject to notice by mail,

personal delivery, but it is best to do it by publication because

all you have to do is to present affidavit of the publisher that

caused the publication.

Is the enumeration under Sec. 47 exclusive or not?

It's not. That's why you have the all-encompassing clause

"Such other matters as may be necessary for the proper or

convenient transaction of its corporate business and

affairs."

RECORD DATE means the stockholders of record entitled to

exercise the right of stockholders, whether right to vote or right

to dividends.

Let's say June 1 the corporation declared dividends "the board

thus declared dividends to stockholders of record as of June15,

2015 payable on June 30, 2015." On June 16 stockholder sold

his shares, between your record date June15 and payment date

of June30, there is a change of ownership. Who is entitled to

receive the dividends?

It is the stockholder of record as fixed in the by-laws, the

stockholders of the record date which is June15. Hence it is not

the buyer-transferee of the stocks but the seller-transferor who

is entitled to receive the dividends, being the stockholder of

record as of the June15, even though he is no longer the owner

as of payment date.

If there will be item in the articles that you have to amend but

is likewise mirrored in the by-laws, then you have to effect it in

the by-laws likewise.

Century Properties will enter into backdoor listing. Backdoor

listing means acquiring the shares of a dormant listed

company. Let's say the listed company is ABC Energy

Company, Century will acquire shares of ABC. Then after the

acquisition they will now amend the AOI to change the purpose

from being an energy company to Realty Company, and they

will also amend the corporate name from ABC Energy

Company to Century City Properties. Because IPO (initial

public offering) is expensive, so the cheapest way to do it, to

make your shares listed, is to do backdoor listing. After the

amendment of AOI, the name is now Century City Properties in

the AOI, but still ABC in the by-laws, because the by-laws has

not been amended. So if you have to amend the item in AOI

that is also contained in the by-laws, you also have to amend

the latter to effect the change. How many votes? 2/3 of the

outstanding capital stock and majority of the board for

amendment of AOI.

A BOD must have all the qualification of a BOD under

the Corporation Code as well as the qualifications under

the by-laws and none of the disqualifications under the

Corporation Code.

What are the qualifications under the Corporation

Code?

1. Must be a natural person except in case of a

cooperative

2. Legal age

3. Ownership of at least 1 share of stock registered in his

name in the books of the corporation

4. Not less than 5 not more than 15 except in case of

merger or consolidation of banks and corporation sole

5. Majority of them must be Philippine residence

QUALIFICATION:

Ownership of at least 1 share of stock

registered in his name in the books of the corporation as

of the date fixed in the by-laws.

Such qualification is a continuing qualification. If at any time, a

director loses ownership or ceases to be a SH, he automatically

loses or becomes disqualified to continue discharging the

functions of a director.

Can the trustee qualify as a director even if he is not a

full owner; he only has legal title over the shares,

NOT A FULL TITLE?

The SC held that a trustee can qualify as a director even if

he is not a full owner because it is the legal title that counts

not the beneficial title.

Generally, you have to be a full owner; it means you should

have both the legal title and beneficial title.

But in the case of Lee vs. CA - ABC Corp obtained a loan from

XYZ Bank secured by a voting trust agreement on the shares of

A in ABC Corp. A is the controlling stockholder of ABC Corp, so

by signing a voting trust agreement in favor of XYZ Bank , A

conveyed the legal title to his shares in ABC Corp in favor of

XYZ Bank. The loan was not paid; promptly XYZ filed an action

for collection.

In the voting trust agreement the lender acquires legal title to

the shares, and because the lender acquires legal title as trustee

then he has the right to elect the directors of the corporation so



40

that they can now manage the affairs of the corporation. It is a

more effective way of gaining or acquiring control.

For qualification purposes who is qualified to be

elected director? The trustor-beneficial owner or the

trustee legal title?

SC said LEE V. CA: One with legal title, not necessarily

with full ownership. Conversely, the moment the director

loses the legal title to the share automatically he forfeits

the director position.

Why is it legal title suffices not full ownership?

Because SC said in LEE V. CA the phrase “in his own

right” under the old corporation code has been deleted.

What about the practice of lodging your shares with

a broker? (SCRIPLESS TRADING)[to be discussed in

detail regarding transfer of share] Let’s say you

want to sell your shares as a stockholder, what are

the requirements under the law?

Endorsement plus Delivery

To facilitate Scripless trading, the stock certificate of the

stockholder is lodged with the broker. It will be the name

of the broker for the benefit of whoever will be the

beneficial owner of the shares.

For Director qualification purposes, the one who lodged the

shares to a broker is NOT QUALIFIED TO BE A DIRECTOR

because he is no longer the stockholder in record in the books

of the corporation.

CONTINUING QUALIFICATION

BAR QUESTION: Let’s say X is a director of ABC Corp. , six

months in his term he sold the shares to Y. So who is qualified

to continue discharging the duties of a Director?

Neither X OR Y. X loss the director position because of the

transfer of shares to Y. Y is not qualified because purchase of

shares of X is not a mode of assumption of office.

GRACE CHRISTIAN HIGHSCHOOL V. CA

The by-laws of Grace Village homeowners association provides

that there are 15 directors and out of the 15 directors only 14

will be elected among the members of the association, the 15th

slot is reserved for the representative of the Grace Christian

School (Not a member of the association). For 14 years the

representative of Grace Christian High School is allowed to

have a seat in the homeowners association. Until one time,

when the board of trustees of the Association (Change of

trustees) decided to withdraw or revoked the privilege which

prompted the case filed by Grace Christian HS against the

association. Grace Christian HS’s argument is that the school

has a vested right over the director seat. It has been the

practice and the school was the magnet that drew residence in

the village.

Has Estoppel set in?

No. Estoppel cannot forestall the challenge against an act

which is contrary to law. You cannot have a permanent

representative in the board. Only for a 1 YEAR TERM. You

cannot be a director or trustee of the corporation unless

you are a stockholder or a member for non-stock

corporations.

BAR QUESTION: Can the by-laws enlarge the

qualification for a director to own atleast one share?

Yes, as long it is not intended to deprive the minority

representation

Can the by-laws prescribe other qualification? For

example only law deans be elected as directors of

trustees?

Yes.

Section 27. Disqualification of directors, trustees or officers. -

No person convicted by final judgment of an offense

punishable by imprisonment for a period exceeding six (6)

years, or a violation of this Code committed within five (5)

years prior to the date of his election or appointment, shall

qualify as a director, trustee or officer of any corporation. (n)

GROUNDS FOR DISQUALIFICATION:

1. Conviction by final judgment of an offense punishable

by imprisonment for period exceeding 6 years

Final Judgment

Gravity of the penalty

2. Violation of the corporation code committed within 5

years prior to the date of his election or appointment

Not the gravity of the penalty or offense (even

only mere reprimand or a fine), IT IS WHEN

THE VIOLATION IS COMMITTED.

Suppose in the SEC EN BANC, found a director there

violated the corporation code but he filed a petition

for review with the CA. During the pendency of his

appeal can he still run as a director in another

corporation?

No because decisions of the SEC EN BANC are executory.

Immediately executory but they are not final can be

appealed with the CA. The appeal will not stay the

enforcement of the decision of the SEC EN BANC.

XPN: If the petitioner obtains a TRO or injunction from

the CA



41

4. Elections

Section 24. Election of directors or trustees. - At all elections of

directors or trustees, there must be present, either in person or by

representative authorized to act by written proxy, the owners of a

majority of the outstanding capital stock, or if there be no capital stock,

a majority of the members entitled to vote. The election must be by

ballot if requested by any voting stockholder or member. In stock

corporations, every stockholder entitled to vote shall have the right to

vote in person or by proxy the number of shares of stock standing, at

the time fixed in the by-laws, in his own name on the stock books of the

corporation, or where the by-laws are silent, at the time of the election;

and said stockholder may vote such number of shares for as many

persons as there are directors to be elected or he may cumulate said

shares and give one candidate as many votes as the number of directors

to be elected multiplied by the number of his shares shall equal, or he

may distribute them on the same principle among as many candidates

as he shall see fit: Provided, That the total number of votes cast by him

shall not exceed the number of shares owned by him as shown in the

books of the corporation multiplied by the whole number of directors

to be elected: Provided, however, That no delinquent stock shall be

voted. Unless otherwise provided in the articles of incorporation or in

the by-laws, members of corporations which have no capital stock may

cast as many votes as there are trustees to be elected but may not cast

more than one vote for one candidate. Candidates receiving the highest

number of votes shall be declared elected. Any meeting of the

stockholders or members called for an election may adjourn from day

to day or from time to time but not sine die or indefinitely if, for any

reason, no election is held, or if there are not present or represented by

proxy, at the meeting, the owners of a majority of the outstanding

capital stock, or if there be no capital stock, a majority of the member

entitled to vote.

REQUISITES FOR A VALID ELECTION

Notice of the meeting to the Stockholders in

accordance with the form and mode under the by-laws

There will be present either in person or by

representative authorized to act by written proxy the

owners of a majority of the outstanding capital stock

or majority of the members entitled to vote.

Presided by the officer under the by-laws.

The stockholder may cast such number of votes base

on his shares registered in his name in the books of

corporation multiplied by the directors to be elected.

o For example: Let us say a stockholder has 1000

shares, 15 directors to be elected. So 1000

shares x 15 – the answer is the number of votes

allowed for such SH to cast (15,000 votes)

And the candidate having the highest number of votes

shall be duly elected as director.

Number of shares not number of Warm bodies present. So it

can only be one person, there can be a quorum, if that person is

Henry Sy of SM OR BDO. His presence accounts to more than

majority.

BAR QUESTION: Which shares are not included in

the determination of majority of outstanding capital

stock?

NON-VOTING SHARES, DELINQUENT SHARES,

TREASURY SHARES but includes unpaid shares which

are not delinquent.

a. Cumulative Voting/Straight Voting

b. Quorum

CUMULATIVE VOTING – he may cast his votes in favor of

one nominee or he may spread out equally or various portions

to various nominees as long as it does not exceed the number

of shares owned by him as shown in the books of the

corporation multiplied by the whole number of directors to be

elected.

Such cannot be denied to a stockholder because it is a right

granted by law. The by-laws cannot deprived that right from a

stockholder.

For non-stock non-profit corporation

BAR QUESTION: If there are 6 trustees, how many

votes can one member cast?

6 but not more than once per nominee. There is no

cumulative method voting in non-stock non-profit

corporation unless provided in the by-laws.

INDEPENDENT DIRECTOR is one who is not part of

management and not subject to any circumstance, relationship

or factor present that may impair the exercise of the

independent judgment of a director of the corporation

Example: Legal Counsel of the corporations, adviser

BAR QUESTION: What corporations are required by

law to have an independent director?

Public companies -whose shares of stock are listed in the

stock exchange or with P50 million assets with at least 200

stockholder and each SH owning 100 shares.

5 directors, 2 independent directors at least

15 directors, 2 independent directors

How many election are you going to have if you are

required to have an independent director?

Only one

How many directors will you elect?

Same, the number of directors fixed in the AOI

How many votes may the SH cast?

Same formula, number of shares under their name X

number of directors to be elected INCLUSIVE OF THE

NUMBER OF INDEPENDENT DIRECTORS



42

One nominee for regular director or one nominee for

independent director, or spread its votes among regular only or

independent only or combination of both as long as the votes

do not exceed the shares of stock in his name multiplied by the

number of directors to be elected

Example 13 directors, 2 independent directors. There are 18

nominees to the positions of regular directors. The top 13 will

be considered regular directors.

What if the shares or votes of the 2 independent

directors are less than 14th nominees as general

directors?

The top 13 nominees for regular directors are considered

elected and top 2 nominees for independent directors are

elected as independent directors even though these 2

independent directors obtain less votes than the nominees

for regular directors.

5. Removal

REQUISITE FOR REMOVAL/PROCEDURE TO CARRY OUT

REMOVAL OF DIRECTORS/TRUSTEES:

1. Notice of the meetings and the procedures prescribe

by the by-laws.

2. Notice of the meeting must specify the purpose that

there includes the proposed intention to remove a

director although the code does not require that the

name of the director to be removed be specified. Just

include in the agenda that there is intention to remove

a director.

3. Presence of stockholders representing 2/3 of the

outstanding capital stock.

4. The removal may be with or without just cause.

However, if the removal is intended to deprive the

minority of their representative, the removal has to be

with cause.

5. The vacancy brought about by the removal of the

director may be filled up at the same stockholder’s

meeting where the removal was effected or in a

separate meeting called for that purpose.

6. Filling of Vacancies

Section 29. Vacancies in the office of director or trustee. -

Any vacancy occurring in the board of directors or trustees other than

by removal by the stockholders or members or by expiration of term,

may be filled by the vote of at least a majority of the remaining

directors or trustees, if still constituting a quorum; otherwise, said

vacancies must be filled by the stockholders in a regular or special

meeting called for that purpose. A director or trustee so elected to fill a

vacancy shall be elected only or the unexpired term of his predecessor

in office.

A directorship or trusteeship to be filled by reason of an increase in the

number of directors or trustees shall be filled only by an election at a

regular or at a special meeting of stockholders or members duly called

for the purpose, or in the same meeting authorizing the increase of

directors or trustees if so stated in the notice of the meeting.

Q: There are 3 cases/instances under Section 29

where vacancies in the board may exist. In cases of

expiration of term, removal and what is the third

one? It is important for us to determine these 3

because the board may fill up vacancy in cases other

than these 3 grounds.

A: When the Articles of the corporation is amended to increase

the number of the directors. Removal, Expiration of term and

increase in the number of the board seats, the stockholders

shall fill up the vacancy. For the board to fill up vacancies the

causes may be other ground than removal, expiration of term

and increase in the number of the board seat, it could be

resignation, withdrawal, retirement, abandonment, death,

insanity and incapacity as long as it is not removal, expiration

of term or increase in the number of the board seat. The other

requisite for the board to fill up vacancy is there must be a

quorum.

Q: There are 15 directors under the articles of incorporation, 7

went to Brazil to watch a football game. For example, there was

a plane crash and all of them died. The 8 called a special board

meeting to fill up vacancies and all of them showed up but they

were in disagreement as to who will be elected. 5 out of 8 voted

to fill up the vacancies by nominating certain individuals. Is

this valid?

A: Yes, the Code says the majority of the directors present if

they constitute a quorum. 5 out of 8 is a valid vote to fill up a

vacancy.

Quorum of the board meeting constitutes the number of

directors fixed by the articles of incorporation. If a director

abstains but is physically present in the meeting, his presence

is counted for quorum purposes.

How many votes are needed to fill up vacancies

brought about by the removal?

The power to remove requires 2/3 of votes of the

stockholder representing the outstanding capital stock

while the filling up of the vacancy require only majority of

the outstanding capital stock. So if for example in the

stockholder’s meeting where the removal was effected, the

stockholders decided to appoint and elect the director,

appointment/election of the new director need not require

2/3 of the outstanding capital stock, majority suffices.

As we said earlier, the stockholders have the sole power to

remove a director. It does not belong to the board or jointly by

the board and the stockholders. So if the board passes a

resolution that a director who is absent for three consecutive

meetings or if the director fails to pay dues and assessment of

the corporation, the director may be removed, that board

resolution is invalid because the sole power to remove a

director belongs to the stockholders even though this is in the



43

by-laws. Even if the by-laws says that a director who is absent

for three meetings or more or delinquent to pay the dues and

assessment, it cannot be a valid ground for the directors to

remove him because again the power to remove a stockholder

belongs to the stockholders. In case of absences or in case of

non-payment of dues and assessment, it amounts to just cause

and even though he is the representative of the minority, he

can be removed by the stockholders as long as you have 2/3 of

the outstanding capital stock.

CASES WHEN THE STOCKHOLDERS MAY FILL UP

VACANCIES IN THE OFFICE OF DIRECTORS/TRUSTEES:

1. If the ground or the cause is expiration, removal or

increase in the number of the board seats.

2. The ground is not expiration, removal nor increase in

the number of the board seats but the remaining

directors do not constitute a quorum.

3. The ground is not expiration, removal nor increase in

the number of the board seat and the remaining

directors who constitute a quorum decided to delegate

the power to the stockholders.

REQUISITES FOR THE BOARD TO FILL UP VACANCIES IN

THE OFFICE OF DIRECTORS/TRUSTEE:

1. The cause of the vacancy must be resignation,

withdrawal, retirement, abandonment, death, insanity

or incapacity or any ground other than removal or

increase in the number of the board seat.

2. The remaining directors must constitute a quorum.

To fill up the vacancy by the act of the board, majority of the

quorum suffices. These three on Section 29 of the Corporation

Code it says majority of the remaining directors present, if they

constitute a quorum unless if the by-laws requires otherwise.

The by-laws may require that it should be the majority of the

entire board but if not so provided, majority of the quorum

suffice.

The term of the director who is elected or appointed to fill up

the vacancy is the unexpired portion of the term of the director

replaced.

BAR QUESTION: A was the director appointed June 1, 2013

and then he resigned. On August 1, 2013, D was appointed by

the board. By September, D died and was replaced by X. What

is the term of X?

A: The term of X is the unexpired portion of the one year

term. He can serve only up to June 1, 2014.

Is it mandatory on the part of the board to fill up the

vacancy in case somebody resigns, withdraws or was

incapacitated?

No. It is discretionary on the part of the board and not

mandatory.

STAGGERED ACCEPTANCE OF RESIGNATION

Let’s say that your client buys 75% of a company and it is

customary in any sale transaction for nominees of the seller to

tender resignation of the directors in order to pave the way of

the nominees of the buyer. So the nominees of the seller tend

to resign, to be accepted by the board. The problem is if it is

75% and let us say you have 15 directors and 10 came from the

seller’s nominees, if the board accepted the resignation then

you will not have the quorum to fill up the vacancies. The board

will have to call a stockholder’s meeting. Can you request them

to stay and accept the resignation on staggered basis so even

though 10 tendered resignation, 5 will stay for one meeting and

only 5 will resign and the new nominees of the buyer will be

accepted by the 10. After the 5 has been filled up, the

remaining 10 will then reside and accept the resignation of the

5 remaining directors?

It is valid. The only requirement is the quorum to fill up

the vacancy brought about by the grounds other than the

expiration, removal or increase in the number of the board. In

fact, this has always been done by the corporation. You do not

have to call a stockholder’s meeting. All you have to do is to call

a meeting of the remaining directors and accept the resignation

on a staggered basis. The only requirement to repeat, is that the

cause of the vacancy is not expiration, removal or increase in

the number of board seats and the number of the remaining

directors at the time they fill a vacancy constitute a quorum.

I remember when I was a corporate secretary of the bank, two

nominees come from the GSIS and two from SSS. The two

nominees from the GSIS resign to pave the way for the

appointment of new nominees. They resign 6 months before

their term to give way to the new nominees of GSIS.

Unfortunately the board decided not to fill up the vacancy from

the GSIS nominees and the board only chose one from the two

nominees of GSIS and appointed a third member of the

directors. Of course the GSIS cried and complained that it

should come from their rank. Is that legally correct?

Yes, because during the term of the director, you do not

have to set anymore a stockholders meeting, you are on your

own. So the board may decide who would become a member.

You can only use your shares to elect directors during the

stockholders meeting but the board during the incumbency of

the directors, may appoint someone from GSIS or not from the

GSIS as long as the replacement has all the qualification and

none of the disqualification under the by-laws and under the

Corporation Code.

Things became difficult when the President of the Philippines

called up our ambassador who seats in the board and said why

do you not appoint this guy from the GSIS, appoint him. So we

immediately called up a board meeting. The president all the

way from the palace called up the ambassador who is in the

board and very close to the chairman. The chairman called me

up and asked what shall we do? I said just elect him to seat in

the board of director. He said how could that be, it is against



44

the Articles of the Corporation. I said we will invoke the

provisions under the General Banking Law that allows 21

directors in case of merger and consolidation and in the mean

time we shall give him all the rights of a director. We will give

him per diem allowance and voting rights of a director. In the

meantime, we will get the opinion of the general counsel of the

BSP, to at least to give him the semblance of legitimacy.

So that was done. We appointed him as the 16th member of the

board and then the minority directors questioned the

appointment and said how could we appoint the guy when

under the Articles of the bank only allows 15 directors. I said

under the General Banking Law in case of merger or

consolidation, the bank may have 21 directors and we are party

to the merger and the law does not say at the time of the

merger but says in case of merger. Of course, that was wrong

because the Articles of the corporation says that you have to

specify the number of directors, if you want to have 21 in case

of merger or consolidation then that 21 must be specified in the

Articles but I need something in order to sort of give him

legitimacy to be the 16th director of the bank. The good thing

was there was no more contentions or discussion and di

kailangan idivide ang house. That action was unanimous and I

made it appear on the record that the directors participated in

the discussion, deliberation and the votes were counted. We

were waiting for the opinion of the general counsel to say I’m

sorry but that cannot be done. At least it buys time for me, the

good thing that I always pray that God be always with us. On

the third month, somebody resigned so it solved the problem

by itself. So there were 15 directors of the bank.

AFRICA CASE:

The resignation of the director, may not be filled up the

stockholders and may be done by the board if the vacancy is

other that expiration, removal and increase in the number in

the board seats.

Vacancies due to EXPIRATION OF TERM, REMOVAL and

INCREASE IN THE NUMBER OF BOARD SEATS, IF BOD

DOES NOT CONSTITUTE A QUORUM

To be filled up by Stockholders in a meeting

called for a purpose

Vacancies due to grounds other than mentioned

BOD can fill it up if there is quorum

7. Compensation

Section 30. Compensation of directors. - In the absence of any

provision in the by-laws fixing their compensation, the directors shall

not receive any compensation, as such directors, except for reasonable

per diems: Provided, however, That any such compensation other than

per diems may be granted to directors by the vote of the stockholders

representing at least a majority of the outstanding capital stock at a

regular or special stockholders' meeting. In no case shall the total

yearly compensation of directors, as such directors, exceed ten (10%)

percent of the net income before income tax of the corporation during

the preceding year.

Under Section 30 of the Corporation Code, directors as such

are not entitled to compensation because directors are

supposed to render the services to the corporation gratuitously

and the return of their investment is enough consideration for

their services. The directors presumably have significant

number of shares because you cannot be elected to the board if

you do not have sufficient numbers of share. So if they work

hard for the corporation it would translate into profits which

can be declared as dividends and the return on their

investment is enough consideration for their services. That is

why the by-law can entitle them compensation as such as

directors. There exception as we all know, the by-laws may

authorize the compensation or the stockholders by the vote of

the majority of the outstanding capital stock allowed to vote

may favour payment of compensation in the meeting called for

the purpose.

What if the directors render non-director services? What if the

director is also the president or vice president? Can he be paid

compensation if the by-laws is silent and without the vote of

the stockholders owning majority of the capital stock?

WESTERN TECHNOLOGY VS. SALAS

The Supreme Court said that the prohibition is on the payment

of compensation to the directors as such. The director as such

is not entitled to compensation. The prohibition is against the

payment of compensation for director’s services. If the director

will be paid compensation for director’s services that is the

time that the requirement of the by-laws or vote of the majority

of the stockholders comes in. In case they are paid

compensation in cases other than director capacity or for non-

director services, it does not require the authority of the by-

laws or the approval of the stockholders; the board approval

suffices.

Is there a limitation in the amount of the

compensation?

There is, the annual compensation as such should not

exceed 10% of the net income, not gross income, of the

corporation before income tax of the preceding year.

BAR QUESTION:

The limitation on the directors’ compensation is that in no

case shall the total yearly compensation of directors, as such

directors, exceed fifty (50%) percent of the gross income

before income tax of the corporation during the preceding

year.

NO, it must be 10% of the net income before income tax of

the preceding year.

Again, take note that 10% cut only applies only in

compensation for director’s services and if they are paid



45

compensation for other services, it is not subject to 10%

limitation.

What about per diem allowance? Is per diem

allowance? Is per diem allowance part of the

compensation?

NO, under the present Corporation Code.

On the proposed new Corporation Code, the per diem

allowance under the proposal is to make the per diem

allowance constitute compensation. Why? Because per

diem allowance becomes so big in many corporations and

bigger than the compensation of members of the faculty of

UST. Take a look at PLDT, the per diem allowance of

PLDT is Php 250,000 per board meeting and for every

committee meeting Php 200,000. For San Miguel

Corporation Php 200,00 per diem allowance and Php

150,000 for a committee meeting.

What is the concept of per diem allowance?

It is supposedly allowance for transportation, board and

lodging. The law says it must be reasonable. There is no

amount and it is a question of reasonableness. If a corporation

earns billions of pesos for PLDT, and you have assets of billions

of pesos, the php 250,000 may be defined as reasonable. It

depends on the facts of the case. And in case of meetings of the

corporation, you should get a committee also. In my case, I’m

in the board of UCPB. Despite of the very tight schedule, I have

three committees. Others have 3, 4, 5 or 7 committees, di

naman pwedeng lahat kunin nila so kelangan magbigay ng

kahit konti, so I have to take 3 committees, the most that I can

take. So I am part of the board and I take 3 committees and I

am not a full time director, who can get 7-8 committees. So if

you are a director of PLDT, you have 250,000 and let us say

you have 3 committee memberships. So 200,000 times 3 is

600,000 plus 250,000 is 850,000 for four hours just to take

the board and committee and that is PLDT for you. And this is

abuse by some GOCCs, that is why the officer of the GOCC or

the Good Governance corporate counsel passed a regulation

that board meeting shall not be more than once a month and

the committee meeting has to be every other day. So ginagawa

nung iba Monday para tatlo, Monday, Wednesday and Friday.

Kasi kung Thursday, dalawa lang. When Pnoy took over,

remember the MWSS has so many Board meetings. Wow are

they serious? What are they talking about? What are they

discussing? They have the same problem sewerage problems

etc. The answer is per diem allowance and they get other

bonuses like productivity bonus, compensation bonus. That is

why there is a resolution passed by the good governance

counsel.

8. Fiduciaries Duties and Liability Rules

Q: (This is the case of AC Ransom) dito nagstart yung

recording…. by virtue of the finality of the judgment, the sheriff

upon motion of the winning party, enforce the decision to levy

the assets of the corporation. Unfortunately, assuming that

there are no assets, can the President and other corporate

officers of the corporation may be made liable personally

because of the closure or insolvency of the corporation. (Follow

up question) Can the President stand as an employer of the

Ee’s of the corporation?

A: There were SC decisions that the President stood as as

Employer representing the corporations. Those SC decisions

were no longer applicable.

Supreme Court said in CARAG vs NLRC, the liability of the

President and other officers is not determined by the Labor

Code but by the Corporation Code, sections 31 and 34. That is

why the enumerations are exclusive because you cannot think

of any other ground other than the six (6). –asked four (4)

times in the Bar.

Q1: The President signed a surety agreement to secure the

obligation of this corporation. It turns out that the surety

agreement is spurious. Can the President be made liable on

account of gross negligence or bad faith? Q2: What is

important so that the president can be charge personally when

it comes to the gross negligence and bad faith in conducting the

affairs of the corporation? Procedurally, how? What should be

alleged in the complaint?

A1: No. A2: The SC said that the act constituting the

negligence or bad faith must be alleged; it is not enough

to make averments that they are in bad faith, otherwise it has

no basis.

Q: Can the stockholder be made personally liable?

A: No. It is not included in the enumeration of the directors,

officers and employees. Stockholders are liable only to

the extent of their subscription UNLESS they are

directors, officers or agents of the corporation.

Last Question…

Q: What do you understand by the doctrine of corporate

opportunity?

A: When a director, by virtue of his office, acquires for himself

a business opportunity which should belong to the corporation,

thereby obtaining profits to the prejudice of such corporation.

There is a responsibility not just to account but to remit the

profits he realizes.

Last Question.. Dean: I think I lied. Class: LOL

The case of Lanuza vs BF Corporation, penned by J. Leonen

Q: If the complaint alleges bad faith or gross negligence on the

part of the director and officers of the corporation, and they are

found guilty of bad faith and gross negligence in the course of

the trial, is that tantamount to pierce the veil of corporate

fiction?



46

A: Yes, in the sense that there is no distinction between the

corporation and the directors and officers of the corporation.

In effect it pierce the veil of corporate fiction, you make them

as if they are one and the same person.

Section 31. Liability of directors, trustees or officers. -

Directors or trustees who wilfully and knowingly vote for or assent to

patently unlawful acts of the corporation or who are guilty of gross

negligence or bad faith in directing the affairs of the corporation or

acquire any personal or pecuniary interest in conflict with their duty as

such directors or trustees shall be liable jointly and severally for all

damages resulting therefrom suffered by the corporation, its

stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in

violation of his duty, any interest adverse to the corporation in respect

of any matter which has been reposed in him in confidence, as to which

equity imposes a disability upon him to deal in his own behalf, he shall

be liable as a trustee for the corporation and must account for the

profits which otherwise would have accrued to the corporation. (n)

DISCUSSION.

This was asked four times (4X) in the bar, what are the cases

were the liabilities will attach to the directors, officers and

employees?

1. He wilfully and knowingly votes or assent to patently

unlawful acts of the corporation;

2. Guilty of gross negligence or bad faith in directing the

affairs of the corporation;

3. He acquires any personal or pecuniary interest in

conflict with his duty as such director or trustee.

4. When he consents to the issuance of watered stocks;

or having knowledge thereof, does not forthwith file

with the corporate secretary his written objection

thereto;

5. He is made by specific provision of law to personally

answer for his corporate action

6. When he agrees to hold himself personally and

solidarily liable with the corporation.

Q: Who are covered by this principle?

A: Only directors, officers and agents of the corporation are the

personally liable and not the stockholders, unless he is a

director, officer or employee.

It is not just to vote for but to assent likewise to a patently

unlawful act. Take note of the qualifier, “patently”. It is not

enough to be unlawful act; it must be patently unlawful

act, meaning without doubt, question or debate whatsoever

that the act is unlawful.

Q: What makes an act unlawful?

In CARAG VS NLRC, the Supreme Court said it is

unlawful if the law declares the act is unlawful. Best

example is in the Labor Code, the E’r must notify the

DOLE in case of termination atleast 30 days before the

intended termination, and so what is the consequence? A:

it affects the legality of the termination of the employment,

but will that make the erring officer liable personally? A:

The SC said, no. There is no law that makes that

omission to be unlawful.

Second is, Guilty of gross negligence or bad faith in

directing the affairs of the corporation;

As you all know, simple negligence and error in judgment will

not make the director or officer liable.

So if the directors decide to purchase a property and

after 2 months the price of the property went down,

let’s say the purchase price is 10 million, after 1

month it went down to 7 or 8 million a significant

reduction in the value. Are they liable for that?

Not necessarily, right? Keep in mind the business

judgment rule, that the business policy and management

are left to the sound discretion of the board as long as the

act in good faith, they can never be made liable. The SH

cannot interfere.

What constitutes gross negligence?

It depends on the facts of the case. The SC defined gross

negligence as patently negligent act, but in terms of

jurisprudence, it depends on the facts of the case.

Likewise, in bad faith. There is no hard and fast rule as to

what constitutes gross negligence or bad faith. The

complaint must allege with particularity the act

constituting the gross negligence or bad faith.

The case of Lanuza vs BF Corporation, this is an

interesting case. It refers to the construction of Shangri- La

Mall. BF Corp. constructed the Shangri- LA Plaza mall in

Ortigas, for the Shangri-LA Corporation. BF Corporation

alleged that the fees and the amounts due to it under the

construction agreement were not paid. So it filed an action for

collection and damages against the Shangri- LA Corp. and

impleading therein the directors and officers of the

Corporation. There is an arbitration clause under the

construction agreement in the sense that resort to arbitration is

necessary before they can proceed for an action for breach of

contract. The contention of Shangri-La is that the complaint is

premature because there is no arbitration initiated by the

party. Is this defense applicable to directors of the

corporation? BF Corporation alleges that the case will still

continue against the directors and officers because of bad faith.

On the other hand, the directors and officers of the

corporation, insofar as they are concerned the case should be

dismissed, because they are not part in the construction

agreement that has arbitration clause. In your ADR, arbitration

clause is only binding between the contracting parties. It does



47

not bind the non-party to the agreement. But in this case the

SC said, because there is an allegation of gross negligence and

bad faith and if this allegation is proven then there is no

distinction between the corporation and the directors and

officers. So the case therefore may continue.

The third one is acquiring any personal or pecuniary

interest in conflict with his duty as such director or

trustee of the corporation. This conflict of interest must

result in damage to the corporation. So, conflict of interest is

nothing.

Section 34. Disloyalty of a director. - Where a director, by virtue

of his office, acquires for himself a business opportunity which should

belong to the corporation, thereby obtaining profits to the prejudice of

such corporation, he must account to the latter for all such profits by

refunding the same, unless his act has been ratified by a vote of the

stockholders owning or representing at least two-thirds (2/3) of the

outstanding capital stock. This provision shall be applicable,

notwithstanding the fact that the director risked his own funds in the

venture. (n)

Under section 34, the consequences if the director seized an

opportunity belonging to the corporation, there is an obligation

to account for and remit any profit he earned form that venture

or transaction. The obligation to account and remit is not

excused even if he risked his own funds unless the act was

ratified by the SHs representing atleast 2/3 of the outstanding

capital stock.

So let’s say, Juan Dela Cruz, the president of ABC Corp. is a

good salesman , he was sent by ABC Corporation to Korea to

negotiate with the President and CEO of Samsung to be the

exclusive distributor of SAMSUNG products, S6 in the

Philippines. Because he is so good, he was able to convince the

President of Samsung. Instead, he put up a corporation and

enforced the contract with that corporation. What are his

obligations under section 34? A: to account and remit whatever

he earned in that transaction or venture.

Letter D, is when he consents to the issuance of watered stocks;

or having knowledge thereof, does not forthwith file with the

corporate secretary his written objection thereto;

Q: What are watered stocks?

A: stocks issued for the amount below par (fair value) so what

is the fair value of the share? For PAR VALUE SHARE, (the

minimum is the par value, malabo to, di ko masyadong

maintindihan), what about for NO PAR VALUE SHARE of the

corporation? The issued value fixed in the articles of

incorporation or by the board of directors. So for Par Value

Share of the corporation……… (malabo din , di ko magets)

So if the par is ten, issued for 8 pesos, the 2-peso difference

should be for the account of the consenting director and the

subscriber solidarily, jointly and severally.

What about let’s say ABC corporation issued shares fully paid

and then reacquired such through purchase, donation and

other lawful means and then subsequently the corporation

sold these shares for an amount below par. Are those watered

shares?

NO, they are not watered shares because watered shares only

pertain to issuance of shares and not treasury shares. Treasury

shares are assets of the corporation. They are properties of the

corporation having been acquired through surplus profit and as

assets, properties of the corporation they can be disposed of for

any price, terms and conditions as the board may reasonably

determine. So for example if the par value of the share is 10

pesos and then the book value is 40 but it is trading at 20 pesos

per share. So it makes sense for the corporation to buy the

shares for in the market your book value is 40 and yet the

trade-in value is only 20 pesos. In its books each share is worth

40 pesos but it is traded only for 20 pesos so it is cheaper to

buy these shares. These shares acquired by the corporation

through surplus profit become assets of the corporation.

The par is 10. Supposing the value is not improved, so

the losses of the corporation have not been improved

and the price of the shares would just go down to

even 5pesos, can those shares be sold at 8 pesos?

The answer is YES right. The price, terms and conditions

of the sale of treasury shares determined reasonably by

board of directors not subject to the par value limit.

If he contractually binds himself to be liable with the

corporation.

Now there are cases where the Supreme Court said

that the director or officer is liable solidarily with the

corporation. In some cases the Supreme Court simply

says he is liable with the corporation. So if a director

or officer makes himself liable contractually with the

corporation, is he automatically liable solidarily?

Depends on whether or not he signed a surety agreement

or guaranty agreement. So not all cases where they assume

liability will give rise to solidary liability. If he signs a

surety agreement, he is liable solidarily. If he signs a

guaranty agreement, he is subsidiarily liable. But if he

signs a guaranty agreement which contains a waiver of the

right of excussion, the Supreme Court said in one case, it is

not the name that counts but the terms of the agreement,

in such case he is liable soildarily.

Now if he signs as a guaranty or surety agreement,

this must be read in relation to your credit

transactions. There is one case, CUENCA v. CA, the

president of the corporation signed a surety

agreement to secure the obligation of the corporation

and he signed this when he was president. Thereafter

he was replaced as president and when he was

replaced, the term of the loan was extended without

his consent. Now will the extension of the term of the

loan release him from the obligation?



48

Well that question can never be resolved by Corpo right.

For Corpo he is liable if he contractually binds himself

with the corporation but whether or not he will be made

liable despite the extension of the term of payment is

something that could be answered by your credit

transactions. What is the effect if the surety agreement is

extended without the consent of the surety? As you all

know, any material or adverse change in the terms and

conditions in the principal contract made without consent

of the surety or guarantor shall release him from liability.

So in that case the term was extended without his consent.

That consent cannot be obtained because he was no longer

the president when the term was extended. He is released

from liability under the law on surety.

If by express provision of law he is made to answer for

a corporate act or omission.

So it is the law that makes him liable for the corporate act or

omission. As you all know the general rule is that a director or

officer will not be liable unless the law makes him liable for the

corporate act or omission. An example is PD 115. Under section

30 of PD 115 it is clear that if the offender is a corporation,

criminal liability should be imposed upon the director, officer

or any person responsible for the violation. That is why

remember the case of Ching vs. Secretary of Justice. The fact

that the director or officer did not receive the goods under TR,

the fact that he did not get the loan himself, the fact that he did

not derive any personal benefit under the TR transaction, not

an excuse in so far as the criminal liability is concerned because

it is the law that makes them liable for that corporate act.

Is the enumeration exclusive?

Yes. Because the previous supreme court decisions,

decisions in the past, that made the president liable in

cases of insolvency of the corporation or closure of

establishment are no longer controlling. Carag vs NLRC.

The Supreme Court said that the liability of the director or

officer is determined not by the Labor code but by the

provisions of the Corporation Code, sections 31 and 32?

There was this bad very bad, bad in the sense that it does not

make sense, Supreme Court decision which makes the officer

liable in the case of closure of business. There was no finding of

gross negligence or bad faith simply a case of closure of the

establishment. That does not make sense right. Just because

the corporation has no more assets does not make the officers

liable. Dean was the Corporate Secretary daw of the Equitable

PCI when this decision was promulgated. The bank almost

closed. Kawawa daw siya kung nagclose yun hahaha.

There ought to be gross negligence, bad faith, consenting…. to

make the officer or director liable for any corporate act or

omission.

Who can sign pleadings in behalf of the corporation?

Who can sign petitions, complaint or other initiatory

pleading in behalf of the corporation?

The person authorized by the board.

Can the chief legal counsel verify or sign the

certificate of non-forum shopping? Can he sign a

petition or complaint in behalf of the corporation?

This is the case of Philippine Rabbit Bus Lines vs. Aladdin

Transit Corp. Philippine Rabbit filed a petition to assail

the order of the judgment of the RTC. It was signed by the

chief legal counsel but he was not authorized by the board.

The Supreme Court said that even if he was the chief legal

counsel and a controlling stockholder, he cannot verify

and sign the certificate of non-forum shopping because he

was not authorized by the board. So therefore, only the

person authorized by the board should sign the pleadings

in behalf of the corporation. If signed by someone else, the

pleadings are considered as unsigned, sham and a mere

scrap of paper.

What if your last day to file the petition for certiorari

is today and your board is fragmented and you have

no time to call a meeting, what do you do?

You route the minutes of the meeting and make it appear

that the board authorized you to sign. That is if the board

is friendly.

But what if your board is fragmented?

Justice de Castro, in one case, said that the President can

verify the certificate of non-forum shopping even without

board resolution. She relaxed the rule. That was 2010.

Reiterated in 2013 by Justice Peralta and expanded the

list. The following officers may verify or certify against

forum shopping even without board resolution: the

1. Chairman,

2. President,

3. General Manager,

4. Human Resource Officer and

5. the Employment Specialist in Labor Case.

Have you ever heard of employment specialists in labor

cases? This was reiterated three times already.

Why?

SC said that because of their familiarity with the affairs of

the corporation they can certify as to the truthfulness and

accuracy of the allegations in the petition.

UCPB vs Planters

A manager signed a document he called “pagares”

which means to pay. XYZ wanted to buy property

from ABC. ABC said I would sell to you only if a bank

guarantees that you pay. SO this manager signed

this document called pagares. The bank will pay in

case the buyer does not pay. Buyer failed to pay,

seller goes to the bank. IS the bank liable?



49

NO. First, he was not authorized. Second, the bank is not

allowed to secure or guaranty the obligation of another.

The only time that the bank may do so is in case of a

STANDBY LETTER OF CREDIT.

9. Responsibility for Crimes

Can the corporation be criminally prosecuted?

Yes, if the penalty is not imprisonment, if the penalty is

fine, forfeiture or revocation of corporate franchise. Case

of ANG vs CA.

10. Inside Information

11. Contracts

a. By self-dealing Directors with the Corporation

b. Between Coporations with Interlocking Directors

i. Voidable Character

ii. Ratification

Section 32. Dealings of directors, trustees or officers with

the corporation. - A contract of the corporation with one or more of

its directors or trustees or officers is voidable, at the option of such

corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board

meeting in which the contract was approved was not

necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary

for the approval of the contract;

3. That the contract is fair and reasonable under the

circumstances; and

4. That in case of an officer, the contract has been previously

authorized by the board of directors.

Where any of the first two conditions set forth in the preceding

paragraph is absent, in the case of a contract with a director or trustee,

such contract may be ratified by the vote of the stockholders

representing at least two-thirds (2/3) of the outstanding capital stock

or of at least two-thirds (2/3) of the members in a meeting called for

the purpose: Provided, That full disclosure of the adverse interest of

the directors or trustees involved is made at such meeting: Provided,

however, That the contract is fair and reasonable under the

circumstances. (n)

Section 32. What is the status of the contract between the

corporation and the director?

It is voidable at the option of the Corporation. The

option to nullify ceases when the following elements

are present:

1. That the presence of such director or trustee in the board

meeting in which the contract was approved was not necessary

to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary

for the approval of the contract;

3. That the contract is fair and reasonable under the

circumstances; and

4. That in case of an officer, the contract has been previously

authorized by the board of directors.

Where any of the first two conditions set forth in the preceding

paragraph is absent, in the case of a contract with a director or

trustee, such contract may be ratified by the vote of the

stockholders representing at least two-thirds (2/3) of the

outstanding capital stock or of at least two-thirds (2/3) of the

members in a meeting called for the purpose: Provided, That

full disclosure of the adverse interest of the directors or

trustees involved is made at such meeting: Provided,

however, That the contract is fair and reasonable

under the circumstances.

ABC corporation is engaged in the manufacture of

prime white cement. It entered into a contract with

Juan dela Cruz, one of the directors, for the right to

be the exclusive distributor of prime white cement in

their entire consortium. The contract stipulated that

the price of the cement is fixed at 9 pesos per pack for

a period of 5 years. Is the contract fair and

reasonable under the circumstances? Is it valid or

not?

SC said it is covered by the provision on self-dealing with

directors. It is not valid because the contract is not fair and

reasonable under the circumstances. As you all know there

is no hard and fast rule in determining whether the

contract is fair and reasonable under the circumstances.

That’s why there is a clause “under the circumstances”. But

if the act has become a norm you no longer apply the

yardstick of fair and reasonable under the circumstances.

In this case the SC said that is not fair and reasonable

because you cannot fix the price for the period of 5 years,

the price fluctuates.

There was a time when my firm handled its biggest

case, UCPB. After that I was crucified in papers

because I was a director of the bank and also acting

as counsel for the bank. Of course, without the

farmers knowing that first, I did not solicit the

engagement, the bank was the one which solicited my

engagement and second, I abstained in the meeting,

and third, I waived my fees. So will section 32 apply

to me? Is it reasonable under the circumstances?

Obviously yes because I waived my fees right hehe and I

did not participate in the board meeting.

So 32 is the self-dealing provision under the corporation code.

Self-dealing by a director with the corporation. So as you can

see in 32, the element you cannot do away with, if the contract

is fair and reasonable under the circumstances.

1 and 2, presence of quorum, vote for approval can be

dispensed with as long as you get verification from



50

stockholders holding 2/3. But the contract must be fair and

reasonable under the circumstances.

The next one, section 33 is the contract between 2 corporations

with interlocking directors. As you know in 32, except if there

is fraud and as long as the contract is fair and reasonable under

the circumstances, a contract between 2 corporations with

interlocking directors cannot be invalidated on that ground.

Just because you have a contract between 2 corporations with

common directors, is not a ground to invalidate the contract.

Because it’s a guarantee of business that corporations deal with

affiliated companies.

When Ramon Ang was the president of Philippine Airlines,

where did PAL source their fuel requirements? Obviously not

from Caltex, not from Shell because they are competitors, but

they sourced their fuel from Petron.

Now, try taking a loan from BDO. Housing loan. You are

required to mortgage your house as collateral and you are also

required to get insurance. Where would they require you to get

insurance coverage?

o Not from Metrobank, not from AXA, or Ayala but

from their own, BDO Generali.

There is nothing wrong with this, because why would you give

business to your competitor? That is why the law is clear that

except if there is fraud or the contract is not fair and reasonable

under the circumstances, a contract cannot be invalidated just

because it is between 2 corporations with interlocking

directors.

Now if the contract with interlocking directors is a

management contract under sec. 44, then in addition to 33, you

must also apply sec. 44.

What are the additional requirements for

management contracts under sec. 44?

o The management contract must be approved by the BOD,

majority of the quorum of each of the managed and

managing corporation

o And by the stockholders representing at least majority of

the outstanding capital stock of the managing corporation

o And 2/3 of the outstanding capital stock of the managed

corporation.

- (where a majority of the members of the board of

directors of the managing corporation also

constitute a majority of the members of the board

of directors of the managed corporation, then the

management contract must be approved by the

stockholders of the managed corporation owning

at least two-thirds (2/3) of the total outstanding

capital stock entitled to vote) (source: Sec. 44,

Corporation Code)

o It should not be longer than 5 years.

So there were questions about management contract,

is management contract a reality or is it just a codal

provision, an abstract or theory?

It happens for hotels, so the best example of management

contract is hotels. So Shangri- la manages trader’s royal

hotel, holiday inn in galleria. So in this kind of contract,

the corporation entrusts management of its affairs to

another corporation and governed by sec. 44.

(We have a client who is a billionaire; he wants to disinherit his

daughter. He has 2 daughters, he wants to disinherit 1, He

came to us, he said “Nilo, how can I find grounds to disinherit

my daughter” and I said “it’s not easy because the grounds for

disinheritance are very stringent under the civil code and you

have to include it in your will and probated. So I said, just

because you don’t like her, doesn’t mean you can disinherit her.

So the client said, “FIND A WAY” and you know in my firm,

“WE FIND WAYS” (CLASS: HAHAHAHA)

Because he is a billionaire, he has properties all around the

world, Philippines, Spain and USA, and these are all in the

name of corporations. So to effectively disinherit your

daughter, I said, what you can do is to amend the AOI of these

various corporations to allow the issuance of preferred shares

to make them nonvoting, non-cumulative, non-participating

and all. Now we will divide the shares, the preferred shares to

your common daughter, and the common shares to your

preferred daughter. The common shares will only be given to

the preferred, the favorite. Then the preferred shares which

should be non-voting will be given to the common daughter. So

there will be disinheritance because each of them will get 1

share each equal. But who will control the corporation? Your

preferred daughter right? Because you made those pref shares

non-voting, and the right to receive dividends is subject to the

availability of surplus profits and you can manage the

corporation so that there can be no surplus profits to declare

dividends.

But I said it will take time to amend the AOI. He said “so what

do I do that in the meantime so that my daughter will control

the corporation?”

I said just enter into a management contract between the

daughter and the corporation. Question, is that subject to the 5

year limitation?

o It is not, right? Because the 5 year limitation only

applies to management contract between

corporations. Not a management contract with the

corporation and a natural person. It is dependent on

the terms and conditions of the agreement.

(So that idea is patented) (HAHAHA)

ABC Corporation granted a loan to a mining company secured

by a mortgage on the properties. The loan was not paid so ABC

foreclosed on the mortgage and the property of the mining



51

company, after foreclosure, the right of redemption may be

exercised. ABC Bank put up a wholly owned subsidiary,

engaged in mining and then ABC transferred the assets

(foreclosed assets) of the old mining company to the new

mining company. It turns out that the old mining company had

unpaid purchase from Remington Steel. Remington steel sold

products to the mining company, the purchase price were not

paid. So when the assets of the old mining company as

foreclosed were transferred to the new mining company,

Remington Steel filed an action to nullify the contract on the

ground that it has Interlocking directors and therefore should

be void.

First Question, does Remington Steel have the legal

personality, to assail the transfer, assignment of

assets from ABC Bank to the New Mining Company?

Remington Steel does not have the legal standing to

assail the creation of the new mining company because

only the corporations, parties to the contract of

interlocking directors or stockholders are allowed, but not

3rd parties.

Second Question, if it does have personality, can the

contract be voided because ABC bank and the new

mining company have common directors and the

new mining company is wholly owned subsidiary by

the bank?

- The contract cannot be invalidated just because it is

between 2 corporations with interlocking directors.

Can the Exec Comm approve amendment of the bylaws? Can

the Exec comm approve stock dividends?

- The exec comm. cannot approve stock dividends,

because it also requires the approval of the

Stockholders.

So first exception, first item outside the powers of the exec

comm. because the judicial corporate act requires stockholders

approval. The stock dividends require stockholders approval.

Can the exec comm. Approve compromise

agreement?

- Yes, if authorized by the Board

Can the board create an exec comm.?

- If it is included in the by-laws, then the board is

authorized to create an exec comm.

Can the board have an authority to create exec

comm. If authorized by the bylaws or the board my

simply fill up the composition of the exec comm. Once

approved by the bylaws?

You remember the case of Filipinas Port Services vs Go (2007),

we discussed this 2 meetings ago.

So what is the limitation of the board to create exec

comm?

What kind of exec comm can the board can create?

What kind of exec comm can be created by the board

so that it would fall under the Business Judgment

Rule?

And what kind of exec comm can the board NOT

create because it is outside its authority?

- The SC said that the board can create a committee and

call it executive committee as long as it will not

function similar to Exec Comm under sec.35 of the

Corp Code. So it’s a committee named exec comm.

But cannot function as such under sec 35 of the

corporation code.

- If that committee will function as the exec comm.

Under 35, then only the bylaws may create that kind

of committee.

- The board may fill up the composition but the

committee must first be created by the bylaws of the

corporation

Section 33. Contracts between corporations with

interlocking directors. - Except in cases of fraud, and provided the

contract is fair and reasonable under the circumstances, a contract

between two or more corporations having interlocking directors shall

not be invalidated on that ground alone: Provided, That if the interest

of the interlocking director in one corporation is substantial and his

interest in the other corporation or corporations is merely nominal, he

shall be subject to the provisions of the preceding section insofar as the

latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding

capital stock shall be considered substantial for purposes of

interlocking directors. (n)

So in addition to what we have said under sec.32, if the

contract is between 2 corporations with interlocking directors

and the interest of the interlocking director is substantial in

one, and nominal in the other, then he shall be subjected to the

requirement of sec 33 of the Corporation Code.

So if the interest of Juan dela Cruz in ABC is substantial and

the interest in XYZ is nominal, and Juan dela Cruz is in the

board of both ABC and XYZ corporation, under sec. 33, in so

far as XYZ is concerned where the interest is nominal, Juan

dela Cruz is subjected to the requirements of 32. Which means

that his presence must not be necessary in the meeting of XYZ,

his vote is not necessary for the contract in XYZ and the

contract is fair and reasonable under the circumstances. It is as

if, it is a contract between the corporation and Juan dela Cruz

in so far as the nominal corporation is concerned.

Substantial = more than 20%



52

Substantial in the context of sec. 33 is not 50% plus 1, but more

than 20%. 20% or less is nominal.

Still on Sec. 33, so there are special laws that prohibit

interlocking director unless secured by Monetary Board

approval or Insurance Commission approval, as the case may

be. Somebody can be director of 2 banks without prior BSP

approval. You are going to be a director of a bank and a quasi-

bank without prior BSP approval or a bank and an investment

house likewise without BSP approval.

But save for these cases governed by special laws, under its

provisions under government agencies, there is nothing

wrongful in a contract between 2 corporations with

interlocking directors as long as there is no fraud and the

contract is fair and reasonable under the circumstances, and

then to repeat, if it is a management contract under section 44,

in addition to the requirements of under 33, you have to add

likewise the approval of the board of directors of each

corporation (managing and managed) and through the

stockholders owning majority for the managing corporation

and 2/3 for the managed corporation.

Now under sec.44, you don’t need majority of the entire board,

majority of the quorum will suffice. This is clear from the

language of sec.44. It says that the board of directors unlike

Sec. 37 which says majority of the board

Sec. 38 majority of the board

Sec. 40 majority of the board

Sec. 42 majoirty of the board

But for 43 and 44, it only talks about the board of directors,

which means that for 43 and 44, you only need majority of the

quorum.

That’s your guide, if the Corp Code says the board of directors,

quorum suffices. So as distinguished from the majority of the

entire board.

Found in 16 37 38 40 42 76 and 117.

As what we said also, in the case of DBP vs CA only the

corporation involved in the transaction or the stockholders

injured can file or by a derivative suit can file the action to

nullify or assail the contract.

Just like the example earlier. Let’s say fuel supply

between Philippine Airlines and Petron. Let’s say the

price of the fuel product being shouldered by PAL

with Petron is expensive, can you and I complain?

Obviously not because we have no interest in that contract

or transaction

Who can complain?

Only Petron or San Miguel (San Miguel talaga sinabi niya

haha) or their stockholders either by themselves or by

derivative suit.

In the case of DBP vs CA what happened was, DBP granted a

loan to a mining company secured by a mortgage on the

property, the loan was not paid. So DBP foreclosed on the

mortgage. After foreclosure, it put up a new mining company

called “Nonoc” Mining Company and then transferred the

foreclosed assets to Nonoc Mining Company. Nonoc and DBP

have common directors. Nonoc is a subsidiary of DBP. So

Remington Steel sold steel products to Marinduque Mining,

who did not pay the purchase price. So to enforce payment of

the purchase price, Remington Steel filed an action to nullify

the contract, the assignment, transfer of assets from DBP to

Nonoc Mining company because they have common directors,

and as we have said, that cannot be allowed because he is not a

party to the contract. He is a 3rd party without any legal

personality to nullify the contract on the ground of interlocking

directors.

Now you remember this case of DBP vs CA was also the factual

background of DBP vs Hydro Resources. So DBP vs Hydro

Resources Corporation on separate legal personality, same

facts right? DBP foreclosed the mortgage, and then transferred

the assets to Nonoc Mining Company and Nonoc Mining

Company engaged a consultant to render services to Nonoc

Mining Company, who was not paid and then filed an action to

enforce his consultancy fees.

Can the fees be enforced against DBP and Nonoc

because they have common directors?

- Interlocking directors is not a ground to pierce the

corporate fiction.

So we have 2 cases with the same factual background, so DBP

vs CA, on the issue of the 3rd party not having the legal

personality to assail the contract between to corporations with

interlocking directors and DBP vs Hydro Resources

Corporation on the issue of interlocking director not enough

reason to pierce the veil of corporate fiction.

12. Executive Committee

Sec. 35. Executive committee. - The by-laws of a corporation may

create an executive committee, composed of not less than three

members of the board, to be appointed by the board. Said committee

may act, by majority vote of all its members, on such specific matters

within the competence of the board, as may be delegated to it in the by-

laws or on a majority vote of the board, except with respect to: (1)

approval of any action for which shareholders' approval is also

required; (2) the filing of vacancies in the board; (3) the amendment or

repeal of by-laws or the adoption of new by-laws; (4) the amendment

or repeal of any resolution of the board which by its express terms is

not so amendable or repealable; and (5) a distribution of cash

dividends to the shareholders.



53

a. Powers of the Executive Committee

b. Limitations of the Powers of the Executive Committee

Now why is there a need to create and executive

committee?

So the board of directors only meets once a month, the

regular board meetings are conducted only once a month.

There are certain transactions that cannot wait for once a

month. That is why there is a need to create a mini board

of directors that can act on matters with the board’s

competence. So effectively, the board delegates the

authority to the executive committee because it can act on

all matters within the board’s competence. Whatever the

board can do, the executive committee can also do. What is

important is that kind of committee be first created by the

by-laws because the board cannot create an execom unless

the committee is first created by the by-laws.

What the board can do under sec. 35 is to compose or to fill-up

the composition of the execom after created by the by-laws of

the corporation.

Can you appoint non-board members to the execom?

According to the SEC, you can but they are regulatory or

advisory only in nature. The functions are advisory or

recommendatory and they have no voting rights. Only

directors have voting rights when it comes to execom

meetings.

There are limitations on the powers of the execom, they are not

absolute.

What are the matters outside the competence of the

execom?

1. Any corporate act requiring stockholder’s approval;

2. Adoption of new by-laws, repeal or amendment of the

by-laws;

3. Amendment of a board resolution which by its express

terms is not so amendable or repealable;

4. Distribution of cash dividends to shareholders; and

5. Filling up of vacancies in the board.

We said that stock dividends, likewise, are outside the

competence of the board. The decision of the board cannot be

replaced by the stockholders. For stock dividends, it is the

board and the stockholders. So the execom cannot take the

place of the board when it comes to stock dividends.

If you read section 35, it says stock dividends not included,

right? So the argument is not included if cash but it will fall

under stockholder’s approval, right? Now what about adoption

of by-laws? How come it is there if it is already covered by the

preceding number? Meaning you do not have to include that

because it already falls under the first. So what is this case? It is

a case of poor craftsmanship.

Anyway, for the purpose of the bar, execom cannot take the

place of the board for these matters but it can replace the board

of directors for all other matters as long as it is created by the

by-laws.

Filipinas Port vs. Go

SC: Under the business judgment rule, the board can create

committees and positions but the board cannot create an

execom if it will function as that mentioned in Section 35 of the

Corporation Code. The only kind of execom the board can

create is a committee that is execom by name but not

performing those mentioned under Sec. 35.



54

F. CORPORATE POWERS

Board of Directors Outstanding Capital Stock

Sec. 16 – Amendment of AOI Majority of the board 2/3 of the OCS

Sec. 24 – Election of Directors At least majority of OCS

Sec. 25 – Appointment of Corporate Officers

Majority of the entire board

Removal of Corporate Officers Majority of the entire board

Sec. 28 – Removal of the Directors 2/3 of the OCS

Sec. 29 – Filling up of Vacancy: it depends…

If the ground is not expiration, removal, increase number of board seats AND the remaining directors constitute a quorum – Majority of the board

If the ground is expiration, removal, increase number of directors; OR If the ground is not expiration, removal, increase number of board seats BUT the remaining directors do not constitute a quorum – Majority of the OCS

Sec. 30 – Payment of Compensation to Directors

Majority of OCS

Sec. 35 – By-laws create an Executive Committee appointed by the directors

Majority of the board

Sec. 37 – Extension of Term; Shortening of the term

Majority of the board 2/3 of the OCS

Sec. 38 – Incurring, creating or increasing bonded indebtedness; and increasing or decreasing OCS


Sec. 39 – Amendment of the AOI and to deny pre-emptive right


Sec. 40 – Sale or other disposition of assets In the ordinary course – Majority of the quorum (Why majority of the quorum and not majority of the entire board? Sec. 25 says unless the corporation code or the by-laws requires otherwise, quorum shall mean majority of the board of directors as fixed in the AOI. And the majority of the quorum is sufficient to transact business under sec. 25. Here the code does not require majority of entire board)

All or substantially all – Majority of the board

2/3 of the OCS

Sec. 42 – Invest funds in the primary purpose

Majority of the quorum

Invest funds to incidental purpose for which corporation is created

Majority of the quorum

Invest the funds in a secondary purpose Majority of the entire board 2/3 of the OCS

Cash Dividends Majority of the quorum

Stock Dividends Majority of the quorum 2/3 of the OCS

Enter into Management Contract Majority of the quorum for both managed and managing corporation

Majority of the OCS of each managed and managing corporation;

The only time that 2/3 of the OCS is required from the managed corporation



55

and retain majority of stocks of the managing corporation is in the case of interlocking directors and interlocking stockholders.

Sec. 46 – Adoption of by-laws Adopted within 1 month after incorporation – majority of OCS

Sec. 48 – Amendment of the by-laws Majority of the entire board

Majority of the OCS

If delegate authority of the stockholders to the board – 2/3 OCS

If they revoke the delegation – majority

Sec. 62 – fixing the issued value of no par value shares

(if you remember the AOI may fix the issued value of no par value share, or if there is no provision, the BOD may fix the value or the stockholders owning majority of OCS

Majority of quorum OR Majority of OCS

Sec. 76 – Merger or Consolidation Majority of the entire board 2/3 of OCS

Sec. 117 – Dissolution Majority of the entire board 2/3 of OCS

1. How Exercised

a. By the Shareholders

b. By the Board of Directors

c. By the Officers

c.1. Officers of the Corporation

- Statutory Officers

- Corporate Officers

- Ordinary officers of the Corporation

What are the corporate powers reserved solely to the

stockholders? Those exercised jointly with the board

and stockholders? When does it require majority of

the quorum or majority of the entire board? Majority

of the outstanding capital stock or 2/3? (see Table 1)

On officers of a corporation, who are the officers of

the corporation?

1. President

2. Secretary

3. Treasurer

4. Other officers as provided in the by-laws

BAR: May a foreigner be appointed as president, secretary and

treasurer of the corporation?

Yes except if the corporation is engaged in nationalized

activity, whether wholly or partly nationalized, a foreigner

cannot be appointed president under the Anti-Dummy Law. As

to Secretary, whether nationalized or not, a foreigner cannot be

appointed. As to Treasurer, a foreigner may be appointed as

treasurer.

BAR: Who is required to be a resident officer of the

corporation?

President – not required for as long as majority of the directors

are Philippine residents

Secretary – YES

Treasurer – as to the 2012 SEC Circular, treasurer need not be

a resident of the corporation

BAR: Who is required to be a director?

Only the president is required to be a director.

Case: There is a contract between a president and a corporation

for 5 years. Let us say Juan dela Cruz will be president for 5

years by ABC Co. The problem is in the second year of his term,

nobody wants to use his shares for him because they want to

use it for their own nominee (nobody now wants to vote for

him). What happens if the president is not a director? He will

now be a “de facto president”, right? But there is a 5 year



56

contract. What do you do now? What is the solution to this

problem?

So I advanced this very noble theory which I have yet to be

tested by the SC. I said let us seed the president. By seed I

mean let us only vote for team under 15. So automatically he is

considered a director because if you don’t make him a director,

the corporation would be entitled to damages because of the 5

year contract. Nobody wanted to carry him so naglaban-laban

lang yung 14 out of 15. Is it valid? Well, so far ano pero I don’t

think that will be asked in the bar. That is already going too far.

I will kill the bar examiner ano… =))))

BAR: What is the only position that can be held at the same

time by the same individual?

President cannot be both secretary and treasurer at the same

time. Secretary and treasurer can be held by the same person.

What about chairman and president?

Yes, except if it is a public company. Under the Code of

Corporate Governance, the chairman must be different from

the president. But if it is an ordinary company, not a public

company, the chairman and president may be held by the same

person at the same time.

What are the qualifications of the president?

He must be a director, and therefore a stockholder.

Secretary – Filipino citizen and resident

Treasurer – neither citizen nor resident

SEC issued a circular (Dean: not part of the bar), said that the

Corporate Secretary must have the (Dean: hold your breath)

legal skills of Chief Legal Officer, the vision of a CEO, the

financial _____ of a Chief Financial Officer and skills of a

Human Resource Officer. Good thing we don’t consider the

circular and the circular is issued by the SEC and nobody

qualifies. Nobody would qualify if that is the qualifications.

(Pero dean, super qualified ka daw sabi ni Atty. S. Pwede mo

nga kaming iadopt eh. =)))

I brought it up because there was one in the conference I

organized for PALS, the examiner in commercial law admitted

that the answer the question is based on a foreign

jurisprudence. So the committee in-charge in the UP Law

Center, answered based on local jurisprudence and the

examiner answered based on a foreign jurisprudence. There

was also a time that there is this examiner that answered based

on an SEC circular and not making reference to the corporation

code. What happens now if the examinee goes beyond the

Corporation Code? He is more diligent than the ordinary

reader. These I tell you are only for discussion purposes only

for intellectual discourse but for the bar you should stick to the

syllabus issued by the SC.

2. General Powers, Theory of General Capacity

Sec. 36. Corporate powers and capacity. - Every corporation

incorporated under this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in

the articles of incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the

provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and

to amend or repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers

and to sell stocks to subscribers and to sell treasury stocks in

accordance with the provisions of this Code; and to admit members to

the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,

mortgage and otherwise deal with such real and personal property,

including securities and bonds of other corporations, as the transaction

of the lawful business of the corporation may reasonably and

necessarily require, subject to the limitations prescribed by law and the

Constitution;

8. To enter into merger or consolidation with other corporations as

provided in this Code;

9. To make reasonable donations, including those for the public welfare

or for hospital, charitable, cultural, scientific, civic, or similar purposes:

Provided, That no corporation, domestic or foreign, shall give

donations in aid of any political party or candidate or for purposes of

partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of

its directors, trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to

carry out its purpose or purposes as stated in the articles of

incorporation.

ABC Corp engaged in cement manufacture. Can it

construct roads or bridges? When does it become an

implied power?

Construction of roads or bridges per se is ultra vires

because it is not related to the primary purpose of the

corporation. However, if the road or bridge leads to or

paves way to the manufacturing site, it is an implied power

of the corporation.

Corporate powers:

1. EXPRESS- when conferred under the AOI or

Corporation Code

2. IMPLIED- implied from the express powers

3. INCIDENTAL



57

Quarry operations for limestone to form part of cement

manufacture. It is needed for cement manufacture, thus, within

the powers of the corporation.

NAPOCOR vs. VERA

Can NAPOCOR hire stevedores?

SC: Primary purpose is electricity generation, stevedores

not related to the primary purpose. However, if they are

hired to transport coal from the pier to the plant, it

becomes an implied power.

Test: Is this act or transaction or activity in furtherance or

germane to the purpose of the corporation?

YES: Intra Vires

NO: Ultra Vires. Therefore, voidable or unenforceable

The power to sue and be sued is lodged in the BOD.

Is there an exception? Can there be a suit without

board approval?

Derivative Suit

A minority SH filed a derivative suit in behalf of ABC

Corporation to assail the acts of mismanagement on

the part of the majority of the board and key

corporate officers. The board convened and then

adopted a resolution instructing its counsel to move

to dismiss the complaint on the ground that it has not

been authorized by the board. Will you grant the

MTD?

Answer: The wrongful acts of the majority of the directors

and to require a board resolution would make ILLUSORY

the right of the minority SH to file a derivative suit on

behalf of the corporation.

General Capacity- general powers of the corporation

1. EXPRESS

2. IMPLIED

3. INHERENT- a.k.a. INHERENT POWERS

In our jurisdiction, inherent powers are also express powers.

Example: Right to succession inheres in a corporation.

Enumerated likewise as an express power under Sec 36.

Can a lending investor be engaged in

pawnbrokering?

No, these are 2 different businesses. Pawnbrokering

requires another authority from the BSP.

PAEL v. CA

Corp engaged in mining, can it acquire property for

urban development?

No, not related to mining. Not justified.

Corp engaged in trading, can it buy a beach front

property?

No, no relation to its business. However, if the beach

house is a residence of a director, guest house or seminar

house it becomes an implied purpose of the corp.

Derivative suit - to enforce a corporate right or cause of

action because of wrongful acts of the majority of the board. It

is an exception to the rule that the right to sue and be sued is

lodged with the board.

GR: it does not require a board resolution

XPN: if the SH is a corporate SH, he must be authorized by the

board of the corporate SH but not the board of the corporation

whose acts or majority of acts of the board are being assailed.

VITO CASE

He claims to be a trustee of JAVA Publishing Company. He

filed a derivative suit. He is not a SH, SH is JACA Investment.

Board resolution is necessary to authorize filing of derivative

suit by JACA Investment because the shares of stock that he

represents are owned by JACA Investment.

With respect to a foreign corp, it cannot sue but can be sued on

any cause of action if it has no license to do business in the

Philippines. Foreign corp lacking license from SEC affects its

legal capacity to sue.

Corporation that is dissolved has no power to sue and be sued.

(ALABANG HILLS CASE)

Can a corporation that is dissolved file a suit?

SC: If the suit is filed AFTER 3 years from dissolution

DISMISSED!

Ground: Lack of legal capacity to sue

Note: Previous decisions say that a suit filed during its lifetime

can go beyond the 3 year period.

Board resolution necessary:

1. Filing a suit

2. Authorize a person to sign pleadings and

verifications on behalf of a corporation

EXCEPTIONS: The following are familiar with the corporate

affairs.

1. Chairman

2. President

3. General Manager

4. Human Resource Officer

5. Employment Specialist

To adopt and use a corporate seal- lack of corporate seal does

not invalidate a stock certificate.



58

Why? It’s a formal requirement only. Directory not mandatory.

Paragraph 6 contemplates:

1. Issuance of shares- pertains to UNISSUED shares

2. Sale of shares- pertains to TREASURY shares

(assets of the corporation, as assets, they can be

sold)

You issue PRIMARY shares!

You sell EXISTING shares!

You subscribe from ISSUED shares!

Paragraph 7. Test: Is the transaction reasonably required by

the business?

Subject to Constitutional limitations.

Example:

Private lands- Corporation must be 60% Filipino owned

Public lands- it can only be for lease not disposition

Can a corporation guarantee obligation of another?

No, it cannot mortgage its own property to secure

obligation of another

Can it act as a 3rd party mortgagor?

No. Property of corp must be used for its purpose and not

for the purpose of another corp

What is the remedy available to the corp to

guarantee obligation of another?

AMEND AOI to include the power to guarantee or secure

obligation of another

Section 36 subtitle 8: Merger or Consolidation, then

after that Donations.

So power to make donations, as you have noticed, there is no

limitation as to amount. It’s a question of reasonableness. Of

course in any case it must not be made in favor of any partisan

political activity.

As you all know, there is a distinction between taxability and

ultra vires. To determine whether a donation is ultra vires, the

only test is “is it reasonable?” Which is different from “to what

extent can you claim the donation as a deductible item,

deductible amount?” “To what extent may the corporation

donate to another?” That will be governed by the Tax Code not

by the Corporation Code. CC only determines the issue of intra

vires or ultra vires act. The question is, it is reasonable? And

whatever is reasonable, of course, depends on the facts of each

case, the circumstances peculiar to the corporation.

There have been many corporations that made use of

donations and with corresponding press releases. You do

realize that these are all tax saving schemes right? You donate

to a foundation, say, you’re a Taipan. You receive dividends

and corresponding 10% tax. Whereas if you donate your

property to a foundation, then the income is either tax exempt

or less tax rate. I’m sure you have read announcements of

billionaires making donations, so they have to consider

likewise that this must be a tax avoidance scheme, especially if

they control the very foundation of the recipient of the

donation.

But the power to make and the power to accept, likewise

recognized by your CC.

Benefit Programs

Now what about benefit programs? So pension plan,

retirement plan, and other benefit program for employees,

that’s an express power. Regarding retirement plan, what is

your default retirement plan under the Labor Code? Your

default retirement plan is ½ month salary for every year of

service, provided you have rendered at least 5 years of service

and you are 60 years of age. But can a corporation prescribe or

provide for a retirement plan with superior benefits than the

default retirement plan? Yes, that is found under Section 36 of

the CC. A corporation, however, cannot adopt a retirement

plan inferior to that of the basic or default retirement plan.

What about housing loans? Is it ultra vires? Intra vires? It is

an express power because any welfare or benefit program of

employees cannot be diminished. So any welfare program is an

express power under Section 36 of the CC. Remember this case,

Republic v. Acjoe Mining, putting up a postal office inside a

mining camp. It is for communication of the employees of

Acjoe Mining inside the camp and relatives outside the camp.

So is it ultra vires? Supreme Court said it’s not because it is a

welfare program for the employees.

What about salary loan? Can the employer corporation grant

salary loan? Yes, again, it being a benefit or welfare program

for its employees.

What about acting as collection agent for a third party lender?

Supposing a corporation cannot grant a loan to its officers and

employees, but entered into a tripartite agreement among the

employees, employer and the lender, where the lender would

be the one to grant the loan to the employees at concessionary

rate but payment would be made through salary deduction. Is

that an ultra vires or intra vires act? So according to the SEC,

as long as the corporation does not obtain any benefit from that

arrangement, it is intra vires. But the moment it obtains a

benefit, let’s say a commission or fee or facilitating the

payments of the employees to the lender, then it becomes an

ultra vires act.

The enumeration under Article 36 is not exclusive because, as

you all know, the corporation may exercise any other powers as

may be necessary to achieve its corporate ends.

3. Specific Powers, Theory of Specific Capacity

Now moving on to the theory of specific capacity or the specific

powers of the corporation, that’s Section 37 to 44, capped with



59

a conclusion under Section 35. So the whole chapter on

corporate powers is perfectly arranged. After the enumeration

of corporate powers, it ends with a conclusion that anything

outside this is ultra vires.

a. Power to Extend or Shorten Corporate Term

Sec. 37. Power to extend or shorten corporate term. - A

private corporation may extend or shorten its term as stated in the

articles of incorporation when approved by a majority vote of the board

of directors or trustees and ratified at a meeting by the stockholders

representing at least two-thirds (2/3) of the outstanding capital stock

or by at least two-thirds (2/3) of the members in case of non-stock

corporations. Written notice of the proposed action and of the time and

place of the meeting shall be addressed to each stockholder or member

at his place of residence as shown on the books of the corporation and

deposited to the addressee in the post office with postage prepaid, or

served personally: Provided, That in case of extension of corporate

term, any dissenting stockholder may exercise his appraisal right under

the conditions provided in this code. (n)

Now let’s take up Section 37, the power to extend or shorten

corporate term. We have taken this up under Section 11 right?

But to repeat, what are the limitations on the power of the

corporation to extend its corporate term?

1. The extension can only be done during the

lifetime of the corporation but not earlier than 5

years prior to the original expiry date, unless

there are other causes that warrant an earlier

extension as may be determined by the SEC.

2. In a case (SEC v. _____ Cigar), extension may

not be done within the 3 year liquidation period.

BAR: Suppose a corporation is suffering losses, to recoup the

losses by the corporation, the corporation decided to extend its

term but during the 3-year liquidation period. So for a noble

purpose, to recoup or to recover the losses suffered by

corporation, it decided to extend its term during liquidation

period. Is it valid?

The answer is no.

BAR: What happens upon expiration of the corporate term? Is

the corporation dissolved? Or is there a need for an SEC

approval?

As you all know, under the law, once a corporation’s term

expires, it is dissolved ipso facto. There is no need for a

certificate of dissolution from the SEC if the term expires. So

ipso facto, the corporation is dissolved. The next step is to

obtain a certificate of dissolution if it is a voluntary dissolution,

not when it comes to expiration of corporate term.

3. There is no limit on the number of extensions as

long as the extension does not exceed 50 years in

any single instance.

4. The extension entails an amendment of the AOI,

and therefore must be approved by at least

majority of the board and stockholders owning

2/3s of the OCS. Then you have to comply with

the requirements for amending the AOI.

5. In the case of banks, insurance company, public

utility corporations, and other corporations

governed by special law, the favorable

endorsement of the appropriate government

agency.

6. Effective upon approval by the SEC.

What is the remedy available to the stockholder who

does not favor the extension of corporate term?

It is the exercise of his appraisal right.

What about shortening of corporate term?

Same, same approval requirement.

BAR: Can you shorten the corporate term one year before its

actual expiration?

The answer is yes because the 5 year limitation applies to

extension and not shortening of corporate term.

What is the remedy available to a stockholder in case of

shortening of corporate term?

Remember our discussion here. If the term is shortened to

dissolve the corporation, no need to exercise appraisal right.

Why? Because once the corporation is dissolved, the next step

anyway is to liquidate the corporation and its assets, after

payment of the claims due to creditors, would be distributed to

the stockholders anyway. So when we talk about appraisal right

as a remedy, in case of shortening of corporate term, it is

provided not under Section 37 but under Section 81.

Remember our conflict here, 37 is silent on the remedy of

appraisal right in case of shortening of corporate term. Senator

Miriam Santiago has a pending bill in the senate to amend only

one section of the CC. Only one, Section 37, to make it clear

that appraisal right is available when it comes to shortening the

corporate term. Which is not necessary because Section 81

already covers shortening of corporate term as an instance that

justifies appraisal right.

But we have to make a distinction. If the shortening of the

corporate term, as we said, will dissolve the corporation, it’s

irrelevant to talk about appraisal right. So the corporate term

has to be shortened without dissolving the corporation.

Does it ever happen that the corporation’s term is shortened

without dissolving it?

Of course, yes.

b. Power to Increase or Decrease Capital Stock or Incur, Create,

Increase Bonded Indebtedness

Sec. 38. Power to increase or decrease capital stock; incur,

create or increase bonded indebtedness. - No corporation shall

increase or decrease its capital stock or incur, create or increase any

bonded indebtedness unless approved by a majority vote of the board

of directors and, at a stockholder's meeting duly called for the purpose,



60

two-thirds (2/3) of the outstanding capital stock shall favor the

increase or diminution of the capital stock, or the incurring, creating or

increasing of any bonded indebtedness. Written notice of the proposed

increase or diminution of the capital stock or of the incurring, creating,

or increasing of any bonded indebtedness and of the time and place of

the stockholder's meeting at which the proposed increase or

diminution of the capital stock or the incurring or increasing of any

bonded indebtedness is to be considered, must be addressed to each

stockholder at his place of residence as shown on the books of the

corporation and deposited to the addressee in the post office with

postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors

of the corporation and countersigned by the chairman and the

secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or

number of shares of no-par stock thereof actually subscribed, the

names, nationalities and residences of the persons subscribing, the

amount of capital stock or number of no-par stock subscribed by each,

and the amount paid by each on his subscription in cash or property, or

the amount of capital stock or number of shares of no-par stock

allotted to each stock-holder if such increase is for the purpose of

making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the

meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock,

or the incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating

or increasing of any bonded indebtedness shall require prior approval

of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the

corporation and the other shall be filed with the Securities and

Exchange Commission and attached to the original articles of

incorporation. From and after approval by the Securities and Exchange

Commission and the issuance by the Commission of its certificate of

filing, the capital stock shall stand increased or decreased and the

incurring, creating or increasing of any bonded indebtedness

authorized, as the certificate of filing may declare: Provided, That the

Securities and Exchange Commission shall not accept for filing any

certificate of increase of capital stock unless accompanied by the sworn

statement of the treasurer of the corporation lawfully holding office at

the time of the filing of the certificate, showing that at least twenty-five

(25%) percent of such increased capital stock has been subscribed and

that at least twenty-five (25%) percent of the amount subscribed has

been paid either in actual cash to the corporation or that there has been

transferred to the corporation property the valuation of which is equal

to twenty-five (25%) percent of the subscription: Provided, further,

That no decrease of the capital stock shall be approved by the

Commission if its effect shall prejudice the rights of corporate

creditors.

Non-stock corporations may incur or create bonded indebtedness, or

increase the same, with the approval by a majority vote of the board of

trustees and of at least two-thirds (2/3) of the members in a meeting

duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities

and Exchange Commission, which shall have the authority to

determine the sufficiency of the terms thereof. (17a)

BAR: Cite practical reasons why a corporation would increase

its capital stock.

1. To have additional funds – the most practical

reason why the corporation would increase its

capital stock, to have extra or additional capital.

2. To have additional shares that can be used to

acquire more assets – so that when you increase

capital stock, you have additional shares, which

shares can be used to acquire assets, you issue

shares in exchange for assets.

3. To have additional shares to support stock

dividend declaration – this happens if the

corporation’s authorized capital stock is almost

fully subscribed and the remaining shares are not

enough to justify your stock dividend declaration.

What if your ACS is almost fully subscribed, you don’t have

additional shares to issue, what do you do? Where will you take

the shares to cover your stock dividends? Do you take them

from the existing shares of the corporation or do you split the

existing shares of the stockholder? Where do you source the

shares for stock dividends?

From the unissued portion of the capital stock.

BAR: What are the various ways, or remedies or tools,

available to the corporation to obtain additional funds?

1. To issue shares – because when you issue shares,

you receive consideration because shares cannot

be issued without consideration, they become

watered shares. You either issue shares from the

unissued portion of the ACS or you increase your

capital stock.

BAR: Are you sure to obtain additional funds when you

increase your capital stock?

Yes because the stockholders are required to pay subscription

(25% of the increase must be subscribed and 25% thereof must

be fully paid).

Supposing your capital stock is 1 billion divided into 1 billion

shares, with a par value of 1 peso per share. Subscribed capital

stock is 500 million. Ordinarily, 250 million will suffice

because the only requirement upon incorporation is to

subscribe to 25% of the ACS. But in this case, let’s say the

subscribed capital stock is 500 million. The corporation

intends to increase the capital stock from 1 billion to 2 billion

consisting of 2 billion shares, par value of 1 peso and the

requirement is you have to subscribe to 25%. Can the



61

corporation still receive additional funds considering that 500

million is already 25% of your 2 billion proposed increase in

capital stock?

Yes. When you increase your capital stock, you are sure to

obtain funds.

So either you issue shares or increase your capital stock, either

way, the corporation is sure to obtain additional funds.

2. Advances from stockholders – advances are loans

3. Deposits for future subscription

Are advances and deposits for future subscription considered

as equity already?

Not yet.

Are these securities? Certificates of deposit for future

subscription?

Yes. But they are not equity, they are not shares of stock. They

are considered securities under the SRC. They are not yet

equity, they are not yet converted to shares, but the corporation

still receives additional funds.

4. Loans

Is equity entitled to interest payment?

No because equity is not a loan. It’s only a loan that would earn

interest. That’s why the cheapest way to obtain funds is to issue

shares because there is no obligation to pay any interest. You

only pay interest on a loan but not on equity. For equity, as you

know, dividends. The expectation of the stockholder for

infusing equity to the corporation is dividends, but the right to

receive dividends is

a. dependent on the availability of surplus profits;

and

b. always discretionary on the part of the BoD.

What is CAPITAL STOCK?

It represents the maximum number of shares that the

corporation may issue without amending the articles of

incorporation.

What happens if there are no additional shares?

The corporation should increase capital stock to have

additional shares because issuance of shares in excess of

your authorized capital stock is null and void.

Does it mean that the only amount of capital that the

corporation may raise is the product of authorized

shares multiplied by the par value?

OBVIOUSLY NOT. It simply represents the maximum

number of shares the corporation may issue without

amending the AOI. It does not reflect the capital of the

corporation because shares of stock may be issued for an

amount above or in excess of par value.

Capital stock or capital is different from the authorized

capital stock. Authorized capital stock is an arbitrary

amount indicated in the AOI.

25 % of your authorized capital stock must be subscribed

and 25% of this subscription paid in cash or property. The

subscribed capital stock is your outstanding capital stock,

these are shares subscribed by stockholders and therefore

outstanding in the sense that it is included in the

computation of the needed numbers to approve corporate

acts.

The stockholders are entitled to all rights pertaining to his

subscribed shares even though he did not pay the entire

subscription.

TRUST FUND DOCTRINE

BAR: Does the trust fund doctrine include the

additional paid in capital?

No. Your trust fund doctrine is synonymous with your

total subscriptions. It means that the total subscriptions

are funds held in trust for the benefit of the creditors.

Can a corporation increase the capital stock if its

authorized capital stock is not yet fully subscribed?

Yes because there is no prohibition.

MAJORITY OF STOCKHOLDERS OF RUBY

CORPORATION V. MIGUEL LIM (2011)

If the corporation will issue shares from your unsubscribed

portion of the original authorized capital stock it is not subject

to SH approval. What is required is board approval, majority of

the quorum suffices because under section 25 “unless the

corporation code requires otherwise, majority of the directors

constituting a quorum is sufficient to transact business”.

The power to issue shares of stock in a corporation is lodged in

the board of directors and no stockholders meeting is required

to consider it because additional issuances of shares of stock do

not need approval of the stockholders. What is only required is

the board resolution approving the additional issuance of

shares.

How many votes are needed when you increase your

capital stock?

Majority of the entire board and at the SH’s meeting, 2/3

of outstanding capital stock (important!)

3 PRACTICAL REASONS for INCREASING CAPITAL

STOCK

1. To obtain additional funds

You are assured to get at least 25 % of

subscription of the increase



62

The capital stock of a corporation is 1B divided into shares with

par value of 1 peso and subscribed and paid up capital stock is

500 million and the corporation would like to increase the

capital stock from 1B to 2b. Is there still a need to subscribed to

the 25% of the 2B considering that the paid up capital is ¼ of

the capital stock as increased?

Yes but it must be 25% of the increase not as increased. It is

to make sure that the corporation receives minimum capital

because to interpret otherwise there is no need to subscribed

further because 500M is already ¼ of 2B.

2. To have additional shares to acquire assets for the

corporation

Under section 62 of the Code shares of stock may

be exchange for property. The property is the

consideration for the issuance of shares and those

properties will become the assets of the

corporation.

3. To support stock dividend declaration

Are advances from SH subject to documentary stamp

tax?

Advances are loans. So if the advances are evidenced by a credit

or debit memo it is subject to DST. If not, just do an

accounting.

Until the case of BIR V. UST

There is no DST unless there is a loan. Doc stamps are not tax

on the document but a tax on the transaction.

Advances, although a loan, usually do not earn interest unlike

in loans it earns interest. A bank which does not charge interest

is performing an ULTRA VIRES ACT.

A SH who grants an advance to corporation without interest

can never be an ultra vires act. It is intended to help the

corporation.

Loans or advances are documented in the books of the

corporation as borrowings.

Shares of stock do not earn interest. Shares of stock are entitled

to dividends if declared by the corporation subject to

availability of surplus profits.

BAR: WAYS OF INCREASING CAPITAL STOCK

By increasing the number of shares but maintaining

the par value

By increasing the par value but maintaining the

number of shares

By increasing the par value and increasing likewise

the number of shares

REQUIREMENTS IN CASE OF INCREASE/DECREASE

OF THE CAPITAL STOCK

1. Approval of the majority of the entire board.

2. Approval of stockholders representing 2/3 of the

majority of the outstanding capital stock

3. Treasurer must sign an affidavit that 25% of the

increase in the capital stock has been subscribed

and 25% of the subscription of the increase has

been paid in cash or in property received by the

corporation. (Applicable only in case of increase

in capital stock)

4. Certificate of amendment filed with the SEC

which shall embody that the items contained

under Sec. 38 has been complied with or the

requirement for the increase in the capital stock.

Under Section 38, there is one item there that you are

supposed to state the amount of bonded indebtedness in the

certificate of amendment. There is increase of stock in one case

that we handled, we did not indicate the amount of bonded

indebtedness assuming there is none but the SEC looked for it.

So just state that there is no amount of bonded indebtedness to

fully comply with the requirements under Section 38.

And then, What is the effect of the amendment

brought about by the increase of the capital stock?

It is effective upon the approval of the SEC.

Now, what about the reduction of the capital stock?

Are the requirements the same?

As to the approval requirements, it is thesame. The

approval of the majority of the entire board and 2/3 of the

stockholders owning the majority of the capital stock.

What differs is the affidavit of treasurer. Obviously, it is not

applicable for the simple reason that such requirement is

peculiar only to increase in the capital stock.

But there is a requirement that is peculiar only to the

reduction of the capital stock and is not applicable to

the increase of capital stock and what is that?

The reduction of the capital stock shall not be done or

allowed if it will impair the rights of the third parties. So it

must not impair or prejudice third parties.

You don’t see that when you increase the capital stock. Why?

Because every time you increase your capital stock, there can

be no impairment of rights of the third parties there. It is for

the interest of the third parties that they will have additional

funds for the corporation.

Now an example in the reduction of the capital stock. Let’s say

your authorized capital stock is 1 billion divided into 1 billion

shares, you have a par value of one peso per share. Now the

subscribed capital stock is 600 million divided into 600 million

shares, par value of one peso.



63

The Corporation reduced the capital stock from 1 billion to 600

million.

What happens now to the 400 million shares?

Then they are retired. They cannot be reissued anymore unless

allowed by the articles of incorporation.

What about this one, supposing that your authorized capital

stock is 1 billion divided by 1 billion share with a par value of 1

peso. Your subscribed is 600 million and your paid up is 500

million. Can you reduced the authorized capital stock from 1

billion to 500 million?

No, you cannot because it will amount to condonation of your

100 million subscription. And what did we say earlier? That all

subscriptions are funds held in trust for the benefit of the

creditors under the TRUST FUND DOCTRINE. To condone the

unpaid subscription is to violate the trust fund doctrineunless

the net assets of the corporation is 600 million and if the net

asset anyway is 600 million then you can reduce the capital

stock to 500 million.

What about this one, Let’s say that 1 billion is authorized

capital stock and it has a par value of 1 peso fully subscribed

and paid up. The corporation decides to reduce capital stock to

600 million. What happens to your 400 million? Can they be

returned to the stockholders?

They can be returned only to the extent that it will not impair

third party creditors.

So in what way can you distribute the excess?

If the net assets of the corporation is 1billion pesos and you

have enough to cover the claims of your creditors.

Because if not, let’s say that the net asset is only 700 million

and they reduced it to 600 million can they return the 400

million?

No, only the 100 million excess.

Now, if you return the surplus capital stock, is it a

declaration of dividends?

As you all know, when you return the surplus to the

stockholders, it is not dividends under Section 43 but a

return in capital or return in investment of the

corporation.

Our client Century did a backdoor listing. BACKDOOR

LISTING is when you buy the shares of a dormant listed

company. ABC is an energy company, it is listed in the stocks

exchange. Century wants to go public, it wants to trade its

shares publicly. So it wants to apply in the list for public

offering in the Philippine stock exchange. It is very expensive.

You have to hire accountants, lawyers, investment managers so

and so. The cheapest way to do it is to simplify, by buying a

dormant listed company. So Century bought the shares of ABC

company, a dormant listed company, then amended the

articles from energy to realty. Then the name from ABC to

Century. This is the problem: ABC incurred losses so that is

why it is sold for a cheap amount.

The question is: How do you wipe out the losses?

You wipe out losses by reducing the capital stock and it

will take .000001 of par value before you can decrease

capital stock and wipe out the losses. So ganun kalaki yung

reduction ng par value .000001 from 1 peso para ma wipe

out yung losses na 40 million. So ang tanong sakin meron

bang limitations sa par value?

Wala. The 5 peso applies to no par value. So for as long as

you have a monetary value, it can be used. So that’s what

we did. We reduce the capital stock. By reducing the par

value to .000001 such as the capital stock of the

corporation became only 150 million.

Now of course, if you are a listed company and you want you

trade shares in the stock exchange and it is .000001, No one

will take you seriously. Sino bibiling stocks mo kung .000001

ang value. So after we reduce the capital stock and wipeout the

losses, we again amended the articles to increase the par value.

So this is what we did to wipe out the losses, we reduce the

capital stock and then again increase it to make it viable. And

the point is, there is no minimum par value according to the

SEC. As long as there is a value attached to it. The 5 peso

limitation is applicable only to no par value shares.

POWER TO INCUR, CREATE OR INCREASE BONDED

INDEBTEDNESS

Now moving on to Sec 38, the power to incur, create and to

increase bonded indebtedness. It is the only power of the

corporation that has not been asked in the bar, the power to

incur bonded indebtedness.

In the corporation power to incur debt, for example, 1

million debt or 5billion. Would that require

stockholder’s approval? For 5 billion? or 10 billion?

Is it a question of amount?

NO. It is not a question of amount but a question of

whether the following partakes of a bonded indebtedness.

Only bonded indebtedness requires approval of the

majority of the board and stockholders owning at least

2/3 of the outstanding capital stock.

Ordinary debts of the corporation under the general borrowing

of the corporation, regardless of the amount, only requires

approval of the majority of the quorum.

Now, the question there is what is a bonded

indebtedness? And how do you distinguish it from a

mere general borrowing of the corporation?

BONDED INDEBTEDNESS

Is in the form of the bond.



64

Is the bond different from a promissory note?

A BOND is long term in nature involving large number of

creditors. Unlike promissory notes which is issued only to

one person and short term of payment, a bond cannot be

for one year. The bond is payable for three years, 5 years or

7 years as the case may be. It cannot be a bond if it is less

than 3 years.

So a bond is for longer term involving large number of

lenders more than 20. The second feature of a bonded

indebtedness is that it must be secured by an encumbrance

on the corporate assets. So assets are given or assigned to

a trustee and then offered as collaterals or secure the

obligations under the bond.

To repeat, it must be in the form of a bond and then

secured by an encumbrance in the corporate assets and

subject for the approval of the SEC.

You cannot issue bond to the public unless you have a SEC

approval. Under SRC, remember that you cannot issue

securities to the public unless you secure SEC’s approval.

Bonds are securities.

Also keep in mind, the act of incurring requires majority and

2/3. The act of increasing requires majority and 2/3. So the if

you have approval of 1 billion bonded indebtedness and after

one year, the corporation once more increase the same, so it is

subject to the same requirement which is majority of the entire

board and 2/3 approval of stockholders.

c. Power to Deny Pre-Emptive Rights

Sec. 39. Power to deny pre-emptive right. - All stockholders of a

stock corporation shall enjoy pre-emptive right to subscribe to all

issues or disposition of shares of any class, in proportion to their

respective shareholdings, unless such right is denied by the articles of

incorporation or an amendment thereto: Provided, That such pre-

emptive right shall not extend to shares to be issued in compliance with

laws requiring stock offerings or minimum stock ownership by the

public; or to shares to be issued in good faith with the approval of the

stockholders representing two-thirds (2/3) of the outstanding capital

stock, in exchange for property needed for corporate purposes or in

payment of a previously contracted debt.

The power of the stockholders is to subscribe to any shares of

the corporation. The power of the corporation is to deny.

The right of the stockholders to subscribe to any and all

issuance of shares or the disposition of shares of any class of

shares of the corporation in proportion to his shareholdings in

the corporation.

As I said, the right to subscribe in any and all issuance of

shares of the corporation.

First question, does pre-emptive right apply to

issuance of stock or issuance of shares from the

unsubscribed portion of the original authorized

capital stock? Or only in the increase of the capital

stock?

There was an old Supreme Court decision, that the pre-

emptive rights is only applicable in case of increase in the

capital stock and not from the issuance of shares from the

original capital stock.

For example, the authorized capital stock is for 1billion divided

into 1 billion share with a par value of one peso. The subscribed

capital stock is 500 million pesos with 10 stockholders and

each stockholders subscribed into 50 million shares each to

make it 500. Let’s say that your paid up is 250 million and 25

million is paid for each stockholders. So you have 10

stockholders holding 50 million shares each, so what does it

mean? Each of them owns 10% of the company.

Now let’s say the corporation will issue shares from

the unsubscribed 500 million. Is that subject to pre-

emptive right?

According to the Supreme Court, No. Why? Because if the

stockholders want more than 50 million, in the outset they

should have subscribed for more than 50 million. Having

subscribed to 50 million upon the incorporation, it means

that the only number of shares they want in the

corporation.

So according to this case, pre-emptive rights is only applicable

in case of increase in the capital stock.

According to the SEC, this is based on the old corporation code.

Under the new corporation code, when I say new it means the

current Corporation Code, pre-emptive right applies to any and

all issuance of shares whether from the increased or from the

unsubscribed portion of the original authorized capital stock.

Bottomline, every time the corporation issues new shares,

whether from the increased or the unsubscribed portion, the

stockholders are entitled to pre-emptive rights. Why?

Because the rationale of pre-emptive right is for the

stockholders to maintain their proportional interest in the

corporation in terms of voting rights, in terms of assets upon

dissolution and in terms of dividends .

In what sense?

We have 10 stockholders, each of them has been given 10% of

the shares each. Every time the corporation declares dividends,

each receives 10%. Every time there is a voting of corporate act,

each can vote 10%. If you dissolve the corporation, each of

them gets 10% of the assets. Now of you issue the shares from

whatever source to third parties outside the 10, they will get

diluted from 10% to less than 10%.

That is why pre-emptive rights apply to any or all issuance

because any or all issuance may result to dilution of the

stockholders interest or proportion of his interest in the

corporation.



65

Is pre-emptive right applicable to sale of treasury

shares?

YES. Because the word disposition covers such.

It says of any class of shares. For example:

1) At the outset, the corporation has "all common shares." 1B

common shares with par value of One Peso, then the

corporation amended the AOI, to issue preferred shares. Can

the holders of the common shares subscribe to the new

preferred shares? The answer is YES, because the law says "of

any class." So any class whether common or preferred.

2) At the outset you have 2B authorized capital stock, 1B

common shares and 1B preferred shares, and the holders of the

common shares are different from the holders of the preferred

shares. The corporation will increase the capital stock, to

increase only common shares. Can the holders of the preferred

shares exercise pre-emptive right to the new common shares?

The answer is NO, because the pre-emptive right will only

apply to the holders of the common shares. The purpose is to

prevent dilution, so it can only grant pre-emptive right to the

holders of common shares, because the preferred shareholders

are not diluted as the same preferred shares remain the same.

Is pre-emptive right absolute?

NO.

EXCEPTIONS TO THE RIGHT OF PRE-EMPTIVE

RIGHT:

1. If it is denied in the AOI or any amendment

thereto

2. Waiver of that right, whether express or implied

3. Shares issued in compliance with

laws requiring minimum stock ownership to t

he public

4. Issuance of shares in exchange for

property given for a corporate

purpose, if approved by the SH owning at least

2/3 of the outstanding capital stock.

5. Issuance of shares in payment of debt made

in good faith, if approved

by the SH representing 2/3 of the outstanding

capital stock.

The first one, if the right is denied in the AOI or any

amendment thereto. The by-laws of the corporation were

amended to deny pre-emptive right. The amendment was

approved by majority of the board and SH representing 2/3 of

the outstanding capital stock. Is the denial valid? No. The Code

says "amendment of the AOI." Amendment of the by-laws is

not enough, it must be AOI.

In 2013, the SC said in one case,

"you cannot freeze-out the minority SH, in bad faith." In such

case, the corporation is already insolvent, but the majority of

the SH still wanted to continue the existence of the corporation

and revived it by adopting rehabilitation plan that will call for

equity infusion, but the minority SH does not want to put up

more capital with the corporation since it is already insolvent.

The minority SH wanted to dissolve the corporation, liquidate

and distribute the assets to the SH, so they can recover their

investment or whatever is left. But what the majority SH did

was to amend the AOI and increase the capital stock resulting

to dilution of the interest of the minority SH in the corporation.

So when the corporation will liquidate its assets, the minority

will be left with lesser share in the distribution of assets. Then

eventually the SC declared the corporation to be insolvent and

the equity infusion was not advisable, improper, and illegal. It

is in that context that the SC said you cannot dilute the

minority.

The second one, waiver of pre-emptive right.

When you become a corporate secretary, and you will be

issuing shares, don't forget to include in your board resolution

that "SH are given, for examples, 7 days from notice to exercise

the pre-emptive right, otherwise the right is deemed waived."

Because it cannot be indefinite (the exercise of pre-emptive

right). So given that period, and you did not exercise the right

within that period, then the right is deemed waived impliedly.

The third one, Shares issued in compliance with

laws requiring minimum stock ownership to the public.

What is your minimum public ownership

requirement for a public company?

10% must be owned by the public.

What happens if the public does not own 10%?

It will be delisted by the SEC.

So if you issue shares to comply with laws requiring minimum

SH ownership by the public, then you don't have to offer those

shares to existing SH, you will offer them to third parties to

comply with the requirement.

The fourth one, Issuance of shares in exchange for

property given for a corporate

purpose, if approved by the SH owning at least 2/3 of


ABC Corporation is on expansion mode and is looking for a

property that could be the site of the factory of the corporation,

and after considerable search, the corporation was able to find

a land. It entered into negotiations with the owner of the

property. The owner wants to sell the property to the

corporation but in exchange for shares of stock in the

corporation. So the president discussed the idea to the BOD,

made proposals to the board, and the board approved it, and

presented it to the SH, to increase the capital stock, for the



66

issuance of shares in exchange of the property to the owner of

the property. The increase in the capital stock, and the issuance

of shares of the corporation in exchange for the property was

approved by the SH owning 2/3 of the outstanding capital

stock or 66.67%. Pedro Reyes who owns 10% claims that the

issuance of shares in exchange of the property is in violation of

his pre-emptive right. Is Pedro correct?

No because it is issuance of shares in exchange for

property given for a corporate purpose,

if approved by the SH owning at least 2/3 of


The last one, Issuance of shares in payment of a debt made in

good faith, if approved by the SH representing 2/3 of the

outstanding capital stock.

d. Power to Sell or Dispose of Corporate Assets

Section 40. Sale or other disposition of assets. – Subject to the

provisions of existing laws on illegal combinations and monopolies, a

corporation may, by a majority vote of its board of directors or trustees,

sell, lease, exchange, mortgage, pledge or otherwise dispose of all or

substantially all of its property and assets, including its goodwill, upon

such terms and conditions and for such consideration, which may be

money, stocks, bonds or other instruments for the payment of money

or other property or consideration, as its board of directors or trustees

may deem expedient, when authorized by the vote of the stockholders

representing at least two-thirds (2/3) of the outstanding capital stock,

or in case of non-stock corporation, by the vote of at least to two-thirds

(2/3) of the members, in a stockholder’s or member’s meeting duly

called for the purpose. Written notice of the proposed action and of the

time and place of the meeting shall be addressed to each stockholder or

member at his place of residence as shown on the books of the

corporation and deposited to the addressee in the post office with

postage prepaid, or served personally: Provided, That any dissenting

stockholder may exercise his appraisal right under the conditions

provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the

corporate property and assets if thereby the corporation would be

rendered incapable of continuing the business or accomplishing the

purpose for which it was incorporated.

After such authorization or approval by the stockholders or members,

the board of directors or trustees may, nevertheless, in its discretion,

abandon such sale, lease, exchange, mortgage, pledge or other

disposition of property and assets, subject to the rights of third parties

under any contract relating thereto, without further action or approval

by the stockholders or members.

Nothing in this section is intended to restrict the power of any

corporation, without the authorization by the stockholders or

members, to sell, lease, exchange, mortgage, pledge or otherwise

dispose of any of its property and assets if the same is necessary in the

usual and regular course of business of said corporation or if the

proceeds of the sale or other disposition of such property and assets be

appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting

rights, the vote of at least a majority of the trustees in office will be

sufficient authorization for the corporation to enter into any

transaction authorized by this section.

Section 40, there are two kinds of disposition. One is disposition in the ordinary course of business and the other one is the disposition, sale, encumbrance of all or substantially all of properties of the corporation. If it is a sale in the ordinary course of business, it requires approval of the majority of the board. Why? The reason is Section 25 of the CC, it provides that unless the Corporation Code or the by-laws requires otherwise, majority of the members of the board constituting a quorum are sufficient to transact business. Sale in the ordinary course of business does not require majority of the entire board. If the sale of the properties, mortgage of the properties is in the ordinary course of business, it only requires the approval of the board of directors, it means majority of the quorum.

The other one is the disposition, sale, encumbrance of all or substantially all properties of the corporation, it requires the approval of the board of directors and the stockholders representing atleast 2/3 of the outstanding capital stock. It is also subject to the laws on illegal combination, monopoly, restraint of trade or other relevant special laws.

This was asked 7 times in the bar, Q: What special law is applicable when it comes to the sale of all or substantially all of the corporate properties? A: The Bulk Sales Law. So the Bulk Sales Law must be read in conjunction with Section 40 of the Corporation Code. Under this law, any sale in bulk as defined by law must comply with certain requirements otherwise the sale is in fraud of the creditors. There is a presumption that if the sale is in bulk and does not comply with the requirements under the law, it is a sale in fraud of the creditors.

Q: So what are the different kinds of sales in bulk? A: 1. Sale, exchange, transfer and mortgage not in the ordinary course of business, 2. Sale, exchange, transfer and mortgage of all or substantially all of the assets of the corporation. 3. Sale, exchange, transfer and mortgage of all or substantially all of the business or trade of the seller.

The requirements under the Bulk Sales Law are the following,

1. The seller must provide the buyer a verified list of the creditors containing the names of the creditors, their addresses, amounts owing to each of them and the respective maturity dates.

2. Inventory of the properties or assets to be sold and must include the cost price or acquisition price in the amount being sold.

3. The inventory and the list must be filed with DTI.

The consent of the creditors is not required because there is no law requiring the seller or the buyer to secure the consent of the creditors before the sale can be effected. If the requirements have not been followed, the consequences are it is null and void, Q: Against whom? A: Null and void against the creditors of the corporation. Q: So what would be the rights and obligations of the buyer in the bulk sales law if it does not comply with the requirement under the bulks sales law? A: Well the buyer holds the properties in trust for the benefit of the creditors with the right to return the price plus damages if warranted. So holding the properties in trust for the benefit of the creditors and the right to require the return of the price plus damages.



67

That is why it doesn’t make sense not to comply, because__________ except if you do not know the law.

That is why this afternoon; we had a meeting with a client who is selling his assets to a foreign based company. He told us that he engaged the services of a lawyer from Harvard, lawyers from so on and so on and he is engaging our firm to make sure that his interest is protected and to “proof read” the sale purchase agreement because he already hired the lawyers from Harvard who are supposed to be experts. And I said, I feel insulted that you are hiring us just to proof read. Of course I said it in a nice way, that I feel insulted. And I said, perhaps those lawyers from Harvard do not know about the Bulk Sales Law. You are selling your property in bulk, all of them. Please ask them if they know about the bulk sales law.

Well if you have a transaction involving a sale of all or substantially all, the bulk sales law applies. The foreign counsel was surprised when I cited bulk sales law. He asked me “are you sure there is a law in the Philippines?” and I said, “Yes, it is an old law but it has not yet been repealed”.

In fact, it is not limited to sale, assignment or transfer, it even includes mortgage of all or substantially all. So even if it is bulk sale by name, it also applies to mortgage of all or substantially all of the properties. If these are not complied with, the transferee will hold them in trust for the benefit of the creditor. So might as well comply. Anyway, these are all procedural requirements, but the consequences can be fatal, can have adverse effects in implication if you do not comply.

You just notify them right, so better to give the list to the buyer so the buyer can inform the creditors at least 10 days before the sale and what will it take to notify the DTI? Nothing, just a paper, just a letter.

BAR: Supposing Juan Dela Cruz sought the advice of his lawyer on how he can save on estate tax upon his death. So he was advised by his lawyer that he can put up a holding company and that he can transfer all of his real properties in the holding company in exchange for shares of stock, and he was advised further that a transfer of real properties in exchange for shares is a tax exempt transaction provided he acquires control of the transferee corporation. So he heeded the advice of his lawyer, he assigned and transferred all of his properties to a transferee corporation. It turns out that he has a creditor. Oryt, creditor filed a case against him, obtained a judgment which became final and executory and implemented judgment the against transferor, only to find out that there are no real properties to be levied on execution because they have been transferred to the holding company.

And there is no registry when it comes to shares, you do not find shares right? You will never know where the shares are, because they are intangible properties and the stock certificate is in the possession of the stockholder.

First Question: Can the creditor pierce the veil of corporate fiction? Is the setting up of the holding company, recipient of the properties from the transferor, be the basis for the corporate veil to be pierced?

A: The answer is No. Delfin vs. IAC. Tax avoidance scheme is valid, it is ethical, it is recognized by the tax code and piercing the corporate veil only applies in case of misuse or abuse of the fiction of separate legal personality. There is no misuse or abuse of legal personality fiction in this case.

Second Question: What then is the remedy available to the judgment creditor?

A: The bulk sales law as the transfer or assignment did not comply with the requirement of the bulk sales law. The transferee holds the properties in trust for the benefit of the judgment creditors.

Now the question in the bar, the transfer or assignment was made during the pendency of the case, so in other words, a case was already filed against Juan Dela Cruz, and during the pendency of the case he sought the advice of his lawyer on how he can save on tax upon his death and he was told to put up a holding company where he will transfer all of his properties in the holding company in exchange for shares of stock.

Then the judgment creditor obtains a judgment which became final and executory. The question then was,

Can he pierce the corporate veil?

Can he pierce the corporate veil? There were two answers, two conflicting answers, primary and alternative.

Primary answer- Because the transfer was made during the pendency of the collection case, it is in bad faith; therefore the corporate veil should be pierced.

Alternative answer- No, because tax avoidance is valid.

It is better to subscribe to the alternative answer because it is based on jurisprudence. The primary answer assumes there was bad faith just because the transfer was made during the pendency of the case regardless of the intention to save tax. But here there may still be leviable properties, the shares. You can levy the shares and that there is no registry of property for shares. Somebody showed me a book, Sir, according to so and so... I said,” According to Supreme Court…” (tawanan)

What is the difference between tax avoidance and tax evasion?

You can always tell me tax evasion is illegal, unethical, contrary to public policy. Tax avoidance is valid, allowed by the code. When you become lawyers, you realize that the difference between tax avoidance and tax evasion is a good lawyer. A good lawyer can make tax evasion look like tax avoidance and a lousy lawyer can make tax avoidance look like tax evasion. But of course the difference would be whatever Kim Henares says until June 30, 2016.

Does the Bulk Sales Law apply to sales made by a manufacturer? Asked twice in the BAR.

No, because a manufacturer always sells in bulk.

There is one case on Sale of Corporate Assets on your outline, Pena vs CA. This has been asked in the Bar. The question was, “Is the assignment of the right to redeem the property of the corporation subject to stockholders’ approval and majority of the board’s approval?”

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



68

Sc said, “If what is being assigned is the only or substantially all the properties of the corporation, that is tantamount to sale of sale of all or substantially all which requires the approval of stockholders and majority of the board and would fall under section 40 of the Corporation Code.”

What is the remedy of one who is not in favour of the sale of all or substantially all of the corporate properties?

Appraisal right.

That is why the stockholders’ approval should be secured in a meeting called for that purpose; because of the appraisal right. The dissenting stockholder has to be present in the meeting where he will express his dissent against the proposed sale of all or substantially all properties.

What is the test to determine whether the sale involves substantially all?

The Bulk Sales Law does not provide for the formula or test but it is found in the Corporation Code. If after the sale, the corporation cannot continue with the purpose for which it was organized, then the sale is considered as a sale of substantially all of the corporate assets. It is not a question of quantity; it is a question of effects after the sale.

Let us say La vista land has various properties for development and they were able to sell only the lots in (a certain place), is that covered by the Bulk Sales law?

No, it is a sale in the ordinary course of business and it is not the only or substantially all the properties of the corporation.

e. Power to Acquire Own Shares

Section 41. Power to acquire own shares. – A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a)

SECTION 41 refers to the power of the corporation to acquire its own shares. Relate to Sections 7, 8, and 9.

What are the cases where the corporation can acquire its own shares?

Ordinarily, the corporation cannot acquire its own shares right? The corporation cannot be its own stockholder. That does not make sense, so it is only in certain cases that the corporation becomes its own stockholder.

Instances when the corporation may acquire its own shares

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code

4. Redeemable Shares (Sec.8)

5. Treasury Shares (Sec.9)

1. To eliminate fractional shares arising out of stock dividends

When can there be a fractional share in case of stock dividends?

Fractional share (butal) is less than one share.

Example: Let us say a stockholder owns 250 shares and the corporation declares 25% stock dividends. 25% of 250 is 62.5. The .5 is the fractional share that the corporation may acquire.

When you become corporate secretary, don't forget to include in your board resolution the authority of the corporation to acquire fractional shares arising from stock dividends.

Section 41 is not self executory. It is implemented by a board resolution. Section 41 only empowers the corporation to acquire its own share but it has to be authorize by the BOD.

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;

Can the corporation acquire or participate in sale of delinquent shares?

No. The corporation may acquire delinquent shares only if there is no bidder willing to pay the full amount of the subscription plus interest, costs and expense and subject to the existence of surplus profits.

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code

Appraisal right (sec.81) is the right of the stockholder to demand payment of the fair value of his share after dissenting from a proposed corporate act involving fundamental changes in the corporation in the cases specified by law.

It is basically the right to get out of the corporation.

In close corporations, appraisal right may be exercised at any time.

4. Redeemable Shares (Sec.8)

These are shares classified as such in the AOI which the Corporation may take up upon expiration of a certain period, regardless of availability of surplus profits.

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



69

5. Treasury Shares (Sec.9)

Treasury shares are issued, fully paid and outstanding but they are reacquired by the corporation through purchase, redemption, donation and any other lawful means.

Purchase

Example: If the economy is not doing well and the shares are being traded in the amount below book value, it makes sense for the corporation to acquire those shares because those shares acquired become assets. Basically they are cheap assets because they are acquired below their real worth.

DONATION, well shares may be donated back to the corporation by the stockholder.

What about REDEMPTION? That is confusing because redemption is a mode of acquiring shares under Sec. 9. Then redemption is also separately discussed under Sec. 8.

This was asked in the Bar - What are the requisites to enable the corporation to acquire its own shares?

1. For a legitimate purpose only. The corporation may acquire its own shares for legitimate corporate purposes.

2. Subject to availability of unrestricted retained earnings.

3. The condition of the corporation warrants it.

Redemption under Sec. 8 v. Redemption under Sec. 9

If acquisition of its own shares, treasury shares, is subject to availability of surplus profit and one of the modes of acquiring treasury shares is redemption under Sec. 9, how do we distinguish then redemption under Sec. 9 that requires surplus profit from redemption under Sec. 8 that enables the corporation to acquire such shares notwithstanding lack of surplus profit. So the only way you can reconcile is to say that Sec. 8 on redeemable shares contemplates shares that were retired and were later on redeemed. So redeemable shares are shares that are retired, once they are acquired they are retired, they are no longer outstanding, that is why you have to amend the AOI to take them out.

Can you reissue Redeemable Shares after they are reacquired by the corporation?

YES if re-issuance is allowed by the AOI. When re-issuance is allowed by the AOI, then they become treasury shares. So if re-issuance is allowed then it will cover shares under Sec. 9. So in other words, the corporation can redeem redeemable shares not requiring surplus profit if those shares once redeemed are retired. If the AOI allow the re-issuance of these redeemable shares then it will be governed by Sec. 9 which requires now surplus profit, because you know that such treasury shares can be re-sold upon such terms and conditions as may be authorize by the board. (Dean's Note: It may be better to amend these provisions and take out "redemption" under the modes of acquiring treasury shares because it is confusing with Sec. 8. Unless it will be explained the way I explained it to you..)

Bar Exam Question: Can a bank acquire its own shares?

A: YES.

Q: Within what period should the bank dispose of its treasury shares?

A: 6 months from acquisition.

Now is the 6month period applicable to other corporations not a bank?

The answer is NO. A corporation may acquire its own shares, they become treasury shares, they become assets of the corporation and as assets they can be sold or disposed of at any time and there is no period for the corporation to dispose of treasury shares.

When it comes to shares of a bank, a bank can only acquire its own shares subject to BSP approval. Any shares acquired by a bank should be disposed of within 6 months from acquisition because the bank cannot be a stockholder of its own.

Asked in the Bar: How do you distinguish Treasury Shares from Redeemable Shares?

Redeemable shares are shares classified as such in the AOI and reacquired upon expiration of a certain period regardless of existence of retained earnings or surplus profit. Treasury shares cannot be reacquired if there is no surplus profit.

Redeemable shares have to be denied the right to vote while Treasury shares need not be denied the right to vote because by their very nature they cannot vote.

Redeemable shares are generally retired upon redemption and therefore cannot be reissued whereas Treasury shares can be resold upon such price or terms and conditions as may be determined by the board.

The answer to this question, how can the issuance be allowed in the articles?

If it is a perpetual redeemable share. Perpetual meaning it can be redeemed anytime. So there is no period. For example, San Miguel is notorious for this, they will issue preferred-redeemable shares (these features go hand in hand, preferred and redeemable shares). So redeemable up to 3 years. So Let’s say the corporation issues 1 billion worth of preferred redeemable shares with a term of three years and every year it pays dividends on a guaranteed basis. So those are the features. 3% every quarter or 12% dividends every year. After 3 years, it becomes redeemable. On the first quarter of the first year, the corporation must pay dividends.

What if there is no surplus profit and the features of the preferred and redeemable shares are guaranteed dividends?

In the case of Republic Planters Bank v. Agana, xxxx can the holders of such shares compel the corporation to pay dividends due on the preferred-redeemable shares if the payment of dividends is guaranteed by the corporation and there is no surplus profit?

The answer is NO because these shares are not borrowings and not indebtedness of the corporation. Although pref shares are ----, they are also stakeholders of the corporation and the right to receive dividends is still subordinate or dependent on availability of surplus profit. So preference comes in only if there is surplus profit and dividends are

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



70

declared by the corporation. If there is none then there is no such thing as guaranteed dividends.

This is the case of San Miguel Corporation. San Miguel Corporation used to be owned by the government by up to 40% and the Supreme Court declared that --- goes to Danding Cojuanco. So only 20% are left to the government. Now, the San Miguel made an offer to Sandiganbayan to convert the common share into redeemable shares. So from common, voting diba. Ang sabi ng San Miguel, let’s convert your common to preferred and we will pay you guaranteed dividends every quarter. Then they got the approval of the Sandiganbayan all the way to Supreme Court. So that is why the government is no longer a voting stockholder of San Miguel, they were reduced to non-voting pref share holder. When the new PCGG chairman came in, now the present chairman of COMELEC, they asked me, can they undo the deal because they wanted to get back the common shares to enable the government to vote and elect the Board of directors of San Miguel. It cannot be undone anymore right because it was approved validly by the Supreme Court. The question is suppose San Miguel loses money and investment, right now they are very profitable, but supposing it bungle in its many investments and there is no surplus profit, can the government insist on payments of dividends because it was guaranteed?

The answer is NO because there is no such thing as guaranteed dividends if there is no surplus profit. So they can only pray that the San Miguel always has surplus profit so dividends can be declared.

So on the third year, what happens now?

It will be redeemed by the corporation, so obviously those shares once redeemed are deemed retired because it was only good for 3 years. It cannot be reissued anymore. You have to amend the articles of incorporation to take out those redeemable pref shares.

What if there is no period?

It can be redeemed anytime by the corporation. So kung wala kang redeemable period, it can be redeemed by San Miguel anytime. If there is no term, limit, period or time, it can be reissued anytime upon the terms and conditions approved by the board of directors and in that case it becomes treasury shares.

Are treasury shares entitled to dividends? NO.

Can they vote? NO as long as they are in the treasury.

Are they part of the outstanding capital stock?

They are not. They used to be outstanding but when they are acquired by the corporation they become mere assets of the corporation.

Can they become a part of outstanding capital stock again?

Yes, if they are re-issued by the corporation.

f. Power to Invest Corporation Funds in another Corporation

Sec. 42. Power to invest corporate funds in another

corporation or business or for any other purpose. - Subject to

the provisions of this Code, a private corporation may invest its funds

in any other corporation or business or for any purpose other than the

primary purpose for which it was organized when approved by a

majority of the board of directors or trustees and ratified by the

stockholders representing at least two-thirds (2/3) of the outstanding

capital stock, or by at least two thirds (2/3) of the members in the case

of non-stock corporations, at a stockholder's or member's meeting duly

called for the purpose. Written notice of the proposed investment and

the time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on the books

of the corporation and deposited to the addressee in the post office

with postage prepaid, or served personally: Provided, That any

dissenting stockholder shall have appraisal right as provided in this

Code: Provided, however, That where the investment by the

corporation is reasonably necessary to accomplish its primary purpose

as stated in the articles of incorporation, the approval of the

stockholders or members shall not be necessary. (17 1/2a)

Again, investment of funds may be for primary purpose or

secondary purpose in another corporation.

If the funds are invested by the corporation for primary

purpose, then obviously it must require approval of the board

of directors (if we say BOD, we mean, majority of the quorum

suffices)

BAR: ABC Corporation is engaged in the business of

manufacture of soft drinks and then it wanted to

invest its funds in the manufacturing of bottles for

the soft drinks and a stockholder required or asked

the board taken up in a stockholders’ meeting, so he

can dissent and then exercise his appraisal right. If

the funds to be invested by the manufacturer of

softdrink are for manufacture of bottles, does this

require SHs’ approval? Is this something that a

stockholder can exercise his appraisal right?

Under Section 42, if the funds invested are for primary

purpose, any undertaking or venture incident to primary

the purpose, then board approval suffices. The approval of

the stockholders is not necessary.

If the funds invested are for secondary purpose, then under

Section 21:

1. Approval of the majority of the board of directors

2. A meeting must be called for the purpose for the

stockholders

3. The corporation must secure the approval of the SH

holding at least 2/3 of the outstanding capital stock.

So obviously, written assent will not suffice. There must be

a meeting called for that purpose so the SH can exercise

their appraisal right

Section 42 is not enumerated in Section 81 where cases on

appraisal right may be exercised. Section 42 understandable on

the basis which provides that appraisal right is available for the

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



71

stockholder who dissents in investing the corporation funds for

a secondary purpose with the expectation that the funds will be

invested for primary purpose, not secondary purpose. He puts

his money in a corporation with the expectation that the equity

he made in the corporation would be devoted for primary

purpose.

If the funds are invested for secondary purpose, the law

requires stockholders to be consulted, the board must go back

to the SHs to get their consent, and those who are not in favor

can exercise their appraisal right.

What about investment of funds in a business not in

the secondary purpose? Is this allowed by Section

42?

Section 42 says investment of funds in secondary purpose

or another business and this requires approval by the

board likewise and SH by the 2/3.

Does this require amendment of the AOI? Can the

corporation invest its funds in an undertaking or business

not at all related, not at all provided in the AOI as

secondary or primary purpose?

This Section 42, when it comes to investing funds in

another business not part of the secondary purpose must

be read in relation to Sections 16 and 45 of the

Corporation Code. So that business must be incorporated

either as a primary purpose or secondary purpose.

A corporation can only exercise powers conferred upon it

under the Articles, express, implied, or incidental to its

corporate existence.

So what 42 recognizes is the prerogative of the corporation

to invest the funds in another business, that requires an

amendment of the AOI otherwise it would be ultra vires.

BAR: A corporation is engaged in deep sea fishing, it

wants to invest funds in agriculture, it being the

secondary purpose. What steps should be undertaken

by the Corporation to allow investment of funds in

agriculture? What are the procedures that should be

taken up under Section 42 if the corporation invests

its fund for secondary purpose?

1. Board approval (majority vote)

2. Notice to the SH of the meeting and must include the

proposal to invest funds in secondary purpose,

3. and it that meeting, get the approval of the SH

representing 2/3 of the outstanding capital stock,

4. for the corporation to pay dissenting SH the fair value

of the shares subject to availability of surplus profits

Section 42 says funds. Does the term “funds” include

properties?

According to the SEC, the term “funds” includes properties

in the sense that can an idle asset of a corporation be used

for a different purpose not the primary purpose of the

corporation? According to SEC, idle funds may be devoted

to secondary purpose, in this case, it will be treated as

investment of funds in secondary purpose requiring SHs’

approval.

So the property must be devoted for primary purpose, right? If

the property is to be devoted for secondary purpose, it requires

board and SHs’ approval. So same requirement.

g. Power to Declare Dividends

Sec. 43. Power to declare dividends. - The board of directors of a

stock corporation may declare dividends out of the unrestricted

retained earnings which shall be payable in cash, in property, or in

stock to all stockholders on the basis of outstanding stock held by

them: Provided, That any cash dividends due on delinquent stock shall

first be applied to the unpaid balance on the subscription plus costs

and expenses, while stock dividends shall be withheld from the

delinquent stockholder until his unpaid subscription is fully paid:

Provided, further, That no stock dividend shall be issued without the

approval of stockholders representing not less than two-thirds (2/3) of

the outstanding capital stock at a regular or special meeting duly called

for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in

excess of one hundred (100%) percent of their paid-in capital stock,

except: (1) when justified by definite corporate expansion projects or

programs approved by the board of directors; or (2) when the

corporation is prohibited under any loan agreement with any financial

institution or creditor, whether local or foreign, from declaring

dividends without its/his consent, and such consent has not yet been

secured; or (3) when it can be clearly shown that such retention is

necessary under special circumstances obtaining in the corporation,

such as when there is need for special reserve for probable

contingencies. (n)

43 is the heart and soul. Most of the questions on the powers of

a corporation focus on 43 and 45 – dividends and ultra vires.

The heart of the proprietary right of a stockholder is the right

to receive dividends. A stockholder invests money in the

corporation not because he just feels it or likes it but because

he wants to earn dividends, he wants to earn profits and those

profits must be translated(?) to dividends payable to the

stockholders.

BAR: Are profits same as dividends?

Profits are not dividends. Profits are sources of dividends.

Dividends are profits, in whole or in part, set aside for

distribution to the stockholders.

Profits are not dividends. [To be considered as dividends], they

ought to be separated or segregated, earmarked and

distributed to the stockholders.

REQUIREMENTS OR CONDITIONS FOR A

CORPORATION TO BE ABLE TO DECLARE

DIVIDENDS

1. Availability of unrestricted retained earnings

2. Board approval for cash dividends

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



72

3. Board approval and stockholders’ approval

representing 2/3 of the outstanding capital stock for

stock dividends

RETAINED EARNINGS/SURPLUS PROFIT – a

corporation has surplus profit if the assets exceed the

combined subscriptions and liabilities of the corporation

The formula is: Assets – liabilities – subscriptions

Now why is it that subscriptions are deducted from

the assets to determine the surplus profit?

This is because subscriptions cannot be touched. They

cannot be impaired. They are held in benefit for the

creditors under the trust fund doctrine. They cannot be

used as basis/source for dividend contribution. They are

part of capital, and if they are part of capital, they cannot

be available for distribution

In order to have surplus profit, the corporation must have

something more than subscriptions plus liabilities of the

corporation.

It is not enough to have retained earnings. The law qualifies

retained earnings to be unrestricted, which means that there

is no condition, no burden, no limitation imposed to the

corporation for the declaration of dividends.

For example, if a corporation is a party to the loan agreement

that prohibits the declaration of dividends, despite surplus

profit, it cannot be said that it is unrestricted since there is a

limitation or burden on it.

BAR: What are the exceptions to the rule that a

corporation must have surplus profit before it can

declare dividends?

Cases where the corporation may declare dividends

despite lack of retained earnings.

1.) Wasting Asset Doctrine – Wasting asset-corporation

whose capital gets depleted during the course of the operations

is NOT required to replenish its depleted capital before it can

declare dividends.

Ex: Mining Companies, timber cutting companies. The capital

of a mining company gets depleted in the course of its

operations. Diba as you complete the mining ___, you deplete

the capital? So the corporation can declare dividends if there is

income without having to make-up or replenish depleted

capital.

Ordinarily, your capital should not be impaired in order to

declare dividends but under this doctrine, it is enough that the

corporation has income or profit to be able to declare

dividends.

2.) Liquidating Dividends

When the corporation dissolves the share will be distributed to

the stockholders so that the gain of the stockholder is subject to

liquidating dividends. The gain is the difference between the

cause of investment and the value of the share upon dissolution

is your liquidating dividends.

It is called liquidating “dividend” but it is not really in the

context of what we understand as dividends in Section 43 .

Rather, it is the return of the capital to the stockholders upon

dissolution of the corporation.

BAR: Can the corporation declare dividends out of

re-appraisal or re-evaluation surplus? The

corporation acquired a real property 5 years ago

which is 5M. Now, the appraised value of the

property is already 15M. May the 10M difference be

the source of dividend distribution?

No, not allowed because it is merely a paper gain that can

be wiped out anytime, it is not an actual gain. Hence it

cannot be a basis for declaration of dividends.

The BoD, to motivate the stockholders and directors,

invoked the business judgment rule to pay dividends

to stockholders and pay allowance and bonuses to

the officers and directors all in the guise or pretext of

business judgment rule. Can the corporation declare

dividends under the business judgment rule to work

hard for the corporation?

No, because there is no surplus profit

Anything that increases of the assets enhances the capability of

the corporation to declare dividends. So anything that

increases your assets like donation to the corporation or in

increase in the income of the corporation or gain in sale of a

property of the corporation

Non-recurring claim – means it does not recur in the

ordinary course of business.

Operating profit is your recurring claim. It recurs. It is

continuous.

An example of non-recurring claim is let’s say, income arising

from sale of real property not used in the usual course of

business. It does not happen all the time that they have an

income arising from the sale of property if you’re not a realty

company.

And this is where Ramon Ang is an expert because he buys

companies, flips, sells them. (What like Richard Gere sa Pretty

Woman? Haha) He has done this for Coca-cola, Philippine

Daily Inquirer, Meralco, PAL. That’s his formula. So the gain

realized from the sale, of course, is the profit ___________.

Now for Cash Dividends, the law requires approval by the

board, and

Stock Dividends, both board (majority of quorum to pota)

and stockholders (2/3 to ha pota) approval.

BAR: In a stockholders’ meeting, a stockholder

demanded the corporation to pay them CASH

dividends, the Corporation presented that it has only

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



73

so much surplus profit. The stockholder stood up, and

demanded the corporation to declare dividends and

prevailed upon the chairman of the corporation to

have a “raising of the hands” and all the stockholders

in attendance voted to declare CASH dividends. Is

that valid?

Malamang hindi. It has to be approved by the BOARD and

not by the stockholders.

How about the stockholders declaring or voting to

declare STOCK Dividends?

Also NO. Likewise, to declare stock dividends, you need

board approval. (Majority of Quorum of Board and 2/3

vote of shareholders)

Supposing the question is, “Can the Stockholders

COMPEL the Board to declare CASH Dividends?” Is it

discretionary on the board to declare dividends?

As you all know it is discretionary. The corporation may or

may not declare dividends.

So when is it compellable by MANDAMUS?

It becomes compellable by mandamus when it becomes A

DUTY.

It becomes a duty when the surplus profit exceeds 100% of the

PAID-IN CAPITAL. Not subscribed capital ha, but paid-in

capital. Anything in excess of the paid-in capital must be

declared as dividends.

BUT then, given the language of Sec. 43, there are THREE

exceptions, and these exceptions make the general rule look

like nothing, especially the third exception.

The three exceptions are:

(1) When justified by definite corporate expansion

projects or programs approved by the board of

directors

(2) When the corporation is prohibited under any loan

agreement with any financial institution or creditor,

whether local or foreign, from declaring dividends

without its consent, and such consent has not yet been

secured

(3) When it can be clearly shown that such retention is

necessary under special circumstances obtaining in

the corporation, such as when there is need for special

reserve for probable contingencies (codal nayan kasi

dean loves to eat his words)

The third one is the all-encompassing, flexible, “vague-of-

them-all” exception. The special reserve to meet contingencies.

The corporation can always say, “We need extra reserves. You

never know what will happen. You can never tell. A new

president may bring about instability, disorder, chaos. We need

to be prepared for the next election. Let’s wait for a while ha”

*blah blah blah part of the lectuuure* I have a client who has

accumulated profit in excess of ONE THOUSAND TIMES his

paid-in capital, and has not declared dividends, because they

own 90% of the company, 10% by the minority. If they declare

dividends of 100M, 90M will go to them, and 10M will go to

the minority stockholders. They don’t want any leakage, they

want everything for themselves (trulaloo). So they did not

declare dividends. So the SEC came and visited their office,

and inspected the records as part of their visitorial right, and

it became clear to them that the corporation has amassed

surplus profit way in excess of the 100% paid-in capital

threshold. So the SEC asked why, and we said we were in

“expansion mode”, so the official asked, “Where’s your board

resolution approving the expansion program?” (because it

cannot be just laway diba?). The code says definite

expansion program as APPROVED by the BOARD of

directors. So I was forced to say, “nonono it’s in the works.

Relax”. Come on, declare ka na, nakakaawa naman

stockholders. But in a public company you cannot do it because

in a public company, you would be booted.

What are the kinds of dividends?

We have cash and stock, as you all know.

What about property dividends, bond dividends,

scrip dividends, how do you classify them?

In the context of Sec. 43, there are only two kinds. Cash

and Stock. Anything not payable in shares is considered

CASH DIVIDENDS. So other dividends require approval

by the board, not the stockholders.

Which of these dividends requires SEC approval?

Cash dividends do not require SEC approval.

Stock dividends do not require SEC approval, unless you

have to increase your capital stock, but you get SEC

approval not because of stock dividends but because of the

increase in capital stock. Remember Sec. 38, if your

authorized capital stock is not enough when you declare

stock dividends, then you have to increase your capital

stock.

Declaration of Property dividends are likewise not subject

to SEC approval. But in order to DISTRIBUTE property

dividends to stockholders, you have to get SEC approval.

The declaration PER SE does not require SEC approval,

but to distribute PROPERTY dividends, you have to get

SEC approval.

CASH and STOCK dividends can be distributed

WITHOUT SEC APPROVAL.

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



74

BAR: Distinguish CASH from STOCK dividends.

CASH DIVIDENDS STOCK DIVIDENDS

payable in cash payable in shares

board approval only Board and stockholder approval.

require cash disbursement on the part of the corporation

There is no cash outlay because surplus profit is capitalized.

increase the wealth of the stockholder

do not increase the wealth of the stockholder

cannot be revoked after declaration

may be revoked even after declaration BUT BEFORE ACTUAL ISSUE

Cash dividends received by

natural persons are subject to

tax.

REGARDLESS OF THE RECIPIENT, SDs are not subject to tax.

Revocation

What consummates you stock dividends?

Not by declaration but by issuance of shares that’s why

before issuance, you can revoke.

Dean’s client declared stock dividends, shares of stock are

supposedly listed but the PSE did not approve the listing.

My client asked me, can we revoke the stock dividends

declaration?

Yes, because you have not yet issued the shares. But

revoking it is different from acceptability. Legally allowed

but PR wise, it’s a nightmare. Can you imagine the feelings

of your SH, you whet their appetite diba? You declared SD

tapos, ay di pala.

Why is it that after declaration of cash dividends, it

cannot be revoked?

Because the relationship is no longer SH (investor)-

Corporation, it becomes now creditor-debtor relationship.

The SH becomes the creditor with a right over the money.

Increase in wealth

Cash dividends increase the wealth of the SHs, while stock

dividends do not. This the academic distinction good for bar

purposes. But in the real world, you can make money in stock

dividends if you can sell the shares above par. What do I mean?

Cash dividends, there is wealth because the stockholder

receives cash but stock dividends, stockholder receives shares

not cash yet they have the same book value because dinamihan

mo lang yung shares mo pero pareho parin yung capital mo.

You can make money if you can sell your shares above par but

it’s the selling after the stock dividend that results in increase

in wealth not the stock dividend per se.

Stock dividend is a 2-step process.

1st step: To declare cash dividends

2nd step: The Corporation will use the cash to subscribe

shares of stock at par value and distribute to SHs

What is the consideration for the issuance of shares

brought about by SH?

Section 62 of the Corporation Code paragraph 5- stock

dividends.

No money out from SHs, money comes from corporation’s

surplus profit. Although the SHs own the money, they

don’t have physical enjoyment because the corporation

uses the cash for subscription of shares.

RECORD DATE - date insofar as the corporation is

concerned to recognize SHs right to vote, entitled to receive

dividends or participate in the corporate acts.

Declaration date is different from record date and payment

date. If the corporation declares dividends, they are not paid

right away. Usually it’s a 30-day wait or 1 month.

Example:

Declaration date is June 1

Payment date is June 30

Record date could be between June 1 and June 30

If the corporation said that record date is June 15, only

SHs of record are entitled to receive dividends.

If a SH transferred shares on June 16 or 17, who

will get the dividends?

SH of record as of June 15 NOT SH of records on June

30 or payment date.

Who are entitled to receive dividends?

Only SH.

NIELSON v. LEPANTO

ABC company enters into a management contract with XYZ

mining company and one of the features of the management

contract is the right of ABC to receive 10% stock dividends but

ABC is not a SH of the mining company.

So is it entitled to receive the dividends?

No.

What can be the alternative to 10% stock dividends?

It can be PROFIT-SHARING. There is nothing wrong in

giving profit share to a non-SH but it’s also wrong to pay

dividends for someone who is not a SH.

May the corporation declare dividends midway to

the year?

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



75

GR: Wait until the end of the fiscal year before you can

determine if you have surplus profit. Thus, it’s not generally

allowed to declare dividends midway to the year.

EXCEPTION: If the corporation has so much surplus profit

that it cannot be wiped out by loses in the subsequent quarters

of the year.

Q: Can the corporation declare dividends out of its additional paid in capital stocks?

Paid in surplus is the consideration received for the issuance of shares in excess of par value. So if the par value is 10 Php and the share is issued for 20 Php, this 10 Php share increase is your paid in surplus.

So, let’s say the corporation has a paid in capital stock of 1 billion Php divided into 1 billion shares par value of 1 Php , and let’s say 250 MILLION shares were issued for 2php so can 250 is your subscribed capital stock right? And 250 million additional of paid-in capital or paid in surplus. The question now can the corporation declare dividends out of the paid in surplus? (BAR)

Q: Remember what section 43? What does section 43 provide with respect to the source of dividends?

A: Unrestricted retained earnings. It means profits in the course of its operation.

A: No. Section 6 of the corporation code refers to the issuance of no par value shares. Right? And under this, the consideration received by the corporation for the issuance of no par value shares forms part of the capital and not available for redistribution.

Q: Is there a counterpart provision for par value shares? That the consideration received for the issuance of par value shares forms part of the capital and not available for redistribution?

A: There is none.

Q: So can you now take a position that shares issued in the excess of par value can be declared as dividends?

So I’m just trying to confuse you noh…

Let’s make a distinction between a cash and stock dividends. (BAR)

Q: So can you declare stock dividends out of paid in surplus?

A: Yes, because you’re not giving away money out to the stockholders. You are just capitalizing the profits. You just convert the profit to capital.

With regard to cash dividends, there is a conflicting SEC Opinion. One argument in support of declaring dividends out of paid in surplus is section 43 that says that dividends shall be taken resource from unrestricted retained earnings (profits in the course of operations). On the other hand, you can take the position that the excess of the par value may be declared as cash dividends because under section 6 there is a provision to the effect that the entire consideration received by the corporation for the issuance of NO PAR VALUE shares forms

part of the capital and not available for distribution. There is no counterpart provision for PAR VALUE SHARES.

Likewise, the trust fund doctrine is limited only to the par value shares of the corporation. So in excess of the par value is not covered by the trust fund doctrine. So it can be argued either way when it comes to cash dividends. But for stock dividends, no room for argument, it can be declared as stock dividends.

Easier question (acc. to Dean): The authorized capital stock of the corporation is 1 billion divided into 1 billion shares with a par value of 1 Php fully subscribed and paid up. The Corporation has surplus profits of 650 million. Can the corporation declare STOCK DIVIDENDS of 50%?

A: Yes.

Q: What is the basis? Your authorized shares or subscribed shares?

A: Based on the subscribed shares. Based on the example, the authorized capital is fully subscribed, so if you have 650 M surplus profits and your subscribed shares is 1 billion par value is 1php, one-half (1/2) of that is 500 M, so you can declare 50% stock dividends your surplus profits is more than 500 M, more than ½ of your subscribed shares.

Q: What are the steps to be undertaken by the corporation to support the 50% stock dividends?

A: There must be an approval of the majority of the board and the stockholders (SH) representing at least 2/3 of the outstanding capital stock. There must be notice to the SH.

To complete the process, what do you need to do? Let us do the math again. You’re authorized 1 million shares par value and it is fully subscribed and paid off. You have the money because you have 650 M and you only want to declare 50% stock dividends. But what do you need to carry-out this? Do you have enough shares? So what do you do when you do not have enough shares? You pray to God? So what would it take to get additional shares? What do you do under sec. 38? (That is the most leading question I have ever asked. Do you pray to God, please grant me enough shared…?)

-Increase your capital stock by 500 M shares.

Q: So what is the maximum increase that the corporation may effect given that you have 500 M?

A: You can increase up to 2 billion because 500 M is 25% of 2 billion.

Very easy question: A subscribed 200 million shares, par value is 1php, subscription is hundred million pesos, hundred million shares, so he paid 25 million, how many shares can he vote?(BAR) 100 or 25?

A: 100.

Can the corporation apply the cash dividends against the unpaid subscription?

A: No. Under section 43 of the CC, the power of the corporation to apply the cash dividends applies to delinquent stocks.

TOSHIBA

Highlight



76

h. Power to enter into Management Contract

Sec. 44. Power to enter into Management Contract in relation to Sec. 33 contract with interlocking directors

The contract can be called by any name for as long as the intention is to delegate or entrust to another corporation the management of the corporation.

Just because the corporation is entering into a management contract does not mean that the BoD is neglecting its duty to the corporation because the BoD can still exercise its powers.

Approval requirements:

- by the majority of the quorum of the BoD of both the managing and the managed company

- by the majority of the stockholders of both the managing and the managed corporation

- The only time that the requirement is elevated to 2/3 of the stockholders is in cases of interlocking stockholders/directors

Interlocking directors in the context of Sec. 44 and Interlocking directors in the context of sec. 33 are not the same.

In sec. 33, there is only one director seating in the board of the two corporations. however under sec.44 majority of the managed corporation is also the majority of the managing corporation and the stockholder owns more than 1/3 of the managing corporation. In which case, the approval requires majority of the outstanding capital stock of the managing corporation and 2/3 of the OCS in the managed corporation

Period of Management Contract

GR: 5 years as long as the contract is between TWO CORPORATIONS.

EXPN: 1.) Management contract between two corporations may be longer than 5 years pursuant to Mining laws (Mining Act of 1995). Under the said law, the contract may be for 25 years.

2.) Technical/Financial Service Agreement or Production Agreement can be for 25 years.

4. Ultra Vires Acts

May ultra vires act be ratified?

It depends. If the act is contrary to law, morals, good customs, public order, it cannot be ratified. It is void. If it is not contrary to law but simply outside of the express, implied and incidental powers of the corporation, it can be ratified. (Akohe? Mining) An ultra vires act, which is not contrary to law may be ratified on equitable grounds such as estoppel.

Akohe Mining Case: The company set up a posting office inside its business premises to facilitate the communications between its employees and their relatives. The director of posts agreed to its request to set up the postal office on the strength of his representation that it would agree to the terms and conditions that the director may impose. The act was contested on the ground that it was ultra vires. Is it an ultra vires act?

NO because any program to promote the welfare of the employees is not considered ultra vires. Even assuming that it is ultra vires, it is not a void act it may still be ratified by estoppel.

Ultra vires act on the Part of the Board

Is it possible that an act be an intra-vires act on the part of the corporation but ultra-vires in the part of the board?

Example:

Let’s say the corporation is allowed to invest its funds in the primary purpose, no problem right?

Or secondary purpose.

Now let’s say the board of directors approved the investment of funds for the secondary purpose, but no stockholders approval was obtained.

Q: Is that act ultra vires on the part of the corporation?

A: It’s not. Because the corporation is authorized to invest funds for secondary purpose.

But that act is ultra vires because the board acted beyond the scope of its authority. By itself it cannot approve investment funds in secondary purpose; it must be approved likewise by the stockholders owning 2/3 of the outstanding capital stock.

Now that kind of act may be ratified because what you only need to do is to get the approval of the stockholders representing 2/3 of the outstanding capital stock.

What about ultra vires act on the part of the officer, is it possible that the act is intra vires because it is the power of the corporation and yet unenforceable because the officer has no authority or acted beyond the scope of his authority?

Example:

Let’s say a person signed a deed of sale without the consent of the corporation. Let’s say it’s a purchase of a property in the ordinary course of business, but the one who signed the deed of sale was not the one authorized by the board, so the act is intra vires but still unenforceable against the corporation because the officer was not authorized to transact business for the corporation unless the act is ratified with the doctrine of apparent authority ___.

Q: What is the remedy for ultra vires act?

A: Injunction, to prevent the execution, performance of the ultra vires act.

Q: Now once the act is performed or executed, what is the remedy of the corporation? What if it has been performed partly or wholly?

A: NOT injunction. Because you cannot enjoin an act that has been consummated. So the remedy is a DERIVATIVE SUIT.

A stock holder may file a derivative suit on behalf of the corporation to set aside, assail or question the ultra vires act.

TOSHIBA

Highlight



77

G. MEETINGS

There are only 2 kinds of meetings under the code. BOARD and STOCKHOLDERS. Management meeting is not indicated.

For board meetings, you only have to 2 options, Majority of the entire board Quorum unless the by-laws provides otherwise

And for stockholders you only have 2 options, majority or 2/3.

Quick review.

Stockholder’s meetings, there are 2 kinds. Regular and Special.

Q: Regular, how often?

A: once, annual regular stockholder’s meeting

Q: For what purpose?

A: to elect directors of the corporation, because their term is only 1 year.

Q: Special stockholder’s meeting, how often?

A: as often as may be necessary upon call by the presiding officer.

Q: notice requirement?

A: Regular meetings – 2 weeks written notice

Special meetings – 1 week written notice unless otherwise provided by the by-laws

Q: Where do you hold your stockholder’s meeting, regular or special, where?

A: in the city or municipality where the principal office is located preferably the principal office itself

Q: When?

A: in the date fixed by the by-laws. If the by-laws is silent, any date on April as approved by the board.

Q: What about Board meetings?

A: Regular – once a month unless otherwise provided by the by-laws

Special – as often as may be necessary

Q: Where?

A: any place even outside the country unless the by-laws provides otherwise.

Q: Notice requirement?

A: 1 day

Q: should it be in writing?

A: not necessary, unless the by-laws requires otherwise.

BAR:

The AOI of ABC Corporation provides that its principal office is in Makati. Its area of operations is in Ortigas. The board meets in Manila hotel and stockholders likewise Makati Shangri-La, so are the meetings valid?

Principal office – Makati

Area of operations – Ortigas

Board meetings – Manila hotel

Stockholder’s meeting - Makati

Are the meetings valid?

So the board met in a place other than the principal office of the corporation, not in the city where the office is located.

A: it is valid, because it can be even outside the country unless the by-laws provides otherwise.

For the stockholder’s meeting in Makati?

A: as long as it is in the city where the principal place of office is located. Preferably in the principal office itself.

BAR

Q: Who presides over the meetings?

A: president. Unless otherwise provided by the by-laws

*in practice it is the chairman of the board but the chairman must be authorized by the by-laws

Q: Can you hold stockholder’s meetings through teleconference?

A: you cannot, teleconference not allowed in the Philippines

Q: What about board meetings, can you hold board meetings through teleconference or videoconference?

A: Yes. The SEC has already issued a regulation regarding teleconference or videoconference.

Q: What are the requirements of teleconference or videoconference, should it be in the by-laws?

TOSHIBA

Highlight



78

A: Not necessarily. It is enough that the director expressed his intention to participate through teleconference or videoconference and he must be identified, and the proceedings are recorded.

To repeat, under the SEC rules, he must express his intentions to participate in teleconference or videoconference. He must be identified as a director of the corporation participating in the proceeding and second it must be recorded.

When I was corporate secretary of the bank, there was a measure we are pushing for approval and it was a very important measure. We needed everyone to be present. Because we only have 8 out of 15, we control the board but it is a very slim majority, so therefore, no one should be absent. If one is absent, it becomes a tie with 7-7, now if 2 are absent, our proposal might not be carried out. Our board meeting is at 2pm and 1 is in California, the time there is 11pm, and the other one is in New York with 2am there in New York. 1 is 60+ and the other 1 is 80. So because no one could be absent and they expressed their intention to participate in teleconference. So I asked, are you blah blah the director of the bank, he answered Yes, and I asked do you confirm or affirm your intention to participate via teleconference, he replied yes. And before I can even go to the measure, he said, I’m in favor of everything that you will present to the board, is that valid?

Pena vs CA, we covered this right? Remember that the

issue in this case, is that the By-laws provide that a

quorum is 4/5 and only three (directors) approved the

mortgage and assigned their right to redeem, so is the

mortgage and the assignment of the right of

redemption valid?

It is not valid. The by-laws of the corporation provided that 4/5

of the directors constitute a quorum and only 3/5 were present.

There was no quorum to validly transact business. Sec. 25

states that the by-laws of the corporation may fix a greater

number tha the majority of the number of board members to

constitute the quorum.

There’s this case also, People vs Dumlao. Dumlao was

a trustee of GSIS, so when he was still a trustee, he

and other members of the board of GSIS authorized

GSIS to enter into a “lease with option to purchase

agreement”. After a new set of trustees were elected,

the new set found the contract to be disadvantageous

to the government, so they filed a criminal complaint

for violation of RA 3019 against Dumlao et al. for

entering into a contract that is disadvantageous to the

government.

Dumlao motioned to quash the information on the

ground that the minutes attached to the information

showed that only THREE OUT OF SEVEN signed the

minutes. So his argument was if only 3/7 signed the

minutes, then the lease with option to purchase

agreement was not really authorized by the board. So

if it was not authorized and approved by the board,

then he couldn’t be charged

The issue here is whether the minutes of the meeting

need to be signed by majority of the entire board to be

given PROBATIVE VALUE?

The Shupreme Court said that there is nothing in the

Corporation Code, or any law in the Philippines, that requires

the minutes of the meeting to be signed by majority of the

entire board. As long as it is signed by the CORPORATE

SECRETARY, it will be given probative value.

RULE ON ABSTENTION

I think I told you about GSIS vs CA right? In one of the

meetings I attended, as Corporate Secretary, after

certifying that there was a quorum, Atty. Winston

Garcia stood up and moved that the POSITIONS of

Chairman and Corporate Secretary be declared

Vacant.

He invoked the “sovereign will of the

stockholders”, “we own this company, and we have

the right to appoint our own chairman and corp. sec.”

Of course that’s wrong, since stockholders have no

right to appoint the corporate officers. The

stockholders must appoint the board, and it is the

board who will appoint the officers. The stockholders

cannot by-pass the board, and directly appoint or

remove the corporate officers. So I declared him “out

of order” (ano sya vending machine?)

Because they saw our strategy, that only nominees for

independent directors allied with us were qualified,

they got more directors than us, but we have the

independent directors, so we got 8/15, so we control

the corporation.

So they walked out, and had their own meeting in

Mandaluyong.

So we had two sets of directors, so which one is

controlling?

So there’s this case, Marbel(?) vs CA, so right after we had an

election, I faxed the names of our directors to the SEC. Because

under that case (supra), whoever are listed in the GIS, are the

directors of the corporation.

The following day, they also faxed their set. Now we have two

sets of directors, our set and their set. Now that cannot be

decided by the SEC (obviously), because it is an intra-corporate

controversy cognizable by the RTC acting as a Special

Commercial Court.

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



79

So for two weeks we had two sets of directors, until the Go

family could not take it anymore because the Bank was

bleeding, many customers were withdrawing their funds. The

Go family sold their bank. (Equitable PCI Bank yung

corporation. Thanks Dean for not emphasizing that earlier).

SO THE QUESTION NOW IS: Can the meeting

continue if the stockholders walked out?

Yes of course. Once the Corporate Secretary certifies that there

is a quorum, then the meeting can continue, even if, during the

meeting, some stockholders leave and there is subsequently no

quorum. Unless the meeting is adjourned, then the meeting

can continue.

What will take precedence over a Motion to Adjourn?

What motion takes precedence over it?

A motion to declare the person out of order. Here, one

stockholder moved to have the meeting adjourned since there

was no more quorum after some stockholders walked out. So

obviously I cannot adjourn the meeting because I have no more

quorum. A Motion to Declare A Person OUT OF ORDER is

superior to a Motion to Adjourn. Anyways, that’s too technical,

let’s move on to bar matters. (K!)

What is the effect of abstention on stockholder’s

meeting?

The effect is that a stockholder is NOT entitled to Appraisal

Right. In those cases allowed by law where appraisal right may

be exercised, so amended of AOI to restrict stockholder’s

rights, the stockholder who is present BUT ABSTAINS, is NOT

ENTITLED TO EXERCISE HIS APPRAISAL RIGHTS. He

cannot demand payment of his fair value shares. Because one

of the elements of appraisal rights is that he must DISSENT. So

abstention is tantamount to a waiver of the right to demand the

payment of fair value of his shares.

What is the effect of abstention in BOARD meetings?

Is the abstaining director considered present for quorum

purposes? Yes of course.

Let’s say we have FIFTEEN directors, the quorum is EIGHT.

The 8 are present, but one keeps on abstaining, “on everything

I abstain”.

So on those matters where only majority of the quorum is

needed, his abstention is immaterial.

If the requirement is approval of majority of the entire board,

his abstention is tantamount to no vote. Therefore they cannot

get the approval.

*alright, the other (better) class is joining tonight, so you’ll

have the same page*

TOSHIBA

Highlight

TOSHIBA

Highlight



80

H. STOCKHOLDERS AND MEMBERS

1. Rights of Stockholders and Members

BAR: What are the rights of the SH?

1. PROPRIETARY RIGHTS - anything about

economic benefits

a. The right to receive dividends

b. The right to participate in the assets of the

corporation upon dissolution and liquidation

2. MANAGEMENT RIGHTS

a. The right to vote on all corporate acts requiring

SH’s approval

b. The right to elect the directors of the

corporation

3. REMEDIAL

a. Appraisal right

b. Pre-emptive right

c. Right to inspect

d. Right to copy financial statements of the

company

e. Right to file a derivative suit

a. Doctrine of Equality of Shares

BAR: What is the Doctrine of Equality of Shares

DOCTRINE OF EQUALITY OF SHARES - all shares have

the same rights and privileges UNLESS classified differently in

the AOI. Note: Not just in the by-laws or by approval of

directors

Sec. 6. Classification of shares. - The shares of stock of stock

corporations may be divided into classes or series of shares, or both,

any of which classes or series of shares may have such rights, privileges

or restrictions as may be stated in the articles of incorporation:

Provided, That no share may be deprived of voting rights except those

classified and issued as "preferred" or "redeemable" shares, unless

otherwise provided in this Code: Provided, further, That there shall

always be a class or series of shares which have complete voting rights.

Any or all of the shares or series of shares may have a par value or have

no par value as may be provided for in the articles of incorporation:

Provided, however, That banks, trust companies, insurance companies,

public utilities, and building and loan associations shall not be

permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given

preference in the distribution of the assets of the corporation in case of

liquidation and in the distribution of dividends, or such other

preferences as may be stated in the articles of incorporation which are

not violative of the provisions of this Code: Provided, That preferred

shares of stock may be issued only with a stated par value. The board of

directors, where authorized in the articles of incorporation, may fix the

terms and conditions of preferred shares of stock or any series thereof:

Provided, That such terms and conditions shall be effective upon the

filing of a certificate thereof with the Securities and Exchange

Commission.

Shares of capital stock issued without par value shall be deemed fully

paid and non-assessable and the holder of such shares shall not be

liable to the corporation or to its creditors in respect thereto: Provided;

That shares without par value may not be issued for a consideration

less than the value of five (P5.00) pesos per share: Provided, further,

That the entire consideration received by the corporation for its no-par

value shares shall be treated as capital and shall not be available for

distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of

insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated

in the certificate of stock, each share shall be equal in all respects to

every other share.

Where the articles of incorporation provide for non-voting shares in

the cases allowed by this Code, the holders of such shares shall

nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of

all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another

corporation or other corporations;

7. Investment of corporate funds in another corporation or

business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote

necessary to approve a particular corporate act as provided in this Code

shall be deemed to refer only to stocks with voting rights.

CLASSIFICATIONS OF SHARES

1. Par value

2. No par value

3. Voting

4. Non-voting

5. Common

6. Preferred

CLASSIFICATION TO COMPLY WITH CONSTITUTIONAL

LIMITATIONS:

7. Founder’s (Section 7)

8. Treasury (Section 8)

9. Redeemable (Section 9)

10. Watered (Section 65)

TOSHIBA

Highlight



81

2. Participation in Management

How does a SH participate in the management of the

corporation?

1. By voting and electing directors of the

corporation

2. By voting in the corporate acts requiring SH’s

approval

a. Proxy

b. Voting Trust

The right to vote may be done:

1. In person

2. Through a proxy

3. Through a voting trust agreement

How do you distinguish proxy from VTA?

PROXY VTA

As to form

In writing, signed by

the SH, filed with

the corporate

secretary before the

meeting. Not

required to be

notarized.

In writing, signed by the

SH, must be notarized,

copy of the VTA must

be submitted to the SEC

otherwise it is not

enforceable

Rights

conferred

Only the right to

vote. No right to

inspect UNLESS

separately

authorized for that

purpose.

Cannot be voted and

cannot qualify as

director of the

corporation

Legal title to the shares

and other rights a SH

may exercise. Qualified

to be elected as director

(trustee).

LEE CASE: If a director

loses legal title over the

shares, he ceases to be

director of the

corporation

Term or

Period

Good only for the

meeting intended

UNLESS general

and continuing in

nature but not to

exceed 5 years

Valid for 5 years. Can be

longer than 5 years if

pursuant to a loan

agreement but it expires

upon full payment of a

loan. Can be extended if

it is co-terminus with

the loan agreement

Presence of

SH or

principal

Revokes the

authority of the

proxy holder

Presence of trustor, SH,

Transferor does not

revoke the authority of

trustee. Trustee can

exercise right to vote, he

can inspect corporate

books, he can obtain

copy of financial

statements.

All rights that may be

exercised by the SH can

be exercised by the

trustee EXCEPT

beneficial ownership-

the right to receive

dividends

You cannot extend a proxy

Can you renew a proxy?

Yes, you can have another proxy agreement in increments of 5

years. Renew it on the 4th year and you can have a new proxy

agreement. Existing agreement is good only for 5 years.

VTA of course can be longer than 5.

What is a VTA? What are the limitations?

VTA - agreement whereby the SH conveys legal title and other

rights pertaining to the shares in favor of a trustee.

Why would parties enter into a VTA?

In ordinary transactions:

If a bank wants to lend money, what are the collaterals it can

require from the borrower?

It can require mortgage, surety, guarantee, antechresis but all

these will not give the lender or bank the power to control the

corporation.

In VTA:

The lender will gain control of the corporation because he will

have the voting shares of the stocks of the SH-transferor.

What does the trustor get in return?

He gets a voting trust certificate. The stock certificate in the

SH’s name will be cancelled to give way to the VTA. A voting

trust certificate is transferable just like a stock certificate. Once

the VTA expires, then the stock certificate issued will be

cancelled and the stock certificate issued in favor of the trustor.

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



82

BAR: A executed a voting trust agreement in favor of

XYZ bank transferring legal title over his shares in

favor of XYZ bank. At the same time, ABC

Corporation mortgaged a property in favor of XYZ

bank. The loan was not paid so the bank foreclosed

the mortgage. Upon expiration of the voting trust

agreement, A requested that XYZ turns over the

management of the corporation back to the trustor.

Can he demand that the trustee turns over the

corporation to the trustor? Let us take a look at the

facts again. By virtue of the voting trust agreement,

XYZ bank acquired legal title over the shares of A

effectively voting the shares and taking management

control of ABC corporation. To complement the

voting trust agreement, ABC corporation mortgaged

the property to secure the loan which XYZ granted

likewise to ABC. The loan was not paid, xyz bank

foreclosed the mortagage. After foreclosure, xyz

became the owner of the foreclosed assets. Now, the

voting trust agreement expired, it was good only for

five years. Can the trustor now demand that xyz, the

trustee, turns over the management and control of

corporation A? Is that concept similar to the voting

trust agreement under section 59 of the Corporation

Code?

No, because the assets have been foreclosed. Foreclosure

of the mortgage is different from the voting trust

agreement. The foreclosure is a distinct right and remedy

available the lender.

c. Cases When Stockholders’ Action is Required

i. by a majority vote

ii. by a two-thirds vote

iii. by cumulative voting

3. Proprietary Rights

a. Right to Dividend

b. Right of Appraisal

What is appraisal right?

The right of a stockholder to demand the payment of the

fair value of his shares after dissenting from a proposed

corporate act in cases specified by law.

It is a right of a stockholder - that right can only be

exercised by a stockholder. To demand the fair value of his

shares

What do you mean by the fair value of his shares?

The value of the shares the day before the vote was taken

regardless of any depreciation or appreciation of the value

of the shares as agreed upon by the corporation and the

stockholders and in case of disagreement, by three

appraisers, one chosen by the corporation, the second by

the stockholder, and third to be chosen by the nominees of

the corporation and the stockholder. A day before the vote

was taken- so if the merger, for example, is voted upon by

the stockholders today, it is the value yesterday regardless

of any appreciation or depreciation to prevent any

speculation on the stocks brought about by the corporate

act subject of the appraisal right. It is by agreement of the

corporation and the stockholder; if they agree, there is no

dispute, but if they don't agree, the corporation code

provides for a mechanism to resolve the differences (three

appraisers). The award of the appraiser is final and

executory.

After dissenting from a proposed corporate act, it is important

for the stockholder to dissent, to express his disagreement,

objection or disapproval to the proposed corporate act. If he

waives his presence, or if he is present but abstains, then he

cannot demand the fair value of his shares. So one of the

elements is PHYSICAL PRESENCE AND DISSENT to the

proposed corporate act.

In the cases provided by law – Appraisal right can only be

exercised in the cases provided by law. So not all types of

disagreement, not all forms of dissent. So just because he does

not agree with how the board runs the corporation does not

justify the exercise of appraisal right.

There is only one corporation where you can exercise the

right for any reason whatsoever even though there is no

surplus profit, in case of a Close corporation.

What are these cases?

1. Amendment of the AOI which has the effect of changing

or restricting the rights of stockholders or any shares of

any class or authorizing preference of shares over the

others and extension or shortening of corporate term.

2. Merger or consolidation

3. Sale, mortgage, encumbrance or disposition of all or

substantially all if the corporate assets.

4. Even if not enumerated in section 81, investment of

corporate funds in the secondary purpose under section

42.

AMENDMENT OF AOI WHICH CHANGES OR

RESTRICTS THE RIGHTS OF STOCKHOLDERS

Take note the amendment has to be in the AOI and has to have

the effect of changing or restricting the rights of stockholders

or any shares of any class.

Example:

NOT YET ASKED IN THE BAR: If the corporation

amends the AOI to deny preemptive right, can a

stockholder exercise his appraisal right?

Yes, because that amendment restricts his right to

subscribe to any issuance of shares of the corporation.

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



83

Let us say all of the shares are common and the

corporation amended the AOI to issue preferred

shares, does the issuance of preferred shares justify

the exercise of appraisal right?

Yes, because the issuance of preferred shares restricts the

rights of the common shares.

That's why you remember the anecdote I told you about Dean

Dimayuga and I. We were called by the Father Rector about the

problem caused by the minority SH. That there was increased

in capital stock and denying pre-emptive right, then issue new

shares to third party. It was done in good faith.

Now, what is your remedy if the AOI was amended

denying pre-emptive right?

Appraisal Right.

That is why there is no bad faith because there is a remedy

available to the SH. If they are not in favor of the amendment

to deny pre-emptive right, then "get-out of the company" and

demand payment of the fair value of your shares.

What if at the outset you have common and preferred

shares, can a stockholder exercise his appraisal right

because there are preferred shares that restrict his

rights as a stockholder?

The answer is NO. There has to be an amendment in the

AOI. So if at the outset you already have preferred shares,

and those preferred shares have better rights in terms of

dividends, the right to receive assets over the common

shares, you cannot exercise your appraisal right because

you got into the corporation knowing that there are shares

superior than your common shares. So there has to be an

amendment to the AOI.

Another example would be, if, let's say common shares

converted to preferred shares, or preferred shares converted to

common shares.

So remember the example of San Miguel Corporation,

so if the common shares of the government were

converted to preferred shares, can the holders of the

common shares exercise their appraisal right?

YES because by converting the common shares to

preferred shares, they are given preference superior to the

holders of common shares.

AMENDMENT OF AOI TO EXTEND OR SHORTEN

CORPORATE TERM

Amendment of the Articles to Extend or Shorten Corporate

term both justify Appraisal right. When it comes to shortening

of the corporate term, it has to be shortening the corporate

term without dissolving the corporation.

If it will dissolve the corporation, it is pointless, irrelevant to

talk about the exercise appraisal right because the stockholder,

anyway, will receive the properties or assets of the corporation.

So it has to be shortening the corporate term without

dissolution of the corporation.

SECOND MERGER OR CONSOLIDATION

We will take this up under Sec.76

SALE OF ALL OR SUBSTANTIALLY ALL OF THE

CORPORATE ASSETS

We have covered this under Sec.40.

INVESTMENT OF FUNDS IN SECONDARY PURPOSE

We have covered this under Sec.42.

REQUISITES for the exercise of Appraisal Right:

1. It can only be exercise in the cases provided by law.

2. The SH must make a demand for payment for the fair

value of his share within 30 days from the date the

vote was taken.

3. The value of the shares must be determined in

accordance with the Corporation Code. That is, the fair

value of the share shall be the value as of the day

before the vote was taken as agreed upon by the board

and the SH. In case of disagreement, then 3 appraisers

shall be appointed in accordance with the procedure set

forth in the Corporation Code.

4. The corporation must have surplus profit.

5. Submission of stock certificate to the corporation, for

notation, of those shares subject to appraisal right, within

10days from demand for payment of the fair value of the

shares.

6. Once the shares are paid, Cancellation of the certificate

of stock and acquisition of the corporation of such shares

of stock as treasury shares.

THE CORPORATION MUST HAVE SURPLUS PROFIT

Sec.41 is complemented by Sec.81 onwards of the Corporation

Code.

To refresh your memory under Sec.41, Treasury shares, one of

the cases where a corporation may acquire its own shares is to

pay a dissenting stockholder exercising his appraisal right, and

Sec.41 is clear on the condition before the corporation may

acquire the shares of a dissenting SH - legitimate purpose and

availability of surplus profit. So Sec.41 is complemented by

Sec.81 onwards. Reiterating the need for surplus profit.

TURNER v. LORENZO SHIPPING CORP (2010)

When should the corporation have surplus profit to

warrant the exercise of appraisal right? Is it the time

for demand for payment, or the time of actual

payment, or the time of the surrender of the shares?

The surplus profit must be available at the TIME OF DEMAND

FOR PAYMENT OF THE FAIR VALUE OF THE ASSETS, not

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



84

the time of actual payment. (Turner v. Lorenzo Shipping Corp

2010)

What happened in this case is that Lorenzo Shipping Corp

amended its AOI to deny pre-emptive right. So Turner, a SH,

dissented from the amendment, and then after, he demanded

the fair value of his shares. At the time he demanded the

payment, the corporation has no surplus profit, so not enough

retained earnings. Despite the non-availability of surplus

profit, Turner filed an action to enforce the payment of the fair

value of his shares. During the pendency of the course of action

to enforce payment of the fair value of his shares, the

corporation posted surplus profit.

So the question now is does the fact that the

corporation posted surplus profit retroact to the date

of demand for payment. Is Turner entitled to

appraisal right?

The SC said NO, because at the time he made a demand

for payment, the corporation have no surplus profit. So the

cause of action of Turner is premature. So it can only be a

cause of action if the corporation has surplus profit and

with the ability to pay the fair value of the shares, and the

fact that during the pendency of the case the corporation

earned surplus profit does not cure the defect, it does not

retroact to the date of demand for payment.

Existence of surplus profit at the time of payment (but not

at the time of demand) will not retroact to the date of

demand, in order for the appraisal right may be exercised.

Now the Supreme Court did not answer the question however.

What happens now to the 30 days or the 30-day period to make

the demand for payment. Is it not under the Code, you

suppose that tomake the demand for payment within 30 days

right after the date the vote was taken. So supposing that

the 30 days is about to lapse and you have no surplus

profit? So when do we start counting now the 30-day

period?

So the Supreme Court did not answer that question. It

simply said that when you make a demand for payment,

you better be sure that the corporation has surplus profit.

Otherwise, your cause of action is premature.

Remedy: wait for the corporation to have surplus profit

and once so earned, make the demand for payment and if

was not paid, that is the time to demand and go to Court.

So eventually by virtue of this ruling, the period is

extended if the corporation has no surplus profit. So the

30-day period would seem to apply to a situation where

the corporation has surplus profit. If none, the period is

extended until such time the corporation earns surplus

profit.

Submission of stock certificate for notation that is

subject to appraisal right

So why the stockholders’ certificates should be

submitted for notation that is subject to appraisal

right?

Because as you all know, once the right is exercised and

the stockholder dissents and demands the right of

payment of the fair value of the shares, all of his rights are

suspended.

So the moment he demands for payment for the fair value of

the shares, all of his rights as a stockholder shall be suspended.

Everything. There is only one right available to him, it is just a

redundancy but that’s what the law says. What is the right

available to the dissenting stockholder upon dissent and

demand the payment of the fair value of the shares? It is the

right to receive the fair value of the shares. That is redundant

because that is the essence of appraisal right but that is what

the law says. So all the rights are suspended except the right to

receive the payment of the fair value of the shares.

And the last one, of course, once the corporation pays the fair

value of the shares, the shares are acquired by the corporation

making them treasury shares. So the stock certificates named

before the stockholder will be cancelled and the shares become

the properties and assets of the corporation.

BAR: Stockholder dissented from the proposed

corporate act and the demanded payment for the fair

value of the shares. While waiting for payment, he

sold the shares. Can the buyer demand for the fair

value of the shares? It is a very funny question right.

Why very funny?

If you are the buyer, why would you buy the shares only to

demand the fair value of the shares? Might as well not buy

if that is what you are interested anyway.

So because that was asked in the bar, we have to answer.

And the answer under the Code is that the buyer cannot

exercise appraisal right because the sale of the dissenting

shares cleansed the effects of appraisal right. So all of the

rights pertaining to the shares will be acquired by the

buyer so the effects of appraisal right are removed. He

becomes a regular stockholder of the corporation.

c. Right to Inspect

Right to inspect is more interesting.

Under Section 74 of the Corporation Code, every stockholder

has the right to inspect the corporate records of the

corporation.

YUICO v. QUIAMBAO (2014)

Does the right of inspection extend to the stock and

transfer book?

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



85

If you read the code, it does not mention stock and

transfer book, it refers to the minutes of the meeting and

other records of the corporation because minutes and

other records qualified by that minutes. Can we include

stock and transfers book? So can the stockholder demand

that he sees the entries in the stocks and transfer books or

the entries in such book confidential?

The Supreme Court said in Yuico v. Quimbao (2014),

the right of inspection extends to the stocks and transfer

book because it is deemed part of the record of the

corporation.

Now as we all know under 74, the refusal of the right of

inspection is criminal in nature. It is the only provision in the

code that imposes criminal liability to the responsible officer in

case of refusal of the right to inspection. So other provisions

are governed by Section 144 saying that all violation of the

provisions of the Code are criminal in nature. So this is the only

section where the law or the Corporation code is clear that

refusal or denial of the right of inspection is a criminal offense

that imposes liability to the responsible officer of the

corporation.

And who is the responsible officer?

The corporate secretary because he is the custodian of

corporate records.

Now what about the directors? Can you sue the

directors for refusal of the right of inspection?

If you read the code it says if the refusal of is in the form of

board resolution, they too can be charged of violation of

Sec. 74 of the corporation code. But who among the

directors would be stupid enough to deny the right of

inspection in the board resolution. So why would they pass

a resolution saying we are denying to you your right of

inspection? So the only one usually sued is the corporate

secretary unless the directors openly deny the right of

inspection.

We are handling a case about the right of inspection and for the

first time in the history of Makati prosecution office, somebody

got indicted for the violation of Sec. 74 of the corporation code.

Our client is 83 years old, he sued the chairman and the

corporate secretary of a condo association in Makati because he

was not given minutes of the meeting. And after we filed the

complaint, he was given the minutes. Of course, the crime has

been committed. Can you imagine 83 years old suing another

80-year old lady?

So pag away ng matatanda, labas tayong mga bata. So I asked

him, are you sure you want to do this? So we got an indictment,

so they did the piano. The chairman and the corporate

secretary did the piano. In practice, pag sinabing do the piano

that means you take the finger prints. Because if you post bail,

you are required to give your finger prints. So they did the

piano, their finger prints were taken. After we got indictment, I

asked our client. Okay we got indictment, you made your point,

we had delivered your message that you cannot be taken

lightly. Do you want them convicted? He said yes. I said, they

could not go to jail because they were more than 70 years old.

Nevermind noh heh, he wants a conviction. He was the same

guy, (we’ll take this up on transpo if you’ll be under me next

sem) who filed a suit against Cathay Pacific because he was

upgraded to first class. He was in business class and moved to

first class, he sued Cathay for breach of contract and won a

nominal damage of one peso.

Is the right of inspection absolute?

No

Exceptions to the Right of Inspection (Cases when the

right of inspection is not available)

1. If the purpose of inspection is not germane to the

interest of the stockholder

The stockholder cannot just pry into the affairs of the

corporation. He must have a purpose germane to his interest as

a stockholder.

GONZALES V. PNB

Gonzales was not a stockholder of PNB and he was not allowed

to inspect the corporate records of PNB. What he did, he

acquired one share of stock from a certain Montano and after

buying one share of stock from Montano, he invoked his right

of inspection under the corporation code.

He was denied for two reasons: 1) the charter of PNB at that

time allows only inspection to specified persons; 2) SC said that

the purpose of Gonzales is not germane to his interest as a

stockholder. He only wants to satisfy his own sense of curiosity.

2. If the stockholder has improperly used the

information secured in previous examination or if he

is prompted by bad faith or ill motive

3. It cannot be exercised outside office hours

4. Not in the Code but by Jurisprudence, Right of

inspection does not extend to Trade Secrets

So if you’re a stockholder, can you demand for the

formula of Jollibee, Coke, or San Miguel beer?

You cannot, it is outside the right of inspection

a. One case stated that Formula for Chemicals is

Trade Secret.

b. One case that they handled, the RTC and CA

ruled that the right of inspection does not extend

to names of customers and suppliers.

A stockholder demanded inspection for the corporate records.

We opposed but if we deny the right of inspection they will sue

us criminally. What we did we file a petition for declaratory

relief to determine if the request is made in bad faith or in good

faith. So if they file a written complaint, we can invoke the

petition for declaratory relief as a prejudicial question. We said

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight

TOSHIBA

Highlight



86

that they are the competitor of the corporation engaged in the

same business –steel manufacturing – and for us to open the

books would mean to give them the name of the suppliers and

creditors and customers. So the RTC ruled that the right to

inspection does not extend to the names of customers and

suppliers. They appealed to the CA, CA affirmed the decision of

the RTC. I was hoping they would go up to the SC to enrich

jurisprudence, not to mention our pockets, but unfortunately

they did not appeal to the SC so it’s still just a CA decision but

just the same it has a persuasive effect.

c. Generally, right to inspection includes

information about the amount of attorney’s fees if

there is no confidentiality clause, you can

demand because you have every reason to know

how much funds is being paid to your lawyer.

But in one case handled by Divina Firm involving Maxicare.

The other stockholders demanded from management the

amount of fees Maxicare pays to the Firm. They wanted to

inspect the corporate records to check and verify the amount of

fees. So Firm anticipated that once they determine the figures.

They would file a derivative suit on behalf of Maxicare to stop

the payment of fees to the firm. The RTC ruled that Attorney’s

fees are not subject to inspection right because of the presence

of a non-disclosure agreement between the firm and Maxicare.

Guess who the Judge is? RTC Makati. JUDGE PIMENTEL.

Do you agree with that decision? Of course I agree. Again, I was

hoping they would go to the SC to enrich jurisprudence.

TOSHIBA

Highlight

TOSHIBA

Highlight

corporation - right to inspect.pdf

Documents