NOTES ON THE REVISED CORPORATION CODE

I. INTRODUCTION on taxes. Thus, the parties in this case, merely shared profits. This alone
A. General does not make a partnership.
B. Kinds of Business Organization
1. Sole Proprietorship - one conducted for profit by a lone or TUASON VS. BOLAÑOS 95 PHIL. 106, MAY 28, 1954
single individual who owns all assets, personally owes and FACTS: Plaintiff's complaint was amended three times with respect to the
answers all the liabilities or suffers all the losses and enjoys extent and description of the land sought to be recovered. The original
all the profits to the exclusion of others. complaint described the land as a portion of a lot registered in plaintiff's
name under Transfer Certificate of Title No. 37686 of the land record of
ADVANTAGES DISADVANTAGES Rizal Province and as containing an area of 13 hectares more or less. But
Eliminates the bureaucratic process Unlimited personal liability the complaint was amended by reducing the area to 6 hectares, more or
common in corporations where the of the proprietor less, after defendant had indicated the plaintiff's surveyors the portion of
board of directors must sit as a body land claimed and occupied by him. In the course of trial, after defendant's
to have a valid transaction. The surveyor and witness, Quirino Feria, had testified that the area occupied
proprietor makes his own and claimed by defendant was about 13 hectares, as shown in his Exhibit
decisions and can act without delay. 1, plaintiff again, with the leave of court, amended its complaint to make
Proprietor owns all the profits without Capital is limited by the its allegations conform to the evidence. Defendant, in his answer, sets up
having to share the same proprietor’s personal prescription and title in himself thru "open, continuous, exclusive and
resources public and notorious possession (of the land in dispute) under claim of
ownership, adverse to the entire world by defendant and his predecessors
2. Partnership – a contract where two or more persons bind in interest" from "time immemorial". The answer further alleges that
themselves to contribute money, property or industry to a registration of the land in dispute was obtained by plaintiff or its
common fund with the intention of dividing the profits predecessors in interest thru "fraud or error and without knowledge (of) or
among themselves (Art. 1767, New Civil Code) notice either personal or thru publication to defendant and/or
predecessors in interest." The answer therefore prays that the complaint
MENDIOLA VS. COURT OF APPEALS 497 SCRA 346, JULY 31, 2006 be dismissed with costs and plaintiff required to reconvey the land to
FACTS: Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is defendant or pay its value.
a corporation organized and existing under the laws of California, USA.
Pacfor entered into a ‘Side Agreement on Representative Office known as The lower court rendered judgment for plaintiff, declaring defendant to be
Pacific Forest Resources (Phils.), Inc.’ with petitioner Arsenio T. Mendiola without any right to the land in question and ordering him to restore
(ATM), effective May 1, 1995, “assuming that Pacfor-Phils. is already possession thereof to plaintiff and to pay the latter a monthly rent of
approved by the Securities and Exchange Commission [SEC] on. the said P132.62 from January, 1940, until he vacates the land, and also to pay the
date.” The Side Agreement outlines the business relationship of the costs.
parties with regard to the Philippine operations of Pacfor. Private
respondent will establish a Pacfor representative office in the Philippines, ISSUE: WON trial court erred in not dismissing the case on the ground that
to be known as Pacfor Phils, and petitioner ATM will be its President. the case was not brought by the real party in interest
Petitioner’s base salary and the overhead expenditures of the company
shall be borne by the representative office and funded by Pacfor/ATM, HELD: There is nothing against one corporation being represented by
since Pacfor Phils. is equally owned on a 50-50 equity by ATM and Pacfor- another person, natural or juridical, in a suit in court, for the true rule is that
USA. The Side Agreement was later amended through a Revised "although a corporation has no power to enter into a partnership, it may
Operating and Profit-Sharing Agreement where petitioner’s salary was nevertheless enter into a joint venture with another where the nature of
increased to $ 78,000. Both agreements show that the operational that venture is in line with the business authorized by its charter."
expenses will be borne by the representative office and funded by all
parties “as equal partners,” while the profits and commissions will be 3. Joint Venture – partakes the nature of a partnership
shared among them. contract and it is created for he the purpose of prosecuting
a particular business transaction. A one-time grouping of
In July 2000, petitioner wrote Pacfor’s VP for Asia seeking confirmation of two or more persons, natural or juridical, in a specified
his 50% equity of Pacfor Phils to which Pacfor’s President replied that undertaking. Thus, joint venture and partnership are similar
petitioner is not a part owner, his office being just a representative office to a large extent in that in both forms of business entities,
a “theoretical company with the purpose of dividing the income 50-50.” there is a community of interest in the undertaking, sharing
He even stressed that the petitioner knew of this arrangement from the of profits and losses and a mutual right of control.
start, having been the one to propose to them the setting up of a PARTNERSHIP JOINT VENTURE
representative office, instead of a branch office, to save on taxes. Has a personality separate and Does not acquire a separate
distinct from the partners and distinct personality from
ISSUE: WON a partnership or co-ownership exists between the parties. the venturers
Has for its object a general Object is an undertaking of a
HELD: NO. In a partnership, the members become co-owners of what is business of particular kind, particular or single
contributed to the firm capital and of all property that may be acquired although there may be transaction
thereby and through the efforts of the members. The property or stock of partnership for a single transaction
the partnership forms a community of goods, a common fund, in which
each party has a proprietary interest. In fact, the New Civil Code regards a
AURBACH VS. SANITARY WARES MANUFACTURING CORPORATION
partner as a co-owner of specific partnership property. Each partner 180 SCRA 130, DECEMBER 15, 1989
possesses a joint interest in the whole of partnership property. If the
FACTS: In 1961, Saniwares, a domestic corporation, was incorporated for
relation does not have this feature, it is not one of partnership.
manufacturing and marketing sanitary wares. One of the incorporators, Mr.
Young, went overseas to look for foreign partners to help in its expansion
This essential element, the community of interest, or co-ownership of, or
plants. In 1962, ASI, a foreign corporation domiciled in Delaware, US
joint interest in partnership property is absent in the relations between
entered into an Agreement with Saniwares and some Filipino investors. It
petitioner and private respondent Pacfor. Petitioner is not a part-owner of
was agreed that both parties would engage in the business of
Pacfor Phils. William Gleason, private respondent Pacfor’s President
manufacturing in the Philippines selling here and abroad china and sanitary
established this fact when he said that Pacfor Phils. is simply a “theoretical
wares. It was also agreed that it shall carry out business under the name of
company” for the purpose of dividing the income 50-50. He stressed that
“Sanitary Wares Manufacturing Corporation.
petitioner knew of this arrangement from the very start, having been the
one to propose to private respondent Pacfor the setting up of a
In the Agreement, it had the provisions that the management of the
representative office, and “not a branch office” in the Philippines to save
corporation would be vested in the Board of Directors, which were
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 NOTES ON THE REVISED CORPORATION CODE

composed of nine people. Three of the Directors would be from American-

Standard and the other six shall be other stockholders.

At the request of ASI, it provided for a protective provision for the minority
group such as the power to veto a number of corporate acts and right to
designate certain officers such as the Executive Committee whose votes
were required for important corporate transactions.

The 30% capital stock of ASI was later increased to 40% and was registered
with the Board of Investments with the condition that at least 60% shall be
owned by Filipinos.

The joint enterprise prospered. Unfortunately, the business relationship

soured. According to the Filipinos it was due to their desire to expand the
exports which ASI objected as they had subsidiary companies where the
Filipino investors wanted to expand into.

An annual stockholders’ meeting was held and ASI nominated Aurbach,

Griffin, and Whittingham as members of the board of directors as the
Filipinos nominated Lagdameo, Boncan, Lagdameo, Lee, and Young as
well as Salazar and Chamsay. Young then ruled that Salazar and Chamsay
were out of order as there was a practice that only nine people are
nominated for the board of directors.

A petition was filed for the preliminary injunction by the first six Filipinos
nominated against the last two nominated. The three American nominees
and the two later added Filipinos against the petitioners for preliminary
injunction filed a second petition for and application for
receivership.

ISSUE: WON the agreement entered into was a joint venture agreement.

HELD: YES. The rule is that whether the parties to a particular contract have
thereby established among themselves a joint venture or some other
relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of
contracts.

In the instant cases, our examination of important provisions of the

Agreement as well as the testimonial evidence presented by the
Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making
body are all consistent with a joint venture and not with an ordinary
corporation.

4. Corporation – A corporation is an artificial being created by

operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by
law or incidental to its existence (Sec. 2, Revised
Corporation Code (RCC).
5. Historical Background

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II. DEFINITION & ATTRIBUTES 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
A. Definition Therefore, a juridical person such as a corporation can validly complain
SEC. 2. . – A corporation is an artificial being created about libel or any other form of defamation and claim for moral damages.
by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incidental to its Where the broadcast is libelous , the law implies damages. In such
existence. a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. Neither
B. Attributes (C-A-R-P) in such a case is the plaintiff required to introduce evidence of actual
(1) CREATED BY OPERATION OF LAW – the formal requirement of the damages as a condition precedent to the recovery of some damages. In
State’s consent through compliance with the requirements imposed this case, the broadcasts are libelous . Thus, AMEC is entitled to
by law is necessary for its creation such that the mere agreement of moral damages. However, we find the award of P300,000 moral damages
the persons composing it or intending to organize it does not warrant unreasonable. The record shows that even though the broadcasts were
the grant of its independent existence as a juridical entity; libelous per se, AMEC has not suffered any substantial or material damage
(2) ARTIFICIAL BEING – it has a juridical personality, separate and to its reputation. Therefore, we reduce the award of moral damages from
distinct from the persons composing it. P300,000 to P150,000.
(3) RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholders does C. Advantages/disadvantages of the corporate form of business
not result in its dissolution; (1) CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may
(4) POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY unite in a single enterprise without using their names, without
AUTDHORIZED BY LAW – it can exercise only such powers and can difficulty or inconvenience, and with the valuable right to contract, to
hold only such properties as are granted to it by the enabling statutes sue and be sued, and to hold or convey property, in the corporate
unlike natural persons who can do anything as they please. name;
(2) LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since
LBC EXPRESS, INC. VS. COURT OF APPEALS 236 SCRA 602, SEPTEMBER stockholders are not personally liable for the debts of the corporation;
21, 1994 (3) CONTINUITY OF EXISTENCE – rights and obligations of a
FACTS: Private respondent Carloto, incumbent President-Manager of corporation are not affected by the death, incapacity or replacement
private respondent Rural Bank of Labason, alleged that he was instructed of the individual members;
to go to Manila to follow up on the Bank’s plan of payment of (4) FEASIBILITY OF GREATER UNDERTAKING – it enables the
rediscounting obligations with Central Bank’s main office, where he individuals to cooperate in order to furnish the large amounts of
purchased a round trip ticket and phone his sister to send him P1,000 for capital necessary to finance large scale enterprises;
his pocket money which LBC failed to deliver and eventually Carloto was (5) TRANSFERABILITY OF SHARES – unless reasonably restricted, shares
not able to submit the rediscounting documents and the Bank was made of stocks, being personal properties, can be transferred by the owner
to pay the Central Bank P32,000 s penalty interest and alleged that he without the consent of the other stockholders;
suffered embarrassment and humiliation. Respondent Rural Bank was later (6) CENTRALIZED MANAGEMENT – the vesting of powers of
on joined as one of the plaintiffs and prayed for the reimbursement of management and appointing officers and agents in board of directors
P32,000. Carloto and the Bank was awarded moral and exemplary gives to a corporation the benefit of a centralized administration
damages of P10,000 and P5,000, respectively. which is a practical business necessity in any large organization; and
(7) STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT
ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should AND FINANCE – which are provided under a well-drawn general
be awarded moral damages. corporation law. The corporation statutes enter into the charter
contract and these are constantly being interpreted by courts. An
HELD: NO. Moral damages are granted in recompense for physical established system of management and protection of shareholders
suffering, mental anguish, fright, serious anxiety, besmirched reputation, and creditors’ rights has thus been and are being evolved.
wounded feelings, oral shock, social humiliation and social injury. A
corporation, being an artificial person and having existence only in legal D. Distinctions between a corporation and partnership
contemplation, has no feelings, no emotions, no senses; therefore, it CORPORATION PARTNERSHIP
cannot experience physical suffering and mental anguish. Mental suffering Created by operation of law Created by mere agreement of
can be experienced only by one having a nervous system and it flows from (Sec. 2 and 4, RCC) the parties (Art. 1767, NCC)
real ills, sorrows and grieves of life – all of which cannot be suffered by Any person, partnership, Maybe formed by two or more
respondent bank as an artificial person. association or corporation, singly natural persons (Art. 1767, NCC)
or jointly with others (Sec. 10,
RCC)
FILIPINAS BROADCASTING NETWORK, INC. VS. AGO MEDICAL AND
Can exercise only such powers Can do anything by agreement
EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE
and functions expressly granted of the parties provided only that
(AMEC-BCCM) 448 SCRA 413, JANUARY 17, 2005
to it by law and those that are it is not contrary to law, morals,
FACTS: Rima and Alegre were the host of FBNI program “Exposé.”
necessary or incidental to its good customs or public order.
Respondent Ago was the owner of the Medical and Educational Center,
existence (Sec. 2 & 44, RCC) (Art. 1306)
subject of the radio program “Expose”. AMEC claimed that the broadcasts
were defamatory and owner Ago and school AMEC claimed for damages. Unless validly delegated In the absence of an agreement
expressly or impliedly, a to the contrary, any one of the
ISSUE: WON AMEC-BCCM is entitled to moral damages. corporation must transact its parties in the partnership form
business through the board of of business may validly bind the
HELD: YES. A juridical person is generally not entitled to moral damages directors (Sec. 22, RCC) partnership (Art. 1308, par. 1,
because, unlike a natural person, it cannot experience physical suffering or NCC))
such sentiments as wounded feelings, serious anxiety, mental anguish or Right of succession, it continues Based on mutual rust and the
moral shock. The Court of Appeals cites to exist despite the death, death, incapacity, insolvency,
to justify the award of moral damages. However, the Court’s statement withdrawal, incapacity or civil civil interdiction or mere
in that “a corporation may have a good reputation which, if interdiction of the stockholders withdrawal of one of the parties
besmirched, may also be a ground for the award of moral damages” is an or members. (Sec. 3, RCC) would result in its dissolution
. (Art. 1830, par. 6 & 7, NCC)
Transferability of shares – A partner cannot transfer his
AMEC’s claim for moral damages falls under item 7 of Article 2219 of the without the consent of the other rights or interests in the
Civil Code. This provision expressly authorizes the recovery of moral stockholders. (Sec. 62, RCC) partnership so as to make the
damages in cases of libel, slander or any other form of defamation. Article transferee a partner without the

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CORPORATION PARTNERSHIP
consent of the other partners
(Art. 1830, par. 6 & 7, NCC))
Limited liability – only to the All partners, including industrial
extent of their subscription or ones (except a limited partner)
their promised contribution. are liable pro rata with all their
property and after all the
partnership property has been
exhausted, for all partnership
liability (Art. 1813, NCC)
A corporation shall have May exist for an indefinite period
perpetual existence unless its subject only to the causes of
articles of incorporation provides dissolution provided for by the
otherwise. (Sec. 11, RCC) law of its creation (Art. 1824)
Cannot be dissolved by mere Partners may dissolve their
agreement of the stockholders. partnership at will or at any time
The consent of the State is they deem it fit (Art. 1830, par.
necessary for it to cease as a 1(b) and par. 2)
body corporate.

E. Government powers
The Revised Corporation Code places all corporations registered under its
provision to be under the control and supervision of the Securities and
Exchange Commission (Sec. 18 and 179). Its powers and functions are
clearly spelled out in PD 902-A, as amended by RA No. 8799, otherwise
known as the Securities Regulation Code.

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III. CLASSIFICATION OF CORPORATIONS considered as stock corporation, within the contemplation of the
A. Stock vs. Non-Stock Corporation Code.
SEC. 3. Corporations formed or organized
under this Code may be stock or nonstock corporations. Stock B. Created by special law
corporations are those which have capital stock divided into shares and are SEC. 4. – Corporations
authorized to distribute to the holders of such shares, dividends, or created by special laws or charters shall be governed primarily by the
allotments of the surplus profits on the basis of the shares held. All other provisions of the special law or charter creating them or applicable to
corporations are nonstock corporations. them, supplemented by the provisions of this Code, insofar as they are
applicable.
Requisites to be classified stock corporations:
(1) They have a capital stock dividend into shares; and Among these corporations created by special law are the Philippine
(2) That they are authorized to distribute dividends or allotments as National Oil Company, the National Development Company, the
surplus profits to its stockholders on the basis of the shares held by Philippine Export and Foreign Loan Guarantee Corporation and the GSIS.
each of them. All these are government owned or controlled, operating under a special
law or charter such that registration with the SEC is not required for them
SIGNIFICANT DISTINCTION: Although a non-stock corporation exists for to acquire legal and juridical personality. They owe their own existence as
purposes other than for profit, it does not follow that they cannot make such not by virtue of their compliance with the requirements of registration
profits as an incident to their operations. But a significant distinction is that under the Corporation Code but by virtue of the law specially creating
profits obtained by a non-stock corporation cannot be distributed as them.
dividends but are used merely for the furtherance of their purpose or
purposes. They are primarily governed by the special law creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus
COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC. DE CEBU settled that when the government engages in a particular business through
5 SCRA 321, MAY 31, 1962 the instrumentality of a corporation, it divests itself pro hoc vice of its
FACTS: Respondent Club operates a clubhouse, a bowling alley, a golf sovereign character so as to subject itself to the rules governing private
course and a bar restaurant where it sells wines, liquors, soft-drinks, meals corporations ( )
and short orders to its members and their guests. The bar and restaurant
were a necessary incident to the operation of the Club and its golf course Officers and employees of GOCCs created by special laws are governed
is operated mainly with funds derived from membership fees and dues. by the law of their creation, usually the Civil Service Law. Their subsidiaries
Whatever profits it had were used to defray its overhead expenses and to organized under the provisions of the Corporation Code are governed by
improve its golf course. In 1951, as a result of capital surplus arising from the Labor Code. The test in determining whether they are governed by the
the revaluation of its real properties, the Club declared stock dividends. In Civil Service Law is the manner of their creation.
1952, the BIR assessed percentage taxes on the gross receipt of the Club’s
bar and restaurant pursuant to Sec. 182 of the Tax Code: “unless otherwise PNOC-ENERGY DEVELOPMENT CORP. VS. NLRC 201 SCRA 487,
provided, every person engaging in a business on which the percentage SEPTEMBER 11, 1991
tax is imposed shall pay in full a fixed annual tax of P10 for each calendar FACTS: Danilo Mercado, an employee of herein petitioner was dismissed
year or a fraction thereof” and under Sec. 191: “keepers of restaurant, on the ground of dishonesty and violation of company rules and
refreshment parlors and other eating places shall pay a tax of 3% of their regulations. He filed an illegal dismissal complaint before herein
gross receipts” respondent NLRC who ruled on his favor, despite the motion to dismiss of
petitioner that the Civil Service Commission has jurisdiction over the case.
ISSUE 1: WON the Club is liable for the assessment.
ISSUE: WON NLRC has jurisdiction over the case.
HELD: NO. It has been held that the liability for fixed and percentage taxes
does not ipso facto attach by mere reason of the operation of a bar and HELD: Yes. Employees of GOCCs, whether created by special law or
restaurant. For the liability to attach, the operator thereof must be formed as subsidiaries under the Corporation Law are governed by the
engaged in the business as a bar keeper and restauranteur. Business, in Civil Service Law and not the Labor Code, under the 1973 Constitution has
the ordinary sense, is restricted to activities or affairs where profit is the been supplanted by the present Constitution.
purpose or livelihood is the motive, and the term business when used
without qualification, should be construed in its plain and ordinary Thus, under the present state of the law, the test in determining whether
meaning; restricted to activities for profit or livelihood. a GOCC is subject to the Civil Service Law is the manner of its creation,
such that government corporations created by special charter are subject
The fact that the Club derived profits from the operation of its bar and to its provisions while those incorporated under the General Corporation
restaurant does not necessarily convert it into a profit-making enterprise. Law are not within its coverage.
The bar and restaurant are necessary adjunct of the Club to foster its
purpose and the profits derived therefrom are necessarily incidental to the PNOC has its special charter, but its subsidiary, PNOC-EDC, having been
primary object of developing and cultivating sports for the healthful incorporated under the General Corporation Law was held to be a GOCC
recreation and entertainment of the stockholders and members. That a whose employees are subject to the provisions of the Labor Code.
club makes profit does not make it a profit-making club.
HACIENDA LUISITA, INCORPORATED VS. PRESIDENTIAL AGRARIAN
ISSUE 2: WON the Club is a stock corporation.
REFORM COUNCIL 660 SCRA 525, NOVEMBER 22, 2011
FACTS: TADECO, owned by Jose Cojuangco, Sr., bought the 6000
HELD: NO. The fact that the capital of the Club is divided into shares does
hectares land of Hacienda Luisita in Tarlac and the sugar mill within the
not detract from the finding of the trial court that it is not engaged in the
hacienda from the original owner TABACALERA. Prior to the transfer of
business of operator of bar and restaurant. What is determinative of
ownership, the Philippine Government, thru GSIS assisted and extended
whether or not the Club is engaged in such business is its object or
loans to TADECO for the payment of the loan. One of the conditions on
purpose as stated in its articles and by-laws.
the loan agreement between them was the lots comprising

Moreover, for a stock corporation to exists, two requisites must be ISSUE: WON PARC has jurisdiction and power to revoke the SDOA
complied with: (1) a capital stock divided into shares; and (2) an authority
to distribute to the holders of such shares, dividends or allotments of HELD: YES. It should abundantly be made clear that Hacienda Luisita Inc.
surplus profits on the basis of the shares held. In the case at bar, nowhere
was precisely created in order to comply with R.A 9557. It is, thus,
it its AOI or by-laws could be found an authority for the distribution of its
paradoxical for Hacienda Luisita Inc. to shield itself from the coverage of
dividends or surplus profits. Strictly speaking, it cannot therefore, be
CARP by invoking exclusive applicability of the Corporation Code under
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the guise of being a corporate entity. Evidently, R.A 6657 should be the
applicable law to the instant case. ISSUE: WON Marquez needed a written authority from Eternit Corporation
for the sale can be perfected.
TUNA PROCESSING, INC. VS. PHILIPPINE KINGFORD, INC. 667 SCRA
287, FEBRUARY 29, 2012 HELD: YES. A corporation is a juridical person separate and distinct from
FACTS: Kanemitsu Yamaoka (hereinafter referred to as the "licensor"), co- its members or stockholders and is not affected by the personal rights,
patentee of U.S. Patent No. 5,484,619, Philippine Letters Patent No. obligations and transactions of the latter. It may act only through its board
31138, and Indonesian Patent No. ID0003911 (collectively referred to as of directors or, when authorized either by its by-laws or by its board
the "Yamaoka Patent"), and five 5 Philippine tuna processors, namely, resolution, through its officers or agents in the normal course of business.
Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna The general principles of agency govern the relation between the
Resources, Santa Cruz Seafoods, Inc., and respondent Kingford corporation and its officers or agents, subject to the articles of
(collectively referred to as the "sponsors"/"licensees") entered into a incorporation, by-laws, or relevant provisions of law.
Memorandum of Agreement. Due to a series of events not mentioned in
the petition, the licensees, including respondent Kingford, withdrew from The property of a corporation, however, is not the property of the
petitioner TPI and correspondingly reneged on their obligations. Petitioner stockholders or members, and as such, may not be sold without express
submitted the dispute for arbitration before the International Centre for authority from the board of directors. Physical acts, like the offering of the
Dispute Resolution in the State of California, United States and won the properties of the corporation for sale, or the acceptance of a counter-offer
case against respondent. To enforce the award, petitioner TPI filed a of prospective buyers of such properties and the execution of the deed of
Petition for Confirmation, Recognition, and Enforcement of sale covering such property, can be performed by the corporation only by
Foreign Arbitral Award before the RTC of Makati City. officers or agents duly authorized for the purpose by corporate by-laws or
by specific acts of the board of directors. Absent such valid
ISSUE: WON Corporation Code or Alternative Dispute Resolution Act of delegation/authorization, the rule is that the declarations of an individual
2004 should apply. director relating to the affairs of the corporation, but not in the course of,
or connected with, the performance of authorized duties of such director,
HELD: ALTERNATIVE DISPUTE RESOLUTION ACT OF 2004 SHOULD are not binding on the corporation.
APPLY. In the recent case of Hacienda Luisita, Incorporated v. Presidential
Agrarian Reform Council, this Court held: Without doubt, the Corporation While a corporation may appoint agents to negotiate for the sale of its real
Code is the general law providing for the formation, properties, the final say will have to be with the board of directors through
organization and regulation of private corporations. On the other hand, RA its officers and agents as authorized by a board resolution or by its by-laws.
6657 is the special law on agrarian reform. As between a general and An unauthorized act of an officer of the corporation is not binding on it
special law, the latter shall prevail. . unless the latter ratifies the same expressly or impliedly by its board of
directors. Any sale of real property of a corporation by a person purporting
Following the same principle, the Alternative Dispute Resolution Act of to be an agent thereof but without written authority from the corporation
2004 shall apply in this case as the Act, as its title - An Act to Institutionalize is null and void.
the Use of an Alternative Dispute Resolution System in the Philippines and
to Establish the Office for Alternative Dispute Resolution, and for Other PHILIPPINE NATIONAL CONSTRUCTION CORPORATION VS. PABION
Purposes - would suggest, is a law especially enacted to actively promote 320 SCRA 188, DECEMBER 08, 1999
party autonomy in the resolution of disputes or the freedom of the party FACTS: Ernesto Pabion and Louella Ramiro, claiming to be stockholders of
to make their own arrangements to resolve their disputes. It specifically the PNCC, filed with the SEC a verified petition, therein alleging that since
provides exclusive grounds available to the party opposing an application 1982 or for a period of twelve (12) years, there has been no stockholders
for recognition and enforcement of the arbitral award. meeting of the PNCC to elect the corporation’s board of directors, thus
enabling the incumbent directors to hold on to their position beyond their
1-year term, in violation of PNCCs By-Laws and the Corporation Code.
LITONJUA, JR. VS. ETERNIT CORPORATION 490 SCRA 204, JUNE 08, Pabion and Ramiro, therefore, prayed the SEC to issue an order ordering
2006 the officers of PNCC or, in the alternative, authorizing petitioners, to call
FACTS: The Eternit Corporation (EC) manufactures roofing materials and and hold a meeting of the stockholders for the purpose of electing new
pipe products. 90% of the shares of stocks of EC were owned by directors.
Eteroutremer S.A. Corporation (ESAC), a corporation registered under the PNCC claimed that SEC has no jurisdiction over the petition because
laws of Belgium. Glanville was the General Manager and President of EC, PNCC is a government-owned corporation whose organizational and
while Delsaux was the Regional Director for Asia of ESAC. In 1986, because functional management, administration, and supervision are governed by
of the political situation in the Philippines the management of ESAC Administrative Order (AO) No. 59. PNCC asserts that its board of directors
wanted to stop its operations and to dispose the land in Mandaluyong does not hold office by virtue of a stockholder’s election but by
City. They engaged the services of realtor/broker Lauro G. Marquez. appointment of the President of the Philippines.
Marquez thereafter offered the land to Eduardo B. Litonjua, Jr. The
Litonjua brothers deposited US$1,000,000.00 with the Security Bank & ISSUE: WON the SEC may order PNCC to hold a stockholders meeting for
Trust Company and drafted an Escrow Agreement to expedite the sale. the conduct of an election for the members of the Board.
Meanwhile, with the assumption of Corazon C. Aquino as President, the
political situation improved. Marquez received a letter from Delsaux that HELD: YES. We concede that SEC has no jurisdiction over corporations of
the ESAC Regional Office decided not to proceed with the sale. When the first type -- GOCCs with original charter or created by special law --
informed of this, the Litonjuas, filed a complaint for specific performance primarily because they are governed by their charters. But even this
and payment for damages on account of the aborted sale. Both the trial concession is not absolute, since the Corporation Code may apply
court and appellate court rendered judgment in favor of defendants and suppletorily, either by operation of law or through express provisions in
dismissed the complaint. The lower court declared that since the authority the charter.
of the agents/realtors was not in writing, the sale is void and not merely
unenforceable. EC maintain that Glanville, Delsaux and Marquez had no On the other hand, we have no doubt that over GOCCs established or
authority from the stockholders of EC and its Board of Directors to offer organized under the Corporation Code, SEC can exercise jurisdiction.
the properties for sale to the petitioners. Petitioners assert that there was These GOCCs are regarded as private corporations despite common
no need for a written authority from the Board of Directors of EC for misconceptions. That the government may own the controlling shares in
Marquez to validly act as broker. As broker, Marquez was not an ordinary the corporation does not diminish the fact that the latter owes its existence
agent because his only job as a broker was to look for a buyer and to bring to the Corporation Code. More pointedly, Section 143 of the Corporation
together the parties to the transaction. He was not authorized to sell the Code gives SEC the authority and power to implement its provisions,
properties; hence, petitioners argue, Article 1874 of the New Civil Code specifically for the purpose of regulating the entities created pursuant to
does not apply. such provisions. These entities include corporations in which the

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controlling shares are owned by the government or its agencies. organized as a stock or non-stock corporation as defined in Section 2(13)
of the Administrative Code of 1987. MIAA is not organized as a stock or
The Securities and Exchange Commission (SEC) has jurisdiction over
non-stock corporation. MIAA is not a stock corporation because it has no
corporations organized pursuant to the Corporation Code, even if the
capital stock divided into shares. Section 3 of the Corporation Code
majority or controlling shares are owned by the government.
defines a stock corporation as one whose "capital stock is divided into
shares and x x x authorized to distribute to the holders of such shares
REPUBLIC VS. CITY OF PARAÑAQUE 677 SCRA 246, JULY 18, 2012 dividends x x x." MIAA has capital, but it is not divided into shares of stock.
FACTS: By virtue of its mandate, Philippine Reclamation Authority (PRA) MIAA has no stockholders or voting shares. MIAA is also not a non-stock
reclaimed several portions of the foreshore and offshore areas of Manila corporation because it has no members. Section 87 of the Corporation
Bay, including those located in Parañaque City. Parañaque City Treasurer Code defines a non-stock corporation as "one where no part of its income
issued Warrants of Levy on PRA’s reclaimed properties based on the is distributable as dividends to its members, trustees or officers." A non-
assessment for delinquent real property for tax years 2001 and 2002. PRA, stock corporation must have members.
on the other hand, argued that It is not a GOCC under the Administrative
Code, nor is it a GOCC under Section 16, Article XII of the 1987
Constitution because it is not required to meet the test of economic
viability. C. Public vs. Private
PUBLIC CORPORATION: those formed or organized for the government
The City of Parañaque argued that since its creation PRA consistently of a portion of the State or any of its political subdivisions and which have
represented itself to be a GOCC on its very own charter. Has entered into for their purpose the general good and welfare.
several thousands of contracts where it represented itself to be a GOCC.
It argues that PRA is a stock corporation with an authorized capital stock It is to be observed, however, that the mere fact that the undertaking in
divided into 3 million no par value shares, out of which 2 million shares which a corporation is engaged in is one which the State itself might enter
have been subscribed and fully paid up. into as part of its public work does not make it a public one. Nor is the fact
that the State has granted property or special privileges to a corporation
ISSUE: WON PRA is exempt from the payment of tax. render it public. Likewise, the fact that some or all of the stocks in the
corporation are held by the government does not make it a public
HELD: YES. When the law vests in a government instrumentality corporate corporation.
powers, the instrumentality does not necessarily become a corporation.
Unless the government instrumentality is organized as a stock or non-stock The TRUE TEST to determine the nature of a corporation is found in the
corporation, it remains a government instrumentality exercising not only relation of the body to the State. Strictly speaking, a public corporation is
governmental but also corporate powers. one that is created, formed or organized for political or governmental
purposes with political powers to be exercised for purposes connected
Many government instrumentalities are vested with corporate powers, but with the public good in the administration of the civil government. The
they do not become stock or non-stock corporations, which is a necessary GOCCs are regarded as private corporations despite common
condition before an agency or instrumentality is deemed a GOCC. misconceptions.

MANILA INTERNATIONAL AIRPORT AUTHORITY VS. COURT OF NATIONAL COAL CO. VS. COLLECTOR OF INTERNAL REVENUE 46
APPEALS 495 SCRA 591, JULY 20, 2006 PHIL. 583, DECEMBER 02, 1924
FACTS: Petitioner Manila International Airport Authority (MIAA) operates FACTS: Herein plaintiff brought an action for the purpose of recovering a
the Ninoy Aquino International Airport (NAIA) Complex in Parañaque City sum of money allegedly paid by it under protest to the herein defendant,
under Executive Order No. 903, otherwise known as the MIAA Charter. As a specific tax on some tons of coal. It claimed exemption from taxes under
operator of the international airport, MIAA administers the land, Sec. 1469 of the Administrative Code which provides that “on all coal and
improvements and equipment within the NAIA Complex. On 21 March coke shall be collected per metric ton, fifty centavos”. Of the 30,000 shares
1997, the Office of the Government Corporate Counsel (OGCC) opined issued by the corporation, the Philippine government is the owner of
that the Local Government Code of 1991 withdrew the exemption from 29,809 or substantially all of the shares of the company.
real estate tax granted to MIAA under Section 21 of the MIAA Charter.
Thus, MIAA negotiated with respondent City of Parañaque to pay the real ISSUE: WON the plaintiff corporation is a public corporation.
estate tax imposed by the City and then paid some of the real estate tax
already due. On 28 June 2001, MIAA received Final Notices of Real Estate HELD: NO. The plaintiff is a private corporation. The mere fact that the
Tax Delinquency from the City of Parañaque for the taxable years 1992 to government happens to be a majority stockholder does not make it a
2001. Subsequently, the City of Parañaque issued notices of levy and public corporation. As a private corporation, it has no greater rights,
warrants of levy on the Airport Lands and Buildings for failure to MIAA to powers and privileges than any other corporation which might be
pay the real estate tax delinquency. Then, the selling at public auction of organized for the same purpose under the Corporation Law, and certainly,
the said properties was concluded three hours prior to the receipt of the it was not the intention of the Legislature to give it a preference or right or
Temporary Restraining Order. privilege over other legitimate private corporation in the mining of coal.

On 29 March 2005, the Court heard the parties in oral arguments. MIAA PRIVATE CORPORATIONS: those formed for some private purpose,
points out that Section 21 of the MIAA Charter specifically exempts MIAA benefit, aim or end. They are created for the immediate benefit and
from the payment of real estate tax. MIAA insists that it is also exempt from advantage of the individuals or members composing it and their franchise
real estate tax under Section 234 of the Local Government Code because may be considered as privileges conferred by the State to be exercised
the Airport Lands and Buildings are owned by the Republic. Meanwhile, and enjoyed by them in the form of the corporation.
the respondents invoke Section 193 of the Local Government Code, which
expressly withdrew the tax exemption privileges of "government-owned D. Ecclesiastical & Lay
and-controlled corporations" upon the effectivity of the Local Government ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed
Code. It asserts that an international airport is not among the exceptions exclusively of ecclesiastics organized for spiritual purposes or for
mentioned in Section 193 of the Local Government Code. administering properties held for religious ones. They are organized to
secure public worship or perpetuating the right of a particular religion.
ISSUE: WON MIAA is a Government Owned and Controlled Corporation
(GOCC) subject to real estate tax. LAY CORPORATIONS: are those organized for purposes other than
religion. They may further be classified as:
HELD: NO. MIAA is not a government-owned or controlled corporation (1) ELEEMOSYNARY: created for charitable and benevolent purposes
but an instrumentality of the National Government and thus exempt from such as those organized for the purpose of maintaining hospitals and
local taxation. A government owned or controlled corporation must be houses for the sick, aged or poor.

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(2) CIVIL: organized not for the purpose of public charity but for the J. Going Public & Going Private
benefit, pecuniary or otherwise, of its members. A corporation is deemed to be “going public” when it decides to list its
shares in the stock exchange. These include corporations that will make
E. Aggregate & Sole initial public offering of its shares
AGGREGATE CORPORATIONS: are those composed of a number of
individuals vested with corporate powers. A corporation is said to be “going private” when it would restrict the
shareholders to a certain group. In a sense, these also include closed or
CORPORATION SOLE: those consist of one person or individual only and closely held corporation.
who are made as bodies corporate and politic in order to give them some
legal capacity and advantage which, as natural persons, they cannot have. K. Public & Private
Under the Code, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder or L. De jure vs. De facto
religious denominations, sects or churches. DE JURE CORPORATIONS DE FACTO CORPORATIONS
Juridical entities created or Those which exist by the virtue of an
F. Close & Open organized in strict or irregularity or defect in the
CLOSE CORPORATIONS: are those whose shares of stock are held by a substantial compliance organization or constitution or from
limited number of persons like the family or other closely-knit group. There with statutory requirements some omission to comply with the
are no public investors and the shareholders are active in the conduct of of incorporation and whose conditions precedent by which
the corporate affairs; recognized under Sec. 96 of the Corporation Code. rights to exist as such corporations de jure are created, but
cannot be successfully there was colorable compliance with
OPEN CORPORATIONS: are those formed to openly accept outsiders as attacked even by the State the requirements of the law under
stockholders or investors. They are authorized and empowered to list in in a which they might be lawfully
the stock exchange and to offer their shares to the public such that stock proceeding. They are, in incorporated for the purposes and
ownership can widely be dispersed. effect, incorporated by powers assumed, and user of the
strict adherence to the rights claimed to be conferred by law.
G. Domestic & Foreign provisions of the law of Its existence can only be attacked by a
DOMESTIC CORPORATIONS: are those organized or created under or by their creation direct action of
virtue of the Philippine laws, either by legislative act or under the proceedings.
provisions of the Revised Corporation Law.
M. Corporations by Estoppel
FOREIGN CORPORATIONS: are those formed, organized or existing CORPORATION BY ESTOPPEL: those which are so defectively formed as
under any laws other than those of the Philippines and whose laws allow not to be either or corporations, but which are considered
Filipino citizens and corporations to do business in its own country or state as corporations in relation only to those who cannot deny their corporate
(Sec. 240, RCC). The second part of the definition is, however, somehow existence due to their agreement, admission or conduct.
misplaced since any corporation for that matter, which is not registered
under Philippine laws is a foreign corporation. Such second part was N. One Person Corporation
inserted only for the purpose of qualifying a foreign corporation to secure A One Person Corporation is a corporation with a single stockholder:
a license and to do business in the Philippines. that only a natural person, trust, or an estate may form a One
Person Corporation (Sec. 116, RCC).
H. Parent/Holding, Subsidiaries & Affiliates
PARENT OR HOLDING COMPANY: a corporation who controls another SEC Memorandum Circular No. 7, Series of 2019
corporation, or several other corporations known as its subsidiaries.
Holding companies have been defined as corporations that confine their
activities to owning stock in, and supervising management of other
O. Corporations Vested with Public Interest
companies. A holding company usually owns a controlling interest (more
(1) Corporations covered by Section 17.2 of Republic Act No. 8799,
than 50% of the voting stock) in the companies whose stocks it holds. As
otherwise known as “The Securities Regulation Code”, namely those
may be differentiated from investment companies which are active in the
whose securities are registered with the Commission, corporations
sale or purchase of shares of stock or securities, parent or holding
listed with an exchange or with assets of at least Fifty million pesos
companies have a passive portfolio and hold the securities merely for
(P50,000,000.00) and having two hundred (200) or more holders of
purposes of control and management.
shares, each holding at least one hundred (100) shares of a class of its
equity shares;
SUBSIDIARY CORPORATIONS: those which another corporation owns at
(2) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged
least a majority of the shares, and thus have control. A subsidiary has an
in money service business, pre-need, trust and insurance companies,
independent and separate juridical personality, distinct from that of its
and other financial intermediaries; and
parent company, hence any claim or suit against the latter does not bind
(3) Other corporations engaged in business vested with public interest
the former or vice versa.
similar to the above, as may be determined by the Commission, after
taking into account relevant factors which are germane to the
AFFILIATES: are those corporations which are subject to common control
objective and purpose of requiring the election of an independent
and operated as part of a system. They are sometimes called “sister
director, such as the extent of minority ownership, type of financial
companies” since the stockholdings of a corporation is not substantial
products or securities issued or offered to investors, public interest
enough to control the former. Example: 15% of ABCD Company is held by
involved in the nature of business operations, and other analogous
A Corp, 18% by B Corp, and another 15% by C Corp. – A, B and C are
factors.
affiliates.

I. Quasi-Public
These are private corporations which have accepted from the state the
grant of a franchise or contract involving the performance of public duties.
The term is sometimes applied to corporations which are not strictly public
in the sense of being organized for governmental purposes, but whose
operations contribute to the convenience or welfare of the general public,
such as telegraph and telephone companies, water and electric
companies. More appropriately, they are known as public service
corporations.

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IV. FORMATION & ORGANIZATION (C-R-D) (d) The term for which the corporation is to exist, if the corporation has
There are three (3) stages in the life of a corporation: These are not elected perpetual existence;
(1) Creation; (e) The names, nationalities, and residence addresses of the
(2) Reorganization or quasi-reorganization; and incorporators;
(3) Dissolution and winding-up (f) The number of directors, which shall not be more than fifteen (15) or
the number of trustees which may be more than fifteen (15);
This is undertaken by the organizers or promoters who bring together (g) The names, nationalities, and residence addresses of persons who
persons interested in the business venture. They enter into contract either shall act as directors or trustees until the first regular directors or
in their own names or in the name of the proposed corporation. trustees are duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock,
For purposes of its creation, there are three (3) steps that may be identified. number of shares into which it is divided, the par value of each,
It includes: (1) the promotional stage; (2) the process of incorporation; and, names, nationalities, and residence addresses of the original
(3) organization and commencement of business subscribers, amount subscribed and paid by each on the subscription,
and a statement that some or all of the shares are without par value,
• PROMOTION, in the general sense, is the act of advancing or if applicable;
encouraging and etymologically, to move forward is to promote. For (i) If it be a nonstock corporation, the amount of its capital, the names,
the purpose of the Code, promotion refers to the act of getting a nationalities, and residence addresses of the contributors, and
corporation organized including the procurement of subscription to amount contributed by each; and
its capital stock. A PROMOTER, therefore, is an organizer or projector (j) Such other matters consistent with law and which the incorporators
who bring persons to unite in forming a corporation. may deem necessary and convenient.
• INCORPORATION, on the other hand, is the formal and procedural
requisite of drafting the Articles of Incorporation and preparing other An arbitration agreement may be provided in the articles of incorporation
necessary supporting documents and their subsequent filing with, pursuant to Section 181 of this Code.
and finally approval of the Securities and Exchange Commission by
the issuance of the Certificate of Incorporation. The articles of incorporation and applications for amendments thereto may
• ORGANIZATION AND COMMENCEMENT OF BUSINESS refers to be filed with the Commission in the form of an electronic document, in
certain overt acts after incorporation such as adoption of by-laws, accordance with the Commission’s rules and regulations on electronic
election of corporate officers, and other acts tending to show intent filing.
of transacting its business.
SEC. 14. Form of Articles of Incorporation. – Unless otherwise prescribed
A. Process of Incorporation by special law, the articles of incorporation of all domestic corporations
This is undertaken by the organizers or promoters who bring together shall comply substantially with the following form:
persons interested in the business venture. They enter into contract either
in their own names or in the name of the proposed corporation. Articles of Incorporation
of
Since the corporation did not yet exist at the time the contracts were ______________________
executed, it could not have been a party thereto considering that it did not (Name of Corporation)
yet possess a juridical personality.
The undersigned incorporators, all of legal age, have voluntarily agreed to
Liability of Promoters form a (stock) (nonstock) corporation under the laws of the Republic of the
GENERAL RULE: a promoter, although he may assume to act for and on Philippines and certify the following:
behalf of a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a corporation First: That the name of said corporation shall be “_______________, Inc.,
he intends to organize. The personal liability continues even after the Corporation or OPC”;
formation of the corporation unless there is novation or other agreement
to release him from liability. As such, the promoter may do either of the Second: That the purpose or purposes for which such corporation is
following options: incorporated are: (If there is more than one purpose, indicate primary and
(1) He may make a continuing offer on behalf of the corporation, which, secondary purposes);
if accepted after incorporation, will become a contract. In this case,
the promoter does not assume any personal liability, whether or not Third: That the principal office of the corporation is located in the
the corporation will accept the offer; City/Municipality of ______________________, Province of
(2) He may make a contract at the time binding himself, with the _______________________, Philippines;
understanding that if the corporation, once formed, accepts or
adopts the contract, he will be relieved of responsibility; or
(3) He may bind himself personally and assume responsibility of looking
to the proposed corporation, when formed, for reimbursement. Fourth: That the corporation shall have perpetual existence or a term of
______________ years from the date of issuance of the certificate of
B. Contents of the Articles of Incorporation incorporation;
SEC. 13 – All corporations shall
file with the Commission articles of incorporation in any of the official Fifth: That the names, nationalities, and residence addresses of the
languages, duly signed and acknowledged or authenticated, in such form incorporators of the corporation are as follows:
and manner as may be allowed by the Commission, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law: Name Nationality Residence
(a) The name of the corporation; ___________________ __________________ ___________________
(b) The specific purpose or purposes for which the corporation is being ___________________ __________________ ___________________
formed. Where a corporation has more than one stated purpose, the ___________________ __________________ ___________________
articles of incorporation shall indicate the primary purpose and the ___________________ __________________ ___________________
secondary purpose or purposes: , That a nonstock ___________________ __________________ ___________________
corporation may not include a purpose which would change or
contradict its nature as such; Sixth: That the number of directors or trustees of the corporation shall be
(c) The place where the principal office of the corporation is to be _________________; and the names, nationalities, and residence addresses
located, which must be within the Philippines; of the first directors or trustees of the corporation are as follows:
Name Nationality Residence
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___________________ __________________ ___________________ ___________________ __________________

___________________ __________________ ___________________ (Names and signatures of the incorporators)
___________________ __________________ ___________________
___________________ __________________ ___________________ _______________________________________
___________________ __________________ ___________________ (Name and signature of Treasurer)

Seventh: That the authorized capital stock of the corporation is 1. Prefatory Paragraph
______________ PESOS (P________), divided into _____ shares with the par The undersigned incorporators, all of legal age, have voluntarily agreed to
value of ____________ PESOS (P_______________) per share. (In case all form a (stock) (nonstock) corporation under the laws of the Republic of the
the shares are without par value): That the capital stock of the corporation Philippines and certify the following:
is __________________________ shares without par value.
It must specify the nature of the corporation being organized in order to
(In case some shares have par value and some are without par value):
prevent difficulties of administration and supervision. Thus, the corporation
That the capital stock of said corporation consists of
should indicate whether it is a stock or a non-stock corporation, a close
__________________________ shares, of which _______________________
corporation, corporation sole or a religious corporation.
shares have a par value of _________________ PESOS (P____________)
each, and of which _______________________ shares are without par value.
2. Corporate Name
First: That the name of said corporation shall be “_______________, Inc.,
Eighth: That the number of shares of the authorized capital stock above
Corporation or OPC”;
stated has been subscribed as follows:

Name of Nationality No. of Amount Amount SEC. 120. . – A One Person Corporation shall
Subscriber Shares Subscribed Paid indicate the letters “OPC” either below or at the end of its corporate name.
Subscribed
SEC. 17. – No corporate name shall be allowed by the
Commission if it is not distinguishable from that already reserved or
registered for the use of another corporation, or if such name is already
protected by law, or when its use is contrary to existing law, rules and
regulations.

A name is not distinguishable even if it contains one or more of the

(Modify No. 8 if shares are with no-par value. In case the corporation is
following:
nonstock, Nos. 7 and 8 of the above articles may be modified accordingly,
(a) The word “corporation”, “company”, “incorporated”, “limited”,
and it is sufficient if the articles state the amount of capital or money
“limited liability”, or an abbreviation of one of such words; and
contributed or donated by specified persons, stating the names,
(b) Punctuations, articles, conjunctions, contractions, prepositions,
nationalities, and residence addresses of the contributors or donors and
abbreviations, different tenses, spacing, or number of the same word
the respective amount given by each.)
or phrase.
Ninth: That _____________________ has been elected by the subscribers
The Commission, upon determination that the corporate name is: (1) not
as Treasurer of the Corporation to act as such until after the successor is
distinguishable from a name already reserved or registered for the use of
duly elected and qualified in accordance with the bylaws, that as Treasurer,
another corporation; (2) already protected by law; or (3) contrary to law,
authority has been given to receive in the name and for the benefit of the
rules and regulations, may summarily order the corporation to immediately
corporation, all subscriptions, contributions or donations paid or given by
cease and desist from using such name and require the corporation to
the subscribers or members, who certifies the information set forth in the
register a new one. The Commission shall also cause the removal of all
seventh and eighth clauses above, and that the paid-up portion of the
visible signages, marks, advertisements, labels, prints and other effects
subscription in cash and/or property for the benefit and credit of the
bearing such corporate name. Upon the approval of the new corporate
corporation has been duly received.
name, the Commission shall issue a certificate of incorporation under the
amended name.
Tenth: That the incorporators undertake to change the name of the
corporation immediately upon receipt of notice from the Commission that
another corporation, partnership or person has acquired a prior right to The SEC, in implementing the above provision on corporate name, thus
the use of such name, that the name has been declared not distinguishable requires that a “Verification Slip” from the Records Division of the
from a name already registered or reserved for the use of another Commission be submitted showing that the proposed name is legally
corporation, or that it is contrary to law, public morals, good customs or permissible. If the corporate name is available for use, the SEC will allow
public policy. the incorporators to “reserve” it for a nominal fee for a specific period until
the AOI is filed with the SEC.

Eleventh: (Corporations which will engage in any business or activity RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. 60 PHIL. 549,
reserved for Filipino citizens shall provide the following): SEPTEMBER 06, 1934
FACTS: Rural Transit Company, Ltd., a Philippine corporation, filed with
“No transfer of stock or interest which shall reduce the ownership of the Public Company Service Commission an application in which it is stated
Filipino citizens to less than the required percentage of capital stock as in substance that it is the holder of a certificate or public convenience to
provided by existing laws shall be allowed or permitted to be recorded in operate a passenger bus service between Manila and Tuguegarao; that it
the proper books of the corporation, and this restriction shall be indicated is the only operator of direct service between said points and the present
in all stock certificates issued by the corporation.” authorized schedule of only one trip daily is not sufficient; that it will be
also to the public convenience to grant the applicant a certificate for a new
IN WITNESS WHEREOF, we have hereunto signed these Articles of service between Tuguegarao and Ilagan. However, this was opposed by
Incorporation, this _______ day of _____________, 20_____ in the Red Line Transportation Company alleging that it already holds a
City/Municipality of ______________________, Province of certificate of public convenience and is rendering adequate and
_______________________, Republic of the Philippines. satisfactory service; that the granting of the application of the Rural Transit
Company, Ltd., would not serve public convenience but would constitute
___________________ __________________ a ruinous competition for the oppositor over said route. At the trial of this
___________________ __________________ case before the Public Service Commission an issue was raised as to who
___________________ __________________ was the real party in interest making the application, whether the Rural
___________________ __________________ Transit Company, Ltd., as appeared on the face of the application, or the
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Bachrach Motor Company, Inc., using name of the Rural Transit Company, the decision of the hearing officer was reversed and set aside. The SEC
Ltd., as a trade name. did not consider the word "Lyceum" to have become so identified
with Lyceum of the Philippines as to render use thereof by other institutions
ISSUE: WON Rural Transit Company, Ltd. is the real party in interest. as productive of confusion about the identity of the schools concerned in
the mind of the general public. Unlike its hearing officer, the SEC
HELD: NO. Both the Rural Transit Company, Ltd., and the Bachrach Motor held that the attaching of geographical names to the word "Lyceum"
Co., Inc., are Philippine corporations and the very law of their creation and served sufficiently to distinguish the schools from one another, especially
continued existence requires each to adopt and certify a distinctive name. in view of the fact that the campuses of Lyceum of the Philippines and
The incorporators "constitute a body politic and corporate under the name those of the other Lyceums were physically quite remote from each other.
stated in the certificate." (Section 11, Act No. 1459, as amended.) A
corporation has the power "of succession by its corporate name." (Section On appeal, the Court of Appeals affirmed the decision of the Court of
13, ibid.) The name of a corporation is therefore essential to its existence. Appeals and denied reconsideration.
It cannot change its name except in the manner provided by the statute.
By that name alone is it authorized to transact business. The law gives a ISSUE No. 1: WON private respondents can be directed to delete the
corporation no express or implied authority to assume another name that word “lyceum” from their corporate names.
is unappropriated: still less that of another corporation, which is expressly
set apart for it and protected by the law. If any corporation could assume HELD: NO. The policy underlying the prohibition in Section 18 against the
at pleasure as an unregistered trade name the name of another registration of a corporate name which is "identical or deceptively or
corporation, this practice would result in confusion and open the door to confusingly similar" to that of any existing corporation or which is "patently
frauds and evasions and difficulties of administration and supervision. The deceptive" or "patently confusing" or "contrary to existing laws," is the
policy of the law expressed in our corporation statute and the Code of avoidance of fraud upon the public which would have occasion to deal
Commerce is clearly against such a practice. with the entity concerned, the evasion of legal obligations and duties, and
the reduction of difficulties of administration and supervision over
UNIVERSAL MILK CORPORATION VS. UNIVERSAL TEXTILE MILLS, INC. corporations
78 SCRA 62, JULY 28, 1977
FACTS Universal Textile Mills, Inc. is a textile manufacturing firm for which Herein, the Court does not consider that the corporate names of the
it was issued a certificate of registration. On the other hand, Universal Mills academic institutions are "identical with, or deceptively or confusingly
Corporation was registered having as its primary purpose the similar" to that of Lyceum of the Philippines Inc. True enough, the
"manufacture and production of hosieries and wearing apparel of all corporate names of the other schools (defendant institutions) entities all
kinds." The occurrence of a fire which gutted the latter's spinning mills in carry the word "Lyceum" but confusion and deception are effectively
Pasig, Rizal prompted Universal Textile Mills, Inc. to file a complaint precluded by the appending of geographic names to the word "Lyceum."
because of the similarity of the corporate names which created uncertainty Thus, the "Lyceum of Aparri" cannot be mistaken by the general public for
and confusion among its bankers, friends, stockholders and customers. the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
Thereafter, Securities and Exchange Commission granted the petition and would be confused with the Lyceum of the Philippines. Further,
ordered Universal Mills Corporation to change its corporate name for etymologically, the word "Lyceum" is the Latin word for the Greek lykeion
being "confusingly and deceptively similar." which in turn referred to a locality on the river Ilissius in ancient Athens
"comprising an enclosure dedicated to Apollo and adorned with fountains
ISSUE: WON the order of the Commission enjoining Universal Mills and buildings erected by Pisistratus, Pericles and Lycurgus frequented by
Corporation to change its corporate name constitutes a grave abuse of the youth for exercise and by the philosopher Aristotle and his followers
discretion. for teaching."

HELD: NO. The corporate names in question are not Identical, but they In time, the word "Lyceum" became associated with schools and other
are indisputably so similar that even under the test of "reasonable care and institutions providing public lectures and concerts and public discussions.
observation as the public generally are capable of using and may be Thus today, the word "Lyceum" generally refers to a school or an
expected to exercise" invoked by appellant, We are apprehensive institution of learning. Since "Lyceum" or "Liceo" denotes a school or
confusion will usually arise, considering that under the second amendment institution of learning, it is not unnatural to use this word to designate an
of its articles of incorporation on August 14, 1964, appellant included entity which is organized and operating as an educational institution. To
among its primary purposes the "manufacturing, dyeing, finishing and determine whether a given corporate name is "identical" or "confusingly
selling of fabrics of all kinds" in which respondent had been engaged for or deceptively similar" with another entity's corporate name, it is not
more than a decade ahead of petitioner. enough to ascertain the presence of "Lyceum" or "Liceo" in both names.
One must evaluate corporate names in their entirety and when the name
of Lyceum of the Philippines is juxtaposed with the names of private
LYCEUM OF THE PHILIPPINES, INC. VS. COURT OF APPEALS 219 SCRA
respondents, they are not reasonably regarded as "identical" or
610, MARCH 05, 1993
"confusingly or deceptively similar" with each other.
FACTS: Lyceum of the Philippines Inc. previously obtained from the SEC a
favorable decision on the exclusive use of “Lyceum” against Lyceum of
ISSUE No. 2: WON the word “Lyceum” has acquired a secondary meaning
Baguio, Inc. such decision assailed by the latter before the SC which was
although originally generic
denied for lack of merit.
HELD: NO. The Court of Appeals recognized this issue and answered it in
Armed with the Resolution of the Supreme Court, the Lyceum of the
the negative: "Under the doctrine of secondary meaning, a word or phrase
Philippines then wrote all the educational institutions it could find using
originally incapable of exclusive appropriation with reference to an article
the word "Lyceum" as part of their corporate name and advised them to
in the market, because geographical or otherwise descriptive might
discontinue such use of "Lyceum." Unheeded, Lyceum of the Philippines
nevertheless have been used so long and so exclusively by one producer
instituted before the SEC an action to enforce what Lyceum of the
with reference to this article that, in that trade and to that group of the
Philippines claims as its proprietary right to the word "Lyceum." The SEC
purchasing public, the word or phrase has come to mean that the article
rendered a decision sustaining petitioner's claim to an exclusive right to
was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
use the word "Lyceum." The hearing officer relied upon the SEC ruling in
circumstance has been referred to as the distinctiveness into which the
the Lyceum of Baguio, Inc. case.
name or phrase has evolved through the substantial and exclusive use of
the same for a considerable period of time No evidence was ever
On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum
presented in the hearing before the Commission which sufficiently proved
Of Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi
that the word 'Lyceum' has indeed acquired secondary meaning in favor
Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern
of the appellant. If there was any of this kind, the same tend to prove only
Philippines, Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan
that the appellant had been using the disputed word for a long period of
Lyceum, Inc.,, which are also educational institutions, to the SEC ,
time.
Page 11 of 182
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The right to the exclusive use of a corporate name with freedom from
The number alone of the private respondents in the present case suggests infringement by similarity is determined by priority of adoption. In this
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has regard, there is no doubt with respect to Petitioners' prior adoption of' the
not been attended with the exclusivity essential for applicability of the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical
doctrine of secondary meaning. It may be noted also that at least one of and Philips Industrial were incorporated on 29 August 1956 and 25 May
the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used 1956, respectively, while Respondent Standard Philips was issued a
the term "Lyceum" 17 years before Lyceum of the Philippines registered Certificate of Registration on 12 April 1982, twenty-six (26) years later.
its own corporate name with the SEC and began using the word "Lyceum." Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps
It follows that if any institution had acquired an exclusive right to the word of all types and their accessories since 30 September 1922.
"Lyceum," that institution would have been the Western Pangasinan
Lyceum, Inc. rather than Lyceum of the Philippines. Hence, Lyceum of the The second requisite no less exists in this case. In determining the
Philippines is not entitled to a legally enforceable exclusive right to use the existence of confusing similarity in corporate names, the test is whether
word "Lyceum" in its corporate name and that other institutions may use the similarity is such as to mislead a person, using ordinary care and
"Lyceum" as part of their corporate names. discrimination. In so doing, the Court must look to the record as well as
the names themselves. While the corporate names of Petitioners and
PHILIPS EXPORT B.V. VS. COURT OF APPEALS 206 SCRA 457, FEBRUARY Private Respondent are not identical, a reading of Petitioner's corporate
21, 1992 names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
FACTS: Petitioner is the registered owner of the trademark PHILIPS and and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to
PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. Philips conclude that "PHILIPS" is, indeed, the dominant word in that all the
Electric Lamp Inc. and Philips Industrial Development Inc., also petitioners, companies affiliated or associated with the principal corporation, PEBV,
are the authorized users of such trademark. Petitioner filed a case with SEC are known in the Philippines and abroad as the PHILIPS Group of
praying for a writ of injunction to prohibit herein respondent Standard Companies.
Philips Corporation from using the word “PHILIPS” in its corporate name,
which was denied. On appeal, the CA affirmed the SEC. Respondent’s argue that there was no evidence presented that there was
actual confusion. It is settled, however, that proof of actual confusion need
ISSUE: WON Standard Philips should be directed to delete the word not be shown. It suffices that confusion is probably or likely to occur (6
PHILIPS from its corporate name. Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

HELD: YES. As early as Western Equipment and Supply Co. v. Reyes, 51 Moreover, Given Private Respondent's underlined primary purpose in its
Phil. 115 (1927), the Court declared that a corporation's right to use its AOI, nothing could prevent it from dealing in the same line of business of
corporate and trade name is a property right, a right in rem, which it may electrical devices, products or supplies which fall under its primary
assert and protect against the world in the same manner as it may protect purposes. Besides, there is showing that Private Respondent not only
its tangible property, real or personal, against trespass or conversion. It is manufactured and sold ballasts for fluorescent lamps with their corporate
regarded, to a certain extent, as a property right and one which cannot be name printed thereon but also advertised the same as, among others,
impaired or defeated by subsequent appropriation by another corporation Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14,
in the same field (Red Line Transportation Co. vs. Rural Transit Co., 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners,
September 8, 1934, 20 Phil 549). [p]rivate respondent's choice of "PHILIPS" as part of its corporate name
[STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's
A name is peculiarly important as necessary to the very existence of a intention to ride on the popularity and established goodwill of said
corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed petitioner's business throughout the world" (Rollo, p. 137). The
317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First subsequent appropriator of the name or one confusingly similar thereto
National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its usually seeks an unfair advantage, a free ride of another's goodwill
name is one of its attributes, an element of its existence, and essential to (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et
its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to al, 89 App DC 269, 191 F 2d 488).
corporations is that each corporation must have a name by which it is to
sue and be sued and do all legal acts. The name of a corporation in this In allowing Private Respondent the continued use of its corporate name,
respect designates the corporation in the same manner as the name of an the SEC maintains that the corporate names of Petitioners PHILIPS
individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT,
Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); INC. contain at least two words different from that of the corporate name
and the right to use its corporate name is as much a part of the corporate of respondent STANDARD PHILIPS CORPORATION, which words will
franchise as any other privilege granted (Federal Secur. Co. vs. Federal readily identify Private Respondent from Petitioners and vice-versa.
Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36). True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar
A corporation acquires its name by choice and need not select a name to one already used by another corporation or partnership. If the proposed
identical with or similar to one already appropriated by a senior name contains a word already used as part of the firm name or style of a
corporation while an individual's name is thrust upon him (See Standard registered company; the proposed name must contain two other words
Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, different from the company already registered" (Emphasis ours). It is then
977). A corporation can no more use a corporate name in violation of the pointed out that Petitioners Philips Electrical and Philips Industrial have
rights of others than an individual can use his name legally acquired so as two words different from that of Private Respondent's name.
to mislead the public and injure another (
. What is lost sight of, however, is that PHILIPS is a trademark or trade name
which was registered as far back as 1922. Petitioners, therefore, have the
The statutory prohibition (under Sec. 18 of the Corporation Code) cannot exclusive right to its use which must be free from any infringement by
be any clearer. To come within its scope, two requisites must be proven, similarity. A corporation has an exclusive right to the use of its name, which
namely: may be protected by injunction upon a principle similar to that upon which
(1) that the complainant corporation acquired a prior right over the use persons are protected in the use of trademarks and tradenames (18 C.J.S.
of such corporate name; and 574). Such principle proceeds upon the theory that it is a fraud on the
(2) the proposed name is either: (a) identical; or (b) deceptively or corporation which has acquired a right to that name and perhaps carried
confusingly similar to that of any existing corporation or to any other on its business thereunder, that another should attempt to use the same
name already protected by law; or (c) patently deceptive, confusing name, or the same name with a slight variation in such a way as to induce
or contrary to existing law. persons to deal with it in the belief that they are dealing with the
corporation which has given a reputation to the name (6 Fletcher [Perm
Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk
Page 12 of 182
 NOTES ON THE REVISED CORPORATION CODE

Co., 210 F 510). Notably, too, Private Respondent's name actually contains its consent to such use.
only a single word, that is, "STANDARD", different from that of Petitioners (6)
inasmuch as the inclusion of the term "Corporation" or "Corp." merely (a) The full name or surname of a person may be used in a
serves the Purpose of distinguishing the corporation from partnerships and corporate or partnership name if he or she is a stockholder,
other business organizations. member or partner of the said entity and has consented to
such use; if the person is already deceased, the consent shall
The fact that there are other companies engaged in other lines of business be given by his or her estate;
using the word "PHILIPS" as part of their corporate names is no defense (b) The Commission may require a registrant to explain to its
and does not warrant the use by Private Respondent of such word which satisfaction the reason for the use of a person's name;
constitutes an essential feature of Petitioners' corporate name previously (c) The meaning of initials used in a name shall be stated by the
adopted and registered and-having acquired the status of a well-known registrant in the Articles of Incorporation, Articles of
mark in the Philippines and internationally as well (Bureau of Patents Partnership or in a separate document signed by an
Decision No. 88-35 [TM], June 17, 1988, SEC Records). incorporator, director or partner, as the case may be.
(7) The name of an internationally known foreign corporation, or
SEC Memorandum Circular No. 14, Series of 2017 something similar to it, cannot be used by a domestic corporation
Consolidated Guidelines and Procedures on the Use of Corporate and unless it is its subsidiary and the parent corporation has consented
Partnership Names to such use; However, a name written in a foreign language, even
if registered in another country, shall not be registered if the name
To keep abreast with developments in business and information violates good morals, public order or public policy, or has an
technology in the country, the Commission is adopting the following offensive or indecorous meaning in any of the country's official
guidelines and procedures in the registration of corporate and languages or major dialects.
partnership names: (8) The name of a local geographical unit, site or location cannot be
(1) used as corporate or partnership name unless it is accompanied
(a) The corporate name shall contain the word "Corporation" or by a descriptive word or phrase. e.g. Pasay Food Store, Inc.
"Incorporated," or the abbreviations "Corp." or "Inc." (9) Pursuant to existing laws, the following words and phrases can be
respectively; used as corporate or partnership name in the manner enumerated
(b) The partnership name shall bear the word "Company" or below:
"Co." and if it is a limited partnership, the word "Limited" or (a) "Finance Company," "Financing Company," "Finance and
"Ltd.". A professional partnership name may bear the word Leasing Company," and "Leasing Company," "Investment
"Company," "Associates," or "Partners," or other similar Company," "Investment House” — by entities engaged in
descriptions; the financing or investment house business. (R.A. 8556 and
(c) The corporate name of a foundation shall use the word Pres. Decree 129);
"Foundation." (b) "Lending Company" and 'Lending Investor"— companies
(d) The corporate name of all non-stock, non-profit corporations, (R.A. 9474), or "Pawnshop" — by entities authorized to
including non-governmental organizations and foundations, operate pawnshops (P.D. 114);
engaging in microfinance activities shall use the word (c) “Bank," "Banking," "Banker," "Savings and Loan
"Microfinance" or "Microfinancing"; provided that said Association," (R.A.) 8367) "Trust Corporation," "Trust
corporations shall state in the purpose clause of their Articles Company" or words of similar meaning — by entities
of Incorporation that they shall conduct microfinance engaged in the banking or trust business (R.A. 8791);
operations pursuant to Republic Act No. 8425 or the Social (d) "United Nations," "UN," in full or abbreviated form -
Reform and Poverty Alleviation Act. exclusively by the United Nations and its attached agencies
(2) A term that describes the business of a corporation in its name (R.A. 226);
should refer to its primary purpose. If there are two such terms, (e) Bonded" — by entities with licensed warehouses (R.A. 247),
the first should refer to the primary purpose and the second to and;
the secondary purpose. (f) "SPV-AMC" — by corporations authorized to act as special
(3) purpose of vehicle (R.A. 9182).
(a) The name shall not be identical, misleading or confusingly (10) The practice of a profession regulated by a special law which,
similar or a corporate or partnership name registered with the among others, provides for the permissible use of the profession's
Commission, or with the Department of Trade and Industry, name in a firm, partnership or association shall govern the use of
in the case of sole proprietorships; the name, e.g. "Engineer" or "Engineering" (R.A. 1582),
(b) If the name applied for is similar to that of a registered "Architect" (R.A. 9266), or "Geodetic Engineer" (R.A. 8560).
corporation or partnership, the applicant shall add one or
more distinctive words to the proposed name to remove the Notwithstanding the limitations mentioned above, any
similarity or differentiate it from the registered name; association registered by entities engaged in the listed activities
(c) However, the addition of one or more distinctive words shall may use the profession's name, e.g. Association of Engineers of
not be allowed if the registered name is coined or unique the Philippines, Inc.
unless the board of directors or majority of the partners of (11) Unless otherwise authorized by the Commission, the words and
the subject corporation or partnership gives its consent to phrases enumerated below can be used only by the entities
the applied name. mentioned:
(d) Punctuation marks, spaces, signs, symbols, and other similar (a) "Investment(s)" or "Capital" - by entities organized as
characters, regardless of their form or arrangement, shall not investment house or investment company;
be acceptable as distinguishing words for purposes of (b) "Capital" — by entities organized as investment house,
differentiating a proposed name from a registered name. investment company or holding company;
(e) A name that consist solely of special symbols, punctuation (c) "Asset/ Investment/Fund/Financial Management," or
marks or specially designed characters shall not be "Asset/Investment/Fund/Financial Adviser," or any similar
registered. words or phrases - by entities organized as investment
(4) Business or trade name which is different from the corporate or company adviser or holders of investment management
partnership name shall be indicated in the articles of incorporation activities (IMA) license from the Bangko Sentral ng Pilipinas;
or partnership. A company may have more than one business or (d) "National," "Bureau," "Commission," "State," and other
trade name. words, acronyms, abbreviations that have gained wide
(5) A trade name or trademark registered with the Intellectual acceptance in the Philippines - by entities that perform
Property Office may be used as part of the corporate or governmental functions;
partnership name of a party other than its owner if the latter gives (e) "Association" and "Organization" or similar words which
pertain to non-stock corporations - by entities primarily
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engaged in non-profit activities, and; The reasons for requiring a statement of the purposes or objects:
(f) "Stock Exchange/Futures Exchange/Derivatives Exchange," (1) In order that the stockholder who contemplates on an investment in
"Stock Broker/Securities Broker/Derivatives Broker," a business enterprise shall know within what lines of business his
"Commodity/Financial Futures Merchant/Broker," money is to be put at risks;
"Securities Clearing Agency/Stock Clearing Agency," (2) So that the board of directors and management my now within what
"Plans" or any similar words or phrases — by entities lines of business they are authorized to act; and
organized as an exchange, broker dealer, commodity futures (3) So that anyone who deals with the company may ascertain whether a
broker, clearing agency, or pre-need company under the contract or transaction into which he contemplates entering is one
Securities Regulation Code (R.A. 8799). within the general authority of the management.
(12) Pursuant to Republic Act 10530, or "
SECONDARY PURPOSE: Although the Corporation Code does not restrict
", the use of the "red crescent", or "red crystal" or their nor limit the number of purpose or purposes which a corporation may
translation in any words "red cross", official language and dialect have, Sec. 14 thereof, requires that if it has more than one purpose, the
cannot be used or registered as part of a corporate or partnership primary purpose as well as the secondary ones must be indicated therein.
name, unless with the consent of the Philippine Red Cross.
(13) The enumeration in paragraphs 10, 11 and 12 are not exclusive PROHIBITION The following are prohibited by special laws for having any
and may13. increase or decrease depending on future legislative other purpose not peculiar to them:
issuances or administrative orders of the appropriate or duly (1) Educational, religious, and other non-stock corporations cannot
authorized government offices. include any other purpose which would change or contradict its
(14) Notwithstanding the foregoing, the Commission shall, for the nature or to engage in any enterprise to make profits for is members;
protection of the public interest and other justifiable causes, (2) Insurance companies cannot engage in commercial banking at the
disallow the use of names that, in its judgement, are misleading, same time, and vice-versa; and
deceptive, confusingly similar to a registered name, or contrary to (3) Stockbrokers can have no other line of business not peculiar to them.
public morals, good customs or public policy.
(15) The name of a corporation or partnership that has been dissolved RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
or whose registration has been revoked shall not be used by (1) As a general rule, the purpose or purposes must be lawful. Hence,
another corporation, except in meritorious cases as determined the SEC is duty bound to determine the legality of the corporate
by the Commission purpose/s before it issues the certificate of registration;
SEC Memorandum Circular No. 9, Series of 2018 (2) A corporation may not be formed for the purpose of practicing a
profession like law, medicine or accountancy, either directly or
indirectly. These are reserved exclusively for professional
partnerships;
To keep abreast with developments in business and information (3) The retail trade, where the corporate capital is less than $2.5M, or its
technology in the country, the Commission is adopting the following peso equivalent are reserved exclusively for Filipinos, or for
guidelines and procedures in the registration of corporate, one person corporations or partnerships wholly owned by such citizen.
corporate and partnership names: (4) As a general rule, corporations with foreign equity are not allowed to
(1) engage in restaurant business but corporations with such foreign
(a) The corporate name shall contain the word "Corporation" or equity can purse such undertaking if it is incidental or in connection
"Incorporated," or the abbreviations "Corp." or "Inc." with hotel or inn- keeping business.
respectively; (5) Management consultants, advisers and/or specialists, must submit
(b) In the case of a One Person Corporation, the corporate name the personal information sheet of the incorporators and directors in
shall contain the word "OPC" either below or at the end of order that the SEC may be able to find out or determine whether or
its corporate name; not the applicant corporation is qualified to act as such.
(c) The partnership name shall bear the word "Company" or (6) As a matter of policy, financing companies are required by the SEC
"Co." and if it is a limited partnership, the word "Limited" or to submit certain additional documents together with their
"Ltd.". A professional partnership name may bear the word applications for registration to verify compliance with RA 8556.
"Company," "Associates," or "Partners," or other similar (7) For bonded warehousing companies, an undertaking to comply with
descriptions; the General Bonded Warehousing Act must be submitted along with
(d) The corporate name of a foundation shall use the word the AOI.
"Foundation"; e) The corporate name of all non-stock, non- (8) In case the applicant proposes to engage in the business of hospital
profit corporations, including non-governmental and/or clinic, the purpose clause must contain the following proviso:
organizations and foundations, engaging in microfinance “Provided that purely medical or surgical services in connection
activities shall use the word "Microfinance" or therewith shall be performed by duly qualified physician and surgeon
"Microfinancing"; provided that said corporations shall state who may or may not be freely and individually contracted by the
in the purpose clause of their Articles of Incorporation that parties.”
they shall conduct microfinance operations pursuant to (9) In the case of Customs Brokerage business, the applicant must submit
Republic Act No. 8425 or the Social Reform and Poverty the license of at least two customs brokers connected with the
Alleviation Act. applicant corporation;
(10) Transfer Agents, Broker and Clearing Houses must submit the
SEC Memorandum Circular No. 13 Series of 2019 certificate of admission to the profession of the CPA of any officer of
the corporation;
(11) Carriage of mails cannot be a purpose of a corporation unless a
special franchise has been granted to it.
(12) If the corporate purpose or objective includes any purpose under the
3. Purpose Clause
supervision of another government agency, prior clearance and/or
Second: That the purpose or purposes for which such corporation is
approval of the concerned government agencies or instrumentalities
incorporated are: (If there is more than one purpose, indicate primary and
will be required pursuant to the last paragraph of Sec. 16 of the Code.
secondary purposes);
GENERAL LIMITATIONS:
The statement of the objects or purpose or powers in the charter results (1) The purpose or purposes must be lawful;
practically in defining the scope of authority of the corporate enterprise or (2) The purpose must be specific or stated concisely although in broad
undertaking. This statement both congers and also limits the actual or general terms;
authority of the corporate representatives. (3) If there is more than one purpose, the primary as well as the
secondary ones must be specified; and
Page 14 of 182
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(4) The purposes must be capable of being lawfully combined. corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and
4. Principal Office Address liabilities existing prior to its revival. Upon approval by the Commission,
Third: That the principal office of the corporation is located in the the corporation shall be deemed revived and a certificate of revival of
City/Municipality of ______________________, Province of corporate existence shall be issued, giving it perpetual existence, unless
_______________________, Philippines; its application for revival provides otherwise.

It must be located within the Philippines. The AOI must not only specify No application for revival of certificate of incorporation of banks, banking
the province, but also the City or Municipality where it is located. In this and quasi-banking institutions, preneed, insurance and trust companies,
regard, it is to be observed that the principal office may be in one place, non-stock savings and loan associations (NSSLAs), pawnshops,
but the business operations are actually conducted in other areas. The law corporations engaged in money service business, and other financial
does not, of course, require a statement of the place of corporate intermediaries shall be approved by the Commission unless accompanied
operations and, therefore, may be dispensed with. by a favorable recommendation of the appropriate government agency.

The principal office serves as the residence of the corporation and is thus Doctrine of Relations or Relating Back Doctrine
important in: (1) venue of actions; (2) registration of chattel mortgage of The filing and recording of a certificate of extension after that time cannot
shares; (3) validity of meetings of stockholders or members in so far as relate back to the date of the passage of a resolution by the stockholders
venue thereof is concerned. in favor of the extension so as to save the life of the corporation. The
contrary is true, however, and the doctrine of relation will apply, where the
CLAVECILLA RADIO SYSTEM VS. ANTILLON, ET AL. 19 SCRA 379, delay is due to the neglect of the officer with whom the certificate is
FEBRUARY 18, 1967 required to be filed, or to a wrongful refusal on his part to receive it.
FACTS: The New Cagayan Grocery filed a complaint against CRS for some
irregularities in the transmission of a message which changed the context SEC Memorandum Circular No. 23, Series of 2019
and purport causing damages. The complaint was filed in the City Court
of Cagayan de Oro.
Section 1. . – The following corporations may file a Petition for
ISSUE: WON the action will prosper. Revival of Corporate Existence:
a. Generally, a corporation whose term has expired;
HELD: NO. The action was based on tort and not upon a written contract b. An Expired Corporation whose Certificate of Registration has been
and as such, under the Rules of Court, it should be filed in the municipality revoked for non-filing of reports (e.g. General Information Sheet, and
where the defendant or any of the defendants resides or may be served Audited Financial Statements), provided that it shall file the proper
with summons. Petition to Lift its Revoked Status, which may be incorporated in its
Petition to Revive, and must settle the corresponding penalties
Settled is the principle in corporation law that the residence of a thereof;
corporation is the place where the principal office is established. Since it is c. An Expired Corporation whose Certificate of Registration has been
not disputed that CRS has its principal office in Manila, it follows that the suspended, provided that it shall file the proper Petition to Lift its
suit against it may properly be filed in the City of Manila. Suspended Status, which may be incorporated in its Petition to
Revive, and must settle the corresponding penalties thereof; or
The fact that CRS maintains branch office in some parts of the country does d. An Expired Corporation whose corporate name has already been
not mean that it can be sued in any of these places. To allow such would validly re-used, and is currently being used, by another existing
create confusion and work untold inconveniences to the corporation. corporation duly registered with the Commission, provided that the
former shall change its corporate name within thirty (30) days from
SEC Memorandum Circular No. 6, Series of 2016 the issuance of its Certificate of Revival of Corporate Existence.

r SEC Memorandum Circular No. 21, Series of 2014

5. Term of Existence
Fourth: That the corporation shall have perpetual existence or a term of To arrive at an accurate computation of the term of existence of a
______________ years from the date of issuance of the certificate of corporation, the Commission, by virtue of SEC En Banc Resolution No.
incorporation; 564, Series of 2014, resolved to adopt the following guidelines:
(1) The first day of the corporate term is the date of incorporation, as
stated in the Certificate of Incorporation, since it is the day when the
A corporation shall have perpetual existence
existence of a corporation commences pursuant to Section 19 of the
unless its articles of incorporation provides otherwise.
Corporation Code and Section 31, Chapter VIIII, Book 1 of the
Administrative Code of 1987;
Corporations with certificates of incorporation issued prior to the effectivity
(2) The last day of the corporate term is the day before
of this Code, and which continue to exist, shall have perpetual existence,
corresponding numbered day of the same month of incorporation in
unless the corporation, upon a vote of its stockholders representing a
the last year of the existence of a corporation in accordance with the
majority of its outstanding capital stock, notifies the Commission that it
pronouncement of the Supreme Court in the case of Commissioner
elects to retain its specific corporate term pursuant to its articles of
of Internal Revenue, et al. vs. Primetown Property Group, Inc., GR No.
incorporation: , That any change in the corporate term under this
162155, and
section is without prejudice to the appraisal right of dissenting
(3) The above guidelines for the computation of the corporate term,
stockholders in accordance with the provisions of this Code.
including the determination of the first and last days thereof, shall
apply prospectively
A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: , That no extension may
6. Incorporators
be earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension as Fifth: That the names, nationalities, and residence addresses of the
may be determined by the Commission: , That such incorporators of the corporation are as follows:
extension of the corporate term shall take effect only on the day following
the original or subsequent expiry date(s). Name Nationality Residence
___________________ __________________ ___________________
A corporation whose term has expired may apply for a revival of its ___________________ __________________ ___________________
___________________ __________________ ___________________
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 NOTES ON THE REVISED CORPORATION CODE

___________________ __________________ ___________________ disqualifications of its members of the board of directors or trustees.
___________________ __________________ ___________________ However, it may not do away with the minimum disqualifications laid down
by the Code. The minimum qualifications of directors and trustees in a
domestic corporation are provided under the 2nd paragraph of Section 22:
SEC. 5. . –
Corporators are those who compose a corporation, whether as SEC. 22.
stockholders or shareholders in a stock corporation or as members in a –xxx
nonstock corporation. Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally forming and Directors shall be elected for a term of one (1) year from among the holders
composing the corporation and who are signatories thereof. of stocks registered in the corporation’s books, while trustees shall be
elected for a term not exceeding three (3) years from among the members
SEC. 10 – Any person, of the corporation. Each director and trustee shall hold office until the
partnership, association or corporation, singly or jointly with others but not successor is elected and qualified. A director who ceases to own at least
more than fifteen (15) in number, may organize a corporation for any lawful one (1) share of stock or a trustee who ceases to be a member of the
purpose or purposes: , That natural persons who are licensed to corporation shall cease to be such
practice a profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to organize as a QUALIFICATIONS OF DIRECTORS/TRUSTEES:
corporation unless otherwise provided under special laws. Incorporators 1. Must own at least 1 share in their own names or a member (in the
who are natural persons must be of legal age. case of trustees);
2. Majority must be resident of the Philippines. Even aliens may be
Each incorporator of a stock corporation must own or be a subscriber to at elected as directors, provided that the majority of such directors are
least one (1) share of the capital stock. residents of the Philippines. EXCEPT: in activities exclusively reserved
to Filipino citizens like the management of educational institutions
A corporation with a single stockholder is considered a One Person and those governed by the Retail Trade Law.
Corporation as described in Title XIII, Chapter III of this Code.
SEC. 26. . – A person
CORPORATORS apply to all who compose the corporation at any given shall be disqualified from being a director, trustee or officer of any
time and need not be among those who executed the AOI at the start of corporation if, within five (5) years prior to the election or appointment
its formation or organization. as such, the person was:
(a) Convicted by final judgment:
INCORPORATORS are those mentioned in the AOI as originally forming (1) Of an offense punishable by imprisonment for a period
the corporation and who are signatories in the AOI. exceeding six (6) years;
(2) For violating this Code; and
An incorporator may be considered as a corporator as long as he continues (3) For violating Republic Act No. 8799, otherwise known as “The
to be a stockholder or a member, but not all corporators are incorporators. Securities Regulation Code”;
(b) Found administratively liable for any offense involving fraudulent
SEC Memorandum Circular No. 16 Series of 2019 acts; and
(c) By a foreign court or equivalent foreign regulatory authority for
acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.
Section 1. – For the purpose of forming a
domestic corporation under the Revised Corporation Code, two (2) or The foregoing is without prejudice to qualifications or other
more persons, but not more than more than fifteen (15), may organize disqualifications, which the Commission, the primary regulatory agency,
themselves and form a corporation. or the Philippine Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its administrative
Only a One Person Corporation (OPC) may have a single stockholder, as proceedings.
well as a sole director. Accordingly, its registration must comply with
corresponding separate guidelines on the establishment of an OPC. 8. Capitalization
Seventh: That the authorized capital stock of the corporation is
7. Directors/Trustees ______________ PESOS (P________), divided into _____ shares with the par
Sixth: That the number of directors or trustees of the corporation shall be value of ____________ PESOS (P_______________) per share. (In case all
_________________; and the names, nationalities, and residence addresses the shares are without par value): That the capital stock of the corporation
of the first directors or trustees of the corporation are as follows: is __________________________ shares without par value.
Name Nationality Residence
___________________ __________________ ___________________ (In case some shares have par value and some are without par value):
___________________ __________________ ___________________ That the capital stock of said corporation consists of
___________________ __________________ ___________________ __________________________ shares, of which _______________________
___________________ __________________ ___________________ shares have a par value of _________________ PESOS (P____________)
___________________ __________________ ___________________ each, and of which _______________________ shares are without par value.

Eighth: That the number of shares of the authorized capital stock above-
• DIRECTORS is the governing board in stock corporations.
stated has been subscribed as follows:
• TRUSTEES refer to non-stock corporations.
Name of Nationality No. of Amount Amount
There must be at least 5 but not more than 15 directors in a private Subscriber Shares Subscribed Paid
corporation. EXCEPTIONS: Subscribed
(1) Educational corporations registered as non-stock corporations whose
number of trustees, though not less than 5 and not more than 15
should be divisible by 5.
(2) In close corporations where all stockholders are considered as
members of the board of directors (Sec. 97) thereby effectively
allowing 20 members in the board.

(Modify No. 8 if shares are with no-par value. In case the corporation is
The by-laws of a corporation may provide for additional qualifications and
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 NOTES ON THE REVISED CORPORATION CODE

nonstock, Nos. 7 and 8 of the above articles may be modified accordingly, – The classification of shares, their
and it is sufficient if the articles state the amount of capital or money corresponding rights, privileges, or restrictions, and their stated par value,
contributed or donated by specified persons, stating the names, if any, must be indicated in the articles of incorporation. Each share shall
nationalities, and residence addresses of the contributors or donors and be equal in all respects to every other share, except as otherwise provided
the respective amount given by each.) in the articles of incorporation and in the certificate of stock.

Ninth: That _____________________ has been elected by the subscribers The shares in stock corporations may be divided into classes or series of
as Treasurer of the Corporation to act as such until after the successor is shares, or both. No share may be deprived of voting rights except those
duly elected and qualified in accordance with the bylaws, that as Treasurer, classified and issued as “preferred” or “redeemable” shares, unless
authority has been given to receive in the name and for the benefit of the otherwise provided in this Code: That there shall always be a
corporation, all subscriptions, contributions or donations paid or given by class or series of shares with complete voting rights.
the subscribers or members, who certifies the information set forth in the
seventh and eighth clauses above, and that the paid-up portion of the
subscription in cash and/or property for the benefit and credit of the Holders of nonvoting shares shall nevertheless be entitled to vote on the
corporation has been duly received. following matters:
(a) Amendment of the articles of incorporation;
(a) Shares of stock and classification (b) Adoption and amendment of bylaws;
The Corporation Code requires the AOI to state the authorized capital (c) Sale, lease, exchange, mortgage, pledge, or other disposition of all
stock, the number of shares and/or kind of shares into which the authorized or substantially all of the corporate property;
capital is divided, the par value of each share, if there by any, the names, (d) Incurring, creating, or increasing bonded indebtedness;
nationalities and residences of the original subscribers, and the amount (e) Increase or decrease of authorized capital stock;
subscribed and paid by each. At least 25% of the subscribed capital must (f) Merger or consolidation of the corporation with another corporation
be paid and in no case may the paid-up capital be less than P5,000. or other corporations;
(g) Investment of corporate funds in another corporation or business in
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the AOI accordance with this Code; and
to be subscribed and paid-in or secured to be paid by the subscribers. It (h) Dissolution of the corporation.
may also refer to the maximum number of shares that a corporation can
issue. Except as provided in the immediately preceding paragraph, the vote
required under this Code to approve a particular corporate act shall be
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total deemed to refer only to stocks with voting rights.
value for which there are contracts for their acquisition or subscription. It is
in effect, the stockholder’s equity account showing that part of the The shares or series of shares may or may not have a par value: ,
authorized capital stock which has been paid or promised to be paid, or That banks, trust, insurance, and preneed companies, public utilities,
that portion of the authorized capital stock which has been subscribed by building and loan associations, and other corporations authorized to
the subscribers or stockholders. obtain or access funds from the public, whether publicly listed or not, shall
not be permitted to issue no-par value shares of stock.
PAID UP CAPITAL STOCK or PAID-IN CAPITAL is the actual amount or
value which has been actually contributed or paid to the corporation in Preferred shares of stock issued by a corporation may be given preference
consideration of the subscriptions made thereon. It may be in the form of in the distribution of dividends and in the distribution of corporate assets
cash, property or in the form of services actually rendered to the in case of liquidation, or such other preferences: That preferred
corporation as provided under Sec. 62 of the Corporation Code: 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
SEC. 61. . – Stocks shall not be issued for a terms and conditions of preferred shares of stock or any series thereof:
consideration less than the par or issued price thereof. Consideration for That such terms and conditions shall be effective upon
the issuance of stock may be: filing of a certificate thereof with the Securities and Exchange Commission,
(a) Actual cash paid to the corporation; hereinafter referred to as the “Commission”.
(b) Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair Shares of capital stock issued without par value shall be deemed fully paid
valuation equal to the par or issued value of the stock issued; and nonassessable and the holder of such shares shall not be liable to the
(c) Labor performed for or services actually rendered to the corporation; corporation or to its creditors in respect thereto: That no-par
(d) Previously incurred indebtedness of the corporation; value shares must be issued for a consideration of at least Five pesos
(e) Amounts transferred from unrestricted retained earnings to stated (P5.00) per share: That the entire consideration received
capital; by the corporation for its no-par value shares shall be treated as capital
(f) Outstanding shares exchanged for stocks in the event of and shall not be available for distribution as dividends.
reclassification or conversion;
(g) Shares of stock in another corporation; and/or A corporation may further classify its shares for the purpose of ensuring
(h) Other generally accepted form of consideration. compliance with constitutional or legal requirements.

Where the consideration is other than actual cash, or consists of intangible (b) Purpose of the classification
property such as patents or copyrights, the valuation thereof shall initially (1) To specify and define the rights and privileges of the stockholders;
be determined by the stockholders or the board of directors, subject to (2) For regulation and control of the issuance of sale of corporate
the approval of the Commission. securities for the protection of purchasers and stockholders.
(3) As a management control device.
SHARES OF STOCK designate the units into which the proprietary interest (4) To comply with statutory requirements particularly those which
in a corporation is divided. They represent the proportionate integers or provide for certain limitations on foreign ownership.
units, the sum of which constitutes the capital stock of the corporation. It (5) To better ensure return on investment which can be affected through
is likewise the interest or right which the owner, called the stockholders or the issuance of redeemable shares or preferred shares, i.e., granting
shareholder, has in the management of the corporation, and in the surplus the holders thereof, preference as to dividends and/or distribution of
profits and in case of distribution, in all of its assets remaining after the assets in case of liquidation; and
payment of its debts. (6) For flexibility in price, particularly, no par shares may be issued or sold
from time to time at different prices depending on the net worth of
CERTIFICATE OF STOCK is a document or instrument evidencing the the company since they do not purport to represent an actual or fixed
interest of a stockholder in the corporation. value.

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 NOTES ON THE REVISED CORPORATION CODE

to arrears in dividends if there were profits earned during the previous

years. In effect, their right to receive dividends is merely postponed
on a later date. The moment dividends are declared, back dividends
earned in previous years but not declared as such must first be paid
(i) Common vs. Preferred Shares to this type of preferred shareholders before the common
COMMON SHARES PREFERRED SHARES shareholders receive theirs.
The most commonly A stock that gives the holder preference
issued shares of stock of over the holder of common stocks with DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
a corporation. Although respect to the payment of dividends entitled to dividends whether or not there are profits. Earned cumulative
no clear-cut definition and/or with respect to distribution of or dividend credit type is entitled only to arrears if there are profits in those
can be found, it has capital upon liquidation. years.
been described as one
which entitles it owner to LIMITATIONS imposed by the RCC in VOTING RIGHT OF PREFERRED SHARES
an equal or pro-rata the issuance of preferred stocks: Preferred shares, along with redeemable shares, are usually denied voting
division of profits, if (1) They can be issued only with a rights as they are allowed to be denied of such as provided in Sec. 6, but
there are any, but stated par value; and this right must clearly be withheld. However, even if deprived, preferred
without any preference (2) The preference must be stated in shareholders have the right to vote in matters enumerated in the
or advantage in that the AOI and in the certificate of penultimate paragraph of Sec. 6.
respect over any other stock otherwise each share shall be,
stockholder or class of in all respect, equal to every other PREFERENCE UPON LIQUIDATION
stockholders. share. Such preference must also be stated in the contract, accordingly, giving
them the preference to the distribution of corporate assets upon
DOCTRINE OF EQUALITY OF SHARES. A common share usually carries liquidation or termination of corporate existence. If the preferred shares
with it the right to vote, and frequently, the exclusively right to do. It must are cumulative, they have the right to any arrears in arrears in priority to
be observed, nonetheless, that if there are more than one kind of shares any distribution of assets to the common stockholders.
issued by the corporation, each share, irrespective of classification, are
equal in all respects to every other share, unless, the AOI and the certificate (ii) Par vs. No-par Shares
of stock provide otherwise. PAR VALUE SHARES NO PAR VALUE SHARES
Those whose values are fixed in Those whose issued price are
Thus, where the AOI and the certificate of stock are silent on the question the AOI. Its par value is the not stated in the certificate of
of voting rights, all issued and outstanding shares shall be considered to minimum subscription or original stock but may be fixed in the
have the right to vote and to be voted for issue price of the shares and AOI, or by the BOD when so
indicates the amount which the authorized the articles or the by-
– x x x Each share shall be equal in all original subscribers are laws, or in the absence thereof,
respects to every other share, except as otherwise provided in the articles supposed to contribute to the the stockholders themselves.
of incorporation and in the certificate of stock. capital, which, however, may not They do not purport to represent
PREFERENCE AS TO DIVIDENDS reflect the true value of the ay stated proportionate interest
They have the privilege of being paid dividends first before any other shares because the same may in the capital measured by value,
stockholders are paid theirs. The guaranty is not absolute so as to create a fluctuate depending on the but only an aliquot part of the
relation of debtor and creditor between the corporation and the holders liability and net worth of the whole number of shares of the
of such stock. The amount of preference is stated in the contract of enterprise. corporation issuing it.
subscription and is usually a fixed percentage or by specified amount
indicated therein. Watered Stocks are those issued at less than par value where the
stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 64).
If the preferred shares are participating, they are entitled to participate in
dividends with the common shareholders beyond their stated preference. PRIMARY FUNCTION: Fix a minimum subscription or original issue price
Non-participating preferred shares on the other hand are entitled to its of the shares and indicates the amount which the original subscribers are
fixed priority or preference only. supposed to contribute to the capital as the basis of the privilege of profit
sharing

are those that entitle the owner thereof to The Code allows the issuance of no-par value shares, subject to the
payment not only of current dividends but also back dividends not following limitations provided in Sec. 6:
previously paid whether or not, during the past years, dividends were (1) Such shares once issued, are deemed fully paid and thus, non-
declared or paid. In light of the provision of the Code stating that all shares assessable;
are equal in all respects unless otherwise stated in the AOI, a preferred (2) The consideration for its issuance should not be less than P5.00;
share to be considered cumulative, the same must be provided for and (3) The entire consideration constitutes capital, hence, not available for
specified in the certificate. dividend declaration;
(4) They cannot be issued as preferred stock; and
are those which grant the holders of such (5) They cannot be issued by banks, trust companies, insurance
shares only to the payment of current dividends but not back dividends, companies, public utilities and building and loans associations.
when and if dividends are paid, to the extent agreed upon before any
other stockholders are paid the same. This type may be divided into three Advantages of no-par value shares:
groups: (1) Flexibility in price – no par shares may be issued from time to time at
(1) Discretionary dividend type – depends on the judgment or discretion different prices with the exception only that it shall not be issued at
of the board of directors. Unless there is grave abuse of discretion as less than P5;
to result in oppression, fraud or unfair discrimination, the dividend (2) The issuance thereof practically results to the evasion of the danger
right of stockholders of a particular year cannot be made up in of liability upon watered stock in case of overvaluation of the
subsequent years; consideration paid for it;
(2) Mandatory if earned – impose a positive duty on directors to declare (3) There is a disappearance of personal liability on the part of the holder
dividends every year when profits are earned. In effect, directors for unpaid subscription since they are already deemed fully paid and
cannot withhold dividends if there are profits. non- assessable.
(3) Earned cumulative or dividend credit type – gives the holder the right

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 NOTES ON THE REVISED CORPORATION CODE

(iii) Voting vs. Non-voting Shares

VOTING SHARES NON-VOTING SHARES TREASURY SHARES, as provided in Section 9, are reacquired but not
Gives the holder Do not grant the holder thereof, a voice in retired. They may be issued for a price, even less than par, and the
thereof the right to the election of directors and some other purchaser will not be liable to the creditors of the corporation for the
vote and participate matter requiring stockholders’ vote. Only difference of the purchase price and its par value. They may also be
in the management preferred and redeemable shares may be declared as dividends since they are properties of the corporation. Such
of the corporation, denied the right to vote. But, even if denied shares do not have the right to share in dividends nor the right to vote.
through the election such right, they may still vote on the
of the BOD, or in any following matters: COMMISSIONER OF INTERNAL REVENUE VS. MANNING 66 SCRA 14,
matter requiring (1) Amendment of the articles of AUGUST 06, 1975
stockholders’ incorporation; FACTS: Julius Reese owned 24,700 of the 25,000 authorized capital stock
approval. (2) Adoption and amendment of by-laws; of Manta Trading and Supply Co., the rest are owned by herein
(3) Sale, lease, exchange, mortgage, respondents. Upon Reese’ death, his shares was held in trust by the law
However, voting pledge or other disposition of all or firm Ross, Carrascoso and Janda for the private respondent, who were to
shares may substantially all of the corporate continue management of the corporation. These shares considered by the
practically be denied property; respondents as treasury shares, prior to full payment, were declared as
the right to vote (4) Incurring, creating or increasing stock dividends. Such declaration was assessed by the BIR as distribution
where there exist bonded indebtedness; of assets subject to income tax.
founders’ shares. (5) Increase or decrease of capital stock;
(6) Merger or consolidation of the ISSUE: WON the subject shares are treasury shares
corporation with another corporation or
other corporations; HELD: NO. Treasury shares are stocks issued and fully paid for and
(7) Investment of corporate funds in reacquired by the corporation either by purchase, donation, forfeiture or
another corporation or business in other means and do not have the status of outstanding shares. They may
accordance with this RCC; and be re-issued or sold again and while held by the company participates
(8) Dissolution of the corporation neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in meeting of the corporation as voting stock for
(iv) Founders' Shares otherwise equal distribution of voting powers among stockholders will be
SEC. 7. . – Founders’ shares may be given certain rights effectively lost and the directors will be able to perpetuate their control of
and privileges not enjoyed by the owners of other stocks. Where the the corporation, though it still represent a paid for interest in the property
exclusive right to vote and be voted for in the election of directors is of the corporation. These features of a treasury stock are lacking in the
granted, it must be for a limited period not to exceed five (5) years from questioned shares.
the date of incorporation: Provided, That such exclusive right shall not be
allowed if its exercise will violate Commonwealth Act No. 108, otherwise In this case, and under the terms of the trust agreement, the shares of stock
known as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known of Reese participated in dividends which the trustee received and the said
as the “Foreign Investments Act of 1991”; and other pertinent laws. shares were voted upon by the trustee in all corporate meetings. They
were not, therefore, treasury shares. The 24,700 shares were outstanding
FOUNDERS’ SHARES are shares issued to the founders of the corporation shares of Reese’s estate until they were fully paid. Such being the case,
which are granted certain right and privileges such as the exclusive right their declaration as treasury stock dividend was a complete nullity.
to vote and be voted for in the election of directors
(c) Capital requirements
The period of 5 years is non-extendable because it may result in the almost SEC. 12. .–
perpetual disqualification of other stockholders to elect or be elected as Stock corporations shall not be required to have a minimum capital stock,
members of the BOD resulting to the lack of proper representation thereat. except as otherwise specifically provided by special law.

(v) Redeemable Shares Family Code of the Philippines

SEC. 8 . – Redeemable shares may be issued by the Art. 225. The father and the mother shall jointly exercise legal guardianship
corporation when expressly provided in the articles of incorporation. They over the property of the unemancipated common child without the
are shares which may be purchased by the corporation from the holders of necessity of a court appointment. In case of disagreement, the father’s
such shares upon the expiration of a fixed period, regardless of the decision shall prevail, unless there is a judicial order to the contrary.
existence of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the articles of Where the market value of the property or the annual income of the child
incorporation and the certificate of stock representing the shares, subject exceeds P50,000, the parent concerned shall be required to furnish a bond
to rules and regulations issued by the Commission. in such amount as the court may determine, but not less than ten per
centum (10%) of the value of the property or annual income, to guarantee
REDEEMABLE SHARES are those subject to redemption as may be the performance of the obligations prescribed for general guardians.
provided in the subscription contract, which are usually attached to
preferred shares and other debt securities like bonds. A verified petition for approval of the bond shall be filed in the proper
court of the place where the child resides, or, if the child resides in a foreign
These types of shares grant the corporation the right to repurchase the country, in the proper court of the place where the property or any part
shares at its option or at the option of the holder based on the face or thereof is situated.
issued value plus specified premium, such redemption may be optional or
mandatory at a fixed or future date. The petition shall be docketed as a summary special proceeding in which
all incidents and issues regarding the performance of the obligations
Such repurchase may also be made regardless if there are unrestricted referred to in the second paragraph of this Article shall be heard and
retained earnings. (see Power to Acquire Own Shares) resolved.

(vi) Treasury Shares The ordinary rules on guardianship shall be merely suppletory except when
SEC. 9. Treasury shares. – Treasury shares are shares of stock which have the child is under substitute parental authority, or the guardian is a
been issued and fully paid for, but subsequently reacquired by the issuing stranger, or a parent has remarried, in which case the ordinary rules on
corporation through purchase, redemption, donation, or some other lawful guardianship shall apply. (320a)
means. Such shares may again be disposed of for a reasonable price fixed
by the board of directors. GAMBOA VS. TEVES 652 SCRA 690, JUNE 28, 2011
Page 19 of 182
 NOTES ON THE REVISED CORPORATION CODE

FACTS: On 28 February 2007, petitioner filed the instant petition for owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian)
prohibition, injunction, declaratory relief, and declaration of nullity of sale owning 3,998 out of 10,000 shares; MBMI also owns 3,396 out of 10,000
of the 111,415 PTIC shares. Petitioner claims, among others, that the sale shares of Patricia Louise Mining & Development Corporation.
of the 111,415 PTIC shares would result in an increase in First Pacific's
common shareholdings in PLDT from 30.7 percent to 37 percent, and this, ISSUE: WON McArthur, Tesoro and Narra are Filipino nationals.
combined with Japanese NTT DoCoMo's common shareholdings in PLDT,
would result to a total foreign common shareholdings in PLDT of 51.56 HELD: NO. [P]etitioners McArthur, Tesoro and Narra are not Filipino since
percent which is over the 40 percent constitutional limit. MBMI, a 100% Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering petitioners’
Petitioner asserts: If and when the sale is completed, First Pacific's equity corporate owners. xxx Noticeably, the ownership of the “layered”
in PLDT will go up from 30.7 percent to 37.0 percent of its common - or corporations boils down to xxx group wherein MBMI has joint venture
voting- stockholdings, x x x. Hence, the consummation of the sale will put agreements with, practically exercising majority control over the
the two largest foreign investors in PLDT - First Pacific and Japan's NTT corporations mentioned. In effect, whether looking at the capital structure
DoCoMo, which is the world's largest wireless telecommunications firm, or the underlying relationships between and among the corporations,
owning 51.56 percent of PLDT common equity. x x x With the completion petitioners are NOT Filipino nationals and must be considered foreign
of the sale, data culled from the official website of the New York Stock since 60% or more of their capital stocks or equity interests are owned by
Exchange (www.nyse.com) showed that those foreign entities, which own MBMI.
at least five percent of common equity, will collectively own 81.47 percent
of PLDT's common equity. x x x (d) Restrictions and Preferences
Corporations are not required to provide for certain restrictions and
x x x as the annual disclosure reports, also referred to as Form 20-K reports preferences regarding the transfer, sale or assignment of shares in the AOI
x x x which PLDT submitted to the New York Stock Exchange for the period except in close corporations which would subject their shares to specific
2003-2005, revealed that First Pacific and several other foreign entities restrictions as required in Sec. 96 of the Code. They are not, however,
breached the constitutional limit of 40 percent ownership as early as 2003. restrained or prohibited from doing so
x x x "Narra Mining vs. Redmont Mining (21 April 2014; 28 January 2015)
If the corporation desires to grant such options, restrictions and/or
preferences, the same must be indicated in the AOI AND in all of the stock
ISSUE: WON the sale of common shares to foreigners in excess of 40 certificates. Failure to provide the same in the AOI would not bind the
percent of the entire subscribed common capital stock violates the purchasers in good faith despite the fact that the said restriction and/or
constitutional limit on foreign ownership of a public utility. preference is indicated in the by-laws of the corporation.

HELD: YES. The term "capital" in Section 11, Article XII of the Constitution In a close corporation, however, such restrictions and preferences must not
refers only to shares of stock that can vote in the election of directors. only appear in the articles of incorporation and in the stock certificates BUT
ALSO be embodied in the by-laws of that close corporation otherwise it
Mere legal title is insufficient to meet the 60 percent Filipino-owned may not bind purchasers in good faith.
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the Executive Order No. 65
voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation
SEC Memorandum Circular No. 8, Series of 2013
is "considered as non-Philippine national[s]."

Filipinos hold less than 60 percent of the voting stock, and earn less than
60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that "[n]o franchise,
WHEREAS, the Constitution, the Foreign Investments Act of 1991, ("FIA'')
certificate, or any other form of authorization for the operation of a public
as amended, and other existing laws mandate that a certain percentage of
utility shall be granted except to x x x corporations x x x organized under
ownership in corporations engaged in identified areas of
the laws of the Philippines, at least sixty per centum of whose capital is
activities and enterprises be reserved to Philippine Nationals;
owned by such citizens.

WHEREAS, Section 15 of the Corporation Code of the Philippines provides

NARRA NICKEL MINING AND DEVELOPMENT CORP. VS. REDMONT that a corporation which will engage in business or activity reserved for
CONSOLIDATED MINES CORP. 748 SCRA 455, JANUARY 28, 2015 Filipino citizens shall include in its Articles of Incorporation a provision
FACTS: Redmont Consolidated Mines, Inc. (Redmont) filed before the stating that no transfer of stock or interest which shall reduce the
Panel of Arbitrators (POA) of the DENR separate petitions for denial of ownership of Filipino citizens to less than the required percentage of the
McArthur Mining, Inc. (McArthur), Tesoro and Mining and Development, capital stock as provided by existing laws, shall be allowed;
Inc. (Tesoro), and Narra Nickel Mining and Development Corporation
(Narra) applications Mineral Production Sharing Agreement (MPSA) on the WHEREAS, Section 17 of the Corporation Code provides that the
ground that they are not “qualified persons” and thus disqualified from Securities & Exchange Commission may reject or disapprove articles of
engaging in mining activities through MPSAs reserved only for Filipino incorporation or amendments thereto if the percentage of ownership of
citizens. the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution;
McArthur Mining, Inc., is composed, among others, by Madridejos Mining
Corporation (Filipino) owning 5,997 out of 10,000 shares, and MBMI WHEREAS, Section 14 of the FIA empowers the Commission to impose
Resources, Inc. (Canadian) owning 3,998 out of 10,000 shares; MBMI also administrative sanctions provided therein for violation of the FIA and its
owns 3,331 out of 10,000 shares of Madridejos Mining Corporation. implementing rules and regulations ("IRR");

Tesoro and Mining and Development, Inc., is composed, among others, WHEREAS, the Supreme Court in , ruled
by Sara Marie Mining, Inc. (Filipino) owning 5,997 out of 10,000 shares, that the term 'capital' in Section 11, Article XII of the 1987 Constitution
and MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000 shares; refers only to shares of stock entitled to vote in the election of directors;
MBMI also owns 3,331 out of 10,000 shares of Sara Marie Mining, Inc.
WHEREAS, Section 1 (b) of the IRR of FIA clearly requires the existence of
Narra Nickel Mining and Development Corporation is composed, among full beneficial ownership of the stocks and appropriate voting rights in
others, by Patricia Louise Mining & Development Corporation (Filipino) determining whether stocks are owned and held by Philippine nationals;

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intra-corporate dispute is filed with a Regional Trial Court, the court shall
WHEREAS, it is essential to ensure that full beneficial ownership and dismiss the case before the termination of the pretrial conference, if it
effective control of the appropriate voting rights lie with Philippine determines that an arbitration agreement is written in the corporation’s
nationals; articles of incorporation, bylaws, or in a separate agreement.

WHEREAS, Section 143 of the Corporation Code and Sections 5 and 72 of The arbitral tribunal shall have the power to grant interim measures
the Securities Regulation Code ("SRC'') empower the Commission to necessary to ensure enforcement of the award, prevent a miscarriage of
promulgate guidelines, rules and regulations that will enable it to justice, or otherwise protect the rights of the parties.
implement the provisions and purpose of the laws it implements;
A final arbitral award under this section shall be executory after the lapse
NOW, THEREFORE, the Commission hereby issues and promulgates the of fifteen (15) days from receipt thereof by the parties and shall be stayed
following guidelines on compliance with the ownership requirements in only by the filing of a bond or the issuance by the appellate court of an
the Constitution and/or existing laws by corporations engaged in injunctive writ.
nationalized or partly nationalized activities:
The Commission shall formulate the rules and regulations, which shall
Section 1. This Circular shall apply to all corporations ("covered govern arbitration under this section, subject to existing laws on
corporations") engaged in identified areas of activities or enterprises arbitration.
specifically reserved, wholly or partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws, amendments thereto and 11. No-transfer Clause
IRRs of said laws except as may otherwise be provided therein. Eleventh: (Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide the following):
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For purposes of “No transfer of stock or interest which shall reduce the ownership of
determining compliance therewith, the required percentage of Filipino Filipino citizens to less than the required percentage of capital stock as
ownership shall be applied to BOTH (a) the total number of outstanding provided by existing laws shall be allowed or permitted to be recorded in
shares of stock entitled to vote in the election of directors; AND (b) the the proper books of the corporation, and this restriction shall be indicated
total number of outstanding shares of stock, whether or not entitled to in all stock certificates issued by the corporation.”
vote in the election of directors.
12. Treasurer
Corporations covered by special laws which provide specific citizenship
Ninth: That _____________________ has been elected by the subscribers
requirements shall comply with the provisions of said law.
as Treasurer of the Corporation to act as such until after the successor is
duly elected and qualified in accordance with the bylaws, that as Treasurer,
9. Other Matters Consistent with Law
authority has been given to receive in the name and for the benefit of the
SEC. 13 – All corporations shall corporation, all subscriptions, contributions or donations paid or given by
file with the Commission articles of incorporation in any of the official the subscribers or members, who certifies the information set forth in the
languages, duly signed and acknowledged or authenticated, in such form seventh and eighth clauses above, and that the paid-up portion of the
and manner as may be allowed by the Commission, containing subscription in cash and/or property for the benefit and credit of the
substantially the following matters, except as otherwise prescribed by this corporation has been duly received.
Code or by special law:
xxx
13. Undertaking to Change Name
Tenth: That the incorporators undertake to change the name of the
(j) Such other matters consistent with law and which the incorporators
corporation immediately upon receipt of notice from the Commission that
may deem necessary and convenient.
another corporation, partnership or person has acquired a prior right to
the use of such name, that the name has been declared not distinguishable
10. Arbitration Agreement
from a name already registered or reserved for the use of another
SEC. 13 – corporation, or that it is contrary to law, public morals, good customs or
xxx public policy.
An arbitration agreement may be provided in the articles of incorporation
pursuant to Section 181 of this Code.
SEC Memorandum Circular No. 8, Series of 2012

. – An arbitration agreement may be

provided in the articles of incorporation or bylaws of an unlisted
corporation. When such an agreement is in place, disputes between the
corporation, its stockholders or members, which arise from the
implementation of the articles of incorporation or bylaws, or from intra-
(1) Amendment of the first paragraph of Section 17 of the said Circular
corporate relations, shall be referred to arbitration. A dispute shall be
from:
nonarbitrable when it involves criminal offenses and interests of third
"17. At the time of its registration, a corporation or partnership shall submit
parties.
an affidavit containing an unqualified undertaking to change its name
immediately upon receipt of notice or directive from the Commission that
The arbitration agreement shall be binding on the corporation, its
another corporation, partnership or person has acquired a prior right to
directors, trustees, officers, and executives or managers.
the use of that name or that the name has been declared as misleading,
deceptive, confusingly similar to a registered name or contrary to public
To be enforceable, the arbitration agreement should indicate the number
morals, good customs or public policy. The affidavit shall be signed by at
of arbitrators and the procedure for their appointment. The power to
least two incorporators or partners in the form prescribed by the
appoint the arbitrators forming the arbitral tribunal shall be granted to a
Commission. This affidavit shall not be required if the undertaking is
designated independent third party. Should the third party fail to appoint
already included as one of the provisions of the Articles of Incorporation
the arbitrators in the manner and within the period specified in the
or Partnership of the registrant."
arbitration agreement, the parties may request the Commission to appoint
the arbitrators. In any case, arbitrators must be accredited or must belong
to –
to organizations accredited for the purpose of arbitration.

"17. At the time of its registration, a corporation or partnership shall submit

The arbitral tribunal shall have the power to rule on its own jurisdiction and
an affidavit containing an unqualified undertaking to change its name, as
on questions relating to the validity of the arbitration agreement. When an
originally registered or as amended thereafter, immediately upon receipt
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of notice or directive from the Commission that another corporation,

partnership or person has acquired a prior right to the use of that name or After filing of the AOI, the SEC will examine and process them to
that the name has been declared as misleading, deceptive, confusingly determine compliance with the requirements enumerated in Sec. 14 and if
similar to a registered name or contrary to public morals, good customs or the form prescribed under Sec. 15 is complied with. Only substantial and
public policy. The affidavit shall be signed by at least two incorporators or not strict compliance is required.
partners in the form prescribed by the Commission. This affidavit shall not
be required if the undertaking is already included as one of the provisions The above grounds are not exclusive. There may be other reasons for
of the Articles of Incorporation or Partnership of the registrant." rejection or disapproval such as the corporate name is not legally
permissible or that the minimum capital requirement is not sufficient.
(2) Deletion of the last paragraph of Section 17 of the said Circular which
reads "In the case of amendment of the corporate name of an existing D. Commencement of Corporate Existence
company or partnership, the affidavit shall be signed by any of the SEC. 18.
directors or partners. . – A person or group of persons desiring to incorporate shall
submit the intended corporate name to the Commission for verification. If
In view of the foregoing amendments, the relevant undertaking required the Commission finds that the name is distinguishable from a name already
to be included in the Articles of Incorporation shall be written in the reserved or registered for the use of another corporation, not protected
following manner by law and is not contrary to law, rules and regulations, the name shall be
reserved in favor of the incorporators. The incorporators shall then submit
"That we, on behalf of the said corporation/partnership, hereby undertake their articles of incorporation and bylaws to the Commission.
to change its corporate/partnership name, as herein provided or as
amended thereafter, immediately upon receipt of notice or directive from If the Commission finds that the submitted documents and information are
the Commission that another corporation, partnership or person has fully compliant with the requirements of this Code, other relevant laws,
acquired a prior right to the use of that name or that the name has been rules and regulations, the Commission shall issue the certificate of
declared as misleading, deceptive, confusingly similar to a registered incorporation.
name or contrary to public morals, good customs or public policy."
A private corporation organized under this Code commences its corporate
14. Acknowledgment existence and juridical personality from the date the Commission issues
IN WITNESS WHEREOF, we have hereunto signed these Articles of the certificate of incorporation under its official seal and thereupon the
Incorporation, this _______ day of _____________, 20_____ in the incorporators, stockholders/members and their successors shall constitute
City/Municipality of ______________________, Province of a body corporate under the name stated in the articles of incorporation for
_______________________, Republic of the Philippines. the period of time mentioned therein, unless said period is extended or
the corporation is sooner dissolved in accordance with law.
___________________ __________________
___________________ __________________
___________________ __________________ CAGAYAN FISHING DEVELOPMENT VS. SANDIKO 65 PHIL. 223,
___________________ __________________ DECEMBER 23, 1937
___________________ __________________ FACTS: On May 31, 1930, Manuel Tabora executed a Deed of Sale where
(Names and signatures of the incorporators) he sold four parcels of land in favor of herein petitioner Cagayan Fishing
Development Co., said to be under the process of incorporation. Plaintiff
_______________________________________ company filed its AOI with the Bureau of Commerce and Industry on Oct.
(Name and signature of Treasurer) 22, 1930. A year later, before the issuance of the certificate of
incorporation, the BD of the company adopted a resolution to sell the four
15. Treasurer's Affidavit parcels of land to Teodoro Sandiko for P42,000.
The Treasurer’s Affidavit that accompanies the AOI relates to the minimum
subscribed capital and the minimum paid-up capital. Thus, the treasurer ISSUE: WON the subsequent sale to Sandiko is valid.
may be made liable if the corporation does not comply with the
requirements of the law; he may even be prosecuted for perjury HELD: No. A duly organized corporation has the power to purchase and
hold real property as the purpose for which such corporation was formed
C. Grounds for Disapproval may permit and for this purpose may enter into such contract as may be
SEC. 16. necessary. But before a corporation may be said to be lawfully organized
. – The Commission may disapprove the articles of many things have to be done. Among which, the law requires the filing of
incorporation or any amendment thereto if the same is not compliant with the AOI.
the requirements of this Code: Provided, That the Commission shall give
the incorporators, directors, trustees, or officers a reasonable time from It cannot be denied that the plaintiff was not incorporated when it entered
receipt of the disapproval within which to modify the objectionable into the contract of sale. It was not even a de facto corporation at that time.
portions of the articles or amendment. The following are grounds for such Not being in legal existence then, it did not possess juridical personality
disapproval: to enter into the contract.
(a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein; Corporations are creatures of the law and can only come into existence in
(b) The purpose or purposes of the corporation are patently the manner prescribed by the law. That a corporation should have a full
unconstitutional, illegal, immoral or contrary to government rules and and complete organization and existence as an entity before it can enter
regulations; into a contract or transact any business, would seem to be self-evident. A
(c) The certification concerning the amount of capital stock subscribed corporation, until organized, has no being, franchises or faculties. Nor do
and/or paid is false; and those engaged in bringing it into being have any power to bind it by
(d) The required percentage of Filipino ownership of the capital stock contract, unless so authorized by the charter, there is no corporation, nr
under existing laws or the Constitution has not been complied with. does it possess franchise or faculties for it to exercise, until it acquires
complete existence.
No articles of incorporation or amendment to articles of incorporation of
banks, banking and quasi-banking institutions, preneed, insurance and If the company could not and did not acquire the four parcels of and here
trust companies, NSSLAS, pawnshops, and other financial intermediaries involved, it follows that it did not have the resultant right to dispose the
shall be approved by the Commission unless accompanied by a favorable same to the defendant.
recommendation of the appropriate government agency to the effect that
such articles or amendment is in accordance with law. E. Defectively formed corporations

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CORPORATION is one created in strict or substantial its dissolution may be ordered only in a proceedings
compliance to the governing corporation statutes and whose right to exist instituted by the State.
and act as such could not be attacked in a either collaterally or through a
direct proceeding for that purpose even by the State. ISSUE: WON it is a corporation.

1. De facto corporations HELD: NO. First, not having obtained a certificate of incorporation, the
SEC. 19. . – The due incorporation of any company, even its stockholders, may not probably claim “in good faith” to
corporation claiming in good faith to be a corporation under this Code, be a corporation.
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 claim is compatible with the existence of errors and irregularities, but
Such inquiry may be made by the Solicitor General in a not with a total or substantial disregard of the law. Unless there has been
proceeding. an evident attempt to comply with the law the claim to be a corporation
“under this Act” (Sec. 19) could not be made in good faith.
CORPORATION is one that is so defectively created as not to
be a corporation but nevertheless exists, for all practical purposes, Second, this is not a suit where the corporation is a party. This is a litigation
as a corporate body, by virtue of its bona fide attempt to incorporate under between a stockholder of the alleged corporation, for the purpose of
existing statutory authority, coupled with the exercise of corporate powers. obtaining its dissolution. Even the existence of a corporation may
be terminated in a private suit for its dissolution between stockholders,
REQUISITES OF A CORPORATION without the intervention of the State.
(a) There is a valid statute under which the corporation could have been
created as a corporation (or according to some, an apparently 2. Corporation by Estoppel
valid statute); SEC. 20. . – All persons who assume to act as a
(b) An attempt, in good faith, to form a corporation according to the corporation knowing it to be without authority to do so shall be liable as
requirements of law which goes far enough to amount to a “colorable general partners for all debts, liabilities and damages incurred or arising as
compliance” with the law; a result thereof: , That when any such ostensible
(c) A user of corporate powers, the transaction of business in some way corporation is sued on any transaction entered by it as a corporation or on
as if it were a corporation; any tort committed by it as such, it shall not be allowed to use its lack of
(d) Good faith in claiming to be and doing business as a corporation. corporate personality as a defense. Anyone who assumes an obligation to
an ostensible corporation as such cannot resist performance thereof on the
MUNICIPALITY OF MALABANG VS. BENITO 27 SCRA 533, MARCH 28, ground that there was in fact no corporation.
1969
FACTS: The Municipality of Balabagan was created from the barrios and A corporation may exist on the ground of estoppel by virtue of the
sitios of the Municipality of Malabang by virtue of EO No 386 issued by agreement, admission or conduct of the parties such that they will not be
President Garcia by virtue of Sec. 68 of the Revised Administrative Code. permitted to deny the fact of the existence of the corporation. It is neither
Following the decision of the Court in Pelaez vs. Auditor General, which a nor because of serious defects in its incorporation or
declared Sec. 68 unconstitutional and that the President had no power to organization, unlike the de facto doctrine, it does not involve a theory that
create a municipality, herein petitioners sought to nullify EO 386 and to the irregular corporation has acquired a corporate status generally. It
restrain the respondents, who are officers of Balabagan, to vacate said applies to the consequences of some particular transactions or acts done
their office and desist from performing their functions. in the corporate name by associates assuming to be a corporation

Respondents argue that it is at least a de facto corporation and the ruling From the above provision, it is clear that the doctrine of estoppel may
in Pelaez is not applicable to it, having been organized under color of a apply to the alleged corporation or to a third-party transacting with the
statute before it was declared unconstitutional, its officers having been former. The doctrine is a mere fiction and exists only for a particular case.
either elected or appointed, and the municipality itself having discharged It is based on equity consideration and, as in the case of corporation
corporate functions for the past five years. That as a de facto corporation, doctrine, is resorted to for convenience, the avoidance of inquiry of
its existence cannot be collaterally attacked. irrelevant formalities and fairness to all parties concerned

ISSUE: WON the Municipality of Balabagan is a corporation. – those who participate in holding out an association
as a corporate body and thereby induced persons to deal with it as such
HELD: NO. In cases where a de facto municipal corporation was are estopped to deny the representation to their prejudice. If a body of
recognized as such despite the fact that the statute creating it was later men nakedly assumes to act as a corporation without attempt to
invalidated, the decision could be fairly made to rest on the consideration incorporate and enter into a contract as such, they cannot deny their
that there was some other valid law giving validity to the organization. purported existence as a corporation in an action against them on the
Hence, in the case at bar, the mere fact that Balabagan was organized at contract, where the third persons were induced to deal with the supposed
the time when the statute had not been invalidated cannot conceivably corporation. They cannot avoid liability on the ground of lack of personality
make it a de facto corporation, as independently of the Administrative to be sued.
Code provision in question, there is no other valid statute to give color of
authority for its creation. – they are estopped from denying the existence of the
alleged corporation in a suit to enforce a contract. However, the
An unconstitutional act is not a law; it confers no rights; it imposes no association of persons must have purported or acted, and were treated by
duties; it affords no protection; it creates no office; it is, in legal the third persons, as corporations. The doctrine also applies when the third
contemplation, as inoperative as though it had never been passed. person tries to escape liability on a contract from which he has benefited
on the irrelevant ground of defective incorporation.
HALL VS. PICCIO 86 PHIL. 603, JUNE 29, 1950
FACTS: Petitioner, together with private respondents signed and LOZANO VS. DE LOS SANTOS 274 SCRA 452, JUNE 19, 1997
acknowledged the AOI of Far East Lumber and Commercial Co., Inc., after FACTS: Petitioner Reynaldo Lozano and respondent Antontio Anda
the execution of which the corporation proceeded to do business by agreed to consolidate their respective Jeepney Associations, to which they
adopting its by-laws and election of its officers. Subsequently, pending are presidents. They conducted an election for one set of officers of the
action on the AOI, the respondents filed with the CFI alleging the consolidated association, where petitioner was the winner. Respondent,
corporation to be an unregistered partnership and praying for its however, refused to abide by the agreement which prompted petitioner
dissolution, which was granted. to institute an action for damages in the trial court which was denied for
being. intra-corporate, and was held to be within the jurisdiction of the
Herein petitioner claims that the corporation is a de facto corporation, that SEC.

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entered into a contract of lease with the Philippine Fibers Producers Co.,
ISSUE: WON there is corporation by estoppel placing the case within SEC Inc. on March 7, 1954. The company was represented by Mr. Segundino
jurisdiction, Q. Refuerzo as the President. It was provided in said contract that the lease
would be for 10 years, the land would be planted to kenaf, ramie or other
crops and the lessor would be entitled to 30 per cent of the net income
HELD: NONE. The unified association was still a proposal and had not accruing from the harvest of any crop without being responsible for the
been approved by the SEC, neither had its officers and members cost of production thereof; After every harvest, the lessee was bound to
submitted their AOI. Their respective associations are distinct and separate declare at the earliest possible time the income derived therefrom and to
entities, petitioner and private respondent does not have an intra- deliver the corresponding share due the lessor.
corporate relation much less do they have an intra-corporate dispute. The
SEC has no jurisdiction over the complaint. Apparently, the agreement was not complied because defendants refused
to render an accounting of the income derived therefrom and to deliver
The doctrine of corporation by estoppel advance by private respondent the lessor's share; that the estimated gross income was P4,500, and the
cannot override jurisdictional requirements. Jurisdiction is fixed by law and deductible expenses amounted to P1,000, Alanuela T. Vda, de Salvatierra
is not subject to the agreement of the parties. filed with the Court of First Instance of Leyte a complaint against the
Philippine Fibers Producers Co., Inc. and Segundino Q. Refuerzo for
Corporation by estoppel is founded on principle of equity and is accounting, rescission and damages (Civil Case No. 1912). The defendants
designated to prevent injustice and unfairness. It applies when persons failed to file their answer to the complaint. On June 8, 1955, the lower
assume to form a corporation and exercise corporate functions and enter Court rendered judgment granting plaintiff's prayer, and required
into business relations with third persons. Where there is no third person defendants to render a complete accounting of the harvest of the land
involved and the conflict arises only among those assuming to form a subject of the proceeding within 15 days from receipt of the decision and
corporation, who therefore know that it has not been registered, there is to deliver 30 per cent of the net income realized from the last harvest to
no corporation by estoppel. plaintiff, with legal interest from the date defendants received payment for
said crop
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. 13 SCRA 84, JANUARY
30, 1965 No appeal therefrom having been perfected within the reglementary
FACTS: Jose Aruego, president of defendant University Publishing Co, Inc. period, the Court, upon motion of plaintiff, issued a writ of execution. The
entered into a contract with plaintiff for the publishing of the latter’s Provincial Sheriff of Leyte caused the attachment of 3 parcels of land
revised commentaries on the Revised Penal Code, which the defendant registered in the name of Segundino Refuerzo. No property of the
failed to pay the second instalment due. The CFI of Manila rendered Philippine Fibers Producers Co., Inc., was found available for attachment.
judgment in favor of plaintiff, such judgment reduced by the Supreme On January 31, 1956, defendant Segundino Refuerzo filed a motion
Court to P15,000. claiming that the decision rendered in said Civil Case No. 1912 was null
and void with respect to him, there being no allegation in the complaint
A writ of execution was issued against the company, however the pointing to his personal liability and thus prayed that an order be issued
petitioner petitioned for a writ of execution against Jose M. Aruego, as the limiting such liability to Defendant Corporation.
real defendant stating, plaintiff's counsel and the Sheriff of Manila
discovered that there is no such entity as University Publishing Co., Inc. ISSUE: WON Refuerzo can be made personally liable.
and no such entity is registered with the SEC.
HELD: YES. While as a general rule, a person who has contracted or dealt
ISSUE: WON the writ of execution may be effected upon Aruego. with an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising out
HELD: YES. On account of non-registration, University cannot be of such transaction or dealing, yet this doctrine may not be held applicable
considered a corporation, not even a corporation . It has therefore, where fraud takes part in the said transaction. In the instant case, on
no personality separates from Aruego it cannot be sued independently. plaintiff’s charge that she was unaware of the fact that the company had
no juridical personality, defendant Refuerzo gave no confirmation or denial
The Court ruled that the doctrine of corporation by estoppel was not and the circumstances surrounding the execution of the contract led to the
applicable. Although the rule is that a person acting or purporting to act inescapable conclusion that plaintiff Salvatierra was really made to believe
on behalf of a corporation which has no valid existence assumes such that such corporation was duly organized in accordance with law.
privileges and obligations and becomes personally liable for contracts
entered into or for other acts performed as such agent, in this case, Aruego The rule on the separate personality of a corporation is understood to refer
was not named as a defendant. Since he was not named, he could not be merely to registered corporations and cannot be made applicable to the
served and be made liable for the claim because to do so would violate liability of members of an unincorporated association. The reason behind
his right to due process. He was not given the chance to defend himself this doctrine is obvious – since an organization which before the law is non-
and be heard during trial. existent has no personality and would be incompetent to act on its behalf;
thus, those who act or purport to act as its representatives or agent do so
Aruego represented a non-existent entity and induced not only the plaintiff without authority and at their own risk. And, as is it elementary principle of
but even the court of belief of such representation. He signed the contract law that a person who acts as an agent without authority or without
as “President” of University and obviously misled plaintiff in to believing principal is himself regarded as the principal, a person acting or purporting
that University is a “corporation duly organized and existing under the laws to act on behalf of a corporation which has no valid existence assumes
of the Philippines”. One who has induced another to act upon his willful such privileges and obligations and becomes personally liable for
misrepresentation that a corporation was duly organized and existing contracts entered into or for other acts performed as such agents.
under the law, cannot, thereafter, set up against his victim the principle of
corporation by estoppel. In acting on behalf of a corporation which he knew to be unregistered, the
president of the unregistered corporation Refuerzo, assumed the risk of
The order was reversed and set aside and was remanded lower court to reaping the con the consequential damages of resultant right, if any,
hold supplementary proceedings for the purpose of carrying the judgment arising out of such transaction.
into effect against University Publishing Co., Inc. and/or Jose M. Aruego.
CHIANG KAI SHEK SCHOOL VS. COURT OF APPEALS 172 SCRA 389,
APRIL 18, 1989
VDA. DE SALVATIERRA VS. HON. GARLITOS ETC, AND REFUERZO 103 FACTS: Private respondent Faustina Oh has been teaching in the herein
PHIL. 757, MAY 23, 1958 petitioner School since 1932 for a continuous period of 33 years until that
FACTS: Manuela T. Vda. de Salvatierra appeared to be the owner of a day that she was told that she had no assignment for the next semester.
parcel of land located at Maghobas, Poblacion, Burauen, Leyte, He She filed a suit before the CFI against the school and later on amended

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her complaint to include certain officials. The CFI of Sorsogon dismissed the mere passage of RA 3135 otherwise known as the Revised Charter of
the complaint. On appeal, the CA reversed the decision and held herein the Philippine Amateur Athletic Federation and PD 604. It is a basic
petitioner school liable but absolved the other defendants. postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general
ISSUE: WON a school that has not been incorporated may be sued by enabling act. Nowhere can it be found in RA 3135 and PD 604 any
reason of its long-continued existence and recognition by the government. provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided for
HELD: YES. Even though the school failed to incorporate as mandated by the manner by which these entities may acquire juridical personality.
law, it cannot now invoke such non-compliance with the law to immunize
it from the private respondent’s complaint. There should also be no The recognition of Philippine Amateur Athletic Federation required under
question that having contracted with the private respondent every year for RA 3135 and the Department of Youth and Sports Development under
32 years and thus represented itself possessed of juridical personality to 604, extended to the PFF was not substantiated by Kahn. Accordingly, the
defeat her claim against it. According to Art. 1431 of the Civil Code: PFF is not a national sports association within the purview of the
“through estoppel an admission or representation is rendered conclusive aforementioned laws and does not have corporate existence of its own.
upon the person making it and it cannot be denied as against the person
relying on it”. This being said, it follows that private respondent Kahn should be held
liable for the unpaid obligations of the unincorporated PFF. It is a settled
As the school itself may be sued in its own name, there is no need to apply principle in corporation law that any person acting or purporting to act on
Rule 3, Sec. 15, under which the persons joined in an association without behalf of a corporation which has no valid existence assumes such
any juridical personality may be sued with such an association. Besides, it privileges and obligations and becomes personally liable for contracts
has been shown that the individual members of the board of trustees are entered into or for other acts performed as such agents.
not liable, having been appointed only after the private respondent’s
dismissal. We cannot subscribe to the position taken by the appellate court that even
assuming that the PFF was defectively incorporated, the petitioner cannot
ASIA BANKING CORPORATION VS. STANDARD PRODUCTS CO. 46 deny the corporate existence of the PFF because it had contracted and
PHIL. 144, SEPTEMBER 11, 1924 dealt with the PFF in such a manner as to recognize and in effect admits
FACTS: This action was brought to recover the balance due of a promissory its existence. The doctrine of corporation by estoppel is mistakenly applied
note executed by herein appellant. The court rendered judgment in favor by the respondent court to the petitioner. The application of the doctrine
of the plaintiff. applies to a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective
At the trial of the case the plaintiff failed to prove affirmatively the incorporation. In the case at bar, the petitioner is not trying to escape
corporate existence of the parties and the appellant insists that under liability from the contract but rather is the one claiming from the contract.
these circumstances the court erred in finding that the parties were
corporations with juridical personality and assigns same as reversible error.

ISSUE: WON parties herein are corporations with juridical personality. GEORG GROTJAHN GMBH & CO. VS. ISNANI 235 SCRA 216, AUGUST
10, 1994
HELD: YES. There is no merit whatever in the appellant's contention. The FACTS: Petitioner is a German company who was granted a license to
general rule is that in the absence of fraud a person who has contracted or establish a regional or area headquarters in the Philippines. Private
otherwise dealt with an association in such a way as to recognize and in respondent Romana Lanchinebre was a sales representative of petitioner
effect admit its legal existence as a corporate body is thereby estopped to who made advances totalling P35,000 which were left unpaid. Petitioner
deny its corporate existence in any action leading out of or involving such filed a complaint for the collection of a sum of money which was dismissed
contract or dealing, unless its existence is attacked for cause which have by the judge holding, among others, that the license of petitioner does
arisen since making the contract or other dealing relied on as an estoppel not include the license to do business in the Philippines.
and this applies to foreign as well as to domestic corporations.
ISSUE: WON petitioner has capacity to sue.

The defendant having recognized the corporate existence of the plaintiff HELD: YES. Private respondent is estopped from assailing the personality
by making a promissory note in its favor and making partial payments on of petitioner. “The rule is that the party is estopped to challenge the
the same is therefore estopped to deny said plaintiff's corporate existence. personality of a corporation after having acknowledged the same by
It is, of course, also estopped from denying its own corporate existence. entering into a contract with it. And the doctrine of estoppel to deny
Under these circumstances it was unnecessary for the plaintiff to present corporate existence applies to foreign as well as domestic corporation; one
other evidence of the corporate existence of either of the parties. It may who has dealt with a corporation of foreign origin as a corporate entity is
be noted that there is no evidence showing circumstances taking the case estopped to deny its corporate existence and capacity. The principle will
out of the rules stated. be applied to prevent a person contracting with a foreign corporation from
later taking advantage f its non-compliance with the statutes chiefly in case
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC. VS. COURT where such person has received the benefits of the contract” (
OF APPEALS 343 SCRA 674, OCTOBER 19, 2000 ).
FACTS: Petitioner International Express Travel & Tours Services, Inc.
entered into an agreement with the Philippine Football Federation through In the case of Merill Lynch Futures, the SC held that a foreign corporation
its president Henry Kahn, herein private respondent, where the former doing business in the Philippines may sue in Philippine courts although not
supplied tickets for the trips of the athletes to the Southeast Asian Games authorized to do business here against the Philippine citizen who had
and other various trips. The Federation failed to pay a balance of contracted with and been benefited by said corporation. Citing and
P265,894.33 which led petitioner to file a civil case in the RTC of Manila applying the doctrine laid down in Asia Banking Corp. vs. Standard
which decided in its favor and holding Henry Kahn personally liable. On Products Co., Inc.
appeal, the CA reversed the decision of the RTC absolving Kahn from
personal liability holding that the Federation had a separate and distinct IN SUMMARY: it appears that if a corporation by estoppel exist and enters
personality. into a contract and transact business with a third party, the latter has three
possible remedies:
ISSUE: WON Henry Kahn can be made personally liable. (1) He may file a suit against the ostensible corporation to recover from
the corporate properties;
HELD: YES. While we agree with the appellate court that associations may (2) He may file the case directly against the associates personally liable
be accorded corporate status, such does not automatically take place by who held out the association as a corporation; and

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(3) Against both the ostensible corporation and persons forming it, charter simply because it has not been shown that is also had a president
jointly and severally. The last two remedies may not, however, be and a secretary.
availed of if the third party by his conduct is estopped from denying
the existence of the association as a corporation and as such, recovery (b) Commencement of Business/Transaction
should be limited only against the corporate assets. This means that the corporation has actually functioned and engaged in
business for which it was organized which must be done within two years
INDIVIDUAL LIABILITY of associates should not be overlooked. If the from the issuance of the certificate of incorporation lest it is deemed
doctrine of corporation by estoppel cannot be applied in their favor dissolved. This may take the form of entering into contracts which tend to
because the third party dealing with it has not, in any manner, deemed to pursue its business undertaking or other acts related thereto.
have chosen to deal with it as a corporation or in short not, estopped to
deny corporate existence, the associates can be held liable either as If a corporation has commenced its business but subsequently becomes
partners or principals. inoperative continuously for a period of at least 5 years, the same shall be
merely a ground for suspension or revocation of its corporate franchise or
WHO SHOULD BEAR THE LOSS: The better view is that those who actively certificate of registration. Dissolution, in effect, is not automatic.
participated in holding out the association as a corporation should be held
personally liable by virtue of the express provision of Sec. 21 which
provides that “all persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising” therefrom.

3. Organization and Commencement of Business

(a) Corporate organization
SEC. 21.
– If a corporation does not formally organize and commence
its business within five (5) years from the date of its incorporation, its
certificate of incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.

However, if a corporation has commenced its business but subsequently

becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation
under delinquent status.

A delinquent corporation shall have a period of two (2) years to resume

operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall
issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation’s certificate of
incorporation.

The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction

Once the certificate of incorporation has been issued, the corporation

MUST formally organize and commence its business.

NON-USE OF CORPORATE CHARTER: Apparent from the above

provision is that the failure of the corporation to organize within five (5)
years would result in its automatic dissolution, unless, of course, its failure
to do so is due to causes beyond its control.

FORMAL ORGANIZATION: refers to the process of structuring the

corporation to enable it to effectively pursue the purpose for which it was
organized. It includes:
(a) Organizational meeting of the stockholders to elect the BOD;
(b) Adoption of by-laws, if not simultaneously filed with the AOI, and its
subsequent filing with the SEC which must be within 1 month from
the issuance of the certificate of incorporation;
(c) Organizational meeting of the BOD to elect the corporate officers,
adoption of corporate seal, accepting pre-incorporation
subscriptions, establishing the principal office and such other steps
necessary to transact the legitimate business for which the
corporation was formed.

Strict compliance is not required. Substantial compliance therewith is

sufficient. Thus, it has been held in the case of that a
corporation is deemed to have formally organized if it had a governing
board which direct its affairs, as well as a treasurer and a clerk, and that
through these instrumentalities, it actually functioned and engaged in the
business for which it was organized. It cannot be held to have forfeited its

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V. CORPORATE CHARTER AND ITS AMENDMENTS pioneered in the clearing of the land and cultivated the same since the
A. The Corporate Charter Spanish Regime and have been in continuous possession of the same. The
CORPORATE CHARTER signifies an instrument or authority from the action was dismissed on the ground that there is no cause of action. On
sovereign power, bestowing rights or power, and is often used convertibly appeal, the CA certified the case to the SC for the legal issues involved.
with the term “act of incorporation,” where the corporation was formed
under a special act of the legislature, and with the “articles of ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of
incorporation,” when the corporation was formed under a general law. property of its individual members

THREE-FOLD CONTRACT: HELD: NO. It is a doctrine well-established and obtains both at law and in
(1) Between the corporation and the state insofar as it concerns its equity that a corporation is a distinct legal entity to be considered as
primary franchise to be and act as a corporation separate and apart from the individual stockholders or members who
(2) Between the corporation and the stockholders or members insofar as compose it, and is not affected by the personal rights, obligations and
it governs their respective rights and obligations; transactions of its stockholders or members. The property of a corporation
(3) Between and among the stockholders or members themselves as far is its property and not that of the stockholders, as owners, although they
as their relationship with one another is concerned. have equities in it. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members.
“Charter” as far as corporations created under the RCC are concerned, Conversely, a corporation ordinarily has no interest in the individual
consist of the following: property of its stockholders unless transferred to the corporation, “even in
(a) Articles of Incorporation (AOI), the case of a one-man corporation”.
(b) Relevant laws under which it is created,
(c) Revised Corporation Code Absent any showing of interest, therefore, a corporation, like plaintiff-
(d) By-laws adopted appellant herein, has no personality to bring an action for and in behalf of
(e) All other pertinent provision on any statute governing them its stockholders or members for the purpose of recovering property which
belongs to said stockholders or members in their personal capacities.
As to corporations created by legislative act or those mentioned under
Section 4 of the RCC, the charter consists of the following: It is fundamental that there cannot be a cause of action without an
(a) Special law creating the same antecedent primary legal right conferred by law upon a person. Evidently,
(b) Any and all laws, rules and regulations affecting or applicable to them there can be no wrong without a corresponding right, and no breach of
duty by one person without a corresponding right belonging to some
FRANCHISE CHARTER other person.
• Applies to the right or privilege itself to be Charter applies
and act as a corporation or to do a certain to the CARAM, JR. VS. COURT OF APPEALS 151 SCRA 372, JUNE 30, 1987
act instrument by FACTS: Herein petitioners were ordered jointly and severally to pay the
• A franchise may either be: which the state plaintiff P50,000 for the preparation of the project study and his technical
(1) Primary Franchise – the right or vests such right services that led to the organization of the defendant corporation. The
privilege of being a corporation as or privilege petitioners questioned the order stating that they are mere subsequent
when the State, through the SEC, investors in the corporation that was later created, that they should not be
issues a certificate of incorporation; or held solidarily liable with the Filipinas Orient Airways, a separate juridical
(2) Secondary Franchise – the powers and entity, and with co-defendants who were the ones who requested the said
privileges vested in, and to be services from the private respondent.
exercised by the corporate body as
such ISSUE: WON petitioners can be held personally liable for such expenses.
• Example: Employment Agencies, primary
franchise is the certificate of incorporation HELD: NO. Petitioners were not involved in the initial stages of the
from the SEC, the secondary franchise is the organization of the airline, which were being directed by Baretto,
license issued by the POEA respondent, as the main promoter. It was he who was putting all the pieces
together, so to speak. The petitioners were merely among the financiers
1. Corporate Entity Theory whose interest was to be invited and who were in fact persuaded, on the
SEC. 18. strength of the project study, to invest in the proposed airline.
.–
xxx
A private corporation organized under this Code commences its corporate Significantly, there was no showing that the Filipinas Orient Airways was a
existence and juridical personality from the date the Commission issues fictitious corporation and did not have a separate juridical personality, to
the certificate of incorporation under its official seal. justify making the petitioner, as principal stockholder thereof, responsible
for its obligations. As a bona fide corporation, the Filipinas Orient Airways
As a legal entity, the corporation is possessed with a juridical personality should alone be liable for its corporate acts as duly authorized by its
separate and distinct from the individual stockholders or members and is directors and officers.
not affected by the personal rights, obligations or transactions of the latter.
The properties it possesses belongs to it exclusively as a separate juridical The most that can be said is that they benefited from the services, but that
entity such that the personal creditors of its stockholders or members surely is no justification t hold them personally liable therefor. Otherwise,
cannot attach corporate properties to satisfy their claims. all other stockholders of the corporation, including those who came in
later, and regardless of the amount of their stockholdings would be equally
and personally liable also with the petitioners for the claims of the private
On the other hand, the corporation is not likewise liable for the debts, respondents.
obligations or liabilities of its stockholders. Neither may its properties be
made answerable to satisfy the claim of creditors against its stockholders Petitioners are not liable under the challenged decision.
or member even if the stockholder concerned is its president.
RUSTAN PULP & PAPER MILLS, INC. VS. IAC 214 SCRA 665, OCTOBER
SULO NG BAYAN, INC. VS. ARANETA, INC. 72 SCRA 347, AUGUST 17, 19, 1992
1976 FACTS: Petitioner Rustan entered into a conract of sale with respondent
FACTS: Plaintiff- appellant Sulo ng Bayan, Inc. instituted a reinvindicatory Lluch which was later on stopped by Rustan through a letter. Lluch sent a
action for the recovery of 28,000 square meters of land for and in behalf letter to clarify whether the letter sent by Rustan was for the stoppage of
of its members, who were themselves and their predecessors-in-interest delivery or termination of the contract of sale. Unanswered, respondent

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Lluch resumed devliveries and later on filed a complaint for contractual

breach which was dimissed. On appeal, the CA modified the decision of We find no badges of fraud on petitioners’ part. They had literally relied,
the trial court directing petitioner including Tantoco, president and albeit mistakenly, on its contract with private respondent when it rescinded
general manager, and Vergara, resident manager, to pay private the contract to sell extrajudicially and had sold it to another person.
respondents.
No sufficient proof exists on record that said petitioner used the
ISSUE: WON individual petitioners may be held liable. corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he “appears to be the controlling
HELD: NO. The president and manager of a corporation, who entered into stockholder”. Mere ownership by a single stockholder or by another
and signed a contract in his official capacity, cannot be made liable corporation of all or nearly all of the capital stock of a corporation is not,
thereunder in his individual capacity in the absence of stipulation to that of itself, sufficient ground for disregarding the separate corporate
effect due to the personality of a corporation being separate and distinct personality.
from the person composing it. And because of this precept, Vergara’s
supposed non-participation in the contract of sale although he signed the SORIANO VS. COURT OF APPEALS 174 SCRA 195, JUNE 22, 1989
letter terminating it is completely immaterial. FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco
CRUZ VS. DALISAY 152 SCRA 482, JULY 31, 1987 under an agreement between them embodied in a receipt which states as
FACTS: Adelio Cruz charged Quiterio Dalisay, Senior Deputy Sheriff of follows:
Manila, with malfeasance in office, corrupt practices and serious
irregularities when the respondent sheriff attached and/or levied the GREETINGS:
money belonging to complainant Cruz when he was not himself the WE, the President, Manager, Treasurer and Director Representative of
judgment debtor in the final judgment of NLRC sought to be enforced but Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
rather the company known as Qualitrans Limousine Service, Inc., a duly
registered corporation. That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale
ISSUE: WON the charge against the respondent should be upheld for (sic) the said Virginia tobacco consists of different grades or class from E
attaching personal property of the corporate president. to A (sic) the said tobaccos are to be shipped to the redrying plants
through the Bacarra Facoma under Guia number 236.
HELD: YES. The respondent’s action in enforcing judgment against
complaint who is not the judgment debtor in the case calls for disciplinary Conditions of the deal between Mr. Cu and the Association. Upon
action. Considering the ministerial duty in enforcing writs of execution, payment of the said tobacco by the Philippine Virginia Tobacco
what is incumbent upon him is to ensure that only that portion of a decision Administration then Mr. Cu, will collect the corresponding payments as
ordered or decreed in the dispositive part should be the subject of graded by the redrying plant as further stipulated that the check
execution. No more, no less. That the title of the case specifically names representing the payment shall only be cashed in the presence of Mr. Cu,
complaint as one of the respondents is of no moment as execution must or his authorized representative. (Sic)
conform to that directed in the dispositive portion and not in the title of This instrument is executed for the protection, guidance and information
the case. The tenor of the NLRC judgment and the implementing writ are of the parties concerned.
clear enough. It directed Qualitrans to reinstate the discharged employee
and pay the full backwages. Respondent, however, chose to “pierce the Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
veil of corporate entity” usurping a power belonging to the court and
assumed improvidently that since the complainant is the owner/president, (Sgd.) Paulino Soriano
they are one and the same. It is well-settled doctrine, both in law and in PAULINO SORIANO
equity that as a legal entity, a corporation has a personality distinct and President
separate from its individual stockholders or members. The mere fact that
one is president of a corporation does not render the property he owns or (Sgd.) Nenita C. Esperanza
possesses the property of the corporation, since the president, as NENITA C. ESPERANZA
individual, and the corporation are separate entities. Sec. Treasurer
by:
PALAY, INC. VS. CLAVE 124 SCRA 638, SEPTEMBER 21, 1983 (Sgd.) Erlinda V. Acosta
FACTS: Petitioner Palay, Inc. through its president Albert Onstott, BIENVENIDO E. ACOSTA
executed in favor of respondent Naario Dumpit a Contract to Sell a parcel Director, Official Representative
of land which provided for automatic rescission upon default in payment
of any monthly amortization without need of notice and forfeiture of all (Sgd.) A. Macadangdang
instalments paid. Respondent failed to pay some instalments and later A.G. MACADANGDANG
offered to update all his overdue account but was informed that the Manager
contract has already been rescinded.
ISSUE: WON petitioners are liable.
Respondent filed with the NHA a complaint questioning the validity of the
rescission which decided in its favor holding Palay, Inc. and Alberto HELD: NO. We cannot accept the conclusion that the official designations
Onstott, in his capacity as president, jointly and severally liable. of petitioners were written on the document merely as meaningless and
hollow decorations or as mere without any relevance
ISSUE: WON the corporate president is liable to refund the amount state to the liability of the corporation these officers obviously represented.
in the NHA ruling. Indeed, taking in conjunction with the other obtaining circumstances, the
receipt discloses the capacity by which the petitioners entered into the
HELD: NO. As a general rule, a corporation may not be made to answer “deal” with private respondent.
for acts or liabilities of its stockholders or those of the legal entities to which
it may be connected and vice versa. However, the veil of corporate fiction The subject receipt itself states tht the conditions contained therein were
may be pierced when it is used as a shield to further an end subversive of between the private respondent and the “Association”. The lower court
justice; or for purposes that could not have been intended by the law that held that the “Association” referred only to the signatories. We disagree.
created it; or to defeat public convenience, justify wrong, protect fraud, or It is quite plain and we are convinced that the “Association is none other
defend crime; or to perpetuate fraud or confuse legitimate issues; or to than the Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative
circumvent the law or perpetuate deception; or as an alter ego, adjunct or marketing association. Not only that, we cannot find any cogent reason
business conduit for the sole benefit of the stockholders. why the petitioners used the word “Association” when they could have

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more easily and conveniently placed “the undersigned” or words to the corporation is merely a farce since it is a mere alter ego or business conduit
same effect in its stead. of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency,
In light of the foregoing, it is clear that the liability of the petitioners under conduit or adjunct of another corporation."
the document subject of the instant case is not personal but corporate,
and therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a When [the] corporate veil is pierced, the corporation and persons who are
corporation, has a personality distinct and separate from that of the normally treated as distinct from the corporation are treated as one
petitioners who are only its officers. It is the general rule that the protective person, such that when the corporation is adjudged liable, these persons,
mantle of a corporation’s separate and distinct personality could only be too, become liable as if they were the corporation.
pierced and liability attached directly to its officers and/or member-
stockholders, when the same is used for fraudulent, unfair or illegal The piercing of the corporate veil is premised on the fact that the
purpose. corporation concerned must have been properly served with summons or
properly subjected to the jurisdiction of the court a quo. Corollary thereto,
2. Piercing the Veil of Corporate Fiction it cannot be subjected to a writ of execution meant for another in violation
(a) General Concept of its right to due process. There exists, however, an exception to this rule:
The notion of corporate legal entity is not, at all ties respected. This is if it is shown "by clear and convincing proof that the separate and distinct
because the applicability of the corporate entity theory is confined to personality of the corporation was purposefully employed to evade a
legitimate transactions and is subject to equitable limitations to prevent its legitimate and binding commitment and perpetuate a fraud or like
being used as a cloak or cover for fraud or illegality, or to work injustice. wrongdoings."

While no hard and fast rule exists as to when the corporate fiction may be In this case, the Court confirms the lower courts' findings that Santos had
pierced or disregarded, it is a fundamental principle in Corporation law an existing obligation based on a court judgment that he owed monthly
that a corporation is an entity separate and distinct from its stockholders rentals and unpaid realty taxes under a lease contract he entered into as
or member and from other corporations to which it may be connected. But lessee with the Littons as lessor. He was not able to comply with this
when the notion of legal entity is used to defeat public convenience, Justify particular obligation, and in fact, refused to comply therewith.
wrong, Protect fraud, Defend crime, the law will regard the corporation as
a mere association of persons, or in the case of two corporations, merge This Court agrees with the CA that Santos used I/AME as a means to defeat
them into one, the one being merely regarded as part or instrumentality judicial processes and to evade his obligation to Litton. Thus, even while
of the other. The same is true where a corporation is a mere dummy and I/AME was not imp leaded in the main case and yet was so named in a writ
serves no business purpose and is intended only as a blind, or an alter-ego of execution to satisfy a court judgment against Santos, it is vulnerable to
or business conduit for the sole benefit of the stockholders. the piercing of its corporate veil.

In cases where the doctrine of piercing the veil of corporate fiction, liability (2) YES.
will attach directly to the officers and stockholders, at least, in so far as that In determining the propriety of applicability of piercing the veil of
particular act is concerned. corporate fiction, this Court, in a number of cases, did not put in issue
whether a corporation is a stock or non-stock corporation. In Sula ng
INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS Bayan, Inc. v. Gregorio Araneta, Inc., considered but ultimately refused to
(I/AME)VS. LITTON AND COMPANY, INC. 848 SCRA 437, DECEMBER 13, pierce the corporate veil of a non-stock non-profit corporation which
2017 sought to institute an action for reconveyance of real property on behalf
FACTS: Atty. Santos, a lessee to 2 buildings owned by Litton, owed the of its members. This Court held that the non-stock corporation had no
latter arrears as well as his shares of the payment of realty taxes. Litton filed personality to institute a class suit on behalf of its members, considering
a complaint for unlawful detainer against Santos before the MeTC of that the non-stock corporation was not an assignee or transferee of the
Manila, which ruled in favor of Litton. real property in question, and did not have an identity that was one and
Judgment was not executed. Litton subsequently filed an action for revival the same as its members.
of judgment which was granted by the RTC. Santos then appealed to CA
which affirmed the RTC's decision. The Sheriff of MeTC of Manila levied In another case, this Court did not put in issue whether the corporation is
on a piece of real property, registered in the name of I/AME in order to a non-stock, non-profit, non-governmental corporation in considering the
execute the judgment against Santos. I/AME filed a motion claiming that application of the doctrine of piercing of corporate veil. In Republic of the
it has a separate and distinct personality from Santos; hence its properties Philippines v. Institute for Social Concern, while we did not allow the
should not be made to answer for the latter's liabilities. piercing of the corporate veil, this Court affirmed the finding of the CA that
the Chairman of the Institute for Social Concern cannot be held jointly and
ISSUES: severally liable with the aforesaid non-governmental organization (NGO)
(1) WON there was denial of due process when the court pierced the at the time the Memorandum of Agreement was entered into with the
corporate veil of I/ AME and its property was made to answer for the Philippine Government. We found no fraud in that case committed by the
liability of Santos. Chairman that would have justified the piercing of the corporate veil of the
(2) WON the Corporate Veil may apply to Non-stock Corporations NG0.
(3) WON piercing the Corporate Veil may Apply to Natural Persons
In the United States, from which we have adopted our law on corporations,
HELD: non-profit corporations are not immune from the doctrine of piercing the
(1) NO. corporate veil. Their courts view piercing of the corporation as an equitable
In general, corporations, whether stock or non-stock, are treated as remedy, which justifies said courts to scrutm1ze any organization however
separate and distinct legal entities from the natural persons composing organized and in whatever manner it operates. Moreover, control of
them. The privilege of being considered a distinct and separate entity is ownership does not hinge on stock ownership.
confined to legitimate uses and is subject to equitable limitations to
prevent its being exercised for fraudulent, unfair or illegal purposes. As held in : [t]he mere fact that the corporation
However, once equitable limitations are breached using the covertures of involved is a nonprofit corporation does not by itself preclude a court from
the corporate veil, courts may step in to pierce the same. applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the substance
Citing : Piercing the corporate veil is of the organization, and its decision is not controlled by the statutory
warranted when "[the separate personality of a corporation] is used as a framework under which the corporation was formed and operated. While
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion it may appear to be impossible for a person to exercise ownership control
of an existing obligation, the circumvention of statutes, or to confuse over a non-stock, not-for-profit corporation, a person can be held
legitimate issues." It is also warranted in alter ego cases "where a personally liable under the alter ego theory if the evidence shows that the

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person controlling the corporation did in fact exercise control, even though Maria Castro advanced big sums of money to the corporation without any
there was no stock ownership. previous arrangements or account, and the fact that the books of

Given the foregoing, the Court sees no reason why a non-stock

corporation such as I/AME, may not be scrutinized for purposes of piercing
the corporate veil or fiction. In our opinion, the facts and circumstances duly set forth, all of which have
been proved to our satisfaction, prove conclusively and beyond
(3) YES. reasonable doubt that Maria Castro is the sole and exclusive owner of all
As cited in Sulo ng Bayan, Inc. v. Araneta, Inc.,"[t]he doctrine of alter ego the shares of stock of the corporation and that the other partners are her
is based upon the misuse of a corporation by an individual for wrongful or dummies.
inequitable purposes, and in such case the court merely disregards the
corporate entity and holds the individual responsible for acts knowingly YUTIVO SONS HARDWARE CO. VS. COURT OF TAX APPEALS 1 SCRA
and intentionally done in the name of the corporation." This, Santos has 160, JANUARY 28, 1961
done in this case. Santos formed I/AME, using the non-stock corporation, FACTS: Herein petitioner Yutivo purchased its cars and trucks from General
to evade paying his judgment creditor, Litton. Motors Overseas Corporation (GM), the latter paying the sales tax once on
The piercing of the corporate veil may apply to corporations as well as original sales, Yutivo no longer paid sales tax on its sales to the public.
natural persons involved with corporations. This Court has held that the Later no, GM withdrew from the Philippines and appointed Yutivo as
"corporate mask may be lifted and the corporate veil may be pierced when importer. Yutivo in turn exclusively sold to Southern Motors, Inc. (SM), a
a corporation is just but the alter ego of a person or of another corporation where the incorporators are sons fo the founders of Yutivo.
corporation." Under this arrangement, Yutivo paid the sales tax on original sale, while
SM did not subject to sales tax its sales to the public.
PALACIO VS. FELY TRANSPORTATION COMPANY 5 SCRA 1011,
AUGUST 31, 1962 The Collector of Internal Revenue assessed Yutivo for deficiency sales
FACTS: Alfredo Carillo, a driver of herein respondent corporation, ran over taxes which the CTA affirmed.
the child of herein petitioner Mario Palacio, and was found guilty of the
criminal case filed against him. Isabelo Calingasan, the employer, was held ISSUE: WON Yutivo is liable for the deficiency taxes.
subsidiarily liable and not the defendant corporation. Plaintiffs now
contend that the defendant corporation should be made subsidiarily liable HELD: NO. It is elementary rule and fundamental principle of corporation
for damages in the criminal case because the sale to it of the jeep in law that a corporation is an entity separate and distinct from its
question, after the conviction of Carillo was merely an attempt on the part stockholders and from other corporations to which it may be connected.
of Calingasan, its president and general manager, to evade his subsidiary However, when the notion of legal entity is used to defeat public
civil liability. convenience, justify wrong, protect fraud or defend crime, the law will
regard the corporation as an association of persons, or in case of two
ISSUE: WON the corporation can be held liable for the subsidiary civil corporations merge them into one. Another rule is that, when the
liability of Isabelo Calingasan. corporation is a mere alter-ego or business conduit of a person, it may be
disregarded.
HELD: YES. It is evident that Calingasan’s main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from the The sales tax liability of Yutivo did not arise until it became the importer
conviction of his driver. This conclusion is borned out by the fact that the and simply continued its practice of selling to SM. The decision, therefore,
incorporators of the Fely Transportation are Isabelo Calingasan, his wife, of the Tax Court that SM was organized purposely as a tax evasion device
his son, Dr. Calingasan, and his two daughters. We believe that this one runs counter to the fact that there was no tax to evade.
case where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to allow it We are, however, inclined to agree with the court below that SM was
to do so would be to sanction the use of the fiction of corporate entity as actually owned and controlled by petitioner as to make it a mere subsidiary
a shield to further an end of subversive of justice. Furthermore, the failure or branch of the latter created for the purpose of selling the vehicles at
of the defendant corporation to prove that it has other property other than retail and maintaining stores for spare parts as well as service repair shops.
the jeep strengthens the conviction that its formation was for the purpose It is not disputed that the petitioner, which is engaged principally in
above indicated. hardware supplies and equipment, is completely controlled by the Yutivo,
Young and Yu family. The founders of the corporation are closely related
MARVEL BUILDING CORPORATION, ET AL. VS. DAVID 94 PHIL. 376, to each other either by blood or affinity and most of its stockholders are
FEBRUARY 24, 1954 members of the Yu (Yutivo or Young) family.
FACTS: Plaintiffs, as stockholders of Marvel Building Corporation sought
to enjoin the defendant Collector of Internal Revenue from selling at a According to the AOI, the amount of P62,500 was actually advanced by
public auction property which were said to be registered in the name of Yutivo. The additional subscriptions to SM were paid by Yutivo. The
said corporation. Said properties were seized and distrained by defendant shareholders in SM are mere nominal stockholders holding the share for
to collect war profits taxes against Maria Castro who the former claims to and in behalf of Yutivo, so even conceding that the original subscribers
be the sole owner of the said corporation. Maria Castro owns P250,000 of were bona fide stockholders, Yutivo was at all tie in control of the stock of
the P1,025,000 capital of the corporation, of the rest of the incorporators SM and that the latter was a mere subsidiary of the former.
were her half-brothers, half-sister and a brother-in-law.
SM is under the management control of Yutivo by virtue of the
ISSUE: WON Maria Castro is the sole owner of the Corporation. management contract entered into between the two parties. In fact, the
controlling majority of the BOD of Yutivo is also the controlling majority of
HELD: YES. Circumstantial pieces of evidence presented were: (1) the Board of SM. At the same time, the principal officers of both
Endorsement in blank of the certificates of stock issued in the name of the corporations are identical. In addition, both corporations have a common
incorporators and the possession thereof by Maria Castro; (2) The other comptroller. There is therefore no doubt that by virtue of such control, the
incorporators did not have incomes in such amount, during the time of the business, financial and management policies of both corporations would
organization of the corporation or immediately thereto, as to enable them be directed towards common ends. Likewise, cash or funds of SM,
to pay in full their supposed subscriptions; and (3) It should have been the including those of its branches which are directly remitted to Yutivo, and
supposed subscribers who should have come to court to assert that they subject to withdrawal only by Yutivo, SM’s being under Yutivo’s control,
actually paid for their subscriptions and are not mere dummies. The the former’s operations and existence became dependent upon the
circumstantial evidence is not only convincing, it is conclusive. In addition latter.SM, being but a mere instrumentality or adjunct of Yutivo, the CTA
to the above, the fact that the stockholders or directors never appeared to correctly disregarded the technical defense of separate corporate entity to
have ever met to discuss the business of the corporation and the fact that arrive at the true tax liability of Yutivo.

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In the present case, Tan Tong appears to be the owner of the guagua
COMMISSIONER OF INTERNAL REVENUE VS. NORTON & HARRISON factory. And the factory, though an incorporated business, is in reality
COMPANY 11 SCRA 714, AUGUST 31, 1964 owned exclusively by Tan Tong and his family. As found by the CIR, one
FACTS: Herein respondent entered into an agreement with Jackbilt where payroll, except after July 17, the day the case was certified to the CIR, when
the former was made the sole and exclusive distributor of concrete blocks the person who was discharging the office of cashier for both branches of
manufactured by Jackbilt and accordingly every order of a customer of the business began preparing separate payrolls for the two. And above all,
Norton was transmitted to Jackbilt which delivered the merchandise it should not be overlooked that, as also found by the industrial court, the
directly to the customer. Payment of the goods, however, is made to laborers of the guagua factory and the coffee factory were
Norton, which in turn pays Jackbilt the amount charged the customer less interchangeable. In view of all these, the attempt to make the two factories
a certain amount, as its compensation or profit. appear as two separate businesses, when in reality they are but one, is but
a device to defeat the ends of the law and should not be permitted to
During the existence of the agreement, Norton acquired by purchase all prevail.
the outstanding stocks of Jackbilt. Due to this, the Commissioner of
Internal Revenue, assess respondent Norton for deficiency taxes making EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL
the basis of sales tax the sales of Norton to the public, which is the higher RELATIONS 13 SCRA 290, FEBRUARY 26, 1965
price compare to the sale of Jackbilt to Norton. The CTA decided in favor FACTS: An unfair labor practice complaint was filed before the respondent
of Norton. CIR against Emilio, Ariston and Rodolfo, all surnamed Cano in their
capacity as president and proprietor, field supervisor, and manager,
ISSE: WON the two corporations may be merged into a single corporation. respectively, of petitioner company, Emilio Cano Enterprises, Inc. After the
trial, the respondent court rendered a decision finding Emilio and Rodolfo
HELD: YES. It has been settled that the ownership of all the stocks of a guilty of unfair labor practice. As a consequence, the two were ordered to
corporation by another corporation does not necessarily breed an identity reinstate private respondent, Honorata Cruz, to her former position with
of corporate interest between the two companies and be considered as a payment of back wages.
sufficient ground for disregarding distinct personalities. However, in the
case at bar, we find sufficient grounds to support the theory that the Meanwhile, president and proprietor, Emilo Cano died, and the attempt
separate identities of the two companies should be disregarded: to have the case dismissed was denied by the of the respondent
(a) Norton owned all the outstanding stocks of Jackbilt; court. An order of execution was issued and directed against the
(b) Norton constituted Jackbilt’s directors; properties of petitioner corporation instead of those surviving parties
(c) Norton financed the operations of Jackbilt; named in the decision of the respondent court. Petitioner corporation filed
(d) Norton treats Jackbilt’s employees as its own; an motion to quash the writ of execution on the ground that the
(e) Compensation given to board members of Jackbilt indicate that judgment sought to be enforced was not enforced against it, which is a
Jackbilt is merely a department of Norton; juridical entity separate and distinct from its officials. Said motion to quash
(f) The offices of Norton and Jackbilt are located in the same compound; was denied.
(g) Payments were effected by Norton of accounts for Jackbilt and vice
versa; ISSUE: WON the judgment rendered by the respondent court against
(h) Payments were also made to Norton of accounts due or payable to Emilio and Rodolfo Cano in their capacity as officials of the petitioner
Jackbilt and vice versa. corporation, Emilio Cano Enterprises, Inc. be made effective against the
property of the latter, which was not a party to the case.

HELD: YES. While it is an undisputed rule that a corporation has a

The circumstances presented by the facts of the case, yields to the personality separate and distinct from its members or stockholders
conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego because of a fiction of the law, here we should not lose sight of the fact
of Norton and that the fiction of corporate entities, separate and distinct that the Emilio Cano Enterprises, Inc. is a closed family corporation where
from each other should be disregarded. the incorporators and directors belong to one single family. Here is an
instance where the corporation and its members can be considered as one.
LA CAMPANA COFFEE FACTORY, INC., VS. KAISAHAN NG MGA And to hold such entity liable for the acts of its members is not to ignore
MANGGAGAWA SA LA CAMPANA (KKM) 93 PHIL., 160, MAY 25, 1953 the legal fiction but merely to give meaning to the principle that such
FACTS: Tan Tong, one of herein petitioners, is engaged in the buying and fiction cannot be invoked if its purpose is to use it as a shield to further an
selling of guagua under the trade name La Campana Guagua Packing. end subversive of justice, especially where the corporation is a closed
Later on, Tong and his family organized a family corporation known as La family corporation. And so it has been held that while a corporation is a
Campana Coffee Factory Co, Inc. with its principal office located at the legal entity existing separate and apart from the persons composing it,
same place as that of La Campana Guagua Packing. that concept cannot be extended to a point beyond its reason and policy,
and when invoked in support of an end subversive of this policy, it should
Tan Tong’s employees later on formed a union (herein respondent) be disregarded by the courts
through which they demanded (from both companies) higher salaries and
more privileges. As the demand was not granted and an attempt at a A factor that should not be overlooked is that Emilio and Rodolfo Cano are
settlement through mediation had given no result, the Department of here indicted, not in their private capacity, but as president and manager,
Labor certified the dispute to the Court of Industrial Relations (CIR). respectively, of Emilio Cano Enterprises, Inc. Having been sued their
Petitioners filled a motion to dismiss which was denied. Hence, this present connection officially with the case must be deemed to be impressed with
petition for certiorari. the representation of the corporation. In fact, the respondent court’s order
is for them to reinstate private respondent Honorata Cruz to her former
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may position in the corporation and incidentally pay her the wages she had
be disregarded. been deprived of during her separation. Verily, the order against them is
in effect against the corporation.
HELD: YES. La Campana Guagua Packing and La Campana Coffee Factory,
Inc. are operating under on single management, that is, as one business TELEPHONE ENGINEERING & SERVICE CO., INC. VS. WCC 104 SCRA
though with two trade names. True, the coffee factory is a corporation and, 354, MAY 13, 1981
by legal fiction, an entity existing separate and apart from the person FACTS: Petitioner TESCO is a domestic corporation engaged in the
composing it, that Tan Tong and his family. But it is settled that this fiction business of manufacturing telephone equipment Petitioner has a sister
of law, which has been introduced as a matter of convenience and to company, the Utilities Management Corporation (UMACOR).
subserve the ends of justice cannot be invoked as to further and end
subversive of that purpose. UMACOR employed the late Pacifico L. Gatus as Purchasing Agent. Gatus
was detailed with petitioner company and later on reported back to

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UMACOR. A few months after reporting back to UMACOR, Gatus Eduardo Claparols and (2) there was no break in the succession and
contracted an illness and eventually died of “liver cirrhosis with malignant continuity of the same business. This “avoiding-the-liability” scheme is
degeneration.” very patent, considering that (3) 90% of the subscribed shares of stocks of
the Claparols Steel Corporation (the second corporation) was owned by
Private respondent, Leonila Gatus, filed a “Notice and Claim for Claparols himself, and (4) all the assets of the dissolved Claparols Steel and
Compensation” alleging that her deceased husband was an employee of Nail Plant were turned over to the emerging Claparols Steel Corporation.
TESCO and that he died of liver cirrhosis. In compliance with the
requirement of the “notice and claim for compensation” and the law, It is very obvious that the second corporation seeks the protective shield
TESCO submitted an “Employer’s Report of Accident or Sickness” of a corporate fiction whose veil in the present case could, and should, be
indicating UMACOR as the employer of the deceased and further stated pierced as it was deliberately and maliciously designed to evade its
that it would not controvert the claim for compensation and admitted that financial obligation to its employees.
the deceased employee contracted illness “in regular occupation.” Thus,
on the basis of the report, death benefits plus burial expenses were It is well remembering that in
awarded in favor of the heirs of Pacifico Gatus. the Supreme Court held that when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or
A Motion for Reconsideration was filed alleging as grounds therefor, that defend crime, the law will regard the corporation as an association or
the admission made in the “Employer’s Report of Accident or Sickness” persons, or, .
was due to honest mistake and/or excusable negligence on its part, and
that the illness for which compensation is sought is not an occupational The Supreme Court agrees with respondent CIR, therefore, that the
disease, hence, not compensable under the law. The Motion for amount of back wages recoverable by respondent workers from
Reconsideration was denied predicated on two grounds: (1) that the petitioners should be the amount accruing when the Claparols Steel
alleged mistake or negligence was not excusable, and (2) that the basis of Corporation ceased operations
the award was not the theory of direct causation alone but also on that of
aggravation. NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE 143
SCRA 124, JULY 22, 1986
Petitioner TESCO filed with the Supreme Court a petition for “Certiorari FACTS: NAFLU filed a request for conciliation for the intervention in its
and Preliminary Injunction” seeking to annul the award and to enjoin the dispute with management involving certain money claims, refusal to
Sheriff from levying and selling its properties at public auction to pay for conclude a collective agreement after such has been negotiate and run-
the claim for compensation. In its petition, TESCO takes the position that away shop undertaken by management in order to bust the union. Efforts
the public respondent WCC has no jurisdiction to render a valid award in of conciliation proved futile and notwithstanding the commitment of
this suit as there was no employer-employee relationship between them, management to resume operations, the period of shutdown was extended
the deceased having been an employee of UMACOR and not of TESCO. without informing the Office of the Minister of Labor and Employment. It
was also discovered that actual partial shutdown began earlier, as it
ISSUE: WON the award of death benefits and the subsequent levy and appears that at night, machines were dismantled, hauled out and then
attachment of the properties of TESCO may be denied based on the installed in another location and the name of Lawman was changed to
assertation of lack of employee-employer relationship between TESCO LIBRA GARMENTS. Under that name, new applicants for employment
and Pacifico Gatus. were called even as the company continued to manufacture the same
products but under the name of LIBRA GARMENTS. When this was
HELD: NO. Petitioner admitted that TESCO and UMACOR are sister discovered by the workers, LIBRA GARMENTS was changed to DOLPHIN
companies operating under one single management and housed in the GARMENTS.”
same building. Although respect for the corporate personality, as such, is
the general rule, there are exceptions. In appropriate cases, the veil of The Minister of Labor and Employment issued an order assuming
corporate fiction may be pierced as when the same is made as a shield to jurisdiction over the dispute at Lawman Industrial Corporation and ordered
confuse the legitimate issues. “to pay all accrued wages and benefits… for its failure to comply with the
requirement of the law.” For failure of the company to resume operations
TESCO’s denial at this stage that it is the employer of the deceased is as committed a complaint for unfair labor practice was filed. However,
obviously an afterthought, a devise to defeat the law and evade its despite a finding that the private respondent company was guilty of unfair
obligations. This denial also constitutes a change of theory on appeal labor practice, the public respondent did not order the reinstatement of
which is not allowed in this jurisdiction the employees concerned “because the company has declared that it had
already ceased its operations completely.”
CLAPAROLS VS. CIR 65 SCRA 613, JULY 31, 1975
FACTS: A complaint for unfair labor practie was filed by private respondent ISSUE: WON the Ministry of Labor and Employment erred with issuance of
Allied Workers’ Association, Demetrio Garlitos and ten other workers an order for non-reinstatement on the basis that the private respondent
against petitioners on account of the dismissal of respondent workers from company has allegedly ceased operations.
petitioner company, Claparols Steel and Nail Plant.
HELD: YES. It is very obvious from the above findings that the second
Public respondent CIR rendered its decision finding “Mr. Claparols guilty corporation seeks the protective shield of a corporate fiction to achieve an
of union busting and” of having “dismissed said complainants because of illegal purpose. As enunciated in the case of
their union activities,” An order of reinstatement with back wages was s its veil in the present case should, therefore, be pierced as it was
issued by the respondent court. Petitioners on the issue of back wages, deliberately and maliciously designed to evade its financial obligations to
insist that the Supreme Court adopts the ruling in the Sta. Cecilia Sawmills its employees. It is an established principle that when the veil of corporate
case wherein the recoverable back wages were limited only three (3) fiction is made as a shield to perpetrate a fraud or to confuse legitimate
months; because as in the Sta. Cecilia Sawmills case, the Claparols Steel issues (here, the relation of employer-employee), the same should be
and Nail Plant ceased operations due to enormous business reverses. pierced. Thus, as Lawman Industrial Corporation was guilty of unfair labor
practice, the public respondent’s order for reinstatement should follow as
ISSUE: WON the contention of petitioners is valid thus limiting its liability a matter of right.
in paying back wages to the private respondents.

HELD: NO. It is very clear that the latter corporation (Claparols Steel
Corporation) was a continuation and successor of the first entity, and its
emergence was skillfully timed to avoid the financial liability that already A.C. RANSOM LABOR UNION—CCLU VS. NLRC 150 SCRA 498, MAY 29,
attached to its predecessor, the Claparols Steel and Nail Plant. (1) Both 1987
predecessors and successor were owned and controlled by petitioner

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FACTS: The Supreme Court affirmed the joint decision of two earlier cases ISSUE: WON the break-open order should be issued.
rendered by the Court of Industrial Relations (CIR) declaring that
respondent company, A.C. Ransom Philippine Corporation is guilty of HELD: YES. The conditions under which the juridical entity may be
unfair labor practice and ordering the latter to reinstate immediately disregarded vary according to the particular facts and circumstances of
employees to their respective positions with back wages. each case. No hard and fast rule can be accurately laid down, but certainly
there are some probative factors of identity that will justify the application
Petitioner union filed successive Motions for Execution for the satisfaction of the doctrine of piercing the veil of corporate veil, to wit:
of said back wages. All of which respondent company opposed stressing (1) Stock ownership by one or common ownership of both corporations;
its "precarious financial position if immediate execution of the back wages (2) Identity of directors and officers;
would be ordered." Petitioner union filed another Motion for Execution (3) The manner of keeping corporate books and records;
alleging that although respondent company had assumed a posture of (4) Methods of conducting the business.
suffering from business reverse, its officers and principal stockholders had
organized a new corporation, the Rosario Industrial Corporation, using the The SEC explained the “instrumentality rule” which the courts
same equipment, personnel, business stocks and the same place of have applied in disregarding separate juridical personality of corporations
business. Petitioner union filed an Motion for Writ of Execution as follows:
and Garnishment praying that the Writ issue against the Officers/Agents
of respondent company personally and or their estates, as the case may “Where on corporation is so organized and controlled and its affairs are
be, considering their success in hiding or shielding the assets of said conducted so that it is, in fact, a mere instrumentality or adjunct of the
company. The Labor Arbiter granted the e Motion of the petitioner other, the fiction of the corporate entity of the “instrumentality” may be
union, which the NLRC reversed on appeal disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of finances, policies, and
ISSUE: WON the veil of corporation fiction be pierced and that the NLRC practices that the controlled corporation has, so to speak, no separate
decision be modified, in that all the individual private respondent and not mind,
only the President, should held jointly and severally liable with respondent
company

HELD: YES. The NLRC, on appeal to it by respondent company, could not

have modified the CIR decision, as affirmed by this Court, by relieving
respondent company’s officers and agents of liability. The test in determining the applicability of piercing the veil of corporate
fictions is as follows:
This finding does not ignore the legal fiction that a corporation has a (1) Control, not mere majority or complete stock control, but complete
personality separate and distinct from its stockholders and members, for, domination, not only in finances but of policy and business practice
as this Court had held "where the incorporators and directors belong to a in respect to the transaction attacked so that the corporate entity as
single family, the corporation and its members can be considered as one to this transaction had at the time no separate mind, will or existence
in order to avoid its being used as an instrument to commit injustice, or to of its own;
further an end subversive of justice. In the case of Claparols vs. CIR (2) Such control must have been used by the defendant to commit fraud
involving almost similar facts as in this case, it was also held that the shield or wrong, to perpetuate the violation of a statutory or other positive
of corporate fiction should be pierced when it is deliberately and legal duty or dishonest and unjust act in contravention of plaintiff’s
maliciously designed to evade financial obligations to employees. legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the
Aggravating respondent company’s clear evasion of payment of its injury or unjust los complained of.
financial obligations is the organization of a "run-away corporation,"
Rosario Industrial Corporation at the time the unfair labor practice case The absence of one of the elements prevents piercing the corporate veil.
was pending before the CIR by the same persons who were the officers In applying the “instrumentality” or “alter-ego” doctrine, the courts are
and stockholders of respondent company, engaged in the same line of concerned with reality and not form, with how the corporation operated
business as private company, producing the same line of -products, and the individual defendant’s relationship to that operation. Thus, the
occupying the same compound, using the same machineries, buildings, question of whether a corporation is mere alter-ego, a mere sheet of paper
laboratory, bodega and sales and accounts departments used by corporation, a sham or a subterfuge is purely one of fact.
respondent company, and which is still in existence. Both corporations
were closed corporations owned and managed by members of the same
family. Its organization proved to be a convenience instrument to avoid
payment of back wages and the reinstatement of the workers. This is In this case, while petitioner claimed that it ceased on operations on April
another instance where the fiction of separate and distinct corporate 29, 1986, it filed an information sheet with the SEC on May 15, 1987 stating
entities should be disregarded that its office address is at 355 Maysan Road, Valenzuela Metro Manila. On
the other hand, third-party claimant Hydro, on the same day, filed an
CONCEPT BUILDERS, INC. VS. NLRC 257 SCRA 149, MAY 29, 1996 information sheet with the same address, both information sheets filed by
FACTS: Private respondents were employees of petitioner Concept the same Virgilio O. Casino. Both companies have the same president, the
Builders, Inc, who were served termination letters stating that the project same BOD, the same corporate officers and substantially the same
for which they were hired was already completed and that their contracts subscribers.
have already expired. Finding that the project was not actually completed
yet, and that petitioner employed a subcontractor whose employees Clearly, petitioner ceased its business operations in order to evade the
performed the duties of private respondents, the latter filed a complaint payment to private respondents of back wages and to bar their
for illegal dismissal with the Labor Arbiter who held that the dismissal was reinstatement to their former position. Hydro is obviously a business
illegal. conduit of petitioner corporation and its emergence was skilfully
orchestrated to avoid the financial liability attached to petitioner
A writ of execution was issued but was partially satisfied only. The sheriff corporation.
sought levy upon the properties in the head office of Concept Builders,
Inc. but was not allowed to do so on the ground that it was occupied by MCCONNEL VS. COURT OF APPEALS 1 SCRA 722, MARCH 17, 1961
Hydro Pipes Philippines, Inc. and not concept builders. Unable to remove Petitioners, original incorporators of Park Rite Co., Inc. was ordered to pay
the personal properties he found thereat, the Sheriff asked for a “break- the unsatisfied balance of a judgment rendered in favor of lot owners
open” order which was denied by the Labor Arbiter after a third-party whose property they used in the operations of their parking business
claim was filed by Hydro, which was reversed by the NLRC on appeal. without the owners’ consent.

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ISSUE: WON the incorporators may be held liable for obligations of the
corporation. CEASE VS. COURT OF APPEALS 93 SCRA 483, OCTOBER 18, 1979
FACTS: Forrest L. Cease is the common predecessor-in-interest of the
HELD: YES. The Court has already answered the question in the affirmative parties. He and other American citizens organized the Tiaong Milling and
wherever the circumstances have shown that the corporate entity is being Plantation Company and in the course of its corporate existence all other
used as an alter-ego or business conduit for the sole benefit of the incorporators were bought out by Cease and his children. The
stockholders, or else to defeat public convenience, justify wrong, protect corporation’s charter expired but there were no records as to its
fraud, or defend crime. liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3 of the 5
children) and Bonifacia Terante re-incorporated under FL Cease Plantation
The evidence shows that Cirilio Paredes and Ursula Tolentino (present Company, to the objection of Benjamin and Florence who wanted actual
stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez division of Forrest Cease’s shares. The latter two filed a civil case asking to
(previous stockholders) completely dominated and controlled the declare the corporation identical to FL Cease and that its properties be
corporation and that the functions of the corporation were solely for their divided among Fl Cease’s children as his intestate heirs which was granted
benefit, as shown that the other shareholders were merely qualifying by the trial court.
shares. This is strengthened by the fact that the office of Cirilio Paredes
and that of Park Rite Co., Inc. were located in the same building, in the ISSUE: WON the assets of the corporation are also the properties of
same floor, and in the same room. This is further shown by the fact that the Forrest L. Cease.
funds of the corporation were kept by Cirilio Paredes in his own name. The
corporation itself had no visible assets, as correctly found by the trial court, HELD: YES. In sustaining respondent’s theory of “merger of Forrest Cease
except perhaps the toll house, the wire fence around the lot and the signs and the Tiaong Milling as one personality”, or that “the company is only
thereon It was for this reason that the judgment against it could not be the business conduit and alter-ego of the deceased FL Cease and the
fully satisfied. registered properties of Tiaong Milling are actually properties of FL Cease
and sould be divided equally among his children”, the trial court did aptly
While the mere ownership of all or nearly all of the capital stock of a apply the familiar exception to the general rule by disregarding the legal
corporation does not necessarily mean that it is a mere business conduit fiction of distinct and separate corporate personality and regarding the
of the stockholder, that conclusion is amply unjustified where it is shown, corporation and the individual members one and the same. In shredding
as in this case before us, that the operations of the corporation were so the fictitious corporate veil, the trial judge narrated the undisputed factual
merged with the stockholders as to be practically indistinguishable from premise:
them. To hold the latter liable for the corporation’s obligations is not to
ignore the corporation’s separate entity, but merely to apply the “While the records show that originally, the incorporators were aliens,
established principle that such entity cannot be invoked or used for friends or third parties in relation of one to another, in the course of its
purposes that could not have been intended by the law that created the existence, it developed into a close family corporation. The BOD and
separate personality. stockholders belong to one family the head of which FL Cease always
retained the majority and hence, the control and management of its affairs.
TAN BOON BEE & CO., INC. VS. JARENCIO 163 SCRA 205, JUNE 30, In fact, during the reconstruction of its records before the SEC, only 9
1988 nominal shares out of 300 appear in the name of his 3 eldest children then
FACTS: For failure of private respondent Graphic Publishing Inc. to pay and another person close to them (Ternate). It is likewise noteworthy to
paper products purchased from petitioner (doing business under the name observe that as his children increase or perhaps become of age, he
and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of continued distributing his shares among them adding Florence, Teresa
Manila. A writ of Execution was issued levying a printing machine which and Marion until at the time of his death, only 190 were left to his name.
private respondent Philippine American Drug Company claimed as its Definitely, only the members of his family benefited from the corporation.
own. PADCO filed a third-party claim and asked the court to nullify the
auction sale already conducted, which herein respondent judge granted. The accounts of the corporation and therefore its operation, as well as that
of the family appears to be indistinguishable and apparently joined
ISSUE: WON the respondent judge should be upheld. together. As admitted by the defendants, the corporation “never” had any
account with any banking institution or if any account was carried in a bank
HELD: NO. It is true that a corporation, upon coming into being, is invested on its behalf, it was in the name of FL Cease. In brief, the operation of the
by law with a personality separate and distinct from that of the persons Corporation is merged with those of the majority stockholders, the latter
composing it as well as from any other legal entity to which it may be using the former as his instrumentality and for the exclusive benefit of all
related. As a matter of fact, the doctrine that a corporation is a legal entity his family. From the foregoing indication, therefore, there is truth in
distinct and separate from the members and stockholders who compose it plaintiffs’ allegation that the corporation is only a business conduit of his
is recognized and respected in all cases which are within reason and the father and an extension of his personality, they are once and the same
law. However, this separate and distinct personality is merely a fiction thing. Thus, the assets of the corporation are also the estate of FL Cease,
created by law for convenience and to promote justice. Accordingly, this the father of the parties herein who are al legitimate children of full blood”
separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover for Were we to sustain petitioners, the legal fiction of separate corporate
fraud or illegality, or to work an injustice, or where necessary to achieve personality shall have been used to delay and ultimately deprive and
equity or when necessary for the protection of creditors. Corporations are defraud the respondents of their successional right to the estate of their
composed of natural persons and the legal fiction of a separate corporate deceased father.
personality is not a shield for the commission of injustice and inequity.
Likewise, this is true when the corporation is merely an adjunct, business WENSHA SPA CENTER, INC. VS. YUNG 628 SCRA 311, AUGUST 16, 2010
conduit or alter-ego of another corporation. In such case, the fiction of FACTS: Wensha Spa is in the business of sauna bath and massage services.
separate and distinct corporate entities should be disregarded. Loreta used to be employed by Manmen where Xu was a client. Since Xu
was impressed with Loreta’s performance, he convinced Loreta to transfer
In the instant case, petitioner’s evidence established that PADCO never and work at Wensha as Xu’s personal assistant and interpreter. She was
engaged in the printing business; that the BOD and the officers of PADCO promoted to the position of Administrative Manager. Loreta was asked to
and Graphic are the same; and that PADCO holds 50% share of stock of resign from Wensha because according to a Feng Shui master, her aura
Graphic. The printing machine in question was in the premises of Graphic, did not match that of Xu. Loreta filed a case for illegal dismissal against Xu
long before PADCO even acquired its alleged title from Capitol and Wensha. The Labor Arbiter dismissed Loreta’s complaint for lack of
Publishing. merit. He found it more probable that Loreta was dismissed due to loss of
trust and confidence in her while the NLRC affirmed the labor arbiter ruling.
Considering the above, respondent judge should have pierced PADCO’s The CA reversed the ruling of the NLRC.
veil of corporate identity.

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ISSUE: WON Xu is solidarily liable with Wensha, assuming that Loreta was business policies and practices of respondent EQUITY; and the
illegally dismissed. establishment of respondent EQUITY by the petitioner to circumvent CB
rules.
HELD: NO. Xu is not solidarily liable with Wensha. Supreme Court held
that a corporation is invested by law with a personality separate and Finally, the relationships binding EQUITY and GCC have been that of
distinct from those of the persons composing it and from that of any other parent subsidiary corporations, making the doctrine of piercing the
legal entity to which it may be related. Mere ownership by a single corporate veil applicable.
stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.

GENERAL CREDIT CORPORATION VS. ALSONS DEVELOPMENT AND (b) When not justified
INVESTMENT CORPORATION 513 SCRA 225, JANUARY 29, 2007 Absent any of the following circumstances, the courts will not be justified
FACTS: Petitioner General Credit Corporation (GCC), formerly known as in disregarding the corporate entity;
Commercial Credit Corporation (CCC), was able to secure a license from (a) The corporation is used or being used to defeat public convenience;
the Central Bank (CB) and SEC to engage in quasi-banking activities. On (b) Justify wrong;
the other hand, respondent CCC Equity Corporation (EQUITY) was (c) Protect fraud;
organized by GCC for the purpose of taking over the operations and (d) Defend crime;
management of various franchise companies. (e) Confuse legitimate issues;
(f) Circumvent the law;
Alsons Development and Investment Corporation (ALSONS) and the (g) Perpetuate deception; or
Alcantara family, each owned shares in the GCC franchise companies. (h) An alter-ego, adjunct or business conduit for the sole benefit of a
ALSONS and the Alcantara family, for a consideration of P2M, sold their stockholder or a group of stockholders or another corporation.
shareholdings (101,953shares), in the CCC franchise companies to
EQUITY. The wrongdoing must be clearly and convincingly established. It cannot
be justified by speculation and can never be presumed. The petitioner
EQUITY issued ALSONS a "bearer “promissory note for P2M with a one- must seek to impose a claim against the stockholders or officers directly
year maturity date. 4 years later, the Alcantara family assigned its rights liable, otherwise piercing the veil of corporate fiction would not be
and interests over the bearer note to ALSONS which became the holder available nor justified.
thereof. But even before the execution of the assignment deal, letters of
demand for interest payment were already sent to EQUITY. EQUITY no It is well-settled doctrine, both in law and in equity that as a legal entity, a
longer having assets or property to settle its obligation nor being extended corporation has a personality distinct and separate from its individual
financial support by GCC, pleaded inability to pay. stockholders or members. The mere fact that one is president of a
corporation does not render the property he owns or possesses the
ALSONS, having failed to collect on the bearer note aforementioned, filed property of the corporation, since the president, as individual, and the
a complaint for a sum of money against EQUITY and GCC. GCC is being corporation are separate entities (Cruz vs. Dalisay 152 SCRA 482, July 31,
impleaded as party-defendant for any judgment ALSONS might secure 1987)
against EQUITY and, under the doctrine of piercing the veil of corporate
fiction, against GCC, EQUITY having been organized as a tool and mere REMO, JR. VS. INTERMEDIATE APPELLATE COURT 172 SCRA 405, APRIL
conduit of GCC. However, EQUITY contended that it acted merely as an 18, 1989
intermediary or bridge for loan transactions and other dealings of GCC to FACTS: Petitioner Feliciano Coprada, as president of Akron, purchased 13
its franchises and the investing public and is solely dependent upon GCC trucks from private respondent (EB Marcha Transport Co., Inc.) for and in
for its funding requirements. RTC held that EQUITY was but an consideration of P525,000 as evidenced by a deed of absolute sale. In a
instrumentality or adjunct of GCC and considering the legal consequences side agreement, the parties agreed on a down payment of P50,000 and
and implications of such relationship, rendered judgment for Alson. the balance to be paid within 60 days. They further agreed that until the
Consequently, CA affirmed the court’s decision. balance is paid, the down payment shall accrue as rentals for the 13 trucks;
and in case of failure to pay the balance shall constitute a chattel mortgage
ISSUE: WON the doctrine of "Piercing the Veil of Corporate Fiction" lien; and the parties may allow 30 day extension; and private respondent
should be applied. may ask for the revocation of the contract and re-conveyance of the said
trucks. The obligation is further secured by a promissory note executed by
HELD: YES. The court held that there are three (3) basic areas where Coprada, where it is stated that the balance shall be paid from the
piercing the veil, with which the law covers and isolates the corporation proceeds of a loan from DBP which was never applied for. A complaint was
from any other legal entity to which it may be related, is allowed. These later on filed by private respondent for the recovery of the P525, 000 or
are: 1) defeat of public convenience, as when the corporate fiction is used the return of the 13 trucks against Akron and its officers and directors
as vehicle for the evasion of an existing obligation; 2) fraud cases or when including herein petitioner which was granted by the CFI of Rizal. Petitioner
the corporate entity is used to justify a wrong, protect fraud, or defend a denied any participation the transaction and alleging that Akron has
crime; or 3) alter ego cases, where a corporation is merely a farce since it distinct corporate personality. He was, however, declared in default for
is a mere alter ego or business conduit of a person, or where the failure to attend pre- trial.
corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable
another corporation.
HELD: NO. The facts of the case show that there is no cogent basis to
Further, the court enumerated no less than 20 documented circumstances pierce the corporate veil of Akron and hold petitioner personally liable for
and transactions, which, taken as a package, indeed strongly supported its obligation to private respondent. While it is true that he is a member of
the conclusion that respondent EQUITY was but an adjunct, an the board at the time the resolution to purchase the trucks were adopted,
instrumentality or business conduit of petitioner GCC. This provides a it does not appear that said resolution was intended to defraud anyone. It
justifying ground to pierce petitioner’s corporate existence as to ALSONS’ was Coprada who negotiated with respondent and the one who signed
claim in question. Foremost of what the trial court referred to as "certain the promissory note. The word “We” in the said promissory note must refer
circumstances" are the commonality of directors, officers and stockholders to the corporation and Coprada and not of its stockholders and directors.
and even sharing of office between petitioner GCC and respondent Petitioner did not sign such note so he cannot be personally bound
EQUITY; certain financing and management arrangements between the thereby. Thus, if there was any fraud or misrepresentation that was foisted
two, allowing the petitioner to handle the funds of the latter; the virtual on private respondent in that there was forthcoming loan from the DBP
domination if not control wielded by the petitioner over the finances,

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when in fact there as none, it is Coprada who should account for the same INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA 205 SCRA 697,
and not the petitioner. FEBRUARY 03, 1992
FACTS: On April 1987, petitioner and Indophil Textile Mills, Inc. executed
DEL ROSARIO VS. NATIONAL LABOR RELATIONS COMMISSION 187 a CBA effective from April 1, 1987 to March 31, 1990. On November 3,
SCRA 777, JULY 24, 1990 1987, Indophil ACRYLIC MANUFACTURING CORP was formed and
FACTS: Pursuant to a complaint for money claims which was ultimately registered with the SEC and in 1988 became operation and hired workers
decided by the NLRC against PHILSA Construction and Trading Co. according to its own criteria and standards.
(recruiter) and Ariel Enterprises (employer), a writ of execution was issued
by the POEA which was returned unsatisfied as PHILSA was no longer In 1989, the workers of ACRYLIC unionized and a CBA was executed. In
operating and was financially incapable of satisfying the judgment. 1990, petitioner union claimed that the plant facilities build and set up by
ACRYLIC should be considered an extension or expansion of the facilities
At the motion of private respondent, an alias writ was issued against the of TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining
properties of Mr. Francisco del Rosario and if insufficient, against the cash unit. Public respondent voluntary arbitrator Calica declared that the CBA
and/or surety bond of the Bonding Company concerned. of petitioner DOES NOT extend to employees of ACRYLIC.

Petitioner appealed to the NLRC which was denied together with his MR. ISSUE: WON the veil of corporate entity should be pierced.

ISSUE: WON the writ of execution must be upheld. HELD: NO. Under the doctrine of piercing the veil of corporate entity,
when valid grounds therefore exist, the legal fiction that a corporation is
HELD: NO. Under the law, a corporation is bestowed juridical personality, an entity with a juridical personality separate and distinct from its members
separate and distinct from its stockholders. But when the juridical or stockholders may be disregarded. In such cases, the corporation will be
personality of the corporation is used to defeat public convenience, Justify considered as a mere association of persons. The members or
wrong, protect fraud or defend crime, the corporation shall be considered stockholders of a corporation will be considered as the corporation, that
as a mere association of persons, and its responsible officers and/or is, liability will attach directly to the officers and stockholders.
stockholders shall be held individually liable. For the same reasons, a
corporation shall be liable for he obligation of a stockholder or a In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
corporation and its successor-in-interest shall be considered as one and devise to evade the application of the CBA between petitioner and
the liability of the former shall attach to the latter. TEXTILE MILL. While we do not discount the possibility of the similarities
of the businesses of the two corporations, neither are we inclined to apply
But for the separate juridical personality of a corporation to be the doctrine invoked by petitioner.
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. In this regard, we find the NLRC (1) The fact that the business of Indophil Textile Mills and Indphil Acrylic
decision wanting. Manufacturing are related;
(a) (2) That some of the employees of PR are the same persons manning and
– not supported by facts. The license expired in providing for auxiliary services to the units of ACRILYC, and that;
1985, it was delisted in 1986, there was no judgment yet in favour of (3) The physical plants, offices and facilities are situated in the same
PR. An intent to evade payment of his claims cannot therefore be compound.
implied from the expiration of PHILSA’s license and its delisting.
(b) It is our considered opinion that these facts are not sufficient to justify
– it was organized and piercing the corporate veil of ACRYLIC. UMALI VS. CA – “the legal
registered in 1981, several years before private respondent filed his corporate entity is disregarded only if its sought to hold the officers and
complaint with the POEA in 1985. The creation of the second stockholders directly liable for a corporate debt or obligation.” In the
corporation could not therefore have been in anticipation of PR’s instant case, petitioner does not seek to impose a claim against the
money claims and the consequent adverse judgment against PHILSA. members of ACRYLIC.
(c) –
does not necessarily imply fraud. PHILIPPINE NATIONAL BANK VS. RITRATTO GROUP, INC. 362 SCRA
216, JULY 31, 2001
Present case distinguished from other cases: FACTS: PNB International Finance Ltd. (IFL), a wholly-owned subsidiary
• La Campana Coffee Factory, Inc., vs. Kaisahan ng mga Manggagawa of PNB, organized and doing business in HK, extended a letter of credit
sa La Campana (KKM) 93 Phil., 160, May 25, 1953 – the two in favor of respondent RITRATTO in the amount of US$300K, later
companies were substantially owned by the same person. They had increased to 1.14M, to 1.29M, to 1.425M and decreased to
one office, one management, and a single payroll for both 1,421,316.18, secured by a real estate mortgage constituted in 4
businesses. The laborers were also interchangeable. parcels of land in Makati City.

• Claparols vs. CIR 65 SCRA 613, July 31, 1975 – Both corporations As of April 1998, the outstanding obligation of respondents stood at
were substantially owned and controlled by the same person and US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through
there was no break or cessation in operations. Moreover, all the assets its attorney-in-fact PNB, notified respondents of the foreclosure of all the
of the old was transferred to the new corporation. real estate mortgages and that the properties would be sold at a public
auction.
• A.C. Ransom Labor Union—CCLU vs. NLRC 150 SCRA 498, May 29,
1987 – The distinguishing mark of fraud were clearly apparent in AC Respondents filed a complaint for injunction for which a TRO was issued
Ransom, when such corporation ceased operation after the decision and later on a writ of preliminary injunction, which petitioner assailed
of the CIR and new one replacing it which was owned by the same with the CA through petition for certiorari. The CA dismissed the
family, engaging in the same business and operating in the same petition.
compound. In the present case, not only has there been failure to
establish fraud, but it has also not been shown that petitioner is the ISSUE: WON the corporate entity of IFL may be disregarded.
corporation officer responsible for PR’s predicament. It must be
emphasized that the claims were actually directed against the HELD: NO. Respondents, therefore do not have any cause of action
employer, PHILSA became liable only because of its undertaking to against it. The trial court erred in disregarding the corporate entity by
be jointly and severally bound with the foreign employer, as required saying that IFL is a wholly owned subsidiary of PNB and that it is a mere
by POEA rules. alter-ego or business conduit of the latter.

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The mere fact that a corporation owns all of the stocks of another the E–Securities to return to the petitioners 32,180,000 DMCI shares, as of
corporation, taken alone is not sufficient to justify their being treated as judicial demand. On the other hand, petitioners are directed to reimburse
one entity. If used to perform legitimate functions, a subsidiary’s the defendant the amount of P10,942,200.00, representing the buyback
separate existence may be respected, and the liability of the parent price of the 60,790,000 KPP shares of stocks at P0.18 per share. The
corporation as well as the subsidiary will be confined to those arising in Resolution was ultimately affirmed by the Supreme Court and attained
their respective businesses. finality.

KOPPEL PHIL VS. YATCO – this Court disregarded the separate When the Writ of Execution was returned unsatisfied, petitioners moved
existence of the parent and subsidiary on the ground that the latter was for the issuance of an alias writ of execution to hold Export and Industry
formed merely for the purpose of evading the payment of higher taxes. Bank, Inc. liable for the judgment obligation as E–Securities is “a wholly–
In the case at bar, respondents failed to show any cogent reason why owned controlled and dominated subsidiary of Export and Industry Bank,
the separate entities of PNB and IFL should be disregarded. Inc., and is, thus, a mere alter ego and business conduit of the latter. E–
Securities opposed the motion, arguing that it has a corporate personality
While there exists no definite test of general application in determining that is separate and distinct from the respondent.
when a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the The RTC eventually concluded that E–Securities is a mere business conduit
application of the treatment of the doctrine of piercing the corporate or alter ego of petitioner, the dominant parent corporation, which justifies
veil: piercing of the veil of corporate fiction, and issued an alias writ of summons
(1) As a general rule, the stock ownership alone by one corporation of directing defendant EIB Securities, Inc., and/or Export and Industry Bank,
the stock of another does not thereby render the dominant Inc., to fully comply therewith. It ratiocinated that being one and the same
corporation liable for the torts of the subsidiary unless the separate entity in the eyes of the law, the service of summons upon E–Securities has
corporate existence of the subsidiary is a mere sham, or unless the bestowed jurisdiction over both the parent and wholly–owned subsidiary.
control of the subsidiary is such that it is by an instrumentality or
adjunct of the dominant corporation Export and Industry Bank, Inc. (Export Bank) filed before the Court of
; Appeals a petition for certiorari with prayer for the issuance of a temporary
(2) The doctrine of piercing the corporate veil is an equitable doctrine restraining order (TRO) seeking the nullification of the RTC Order. The
developed to address situations where the separate corporate Court of Appeals reversed the RTC Order and explained that the alter ego
personality of a corporation is abused or used for wrongful theory cannot be sustained because ownership of a subsidiary by the
purpose. The doctrine applies when the corporate fiction is used parent company is not enough justification to pierce the veil of corporate
to defeat public convenience, justify wrong, protect fraud or fiction. There must be proof, apart from mere ownership, that Export Bank
defend crime, or when it is used as a shield to confuse legitimate exploited or misused the corporate fiction of E–Securities. The existence
issues or where the corporation is so organized and controlled and of interlocking incorporators, directors and officers between the two
its affairs are so conducted as to make it merely an instrumentality, corporations is not a conclusive indication that they are one and the same.
agency, conduit or adjunct of another corporation; The records also do not show that Export Bank has complete control over
(3) The test in determining the doctrine of piercing the veil of the business policies, affairs and/or transactions of E–Securities. It was
corporation fiction: solely E–Securities that contracted the obligation in furtherance of its
(a) Control, not mere majority of complete control, but complete legitimate corporate purpose; thus, any fall out must be confined within its
domination, not only of finances, but of policy and business limited liability.
practices in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no ISSUE: WON EIB Securities, Inc. merely an alter ego of Export Bank so that
separate mind, will or existence of its own; piercing the veil of corporate fiction is proper
(b) Such control must have been used by the defendant to
commit fraud, or wrong to perpetuate the violation of a HELD: NO. An alter ego exists where one corporation is so organized and
statutory or other positive legal duty, or dishonest and unjust controlled and its affairs are conducted so that it is, in fact, a mere
act in contravention to plaintiff’s legal rights; and instrumentality or adjunct of the other. The control necessary to invoke the
(c) The aforesaid control and breach of duty must proximately alter ego doctrine is not majority, or even complete stock control, but such
cause the injury or unjust loss complained of. domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own,
The absence of any one of these elements prevents “piercing the and is but a conduit for its principal.
corporate veil”. In applying the “instrumentality” or “alter-ego”
doctrine, the courts are concerned with reality and not form, with how The Court has laid down a three–pronged control test to establish when
the corporation operated and the individual defendant’s relationship to the alter ego doctrine should be operative:
the operation. (1) Control, not mere majority of complete control, but complete
domination, not only of finances, but of policy and business practices
Aside from the fact that IFL is a wholly owned subsidiary, there is no in respect to the transaction attacked so that the corporate entity as
showing of the indicative factors that the it is a mere instrumentality of to this transaction had at the time no separate mind, will or existence
PNB. Neither is there a demonstration that any of the evils sought to be of its own;
prevented by the doctrine of piercing the corporate veil based on the (2) Such control must have been used by the defendant to commit fraud,
alter-ego or instrumentality doctrine finds application in the case at bar. or wrong to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention to plaintiff’s
The injunction suit was directed against PNB, as agent of IFL and not as legal rights; and
parent. A suit against an agent, cannot, without compelling reasons be (3) The aforesaid control and breach of duty must proximately cause the
considered a suit against the principal, for he is not the real party in injury or unjust loss complained of.
interest provided under the Rules of Court.
The absence of any one of these elements prevents ‘piercing the corporate
PACIFIC REHOUSE CORPORATION VS. COURT OF APPEALS 719 SCRA veil’ in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are
665, MARCH 24, 2014 concerned with reality and not form, with how the corporation operated
FACTS: A complaint was instituted with the Makati City Regional Trial and the individual defendant’s relationship to that operation. Hence, all
Court (RTC), Branch 66, against EIB Securities Inc. (E–Securities) for three elements should concur for the alter ego doctrine to be applicable.
unauthorized sale of 32,180,000 DMCI shares of Pacific Rehouse
Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum In this case, the alleged control exercised by Export Bank upon its
Holdings Corporation, and East Asia Oil Company, Inc. In its October 18, subsidiary E–Securities, by itself, does not mean that the controlled
2005 Resolution, the RTC rendered judgment on the pleadings, directing corporation is a mere instrumentality or a business conduit of the mother
company. Even control over the financial and operational concerns of a
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subsidiary company does not by itself call for disregarding its corporate were James Yu and Wilson Young impleaded.
fiction. There must be a perpetuation of fraud behind the control or at least .
a fraudulent or illegal purpose behind the control in order to justify
piercing the veil of corporate fiction. Such fraudulent intent is lacking in
this case. Thus, Tanduay Distillers or Twin-Ace did
not take over the corporate personality of TDI although they manufacture
While the courts have been granted the colossal authority to wield the the same product at the same plant with the same equipment and
sword which pierces through the veil of corporate fiction, concomitant to machinery. Obviously, the trade name “Tanduay” went with the sale
the exercise of this power, is the responsibility to uphold the doctrine of because the new firm does business as Tanduay Distillers and its main
separate entity, when rightly so; as it has for so long encouraged product of rum is sold as Tanduay Rum. There is no showing, however, that
businessmen to enter into economic endeavors fraught with risks and TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate
where only a few dared to venture. corporation. In point of fact, TDI is now herein a party respondent
represented by its own counsel.
The decision of the Court of Appeals in favor of Export Bank, reversing the
RTC Order, is affirmed The fiction of separate and distinct corporate entites cannot, in the instant
case, be disregarded and brushed aside, there being not the lease
YU VS. NATIONAL LABOR RELATIONS COMMISSION 245 SCRA 134, indication that the second corporation was a dummy or servces as a client
JUNE 16, 1995 of the first corporate entity.
FACTS: Private respondents were employees of Tanduay Distillery, Inc.
(TDI). On March 29, 1988, 22 employees of TDI, including PRs, received a FRANCISCO MOTORS CORPORATION VS. COURT OF APPEALS 309
memorandum from TDI, terminating their services for reasons of SCRA 72, JUNE 25, 1999
retrenchment, because First Pacific Metro Corporation is buying TDI’s FACTS: Petitioner Francisco Motors Corp filed a complaint to recover from
assets, which purchase did not push through. respondent spouses Manuel the unpaid balance of the jeepney bought by
the latter from them. As their answer, respondent spouses interposed a
On June 1, 1988, after employees had ceased as such, Twin Ace Holdings, counterclaim for unpaid legal services by Gregorio Manuel which was not
Inc. took over the business and assumed the name Tanduay Distillers paid by petitioner corporation’s directors and officers. Respondent Manuel
(Tanduay). alleges that he represented members of the Francisco family who were
directors and officers of herein petitioner corporation in an intestate estate
Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs proceeding but even after its termination, his services were not paid. The
holding the retrenchment illegal, which was affirmed by the NLRC. trial court ruled in favor of petitioner but also allowed respondent spouses’
Petitioners filed an opposition against the motion for execution (which was counterclaim. CA affirmed.
directed towards them and TDI) contending that Tanduay is a separate
entity distinct from TDI, and respondents James Yu and Wilson Young, ISSUE: WON petitioner corporation may be held liable for the liability
which was dismissed by the NLRC. incurred by its directors and officers in their personal capacity.

ISSUES: HELD: NO. In our view, however, given the facts and circumstances of this
(1) WON the order of execution is void. case, the doctrine of piercing the corporate veil has no relevant application
(2) WON NLRC committed grave abuse of discretion in holding here. Respondent court erred in permitting the trial court’s resort to this
petitioner Yu and Young liable. doctrine.

HELD: In the case at bar, instead of holding certain individuals or persons

(1) YES. responsible for an alleged corporate act, the situation has been reversed.
The decision dated May 24, 1989 was already final and executory and It is the petitioner as a corporation which is being ordered to answer for
cannot be amended or corrected except for clerical errors or mistakes. An the personal liability of certain individual directors, officers and
examination of the said decision does not in any manner obligate Tanduay incorporators concerned. Hence, it appears to us that the doctrine has
or even petitioners Yu and Young to reinstate PRs. Only TDI was held liable been turned upside down because of its erroneous invocation. Note that
upto the time of change of ownership. The order of execution in effect according to private respondent Gregorio Manuel his services were
amended the decision. It is beyond the power and competence of Labor solicited as counsel for members of the Francisco family to represent them
Arbiter Cueto to amend a final decision. The writ of execution must not go in the intestate proceedings over Benita Trinidad’s estate. These estate
beyond the scope of judgment. proceedings did not involve any business of petitioner.

(2) It cannot be said that TDI and Tanduay are one and the same, as Furthermore, considering the nature of the legal services involved,
seems to be the impression of respondents when they impleaded whatever obligation said incorporators, directors and officers of the
petitioners as party-respondents in their complaint. corporation had incurred, it was incurred in their personal capacity. When
directors and officers of a corporation are unable to compensate a party
. The name of the company for for a personal obligation, it is far-fetched to allege that the corporation is
whom the petitioners are working is Twin Ace Holdings Corporation. As perpetuating fraud or promoting injustice and be thereby held liable
stated by the SolGen, Twin Ace is part of the Allied Banking Group therefore by piercing its corporate veil.
although it conducts the rum business under the name of Tanduay
Distillers. The use of a similar sounding or almost identical name is an 3. Amendment of Corporate Charter
obvious device to capitalize on the goodwill which Tanduay Rhum has built SEC. 35. . – Every corporation
over the years. Twin Ace or Tanduay Distillers and TDI are distinct and incorporated under this Code has the power and capacity:
separate corporations. There is nothing to suggest that the owners of TDI, xxx
have any common relationship as to identify it with Allied Banking Group (d) To amend its articles of incorporation in accordance with the provisions
which runs Tanduay Distillery. of this Code;

The genuine nature of the sale to Twin Ace is evidenced by the fact that
SEC. 15 – Unless otherwise
Twin Ace was only a subsequent interested buyer. PRs have not presented
prescribed by this Code or by special law, and for legitimate purposes, any
any proof as to communality of ownership and management to support
provision or matter stated in the articles of incorporation may be amended
their contention that the two companies are one firm or closely related.
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
. Only later when the manufacture and
the outstanding capital stock, without prejudice to the appraisal right of
sale of Tanduay products was taken over by Twin Ace or Tanduay Distillers
dissenting stockholders in accordance with the provisions of this Code.
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The articles of incorporation of a nonstock corporation may be amended Commission’s rules as a valid mode for service of notices.
by the vote or written assent of majority of the trustees and at least two-
thirds (2/3) of the members. A certificate must be signed by a majority of the directors of the
corporation and countersigned by the chairperson and secretary of the
The original and amended articles together shall contain all provisions stockholders’ meeting, setting forth:
required by law to be set out in the articles of incorporation. Amendments (a) That the requirements of this section have been complied with;
to the articles shall be indicated by underscoring the change or changes (b) The amount of the increase or decrease of the capital stock;
made, and a copy thereof duly certified under oath by the corporate (c) In case of an increase of the capital stock, the amount of capital stock
secretary and a majority of the directors or trustees, with a statement that or number of shares of no-par stock thereof actually subscribed, the
the amendments have been duly approved by the required vote of the names, nationalities and addresses of the persons subscribing, the
stockholders or members, shall be submitted to the Commission. amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on the subscription in cash or
The amendments shall take effect upon their approval by the Commission property, or the amount of capital stock or number of shares of no-
or from the date of filing with the said Commission if not acted upon within par stock allotted to each stockholder if such increase is for the
six (6) months from the date of filing for a cause not attributable to the purpose of making effective stock dividend therefor authorized;
corporation. (d) Any bonded indebtedness to be incurred, created or increased;
(e) The amount of stock represented at the meeting; and
The steps to be followed for an effective amendment of the articles of (f) The vote authorizing the increase or decrease of the capital stock, or
incorporation would thus be: the incurring, creating or increasing of any bonded indebtedness.
(1) Resolution by at least a majority of the board of directors or trustees;
(2) Vote OR WRITTEN ASSENT of the stockholders representing at least Any increase or decrease in the capital stock or the incurring, creating or
2/3 of the outstanding capital stocks or members in case of a non- increasing of any bonded indebtedness shall require prior approval of the
stock corporation. (Note: non-voting shares are considered in Commission, and where appropriate, of the Philippine Competition
determining the voting and quorum requirement in case of Commission. The application with the Commission shall be made within
amendments of the articles of incorporation as provided in Sec. 6); six (6) months from the date of approval of the board of directors and
(3) Submission and filing of the amendments with the SEC as follows: stockholders, which period may be extended for justifiable reasons.
(a) The original and amended articles together shall contain all the
provision required by law to be set out in the articles of Copies of the certificate shall be kept on file in the office of the corporation
incorporation. Such articles, as amended, shall be indicated by and filed with the Commission and attached to the original articles of
underscoring the change or changes made; incorporation. After approval by the Commission and the issuance by the
(b) A copy thereof, duly certified under oath by the corporate Commission of its certificate of filing, the capital stock shall be deemed
secretary and a majority of the directors or trustees stating the increased or decreased and the incurring, creating or increasing of any
fact that such amendments have been approved by the required bonded indebtedness authorized, as the certificate of filing may declare:
vote of the stockholders or members; Provided, That the Commission shall not accept for filing any certificate of
(c) Favorable recommendation of the appropriate government increase of capital stock unless accompanied by a sworn statement of the
agency concerned in the case where the corporation is under its treasurer of the corporation lawfully holding office at the time of the filing
supervision such as banking and insurance companies, etc. of the certificate, showing that at least twenty-five percent (25%) of the
increase in capital stock has been subscribed and that at least twenty-five
When to take effect? percent (25%) of the amount subscribed has been paid in actual cash to
(1) Upon approval by the SEC; or the corporation or that property, the valuation of which is equal to twenty-
(2) From the date of filing if not acted upon within 6 months for a cause five percent (25%) of the subscription, has been transferred to the
not attributed to the corporation corporation: Provided, further, That no decrease in capital stock shall be
EXCEPTIONS: The following require the approval of the SEC: approved by the Commission if its effect shall prejudice the rights of
(a) increasing or decreasing the capital stock [Sec. 37], or corporate creditors.
(b) shortening the corporate term [Sec. 136].

4. Special Amendments
SEC. 36 . – A private Nonstock corporations may incur, create or increase bonded indebtedness
corporation may extend or shorten its term as stated in the articles of when approved by a majority of the board of trustees and of at least two-
incorporation when approved by a majority vote of the board of directors thirds (2/3) of the members in a meeting duly called for the purpose.
or trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of Bonds issued by a corporation shall be registered with the Commission,
its members. Written notice of the proposed action and the time and place which shall have the authority to determine the sufficiency of the terms
of the meeting shall be sent to stockholders or members at their respective thereof.
place of residence as shown in the books of the corporation, and must
either be deposited to the addressee in the post office with postage
prepaid, served personally, or when allowed in the bylaws or done with Ordinary Amendment/s under Special Amendments under
the consent of the stockholder, sent electronically in accordance with the Sec. 16 Secs. 37 & 38
rules and regulations of the Commission on the use of electronic data A “written assent” of the • A meeting of the
messages. In case of extension of corporate term, a dissenting stockholder stockholders or members would stockholders or members
may exercise the right of appraisal under the conditions provided in this suffice would be required
Code. • Actions must be voted
upon at a duly constituted
SEC. 37. meeting
. – No corporation shall increase or Does not require the formal Requires the formal approval of
decrease its capital stock or incur, create or increase any bonded approval of the SEC ( the SEC
indebtedness unless approved by a majority vote of the board of directors amendments may take effect
and by two-thirds (2/3) of the outstanding capital stock at a stockholders’ from the date of filing when the
meeting duly called for the purpose. Written notice of the time and place Commission did not act upon
of the stockholders’ meeting and the purpose for said meeting must be the application within six (6)
sent to the stockholders at their places of residence as shown in the books months (Sec. 15 par. 3)
of the corporation and served on the stockholders personally, or through May be rejected or approved on the grounds provided for by Section
electronic means recognized in the corporation’s bylaws and/or the 16 of the RCC

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ISSUE: WON the trial court correctly dismissed the case.

SEC. 16.
. – The Commission may disapprove the articles of HELD: NO. Sec. 18 (Now Sec. 15 of the RCC) of the Corporation Law (Act
incorporation or any amendment thereto if the same is not compliant with No. 1459) explicitly permits the articles of incorporation to be amended.
the requirements of this Code: Provided, That the Commission shall give The law does not only authorize corporations to amend their charter; it also
the incorporators, directors, trustees, or officers a reasonable time from lays down the procedure for such amendment; and, what is more relevant
receipt of the disapproval within which to modify the objectionable to the present discussion, it contains provisos restricting the power to
portions of the articles or amendment. The following are grounds for such amend when it comes to the term of their existence and the increase or
disapproval: decrease of the capital stock. There is no prohibition therein against the
(a) The articles of incorporation or any amendment thereto is not change of name. The inference is clear that such a change is allowed, for
substantially in accordance with the form prescribed herein; if the legislature had intended to enjoin corporations from changing
(b) The purpose or purposes of the corporation are patently names, it would have expressly stated so in this section or in any other
unconstitutional, illegal, immoral or contrary to government rules and provision of the law.
regulations;
(c) The certification concerning the amount of capital stock subscribed No doubt, the name of the corporation is peculiarly important as necessary
and/or paid is false; and to the very existence of a corporation. The general rule as to corporation
(d) The required percentage of Filipino ownership of the capital stock is that each corporation shall have a name by which it is to sue and be sued
under existing laws or the Constitution has not been complied with. and do all legal acts. The name of the corporation in this respect
designates the corporation in the same manner as the name of an
No articles of incorporation or amendment to articles of incorporation of individual designates the person. Since an individual has the right to
banks, banking and quasi-banking institutions, preneed, insurance and change his name under certain conditions, there is no compelling reason
trust companies, NSSLAS, pawnshops, and other financial intermediaries why a corporation may not enjoy the same right. The sentimental
shall be approved by the Commission unless accompanied by a favorable considerations which individuals attach to their names are not present in
recommendation of the appropriate government agency to the effect that corporations and partnerships. Of course, as in the case of an individual,
such articles or amendment is in accordance with law. such change may not be made exclusively by the corporation’s own act. It
has to follow the procedure prescribed by law for the purpose, and this is
5. Provisions subject to amendments what is important and indispensably prescribed – strict adherence to such
GENERAL RULE: Section 15 of the RCC provides that any provision or procedure.
matter stated in the AOI is subject to amendment
EXCEPTIONS: RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
(1) Unless otherwise prescribed by the RCC or by special law; contrary to public policy is the USE by one corporation of the name of
(2) Reason for amendment is for an Illegitimate purpose; and another corporation as its trade name. We are certain no one will disagree
(3) acts of a corporation ( provisions not subject to that such an act can only result in confusion and open the door to frauds
amendment): and evasions and difficulties of administration and supervision. Surely, the
(a) Names of the incorporations and the incorporating directors or Red Line case was not one of change of name.
trustees;
(b) Name of the treasurer originally or first elected by the The change of name of a corporation DOES NOT result in its dissolution.
subscribers or members to act as such; There is unanimity in authorities: “An authorized change in the name of a
(c) Number of shares and the amount originally subscribed and corporation has no more effect upon its identity as a corporation than
paid out of the original authorized capital stock of the change of name of natural person has upon his identity. It does not affect
corporation; and the rights of the corporation or lessen or add to its obligations. After a
(d) Date and place of execution of the articles of incorporation and corporation has effected a change in its name it should sue and be sued
the signatories and acknowledgment thereof. in its new name” (13 Am. Jur. 276-277)

(a) Change in Corporate Name A mere change in the name of a corporation, either by the legislature or
Change in corporate name is included in the general power to amend and by the corporators or stockholders under legislative authority, does not,
maybe effected with compliance to Sec. 15. generally speaking, affect the identity of the corporation, nor in any way
affect the rights, privileges, or obligations previously acquired or incurred
Any change in the corporate identity or name does not affect the rights by it. Indeed, it has been said that a change of name by a corporation has
and obligations of the corporation. A mere change in the name of the no more effect upon the identity of the corporation than a change of name
corporation does not affect the identity of a corporation nor in any manner by a natural person has upon the identity of such person. The corporation,
affect the rights, privileges and obligations previously acquired or incurred upon such change in its name, is in no sense a new corporation, nor the
by it. successor of the original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and its
character is in no respect changed. ... (6 Fletcher, Cyclopedia of the Law
PHILIPPINE FIRST INSURANCE CO., INC. VS. HARTIGAN 34 SCRA 252,
of Private Corporations, 224-225, citing cases).
JULY 31, 1970
FACTS: Plaintiff changed its name from “The Yek Tong Lin Fire and Marine
Insurance Co., Ltd” (Yek Tong). REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A
change in the corporate name does not make a new corporation, and
The complaint alleges that under its old name, PFIC signed as co-maker whether effected by special act or under a general law, has no effect on
together with Hartigan, a promissory note for P5,000 in favor of China the identity of the corporation, or on its property rights or liabilities. The
Banking Corporation (Chinabank). Plaintiff agreed to act as such upon corporation continues, as before, responsible in its new name for all debts
application of the defendant, who together with Antonio Chua and Chang or other liabilities which it had previously contracted or incurred.
Ka Fu, signed an indemnity agreement in favor of the plaintiff.
Relevant SEC Memorandum Circulars
Defendants admitted the execution of the indemnity agreement but
argued that it was made in favor of Yek Tong and not PFIC. They claim that (b) Corporate Term
there was no privity of contract between plaintiff and defendants and
SEC. 36. . – A private
consequently, the plaintiff has no cause of action against them considering
corporation may extend or shorten its term as stated in the articles of
that the plaintiff does not allege that PFIC and Yek Tong are one and the
incorporation when approved by a majority vote of the board of directors
same or that the plaintiff has acquired the rights of the latter. CFI of Manila
or trustees, and ratified at a meeting by the stockholders or members
dismissed the complaint.
representing at least two-thirds (2/3) of the outstanding capital stock or of
its members. Written notice of the proposed action and the time and place
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of the meeting shall be sent to stockholders or members at their respective is nothing to extend, and that the appeal must be dismissed... So, when
place of residence as shown in the books of the corporation, and must the articles of a corporation have expired, it is too late to adopt an
either be deposited to the addressee in the post office with postage amendment extending the life of a corporation; for, the corporation having
prepaid, served personally, or when allowed in the bylaws or done with expired, this is in effect to create a new corporation ..."
the consent of the stockholder, sent electronically in accordance with the
rules and regulations of the Commission on the use of electronic data COMPANY REGISTRATION AND MONITORING DEPARTMENT & SEC
messages. In case of extension of corporate term, a dissenting stockholder VS. CHING BEE TRADING CORPORATION
may exercise the right of appraisal under the conditions provided in this FACTS: CBTC was registered with the SEC on December 23, 1960. Its
Code. corporate existence being limited to a period of only 50 years, it was to
expire on December 23, 2010.
For purposes of amending the corporate term, the following procedure is
to be observed (Sec. 36): On December 22, 2010 or one (1) day before the last day of its corporate
1. Approval by a majority vote of the board of directors or trustees; existence, CTBC filed with the CRMD of the SEC, an application seeking
2. Written notice of the proposed action and the time and place of the approval of its amended AOI extending its term for another 50 years.
meeting shall be served to each stockholder or member either by mail CRMD, however, refused to accept the application because of failure to
or by personal service; state in the required Directors’ Certificate that the stockholders, owning
3. Ratification by the stockholders or members representing at least 2/3; and representing at least two third (2/3) of its capital stock, voted and
4. In case of extension of corporate term, it should be for periods not approved the amendment. The CRMD processor in the name of Erlinda
exceeding 50 years in any single instance, and provided that no Cabatic then verbally advised CBTC to submit a letter requesting an
extension can be made earlier than 5 years prior to the original or extension to file requirements.
subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the SEC. On December 23, 2010, or just hours before CBTC’s corporate personality
5. In cases of extension of corporate term, a dissenting stockholder may expires, such a letter was filed. On January 6, 2011, however, the SEC
exercise appraisal rights under the conditions prescribes by Sec. 80 denied the request, citing SEC Resolution No. 394, dated November 13,
and 81 of the Code. 2008, as basis. The said resolution contained SEC’s policy of denying the
filing of any amended AOI extending the corporate life of a corporation,
whose original term has expired.
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING CO., INC. VS.
SECURITIES AND EXCHANGE COMMISSION 24 SCRA 269, JULY 29, On appeal to SEC En Bank, the request was likewise denied. The CA
1968 reversed the decision of the SEC En Banc.
FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
which expired on Jan. 15, 1962. ISSUE: WON the CA erred in reversing the decision of the SEC En Banc,
ordering the latter to accept the Amended AOI which was filed by CBTC.
On July 15, 1963, during the period within which it is to liquidate, the
board of directors resolved to amend its articles of incorporation HELD: NO. While the court agrees that extension (including the SEC
extending its corporate life for another 50 years which was approved by approval) must happen before the expiration of the corporate term, the
the stockholders but denied by the SEC. burden of doing so does not only gall to the applicant, but also on the
SEC. the requirement pronounced in the Alhambra, requiring that all steps
ISSUE: WON the extension of corporate term should be allowed. must be undertaken while life still subsists, is bot the responsibility of the
State, acting through the SEC, and the corporation. To say that the
HELD: NO. The privilege of extension is purely statutory. All the statutory corporation alone has this burden is unfair as the Code does not impose
conditions precedent must be complied with in order that the extension this obligation solely on the corporation. Therefore, so long as renewal is
may be effectuated. And, generally, these conditions must be complied filed before the expiry date, leads to renewal.
with, and the steps necessary to effectuate an extension must be taken,
during the life of the corporation, and before the expiration of the term of OTHER MATTERS SUBJECT TO AMENDMENT:
existence as originally fixed by its charter or the general law, since, as a (1) Purpose clause – by changing, altering or including other purpose or
rule, the corporation is dissolved as soon as the purposes;
(2) Principal Office;
(3) Number of Directors;
(4) Shares of stock and their classification;
The logic of this position is well-expressed in a four-square case decided (5) Restrictions as well as preference;
by the CA of Kentucky:

“But section 561 (section 2147) provides that, when any corporation
expires by the terms of its articles of incorporation, it may be thereafter
continued to act for the purpose of closing up its business, but for no other
purpose. The corporate life of the Home Building Association expired on
May 3, 1905. After that date, by the mandate of the statute, it could
continue to act for the purpose of closing up its business, but for no other
purpose. The proposed amendment was not made until January 16, 1908,
or nearly three years after the corporation expired by the terms of the
articles of incorporation. When the corporate life of the corporation was
ended, there was nothing to extend. Here it was proposed nearly three
years after the corporate life of the association had expired to revivify the
dead body, and to make that relate back some two years and eight
months. In other words, the association for two years and eight months
had only existed for the purpose of winding up its business, and, after this
length of time, it was proposed to revivify it and make it a live corporation
for the two years and eight months daring which it had not been such.

The law gives a certain length of time for the filing of records in this court,
and provides that the time may be extended by the court, but under this
provision it has uniformly been held that when the time was expired, there

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VI. BOARD OF DIRECTORS / TRUSTEES underlying policy of the Corporation Code is that the business and affairs
A. Powers of the Board of a corporation must be governed by a board of directors whose members
SEC. 22. have stood for election, and who have actually been elected by the
. – Unless otherwise provided in this Code, the board of directors stockholders, on an annual basis. Only in that way can the directors'
or trustees shall exercise the corporate powers, conduct all business, and continued accountability to shareholders, and the legitimacy of their
control all properties of the corporation. decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of
Directors shall be elected for a term of one (1) year from among the holders power by the directors or officers over properties that they do not own.
of stocks registered in the corporation’s books, while trustees shall be (Valle Verde Country Club, Inc. vs. Africa 598 SCRA 195, September 04,
elected for a term not exceeding three (3) years from among the members 2009)
of the corporation. Each director and trustee shall hold office until the
successor is elected and qualified. A director who ceases to own at least CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
one (1) share of stock or a trustee who ceases to be a member of the Unless the law so provides, corporate powers may be delegated to
corporation shall cease to be such. individual directors or other officers or agents. Whether or not the acts of
the individual director, officer or agent would bind the corporation depend
The board of the following corporations vested with public interest shall on the nature of the agency created or the person conferred upon such
have independent directors constituting at least twenty percent (20%) of person by the statute, the corporate charter, the by-laws, the corporate
such board: action of the board or stockholders, or whether it is necessary or incidental
(a) Corporations covered by Section 17.2 of Republic Act No. 8799, to one’s office.
otherwise known as “The Securities Regulation Code”, namely those
whose securities are registered with the Commission, corporations The GENERAL RULE is that a corporation is bound by the acts of its
listed with an exchange or with assets of at least Fifty million pesos corporate officers who act within the scope of the five (5) classification of
(P50,000,000.00) and having two hundred (200) or more holders of powers of corporate agents, which are:
shares, each holding at least one hundred (100) shares of a class of its (1) Those expressly conferred or those granted by the articles of
equity shares; incorporation, corporate by-laws or by the official act of the board of
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged directors;
in money service business, pre-need, trust and insurance companies, (2) Those that are incidental or those acts as are naturally and ordinarily
and other financial intermediaries; and done which are reasonable and necessary to carry out the corporate
(c) Other corporations engaged in business vested with public interest purpose or purposes;
similar to the above, as may be determined by the Commission, after (3) Those that are inherent or acts that go with the office;
taking into account relevant factors which are germane to the (4) Those that are apparent or those acts which although not actually
objective and purpose of requiring the election of an independent granted, the principal knowingly allows or permits it to be done; and
director, such as the extent of minority ownership, type of financial (5) Powers arising out of customs, usage or emergency.
products or securities issued or offered to investors, public interest
involved in the nature of business operations, and other analogous 1. Classification of Powers
factors. RAMIREZ VS. ORIENTALIST CO. AND FERNANDEZ. 38 PHIL. 634,
SEPTEMBER 24, 1918
An independent director is a person who, apart from shareholdings and FACTS: The Board of Directors were apprised of the fact the plaintiff JF
fees received from the corporation, is independent of management and Ramirez, who is based in Paris and represented by his son Jose Ramirez,
free from any business or other relationship had control of agencies for two different marks of films, “Éclair Films” and
“Milano Films”.
The Board of Directors (or trustees or other designation allowed under Sec.
174) is the supreme authority in matter of management of the regular and Negotiations began between Jose Ramirez and the board of directors of
ordinary business affairs of the corporation. Orientalist Co. where Ramon Fernandez, one of the members of the board
and TOC’s treasurer was chiefly active.
However, this authority does not extend to the
such as amendments or substantial changes thereof, Near the end of July 1913, Jose Ramirez offered to supply from Paris the
which belong to the stockholders as a whole. The equitable principle aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an
therefore is that the stockholders may have all the profits but shall turn informal conference with the BOD except one, and with approval of those
over the management of the enterprise to the Board of Directors. whom he had communicated, accepted the offer through letters signed by
Fernandez in his capacity as treasurer.
THEORIES ON SOURCE OF POWERS
(1) Agency Theory – All powers reside in the stockholders and are just Upon arrival of the said films, it turned out that TOC was without funds, so
delegated to the directors as agents the first drafts, taken in the name of TOC were received and paid by its
(2) Concession Theory – Power of directors is derived from the State. The president, Hernandez, through his own funds and such films were treated
State permits the directors to perform only such functions as the State by him as his own property; and in fact, they never came into the
allows possession of TOC and were rented by Hernandez to TOC as they are
(3) Platonic Guardian Theory – the board is an aristocracy or group of exhibited in the Oriental Theater.
Platonic guardians created by legislative ordainment. The board is
not a mere caretaker but it exercise control over corporate affairs and Other films arrived together with their drafts, taken in the name of TOC
considered an inviolable institution through its president, which were not paid and gave rise to the present
(4) Theory – directors are fiduciaries whose duties run action. TOC was declared the principal debtor and Ramon Fernandez, the
primarily to the corporation. Their powers are derived from the State guarantor.
through the statute under which the corporation is organized, yet they
do not qualify solely as Platonic guardians. They are indeed ISSUE: WON the corporation could be held liable for the contract.
.
The board of directors is the directing and controlling body of the HELD: YES. The public is not supposed nor required to know the
corporation. It is a creation of the stockholders and derives its power to transactions which happen around the table where the corporate board of
control and direct the affairs of the corporation from them. The board of directors or the stockholders are from time to time convoked. In dealing
directors, in drawing to themselves the powers of the corporation, with corporations, the public at large is bound to rely to a large extent
occupies a position of trusteeship in relation to the stockholders, in the upon outward appearances. If a man is acting for a corporation with the
sense that the board should exercise not only care and diligence, but external indicia of authority, any person not having notice of want of
utmost good faith in the management of corporate affairs. x x x The authority may usually rely upon those appearances; and if it be found that

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the directors had permitted the agent to exercise that authority and corporations in that section refers only to providing compensation for the
thereby held him out as a person competent to bind the corporation, or future services of directors, officers, and employees thereof after the
had acquiesced in a contract and retained the benefit supposed to have adoption of the by-law or other provisions in relation thereto, and cannot
been conferred by it, the corporation will be bound, notwithstanding the in any sense be held to authorize the giving, as in this case, of continuous
actual authority may ever have been granted. compensation to particular directors after their employment has
terminated for part services rendered gratuitously by them to the
The failure of the defendant corporation to make an issue in its answer with corporation. To permit the transaction involved in this case would be to
regard to the authority of Ramon Fernandez to bind it, and particularly to create an obligation unknown to law, and to countenance a misapplication
deny specifically under oath the genuineness and due execution of the of the funds of the defendant building and loan association to the
contracts sued upon have the effect of eliminating the question of his prejudice of the substantial rights of its shareholders.
authority from the case.
Irrespective of the above, the conclusion is the same. The article which the
It is declared under Sec. 28 (now 23) that corporate powers shall be appellees rely upon is merely a by-law provision adopted by the
exercised, and all corporate business conducted by the board of directors, stockholders of the defendant corporation, without any action having been
and this principle is recognized in the by-laws of the corporation in takin in relation thereto by its board of directors. The law is settled that
question which contain a provision declaring that the power to make contracts between a corporation and third person must be made by or
contracts shall be vested in the board of directors. under the authority of its board of directors and not by its stockholders.
Hence, the action of the stockholders in such matters is only advisory and
It is true that it is also true in the by-laws, that the president shall have the not in any wise binding on the corporation. There could not be a contract
power and it shall be his duty, to sigh contract; but this has reference rahter without mutual consent, and it appears that the plaintiffs did not consent
to the formality of reducing to proper form the contract which are to the provisions of the by-law in question, but, on the contrary, they
authorized by the board and is not intended to confer an independent objected to and voted against it in the stockholders’ meeting in which it
power to make contract binding on the corporation. was adopted.

The fact that the power to make corporate contracts is thus vested in the 2. Qualifications and Disqualifications
board of directors does not signify that a formal vote of the board must STOCK CORPORATION NON-STOCK CORPORATION
always be taken before contractual liability can be fixed upon a Holder of at least one share of Must be a member thereof
corporation; for a board can create liability, like an individual, by other stock in his own name
means than by a formal expression of its will. Within five (5) years prior to the election or appointment as a director,
trustee or officer the person:
Participation of the stockholders. The letter accepting the offer was (a) must not be convicted by final judgement of an offense
dispatched in a meeting of the board called by Ramon Fernandez, where punishable by imprisonment for a period exceeding six (6) years
4 members, including the president was present. The minutes add that or a violation of the Revised Corporation Code and for violating
terms of this offer were approved; but at the suggestion of Fernandez it Republic Act No. 8799, otherwise known as “The Securities
was decided to call a special meeting of the stockholders to consider the Regulation Code”
matter and definite action was postponed. From the meeting of the
stockholders, it can be inferred that this body was then cognizant that the (b) must not be found administratively liable for any offense
offer had already been accepted. It is not, however, necessary to find the involving fraudulent acts; and
judgment of the stockholder proceedings, even if the assumption is that (c) By a foreign court or equivalent foreign regulatory authority for
they did not approve of acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above
Both upon the principle and authority it is clear that the action of the Must of be of Legal Age
stockholders, whatever its character, must be ignored. The theory of a
corporation is that the stockholders may have all the profits but shall turn Rationale: While the New Civil Code does not prohibit a minor from
over the complete management of the enterprise to their representatives being elected as director or as officer of a corporation, the
and agents, called directors. Accordingly, there is little for the stockholders Commission is inclined to think that the election of minors to board
to do beyond electing directors, making by-laws, and exercising certain membership or as officers of the corporation is not a sound corporate
other special powers defined by law. In conformity with this idea, it is practice. Since the management of corporate affairs is vested in the
settled that contract between a corporation and third person must be board of directors, who as a body will enter into legal relations with
made by the director and not by the stockholders. The corporation, in such third persons, it is extremely unwise for the board to have members
matters, is represented by the former and not by the latter. It results that whose capacity to act is restricted (SEC Opinion February 2, 1981)
where a meeting of the stockholders is called for the purpose of passing
Must possess other qualifications as may be prescribed in special
on the propriety of making a corporate contract, its resolutions are at most
laws or regulations or in the by-laws of the corporation
advisory and not in any wise binding on the board.

LEE VS. COURT OF APPEALS 205 SCRA 752, FEBRUARY 04, 1992
BARRETTO VS. LA PREVISORA FILIPINA 57 PHIL., 649, DECEMBER 08, FACTS: A complaint for a sum of money was filed by International
1932 Corporate Bank, Inc. against the private respondents who, in turn, filed a
FACTS: Petitioners, directors of respondent up to March 1929, sought third-party complaint against Alfa Integrated Textile Mills, Inc.
to recover 1% (to each plaintiff) of the profits of the copany for the year
1929, under and in accordance with an amendment to the by-laws which The trial court ordered the issuance of alias summons upon Alfa through
was made at the general meeting of the stockholders on Feb. 1929, to DBP, who is said to be the transferee of Alfa’s management by virtue of a
which the lower court rendered in their favor. voting trust agreement.

ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ DBP declined to receive the summons saying it is not authorized, Alfa
Claim. having a personality separate and distinct. The trial court, in turn ordered
private respondents to take the appropriate steps to serve the summons
HELD: NO. Sec. 20 of the Corporation Law limits the authority of a to Alfa which they made through the officers and later on, was later on
corporation to adopt by-laws which are not consistent with the provisions declared to be proper service of summons.
of the law. The appellees contend that the articled in question is merely a
provision of the compensation of directors which is not only consistent with After the second motion for reconsideration, the trial court reversed itself,
but expressly authorized by Sec. 21 of the Corporation Law. saying that the service of summons upon the petitioners were not proper,
them not being officers of the corporation anymore. On appeal, the CA
We cannot agree with this contention. The authority conferred upon reversed the trial court.

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qualified successor.
ISSUE: WON the petitioners can still be authorized to receive the summons
despite the voting trust agreement with DBP. GRACE CHRISTIAN HIGH SCHOOL VS. COURT OF APPEALS 281 SCRA
133, OCTOBER 23, 1997
HELD: NO. Sec. 59 of the Code expressly recognizes VTAs and gives a FACTS: Grace Christian High School is an educational institution offering
more definitive meaning. By its very nature, a VTA results in the separation preparatory, kindergarten and secondary courses at the Grace Village in
of the voting right of a stockholder from his other rights such as the right Quezon City. Grace Village Association, Inc., on the other hand, is an
to receive dividends, the right to inspect the books of the corporation, the organization of lot and/or building owners, lessees and residents at Grace
right to sell certain interests in the assets of the corporation and other Village, while Alejandro G. Beltran and Ernesto L. Go were its president
rights to which a stockholder may be entitled until the liquidation of the and chairman of the committee on election, respectively, in 1990, when
corporation. However, in order to distinguish a VTA from proxies and other this suit was brought. As adopted in 1968, the by-laws of the association
voting pool and agreements, it must pass three criteria or tests, namely: provided in Article IV, that "the annual meeting of the members of the
(1) the voting rights of the stock are separated from other attributes or Association shall be held on the first Sunday of January in each calendar
ownership; (2) that the voting right granted are intended to be irrevocable year at the principal office of the Association at 2:00 P.M. where they shall
for a definite period of time; and (3) that the principal purpose of the grant elect by plurality vote and by secret balloting, the Board of Directors,
of voting rights is to acquire voting control of the corporation. composed of 11 members to serve for one year until their successors are
duly elected and have qualified." It appears, that on 20 December 1975,
The execution of VTA, therefore, may create a dichotomy between the a committee of the board of directors prepared a draft of an amendment
equitable and beneficial ownership of the corporate shares of stockholder, to the by-laws, providing that "The Annual Meeting of the members of the
on the one hand and the legal title thereto, on the other hand. Association shall be held on the second Thursday of January of each year.
Each Charter or Associate Member of the Association is entitled to vote.
By virtue of the VTA, the petitioners are no longer directors. Under the old He shall be entitled to as many votes as he has acquired thru his monthly
and new Corporation Code, the most immediate effect of a VTA on the membership fees only computed on a ratio of TEN (P10.00) PESOS for one
status of a stockholder who is a party to its execution is that he becomes vote.
only an equitable or beneficial owner, from being the legal titleholder or
owner of the shares subject of the VTA. The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first 14 highest number of votes
Under the old code, the eligibility of a director, strictly speaking, cannot shall be declared and proclaimed elected until their successors are elected
be and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION." This draft was never presented
to the general membership for approval. Nevertheless, from 1975, after it
in his was presumably submitted to the board, up to 1990, Grace Christian High
own right” provided under the Old Code, which has been omitted. School was given a permanent seat in the board of directors of the
association. On 13 February 1990, the association's committee on election
Hence, this omission requires that in order to be eligible as director, what in a letter informed James Tan, principal of the school, that "it was the
is material is the legal title to, not beneficial ownership, of the stock as sentiment that all directors should be elected by members of the
appearing on the books of the corporation. association" because "to make a person or entity a permanent Director
would deprive the right of voters to vote for 15 members of the Board,"
The petitioners ceased to be the owners of at least one share standing in and "it is undemocratic for a person or entity to hold office in perpetuity."
their names on the books of Alfa as required under Sec. 23 of the new For this reason, Tan was told that "the proposal to make the Grace
Code. They also ceased to have anything to do with the management of Christian High School representative as a permanent director of the
the enterprise. The petitioners ceased to be directors. association, although previously tolerated in the past elections should be
reexamined." Following this advice, notices were sent to the members of
Considering the VTA, DBP as trustee, became the stockholder of record the association that the provision on election of directors of the 1968 by-
with respect to the said shares of stocks. laws of the association would be observed. The school requested the
chairman of the election committee to change the notice of election by
DETECTIVE & PROTECTIVE BUREAU, INC. VS. CLORIBEL 26 SCRA 255, following the procedure in previous elections, claiming that the notice
NOVEMBER 29, 1968 issued for the 1990 elections ran "counter to the practice in previous
FACTS: A complaint was filed by herein petitioner-plaintiff Detective and years" and was "in violation of the by-laws (of 1975)" and "unlawfully
Protective Bureau against defendant-respondent Fausto Alberto, alleging deprive[d] Grace Christian High School of its vested right [to] a permanent
that defendant illegally seized and took control of all the assets as well as seat in the board." As the association denied its request, the school
the books, records, vouchers and receipt of the corporation from the brought suit for mandamus in the Home Insurance and Guaranty
accountant- cashier, concealed them illegally and refused to allow any Corporation to compel the board of directors of the association to
member of the corporation to see and examine the same. That on a recognize its right to a permanent seat in the board.
meeting, the stockholders removed defendant as managing director and
elected Jose dela Rosa. The school based its claim on the following portion of the proposed
amendment which, it contended, had become part of the by-laws of the
Alberto, on the other hand, stated that Jose dela Rosa could not be association as Article VI, paragraph 2. It appears that the opinion of the
elected managing director because he did not own any stock in the Securities and Exchange Commission on the validity of this provision was
corporation. sought by the association and that in reply to the query, the SEC rendered
an opinion to the effect that the practice of allowing unelected members
ISSUE: WON dela Rosa may be elected managing director. in the board was contrary to the existing by-laws of the association and to
§92 of the Corporation Code. The association cited the SEC opinion,
HELD: NO. There is no record showing that Jose dela Rosa owned a share among others, in its answer.
of stock in the corporation. If he did not own any share of stock, certainly
he could not be a director pursuant to Sec. 30 of the Corporation Law and A preliminary conference was held on 29 March 1990 but nothing
consequently he cannot be a managing director by virtue of the by-laws of substantial was agreed upon. A subsequent meeting was held on 17 April
the corporation that the manager shall be elected by the BOD among its 1990, but the parties failed to reach an agreement. Instead, the board
members. adopted a resolution declaring the 1975 provision null and void for lack of
approval by members of the association and the 1968 by-laws to be
Accordingly, Faustino Alberto could not be compelled to vacate his office effective. On 20 June 1990, the hearing officer of the HIGC rendered a
and cede the same to dela Rosa because the by-laws provide that the decision dismissing the school's action. The appeals board of the HIGC
Directors shall serve until the election and qualification of their duly affirmed the decision of the hearing officer in its resolution dated 13

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September 1990. Petitioner appealed to the Court of Appeals but the

school again lost as the appellate court on 9 February 1993, affirmed the HELD: NO.
decision of the HIGC. The school filed the petition for review.
In nonstock corporations, the voting rights attach to membership.
Members vote as persons, in accordance with the law and the bylaws of
the corporation. Each member shall be entitled to one vote unless so
ISSUE: WON the school's representative should be elected to have the limited, broadened, or denied in the articles of incorporation or bylaws.
right to sit in the board of directors of Grace Village Association, Inc. as a We hold that when the principle for determining the quorum for stock
member thereof. corporations is applied by analogy to nonstock corporations, only those
who are actual members with voting rights should be counted.
HELD: It is actually Sections 28 and 29 of the Corporation Law — Section
23 of the present law; not §92 of the present law or §29 of the former one Under Section 52 of the Corporation Code, the majority of the members
— which require members of the boards of directors of corporations to be representing the actual number of voting rights, not the number or
elected. The board of directors of corporations must be elected from numerical constant that may originally be specified in the articles of
among the stockholders or members. There may be corporations in which incorporation, constitutes the quorum.
there are unelected members in the board but it is clear that in the
examples cited by the school, the unelected members sit as ex officio Section 25 of the Code specifically provides that a majority of the directors
members, i.e., by virtue of and for as long as they hold a particular office. or trustees, as fixed in the articles of incorporation, shall constitute a
But in the case of the school itself, there is no reason at all for its quorum for the transaction of corporate business (unless the articles of
representative to be given a seat in the board. Nor does the school claim incorporation or the bylaws provide for a greater majority). If the intention
a right to such seat by virtue of an office held. of the lawmakers was to base the quorum in the meetings of stockholders
or members on their absolute number as fixed in the articles of
In fact, it was not given such seat in the beginning. It was only in 1975 that incorporation, it would have expressly specified so. Otherwise, the only
a proposed amendment to the by-laws sought to give it one. Since the logical conclusion is that the legislature did not have that intention
provision in question is contrary to law, the fact that for 15 years it has not
been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later In stock corporations, shareholders may generally transfer their shares.
challenge to its validity. Neither can it attain validity through acquiescence Thus, on the death of a shareholder, the executor or administrator duly
because, if it is contrary to law, it is beyond the power of the members of appointed by the Court is vested with the legal title to the stock and
the association to waive its invalidity. For that matter the members of the entitled to vote it. Until a settlement and division of the estate is effected,
association may have formally adopted the provision in question, but their the stocks of the decedent are held by the administrator or executor.
action would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law. It is probable that, in allowing the school's On the other hand, membership in and all rights arising from a nonstock
representative to sit on the board, the members of the association were corporation are personal and non-transferable, unless the articles of
not aware that this was contrary to law. It should be noted that they did incorporation or the bylaws of the corporation provide otherwise. In other
not actually implement the provision in question except perhaps insofar as words, the determination of whether or not dead members are entitled to
it increased the number of directors from 11 to 15, but certainly not the exercise their voting rights (through their executor or administrator),
allowance of the school's representative as an unelected member of the depends on those articles of incorporation or bylaws.
board of directors. It is more accurate to say that the members merely Under the By-Laws of GCHS, membership in the corporation shall, among
tolerated the school's representative and tolerance cannot be considered others, be terminated by the death of the member. Section 91 of the
ratification. Nor can the school claim a vested right to sit in the board on Corporation Code further provides that termination extinguishes all the
the basis of "practice." Practice, no matter how long continued, cannot rights of a member of the corporation, unless otherwise provided in the
give rise to any vested right if it is contrary to law. Even less tenable is the articles of incorporation or the bylaws.
school's claim that its right is "co-terminus with the existence of the
association." Applying Section 91 to the present case, we hold that dead members who
are dropped from the membership roster in the manner and for the cause
TAN VS. SYCIP 499 SCRA 216, AUGUST 17, 2006 provided for in the By-Laws of GCHS are not to be counted in determining
FACTS: Petitioner Grace Christian High School (GCHS) is a nonstock, non- the requisite vote in corporate matters or the requisite quorum for the
profit educational corporation with fifteen (15) regular members, who also annual members meeting. With 11 remaining members, the quorum in the
constitute the board of trustees. During the annual members meeting held present case should be 6. Therefore, there being a quorum, the annual
on April 6, 1998, there were only eleven (11) living member-trustees, as members meeting, conducted with six members present, was valid.
four (4) had already died. Out of the eleven, seven (7) attended the
meeting through their respective proxies. The meeting was convened and B. Election and Voting
chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. SEC. 23. . – Except when the exclusive
Pacis, who argued that there was no quorum. In the meeting, Petitioners right is reserved for holders of founders’ shares under Section 7 of this
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to Code, each stockholder or member shall have the right to nominate any
replace the four deceased member-trustees. director or trustee who possesses all of the qualifications and none of the
When the controversy reached the Securities and Exchange Commission disqualifications set forth in this Code.
(SEC), petitioners maintained that the deceased member-trustees should
not be counted in the computation of the quorum because, upon their At all elections of directors or trustees, there must be present, either in
death, members automatically lost all their rights (including the right to person or through a representative authorized to act by written proxy, the
vote) and interests in the corporation. owners of majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. When so authorized in
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting the bylaws or by a majority of the board of directors, the stockholders or
null and void for lack of quorum. She held that the basis for determining members may also vote through remote communication or :
the quorum in a meeting of members should be their number as specified , That the right to vote through such modes may be exercised in
in the articles of incorporation, not simply the number of living members. corporations vested with public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.

A stockholder or member who participates through remote

ISSUE: WON in NON-STOCK corporations, dead members should still be communication or , shall be deemed present for purposes of
counted in determination of quorum for purpose of conducting the Annual quorum.
Members Meeting.

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The election must be by ballot if requested by any voting stockholder or CORPORATE CONTROVERSIES UNDER R. A. NO. 8799
member.
SECTION 1. – These Rules shall govern the procedure
In stock corporations, stockholders entitled to vote shall have the right to to be observed in civil cases involving the following:
vote the number of shares of stock standing in their own names in the stock 1. Devices or schemes employed by, or any act of, the board of
books of the corporation at the time fixed in the bylaws or where the directors, business associates, officers or partners, amounting to fraud
bylaws are silent, at the time of the election. The said stockholder may: (a) or misrepresentation which may be detrimental to the interest of the
vote such number of shares for as many persons as there are directors to public and/or of the stockholders, partners, or members of any
be elected; (b) cumulate said shares and give one (1) candidate as many corporation, partnership, or association;
votes as the number of directors to be elected multiplied by the number 2. Controversies arising out of intra-corporate, partnership, or
of the shares owned; or (c) distribute them on the same principle among association relations, between and among stockholders, members, or
as many candidates as may be seen fit: That the total number of associates; and between, any or all of them and the corporation,
votes cast shall not exceed the number of shares owned by the partnership, or association of which they are stockholders, members,
stockholders as shown in the books of the corporation multiplied by the or associates, respectively;
whole number of directors to be elected: , That no 3. Controversies in the election or appointment of directors, trustees,
delinquent stock shall be voted. Unless otherwise provided in the articles officers, or managers of corporations, partnerships, or associations;
of incorporation or in the bylaws, members of nonstock corporations may 4. Derivative suits; and
cast as many votes as there are trustees to be elected but may not cast 5. Inspection of corporate books.
more than one (1) vote for one (1) candidate. Nominees for directors or
trustees receiving the highest number of votes shall be declared elected. SEC. 5. – All actions covered by these Rules shall be commenced
and tried in the Regional Trial Court which has jurisdiction over the
If no election is held, or the owners of majority of the outstanding capital principal office of the corporation, partnership, or association concerned.
stock or majority of the members entitled to vote are not present in person, Where the principal office of the corporation, partnership or association is
by proxy, or through remote communication or not voting in absentia at registered in the Securities and Exchange Commission as Metro Manila,
the meeting, such meeting may be adjourned and the corporation shall the action must be filed in the city or municipality where the head office is
proceed in accordance with Section 25 of this Code. located.

The directors or trustees elected shall perform their duties as prescribed C. Other Corporate Officers
by law, rules of good corporate governance, and bylaws of the SEC. 24 . – Immediately after their election, the
corporation. directors of a corporation must formally organize and elect: (a) a president,
who must be a director; (b) a treasurer, who must be a resident; (c) a
NOTES: secretary, who must be a citizen and resident of the Philippines; and (d)
(1) MECHANICS OF VOTING: Majority of the outstanding capital stock, such other officers as may be provided in the bylaws. If the corporation is
whether in person or by written proxy must be present at the election vested with public interest, the board shall also elect a compliance officer.
of the directors; or majority of members entitled to vote, in the case The same person may hold two (2) or more positions concurrently, except
of a non-stock corporation. that no one shall act as president and secretary or as president and
(2) QUORUM REQUIRED: If the required quorum is not obtaining, the treasurer at the same time, unless otherwise allowed in this Code.
meeting may be adjourned;
(3) CONDUCT OF VOTING: On the request of any voting stockholder or The officers shall manage the corporation and perform such duties as may
member, the election may be held by ballot otherwise be provided in the bylaws and/or as resolved by the board of directors.
would suffice.
(4) PLURALITY OF VOTES: The candidates receiving the highest number SEC. 62 – The capital stock of
of votes shall be elected. corporations shall be divided into shares for which certificates signed by
the president or vice president, countersigned by the secretary or assistant
CUMULATIVE VOTING secretary, and sealed with the seal of the corporation shall be issued in
• Cumulative voting gives the stockholder entitled to vote the right to accordance with the bylaws. x x x
give a candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal or he may QUALIFICATIONS OF CORPORATE OFFICERS:
distribute them among the candidates as he may see fit. 1. Except in a close corporation where the corporate officers may be
• This is granted by law to each stockholder with voting rights. elected directly by the stockholders, the Code requires the BOD to
However, in non-stock corporations, cumulative voting is elect the said officers;
not allowed, UNLESS allowed by the AOI or by-laws. 2. The officers that may be elected are the:
• Under this method, if there are 10 directors to be elected, a holder of a. President – who must be a director;
1,000 shares will have 10,000 votes which he may cast in favor of one b. Treasurer – who may or may not be a director;
candidate or may apportion to any number of candidates he may c. Secretary – who should be a resident and citizen of the
wish; Philippines;
• PURPOSE: to allow the minority to have a rightful representation in d. Such other officers as may be provided for in the by-laws.
the board of directors. 3. Any two or more positions may be held concurrently by the same
person, except:
STRAIGHT a. The president and the secretary;
CUMULATIVE VOTING
VOTING b. The president and the treasurer.
A stockholder Stockholder can cumulate all his votes and he can
can cast one either: D. Validity and Binding Effects of Actions of Corporate Officers
vote per share (a) give to one candidate all his votes (also known YAO KA SIN TRADING VS. COURT OF APPEALS 209 SCRA 763, JUNE 15,
for each as, CUMULTATIVE VOTING FOR ONE 1992
director CANDIDATE), or FACTS: Constacio B. Malagna, President and Chairman of the Board of
(b) divide the votes among two or more private respondent Prime White Cement Corporation (PWCC), sent a
candidates (also known as, CUMULATIVE letter-offer (Exhibit A) to Mr. Yao for the delivery of cement, which was
VOTING BY DISTRIBUTION) accepted by the latter by delivering a check for P243,000.

ELECTION CONTESTS ISSUE: WON the letter-offer sent by Malagna binds the corporation.
A.M. No. 01-2-04-SC. March 13, 2001
Re: PROPOSED INTERIM RULES OF PROCEDURE GOVERNING INTRA- HELD: NO. A corporation can act only through its officers and agents, all

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acts within the powers of said corporation may be performed by agents of

his selection and except in so far as limitations or restrictions may be LOPEZ REALTY, INC. VS. FONTECHA 247 SCRA 183, AUGUST 11, 1995
imposed by special charter, by-law or statutory provisions, the same FACTS: Petitioner corporation approved two resolutions providing for the
general provision of law which govern the relation of agency for natural gratuity pay of its employees. Except for Asuncion Lopez-Gonzales, who
person govern the officer or agent of a corporation, of whatever status or was then abroad, the remaining member of the board convened a special
rank, in respect to his power to act for the corporation; and the agents meeting and passed a resolution adopting the above-mentioned
once appointed, or members acting in their stead, are subject to the same resolutions. Private respondents requested for the full payment of the
rules, liabilities and incapacities as are agents of individuals and private gratuity pay which was granted. At that time, however, petitioner Asuncion
persons. was still abroad, and allegedly sent a cablegram objecting to certain
matters taken up by the board in her absence.
Moreover, a corporate officer or agent may represent and bind the
corporation in transactions with third person to the extent that authority Notwithstanding a corporate squabble between Asuncion and Arturo
has been conferred upon him, and this includes powers which have been Lopez, the first two installments of the gratuity pay of private respondents
(1) intentionally conferred, and (2) also such powers as, in the usual course were paid. Also, petitioner corporation had prepared the cash vouchers
of business, are incidental thereto, or may be implied therefrom, (3) powers and checks for the thir installment. For some reason, said voucher was
added by custom and usage, as usually pertaining to the particular officer cancelled by petitioner Asuncion.
or agent, and (4) such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has conferred. A complaint was filed before the labor arbiter who decided in favor of
While Mr. Maglana was an officer, the by-laws do not in any way confer private respondents.
upon the president the authority to enter into contracts for the corporation
independently of the BOD. That power is expressly lodged in the latter. ISSUE: WON the gratuity pay should be paid.

Nevertheless, to expedite or facilitate the execution of the contract, only HELD: YES. The general rules are that a corporation, through its board of
the President shall sign the contact for the corporation. No greater power directors, should act in the manner and within the formalities, if any,
can be implied from such express but limited delegated authority. Neither prescribed by its charter or by the general law. Thus, the directors must
can it be logically claimed that any power greater than that expressly act as a body in a meeting called pursuant to the law or the corporation’s
conferred is inherent in Mr. Maglana’s position as president and chairman by-laws, otherwise, any action taken therein may be questioned by any
of the corporation. objecting director or shareholder.

Although there is authority "that if the president is given general control Be that as it may, jurisprudence tells us that an action of the board of
and supervision over the affairs of the corporation, it will be presumed that directors during a meeting, which was illegal for lack of notice, may be
he has authority to make contract and do acts within the course of its ratified either (1) expressly, by the action of the directors in subsequent
ordinary business," We find such inapplicable in this case. We note that legal meeting, or (2) impliedly, by the corporations’ subsequent conduct.
the private corporation has a general manager who, under its By-Laws has, Ratification by directors may be by an express resolution or vote to that
inter alia, the following powers: "(a) to have the active and direct effect, or it may be implied from adoption of the act, acceptance or
management of the business and operation of the corporation, conducting acquiescence. Moreover, the unauthorized acts of an officer of a
the same accordingly to the order, directives or resolutions of the Board corporation may be ratified by the corporation by conduct implying
of Directors or of the president." It goes without saying then that Mr. approval and adoption of the act in question. Such ratification may be
Maglana did not have a direct and active and in the management of the expressed or may be inferred from silence and inaction.
business and operations of the corporation.
In the case at bench, it was established that petitioner corporation did not
Petitioner's last refuge then is his alternative proposition, namely, that issue any resolution revoking nor nullifying the board resolution granting
private respondent had clothed Mr. Maglana with the apparent power to gratuity pay to private respondents. Instead, they paid the gratuity pay,
act for it and had caused persons dealing with it to believe that he was particularly, the first two installments thereof.
conferred with such power. The rule is of course settled that "[a]lthough
an officer or agent acts without, or in excess of, his actual authority if he
PUA CASIM & CO. VS. W. NEUMARK & CO. 46 PHIL. 342, OCTOBER 02,
acts within the scope of an apparent authority with which the corporation
1924
has clothed him by holding him out or permitting him to appear as having
FACTS: W. Neumark, president of defendant corporation borrowed
such authority, the corporation is bound thereby in favor of a person who
P15000 from plaintiff which was delivered by means of a check in favor of
deals with him in good faith in reliance on such apparent authority, as
defendant and deposited in BPI and the amount of it credited to the
where an officer is allowed to exercise a particular authority with respect
corporation’s current account.
to the business, or a particular branch of it, continuously and publicly, for
a considerable time." Also, "if a private corporation intentionally or
ISSUE: WON the corporation is responsible for the money borrowed by its
negligently clothes its officers or agents with apparent power to perform
president.
acts for it, the corporation will be estopped to deny that such apparent
authority in real, as to innocent third persons dealing in good faith with
HELD: YES. W. Neumark is the principal stockholder, president and
such officers or agents." This "apparent authority may result from (1) the
general business manager of the defendant corporation. On behalf of the
general manner, by which the corporation holds out an officer or agent as
corporation, he solicited a loan and was given a check, which was endorsed
having power to act or, in other words, the apparent authority with which
by him in his capacity as president and deposited to the corporation’s
it clothes him to act in general or (2) acquiescence in his acts of a particular
account. It may be true that a large part of the amount so deposited was
nature, with actual or constructive knowledge thereof, whether within or
diverted by Neumark to his own use, but that does not alter that the money
without the scope of his ordinary powers.
was borrowed for the corporation and was placed in its possession.

It was incumbent upon the petitioner to prove that indeed the private
It is conceded that Neumark was not expressly authorized by the board of
respondent had clothed Mr. Maglana with the apparent power to execute
directors to borrow the money in question and the general rule is that a
Exhibit "A" or any similar contract. This could have been easily done by
business manager or other officer of a corporation, has no implied power
evidence of similar acts executed either in its favor or in favor of other
to borrow money on its behalf. But much depends upon the circumstances
parties. Petitioner miserably failed to do that. Upon the other hand, private
of each particular case and the rule state is subject to important
respondent's evidence overwhelmingly shows that no contract can be
exceptions. Thus, where a general business manager of a corporation is
signed by the president without first being approved by the Board of
clothed with apparent authority to borrow money and the amount
Directors; such approval may only be given after the contract passes
borrowed does not exceed the ordinary requirements of the business, it
through, at least, the comptroller, who is the NIDC representative, and the
has often been held that the authority is implied and that the corporation
legal counsel.
is bound.

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corporation could not evade the binding effect produced by the telegram.
YU CHUCK VS. "KONG LI PO" 46 PHIL. 608, DECEMBER 03, 1924
FACTS: CC Chen or TC Chen, General Manager of defendant corporation The error in the wording cannot be taken seriously. All the while GSIS
Kong Li Po, entered into an agreement with the plaintiffs by which the pocketed the various remittances and kept silent as to the true facts as it
latter bound themselves to do the necessary printing for the newspaper. now alleges. This silence, taken together with the unconditional
Later on, the new general manager, Tan Tian Hong, discharged plaintiffs acceptance of three other subsequent remittances from plaintiff
with no special reasons. Aggrieved, plaintiffs sought to recover full constitutes in itself a binding ratification of the original agreement.
payment of the remaining term of the contract, which was originally for 3
years, as stated therein. BOARD OF LIQUIDATORS VS, KALAW 20 SCRA 987, AUGUST 14, 1967
FACTS: National Coconut Corporation (NACOCO) embarked on copra
ISSUE: WON Chen had the power to bind the corporation under a contract trading activities led by its General Manager Maximo Kalaw and the other
of that character. defendants as members of the board. Due to natural calamities, the
business of copra became unprofitable. Kalaw made a full disclosure of the
HELD: No. The general rule is that the power to bind a corporation by situation and apprised the board of the impending losses on the contracts
contract lies with its board of directors or trustees, but this power may already entered into, but no action was taken. But later on, the contracts
either be expressly or impliedly be delegated to other officers or agents were unanimously approved by the Board.
of the corporation, and it is well settled that except where the authority of
employing servants and agents is expressly vested in the BOD/T, an officer The buyers threated damage suits, but some were settled. Louis Dreyfus
or agent who has general control and management of the corporation’s & Co. Ltd. actually sued but was also culminated in an out-of-court
business, or a specific part thereof, may bind the corporation as are usual settlement.
and necessary in th conduct of such business. But the contracts of
employment must be reasonable. NACOCO now seeks to recover the sum paid to Louis from general
manager and board chairman Kalaw and the other members who
Chen, as general manager of Kong Li Po, had implied authority to bind the approved the contracts. It charges Kalaw with negligence and bad faith
defendant corporation by a reasonable and usual contract of employment and/or breach of trust for having approved the contracts, which was
with the plaintiffs, but we do not think that contract here in question can dismissed by the trial court.
be so considered. Not only is the term of employment usually long, but
the conditions are otherwise so onerous to the defendant that the ISSUE: WON the contracts executed by Kalaw binds the corporation.
possibility of the corporation being thrown into insolvency thereby is
expressly contemplated in the same contract. This fact, in itself was, in our HELD: YES. A rule that has gained acceptance through the years is that a
opinion, sufficient to put the plaintiffs upon inquiry as to the extent of the corporate officer “entrusted” with the general management and control
business manager’s authority; they had not the right to presume that he of its business, has implied authority to make any contract or do any other
or any other single officer or employee of that corporation had implied act which is necessary or appropriate to the conduct of the ordinary
authority to enter into a contract of employment which might bring about business of the corporation. As such officer, he may, without any special
its ruin. authority from the BOD perform all acts of an ordinary nature, which by
usage or necessity are incident to his office and may bind the corporation
FRANCISCO VS. GOVERNMENT SERVICE INSURANCE SYSTEM 7 SCRA by contracts in matters arising in the usual course of business. Long before
577, MARCH 30, 1963 the disputed contracts came into being, Kalaw contracted by himself alone
FACTS: Trinidad Francisco, in consideration of loan extended by GSIS, as general manager – for forward sales of copra (which is a necessity in the
mortgaged her property in QC. For being in arrears in her installments, business) which were profitable. So pleased was NACOCO;s BOD that it
GSIS extrajudicially foreclosed the mortgage. Plaintiff’s father, Atty. voted to grant Kalaw special bonus in recognition of the signal
Vicente Francisco sent a letter to Rodolfo Andal, general manager of GSIS, achievement rendered by him.
offering to redeem the property which was replied to by Andal through a
telegram saying “GSIS BOARD APPROVED YOUR REQUEST RE These previous contacts, it should be stressed, were signed by Kalaw
REDEMTPION OF FORECLOSED PROPERTY OF YOUR DAUGHTER” without prior authority from the board. Said contracts were known all along
to the board members. Nothing was said by them. The aforesaid contracts
Later, inasmuch as, according to the defendant GSIS, the remittances stand to prove one thing. Obviously, NACOCO’s board met difficulties
made by Atty. Francisco were allegedly not sufficient to pay off her attendant to forward sales by leaving the adoption of means to end, to the
daughter’s arrears, the one-year redemption period has expired, said sound discretion of NACOCO’s general manager Maximo Kalaw.
defendant consolidated title to the property in its name.
Where similar acts have been approved by the directors as a matter of
ISSUE: WON the telegram sent by the Andal binds the corporation. general practice, custom, and policy, the general manager may bind the
company without formal authorization of the BOD. In varying language,
HELD: YES. The terms of the offer were clear and over the signature of existence of such authority is established, by proof of the course of
Andnal, plaintiff was informed that the proposal has been accepted. There business, the usages and practices of the company and by the knowledge
was nothing in the telegram that hinted at any anomaly, or gave grounds which the BOD has, or must be presumed to have, of acts and doings of
to suspect its veracity, and the plaintiff, therefore, cannot be blamed for its subordinates in and about the affairs of the corporation.
relying upon it. There is no denying that the telegram was within Andal’s
apparent authority, but eh defense is that he did not sign it, but that it was In the case at bar, the practice of the corporation has been to allow its
sent by the board secretary in his name and without his knowledge. general manager to negotiate and execute contracts in its copra trading
Assuming this to be true, how was appellee to know it? Corporate activities for and in NACOCO’s behalf without prior board approval. If the
transactions would speedily come to a standstill were every person dealing by- laws were to be literally followed, the board should give its stamp of
with a corporation were held duty-bound to disbelieve every act of its prior approval on all corporate contracts. But the Board itself, by its acts
responsible officers, no matter how regular they should appear on their and through acquiescence, practically laid aside the by-law requirement of
face. prior approval.

Indeed, it is well-settled that If a private corporation intentionally or BUENASEDA VS. BOWEN & CO., INC. 110 PHIL. 464, DECEMBER 29,
negligently clothes its officers or agents with apparent power to perform 1960
acts for it, the corporation will be estopped to deny that such apparent FACTS: As a consequence of P200,000 worth of ECA allocated to the
authority is real, as to innocent third persons dealing in good faith with Bowen & Co., Inc., it required a letter of credit in the amount of P100,000
such officers or agents. with the PNB. As the corporation did not have at the time the necessary
funds to put up the required cash marginal deposit of P60,000, its
Hence, even if it were the board secretary who sent the telegram, the president Geoffrey Bowen, obligating the corporation and himself in his

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personal capacity, offered to pay Fracisco Buenaseda 37 ½% of the profits of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the
to be realized from the sale of the ECA procurement materials, should he requisite quorum could not be obtained so they continued to act as
be able to obtain and produce the amount necessary to cover the cash directors in a hold-over capacity.
marginal deposit – which Buenaseda was able to do.
On September 1, 1998, Dinglasan resigned, BOD still constituting a
The corporation refused to pay, Buenaseda filed an action in the CFI to quorom elected Eric Roxas (Roxas) followed by Macalintal. BOD.
recover the same. Respondent Africa (Africa), a member of VVCC, questioned the election of
Roxas and Ramirez as members of the VVCC Board with the Securities and
ISSUE: WON the agreement was binding. Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary
to Sec. 23 and 29 of the Corporation Code.
HELD: Yes. It is not here pretended that the BOD of the defendant
corporation had no knowledge of the agreement between Bowen and The RTC decided in favor of Africa.
plaintiff. Indeed, at the time the said Agreement was made, the BOD of
the corporation was composed of Bowen himself, his wife, Buenaseda and ISSUE: WON the appointment of Roxas and Ramirez made by the
two others, with Bowen and his wife controlling the majority of the stocks remaining members of the Board, still constituting a quorum, were valid
of the corporation. The Board did not repudiate the agreement but on the
contrary, acquiesced in and took advantage of the benefits afforded by HELD: NO. The resolution of this legal issue is significantly hinged on the
said agreement. Such acts are equivalent to an implied ratification of the determination of what constitutes a director’s term of office.
agreement by the BOD and bound the corporation even without formal
resolution passed and recorded. The holdover period is not part of the term of office of a member of the
board of directors. The word “term” has acquired a definite meaning in
It is agreed by the respondents, defendants below, that the profits of the jurisprudence. In several cases, we have defined “term” as the time during
corporation form part of its assets and payment of a certain percentage of which the officer may claim to hold the office as of right and fixes the
the profits requires a declaration of dividends and/or resolution of the interval after which the several incumbents shall succeed one another. The
BOD. The agreement is untenable. Although the plaintiff is a stockholder term of office is not affected by the holdover. The term is fixed by statute
of the corporation he does not, however, claim a share of the profits as and it does not change simply because the office may have become
such stockholder, but under the agreement between him and the vacant, nor because the incumbent holds over in office beyond the end of
president of the corporation which has been impliedly ratified by the BOD. the term due to the fact that a successor has not been elected and has
failed to qualify.
IN SUMMARY: An unauthorized act, or the act of a single director, officer
or agent of a corporation may be ratified either expressly or impliedly. Term is distinguished from tenure in that an officer’s “tenure” represents
(1) Express ratification is made through a formal board action; the term during which the incumbent actually holds office. The tenure may
(2) Implied ratification can either be: (a) silence or acquiescence; (b) be shorter (or, in case of holdover, longer) than the term for reasons within
acceptance and/or retention of benefits, or (c) by recognition or or beyond the power of the incumbent.
adoption.
Based on the above discussion, when Section 23 of the Corporation Code
E. Removal and Filling up of vacancies declares that “the board of directors…shall hold office for one (1) year until
TERM their successors are elected and qualified,” we construe the provision to
The word "term" has acquired a definite meaning in jurisprudence. In mean that the term of the members of the board of directors shall be only
several cases, we have defined "term" as the time during which the officer for one year; their term expires one year after election to the office. The
may claim to hold the office as of right and fixes the interval after which holdover period – that time from the lapse of one year from a member’s
the several incumbents shall succeed one another. election to the Board and until his successor’s election and qualification –
is not part of the director’s original term of office, nor is it a new term; the
When Section 22 of the RCC declares that "the board of directors…shall holdover period, however, constitutes part of his tenure. Corollary, when
hold office for one (1) year until their successors are elected and qualified," an incumbent member of the board of directors continues to serve in a
we construe the provision to mean that the term of the members of the holdover capacity, it implies that the office has a fixed term, which has
board of directors shall be only for one year; their term expires one year expired, and the incumbent is holding the succeeding term After the lapse
after election to the office of one year from his election as member of the VVCC Board in 1996,
Makalintal’s term of office is deemed to have already expired. That he
HOLDOVER continued to serve in the VVCC Board in a holdover capacity cannot be
The term of office is not affected by the holdover. The term is fixed by considered as extending his term. This holdover period is not to be
statute and it does not change simply because the office may have become considered as part of his term, which, as declared, had already expired.
vacant, nor because the incumbent holds over in office beyond the end of
the term due to the fact that a successor has not been elected and has With the expiration of Makalintal’s term of office, a vacancy resulted which,
failed to qualify. by the terms of Section 29 of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the
The holdover period – that time from the lapse of one year from a purpose. To assume – as VVCC does – that the vacancy is caused by
member’s election to the Board and until his successor’s election and Makalintal’s resignation in 1998, not by the expiration of his term in 1997,
qualification – is not part of the director’s original term of office, nor is it a is both illogical and unreasonable. His resignation as a holdover director
new term; the holdover period, however, constitutes part of his tenure. did not change the nature of the vacancy; the vacancy due to the
expiration of Makalintal’s term had been created long before his
TERM VS. TENURE resignation.
Term is distinguished from tenure in that an officer’s "tenure" represents
the term during which the incumbent actually holds office. The tenure may The powers of the corporation’s board of directors emanate from
be shorter (or, in case of holdover, longer) than the term for reasons within its stockholders
or beyond the power of the incumbent.
This theory of delegated power of the board of directors similarly explains
VALLE VERDE COUNTRY CLUB, INC. VS. AFRICA 598 SCRA 195, why, under Section 29 of the Corporation Code, in cases where the
SEPTEMBER 04, 2009 vacancy in the corporation’s board of directors is caused not by the
February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan expiration of a member’s term, the successor “so elected to fill in a vacancy
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor shall be elected only for the unexpired term of the his predecessor in
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray office.” The law has authorized the remaining members of the board to fill
Gamboa were elected as BOD during the Annual Stockholders’ Meeting in a vacancy only in specified instances, so as not to retard or impair the
corporation’s operations; yet, in recognition of the stockholders’ right to
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elect the members of the board, it limited the period during which the 1. Reasonable per diems
successor shall serve only to the “unexpired term of his predecessor in 2. As provided in the by-laws or upon a majority vote of the stockholders
office.” at a regular or special meeting; and
3. If they are performing functions other than that of a director.
It also bears noting that the vacancy referred to in Section 29 contemplates NOTE: On exception no. 3, Sec. 29 is clear on the point when it provides
a vacancy occurring within the director’s term of office. When a vacancy is “as such directors”. Therefore, special and extraordinary service rendered,
created by the expiration of a term, logically, there is no more unexpired outside of the regular duties, may form the basis for a claim of special
term to speak of. Hence, Section 29 declares that it shall be the compensation, such as when a director acts as a general counsel.
corporation’s stockholders who shall possess the authority to fill in a REASON: The office of a director is usually filled up by those chiefly
vacancy caused by the expiration of a member’s term. interested in the welfare of the institution by virtue of their interest in stock
or other advantages and such interests are presumed to be the motive for
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the executing duties of the office without compensation.
BOD to the SEC:
SEC. 25. Report of Election of Directors, Trustees and Officers, Non- MAY THE COURTS LOOK INTO THE REASONABLENESS OF
holding of Election and Cessation from Office. – Within thirty (30) days COMPENSATION? The courts will not generally undertake to review the
after the election of the directors, trustees and officers of the corporation, fairness of official salaries, at the suit of a stockholder unless wrongdoing
the secretary, or any other officer of the corporation, shall submit to the and oppression or possible abuse of fiduciary position are shown.
Commission, the names, nationalities, shareholdings, and residence
addresses of the directors, trustees, and officers elected. When the recipient does not stand in the dual relation of the (1) one
compensated and (2) a participant in fixing his own compensation, it is
The non-holding of elections and the reasons therefor shall be reported to considered outside the proper judicial function to go into business policy
the Commission within thirty (30) days from the date of the scheduled question of the fairness or reasonableness of compensation as fixed by the
election. The report shall specify a new date for the election, which shall board. Otherwise, it will call for a scrutiny of the reasonableness or fairness
not be later than sixty (60) days from the scheduled date. of the compensation. Likewise, even if consented to by the majority of
If no new date has been designated, or if the rescheduled election is stockholders, the courts may still look into such reasonableness if: (1) it
likewise not held, the Commission may, upon the application of a would amount to giving away corporate funds in the guise of
stockholder, member, director or trustee, and after verification of the compensation as against the interest of the dissenting minority; or (2) in
unjustified non-holding of the election, summarily order that an election fraud of creditors, either amounting to wastage of assets.
be held. The Commission shall have the power to issue such orders as may
be appropriate, including orders directing the issuance of a notice stating CENTRAL COOPERATIVE EXCHANGE, INC. VS. TIBE, SR. 33 SCRA 593,
the time and place of the election, designated presiding officer, and the JUNE 30, 1970
record date or dates for the determination of stockholders or members FACTS:This is a complaint filed by herein petitioner CCE for the refund of
entitled to vote. certain amounts received by respondent when he served as member of the
board of directors of CCE, which were said t be per diems and
Notwithstanding any provision of the articles of incorporation or bylaws to transportation expenses, representation expenses and cummutable
the contrary, the shares of stock or membership represented at such discretionary funds.
meeting and entitled to vote shall constitute a quorum for purposes of
conducting an election under this section. ISSUE: WON the BOD had the power to appropriate funds for the
expenses claimed by respondent
Should a director, trustee or officer die, resign or in any manner cease to
hold office, the secretary, or the director, trustee or officer of the HELD: NO. The by-laws expressly reserved unto the stockholders the
corporation, shall, within seven (7) days from knowledge thereof, report in power to determine the compensation of the members of the BOD, and
writing such fact to the Commission. the stockholders did restrict such compensation to (1) actual transportation
expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
PURPOSE: to give public information, under sanction of oath responsible Even without the express prohibition, the directors are not entitled to
officers, of the nature of the business, financial condition and operational compensation for “The law is well-settled that directors of corporations
status of the company together with information on its key officers or presumptively serve without compensation and in the absence of an
managers so that hose dealing with it and those who intend to do business express agreement or a resolution thereto, no claim can be asserted
with it may know or have the means of knowing facts concerning the therefor. Thus, it has been held that there can be no recovery of
corporation’s financial resources and business responsibility” compensation, unless expressly provided for, when director serves as
president or vice-president, as secretary or treasurer or cashier, as member
F. Compensation of Directors of an executive committee, as chairman of a building committee, or similar
offices.
SEC. 29. . – In the absence of any
provision in the bylaws fixing their compensation, the directors or trustees
Thus, the directors, in assigning themselves additional duties, such as the
shall not receive any compensation in their capacity as such, except for
visitation of FACOMAS, acted within their power, but, by voting for
reasonable : Provided however, That the stockholders
themselves compensation for such additional duties, they acted in excess
representing at least a majority of the outstanding capital stock or majority
of their authority, as express in the by-laws.
of the members may grant directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.
WESTERN INSTITUTE OF TECHNOLOGY, INC. VS. SALAS 278 SCRA 216,
In no case shall the total yearly compensation of directors exceed ten (10%) AUGUST 21, 1997
percent of the net income before income tax of the corporation during the FACTS: In a special board meeting, a resolution was passed providing for
preceding year. compensation of officers. A few years later, petitioners Homero Villais,
Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
Directors or trustees shall not participate in the determination of their own complaint for falsification of public documents (for submission of an
or compensation. income reflecting the resolution as passed on 1985, when in fact it was
passed in 1986) and estafa (for the disbursement of funds by effecting
Corporations vested with public interest shall submit to their shareholders payment to the aforesaid salaries) against herein respondents who were
and the Commission, an annual report of the total compensation of each members of the Board of Trustees who were also officers of the
of their directors or trustees. corporation. The trial court acquitted respondents in both charges without
civil liability. The motion for reconsideration on the civil aspect being
GENERALLY: Directors are not entitled to receive any compensation, denied, petitioners filed this petition.
EXCEPTIONS:

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ISSUE: WON the resolution granting compensation to OFFICERS of the officer or agent is not civilly or criminally liable for acts done by him as
corporation is valid. such officer or agent, or when absent bad faith or malice.

HELD: YES. The proscription under Sec. 30, is against granting TRAMAT MERCANTILE, INC. VS. COURT OF APPEALS 238 SCRA 14,
compensation to directors/trustees of a corporation is not a sweeping rule. NOVEMBER 07, 1994
Worthy of note is the clear phraseology of Sec 30 which states “… [T]he FACTS: Melchor dela Cuesta, doing business under the name Farmers
directors shall not receive any compensation, as such directors, …” The Machineries, sold a tractor to Tramat Mercantile, Inc. In payment, David
phrase as such directors is not without significance for it delimits the scope Ong, Tramat’s president and manager issued a check for P33,500. Tramat
of the prohibition to compensation given to them for services performed sold the tractor, together with an attached lawn mower fabricated by it,
purely in their capacity as directors or trustees. The unambiguous to NAWASA. David Ong put a stop payment on the check when NAWASA
implication is that members of the board may receive compensation, in refused to pay on the account that aside from the defects on the lawn
addition to reasonable per diems, when they render services to the mower, the engine (sold by dela Costa) was a reconditioned unit.
corporation in a capacity other than as directors/trustees. In the case at
bench, the Resolution granted monthly compensation to private De la Costa filed an action for recovery of money which was granted by
respondents not in their capacity as members of the board, but rather as the court.
officers of the corporation, more particularly as Chairman, Vice-Chairman,
Treasurer and Secretary of WIT. ISSUE: WON Ong should be held jointly and severally liable.

Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the HELD: NO. It was an error to hold David Ong jointly and severally liable
compensation to 10% of the net income before income tax does not with TRAMAT to de la Cuesta under the questioned transaction. Ong had
likewise find application in this case since the compensation is being given there so acted, not in his personal capacity, but as an officer of a
to private respondents in their capacity as officers of WIT and not as board corporation, TRAMAT, with a distinct and separate personality. As such, it
members. should only be the corporation, not the person acting for and, on its behalf,
that properly could be made liable thereon.
GOVERNMENT OF THE PHILIPPINE ISLANDS VS. EL HOGAR FILIPINO 50
PHIL. 399, JULY 13, 1927 Personal liability of a corporate director, trustee or officer along (although
FACTS: The members of the board of El Hogar Filipino receives 5% of the not necessarily) with the corporation may so validly attach, as a rule, only
net profit as shown in the balance sheet and is distributed in proportion to when —
their attendance to meetings of the board. A complaint was filed against (1) He assents (a) to a patently unlawful act of the corporation, or (b) for
the, and the sixth cause of action alleged that the directors, instead of bad faith, or gross negligence in directing its affairs, or (c) for conflict
serving without pay, or receiving nominal pay or a fixed salary - as the of interest, resulting in damages to the corporation, its stockholders
complainant supposes would be proper – have been receiving large or other persons;
compensation in varying amounts. (2) He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
ISSUE: WON the courts may declared the by-law provision null and void. secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with the
HELD: NO. The Corporation Law does not undertake to prescribe the rate corporation;
of compensation for the directors of corporations. The power to fixed the (4) He is made, by a specific provision of law, to personally answer for his
compensation they shall receive, if any, is left to the corporation, to be corporate action.
determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority
the compensation for the directors of El Hogar Filipino has been fixed in In the case at bench, there is no indication that petitioner David Ong could
section 92 of its by-laws, as already stated. The justice and propriety of this be held personally accountable under any of the abovementioned cases.
provision was a proper matter for the shareholders when the by-laws were
framed; and the circumstance that, with the growth of the corporation, the LLAMADO VS. COURT OF APPEALS 270 SCRA 423, MARCH 26, 1997
amount paid as compensation to the directors has increased beyond what FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
would probably be necessary to secure adequate service from them is Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid
matter that cannot be corrected in this action; nor can it properly be made in 6 months with 12% interest. As security, the accused issued and signed
a basis for depriving the respondent of its franchise, or even for enjoining a postdated check which was later on stopped and dishonored for being
it from compliance with the provisions of its own by-laws. If a mistake has drawn against insufficient funds. Gaw filed a complaint for violation of BP
been made, or the rule adopted in the by-laws has been found to work Blg. 22. Pascual remained at large and the trial on the merits against
harmful results, the remedy is in the hands of the stockholders who have Llamado was conducted. The trial court convicted Llamado.
the power at any lawful meeting to change the rule. The remedy, if any,
seems to lie rather in publicity and competition, rather than in a court ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could
proceeding. The sixth cause of action is in our opinion without merit. be held civilly and criminally liable.

G. Liability Corporate Officers HELD: YES. Petitioner denies knowledge of the issuance of the check
SEC. 30. . – Directors or trustees without sufficient funds and involvement in the transaction with private
who willfully and knowingly vote for or assent to patently unlawful acts of complainant. However, knowledge involves a state of mind difficult to
the corporation or who are guilty of gross negligence or bad faith in establish. Thus, the statute itself creates a prima facie presumption, i.e.,
directing the affairs of the corporation or acquire any personal or pecuniary that the drawer had knowledge of the insufficiency of his funds in or credit
interest in conflict with their duty as such directors or trustees shall be liable with the bank at the time of the issuance and on the check's presentment
jointly and severally for all damages resulting therefrom suffered by the for payment. Petitioner failed to rebut the presumption by paying the
corporation, its stockholders or members and other persons. amount of the check within five
(5) banking days from notice of the dishonor. His claim that he signed the
A director, trustee, or officer shall not attempt to acquire, or acquire any check in blank which allegedly is common business practice, is hardly a
interest adverse to the corporation in respect of any matter which has been defense. If as he claims, he signed the check in blank, he made himself
reposed in them in confidence, and upon which, equity imposes a disability prone to being charged with violation of BP 22. It became incumbent upon
upon themselves to deal in their own behalf; otherwise the said director, him to prove his defenses. As Treasurer of the corporation who signed the
trustee, or officer shall be liable as a trustee for the corporation and must check in his capacity as an officer of the corporation, lack of involvement
account for the profits which otherwise would have accrued to the in the negotiation for the transaction is not a defense.
corporation.
Petitioner's argument that he should not be held personally liable for the
The general rule is that unless the law specifically provides a corporate amount of the check because it was a check of the Pan Asia Finance

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Corporation and he signed the same in his capacity as Treasurer of the reasonably be expected to exercise in a like position under similar
corporation, is also untenable. The third paragraph of Section 1 of BP Blg. circumstances.
22 states:
BUSINESS JUDGMENT RULE: Although directors are commonly said to be
“Where the check is drawn by a corporation, company or entity, the person responsible both for reasonable care and also prudence, the formula is
or persons who actually signed the check in behalf of such drawer shall be continually repeated that they are not liable for losses due to imprudence
liable under this Act” or honest error of judgment. The business judgment rule in effect states
that questions of policy and management are left solely to the honest
UICHICO VS. NATIONAL LABOR RELATIONS COMMISSION 273 SCRA decision of the board of directors and the courts are without authority to
35, JUNE 02, 1997 substitute its judgment as against the former. The directors are business
FACTS: Private respondents were employees of Crispa, Inc. who were managers and as long as they act in good faith, its actuations are not
dismissed due to alleged retrenchment. They filed an illegal dismissal subject to judicial review.
complaint with the NLRC against Crispa, Inc., Valeriano Floro (major
stockholder, incorporation and director of Crispa) and petitioners, who The will of the majority controls, and that contracts entered into
were high ranking officials and directors of Crispa. The Lbor Arbiter by the board of directors are binding upon the corporation and that the
dismissed the complaint but ordered petitioners, Floro and Crispa to pay court will not interfere unless such contracts are unconscionable and
separation pay. oppressive as to amount to a wanton destruction of the rights of the
minority. courts cannot undertake to control the discretion of the board of
ISSUE: WON petitioners can be held liable. directors about administrative matters as to which they have legitimate
power of, action and contracts intra vires entered into by the board of
HELD: YES. A corporation is a juridical entity with legal personality directors are binding upon the corporation and courts will not interfere
separate and distinct from those acting for and, in its behalf and, in unless such contracts are so unconscionable and oppressive as to amount
general, from the people comprising it. The general rule is that obligations to a wanton destruction of the rights of the minority.
incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. There are times, however, when solidary
liabilities may be incurred but only when exceptional circumstances (1) Presence of a business decision, including decisions on policy,
warrant such as in the following cases: management and administration;
(2) The business decision must be and must comply with the
(1) “When directors and trustees or, in appropriate cases, the officers of procedural and substantive requirements of law;
a corporation: (a) vote for or assent to patently unlawful acts of the (3) Good faith;
corporation; (b) act in bad faith or with gross negligence in directing (4) Due care in making the decision; and,
the corporate affairs; (c) are guilty of conflict of interest to the (5) Director must not have personal interest or not self-dealing or is
prejudice of the corporation, its stockholders or members, and other otherwise in breach of the duty of loyalty governed by specific
persons; provisions of the RCC, like Sections 29, 30, 31 and 34
(2) When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with MONTELIBANO VS. BACOLOD-MURCIA MILLING CO., INC. 5 SCRA 36,
the corporate secretary his written objection thereto; MAY 18, 1962
(3) When a director, trustee or officer has contractually agreed or FACTS: Appellants Montelibano et al. have been sugar planter adhered to
stipulated to hold himself personally and solidarily liable with the defendant-appellees sugar central mill under identical milling contracts
corporation; or with a 55% share of the resulting product. There was a proposal to increase
(4) When a director, trustee or officer is made, by specific provision of the planter’s share to 60% which was adopted by defendant in an
law, personally liable for his corporate action.”i Amended Milling Contract and consequently a Board Resolution.

In labor cases, particularly, corporate directors and officers are solidarily In 1953, the appellants initiated the present action, contending that three
liable with the corporation for the termination of employment of corporate Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with
employees done with malice or in bad faith. In this case, it is undisputed a total annual production exceeding one-third of the production of all the
that petitioners have a direct hand in the illegal dismissal of respondent sugar central mills in the province, had already granted increased
employees. They were the ones, who as high- ranking officers and directors participation (of 62.5%) to their planters, and that under paragraph 9 of the
of Crispa, Inc., signed the Board Resolution retrenching the private resolution of August 20, 1936, heretofore quoted, the appellee had
respondents on the feigned ground of serious business losses that had no become obligated to grant similar concessions to the plaintiffs (appellants
basis apart from an unsigned and unaudited Profit and Loss Statement herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
which, to repeat, had no evidentiary value whatsoever. This is indicative of and defended by urging that the stipulations contained in the resolution
bad faith on the part of petitioners for which they can be held jointly and were made without consideration; that the resolution in question was,
severally liable with Crispa, Inc. for all the money claims of the illegally therefore, null and void ab initio, being in effect a donation that was ultra
terminated respondent employees in this case. vires and beyond the powers of the corporate directors to adopt. The trial
court decided in favor of defendant, thus the present appeal.
H. Three-fold Duty of Directors
Directors owe a three-fold duty to the corporation: (1) Obedience; (2) ISSUE: WON the resolutions passed by the bard are valid and binding.
Diligence and (3) Loyalty
HELD: YES. There can be no doubt that the directors of the appellee
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting company had authority to modify the proposed terms of the Amended
or assenting, either willfully or knowingly, to patently unlawful acts thereby Milling Contract for the purpose of making its terms more acceptable to
making the responsible director liable for damages resulting therefrom; the other contracting parties.

DILIGENCE: Under the second part of Sec. 31, the directors are required As the resolution in question was passed in good faith by the board of
to manage the corporate affairs with reasonable care and prudence. This directors, it is valid and binding, and whether or not it will cause losses or
is because the liability of a corporation is not limited to willful breach of decrease the profits of the central, the court has no authority to review
trust or excess of power but extends also to negligence. Their liability rests them.
upon the common law rule which renders liable every agent who violates
his authority or neglects his duty to the damage of his principal. “They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
The degree of diligence is relative. The fairer and more satisfactory rule is controlled in the reasonable exercise and performance of such duty.
that degree of care and diligence which an ordinary prudent director could

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Whether the business of a corporation should be operated at a loss during CORPORATE OPPORTUNITY DOCTRINE: it places a director of a
depression, or close down at a smaller loss, is a purely business and corporation in the position of a fiduciary and prohibits him from seizing a
economic problem to be determined by the directors of the corporation business opportunity and/or developing it at the expense and with the
and not by the court. It is a well-known rule of law that questions of policy facilities of the corporation. He cannot appropriate to himself opportunity
or of management are left solely to the honest decision of officers and which in fairness should belong to the corporation.
directors of a corporation, and the court is without authority to substitute
its judgment of the board of directors; the board is the business manager RATIFICATION:
of the corporation, and so long as it acts in good faith its orders are not (1) The second paragraph of Sec. 31 which makes a director liable to
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).” account for profits if he attempts to acquire or acquires any interest
adverse to the corporation in respect to any matter reposed in him in
And it appearing undisputed in this appeal that sugar centrals of La confidence as to which equity imposes a disability upon him to deal
Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which produce in his own behalf is not subject to ratification
over one- third of the entire annual sugar production in Occidental Negros) (2) Whereas, in Sec. 33, if a director acquires a business opportunity
have granted progressively increasing participations to their adhered which should belong to the corporation, he is bound to account for
planter at an average rate of such profits unless his act is ratified by the stockholders owing or
representing at least 2/3 of the outstanding capital stock
62.333% - for the 1951-52 crop year; 64.2% - for 1952-53; 64.3% for 1953-
54; 64.5% for 1954-55; and 63.5% for 1955-56, the appellee Bacolod- Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
Murcia Milling Company is, under the terms of its Resolution of August 20, his property with a fair market value of P100M for P90M.
1936, duty bound to grant similar increases to plaintiffs-appellants herein. (a) If it was offered first to A, and A made a profit of P90M, this would
fall under Sec. 34 and may be subject to ratification; A merely
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS: acquired a business opportunity owing to the corporation.
GENERAL RULE: A director is not liable for the acts of their co-directors, (b) If it was offered to REALTY CORP., and A, later on offered to buy it
EXCEPTIONS: for P95 and sold it making a profit of P5M, it would fall under Sec. 31
(1) He connives or participates; or and not subject to ratification, A should return the profits to REALTY
(2) He is negligent in not discovering or acting to prevent it. CORP. It was a matter reposed in him in confidence

Thus, absent of actual knowledge of the wrongful activities, on the part of STRONG AND STRONG VS. GUTIERREZ REPIDE. 41 PHIL. 947, MAY 03,
the co-directors, the same cannot be imputed to the other director unless 1909
in the exercise of reasonable care attending his responsibilities, he should FACTS: The Governor of the Philippine Islands, on behalf of the
have been aware of suspicious circumstances demanding correlative government, made an offer of purchase for the total sum of $6,043,219.47
action. in gold for all the friar lands, though owned by different owners.

While this state of things existed, and before the final offer had been made
by the Governor, the defendant, although still holding out for a higher
LOYALTY: refers to the proscription imposed on directors on acquiring any price for the lands, took steps to purchase the 800 shares of stock in his
personal or pecuniary interest in conflict with their duty as director. Their own company from Mrs. Strong, which he knew were in the possession of
relationship is regarded as “fiduciary relation”. As fiduciaries, they are F. Stuart Jones, as her agent. The defendant employed Krauffman and the
obliged to act with utmost candor and fair dealing for the interest of the latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr.
corporation and without selfish motives Sloan, the husband, did not know who wanted to buy the shares nor did
Jones when he was spoken to. Jones would not have sold at the price he
SEC. 33. . – Where a director, by virtue of such did had he known it was the defendant who was purchasing, because, as
office, acquires a business opportunity which should belong to the he said, it would show increased value, as the defendant would not be
corporation, thereby obtaining profits to the prejudice of such corporation, likely to purchase ore stock unless the price was going up.
the director must account for and refund to the latter all such profits, unless
the act has been ratified by a vote of the stockholders owning or ISSUE: WON it was the duty of the defendant to disclose to the agent of
representing at least two-thirds (2/3) of the outstanding capital stock. This the plaintiff the facts bearing upon or which might affect the value of the
provision shall be applicable, notwithstanding the fact that the director stock.
risked one’s own funds in the venture.
HELD: YES. A director upon whose action the value of the shares depends
Apparent from Sec. 30 and 33, the duty of loyalty is violated in the cannot avail of his knowledge of what his own action will be to acquire
following instances: shares from those whom he intentionally keeps in ignorance of his
(1) When a director or trustee “acquires any personal or pecuniary expected action and the resulting value of the shares.
interest in conflict with (his) duty as such director or trustee;”
(2) When he “attempts to acquire or acquires, in violation of his duty, any Even though a director may not be under the obligation of a fiduciary
interest adverse to the corporation in respect to any matter which has nature to disclose to a shareholder his knowledge affecting the value of
been reposed in him in confidence, as to which equity imposes a the shares, that duty may exist in special cases, and did exist upon the facts
disability upon him to deal in his own behalf;” and in this case.
(3) When he, “by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby In this case, the facts clearly indicate that a director of a corporation owning
obtaining profit to the prejudice of such corporation.” friar lands in the Philippine Islands, and who controlled the action of the
corporation, had so concealed his exclusive knowledge of the impending
FORBIDDEN PROFITS: Forbidden in the sense that directors and officers sale to the government from a shareholder from whom he purchased,
are fiduciary representatives of the corporation and as such they are not through an agent, shares in the corporation, that the concealment was in
allowed to obtain any personal profit, commission, bonus or gain for their violation of his duty as a director to disclose such knowledge, and
official actions. This may also refer to those arising from transactions of amounted to deceit sufficient to avoid the sale; and, under such
directors with third persons which may involve misappropriation of circumstances, it was immaterial whether the shareholder's agent did or
corporate opportunities and disloyal diverting of business. Directors and did not have power to sell the stock.
officers are corporate insiders and cannot, therefore, utilize their strategic
position for their own preferment or use their powers and opportunities for In addition to his ownership of almost three-fourths of the shares of the
their personal advantage to the exclusion of the interest which they stock of the company, the defendant was one of the five directors of the
represent. company, and was elected by the board the agent and administrator
general of such company, "with exclusive intervention in the

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management" of its general business. with Napoleon Co for the marketing of white cement in Mindanao. Hence,
this suit.
Concealing his identity when procuring the purchase of stock, by his agent,
was in itself stock evidence of fraud on the part of the defendant. The ISSUE: WON the dealership agreement entered into by Te with his own
concealment was not a mere inadvertent omission but was a studied and corporation is valid and binding.
intentional omission, to be characterized as part of the deceitful
machination to obtain the purchase without giving information whatever HELD: NO. In the instant case respondent Te was not an ordinary
as to the state and probable result of the negotiations, to the vendor of stockholder; he was a member of the Board of Directors and Auditor of
the stock, and to, in that way, obtain the same at a lower price. the corporation as well. He was what is often referred to as a "self-dealing"
director.
I. Self-Dealing Directors
SEC. 31. . A director of a corporation holds a position of trust and as such, he owes
– A contract of the corporation with (1) one or more of its directors, a duty of loyalty to his corporation. In case his interests’ conflict with those
trustees, officers or their spouses and relatives within the fourth civil of the corporation, he cannot sacrifice the latter to his own advantage and
degree of consanguinity or affinity is voidable, at the option of such benefit. As corporate managers, directors are committed to seek the
corporation, unless all the following conditions are present: maximum amount of profits for the corporation. This trust relationship "is
(a) The presence of such director or trustee in the board meeting in not a matter of statutory or technical law. It springs from the fact that
which the contract was approved was not necessary to constitute a directors have the control and guidance of corporate affairs and property
quorum for such meeting; and hence of the property interests of the stockholders.
(b) The vote of such director or trustee was not necessary for the
approval of the contract; Granting arguendo that the "dealership agreement" involved here would
(c) The contract is fair and reasonable under the circumstances; be valid and enforceable if entered into with a person other than a director
(d) In case of corporations vested with public interest, material contracts or officer of the corporation, the fact that the other party to the contract
are approved by at least two-thirds (2/3) of the entire membership of was a Director and Auditor of the petitioner corporation changes the whole
the board, with at least a majority of the independent directors voting situation. First of all, we believe that the contract was neither fair nor
to approve the material contract; and reasonable. The "dealership agreement" entered into in July 1969, was to
(e) In case of an officer, the contract has been previously authorized by sell and supply to respondent Te 20,000 bags of white cement per month,
the board of directors. for five years starting September 1970, at the fixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have known, or at least
Where any of the first three (3) conditions set forth in the preceding must be presumed to know, that at that time, prices of commodities in
paragraph is absent, in the case of a contract with a director or trustee, general, and white cement in particular, were not stable and were
such contract may be ratified by the vote of the stockholders representing expected to rise. At the time of the contract, petitioner corporation had
at least two-thirds (2/3) of the outstanding capital stock or of at least two- not even commenced the manufacture of white cement, the reason why
thirds (2/3) of the members in a meeting called for the purpose: , delivery was not to begin until 14 months later. He must have known that
That full disclosure of the adverse interest of the directors or trustees within that period of six years, there would be a considerable rise in the
involved is made at such meeting and the contract is fair and reasonable price of white cement. In fact, respondent Te's own Memorandum shows
under the circumstances. that in September 1970, the price per bag was P14.50, and by the middle
of 1975, it was already P37.50 per bag. Despite this, no provision was
made in the "dealership agreement" to allow for an increase in price
A self-dealing director is one who deals or transacts business with his own
mutually acceptable to the parties. Instead, the price was pegged at P9.70
corporation
per bag for the whole five years of the contract. Fairness on his part as a
director of the corporation from whom he was to buy the cement, would
GENERAL RULE: A contract entered into by a director with his own
require such a provision. In fact, this unfairness in the contract is also a
corporation is voidable at the latter’s option,
basis which renders a contract entered into by the President, without
EXCEPTION: when ALL the conditions laid down in Sec. 31 are met.
authority from the Board of Directors, void or voidable, although it may
On the other hand, where any of the first two conditions is absent, the
have been in the ordinary course of business. We believe that the fixed
contract becomes voidable subject to the ratification of the stockholders
price of P9.70 per bag for a period of five years was not fair and
representing 2/3 of the outstanding capital stock – the requirements of
reasonable. Respondent Te, himself, when he subsequently entered into
which are:
contracts to resell the cement to his "new dealers" Henry Wee and
(1) There must be a meeting called for that purpose;
Gaudencio Galang stipulated as follows:
(2) Full disclosure of the adverse interest of the director; and
(3) The contract is fair and reasonable under the circumstances.
“The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs)”
If the self-dealing director owns all or substantially all of the shares of stock,
thereby making ratification easily possible, the last sentence of Sec. 31
As director, especially since he was the other party in interest, respondent
should be made to apply by determining reasonableness of the transaction
Te's bounden duty was to act in such manner as not to unduly prejudice
to which there is no yardstick. Every case stands upon its own bottom, and
the corporation. In the light of the circumstances of this case, it is to Us
the ultimate question is whether the contract was honest and beneficial
quite clear that he was guilty of disloyalty to the corporation; he was
which is always a question of fact.
attempting in effect, to enrich himself at the expense of the corporation.
There is no showing that the stockholders ratified the "dealership
PRIME WHITE CEMENT CORP. VS. INTERMEDIATE APPELLATE COURT
agreement" or that they were fully aware of its provisions. The contract
220 SCRA 103, MARCH 19, 1993
was therefore not valid, and this Court cannot allow him to reap the fruits
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
of his disloyalty.
awarded a dealership agreement whereby Te would be the exclusive
dealer and/or distributor of the corporation in the entire Mindanao. As a
consequence, Te entered into different contracts for selling white cement. MEAD VS. MCCULLOUGH. 21 PHIL. 95, DECEMBER 26, 1911
Later on, defendant corporation decided to impose certain conditions FACTS: Herein plaintiff-appellant Mead with defendant McCullough
upon the dealership agreement. formed the Philippine Engineering and Construction Company, the
incorporators being the only stockholders and directors of the company.
Several demands to comply with the agreement were made by Te to the When Mead left for China, the other directors entered into an agreement
corporation but was refused and Te was constrained to cancel the where all the rights in a “wrecking contract” with the naval authorities were
contracts he entered into. sold to defendant.

Defendant corporation entered into an exclusive dealership agreement The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John

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Macleod and TH Twentyman, and retaining one sixth interest, formed board of directors — a majority of the stockholders — is valid and binding
Manila Salvage Association. upon the majority-the plaintiff.

ISSUE: WON officers or directors of the corporation may purchase the SEC Memorandum Circular No. 10, Series of 2019
corporate property.

HELD: NO. While a corporation remains solvent, we can see no reason why
J. Interlocking Directors
a director or officer, by the authority of a majority of the stockholders or
SEC. 32. –
board of managers, may not deal with the corporation, loan it money or
Except in cases of fraud, and provided the contract is fair and reasonable
buy property from it, in like manner as a stranger. So long as a purely
under the circumstances, a contract between two (2) or more corporations
private corporation remains solvent, its directors are agents or trustees for
having interlocking directors shall not be invalidated on that ground alone:
the stockholders. They owe no duties or obligations to others. But the
, That if the interest of the interlocking director in one (1)
moment such a corporation becomes insolvent, its directors are trustees
corporation is substantial and the interest in the other corporation or
of all the creditors, whether they are members of the corporation or not,
corporations is merely nominal, the contract shall be subject to the
and must manage its property and assets with strict regard to their interest;
provisions of the preceding section insofar as the latter corporation or
and if they are themselves creditors while the insolvent corporation is
corporations are concerned.
under their management, they will not be permitted to secure to
themselves by purchasing the corporate property or otherwise any
Stockholdings exceeding twenty percent (20%) of the outstanding capital
personal advantage over the other creditors. Nevertheless, a director or
stock shall be considered substantial for purposes of interlocking directors.
officer may in good faith and for an adequate consideration purchase from
a majority of the directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is valid and binding upon the An interlocking director is a director in one corporation who deals or
minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, transacts with another corporation of which he is also a director (or also
supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How., known as arms-length transaction). In such case, there may effectively be
304; Richards vs. New Hamphshire Insurance Company, 43 N. H., 263; a , a divided allegiance where allegiance in one corporation
Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln may subordinated to the other.
Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60;
Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.) The prevailing view is that these contracts entered into where there is an
interlocking director is not voidable merely by reason of conflicting duties
In the case of the Twin-Lick Oil Company vs. Marbury, he court said: or interest as to corporations represented, even when a majority or all of
the directors are common to both corporations. It is recognized that such
That a director of a joint-stock corporation occupies one of those fiduciary will be upheld if there is no bad faith or unfairness or collusion
relations where his dealings with the subject-matter of his trust or agency,
and with the beneficiary or party whose interest is confided to his care, is NOTES:
viewed with jealousy by the courts, and may be set aside on slight grounds, (1) The contract between corporations with interlocking director is valid
is a doctrine founded on the soundest morality, and which has received absent fraud and provided it is reasonable under the circumstances;
the clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, (2) If the interest of the interlocking director in one corporation exceeds
715; Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; 20% and in the other merely nominal, the contract becomes voidable
Cumberland Co vs. Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. at the latter corporation’s option. In effect, the director would be
Cumberland Co., 16 Md., 456.) The general doctrine, however, in regard treated as a self-dealing director under Sec. 31;
to contracts of this class, is, not that they are absolutely void, but that they (3) If the interest in both companies is either both substantial or both
are voidable at the election of the party whose interest has been so nominal, Sec. 32 will apply.
represented by the party claiming under it. We say, this is the general rule;
for there may be cases where such contracts would be void ab initio; as K. Derivative Suit
when an agent to sell buys of himself, and by his power of attorney conveys In case of a wrongful or fraudulent act of a director, officer or agent,
to himself that which he was authorized to sell. but even here, acts which stockholders have the following options:
amount t a ratification by the principal may validate the sale (a) Individual or Personal Action – for direct injury to his rights, such as
denial of his right to inspect corporate books and records or pre-
The sale or transfer of the corporate property in the case at bar was made emptive rights;
by three directors who were at the same time a majority of stockholders. If (b) Representative or Class Suit – in which one or more members of a
a majority of the stockholders have a clear and a better right to sell the class sue for themselves as a class or for all to whom the right was
corporate property than a majority of the directors, then it can be said that denied, either as an individual action or a derivative suit; and a
a majority of the stockholders made this sale or transfer to the defendant (c) Derivative Suit – an action based on injury to the – to
McCullough. enforce a corporate right – wherein the corporation itself is joined as
a necessary party, and recovery is in favor of and for the corporation.
What were the circumstances under which said sale was made? The It is a suit granted to any stockholder to institute a case to remedy a
corporation had been going from bad to worse. The work of trying to raise wrong done directly to the corporation and indirectly to stockholders.
the sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in PASCUAL VS. DEL SAZ OROZCO. 19 PHIL. 82, MARCH 17, 1911
this undertaking. It had broken its contract with the naval authorities and FACTS: During 1903-1907, the defendant-appellees, without the
the $10,000 Mexican currency deposited had been confiscated. It had no knowledge and acquiescence of the stockholders deducted their
money. It was considerably in debt. It was a losing concern and a financial compensation from gross income instead of from the net profits of the
failure. To continue its operation meant more losses. Success was bank, the same with their predecessors for the years 1899-1902.
impossible. The corporation was civilly dead and had passed into the limbo
of Plaintiff-appellant brings this action in his own right as a stockholder of the
bank, for the benefit of the bank and all the stockholders, in behalf of the
corporation, which, even though, nominally a defendant, is to all intents
and purposes the real plaintiff in this case as shown in the prayer of the
complaint.

ISSUE: WON plaintiff has capacity to sue.

HELD: YES. In suits of this character the corporation itself and not the
We therefore conclude that the sale or transfer made by the quorum of the plaintiff stockholder is the real party in interest. The rights of the individual
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stockholder are merged into that of the corporation. It is a universally this character, unless such transactions continue and are injurious to the
recognized doctrine that a stockholder in a corporation has no title legal stockholder, or affect him especially and specifically in some other way.
or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of all the stockholders. Text writers EVERETT VS. ASIA BANKING CORPORATION 49 PHIL. 512, NOVEMBER
illustrate this rule by the familiar example of one person or entity owning 03, 1926
all the stock and still having no greater or essentially different title than if FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and
he owned but one single share. Since, therefore, the stockholder has no Company (Company), entered into a Memorandum of Agreement and
title, it is evident that what he does have, with respect to the corporation Voting Trust Agreement with defendant Asia Banking Corporation (Bank)
and his fellow stockholder, are certain rights sui generis. These rights are with the understanding that it was intended for the protection of all parties
generally enumerated as being, first, to have a certificate or other evidence thereto from outside creditors, but that they were not intended to be
of his status as stockholder issued to him; second, to vote at meetings of enforced according to the letter thereof, and that they did not contain the
the corporation; third, to receive his proportionate share of the profits of true agreement between the Bank and the Company which was to finance
the corporation; and lastly, to participate proportionately in the the company without interference from the above-named creditors.
distribution of the corporate assets upon the dissolution or winding up.
(Purdy's Beach on Private Corporations, sec. 554.) That shortly after, Mullen caused the removal of the plaintiffs as directors
of the Company and their replacement. The defendants thereafter gave
The right of individual stockholders to maintain suits for and on behalf of pledges and mortgages from the Company to the Bank and entered into
the corporation was denied until within a comparatively short time, but his contracts as directed by the Bank, and permitted the Bank to foreclose the
right is now no longer doubted. Accordingly, in 1843, in the leading case same and to sell the property of the Company itself and permitted the
of , a stockholder brought suit in the name of himself and Bank to institute suits against the Company, in which the Company was
other defrauded stockholders, and for the benefit of the corporation, not represented by anyone having its interest at heart and in which reason
against the directors, for a breach of their duty to the corporation. This the Bank occupied both plaintiff and defendant and tricked and deluded
case was decided against the complaining stockholder, on the ground that the courts into giving judgment in which the rights of the real parties were
the complainant had not proved that the corporation itself was under the concealed and unknown to the courts.
control of the guilty parties and had not proved that it was unable to
institute suit. The court, however, broadly intimated that a case might arise Thereafter, defendants incorporated Philippine Motors Corporation where
when a suit instituted by defrauded stockholders would be entertained by all the assets and goodwill of the Company were transferred by the Bank.
the court and redress given. Acting upon this suggestion and impelled by
the utter inadequacy of suits instituted by the corporation, defrauded ISSUE: WON the plaintiffs have the legal capacity to bring an action.
stockholders continued to institute these suits and to urge the courts of
equity to grant relief. These efforts were unsuccessful in clearly establishing HELD: YES. Invoking the well-known rule that shareholders cannot
the right of stockholders herein until the cases of Atwol against ordinarily sue in equity to redress wrongs done to the corporation, but that
Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, the action must be brought by the Board of Directors, the appellees argue
in 1855. These two great and leading cases have firmly established the law — and the court below held — that the corporation Teal and Company is
for England and America, that where corporate directors have committed a necessary party plaintiff and that the plaintiff stockholders, not having
a breach of trust either by their frauds, ultra vires acts, or negligence, and made any demand on the Board to bring the action, are not the proper
the corporation is unable or unwilling to institute suit to remedy the wrong, parties plaintiff. But, like most rules, the rule in question has its exceptions.
a single stockholder may institute that suit, suing on behalf of himself and It is alleged in the complaint and, consequently, admitted through the
other stockholders and for the benefit of the corporation, to bring about a demurrer that the corporation Teal and Company is under the complete
redress of the wrong done directly to the corporation and indirectly to the control of the principal defendants in the case, and, in these circumstances,
stockholders. it is obvious that a demand upon the Board of Directors to institute an
action and prosecute the same effectively would have been useless, and
So it is clear that the plaintiff, by reason of the fact that he is a stockholder the law does not require litigants to perform useless acts. (Exchange bank
in the bank (corporation) has a right to maintain a suit for and on behalf of of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior
the bank, but the extent of such a right must depend upon when, how, and Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn
for what purpose he acquired the shares which he now owns. In the vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water
determination of these questions we cannot see how, if it be true that the Company, 104 U. S., 450.)
bank is a quasi-public institution, it can affect in any way the final result.
The conclusion of the court below that the plaintiffs, not being
It is alleged that the plaintiff became a stockholder on the 13th of stockholders in the Philippine Motors Corporation, had no legal right to
November, 1903; that the defendants, as members of the board of proceed against that corporation in the manner suggested in the
directors and board of government, respectively, during each and all the complaint evidently rest upon a misconception of the character of the
years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great action. In this proceeding it was necessary for the plaintiffs to set forth in
prejudice of the bank and its stockholders, appropriate to their own use full the history of the various transactions which eventually led to the
from the profits of the bank sums of money amounting approximately to alleged loss of their property and, in making a full disclosure, references
P20,000 per annum. to the Philippine Motors Corporation appear to have been inevitable. It is
to be noted that the plaintiffs seek no judgment against the corporation
It is self-evident that the plaintiff in the case at bar was not, before he itself at this stage of the proceedings.
acquired in September 1903, the shares which he now owns, injured or
affected in any manner by the transactions set forth in the second cause of In our opinion the plaintiffs state a good cause of action for equitable relief
action. His vendor could have complained of these transactions, but he did and their complaint is not in any respect fatally defective. The judgment of
not choose to do so. The discretion whether to sue to set them aside, or the court below is therefore reversed, the defendant’s demurrer is
to acquiesce in and agree to them, is, in our opinion, incapable of transfer. overruled, and it is ordered that the return of the record to the Court within
If the plaintiff himself had been injured by the acts of defendants' ten days from the return of the record to the Court of First Instance.
predecessors that is another matter. He ought to take things as he found
them when he voluntarily acquired his ten shares. If he was defrauded in
REPUBLIC BANK VS. CUADERNO 19 SCRA 671, MARCH 30, 1967
the purchase of these shares, he should sue his vendor. (Thus, he may sue
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a
for the second half of 1903 to 1907 but not for the years 1989 to the first
derivative suit against defendant Pablo Roman, then President of the Bank,
half of 1903.)
for granting certain loans to fictitious and non-existing persons and to their
close friends, relatives and/or employees, who were in reality their
So it seems to be settled by the Supreme Court of the United States, as a
dummies on the basis of fictitious or inflated appraised value of real estate
matter of substantive law, that a stockholder in a corporation who was not
properties, in connivance with other officials.
such at the time of the transactions complained of, or whose shares had
not devolved upon him since by operation of law, cannot maintain suits of
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The complaint alleged that Miguel Cuaderno, then Central Bank Governor, seem to militate against making the corporation a party plaintiff, while (2)
acting upon the complaint, and the Monetary Board ordered an joining it as defendant places the entity in the awkward position of resisting
investigation and found violations of the General Banking Act, but no an action instituted for its benefit. What is important is that the
information was filed until his retirement; that to neutralize the impending corporation' should be made a party, in order to make the Court's
action against him, Pablo Roman engaged Miguel Cuaderno as technical judgment binding upon it, and thus bar future relitigation of the issues. On
consultant and selected Bienvenido Dizon as Chairman of the Board of the what side the corporation appears loses importance when it is considered
Bank; that such appointment was done in bad faith and without intention that it lay within the power of the trial court to direct the making of such
to protect the interest of the Bank but were only prompted to protect amendments of the pleadings, by adding or dropping parties, as may be
Pablo Roman. required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of
parties is not a ground to dismiss an action. (Ibid.)
The complaint, therefore, prayed for a writ of preliminary injunction against
eh Monetary Board in confirming such appointments, but was dismissed ISSUE No. 3: WON the action of the plaintiff amounts to a
by the lower court. proceeding.

ISSUE No. 1: WON the court below erred in dismissing the complaint. HELD: NO. Plaintiff Perez is not claiming title to Dizon's position as head
of the Republic Bank's board of directors. The suit is aimed at preventing
HELD: YES. The defendants mainly controvert the right of plaintiff to the
question the appointment and selection of defendants Cuaderno and protect Pablo Roman from criminal prosecution, and not to carry
Dizon, which they contend to be the result of corporate acts with which on the corporation's bank business. Whether the complaint's allegations
plaintiff, as stockholder, cannot interfere. Normally, this is correct, but to such effect are true or not must be determined after due hearing.
Philippine jurisprudence is settled that an individual stockholder is
permitted to institute a derivative or representative suit on behalf of the WESTERN INSTITUTE OF TECHNOLOGY, INC. VS. SALAS 278 SCRA 216,
corporation wherein he holds stock in order to protect or vindicate AUGUST 21, 1997
corporate rights, whenever (1) the officials of the corporation refuse to sue, FACTS: In a special board meeting, a resolution was passed providing for
or (2) are the ones to be sued or (3) hold the control of the corporation. In compensation of officers. A few years later, petitioners Homero Villais,
such actions, the suing stockholder is regarded as a nominal party, with Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 complaint for falsification of public documents (for submission of an
Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. income reflecting the resolution as passed on 1985, when in fact it was
Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff- passed in 1986) and estafa (for the disbursement of funds by effecting
appellant's action here is precisely in conformity, with these principles. He payment to the aforesaid salaries) against herein respondents who were
is neither alleging nor vindicating his own individual interest or prejudice, members of the Board of Trustees who were also officers of the
but the interest of the Republic Bank and the damage caused to it. The corporation. The trial court acquitted respondents in both charges without
action he has brought is a derivative one, expressly manifested to be for civil liability.
and in behalf of the Republic Bank, because it was futile to demand action
by the corporation, since its Directors were nominees and creatures of Petitioners assert that the motion for reconsideration of the civil aspect of
defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff the RTC decision acquitting respondents is a derivative suit brought by
are frauds against the Bank that redounded to its prejudice. them as minority stockholders of WIT for and on behalf of the corporation.
The motion for reconsideration on the civil aspect being denied,
The complaint expressly pleads that the appointment of Cuaderno as petitioners filed this petition.
technical consultant, and of Bienvenido Dizon to head the Board of
Directors of the Republic Bank, were made only to shield Pablo Roman ISSUE: WON the appeal may be considered as a derivative action.
from criminal prosecution and not to further the interests of the Bank, and
avers that both men are Roman's alter egos. There is no denying that the HELD: NO. A derivative suit is an action brought by minority shareholders
facts thus pleaded in the complaint constitute a cause of action for the in the name of the corporation to redress wrongs committed against it, for
bank: if the questioned appointments were made solely to protect Roman which the directors refuse to sue. It is a remedy designed by equity and
from criminal prosecution, by a Board composed by Roman's creatures has been the principal defense of the minority shareholders against abuses
and nominees, then the moneys disbursed in favor of Cuaderno and Dizon by the majority. Here, however, the case is not a derivative suit but is
would be an unlawful wastage or diversion of corporate funds, since the merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and
Republic Bank would have no interest in shielding Roman, and the 37098 filed with the RTC of Iloilo for estafa and falsification of public
directors in approving the appointments would be committing a breach of document. Among the basic requirements for a derivative suit to prosper
trust; the Bank, therefore, could sue to nullify the appointments, enjoin is that the minority shareholder who is suing for and on behalf of the
disbursement of its funds to pay them, and recover those paid out for the corporation must allege in his complaint before the proper forum that he
purpose, as prayed for in the complaint in this case (Angeles vs. Santos, is suing on a derivative cause of action on behalf of the corporation and
supra.). all other shareholders similarly situated who wish to join. This is necessary
to vest jurisdiction upon the tribunal in line with the rule that it is the
Defendants urge that the action is improper because the plaintiff was not allegations in the complaint that vests jurisdiction upon the court or quasi-
authorized by the corporation to bring suit in its behalf. Any such authority judicial body concerned over the subject matter and nature of the action.
could not be expected as the suit is aimed to nullify the action taken by This was not complied with by the petitioners either in their complaint
the manager and the board of directors of the Republic Bank; and any before the court a quo nor in the instant petition which, in part, merely
demand for intra-corporate remedy would be futile, as expressly pleaded states that "this is a petition for review on certiorari on pure questions of
in the complaint. These circumstances permit a stockholder to bring a law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097
derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other and 37098" since the trial court's judgment of acquittal failed to impose
stockholder has chosen to make common cause with plaintiff Perez is any civil liability against the private respondents. By no amount of equity
irrelevant, since the smallness of plaintiff's holdings is no ground for considerations, if at all deserved, can a mere appeal on the civil aspect of
denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet a criminal case be treated as a derivative suit.
too early in the proceedings for the absence of other stockholders to be
of any significance, no issues having even been joined. Granting, for purposes of discussion, that this is a derivative suit as insisted
by petitioners, which it is not, the same is outrightly dismissible for having
ISSUE No. 2: WON the Corporation should be a plaintiff or defendant. been wrongfully filed in the regular court devoid of any jurisdiction to
entertain the complaint. The ease should have been filed with the
HELD: The English practice is to make the corporation a party plaintiff, Securities and Exchange Commission (SEC) which exercises original and
while in the United States, the usage leans in favor of its being joined as exclusive jurisdiction over derivative suits, they being intra-corporate
party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be disputes, per Section 5 (b) of P.D. No. 902-A.
raised against either method. (1) Absence of corporate authority would
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tendered his resignation which was accepted by Buencamino and Cranker.

SAN MIGUEL CORPORATION VS. KAHN 176 SCRA 447, AUGUST 11, Chase initially filed a case in California against Cranker for the recovery of
1989 the purchase price of his plant, but this died a natural death. Eventually,
FACTS: Eduardo de los Angeles was a director appointed by PCGG who he filed a case before the CFI alleging various acts of frauds allegedly
sequestered the shares of Andres Soriano III claiming it to belong to committed by the other two.
Eduardo Conjuangco, a close associate and dummy of then President
Marcos. De los Angeles initiated a derivative suit against herein ISSUE: WON Chase has capacity to institute a derivative suit.
respondents, in behalf of SMC, for the revocation of a Board Resolution
adopted to assume the loans incurred by Neptunia Corporation, a foreign HELD: Yes. The evidence of defendants proves very clearly that right from
company, said to be a wholly- owned subsidiary of SMC. The action was the start, Chase was by them recognized as a stockholder and initial
dismissed by the SEC on the grounds that De los Angeles does not have incorporator with 600 paid up shares representing a 1/3 interest in
adequate shares to represent the interest of the stockholders and that his Amparts, and that would be enough for Chase to have the correct
assumed role as a PCGG appointed director is inconsistent with his personality to institute this derivative suit; the second place, it also appears
assumed role as a representative of minority stockholders. apparently undenied that Chase did not win in California so that he did not
recover the $150,000.00 that he had prayed for there against Overseas,
ISSUE: WON De Los Angeles can institute a derivative suit. which if he had would really in the mind of the Court have put him in
estoppel to intervene in any manner as incorporator or stockholder of
HELD: YES. The theory that de los Angeles has no personality to bring suit Amparts; and in the third place and most important it should not be
in behalf of the corporation — because his stockholding is minuscule, and forgotten that Chase has filed the present case not for his personal benefit,
there is a "conflict of interest" between him and the PCGG — cannot be but for the benefit of Amparts, so that to the Court the argument of
sustained. estoppel as against him would appear to be out of place; the estoppel to
be valid as a defense must be an estoppel against Amparts itself; the long
It is claimed that since de los Angeles 20 shares (owned by him since 1977) and short of it is that the Court is impelled and constrained to discard all
represent only. 00001644% of the total number of outstanding shares (1 the other defenses set up by Dr. Buencamino on the principal complaint;
21,645,860), he cannot be deemed to fairly and adequately represent the the result of all these would be to sustain so far, the position of Chase that
interests of the minority stockholders. The implicit argument — that a Dr. Buencamino must account for the P570,000.00 used to pay the second
stockholder, to be considered as qualified to bring a derivative suit, must series of payment on the subscription, the P330,000.00 used in paying the
hold a substantial or significant block of stock — finds no support whatever lsst series on the subscription, plus another sum of P245,000.00 entered
in the law. The requisites for a derivative suit are as follows: as loan on his favor and against Amparts, for the sum of P434,000.00
(a) the party bringing suit should be a shareholder as of the time of the earned in the blackmarketing of the excess of $140,000.00 dollars on
act or transaction complained of, the number of his shares not being the forwarding costs and promotional expenses, for the sum of
material; P391,200.00 earned in the black marketing of the excess of
(b) he has tried to exhaust intra-corporate remedies, i.e., has made a $117,000.00 in the transaction with Bertoni and Cotti, and all these would
demand on the board of directors for the appropriate relief but the reach a total of P1,970,200.00; and as the appropriation of the profits for
latter has failed or refused to heed his plea; and himself was a quasi-delict, the liability therefore assuming that it had been
(c) the cause of action actually devolves on the corporation, the done with the cooperation of Cranker would have to be solidary, 2194 New
wrongdoing or harm having been, or being caused to the corporation Civil Code.
and not to the particular stockholder bringing the suit.
REYES VS. TAN 3 SCRA 198, SEPTEMBER 30, 1961
The bona fide ownership by a stockholder of stock in his own right suffices FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New
to invest him with a standing to bring a derivative action for the benefit of York for raw materials but were found out to consist of already finished
the corporation. The number of his shares is immaterial since he is not product for which reason the Central Bank of the Philippines stopped all
suing in his own behalf, or for the protection or vindication of his own dollar allocations for raw materials for the corporation which necessarily
particular right, or the redress of a wrong committed against him, led to the paralyzation of the operations. It was alleged that the supplier
individually, but in behalf and for the benefit of the corporation. of the said finished goods was United Commercial Company of New York
in which Dalamal, appointed by the BOD of the Textile Mills as co-
Neither can the "conflict-of-interest" theory be upheld. From the manager, had inrterests and that the letter of credit for said goods were
conceded premise that de los Angeles now sits in the SMC Board of guaranteed by the Indian Commercial Company and Indian Traders in
Directors by the grace of the PCGG, it does not follow that he is legally which Dalamal likewise has interests. It was further alleged that the sale of
obliged to vote as the PCGG would have him do, that he cannot the finished products was the business of Indian Commercial Company of
legitimately take a position inconsistent with that of the PCGG, or that, not Manila who cannot obtain dollar allocations for importations of finished
having been elected by the minority stockholders, his vote would goods. An action for the appointment of a receiver was filed before the
necessarily never consider the latter's interests. The proposition is not only trial court after the BOD refused to proceed against Dalamal, which was
logically indefensible, , but also constitutes an erroneous granted.
conception of a director's role and function, it being plainly a director's
duty to vote according to his own independent judgment and his own ISSUE: WON Justiniani may be allowed to institute the case for
conscience as to what is in the best interests of the company. Moreover, it receivership and damages.
is undisputed that apart from the qualifying shares given to him by the
PCGG, he owns 20 shares in his own right, as regards which he cannot HELD: YES. It is not denied by petitioner that the allocation of dollars to
from any aspect be deemed to be "beholden" to the PCGG, his ownership the corporation for the importation of raw materials was suspended. In the
of these shares being precisely what he invokes as the source of his eyes of the court below, as well as in our own, the importation of textiles
authority to bring the derivative suit. instead of raw materials, as well as the failure of the Board of Directors to
take action against those directly responsible for the misuse of dollar
CHASE VS. BUENCAMINO, SR. 136 SCRA 365, MAY 13, 1985 allocations constitute fraud, or consent thereto on the part of the directors.
FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement Therefore, a breach of trust was committed which justified the derivative
with Dr. Buencamino and William Cranker (already business partners) for suit by a minority stockholder on behalf of the corporation.
the establishment of a factory in Manila called American Machinery
Engineering Parts, Inc. (Amparts), where chase was to transfer his tractor “It is well settled in this jurisdiction that where corporate directors are
plant, ship his machineries from his former plant in America to Manila, guilty of a breach of trust — not of mere error of judgment or abuse of
install said machineries at Amparts plant and he is to be the production discretion — and intra-corporate remedy is futile or useless, a stockholder
manager of Amparts. may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted
For some time the three maintained harmonious relations until Chase directly upon the corporation and indirectly upon the stockholders. An

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illustration of a suit of this kind is found in the case of Pascual vs. Del Saz
Orozco (19 Phil. 82), decided by this Court as early as 1911. In that case, ISSUE: WON plaintiffs have a right to bring the action for their benefit.
the Banco Español-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which HELD: No. The complaint shows that the action is for damages resulting
losses, it was contended, could have been avoided if the president and from mismanagement of the affairs and assets of the corporation by its
directors had been more vigilant in the administration of the affairs of the principal officer, it being alleged that defendant's maladministration has
bank. The stockholders constituting the minority brought a suit in behalf brought about the ruin of the corporation and the consequent loss of value
of the bank against the directors to recover damages, and this over the of its stocks. The injury complained of is thus primarily to that of the
objection of the majority of the stockholders and the directors. This court corporation, so that the suit for the damages claimed should be by the
held that the suit could properly be maintained.” (64 Phil., Angeles vs. corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697). Corporation pp. 977-980). The stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and
The claim that respondent Justiniani did not take steps to remedy the the distribution among them of part of the corporate assets before the
illegal importation for a period of two years is also without merit. During dissolution of the corporation and the liquidation of its debts and liabilities,
that period of time respondent had the right to assume and expect that something which cannot be legally done in view of section 16 of the
the directors would remedy the anomalous situation of the corporation Corporation Law.
brought about by their own wrongdoing. Only after such period of time
had elapsed could respondent conclude that the directors were remiss in But while it is to the corporation that the action should pertain in cases of
their duty to protect the corporation property and business. this nature, however, if the officers of the corporation, who are the ones
called upon to protect their rights, refuse to sue, or where a demand upon
We are led to agree with the judge below that the appointment of a them to file the necessary suit would be futile because they are the very
receiver was not only expedient but also necessary to restore the faith and ones to be sued or because they hold the controlling interest in the
confidence of the Central Bank authorities in the administration of the corporation, then in that case any one of the stockholders is allowed to
affairs of the corporation, thus ultimately leading to a restoration of the bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in
dollar allocation so essential to the operation of the textile mills. that case, it is the corporation itself and not the plaintiff stockholder that is
the real property in interest, so that such damages as may be recovered
GAMBOA VS. VICTORIANO 90 SCRA 40, MAY 05, 1979 shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82,
FACTS: A writ of prelimiary injunction was filed by herein respondents as 85). In other words, it is a derivative suit brought by a stockholder as the
purchasers of 1,328 shares of stock of Inocented De La Rama, inc. after nominal party plaintiff for the benefit of the corporation, which is the real
herein petitioners surreptitiously met and authorized the sale of 823 shares property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).
to forestall the petitioner’s takeover from the previous president and vice-
president (sellers of the 1,328 shares), in violation of their pre-emptive In the present case, the plaintiff stockholders have brought the action not
right. The trial court ruled in favor of respondents. Later on, private for the benefit of the corporation but for their own benefit, since they ask
respondents entered into a compromise agreement with the recipients for tha the defendant make good the losses occasioned by his
the transfer of the 823 shares, against which the petitioners filed a motion mismanagement and pay to them the value of their respective
to dismiss which was denied. participation in the corporate assets on the basis of their respective
holdings. Clearly, this cannot be done until all corporate debts, if there be
ISSUE: WON a derivative suit is the more proper action that should have any, are paid and the existence of the corporation terminated by the
been filed by respondents. limitation of its charter or by lawful dissolution in view of the provisions of
section 16 of the Corporation Law.
HELD: NO. The petitioners contend that the proper remedy of the
plaintiffs would be to institute a derivative suit against the petitioners in It results that plaintiff's complaint shows no cause of action in their favor
the name of the corporation in order to secure a binding relief after so that the lower court did not err in dismissing the complaint on that
exhausting all the possible remedies available within the corporation. ground.

An individual stockholder is permitted to institute a derivative suit on While plaintiffs ask for remedy to which they are not entitled unless the
behalf of the corporation wherein he holds stock in order to protect or requirement of section 16 of the Corporation Law be first complied with,
vindicate corporate rights, whenever the officials of the corporation refuse we note that the action stated in their complaint is susceptible of being
to sue, or are the ones to be sued or hold the control of the corporation. converted into a derivative suit for the benefit of the corporation by a mere
In such actions, the suing stockholder is regarded as a nominal party, with change in the prayer. Such amendment, however, is not possible now,
the corporation as the real party in interest. In the case at bar, however, since the complaint has been filed in the wrong court, so that the same last
the plaintiffs are alleging and vindicating their own individual interests or to be dismissed.
prejudice, and not that of the corporation. At any rate, it is yet too early in
the proceedings since the issues have not been joined. Besides, misjoinder The order appealed from is therefore affirmed, but without prejudice to
of parties is not a ground to dismiss an action. the filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered

EVANGELISTA VS. SANTOS 86 PHIL. 387, MAY 19, 1950

IN SUMMARY:
FACTS: Juan D. Evangelista, et. al. are minority stockholders of the Vitali
(1) That the party bringing the suit should be a stockholder as of the time
Lumber Company, Inc., while Rafael Santos holds more than 50% of the
the act or transaction complained of took place, or whose shares have
stocks of said corporation and also is and always has been the president,
evolved upon him since by operation of law. This rule, however, does
manager, and treasurer thereof. Santos, in such triple capacity, through
not apply if such act or transaction continues and is injurious to the
fault, neglect, and abandonment allowed its lumber concession to lapse
stockholder or affect him specifically in some other way. The number
and its properties and assets, among them machineries, buildings,
of his shares is immaterial since he is not suing in his own behalf or
warehouses, trucks, etc., to disappear, thus causing the complete ruin of
for the protection or vindication of his own right, or the redress of a
the corporation and total depreciation of its stocks.
wrong done against him, individually, but in behalf and for the benefit
of the corporation.
Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to
(2) He has tried to exhaust intra-corporate remedies, he has made a
render an account of his administration of the corporate affairs and assets:
demand on the board of directors for the appropriate relief but the
(2) to pay plaintiffs the value of their respective participation in said assets
latter had failed or refused to heed his plea. Demand, however, is not
on the basis of the value of the stocks held by each of them; and (3) to pay
required if the company is under the complete control of the directors
the costs of suit. Evangelista, et. al. also ask for such other remedy as may
who are the very ones to be sued (or where it becomes obvious that
be and equitable. The trial court dismissed the action on the ground of
a demand upon them would have been futile and useless) since the
improper venue and lack of cause of action.
law does not require a litigant to perform useless acts.
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(3) The stockholder bringing the suit must allege in his complaint that he
is suing on a derivative cause of action on behalf of the corporation
and all other stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action actually devolves on
the corporation and not to a particular stockholder.
(4) The corporation should be made a party, either as party-plaintiff or
defendant, in order to make the court’s judgment binding upon it,
and thus, bar future litigation of the same issues. On what side the
corporation appears loses importance when it is considered that it lay
within the power of the court to direct the making of amendment of
the pleading, by adding or dropping parties, as may be required in
the interest of justice. Misjoinder of parties is not a ground to dismiss
action; and,

Any benefit or damages recovered shall pertain to the corporation. This is

so because in all instances, derivative suit is instituted for and in behalf of
the corporation and not for the protection or vindication of a right or rights
of a particular stockholder, otherwise, the aggrieved stockholder should
institute, instead, an individual or personal suit to vindicate his personal or
individual right. Or, for that matter, representative or class suit for all other
stockholders whose rights are similarly situated, injured or violated,
personally or individually.

L. Executive Committee, Management Committee and other

Committees
SEC. 34. . – If the
bylaws so provide, the board may create an executive committee
composed of at least three (3) directors. 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 bylaws or by
majority vote of the board, except with respect to the: (a) approval of any
action for which shareholders’ approval is also required; (b) filling of
vacancies in the board; (c) amendment or repeal of bylaws or the adoption
of new bylaws; (d) amendment or repeal of any resolution of the board
which by its express terms is not amendable or repealable; and (e)
distribution of cash dividends to the shareholders.

The board of directors may create special committees of temporary or

permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.

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VII. CORPORATE POWERS AND AUTHORITY may be.

SEC. 35 – Every corporation
incorporated under this Code has the power and capacity: Should there be a refusal on the part of the persons above-mentioned to
(a) To sue and be sued in its corporate name; receive summons despite at least three (3) attempts on two (2) different
(b) To have perpetual existence unless the certificate of incorporation dates, service may be made electronically, if allowed by the court, as
provides otherwise; provided under Section 6 of this Rule. (11a)
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the Service of summons upon persons other than those named under than
provisions of this Code; those named in the above provision is without force and effect.
(e) To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same in accordance with this Code; DELTA MOTOR SALES CORPORATION VS. MANGOSING 70 SCRA 598,
(f) In case of stock corporations, to issue or sell stocks to subscribers and APRIL 30, 1976
to sell treasury stocks in accordance with the provisions of this Code; FACTS: Herein respondent Pamintuan initiated an action against petitioner
and to admit members to the corporation if it be a nonstock Delta Motors for the alleged defective Toyota car sold to him and for
corporation; failure to fulfill the warranty obligation by not repairing the car.
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property, The summons were served on Dionisia Miranda, employee of the
including securities and bonds of other corporations, as the petitioner. Delta Motors failed to answer the complaint and was declared
transaction of the lawful business of the corporation may reasonably in default and evidence was presented and a decision was rendered
and necessarily require, subject to the limitations prescribed by law against herein petitioner.
and the Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or Petitioner filed a motion to lift the order of default and to set aside the
any other commercial agreement with natural and juridical persons; judgment and for new trial, which was denied.
(i) To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes: ISSUE: WON there was proper service of summons.
Provided, That no foreign corporation shall give donations in aid of
any political party or candidate or for purposes of partisan political HELD: NO. Rule 14 of the Revised Rules of Court provides: SEC. 13 (now
activity; SEC. 12). . — If
(j) To establish pension, retirement, and other plans for the benefit of its defendant is a corporation organized under the laws of the Philippines or
directors, trustees, officers, and employees; and a partnership duly registered, service may be made on the president,
(k) To exercise such other powers as may be essential or necessary to manager, secretary, cashier, agent, or any of its directors.
carry out its purpose or purposes as stated in the articles of
incorporation. For the purpose of receiving service of summons and being bound by it, a
corporation is identified with its agent or officer who under the rule is
A. Classifications of Corporate Power designated to accept service of process. "The corporate power to receive
The statement of the objects, purposes or powers in the AOI results and act on such service, so far as to make it known to the corporation, is
practically in defining the scope of the authorized corporate enterprise or thus vested in such officer or agent." (Lafayette Insurance Co. vs. French,
undertaking. This statement both confers and also limits the actual 15 L. Ed. 451, 453).
authority of the corporation.
A strict compliance with the mode of service is necessary to confer
Along with the powers indicated in the AOI, a corporation can also exercise jurisdiction of the court over a corporation. The officer upon whom service
powers that may be granted by law, particularly those provided under Sec. is made be one who is named in the statute; otherwise the service is
36 and 44 of the Corporation Code and those which may be necessary or insufficient. So, where the statute required that in the case of a domestic
incidental to tis existence. corporation summons should be served on "the president or head of the
corporation secretary treasurer, cashier or managing agent thereof",
In short, corporate authority may be classified as: service of summons on the secretary's wife did not confer jurisdiction over
(a) Express powers – those expressly granted by law inclusive of the the corporation in the foreclosure proceeding against it. Hence, the decree
corporate charter or AOI; of foreclosure and the deficiency judgment were void and should be
(b) Implied Powers – those impliedly granted as are essential or vacated. (Reader vs. District Court, 94 Pacific 2nd 858).
reasonably necessary to the carrying out of the express powers; and
(c) Incidental Powers – those incidental to its existence. The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure that
1. Power to sue and be sued the summons be served on a representative so integrated with the
A corporation may sue and be sued in its corporate name just like any corporation that such person will know what to do with the legal papers
other person. served on him. In other words, "to bring home to the corporation notice
of the filing of the action". (35A C.J.S. 288 citing Jenkins vs. Lykes Bros.
VENUE: the action filed against it must be instituted at the place of S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249).
principal office of the corporation
In the instant case the Manila court did not acquire jurisdiction over Delta
SERVICE OF SUMMONS: Sec. 12, Rule 14 of the Rules of Court provide: Motor because it was not properly served with summons. The service of
Section 12. When the summons on Dionisia G. Miranda, who is not among the persons
defendant is a corporation, partnership or association organized under mentioned in section 13 of Rule 14, was insufficient. It did not bind the
the laws of the Philippines with a juridical personality, service may be made Delta Motor. Courts acquire jurisdiction over the person of a party
on the president, managing partner, general manager, corporate defendant and of the subject-matter of the action by virtue of the service
secretary, treasurer, or in-house counsel of the corporation wherever they of summons in the manner required by law. Where there is no service of
may be found, or in their absence or unavailability, on their secretaries. summons or a voluntary general appearance by the defendant, the court
acquires no jurisdiction to pronounce a judgment in the cause. (Syllabi
If such service cannot be made upon any of the foregoing persons, it shall Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556).
be made upon the person who customarily receives the correspondence
for the defendant at its principal office. Consequently, the order of default, the judgment by default and the
execution in Civil Case No. 97373 are void and should be set aside
In case the domestic juridical entity is under receivership or liquidation,
service of summons shall be made on the receiver or liquidator, as the case E.B. VILLAROSA & PARTNER CO., LTD. VS. BENITO 312 SCRA 65,

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AUGUST 06, 1999 is made must be one who is named in the statute; otherwise the service is
FACTS: Petitioner is a limited partnership with principal office address at insufficient. ...
Davao City and with branch offices at Parañaque, Metro Manila and
Lapasan, Cagayan de Oro City. The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure that
Petitioner and private respondent executed a Deed of Sale with the summons be served on a representative so integrated with the
Development Agreement wherein the former agreed to develop certain corporation that such person will know what to do with the legal papers
parcels of land located at Cagayan de Oro belonging to the latter into a served on him. In other words, "to bring home to the corporation notice
housing subdivision for the construction of low-cost housing units. They of the filing of the action." ...
further agreed that in case of litigation regarding any dispute arising
therefrom, the venue shall be in the proper courts of Makati. The liberal construction rule cannot be invoked and utilized as a substitute
for the plain legal requirements as to the manner in which summons should
Private respondent, as plaintiff, filed a Complaint for Breach of Contract be served on a domestic corporation... (emphasis supplied).
and Damages against petitioner, as defendant, before the RTC Makati for
failure of the latter to comply with its contractual obligation in that, other Accordingly, we rule that the service of summons upon the branch
than a few unfinished low-cost houses, there were no substantial manager of petitioner at its branch office at Cagayan de Oro, instead of
developments therein. upon the general manager at its principal office at Davao City is improper.
Consequently, the trial court did not acquire jurisdiction over the person
Summons, together with the complaint, were served upon the defendant, of the petitioner.
through its Branch Manager at the stated address at Cagayan de Oro City
but the Sheriff's Return of Service stated that the summons was duly served 2. Power to have perpetual existence
"upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager SEC. 11. A corporation shall have perpetual existence
Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, unless its articles of incorporation provide otherwise.
and evidenced by the signature on the face of the original copy of the
summons.
3. Power of Succession
This right basically means that the corporation persists to exist despite
Defendant filed a motion to dismiss on the ground of improper service of
death, incapacity, civil interdiction, or withdrawal of the stockholders or
summons which was denied.
members thereof.

ISSUE: WON the court acquired jurisdiction.

4. Power to Adopt and Use a Common Seal
This right has been expressly granted by law. However, it is not mandatory
HELD: NO. Earlier cases have uphold service of summons upon a
but merely permissive. This is because the corporate seal performs no
construction project manager; a corporation's assistant manager; ordinary
further or greater function than to impart evidence of the due
clerk of a corporation; private secretary of corporate executives; retained
execution by the corporation of a written document or obligation.
counsel; officials who had charge or control of the operations of the
corporation, like the assistant general manager; or the corporation's Chief
SEC. 62 – The capital stock of
Finance and Administrative Officer. In these cases, these persons were
corporations shall be divided into shares for which certificates signed by
considered as "agent" within the contemplation of the old rule. Notably,
the president or vice president, countersigned by the secretary or assistant
under the new Rules, service of summons upon an agent of the corporation
secretary, and sealed with the seal of the corporation shall be issued in
is no longer authorized.
accordance with the bylaws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates
The designation of persons or officers who are authorized to accept
indorsed by the owner, his attorney-in-fact, or any other person legally
summons for a domestic corporation or partnership is now limited and
authorized to make the transfer. No transfer, however, shall be valid,
more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil
except as between the parties, until the transfer is recorded in the books
Procedure. The rule now states, "general manager" instead of only
of the corporation showing the names of the parties to the transaction, the
"manager"; "corporate secretary" instead of "secretary"; and "treasurer"
date of the transfer, the number of the certificate or certificates, and the
instead of "cashier." The phrase "agent, or any of its directors" is
number of shares transferred. The Commission may require corporations
conspicuously deleted in the new rule.
whose securities are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or shares of
The particular revision under Section 11 of Rule 14 was explained by retired
stocks in uncertificated or scripless form in accordance with the rules of the
Supreme Court Justice Florenz Regalado, thus: ... the then Sec. 13 of this
Commission.
Rule allowed service upon a defendant corporation to "be made on the
president, manager, secretary, cashier, agent or any of its directors." The
aforesaid terms were obviously ambiguous and susceptible of broad and 5. Power to Amend the Articles of Incorporation
sometimes illogical interpretations, especially the word "agent" of the As far as corporations created by special law are concerned, amendment
corporation. The Filoil case, involving the litigation lawyer of the may NOT be considered as a matter of right. The law creating it may or
corporation who precisely appeared to challenge the validity of service of may not authorize or empower the corporation to make any changes in its
summons but whose very appearance for that purpose was seized upon to AOI or charter. However, whether empowered or not, Congress may
validate the defective service, is an illustration of the need for this revised amend or repeal a corporate charter by virtue of its inherent authority to
section with limited scope and specific terminology. Thus, the absurd amend or repeal laws under the Constitution.
result in the Filoil case necessitated the amendment permitting service
only on the in-house counsel of the corporation who is in effect an 6. Power to Adopt By-Laws
employee of the corporation, as distinguished from an independent The Corporation Code actually REQUIRES a corporation to adopt by-laws,
practitioner. (emphasis supplied). not contrary to law, morals, or public policy, within 1 month from receipt
of official notice of the issuance of the certificate of incorporation or
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court registration (Sec. 45).
Revision Committee, stated that "(T)he rules must be strictly observed.
Service must be made to one named in (the) statute ... Amendment of the by-laws are allowed subject to the procedure and
requirement provided under Sec. 47.
It should be noted that even prior to the effectivity of the 1997 Rules of
Civil Procedure, strict compliance with the rules has been enjoined. In the 7. Power to Sell / Issue Stocks or Admit Members
case of , the Court held: A The power of a corporation to issue or sell its stocks is an inherent right of
strict compliance with the mode of service is necessary to confer any stock corporation except only as it may be regulated by law or by the
jurisdiction of the court over a corporation. The officer upon whom service AOI. See Title VII of the RCC for the provision on stocks and stockholders
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petitioner's legitimate business.

Admission, as well as termination of members is a prerogative granted by
law to non-stock corporations and the manner, requirements or GOVERNMENT OF THE PHILIPPINE ISLANDS VS. EL HOGAR FILIPINO 50
procedures for such admission or termination may be contained in the AOI PHIL. 399, JULY 13, 1927
or by-laws. FACTS: The directors of El Hogar Filipino erected a modern reinforced
concrete office building at the site of its old building. The acquisition of
8. Power to Acquire / Alienate Property the lot and the construction of the new office building thereon is not the
When a corporation is expressly empowered by law to acquire or alienate subject of the second cause of action for being ultra vires on the part of
real and/or personal properties, the limitations imposed by Sec. 35 are as the corporation.
follows:
ISSUE: WON the erection of the building was reasonable.
SEC. 35 – Every corporation
incorporated under this Code has the power and capacity: HELD: YES. With this contention we are unable to agree. Under the
xxx Corporation Law, every corporation has the power to purchase, hold and
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, lease such real property as the transaction of the lawful business of the
mortgage, and otherwise deal with such real and personal property, corporation may reasonably and necessarily require. When this property
including securities and bonds of other corporations, (1) as the was acquired in 1916, the business of El Hogar Filipino had developed to
transaction of the lawful business of the corporation may reasonably such an extent, and its prospects for the future were such as to justify its
and necessarily require, (2) subject to the limitations prescribed by directors in acquiring a lot in the financial district of the City of Manila and
law and the Constitution; in constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 square meters — was
The first limitation practically sets the limit of the corporate authority to in excess of its reasonable requirements. The law expressly declares that
acquire, own, hold or alienate property. As it has been said the purpose corporations may acquire such real estate as is reasonably necessary to
clause in the AOI grants as well as limits the powers which a corporation enable them to carry out the purposes for which they were created; and
may exercise. Verily, WON the acquisition of such property is within the we are of the opinion that the owning of a business lot upon which to
corporate powers or authority may reasonably be determined from the construct and maintain its offices is reasonably necessary to a building and
purpose or purposes indicated in the AOI. loan association such as the respondent was at the time this property was
acquired. A different ruling on this point would compel important
LUNETA MOTOR COMPANY VS. A. D. SANTOS, INC. 5 SCRA 809, JULY enterprises to conduct their business exclusively in leased offices — a
31, 1962 result which could serve no useful end but would retard industrial growth
FACTS: Nicolas Concepcion executed a chattel mortgage covering a and be inimical to the best interests of society.
certificate of public convenience granted to him to operate taxicab service
of 27 units in Manila, in favor of petitioner, to secure a loan evidenced by We are furthermore of the opinion that, inasmuch as the lot referred to was
a promissory note guaranteed by Concepcion and one Placido lawfully acquired by the respondent, it is entitled to the full beneficial use
Esteban.Concepcion mortgaged the same certificate to cover a second thereof. No legitimate principle can discover which would deny to one
loan with Rehabilitation Finance. owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between
Petitioner filed an action to foreclose the mortgage. While it was pending, owners in this respect is not lightly to be imputed to the Legislature. The
RF also foreclosed the second chattel mortgage where the certificate was point here involved has been the subject of consideration in many
sold at a public auction in favor of AD Santos who applied for the approval decisions of American courts under statutes even more restrictive than that
of the sale which was granted by the Public Service Commission. which prevails in this jurisdiction; and the conclusion has uniformly been
that a corporations whose business may properly be conducted in a
Later on, the CFI rendered a judgment in favor of petitioner, where the populous center may acquire an appropriate lot and construct thereon an
certificate was sold at a public auction in favor of the petitioner who edifice with facilities in excess of its own immediate requirements
immediately filed for approval with the Commission. AD Santos Inc.,
recipient of the certificate from AD Santos, opposed the application for It would seem to be unnecessary to extend the opinion by lengthy citations
approval. upon the point under consideration, but (118 Fed., 981),
may be cited as being in harmony with the foregoing authorities. In dealing
ISSUE: WON Petitioner may acquire the certificate of public convenience. with the powers of a national bank the court, in this case, said: When an
occasion arises for an investment in real property for either of the purposes
HELD: NO. Petitioner claims in this regard that its corporate purposes are specified in the statute the national bank act permits banking associations
to carry on a general mercantile and commercial business, etc., and that it to act as any prudent person would act in making an investment in real
is authorized in its articles of incorporation to operate and otherwise deal estate, and to exercise the same measure of judgment and discretion. The
in and concerning automobiles and automobile accessories' business in all act ought not to be construed in such a way as to compel a national bank,
its multifarious ramification (petitioner's brief p. 7) and to operate, etc., and when it acquires real property for a legitimate purpose, to deal with it
otherwise dispose of vessels and boats, etc., and to own and operate otherwise than a prudent landowner would ordinarily deal with such
steamship and sailing ships and other floating craft and deal in the same property.
and engage in the Philippine Islands and elsewhere in the transportation
of persons, merchandise and chattels by water; all this incidental to the At any rate the weight of judicial opinion is so overwhelmingly in favor of
transportation of automobiles (id. pp. 7-8 and Exhibit B). sustaining the validity of the acts alleged in the second cause of action to
have been done by the respondent in excess of its powers that we refrain
We find nothing in the legal provision and the provisions of petitioner's from commenting at any length upon said cases. The ground stated in the
articles of incorporation relied upon that could justify petitioner's second cause of action is in our opinion without merit.
contention in this case. To the contrary, they are precisely the best
evidence that it has no authority at all to engage in the business of land DIRECTOR OF LANDS VS. COURT OF APPEALS 158 SCRA 568, MARCH
transportation and operate a taxicab service. That it may operate and 14, 1988
otherwise deal in automobiles and automobile accessories; that it may FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite
engage in the transportation of persons by water does not mean that it for registration of a parcel of land which it claimed to have acquired by
may engage in the business of land transportation — an entirely different virtue of a Deed of Absolute Sale from Aquelina de la Cruz, alleging that
line of business. If it could not thus engage in the line of business, it follows the applicant and its predecessors-in-interest have been in actual,
that it may not acquire an certificate of public convenience to operate a continuous, public, peaceful and adverse possession and occupation of
taxicab service, such as the one in question, because such acquisition the said land for more than 30 years, which was opposed by the
would be without purpose and would have no necessary connection with Government as represented by the Director of Lands. The CFI and the CA

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ruled in favor of INC. This is an express power granted by the law under the Code, particularly
Title IX thereof.
ISSUE: WON the corporation may acquire the land in question.
10. Power to make Donations
HELD YES. As observed at the outset, had this case been resolved Ordinarily, a pure gift of funds or property by a corporation not created for
immediately after it was submitted for decision, the result may have been charitable purpose is not authorized and would constitute a violation of the
quite adverse to private respondent. For the rule then prevailing under the rights of its stockholders unless it is empowered by statute. There are
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799, circumstances, however, under which a donation by a corporation may be
reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other to it benefit as a means of increasing its business or promoting patronage.
subsequent cases involving private respondent adverted to above', is that
a juridical person, private respondent in particular, is disqualified under the Thus, Sec. 35 (i) expressly authorizes a corporation to make donations,
1973 Constitution from applying for registration in its name alienable subject to the following limitations:
public land, as such land ceases to be public land "only upon the issuance (1) The donation must be reasonable;
of title to any Filipino citizen claiming it under section 48[b]" of (2) It must be for public welfare, or for hospital, charitable, scientific,
Commonwealth Act No. 141, as amended. These are precisely the cases cultural or similar purpose; and
cited by petitioner in support of its theory of disqualification. (3) Donations from foreign corporations shall not be in aid of political
party or candidate, or for purposes of partisan political activity.
Since then, however, this Court had occasion to re-examine the rulings in
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 11. Power to establish Pension, Retirement and other Plans
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, It is now generally recognized in almost all jurisdiction to empower a
among others. Thus, in the recent case of Director of Lands v. Intermediate corporation to establish pension plans, pension trust, profit sharing plans,
Appellate Court, 146 SCRA 509, We categorically stated that the majority stock bonus or stock option plans and other incentive plans to directors,
ruling in Meralco is "no longer deemed to be binding precedent", and officers and employees. In fact, the power may include any act to promote
that "[T]he correct rule, ... is that alienable public land held by a possessor, convenience, welfare and benefit of the employees or officers.
personally or through his predecessors-in-interest, openly, continuously
and exclusively for the prescribed statutory period [30 years under the REPUBLIC VS. ACOJE MINING CO., INC. 7 SCRA 361, FEBRUARY 28,
Public Land Act, as amended] is converted to private property by mere 1963
lapse or completion of said period, ipso jure." We further reiterated therein FACTS: A post office branch was opened in herein respondent’s mining
the time-honored principle of non-impairment of vested rights. camp at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an
employee of such company, was the postmaster. Prior to the opening the
The crucial factor to be determined therefore is the length of time private company, at the request of the Bureau of Posts, adopted a resolution that
respondent and its predecessors-in-interest had been in possession of the the former would assume full responsibility for all cash received by the
land in question prior to the institution of the instant registration postmaster. On May 11, 1954, the postmaster went on a three day leave
proceedings. The land under consideration was acquired by private but never returned. As a result, an action was brought by the government
respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by to recover P13,867.24, the amount of shortage in the accounts of the
same by purchase from the Ramos brothers and sisters, namely: Eusebia, postmaster, from the company.
Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
Commonwealth Act No. 141, as amended, "those who by themselves or ISSUE: WON the subject resolution is within the powers of the company to
through their predecessors- in-interest have been in open, continuous, adopt.
exclusive and notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition or ownership, for HELD: YES. The opening of the post office branch was undertaken because
at least thirty years immediately preceding the filing of the application for of a request submitted by respondent company to promote the
confirmation of title except when prevented by war or force majeure" may convenience and benefit of its employees. The idea did not come from the
apply to the Court of First Instance of the province where the land is government and the Director of Posts was prevailed upon to agree to the
located for confirmation of their claims, and the issuance of a certificate of request only after studying the necessity for its establishment and after
title therefor, under the Land Registration Act. Said paragraph [b] further imposing upon the company certain requirements intended to safeguard
provides that "these shall be conclusively presumed to have performed all and protect the interest of the government. Accordingly, the company
the conditions essential to a Government grant and shall be entitled to a cannot now be heard to complain of its liability upon the technical plea
certificate of title under the provisions of this chapter." Taking the year that the resolution is ultra vires. The least that can be said is that it cannot
1936 as the reckoning point, there being no showing as to when the now go back on its plighted word on the ground of estoppel.
Ramoses first took possession and occupation of the land in question, the
30-year period of open, continuous, exclusive and notorious possession The resolution covers a subject which concerns the benefit, convenience
and occupation required by law was completed in 1966. and welfare of the company’s employees and their families. There are
certain corporate acts that may be performed outside of the scope of the
The completion by private respondent of this statutory 30-year period has powers expressly conferred if they are necessary to promote the interest
dual significance in the light of Section 48[b] of Commonwealth Act No. or welfare of the corporation. Thus, it has been held that “although not
141, as amended and prevailing jurisprudence: [1] at this point, the land in expressly authorized to do so a corporation may become a surety where
question ceased by operation of law to be part of the public domain; and the particular transaction is reasonably necessary or proper to the conduct
[2] private respondent could have its title thereto confirmed through the of its business”, and here it is undisputed that the establishment of the
appropriate proceedings as under the Constitution then in force, private local post office is a vital improvement in the living condition of its
corporations or associations were not prohibited from acquiring public employees and laborers who came to settle in it mining camp which is far
lands, but merely prohibited from acquiring, holding or leasing such type removed from the postal facilities or means of communication accorded to
of land in excess of 1,024 hectares. people living in a city or municipality

If in 1966, the land in question was converted ipso jure into private land, it 12. Implied Powers (Power to exercise such other powers
remained so in 1974 when the registration proceedings were commenced. essential or necessary to carry out its purpose)
This being the case, the prohibition under the 1973 Constitution would
SEC. 35 – Every corporation
have no application. Otherwise construed, if in 1966, private respondent
incorporated under this Code has the power and capacity:
could have its title to the land confirmed, then it had acquired a vested
(k) To exercise such other powers as may be essential or necessary to
right thereto, which the 1973 Constitution can neither impair nor defeat.
carry out its purpose or purposes as stated in the articles of
incorporation.
9. Power to enter into partnership, joint venture, merger,
consolidation or other commercial agreement
It is a question, in each case, of the logical relation of the act to the

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corporate purpose expressed in the charter. For if the act is one which is of electric power. The stevedoring services which involve the unloading of
lawful in itself and not otherwise prohibited, and is done for the purpose the coal shipments into the NPC pier for its eventual conveyance to the
of serving corporate ends, and reasonably contributes to the promotion of power plant are incidental and indispensable to the operation of the plant.
those ends in a substantial and not in a remote and fanciful sense, it may The Court holds that NPC is empowered under its Charter to undertake
be fairly considered within the corporation’s charter powers ( such services, it being reasonably necessary to the operation and
as cited in ) maintenance of the power plant.

TERESA ELECTRIC & POWER CO., INC. VS. PUBLIC SERVICE POWERS VS. MARSHALL 161 SCRA 176, MAY 09, 1988
COMMISSION 21 SCRA 198, SEPTEMBER 25, 1967 FACTS: Fourteen (14) plaintiffs, all associate members of the International
FACTS: Respondent Filipinas Cement Corporation filed an application with School, Inc. brought an action for injunction against 10 members of the
herein respondent PSC for a certificate of public convenience to install, Board of Trustees, after a letter of Donal Marshall, president of the board,
maintain and operate an electric plant in Teresa, Rizal for the purpose of was sent stating that the school would be collecting a “development fee”
supplying electric power and light to its cement factory and its employees of P2,625 per enrollee for the purpose of constructing new buildings and
living within its compound. Herein petitioner, operating an electric plant in remodel existing ones to accommodate the increasing enrollment in the
Teresa Rizal filed an opposition claiming that Filipinas is not authorized to school which would need P35M. The CFI of Manila dismissed the
operate the proposed electric plant under its articles of incorporation. PSC complaint.
decided in favor of Filipinas.
ISSUE: WON the imposition of the development fee is within the powers
ISSUE: WON under its articles of incorporation, Filipinas is authorized to of the school.
operate and maintain an electric plant.
HELD: YES. Section 2(b) of PD No. 732 granting certain rights to the sch0ol,
HELD: YES. Paragraph 7 of the AOI of Filipinas provides for authority to expressly authorized the Board of Trustees “upon consultation with the
secure from any governmental, state, municipality, or provincial, city or Secretary of Education and Culture” to determine the amount of fees and
other authority, and to utilize and dispose of in any lawful manner, rights, assessments which may be reasonably imposed upon its students, to
powers, privileges, franchises and concessions – obviously necessary or at maintain or conform to the school’s standard of education. Such
least related to the operation of its cement factory. Moreover, said AOI consultation complied with and the Secretary expressed his conformity
also provide that the corporation may generally perform any and all acts with the reasonableness of the assessment. The lower court observed that:
connected with the business of manufacturing portland cement or arising x x x the expansion of the school facilities, which is to be done by
therefrom or incidental thereto. improving old buildings and/or constructing new ones, is an ordinary
business transaction well within the competence of the Board of Trustees
It cannot be denied that the operation of an electric light, heat and power to act upon. Xxx Being directly related to the purpose of elevating and
plant is necessarily connected with the business of manufacturing cement. maintaining the school’s standard of instruction, which is ordained in fact
If in the modern world where we live today electricity is virtually a necessity by PD 732, the expansion cannot result in any radical or fundamental
for our daily needs, it is more so in the case of industries like the change in the kind of activity being conducted by the school that might
manufacture of cement. require the consent of the members composing it.

13. Power to Extend / Shorten Corporate Term

SEC. 36 . – 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 or members
representing at least two-thirds (2/3) of the outstanding capital stock or of
NATIONAL POWER CORPORATION VS. VERA 170 SCRA 721, FEBRUARY its members. Written notice of the proposed action and the time and place
27, 1989 of the meeting shall be sent to stockholders or members at their respective
FACTS: Private Respondent Sea Lion International Port Terminal Services place of residence as shown in the books of the corporation, and must
Inc. filed a complaint for prohibition and mandamus with damages against either be deposited to the addressee in the post office with postage
petitioner NPC and Philippine Ports Authority after NPC did not renew its prepaid, served personally, or when allowed in the bylaws or done with
Contract for Stevedoring Services for coal-handling of NPC’s plant and in the consent of the stockholder, sent electronically in accordance with the
taking over its stevedoring services. rules and regulations of the Commission on the use of electronic data
messages. In case of extension of corporate term, a dissenting stockholder
ISSUE: WON NPC may embark in stevedoring and arrastre services. may exercise the right of appraisal under the conditions provided in this
Code.
HELD: YES. The NPC was created and empowered not only to construct,
operate and maintain power plants, reservoirs, transmission lines and other From the above-provision and jurisprudence, the requirements and
works, but also: …to exercise such powers and do such things as may be procedure for extending or shortening the corporate term are as follows:
reasonably necessary to carry out the business and purposes for which it (1) Approval by the majority vote of the BOD/T;
was organized, or which, from time to time, may be declared by the Board (2) Ratification by the stockholders representing at least 2/3 of
to be necessary, useful, incidental or auxiliary to accomplish said outstanding capital stock (including non-voting shares) or 2/3 of the
purpose… (Sec. 3[1] of RA 6395, as amended) members in case of non-stock corporations;
(3) The ratification must be made at a meeting duly called for that
To determine whether or not the NPC act falls within the purview of the purpose;
above provision, the Court must decide whether or not a logical and (4) Prior written notice of the proposal to extend or shorten the corporate
necessary relation exists between the act questioned and the corporate term must be made stating the time and place of meeting addressed
purpose expressed in the NPC charter. For if the act is one which is lawful to each stockholder or member at his place of residence, either by
in itself and not otherwise prohibited, and is done for the purpose of mail or personal service, or when allowed in the bylaws or done with
serving corporate ends, and reasonably contributes to the promotion of the consent of the stockholder, sent electronically in accordance with
those ends in a substantial and not in a remote and fanciful sense, it may the rules and regulations of the Commission on the use of electronic
be fairly considered within the corporation’s charter powers ( data messages;
) (5) In case of extension, the same cannot be made earlier than 5 years
prior to the original or subsequent expiry date unless there are
In the instant case, it is an undisputed fact that the pier owned by NPC, justifiable reasons for an earlier extension;
receives various shipment of coal which is used exclusively to fuel the (6) In case of extension, the same must be made during the lifetime of
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation the corporation;
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(7) Any dissenting stockholder may exercise his appraisal right; outstanding capital stock (including non-voting shares) or 2/3 of the
(8) Submission of the amended articles with the SEC; and members in case of non-stock corporations at a meeting duly called
(9) Approval thereof by the SEC (as required under Sec. 36 for extension, for that purpose;
and Sec. 136 for shortening the term with the effect of dissolution) (3) Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed
14. Power to Increase / Decrease the Authorized Capital Stock; to each stockholder or member at his place of residence, either by
Incur / Create Bonded Indebtedness mail or personal service, or through electronic means recognized in
SEC. 37. the corporation’s bylaws and/or the Commission’s rules as a valid
. – No corporation shall increase or mode for service of notices;
decrease its capital stock or incur, create or increase any bonded (4) A certificate in duplicate must be signed by a majority of the directors
indebtedness unless approved by a majority vote of the board of directors of the corporation, countersigned by the chairperson and the
and by two-thirds (2/3) of the outstanding capital stock at a stockholders’ secretary of the stockholders meeting, setting forth the matters
meeting duly called for the purpose. Written notice of the time and place contained in subsection a to f of Sec. 37;
of the stockholders’ meeting and the purpose for said meeting must be (5) In case of increase in capital stock, 25% of such increased capital must
sent to the stockholders at their places of residence as shown in the books be subscribed and that at least 25% of the amount subscribed must
of the corporation and served on the stockholders personally, or through be paid either in cash or property;
electronic means recognized in the corporation’s bylaws and/or the (6) In case of decrease of capital stock, the same must not prejudice the
Commission’s rules as a valid mode for service of notices. right of the creditors;
(7) Filing of the certificate of increase and amended AOI with the SEC;
A certificate must be signed by a majority of the directors of the and
corporation and countersigned by the chairperson and secretary of the (8) Approval thereof by the SEC.
stockholders’ meeting, setting forth:
(a) That the requirements of this section have been complied with; METHODS OF INCREASING CAPITAL STOCK:
(b) The amount of the increase or decrease of the capital stock; (1) Increase the par value of the existing number of shares without
(c) In case of an increase of the capital stock, the amount of capital stock increasing the number of shares;
or number of shares of no-par stock thereof actually subscribed, the (2) Increase the number of existing shares without increasing the par
names, nationalities and addresses of the persons subscribing, the value thereof;
amount of capital stock or number of no-par stock subscribed by (3) Increasing the number of shares and at the same time increasing the
each, and the amount paid by each on the subscription in cash or par value of the shares
property, or the amount of capital stock or number of shares of no-
par stock allotted to each stockholder if such increase is for the REASONS/PURPOSE FOR THE INCREASE:
purpose of making effective stock dividend therefor authorized; (1) Expansion;
(d) Any bonded indebtedness to be incurred, created or increased; (2) Payment of Debt Obligations;
(e) The amount of stock represented at the meeting; and (3) To acquire additional assets such as providing cars to employees to
(f) The vote authorizing the increase or decrease of the capital stock, or distribute the goods;
the incurring, creating or increasing of any bonded indebtedness. NOTE: Nothing in law prohibits increase of capital stock

Any increase or decrease in the capital stock or the incurring, creating or REASONS FOR DECREASE:
increasing of any bonded indebtedness shall require prior approval of the (1) To reduce or wipe out existing deficit where no creditors would
Commission, and where appropriate, of the Philippine Competition thereby by affected;
Commission. The application with the Commission shall be made within (2) When the capital is more than what is necessary to procreate the
six (6) months from the date of approval of the board of directors and business or reduction of capital surplus;
stockholders, which period may be extended for justifiable reasons. (3) To write down the value of its fixed assets to reflect their present
actual value in case where there is a decline in the value of the fixed
Copies of the certificate shall be kept on file in the office of the corporation assets of the corporation.
and filed with the Commission and attached to the original articles of
incorporation. After approval by the Commission and the issuance by the TRUST FUND DOCTRINE: The subscriptions to capital stock of the
Commission of its certificate of filing, the capital stock shall be deemed corporation constitute a fund which the creditors have a right to look up
increased or decreased and the incurring, creating or increasing of any for the satisfaction of their claims. Accordingly, if the decrease would affect
bonded indebtedness authorized, as the certificate of filing may declare: the rights of creditors, the same would not be approved by the SEC.
Provided, That the Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by a sworn statement of the ILLUSTRATION OF STOCK SPLIT
treasurer of the corporation lawfully holding office at the time of the filing Total No. of Shares : 10,000 shares @ PhP 10.00 each = PhP 100,000.00
of the certificate, showing that at least twenty-five percent (25%) of the • STOCK SPLIT: 20,000 shares @ PhP 5.00 each = PhP 100,000.00
increase in capital stock has been subscribed and that at least twenty-five • REVERSE STOCK SPLIT: 5,000 shares @ PhP 20.00 each = PhP
percent (25%) of the amount subscribed has been paid in actual cash to 100,000.00
the corporation or that property, the valuation of which is equal to twenty-
five percent (25%) of the subscription, has been transferred to the
PHILIPPINE TRUST CO. VS. RIVERA 44 PHIL. 469, JANUARY 29, 1923
corporation: Provided, further, That no decrease in capital stock shall be
FACTS: Shortly after its incorporation, the stockholders of
approved by the Commission if its effect shall prejudice the rights of
, adopted a resolution to the effect that the capital should be
corporate creditors.
reduced by 50% and the subscribers be released from the obligation to
pay their unpaid balance.
Nonstock corporations may incur, create or increase bonded indebtedness
when approved by a majority of the board of trustees and of at least two-
In the course of time, the company became insolvent and went into the
thirds (2/3) of the members in a meeting duly called for the purpose.
hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy,
and by it this action was instituted to recover ½ of the stock subscription
Bonds issued by a corporation shall be registered with the Commission,
of herein defendant who subscribed to 450 of the 1,000 authorized capital
which shall have the authority to determine the sufficiency of the terms
stock.
thereof.

It does not appear that the formalities under the Corporation Code for the
The following requirements or procedure should be complied with: reduction of capital stock were observed and in particular it does not
(1) Approval by the majority vote of the BOD/T; appear that any certificate was at any time filed in the Bureau of Commerce
(2) Ratification by the stockholders representing at least 2/3 of the and Industry, showing such reduction.

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Respondent judge ruled in favor of Philtrust and directed respondent to EXCEPTIONS (Under Sec. 38):
pay ½ of the subscription price of his shares. (1) When shares to be issued is in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
ISSUE: WON the reduction is valid and proper. (2) Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock either:
HELD: NO. A corporation has no power to release an original subscriber (a) In exchange for property needed for corporate purpose; or
to its capital stock from the obligation of paying for his shares, without a (b) In payment of a previously contracted debt.
valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under The exceptions will not apply to stockholders of close corporation whose
the conditions prescribed by the statute or the charter or the AOI. preemptive right, is broader if not absolute. See Sec. 101:
Moreover, strict compliance with the statutory regulations is necessary. In
the case before us, the resolution releasing the shareholders from their SEC. 101. Preemptive Right in Close Corporations. – The preemptive right
obligation to pay 50% of their respective subscriptions was an attempted of stockholders in close corporations shall extend to all stock to be issued,
withdrawals of so much capital from the fund upon which the company’s including reissuance of treasury shares, whether for money, property or
creditors were entitled ultimately to rely and, having been effected without personal services, or in payment of corporate debts, unless the articles of
compliance with the statutory requirements, was wholly ineffectual. incorporation provide otherwise.

MADRIGAL & COMPANY, INC. VS. ZAMORA 151 SCRA 355, JUNE 30, The right may likewise be lost by waiver, express or implied or inability or
1987 failure to exercise it having been notified of the proposed disposition of
The Madrigal Central Office Employees Union sought for the renewal of its shares.
CBA, proposing a P200 wage increase and an allowance of P100 a month.
Petitioner company requested for the deferment of its negotiation. DATU TAGORANAO BENITO VS. SECURITIES & EXCHANGE
COMMISSION 123 SCRA 722, JULY 25, 1983
Meanwhile, the company effected two reductions of its capital stock by FACTS: Respondent Jamiatul Philippines – Al Islamia, Inc. was
issuing marketable securities owned by petitioner in exchange for incorporated with P2,000,000 authorized capital stock divided into 20,000
shareholders’ shares. shares, of which 460 belong to herein petitioner. In a stockholders
meeting, an increase of the authorized capital stock to P1,000,000 was
After the petitioner’s failure to sit down with the respondent union, the approved, where the previously unissued shares were all issued.
latter commenced a case with the NLRC for unfair labor practice. In due
time, petitioner filed its position paper, alleging operating losses. Petitioner Datu Tagoranao Benito filed a petition with herein respondent
SEC alleging that the additional issue of previously unissued shares was
The Labor Arbiter rendered a decision in favor of respondent Union. made in violation of his pre-emptive right and that the increase of capital
stock was illegal considering that the stockholders on record were not
ISSUE: WON the decrease in capital stock is valid and binding. notified, and that such issuance be cancelled.

HELD: NO. What clearly emerges from the recorded facts is that the SEC Ruling: Benito is not entitled to pre-emptive right with respect to the
petitioner, awash with profits from its business operations but confronted original unsubscribed shares but can exercise such right with regards the
with the demand of the union for wage increase, decided to evade its increase capitalization.
responsibility towards the employees by a devised capital reduction. While
the reduction in capital stock created an apparent need for retrenchment, ISSUE: WON the above ruling is correct.
it was, by all indications, just a mask for the purge of union members, who,
by then, had agitated for wage increases. In the face of the petitioner HELD: YES. The issuance of the unsubscribed portion of the capital stock
company’s piling profits, the unionists had the right to demand for such or P110,980 is valid even if assuming that it was made without notice to
salary adjustments. the stockholders as claimed by petitioner. The power to issue shares of
stocks in a corporation is lodged in the board of directors and no
That the petitioner made quite handsome profits is clear from the records. stockholders’ meeting is necessary to consider it because such issuance
does not need approval of stockholders.
This court is convinced that the petitioner’s capital reduction efforts were,
to begin with, a subterfuge, a deception as it were, to camouflage the fact The general rule is that pre-emptive right is recognized only with respect
that it had been making profits, and consequently, to justify the mass layoff to new issue of shares, and not with respect to additional issues of
in it employee ranks, especially the union members. They were nothing originally authorized shares. This is on theory that when a corporation, at
but a premature and plain distribution of corporate assets to obviate a just its inception offers its first shares, it is presumed to have offered all of those
sharing to labor of the vast profits obtained by its joint efforts with capital which it is authorized to issue. An original subscriber is deemed to have
through the years. Surely, we can neither countenance nor condone this. taken his shares knowing that they form a definite proportionate part of
It is an unfair labor practice. the whole number of authorized shares. When the shares left unsubscribed
are reoffered, he cannot therefore claim a dilution of interest.
15. Power to Deny Pre-emptive Rights
SEC. 38. Power to Deny Preemptive Right. – All stockholders of a stock With respect to the claim that the increase in the authorized capital stock
corporation shall enjoy preemptive right to subscribe to all issues or was without consent, expressed or implied, of the stockholder, it was the
disposition of shares of any class, in proportion to their respective finding
shareholdings, unless such right is denied by the articles of incorporation
or an amendment thereto: , That such preemptive right shall not SEC OGC Opinion No. 11-41, 5 October 2011 The Philippine Stock
extend to shares issued in compliance with laws requiring stock offerings Exchange Inc.
or minimum stock ownership by the public; or to shares issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of
SEC OGC Opinion dated 10 March 2000 Radio Philippines Network Inc.
the outstanding capital stock, in exchange for property needed for
(RPN)
corporate purposes or in payment of a previously contracted debt.

SEC OGC Opinion dated 30 September 1992 Industrial Security

BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired
Consultancy and Management Inc.
and undiluted, of the old stockholders’ relative and proportionate voting
strength and control, that is, the existing ratio of their property interest and
voting power in the corporation. 16. Power to Sell / Dispose of Assets

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SEC. 39. . – Subject to the provisions of thereto, without further action or approval by the stockholders or
Republic Act No. 10667, otherwise known as “Philippine Competition members
Act”, and other related laws, a corporation may, by a majority vote of its (b) Sec. 39, does not intend to restrict the power of any corporation to
board of directors or trustees, sell, lease, exchange, mortgage, pledge, or sell, lease, exchange, mortgage, pledge, or otherwise dispose of any
otherwise dispose of its property and assets, upon such terms and of its property and assets, as long as:
conditions and for such consideration, which may be money, stocks, (1) the same is necessary in the usual and regular course of business
bonds, or other instruments for the payment of money or other property of the corporation or
or consideration, as its board of directors or trustees may deem expedient. (2) the proceeds of the sale or other disposition of such property
and assets shall be appropriated for the conduct of its remaining
A sale of all or substantially all of the corporation’s properties and assets, business
including its goodwill, must be authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at SALE OF ASSETS IN MERGER /
least two-thirds (2/3) of the members, in a stockholders’ or members’ SEC. 39 CONSOLIDATION
meeting duly called for the purpose. Nature Exchange of all or Parent company-
In nonstock corporations where there are no members with voting rights, substantially all of the subscriber distributes to
the vote of at least a majority of the trustees in office will be sufficient assets for shares in its SHs the shares that it
authorization for the corporation to enter into any transaction authorized another corporation (a has acquired from the
by this section. holding company under other corporation in
39 is created) exchange for its own
The determination of whether or not the sale involves all or substantially shares.
all of the corporation’s properties and assets must be computed based on Liquidation None of the corporations There has to be
its net asset value, as shown in its latest financial statements. A sale or other have to be liquidated liquidation of at least one
disposition shall be deemed to cover substantially all the corporate when there is a of the parties to the
property and assets if thereby the corporation would be rendered sale/exchange of assets reorganization.
incapable of continuing the business or accomplishing the purpose for by one corporation to the
which it was incorporated. other.
Liabilities Purchaser does not The surviving or
Written notice of the proposed action and of the time and place for the acquire the liabilities of consolidated corporation
meeting shall be addressed to stockholders or members at their places of the seller because seller is responsible and liable
residence as shown in the books of the corporation and deposited to the remains liable to its for liabilities of each
addressee in the post office with postage prepaid, served personally, or creditors. constituent corporation.
when allowed by the bylaws or done with the consent of the stockholder,
sent electronically: , That any dissenting stockholder may exercise “Substantially all corporate assets and property” = creates 3 kinds of
the right of appraisal under the conditions provided in this Code. corporate combinations:
(1) Merger
After such authorization or approval by the stockholders or members, the (2) Consolidation
board of directors or trustees may, nevertheless, in its discretion, abandon (3) Holding Company – 1 corporation sells all its assets to another
such sale, lease, exchange, mortgage, pledge, or other disposition of corporation in exchange for the latter’s shares of stock.
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 the corporation or if the proceeds of the sale or other ISLAMIC DIRECTORATE OF THE PHILS. VS. COURT OF APPEALS 272
disposition of such property and assets shall be appropriated for the SCRA 454, MAY 14, 1997
conduct of its remaining business. FACTS: The Islamic Directorate of the Philippines received two parcels of
land from the Libyan government for the purpose of putting up a Mosque,
The conditions for the valid exercise of this power are thus as follows: Madrasah (arabic school) and other religious infrastructures. In 1972,
(1) Resolution by a majority of the BOD/T; Martial Law was declared, most of the members of the Board of Trustees,
(2) For a sale of all or substantially all of the corporation’s properties and together with petitioner Sen. Mamintal Tamano, fled to the middle- east
assets, including its goodwill: Authorization from the stockholders to escape political prosecution.
representing at least 2/3 of the outstanding capital stock or 2/3 of the
members; Thereafter, two Muslim groups sprung claiming to be the legitimate IDP.
(3) The ratification of the stockholders or member must be made at a One headed by Engr. Farouk Caprizo, not having been properly elected
meeting duly called for that purpose; as new members of the Board of Trustees caused to be sold, through a
(4) Prior written notice of the proposed action and of the time and place resolution of IDP, the two lots to respondent Iglesia Ni Cristo.
of meeting must be made addressed to all stockholders of record,
either by mail or personal service, or when allowed by the bylaws or The 1971 Board of Trustees now filed a petition to declare the sale null
done with the consent of the stockholder, sent electronically; and void.
(5) The sale of the assets shall be subject to the provisions of Republic
Act No. 10667, otherwise known as “Philippine Competition Act”, ISSUE: WON the sale is valid.
and other related laws; and
(6) Any dissenting stockholder shall have the option to exercise his HELD: NO. The Caprizo Group is a fake board of trustees. IDP never gave
appraisal right its consent through a legitimate Board of Trustees. Therefore, this is not a
case of vitiated consent, but one where consent on the part of one of the
NOTES: contracting parties is totally wanting. Ineluctably, the subject sale is void
(a) The BOD/T, after obtaining the ratification of the stockholders or and produces no effect whatsoever.
members, may at its discretion, abandon such sale, lease, exchange,
mortgage, pledge, or other disposition of property and assets, The Caprizo group-INC sale is further deemed null and void ab initio
subject to the rights of third parties under any contract relating because of the Caprizo Group’s failure to comply with Sec. 40 of the

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Corporation Code pertaining to the disposition of all or substantially all debts;

assets of the corporation. (2) Where the transaction amounts to a consolidation or merger of the
corporations;
The Tandang Sora property, it appears from the records, constitutes the (3) Where the purchasing corporation is merely a continuation of the
only property of the IDP. Hence, its sale to a third-party is a sale or selling corporation; and
disposition of all the corporate property and assets of IDP falling squarely (4) Where the transaction is entered into fraudulently in order to escape
within the contemplation of Sec. 40. For the sale to be valid, the majority liability for such debts.
vote of the legitimate Board of Trustees, concurred in by vote of at least
2/3 of the bona fide members of the corporation should have been
obtained. These twin requirements were not met as the Caprizo Groups The Nell Doctrine states the general rule that the transfer of all the assets
which voted to sell the property was a fake Board and those whose names of a corporation to another shall not render the latter liable to the liabilities
and signatures were affixed by the Caprizo Group together with the sham of the transferor. If any of the above cited exceptions are present, then the
Board Resolution authorizing negotiation for the sale were, from all transferee corporation shall assume the liabilities of the transferor.
indications, not bona fide members of the IDP as they were made to
appear to be. Legal bases of the Nell Doctrine
An evaluation of our contract and corporation laws validates that the Nell
Doctrine is fully supported by Philippine statutes. The general rule
expressed by the doctrine reflects the principle of relativity under Article
1311 of the Civil Code. Contracts, including the rights and obligations
EDWARD J. NELL COMPANY VS. PACIFIC FARMS, INC. 15 SCRA 415, arising therefrom, are valid and binding only between the contracting
NOVEMBER 29, 1965 parties and their successors-in-interest. Thus, despite the sale of all
FACTS: On October 9, 1958, appellant secured in Civil Case No. 58579 of corporate assets, the transferee corporation cannot be prejudiced as it is
the Municipal Court of Manila against Insular Farms, Inc. — hereinafter not in privity with the contracts between the transferor corporation and its
referred to as Insular Farms a judgment for the sum of P1,853.80 — creditors.
representing the unpaid balance of the price of a pump sold by appellant
to Insular Farms — with interest on said sum, plus P125.00 as attorney's The first exception under the Nell Doctrine, where the transferee
fees and P84.00 as costs. A writ of execution, issued after the judgment corporation expressly or impliedly agrees to assume the transferor’s debts,
had become final, was, on August 14, 1959, returned unsatisfied, stating is provided under Article 2047 of the Civil Code. When a person binds
that Insular Farms had no leviable property. Soon thereafter, or on himself solidarily with the principal debtor, then a contract of suretyship is
November 13, 1959, appellant filed with said court the present action produced. Necessarily, the corporation which expressly or impliedly
against Pacific Farms, Inc. — hereinafter referred to as appellee — for the agrees to assume the transferor’s debts shall be liable to the same.
collection of the judgment aforementioned, upon the theory that appellee
is the alter ego of Insular Farms, which appellee has denied. In due course, The second exception under the doctrine, as to the merger and
the municipal court rendered judgment dismissing appellant's complaint. consolidation of corporations, is well-established under Sections 76 to
80, Title X of the Corporation Code. If the transfer of assets of one
The record shows that, on March 21, 1958, appellee purchased 1,000 corporation to another amounts to a merger or consolidation, then the
shares of stock of Insular Farms for P285,126.99; that, thereupon, appellee transferee corporation must take over the liabilities of the transferor.
sold said shares of stock to certain individuals, who forthwith reorganized
said corporation; and that the board of directors thereof, as reorganized, Another exception of the doctrine, where the sale of all corporate assets is
then caused its assets, including its leasehold rights over a public land in entered into fraudulently to escape liability for transferor’s debts, can be
Bolinao, Pangasinan, to be sold to herein appellee for P10,000.00. found under Article 1388 of the Civil Code. It provides that whoever
acquires in bad faith the things alienated in fraud of creditors, shall
ISSUE: WON that the appellee, Pacific Farms is an alter ego of Insular indemnify the latter for damages suffered. Thus, if there is fraud in the
Farms. transfer of all the assets of the transferor corporation, its creditors can hold
the transferee liable.
HELD: NO. We agree with the Court of Appeals that these facts do not
prove that the appellee is an alter ego of Insular Farms, or is liable for its The legal basis of the last in the four (4) exceptions to the Nell Doctrine,
debts. The rule is set forth in Fletcher Cyclopedia Corporations, Vol. 15, where the purchasing corporation is merely a continuation of the selling
Sec. 7122, pp. 160-161, as follows: Generally where one corporation sells corporation, is challenging to determine. In his book, Philippine Corporate
or otherwise transfers all of its assets to another corporation, the latter is Law, Dean Cesar Villanueva explained that this exception contemplates
not liable for the debts and liabilities of the transferor, except: (1) where the “business-enterprise transfer.” In such transfer, the transferee
the purchaser expressly or impliedly agrees to assume such debts; (2) corporation’s interest goes beyond the assets of the transferor’s assets and
where the transaction amounts to a consolidation or merger of the its desires to acquire the latter’s business enterprise, including its goodwill.
corporations; (3) where the purchasing corporation is merely a continuation
of the selling corporation; and (4) where the transaction is entered into In , the Court held that when one were to buy
fraudulently in order to escape liability for such debts. the business of another as a going concern, he would usually wish to keep
it going; he would wish to get the location, the building, the stock in trade,
In the case at bar, there is neither proof nor allegation of the foregoing and the customers. He would wish to step into the seller’s shoes and to
exceptions. In fact, these sales took place not only over 6 months before enjoy the same business relations with other men. He would be willing to
the rendition of the judgment sought to be collected in the present action, pay much more if he could get the “good will” of the business, meaning
but also, appellee purchase the shares of stock of Insular Farms as the by this, the good will of the customers, that they may continue to tread the
highest bidder at an auction sale held at the instance of a bank to which old footpath to his door and maintain with him the business relations
said shares had been pledged as security for the obligation of Insular enjoyed by the seller.
Farms in favor of said bank.
In other words, in this last exception, the transferee purchases not only the
assets of the transferor, but also its business. As a result of the sale, the
NELL DOCTRINE (Y-I Leisure Philippines, Inc. vs. Yu)
transferor is merely left with its juridical existence, devoid of its industry
In the 1965 case of , the Court first pronounced
and earning capacity. Fittingly, the proper provision of law that is
the rule regarding the transfer of all the assets of one corporation to
contemplated by this exception would be Section 40 (now Section 39) of
another (hereafter referred to as the Nell Doctrine) as follows:
the Corporation Code,
Generally, where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
To reiterate, Section 40 refers to the sale, lease, exchange or disposition
liabilities of the transferor, except:
of all or substantially all of the corporation’s assets, including its
(1) Where the purchaser expressly or impliedly agrees to assume such
goodwill. The sale under this provision does not contemplate an ordinary
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sale of all corporate assets; the transfer must be of such degree that the the stockholders, whose shares were purchased, were former directors and
transferor corporation is rendered incapable of continuing its business or resigned before the board approved the purchase and declaration of
its corporate purpose. dividends. In other words, the directors were permitted to resign so that
they could sell their stock to the corporation. In this situation and upon this
Section 40 suitably reflects the business-enterprise transfer under the state of facts, it is very apparent that the directors did not act in good faith
exception of the Nell Doctrine because the purchasing or transferee or that they were grossly ignorant of their duties.
corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the Creditors of a corporation have the right to assume that so long as there
assets but also the business of the transferor corporation, then the are outstanding debts and liabilities, the board of directors will not use the
liabilities of the latter are inevitably assigned to the former. assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent.
It must be clarified, however, that not every transfer of the entire corporate
assets would qualify under Section 40. It does not apply (1) if the sale of
the entire property and assets is necessary in the usual and regular course The amount involved in this case is not large, but the legal principles are
of business of corporation, or (2) if the proceeds of the sale or other important, and we have given them consideration which they deserve.
disposition of such property and assets will be appropriated for the
conduct of its remaining business.41 Thus, the litmus test to determine the 18. Power to Invest Funds
applicability of Section 40 would be the capacity of the corporation to SEC. 41. Power to Invest Corporate Funds in Another Corporation or
continue its business after the sale of all or substantially all its assets. Business or for Any Other Purpose. – Subject to the provisions of this Code,
a private corporation may invest its funds in any other corporation,
17. Power to Acquire Own Shares business, or for any purpose other than the primary purpose for which it
SEC. 40. . – Provided that the corporation was organized, when approved by a majority of the board of directors or
has unrestricted retained earnings in its books to cover the shares to be trustees and ratified by the stockholders representing at least two-thirds
purchased or acquired, a stock corporation shall have the power to (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
purchase or acquire its own shares for a legitimate corporate purpose or members in the case of nonstock corporations, at a meeting duly called for
purposes, including the following cases: the purpose. Notice of the proposed investment and the time and place
(a) To eliminate fractional shares arising out of stock dividends; of the meeting shall be addressed to each stockholder or member at the
(b) To collect or compromise an indebtedness to the corporation, arising place of residence as shown in the books of the corporation and deposited
out of unpaid subscription, in a delinquency sale, and to purchase to the addressee in the post office with postage prepaid, served
delinquent shares sold during said sale; and personally, or sent electronically in accordance with the rules and
(c) To pay dissenting or withdrawing stockholders entitled to payment regulations of the Commission on the use of electronic data message,
for their shares under the provisions of this Code. when allowed by the bylaws or done with the consent of the stockholders:
, That any dissenting stockholder shall have appraisal right as
The limitation that the corporation must at all times have “unrestricted provided in this Code: , That where the investment by
retained earnings” is a condition for the exercise of this power, EXCEPT: the corporation is reasonably necessary to accomplish its primary purpose
(1) Redemption of redeemable shares under Sec. 8; as stated in the articles of incorporation, the approval of the stockholders
(2) Exercise of stockholders right to compel a close corporation to or members shall not be necessary.
purchase his shares for any reason under Sec. 104 when the
corporation has sufficient assets in its book to cover its debts and “MAY INVEST FUNDS” has been held by the SEC to mean an investment
liabilities exclusive of capital stock; in the form of money, stock, bonds and other liquid assets and does not
(3) In case of deadlocks under Sec. 103 include real properties or other fixed assets, otherwise the law would have
phrased Sec. 41 to include “assets” rather than “to invest funds”.
Once purchased, the shares are considered as treasury shares and while
they remain so, they have no voting rights and dividend rights. The SECONDARY PURPOSE: the law uses the phrase “for any purpose other
corporation may than the primary purpose” signifying that even if the business or
(1) Re-issue them even below par; undertaking is allowed or authorized in the secondary purpose or purposes
(2) Issue them as stock dividends; of the corporation, the provision of Sec. 41 would apply.
(3) Retire or cancel them and thereby remove from issue effectively
reducing the number of shares issued stated in the AOI. REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS:
(1) Resolution by a majority of the BOD/T;
STEINBERG VS. VELASCO 52 PHIL. 953, MARCH 12, 1929 (2) Ratification by the stockholders representing 2/3 of the outstanding
FACTS: The Board of Directors of Trading Company approved and capital stock (or 2/3 of members);
authorized the purchases of the capital stock of the company from its (3) The ratification must be made at a meeting duly called for that
various stockholder, herein respondents, at par value amounting to purpose;
P3,300. Petitioner assails the recovery of the amount paid to such (4) Prior written notice of the proposed investment and the time and
stockholders and the P3,000 dividends declared which were claimed to be place of the meeting shall be made, addressed to each stockholder
made to the injury and in fraud of its creditors. The complaint was or member by mail or by personal service; and
dismissed. (5) Any dissenting stockholder shall have the option to exercise his
appraisal right.
ISSUE: WON recovery can be made.
RATIFICATION: as a requirement, applies only to investments that are
HELD: YES. The Board of Directors acted on the assumption that it had beyond the corporation’s primary purpose, or outside the express or
accounts receivable of the face value of P19,126.02 but there was no implied powers of the investing corporation. Thus, if the investment is
stipulation as to the value of such accounts and P12,512.47 of which had reasonably necessary to accomplish its primary purpose, the approval of
but little, if any value. The purchase of the stocks and the dividend the stockholders or members is not required.
declaration further decreased the assets of the corporation. The profits
amounted only to P3,314.72. In other words, that the corporation did not DE LA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. 27 SCRA 247,
then have actual surplus from which the dividends could be paid, FEBRUARY 28, 1969
and that the payment of them in full at the time would “affect the financial FACTS: Defendant Ma-ao Sugar Central Co, Inc., engaged in the
condition of the corporation.” manufacture of sugar, invested P655,000 in shares of stock of Philippine
Fiber Processing Co., Inc., which is engaged in the manufacture of sugar
It is indeed peculiar that the action of the board in the assailed acts was all bags. The sale, though not previously authorized, was ratified by the 2/3
done at the same meeting of the board of directors, and it appears that vote of the stockholders. Claiming the business of defendant is not related

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to that of Philippine Fiber, such sale was attacked but the trial court reorganization.
decided on its legality.
Under these circumstances, the ruling in
ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec. ., appears relevant. In said case, one of the issues was the
17-1/2 of the Corporation Law. legality of an investment made by Manao Sugar Central Co., Inc., without
prior resolution approved by the affirmative vote of 2/3 of the
HELD: YES. In his work entitled “The Philippine Corporation Law”, stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a
Professor Sulpicio S. Guevarra of the UP College of Law, reconciled par. company engaged in the manufacture of sugar bags. The lower court said
(9) and (10) of Sec. 13, as follows that "there is more logic in the stand that if the investment is made in a
“j. Power to acquire or dispose of shares or securities. – A private corporation whose business is important to the investing corporation and
corporation, in order to accomplish it purpose as stated in its articles of would aid it in its purpose, to require authority of the stockholders would
incorporation, and imposed by the Corporation Law, has the power to be to unduly curtail the power of the Board of Directors.”
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities,
and other evidences of indebtedness of any domestic or foreign Assuming arguendo that the Board of Directors of SMC had no authority
corporation. Such an act, if done in pursuance of the corporate purpose, to make the assailed investment, there is no question that a corporation,
does not need the approval of the stockholders; but when the purchase of like an individual, may ratify and thereby render binding upon it the
shares of another corporation is done solely for investment and not to originally unauthorized acts of its officers or other agents. This is true
accomplish the purpose of its incorporation, the vote of approval of the because the questioned investment is neither contrary to law, morals,
stockholders is necessary” public order or public policy. It is a corporate transaction or contract which
is within the corporate powers, but which is defective from a supported
“40. Power to invest corporate funds. – A private corporation has the failure to observe in its execution the. requirement of the law that the
power to invest its corporate funds in any other corporation or business, investment must be authorized by the affirmative vote of the stockholders
or for any other purpose other than the main purpose for which it was holding two-thirds of the voting power. This requirement is for the benefit
organized, provided that its board of directors has been authorized in a of the stockholders. The stockholders for whose benefit the requirement
resolution by the affirmative vote of stockholders holding shares in the was enacted may, therefore, ratify the investment and its ratification by
corporation entitling them to exercise at least two-thirds of the voting said stockholders obliterates any defect which it may have had at the
power on such a proposal at a stockholders’ meeting called for that outset. "Mere acts", said this Court in Pirovano, "or those which
purpose. When the investment is necessary to accomplish its purpose or are not illegal and void ab initio, but are not merely within the scope of
purposes as stated in its articles of incorporation, the approval of the the articles of incorporation, are merely voidable and may become binding
stockholders is not necessary” and enforceable when ratified by the stockholders.

We agree with Professor Guevarra. We therefore agree with the finding of Besides, the investment was for the purchase of beer manufacturing and
the lower court that the investment in question does not fall under the marketing facilities which is apparently relevant to the corporate purpose.
purview of Sec. 17 ½ of the Corporation Law. The mere fact that respondent corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting of May
GOKONGWEI, JR. VS. SECURITIES AND EXCHANGE COMMISSION 89 10, 1977 cannot be construed as an admission that respondent
SCRA 336, APRIL 11, 1979 corporation had committed an ultra vires act, considering the common
FACTS: Petitioner John Gokongwei alleged that the respondent practice of corporations of periodically submitting for the gratification of
corporation has been investing corporate funds in other corporations or their stockholders the acts of their directors, officers and managers.
business outside of its primary purpose in violation of Sec. 17 ½ of the
Corporation Law. 19. Power to Declare Dividends
SEC. 42 . – The board of directors of a stock
Respondents sent notices of the annual stockholders’ meeting including in corporation may declare dividends out of the unrestricted retained
the agenda thereof the re-affirmation of the authorization of the BOD by earnings which shall be payable in cash, property, or in stock to all
the stockholders at the meeting to invest corporate funds in other stockholders on the basis of outstanding stock held by them: ,
companies or businesses or for purposes other than the main purpose. An That any cash dividends due on delinquent stock shall first be applied to
injunction was prayed for by petitioner, but the date of hearing originally the unpaid balance on the subscription plus costs and expenses, while
set was cancelled. No action was taken up to the date of the filing of the stock dividends shall be withheld from the delinquent stockholders until
instant petition. their unpaid subscription is fully paid: , , That no stock
dividend shall be issued without the approval of stockholders representing
ISSUE: WON respondent SEC committed grave abuse of discretion in at least two-thirds (2/3) of the outstanding capital stock at a regular or
allowing the above agenda to be taken up in the stockholders’ meeting. special meeting duly called for the purpose.

HELD: NO. Section 17½ of the Corporation Law allows a corporation to Stock corporations are prohibited from retaining surplus profits in excess
"invest its funds in any other corporation or business or for any purpose of one hundred percent (100%) of their paid-in capital stock, except: (a)
other than the main purpose for which it was organized" provided that its when justified by definite corporate expansion projects or programs
Board of Directors has been so authorized by the affirmative vote of approved by the board of directors; or (b) when the corporation is
stockholders holding shares entitling them to exercise at least two-thirds prohibited under any loan agreement with financial institutions or
of the voting power. If the investment is made in pursuance of the creditors, whether local or foreign, from declaring dividends without their
corporate purpose, it does not need the approval of the stockholders. It is consent, and such consent has not yet been secured; or (c) when it can be
only when the purchase of shares is done solely for investment and not to clearly shown that such retention is necessary under special circumstances
accomplish the purpose of its incorporation that the vote of approval of obtaining in the corporation, such as when there is need for special reserve
the stockholders holding shares entitling them to exercise at least two- for probable contingencies.
thirds of the voting power is necessary.
DIVIDENDS
As stated by respondent corporation, the purchase of beer manufacturing Corporate profits set aside, declared and ordered by the BOD to be paid
facilities by SMC was an investment in the same business stated as its main to the stockholders. It is a fruit of investment, the recurrent return,
purpose in its Articles of Incorporation, which is to manufacture and market analogous to interest and rent upon other forms of invested capital
beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in UNRESTRICTED RETAINED EARNINGS
Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and The undistributed earnings of the corporation which have not been
marketing of San Miguel beer thereat. Restructuring of the investment was allocated for any managerial, contractual or legal purposes and which are
made in 1970- 1971 thru the organization of SMI in Bermuda as a tax-free free for distribution to the stockholders as dividends.

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to determine if the policy of the directors is dictated by their personal

(a) Types interest rather than the corporate welfare.
(1) Cash dividends – payable in lawful money or currency;
(2) Property dividends - those paid in the form property (e.g., bonds, WHEN DIVIDENDS RIGHTS VEST
notes, shares in another corporation); It has been succinctly said that the right of the stockholders to be paid
(3) Stock dividends – corporation’s own shares of stock out of the dividends vest as soon as they have been lawfully and finally declared by
remaining unissued shares which would require the approval of the the BOD. It is not revocable UNLESS: (1) it has not been officially
stockholders representing 2/3 of the outstanding capital stock at a communicated to the stockholders; or (2) it is in the form of stock dividends
regular or special meeting duly called for that purpose. This is to be which is revocable any time prior to distribution because this does not
valued at par value or issue price. result in the distribution of assets but merely the division of existing shares
of a stockholder into smaller units or integers.
Cash and property dividends have the effect of reducing corporate assets
to the extent of the dividends declared. In stock dividends, it would TRANSFER OF SHARES
generally not increase the proportionate interest of the stockholders of the The dividends already declared belong to the owner at the time of
corporation although it will have the effect of increasing the subscribed declaration. Usually, however, the dividends are payable to stockholders
and paid-up capital (exception is when the stock dividend declaration of record on a specific future date and as far as the corporation is
would result in fractional shares like when 1 share is declared as dividend concerned, the registered owner is the one entitled to dividends. As
for every 9 shares held) against his transferor, however, the transferee has presumably the right to
such dividends and is oftentimes taken into account in entering effecting
the transfer of shares.

DIVIDENDS = corporate profits allocated by the BOD to be paid to the NIELSON & COMPANY, INC. VS. LEPANTO CONSOLIDATED MINING
stockholder on demand or at a fixed time COMPANY 26 SCRA 540, DECEMBER 28, 1968
FACTS: This is a motion for reconsideration filed by respondent Lepanto
Kinds of Dividends: contending that the order of the SC to pay Nielson 10% of the stock
(1) cash dividends, declared by Lepanto during the extension of the contract, as
(2) stock compensation for services under a management contract is in violation of
(3) property the Corporation Law and that it could not be the intention of the parties
(4) optional dividend that the services of Nielson should be paid in stock dividends.
(5) composite dividend
(6) preferred dividend ISSUE: WON Nielson & Co. is entitled to receive stock dividends.
(7) guaranteed dividend
(8) cumulative dividend HELD: NO. The consideration for which shares of stock may be issued are:
(9) non-cumulative dividend (1) cash; (2) property; and (3) undistributed profits. Shares of stock are
(10) scrip dividend given the special name "stock dividends" only if they are issued in lieu of
(11) bond dividend undistributed profits. If shares of stocks are issued in exchange of cash or
(12) liquidating dividend property then those shares do not fall under the category of "stock
dividends". A corporation may legally issue shares of stock in
OVERISSUANCE OF SHARES: happens when a corporation issues shares consideration of services rendered to it by a person not a stockholder, or
beyond its authorized capital stock, even in the form of stock dividends. in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property, because
DELINQUENCY services is equivalent to property. Likewise a share of stock issued in
A requirement for the application of the second part of the first paragraph payment of indebtedness is equivalent to issuing a stock in exchange for
of Sec. 42. Such that, cash dividends declared are first applied on the cash. But a share of stock thus issued should be part of the original capital
unpaid balance on the subscription plus costs and expenses and stock stock of the corporation upon its organization, or part of the stocks issued
dividends are withheld until the subscription is fully paid. when the increase of the capitalization of a corporation is properly
authorized. In other words, it is the shares of stock that are originally issued
RESTRICTED VS. UNRESTRICTED RETAINED EARNINGS by the corporation and forming part of the capital that can be exchanged
UNRESTRICTED RETAINED for cash or services rendered, or property; that is, if the corporation has
RESTRICTED EARNINGS original shares of stock unsold or unsubscribed, either coming from the
EARNINGS
original capitalization or from the increased capitalization. Those shares of
Accumulated profits; profits from Refers to restricted earnings that
stock may be issued to a person who is not a stockholder, or to a person
the normal and continuous were not appropriated
already a stockholder in exchange for services rendered or for cash or
operation of the corporation
property. But a share of stock coming from stock dividends declared
• They are accumulated profits for expansion projects; not retained
cannot be issued to one who is not a stockholder of a corporation.
under special circumstances; not covered by a restriction under a loan
agreement
A "stock dividend" is any dividend payable in shares of stock of the
• Borrowed funds cannot be used.
corporation declaring or authorizing such dividend. It is, what the term
• Paid-in surplus - difference bet the par value and issued value / selling
itself implies, a distribution of the shares of stock of the corporation among
price of the shares. Also called "premium”
the stockholders as dividends. A stock dividend of a corporation is a
• Revaluation surplus - increase in value of the assets. They are not
dividend paid in shares of stock instead of cash and is properly payable
dividends because they are not earnings
only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par. When a corporation issues stock
(b) When and to whom it is vested
dividend, it shows that the corporation's accumulated profits have been
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled
capitalized instead of distributed to the stockholders or retained as surplus
to declare dividends, except: (1) When the unrestricted retained earnings
available for distribution, in money or kind, should opportunity offer. Far
are in excess of 100% of the paid-up capital; and (2) In the case of
from being a realization of profits for the stockholder, it tends rather to
Mandatory If Earned Preference Shares.
postpone said realization, in that the fund represented by the new stock
has been transferred from surplus to assets and no longer available for
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
actual distribution. Thus, it is apparent that stock dividends are issued only
faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
to stockholders. This is so because only stockholders are entitled to
unreasonably or unjustly; or (4) abuse of discretion can be shown as to
dividends. They are the only ones who have a right to a proportional share
impair the rights of the complaining shareholders. The TEST of bad faith is

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in that part of the surplus which is declared as dividends. A stock dividend utilization of natural resources which may be entered into for such
really adds nothing to the interest of the stockholder; the proportional periods as may be provided by pertinent laws and regulations;
interest of each stockholder remains the same. If a stockholder is deprived (5) 2/3 of the stockholders or members would be required, where:
of his stock dividends - and this happens if the shares of stock forming part (a) The stockholders representing the same interest of both the
of the stock dividends are issued to a non-stockholder — then the managing and the managed corporation own or control more
proportion of the stockholder's interest changes radically. Stock dividends than 1/3 of the total outstanding capital stock of the managing
are civil fruits of the original investment, and to the owners of the shares corporation;
belong the civil fruits. (b) A majority of the members of the BOD of the managing
corporation also constitute a majority of the directors of the
The term "dividend" both in the technical sense and its ordinary managed corporation;
acceptation, is that part or portion of the profits of the enterprise which (c) The contract would constitute the management or operation of
the corporation, by its governing agents, sets apart for ratable division all or substantially all of the business of another corporation,
among the holders of the capital stock. It means the fund actually set aside whether such contracts are called service contracts. If it will not
and declared by the directors of the corporation as dividends and duly constitute the management of all or substantially all of the
ordered by the director, or by the stockholders at a corporate meeting, to business of another corporation, the first paragraph of Sec. 43
be divided or distributed among the stockholders according to their will apply and not that of the second, that is, only the vote of the
respective interests. majority is required.

It is Our considered view, therefore, that under Section 16 of the CONSEQUENCES

Corporation Law stock dividends cannot be issued to a person who is not (1) On the Corporation itself: The proper forum may suspend or revoke,
a stockholder in payment of services rendered. And so, in the case at bar after proper notice and hearing, the franchise or certificate of
Nielson cannot be paid in shares of stock which form part of the stock registration of the corporation for serious misrepresentation as to
dividends of Lepanto for services it rendered under the management what the corporation can do or is doing to the great damage or
contract. We sustain the contention of Lepanto that the understanding prejudice of the general public.
between Lepanto and Nielson was simply to make the cash value of the (2) On the rights of the Stockholders: A stockholder may bring either an
stock dividends declared as the basis for determining the amount of individual or derivative suit to enjoin a threatened ultra-vires act or
compensation that should be paid to Nielson, in the proportion of 10% of contract. If already performed, a derivative suit against the directors
the cash value of the stock dividends declared. And this conclusion of Ours may be filed, but their liability will depend on whether they acted in
finds support in the record. good faith and with reasonable diligence in entering into the contract.
(3) On the immediate parties:
20. Power to Enter into Management Contracts
SEC. 43 – No corporation shall B. Ultra Vires Acts
conclude a management contract with another corporation unless such SEC. 44. . – No corporation shall possess
contract is approved by the board of directors and by stockholders owning or exercise corporate powers other than those conferred by this Code or
at least the majority of the outstanding capital stock, or by at least a by its articles of incorporation and except as necessary or incidental to the
majority of the members in the case of a nonstock corporation, of both the exercise of the powers conferred.
managing and the managed corporation, at a meeting duly called for the
purpose: , That (a) where a stockholder or stockholders 1. Consequences: on the Corporation, on the immediate
representing the same interest of both the managing and the managed parties, on the stockholders
corporations own or control more than one-third (1/3) of the total (1) On the Corporation itself: The proper forum may suspend or revoke,
outstanding capital stock entitled to vote of the managing corporation; or after proper notice and hearing, the franchise or certificate of
(b) where a majority of the members of the board of directors of the (2) On the rights of the Stockholders: A stockholder may bring either an
managing corporation also constitute a majority of the members of the individual or derivative suit to enjoin a threatened ultra vires act or
board of directors of the managed corporation, then the management contract. If already performed, a derivative suit against the directors
contract must be approved by the stockholders of the managed may be filed, but their liability will depend on whether they acted in
corporation owning at least two-thirds (2/3) of the total outstanding capital good faith and with reasonable diligence in entering into the contract.
stock entitled to vote, or by at least two-thirds (2/3) of the members in the (3) On the immediate parties:
case of a nonstock corporation. (a) , the contract is
effective and the courts will not interfere to deprive either party
These shall apply to any contract whereby a corporation undertakes to of what has been acquired under it;
manage or operate all or substantially all of the business of another (b) , as a rule, neither party
corporation, whether such contracts are called service contracts, operating can maintain an action for its non-performance; and
agreements or otherwise: , That such service contracts (c)
or operating agreements which relate to the exploration, development, , the courts differ as to whether an
exploitation or utilization of natural resources may be entered into for such action will lie on the contract against the party who has received
periods as may be provided by the pertinent laws or regulations. benefits of performance under it. Majority of the courts,
however, hold that the party who has received benefits from the
No management contract shall be entered into for a period longer than performance is “estopped” to set up that the contract is
five (5) years for any one (1) term to defeat an action on the contract.

This provision was inserted to assure not only technical competence but PIROVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. 96 PHIL. 335,
continuity in management policy in running corporate affairs which can be DECEMBER 29, 1954
achieved through a management contract. FACTS: The Board of directors of defendant company adopted a
resolution wherein the proceeds of the insurance taken on the life of its
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT previous President and General Manager Enrico Privano be set aside and
(1) Resolution of the BOD; used to purchase 4,000 shares to be given to Privano’s heirs, which was
(2) Approval by the stockholders representing a majority of the approved by the stockholders in a meeting duly called for the purpose.
outstanding capital stock or majority of the members of both the
managing and the managed corporation; The donation of the shares was later on modified to transfer all the
(3) The approval of the stockholders or members must be made at the proceeds directly to the heirs which would become a loan of the company
meeting called for that purpose; and with 5% interest per annum and payable after the settlement of its bonded
(4) The contract shall not be for a period longer than five (5) years for any indebtedness, and still later, modified to be payable “whenever the
one term, except those which relate to exploration, development or company is in a position to meet said obligation.”

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Philippine Trust Company (PTC) in consideration of the bonds it had issued

On an opinion by the SEC, sought by the President of the corporation, to the value of P3,000,000, each bond being $1,000, which par value, with
Sergio Osmena, Jr., it was opined by the SEC that the donation was void interest at 8% per annum, PTC guaranteed to the holders.
for being ultra vires. The Board planned to adopt a different resolution to
effect the donation but failed to act on it. The heirs, through Mrs. Estefania PTC paid Ramon Diaz upon presentation of the coupons, the stipulated
R. Privano, acting as guardian, demanded the settlement of the obligation. interest from the date of maturity until July 1, 1928, when its stopped
payments, alleging that it did not deem itself bound to pay such interest
ISSUE No. 1: WON the donation was an act. or to redeem the obligation because the guarantee given for the bonds
was illegal and void.
HELD: NO. After a careful perusal of the AOI, we find that the corporation
was given broad and almost unlimited powers to carry out the purposes The CFI of Manila absolved the defendants from the complaint except
for which it was organized among them, (1) “to invest and deal with the MSC which was sentenced to pay the value of the bond.
money of the company not immediately required, in such manner as for
time to time may be determined” and (2) “to aid in any manner any person ISSUE: WON PTC’s act was .
association, or corporation or in the affairs of the property of which this
corporation has lawful interest”. The donation in question undoubtedly HELD: NO. Firstly, PTC although secondarily engaged in banking, was
comes within the scope of this broad power for it is a fact appearing in the primarily organized as a trust corporation with full power to acquire
evidence that the insurance proceeds were not immediately required when personal property such as the bonds in question according to both sec. 13
they were given away. (par. 5) of the Corporation Law and its duly registered by-laws and AOI;
Secondly, that being thus authoriezd to acquire the bonds, it was given
We don’t see much distinction between the acts of generosity of the implied power to guarantee them in order to place them upon the market
benevolence extended to some employees of the corporation, and even under better, more advantageous conditions, and thereby secure the
to some in whom the corporation was merely interested because of certain profit derived from their sale.
moral or political consideration, and the donations which the corporation
has seen fit to give the children of the late Enrico Privano from the point “It is not, however, ultra vires for a corporation to enter into contracts of
of view of the power of the corporation as expressed in the AOI. And if the guaranty where it does so in the legitimate furtherance of its purposes and
former had been sanctioned and had been valid and intra-vires, we see no business. And it is well settled that where a corporation acquires
plausible reasons why the latter should now be deemed ultra-vires. It may commercial papers or bonds in the legitimate transaction of its business it
perhaps be argued that the donation given to the children of the late may sell them, and in furtherance of such a sale, it may in order to make
Enrico Privano is so large and disproportionate that it can hardly be them more readily marketable, indorse or guarantee their payment.”
considered a pension or gratuity that can be placed on a par with the
instances above-mentioned, but this argument overlooks one Even if PTC did not acquire the bonds in question, but only guaranteed
consideration: the gratuity here given was not merely motivated by pure them, it would at any rate, be valid and the said corporation is bound to
liberality or act of generosity, but by a deep sense of recognition of the pay the appellant their value with the accrued interest in view of the fact
valuable services rendered by the late Enrico Privano which had immensely that they become due on account of the lapse of 60 days, without the
contributed to the growth of the corporation to the extent that from its accrued interest due having been paid; and the reason is that it is
humble capitalization it blossomed into a multi-million corporation that it estopped from denying the validity of its guarantee.
is today.
The doctrine of as a defense, is by some courts regarded as an
Granting that it was ultra-vires, it may be said that the same cannot be ungracious and odious one, to be sustained only where the most
invalidated, or declared legally ineffective for that reason alone, it persuasive consideration of public policy are involved, and there are
appearing that the donation represents not only the act of the BOD but of numerous decisions and dicta to the effect that the plea should not as a
the stockholders themselves as shown by the fact the same has been general rule prevail whether interposed for or against the corporation,
expressly ratified in a resolution duly approved by the latter. By this where it will not advance justice but on the contrary will accomplish a legal
ratification, the infirmity of the corporate act, if any has been obliterated wrong.
thereby making the act perfectly valid and enforceable. This is specially so
if the donation is not merely executory but executed and consummated When a contract is not on its face necessarily beyond the scope of the
and no creditors are prejudiced, or if there are creditors affected, the latter power of the corporation by which it was made, it will, in the absence of
has expressly given their conformity. proof to the contrary, be presumed to be valid. Corporations are
presumed to contract within their powers. The doctrine of , when
ISSUE No. 2: What is the difference between an illegal act and that which invoked for or against a corporation, should not be allowed to prevail
is ultra-vires. where it would defeat the ends of justice or work a legal wrong.

HELD: The former contemplates the doing of an act which is contrary to JAPANESE WAR NOTES CLAIMANTS ASSO INC. VS. SECURITIES AND
law, morals, or public order or contravene some rules of public policy or EXCHANGE COM. 101 PHIL. 540, MAY 23, 1957
public duty, and are, like similar transactions between the individuals, void. FACTS: The SEC issued an order requiring petitioner herein and its
They cannot serve as basis of a court action, nor acquire validity by President Alfredo Abcede to show cause why it should not be proceeded
performance, ratification or estoppel. Mere ultra-vires acts, on the other against for making misrepresentations to the public about the need of
hand, or those which are not illegal and void ab initio, but are merely registering and depositing war notes, with a view of probable redemption
beyond the scope of the AOI, are merely voidable and may become as contemplated in Senate Bill No. 163 and in Senate Concurrent
binding and enforceable when ratified by the stockholders. Resolution No. 14, for otherwise they would be valueless.

Since it is not contended that the donation under consideration is illegal, Petitioner contended that the statement was made in good faith as
or contrary to any of the express provisions of the AOI, nor prejudicial to President Magsaysay would soon make representations to the US to have
the creditors of the defendant corporation, we cannot but logically the war notes redeemed.
conclude that said donation, even if ultra vires in the supposition we have
adverted to, is not void, and if voidable its infirmity has been cured by Respondent SEC found that according to its AOI, the petitioner has the
ratification and subsequent acts of the defendant corporation. The privilege to work for the redemption of the war notes of its members alone,
corporation is now prevented or estopped from contesting the validity of but that it cannot offer its services to the public for a valuable
the donation. consideration, because there is nothing definite and tangible about the
redemption of the war notes and its success is speculative that any
CARLOS VS. MINDORO SUGAR CO. 57 PHIL., 343, OCTOBER 26, 1932 authority given to offer services can easily degenerate into a racket; that
FACTS: Mindoro Sugar Company (MSC) transferred all of its property to under its AOI the petitioner is a civic and non-stock corporation and upon

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should not engage in business for profit; that it has received war notes for
deposit, upon payment of fees, without authority in its articles to do so;
that it had previously been rendered to desist from collecting from those
registering the war notes, but notwithstanding this prohibition it has done
so in the guise of service fees. Hence the Commission ordered to stop
receiving war notes, receiving same for deposit and charging fees,
therefore.

ISSUE: WON the SEC erred in issuing the questioned order.

HELD: NO. The articles authorize collection of fees from members; but
they do not authorize the corporation to engage in the business of
registering and accepting war notes for deposit and collecting fees from
such services. This was the ruling of the Commission and this we find to be
correct.

Neither do we find any merit in the third contention that the association
has authority to accept and collect fees for reparation claims for civilian
casualties and other injuries. This is beyond any of the powers of the
association as embodied in its articles and have absolutely no relation to
the avowed purpose of the association to work for the redemption of war
notes.

CRISOLOGO-JOSE VS. COURT OF APPEALS 177 SCRA 594, SEPTEMBER

15, 1989
FACTS: The Vice-president of Mover Enterprises, Inc. issued a check drawn
against Traders Royal Bank, payable to petitioner Ernestina Crisologo-
Jose, for the accommodation of his client. Petitioner-payee was charged
with the knowledge that the check was issued at the instance and for the
personal account of the President who merely prevailed upon respondent
vice-president to act as co-signatory in accordance with the arrangement
of the corporation with its depository bank. While it was the corporation's
check which was issued to petitioner for the amount involved, petitioner
actually had no transaction directly with said corporation.

ISSUE: WON private respondent, one of the signatories of the check issued
under the account of Mover Enterprises, Inc., is an accommodation party.

HELD: YES. The liability of an accommodation party to a holder for value,

although such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for the
accommodation of another is . One who has taken the instrument
with knowledge of the accommodation nature thereof cannot recover
against a corporation where it is only an accommodation party. By way of
exception, an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the corporation for
the accommodation of a third person only if specifically authorized to do
so. Corollarily, corporate officers, such as the president and vice-president,
have no power to execute for mere accommodation a negotiable
instrument of the corporation for their individual debts or transactions
arising from or in relation to matters in which the corporation has no
legitimate concern. Since such accommodation paper cannot thus be
enforced against the corporation, especially since it is not involved in any
aspect of the corporate business or operations, the signatories thereof
(president and vice-president) shall be personally liable therefor, as well as
the consequences arising from their acts in connection therewith.

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VIII. BY- LAWS the mode or manner of giving notice thereof;

Rules and ordinances made by a corporation for its own government; to (h) The manner of election or appointment and the term of office of all
regulate the conduct and define the duties of the stockholders or members officers other than directors or trustees;
towards the corporation and among themselves. They are the rules and (i) The penalties for violation of the bylaws;
regulations, or private laws enacted by the corporation to regulate, govern (j) In the case of stock corporations, the manner of issuing stock
and control its own actions, affairs and concerns and tis stockholder or certificates; and
members and directors and officers with relation thereto and among (k) Such other matters as may be necessary for the proper or convenient
themselves in their relation to it. transaction of its corporate affairs for the promotion of good
governance and anti-graft and corruption measures.
SEC. 45. . – For the adoption of bylaws by the
corporation, the affirmative vote of the stockholders representing at least An arbitration agreement may be provided in the bylaws pursuant to
a majority of the outstanding capital stock, or of at least a majority of the Section 181 of this Code.
members in case of nonstock corporations, shall be necessary. The bylaws
shall be signed by the stockholders or members voting for them and shall SEC. 47. . – A majority of the board of directors or
be kept in the principal office of the corporation, subject to the inspection trustees, and the owners of at least a majority of the outstanding capital
of the stockholders or members during office hours. A copy thereof, duly stock, or at least a majority of the members of a nonstock corporation, at
certified by a majority of the directors or trustees and countersigned by a regular or special meeting duly called for the purpose, may amend or
the secretary of the corporation, shall be filed with the Commission and repeal the bylaws or adopt new bylaws. The owners of two-thirds (2/3) of
attached to the original articles of incorporation. the outstanding capital stock or two-thirds (2/3) of the members in a
nonstock corporation may delegate to the board of directors or trustees
Notwithstanding the provisions of the preceding paragraph, bylaws may the power to amend or repeal the bylaws or adopt new bylaws: ,
be adopted and filed prior to incorporation; in such case, such bylaws shall That any power delegated to the board of directors or trustees to amend
be approved and signed by all the incorporators and submitted to the or repeal the bylaws or adopt new bylaws shall be considered as revoked
Commission, together with the articles of incorporation whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a
In all cases, bylaws shall be effective only upon the issuance by the regular or special meeting.
Commission of a certification that the bylaws are in accordance with this
Code. Whenever the bylaws are amended or new bylaws are adopted, the
corporation shall file with the Commission such amended or new bylaws
The Commission shall not accept for filing the bylaws or any amendment and, if applicable, the stockholders’ or members’ resolution authorizing the
thereto of any bank, banking institution, building and loan association, delegation of the power to amend and/or adopt new bylaws, duly certified
trust company, insurance company, public utility, educational institution, under oath by the corporate secretary and a majority of the directors or
or other special corporations governed by special laws, unless trustees.
accompanied by a certificate of the appropriate government agency to the
effect that such bylaws or amendments are in accordance with law. The amended or new bylaws shall only be effective upon the issuance by
the Commission of a certification that the same is in accordance with this
EFFECTIVITY: After approval of the SEC. Code and other relevant laws.

BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the TWO MODES OF AMENDMENT:
incorporators without the need of the affirmative vote of the majority of (1) By a majority vote of the directors or trustees and the majority vote
the outstanding capital stock or the members provided it is submitted of the outstanding capital stock or members, at a regular or special
together with the AOI meeting called for that purpose; or
(2) By the board of directors alone when delegated by stockholders
AFTER INCPORPORATION: Must be submitted one month after the owning 2/3 of the outstanding capital stock or 2/3 of the members.
issuance of the certificate of incorporation and must be approved by a This power, however, is considered revoked, when so voted by a
majority of the outstanding capital stock or members and signed by such majority of the outstanding capital stock or members in a regular or
stockholders or members voting for them. Failure to file within 1 month special meeting.
may result to suspension or revocation of corporate franchise.
HENRY FLEISCHER, VS. BOTICA NOLASCO CO., INC., 47 PHIL. 583,
THIRD PERSONS: are generally not bound, affected or prejudiced the by- MARCH 14, 1925
laws, it being merely internal rules of the corporation, EXCEPT: if they have FACTS: Manuel Gonzales, the original owner of 5 shares of stock in
knowledge of its existence and contents. question of Defendant Company, assigned and transferred to herein
plaintiff Fleischer. Two days after, Dr. Miciano, secretary-treasurer of the
SEC. 46. . – A private corporation may provide the company, offered to buy from Fleischer the said shares in behalf of the
following in its bylaws: corporation, contending that Art. 12 of the by-laws grants the company
(a) The time, place and manner of calling and conducting regular or preferential right to buy Gonzales’ shares. Plaintiff refused and requested
special meetings of the directors or trustees; Dr. Miciano to register said shares in his name, and the latter refused to do
(b) The time and manner of calling and conducting regular or special so.
meetings and mode of notifying the stockholders or members
thereof; ISSUE: WON Fleischer is bound by the provisions of the corporation’s by-
(c) The required quorum in meetings of stockholders or members and laws.
the manner of voting therein;
(d) The modes by which a stockholder, member, director, or trustee may HELD: NO. Section 13, paragraph 7 (of Act 1459), empowers a corporation
attend meetings and cast their votes; to make by-laws, not inconsistent with any existing law, for the transferring
(e) The form for proxies of stockholders and members and the manner of its stock. It follows from said provision, that a by-law adopted by a
of voting them; corporation relating to transfer of stock should be in harmony with the law
(f) The directors’ or trustees’ qualifications, duties and responsibilities, on the subject of transfer of stock. The law on this subject is found in
the guidelines for setting the compensation of directors or trustees section 35 of Act No. 1459. Said section specifically provides that the
and officers, and the maximum number of other board shares of stock "are personal property and may be transferred by delivery
representations that an independent director or trustee may have of the certificate indorsed by the owner, etc." Said section 35 defines the
which shall, in no case, be more than the number prescribed by the nature, character and transferability of shares of stock. Under said section
Commission; they are personal property and may be transferred as therein provided.
(g) The time for holding the annual election of directors or trustees and Said section contemplates no restriction as to whom they may be

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transferred or sold. It does not suggest that any discrimination may be the number of the certificate, and the number of shares transferred." This
created by the corporation in favor or against a certain purchaser. The restriction is necessary in order that the officers of the corporation may
holder of shares, as owner of personal property, is at liberty, under said know who the stockholders are, which is essential in conducting elections
section, to dispose of them in favor of whomsoever he pleases, without of officers, in calling meeting of stockholders, and for other purposes. but
any other limitation in this respect, than the general provisions of law. any restriction of the nature of that imposed in the by-law now in question,
Therefore, a stock corporation in adopting a by-law governing transfer of is ultra vires, violative of the property rights of shareholders, and in restraint
shares of stock should take into consideration the specific provisions of of trade
section 35 of Act No. 1459 and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith. And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
As a general rule, the by-laws of a corporation are valid if they are assigned to him. He obtained them in good faith and for a valuable
reasonable and calculated to carry into effect the objects of the consideration. He was not a privy to the contract created by said by-law
corporation and are not contradictory to the general policy of the laws of between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc.
the land. (Supreme Commandery of the Knights of the Golden Rule vs. Said by-law cannot operate to defeat his rights as a purchaser
Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC.
On the other hand, it is equally well settled that by-laws of a corporation VS. COURT OF APPEALS 276 SCRA 681, AUGUST 07, 1997
must be reasonable and for a corporate purpose, and always within the FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
charter limits. They must always be strictly subordinate to the constitution reason failed to file its corporate by-laws. Victorio Soliven, himslef the
and the general laws of the land. They must not infringe the policy of the owner and developer of the subdivision was the first president of the
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not Association. Later on, asking on the status of petitioner, Soliven discovered
disturb vested rights or impair the obligation of a contract, take away or that the said association was already dissolved (according to the head of
abridge the substantial rights of stockholder or member, affect rights of the legal department of HIGC), and accordingly caused the registration of
property or create obligations unknown to the law. (People's Home HIGC as the association covering Phases West I, East I and East II of the
Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; subdivision.
Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
ISSUE: WON the Association can be considered dissolved for non-
The validity of the by-law of a corporation is purely a question of law. adoption of by-laws.
(South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
HELD: YES. As correctly postulated by the petitioner, interpretation of this
“The power to enact by-laws restraining the sale and transfer of stock must provision of Sec. 46 begins with the determination of the meaning and
be found in the governing statute or the charter. Restrictions upon the import of the word "must" in this section. Ordinarily, the word "must"
traffic in stock must have their source in legislative enactment, as the connote an imperative act or operates to impose a duty which may be
corporation itself cannot create such impediments. By-laws are intended enforced. It is synonymous with "ought" which connotes compulsion or
merely for the protection of the corporation, and prescribe regulation and mandatoriness. However, the word "must" in a statute, like "shall," is not
not restriction; they are always subject to the charter of the corporation. always imperative. It may be consistent with an exercise of discretion. In
The corporation, in the absence of such a power, cannot ordinarily inquire this jurisdiction, the tendency has been to interpret "shall" as the context
into or pass upon the legality of the transaction by which its stock passes or a reasonable construction of the statute in which it is used demands or
from one person to another, nor can it question the consideration upon requires. This is equally true as regards the word "must." Thus, if the
which a sale is based. A by-law cannot take away or abridge the substantial languages of a statute considered as a whole and with due regard to its
rights of stockholder. Under a statute authorizing by- laws for the transfer nature and object reveals that the legislature intended to use the words
of stock, a corporation can do no more than prescribe a general mode of "shall" and "must" to be directory, they should be given that meaning.
transfer on the corporate books and cannot justify an unreasonable
restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137, In this respect, the following portions of the deliberations of the Batasang
p. 674. Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker. On page 34, referring to the
The , being an incident of the ownership of property, the adoption of by-laws, are we made to understand here, Mr. Speaker, that
general rule (subject to exceptions hereafter pointed out and discussed) is by-laws must immediately be filed within one month after the issuance? In
that every owner of corporate shares has the same uncontrollable right to other words, would this be mandatory or directory in character?
alien them which attaches to the ownership of any other species of
property. A shareholder is under no obligation to refrain from selling his MR. MENDOZA. This is mandatory.
shares at the sacrifice of his personal interest, in order to secure the welfare
of the corporation, or to enable another shareholder to make gains and MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
profits. (10 Cyc., p. 577.) effect of the failure of the corporation to file these by-laws within one
month?
It follows from the foregoing that a corporation has no power to prevent
or to restrain transfers of its shares, unless such power is expressly MR. MENDOZA. There is a provision in the latter part of the Code which
conferred in its charter or governing statute. This conclusion follows from identifies and describes the consequences of violations of any provision of
the further consideration that by-laws or other regulations restraining such this Code. One such consequences is the dissolution of the corporation for
transfers, unless derived from authority expressly granted by the its inability, or perhaps, incurring certain penalties.
legislature, would be regarded as impositions in restraint of trade. (10 Cyc.,
p. 578.) MR. FUENTEBELLA. But it will not automatically amount to a dissolution of
the corporation by merely failing to file the by-laws within one month.
The foregoing authorities go farther than the stand we are taking on this Supposing the corporation was late, say, five days, what would be the
question. They hold that the power of a corporation to enact by-laws mandatory penalty?
restraining the sale and transfer of shares, should not only be in harmony
with the law or charter of the corporation, but such power should be MR. MENDOZA. I do not think it will necessarily result in the automatic or
expressly granted in said law or charter. ipso facto dissolution of the corporation. Perhaps, as in the case, as you
suggested, in the case of where a action is
The only restraint imposed by the Corporation Law upon transfer of shares brought, one takes into account the gravity of the violation committed. If
is found in section 35 of Act No. 1459, quoted above, as follows: "No the by-laws were late — the filing of the by-laws were late by, perhaps, a
transfer, however, shall be valid, except as between the parties, until the day or two, I would suppose that might be a tolerable delay, but if they
transfer is entered and noted upon the books of the corporation so as to are delayed over a period of months — as is happening now — because
show the names of the parties to the transaction, the date of the transfer,
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of the absence of a clear requirement that by-laws must be completed

within a specified period of time, the corporation must suffer certain
consequences.

This exchange of views demonstrates clearly that automatic corporate

dissolution for failure to file the by-laws on time was never the intention of That the failure to file by-laws is not provided for by the Corporation Code
the legislature. Moreover, even without resorting to the records of but in another law is of no moment. P.D. No. 902-A, which took effect
deliberations of the Batasang Pambansa, the law itself provides the answer immediately after its promulgation on March 11, 1976, is very much
to the issue propounded by petitioner. apposite to the Code.

Taken as a whole and under the principle that the best interpreter of a Accordingly, the provisions above quoted supply the law governing the
statute is the statute itself ( ), situation in the case at bar, inasmuch as the Corporation Code and P.D.
Section 46 aforequoted reveals the legislative intent to attach a directory, No. 902-A are statutes in
and not mandatory, meaning for the word "must" in the first sentence . Every statute must be so construed and
thereof. Note should be taken of the second paragraph of the law which harmonized with other statutes as to form a uniform system of
allows the filing of the by-laws even to incorporation. This provision jurisprudence.
in the same section of the Code rules out mandatory compliance with the
requirement of filing the by-laws "within one (1) month after receipt of As the "rules and regulations or private laws enacted by the corporation
official notice of the issuance of its certificate of incorporation by the to regulate, govern and control its own actions, affairs and concerns and
Securities and Exchange Commission." It necessarily follows that failure to its stockholders or members and directors and officers with relation thereto
file the by-laws within that period does not imply the "demise" of the and among themselves in their relation to it," by-laws are indispensable to
corporation. By-laws may be necessary for the "government" of the corporations in this jurisdiction. These may not be essential to corporate
corporation, but these are subordinate to the articles of incorporation as birth but certainly, these are required by law for an orderly governance and
well as to the Corporation Code and related statutes. There are in fact management of corporations. Nonetheless, failure to file them within the
cases where by-laws are unnecessary to corporate existence or to the valid period required by law by no means tolls the automatic dissolution of a
exercise of corporate powers, thus: corporation.

In the absence of charter or statutory provisions to the contrary, by- laws In this regard, private respondents are correct in relying on the
are not necessary either to the existence of a corporation or to the valid pronouncements of this Court in
exercise of the powers conferred upon it, certainly in all cases where the , as follows:
charter sufficiently provides for the government of the body; and even
where the governing statute in express terms confers upon the corporation “Non-filing of the by-laws will not result in automatic dissolution of the
the power to adopt by-laws, the failure to exercise the power will be corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
ascribed to mere nonaction which will not render void any acts of the "suspend or revoke, after proper notice and hearing, the franchise or
corporation which would otherwise be valid. (Emphasis supplied.) certificate of registration of a corporation" on the ground inter alia of
"failure to file by-laws within the required period." It is clear from this
As Fletcher aptly puts it: It has been said that the by-laws of a corporation provision that there must first of all be a hearing to determine the existence
are the rule of its life, and that until by-laws have been adopted the of the ground, and secondly, assuming such finding, the penalty is not
corporation may not be able to act for the purposes of its creation, and necessarily revocation but may be only suspension of the charter. In fact,
that the first and most important duty of the members is to adopt them. under the rules and regulations of the SEC, failure to file the by-laws on
This would seem to follow as a matter of principle from the office and time may be penalized merely with the imposition of an administrative fine
functions of by-laws. Viewed in this light, the adoption of by-laws is a without affecting the corporate existence of the erring firm.”
matter of practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may impose the GOVERNMENT OF THE PHILIPPINE ISLANDS VS. EL HOGAR FILIPINO 50
obligation to adopt certain by-laws, as in the case of a close corporation PHIL. 399, JULY 13, 1927
organized for specific purposes. And the statute or general laws from FACTS: Fourth cause of action. — It appears that among the by-laws of
which the corporation derives its corporate existence may expressly the association there is an article (No. 10) which reads as follows:
require it to make and adopt by-laws and specify to some extent what they
shall contain and the manner of their adoption. “The board of directors of the association, by the vote of an absolute
majority of its members, is empowered to cancel shares and to return to
the owner thereof the balance resulting from the liquidation thereof
. whenever, by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares is not desirable.”
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within ISSUE No. 1: WON the above provision is valid.
the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the HELD: NO. This by-law is of course a patent nullity, since it is in direct
jurisdiction of the SEC of which state: conflict with the latter part of section 187 of the Corporation Law, which
expressly declares that the board of directors shall not have the power to
Sec. 6. In order to effectively exercise such jurisdiction, the Commission force the surrender and withdrawal of unmatured stock except in case of
shall possess the following powers: liquidation of the corporation or of forfeiture of the stock for delinquency.
xxx It is agreed that this provision of the by- laws has never been enforced,
(1) and in fact no attempt has ever been made by the board of directors to
make use of the power therein conferred. In November 1923, the Acting
, upon any of the grounds provided by law, including the Insular Treasurer addressed a letter to , calling attention
following: to article 10 of its by-laws and expressing the view that said article was
xxx invalid. It was therefore suggested that the article in question should be
Failure to file by-laws within the required period. eliminated from the by-laws. At the next meeting of the board of directors
the matter was called to their attention and it was resolved to recommend
Even under the foregoing express grant of power and authority, there can to the shareholders that in their next annual meeting the article in question
be no automatic corporate dissolution simply because the incorporators be abrogated. It appears, however, that no annual meeting of the
failed to abide by the required filing of by-laws embodied in Section 46 of shareholders called since that date has been attended by a sufficient
the Corporation Code. There is no outright "demise" of corporate number of shareholders to constitute a quorum, with the result that the
existence. Proper notice and hearing
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provision referred to has not been eliminated from the by-laws, and it still HELD: YES. The validity or reasonableness of a by-law of a corporation in
stands among the by-laws of the association, notwithstanding its patent purely a question of law. Whether the by-law is in conflict with the law of
conflict with the law. the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. This rule is
It is supposed, in the fourth cause of action, that the existence of this article subject, however, to the limitation that where the reasonableness of a by-
among the by-laws of the association is a misdemeanor on the part of the law is a mere matter of judgment, and one upon which reasonable minds
respondent which justifies its dissolution. In this view we are unable to must necessarily differ, a court would not be warranted in substituting its
concur. The obnoxious by-law, as it stands, is a mere nullity, and could not judgment instead of the judgment of those who are authorized to make
be enforced even if the directors were to attempt to do so. There is no by-laws and who have exercised their authority.
provision of law making it a misdemeanor to incorporate an invalid
provision in the by-laws of a corporation; and if there were such, the It is a settled state law in the United States, according to Fletcher, that
hazards incident to corporate effort would certainly be largely increased. corporations have the power to make by-laws declaring a person
There is no merit in this cause of action. employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. (A)n amendment which renders
ISSUE No. 2: WON Art. 71 is valid. Owing to the failure of a quorum at ineligible, or if elected, subjects to removal, a director if he be also a
most of the general meetings since the respondent has been in existence, director in a corporation whose business is in competition with or is
it has been the practice of the directors to fill vacancies in the directorate antagonistic to the other corporation is valid." This is based upon the
by choosing suitable persons from among the stockholders. This custom principle that where the director is so employed in the service of a rival
finds its sanction in article 71 of the by- laws, which reads as follows: company, he cannot serve both, but must betray one or the other. Such
an amendment "advances the benefit of the corporation and is good." An
“ART. 71. The directors shall elect from among the shareholders members exception exists in New Jersey, where the Supreme Court held that the
to fill the vacancies that may occur in the board of directors until the Corporation Law in New Jersey prescribed the only qualification, and
election at the general meeting” therefore the corporation was not empowered to add additional
qualifications. This is the exact opposite of the ines
HELD: YES. We are unable to see the slightest merit in the charge. No fault because as stated heretofore, Section 21 of the Corporation Law expressly
can be imputed to the corporation on account of the failure of the provides that a corporation may make by-laws for the qualifications of
shareholders to attend the annual meetings; and their non-attendance at directors. Thus, it has been held that an officer of a corporation cannot
such meetings is doubtless to be interpreted in part as expressing their engage in a business in direct competition with that of the corporation
satisfaction of the way in which things have been conducted. Upon failure where he is a director by utilizing information he has received as such
of a quorum at any annual meeting the directorate naturally holds over and officer, under "the established law that a director or officer of a corporation
continues to function until another directorate is chosen and qualified. may not enter into a competing enterprise which cripples or injures the
Unless the law or the charter of a corporation expressly provides that an business of the corporation of which he is an officer or director.
office shall become vacant at the expiration of the term of office for which
the officer was elected, the general rule is to allow the officer to holdover It is also well established that corporate officers "are not permitted to use
until his successor is duly qualified. Mere failure of a corporation to elect their position of trust and confidence to further their private interests." In
officers does not terminate the terms of existing officers nor dissolve the a case where directors of a corporation cancelled a contract of the
corporation. The doctrine above stated finds expressions in article 66 of corporation for exclusive sale of a foreign firm's products, and after
the by-laws of the respondent which declares in so many words that establishing a rival business, the directors entered into a new contract
directors shall hold office "for the term of one year on until their successors themselves with the foreign firm for exclusive sale of its products, the court
shall have been elected and taken possession of their offices." held that equity would regard the new contract as an offshoot of the old
contract and, therefore, for the benefit of the corporation, as a "faultless
It results that the practice of the directorate of filling vacancies by the fiduciary may not reap the fruits of his misconduct to the exclusion of his
action of the directors themselves is valid. Nor can any exception be taken principal.
to then personality of the individuals chosen by the directors to fill
vacancies in the body. Certainly, it is no fair criticism to say that they have The doctrine of "corporate opportunity" is precisely a recognition by the
chosen competent businessmen of financial responsibility instead of courts that the fiduciary standards could not be upheld where the fiduciary
electing poor persons to so responsible a position. The possession of was acting for two entities with competing interests. This doctrine rests
means does not disqualify a man for filling positions of responsibility in fundamentally on the unfairness, in particular circumstances, of an officer
corporate affairs. or director taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection.
GOKONGWEI, JR. VS. SECURITIES AND EXCHANGE COMMISSION 89
SCRA 336, APRIL 11, 1979 It is not denied that a member of the Board of Directors of the San Miguel
FACTS: As additional causes of action, it was alleged that corporations Corporation has access to sensitive and highly confidential information,
have no inherent power to disqualify a stockholder from being elected as such as: (a) marketing strategies and pricing structure; (b) budget for
a director and, therefore, the questioned act is ultra vires and void; that expansion and diversification; (c) research and development; and (d)
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other sources of funding, availability of personnel, proposals of mergers or tie-
corporations, entered into contracts (specifically a management contract) ups with other firms.
with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether It is obviously to prevent the creation of an opportunity for an officer or
they or other persons are engaged in competitive or antagonistic business; director of San Miguel Corporation, who is also the officer or owner of a
that the portion of the amended bylaws which states that in determining competing corporation, from taking advantage of the information which
whether or not a person is engaged in competitive business, the Board he acquires as director to promote his individual or corporate interests to
may consider such factors as business and family relationship, is the prejudice of San Miguel Corporation and its stockholders, that the
unreasonable and oppressive and, therefore, void; and that the portion of questioned amendment of the by-laws was made. Certainly, where two
the amended by-laws which requires that "all nominations for election of corporations are competitive in a substantial sense, it would seem
directors ... shall be submitted in writing to the Board of Directors at least improbable, if not impossible, for the director, if he were to discharge
five (5) working days before the date of the Annual Meeting" is likewise effectively his duty, to satisfy his loyalty to both corporations and place the
unreasonable and oppressive. performance of his corporation duties above his personal concerns.

ISSUE No.1: WON the amended by-laws of SMC disqualifying a Sound principles of corporate management counsel against sharing
competitor from nomination or election to the BOD are valid and sensitive information with a director whose fiduciary duty of loyalty may
reasonable. well require that he disclose this information to a competitive arrival. These
dangers are enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the competing
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corporations. It would seem manifest that in such situations, the director stockholder may be considered to have "parted with his personal right or
has an economic incentive to appropriate for the benefit of his own privilege to regulate the disposition of his property which he has invested
corporation the corporate plans and policies of the corporation where he in the capital stock of the corporation, and surrendered it to the will of the
sits as director. majority of his fellow incorporators. It cannot therefore be justly said that
the contract, express or implied, between the corporation and the
Indeed, access by a competitor to confidential information regarding stockholders is infringed... by any act of the former which is authorized by
marketing strategies and pricing policies of San Miguel Corporation would a majority "
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for Under section 22 of the same law, the owners of the majority of the
the development of existing or new markets of existing or new products subscribed capital stock may amend or repeal any by-law or adopt new by-
could enable said competitor to utilize such knowledge to his advantage. laws. It cannot be said, therefore, that petitioner has a vested right to be
elected director, in the face of the fact that the law at the time such right
Neither are We persuaded by the claim that the by-law was Intended to as stockholder was acquired contained the prescription that the corporate
prevent the candidacy of petitioner for election to the Board. If the by-law charter and the by-law shall be subject to amendment, alteration and
were to be applied in the case of one stockholder but waived in the case modification.
of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, It being settled that the corporation has the power to provide for the
applies to all stockholders. The equal protection clause of the Constitution qualifications of its directors, it has also been settled that the
requires only that the by-law operate equally upon all persons of a class. disqualification of a competitor from being elected to the Board of
Besides, before petitioner can be declared ineligible to run for director, Directors is a reasonable exercise of corporate authority.
there must be hearing, and evidence must be submitted to bring his case
within the ambit of the disqualification. Sound principles of public policy A. MEETINGS
and management, therefore, support the view that a by-law which MEETINGS apply to every duly convened assembly either of stockholders,
disqualifies a competition from election to the Board of Directors of members, directors or trustees, managers, etc. for any legal purpose or the
another corporation is valid and reasonable. transaction of business of common interest.

ISSUE No. 2: WON the Corporation has the power to prescribe SEC. 48 – Meetings of directors, trustees,
qualifications. stockholders, or members may be regular or special.

HELD: YES. Private respondents contend that the disputed amended by

REQUISITE OF A VALID MEETING, GENERALLY
laws were adopted by the Board of Directors of San Miguel Corporation
In order to have a valid meeting:
a-, a measure of self-defense to protect the corporation from the clear and
(a) It must be held at the stated date (per by-laws) and appointed time
present danger that the election of a business competitor to the Board
or at a reasonable time thereafter;
may cause upon the corporation and the other stockholders inseparable
(b) There must be previous notice;
prejudice. Submitted for resolution, therefore, is the issue — whether or
not respondent San Miguel Corporation could, as a measure of self-
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB
protection, disqualify a competitor from nomination and election to its
WORKERS SAVINGS AND LOAN ASSO., INC. VS. TAN, ETC., ET AL. 105
Board of Directors.
PHIL. 426, MARCH 31, 1959
FACTS: A meeting electing the BOD of herein petitioner was declared null
It is recognized by an authority that 'every corporation has the inherent
and void by the Court in a suit filed by John Castillo, et. al.
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself
In compliance with the order, another election was scheduled on March 28
and among themselves in reference to the management of its affairs. At
at 5:30. On March 27, the plaintiff filed an ex-parte motion alleging that
common law, the rule was "that the power to make and adopt by-laws was
the meeting is composed of the same people that had conducted and
inherent in every corporation as one of its necessary and inseparable legal
supervised the previously nullified meeting; that the election to be
incidents. And it is settled throughout the United States that in the absence
conducted did not comply with the 5 day notice requirement required by
of positive legislative provisions limiting it, every private corporation has
the by-laws and the constitution of the association, since the notice was
this inherent power as one of its necessary and inseparable legal incidents,
posted and sent out only on March 26 and the election was to be held on
independent of any specific enabling provision in its charter or in general
March 28.
law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation.
ISSUE: WON the notice requirement is complied with.

In this jurisdiction, under Section 21 of the Corporation Law, a corporation

HELD: NO. Section 3, Article III, of the constitution and by-laws the
may prescribe in its by-laws "the qualifications, duties and compensation
association provides:
of directors, officers and employees ... " This must necessarily refer to a
“Notice of the time and place of holding of any annual meeting, or any
qualification in addition to that specified by section 30 of the Corporation
special meeting, the members, shall be given either by posting the same
Law, which provides that "every director must own in his right at least one
in a postage prepaid envelope, addressed to each member on the record
share of the capital stock of the stock corporation of which he is a director
at the address left by such member with the Secretary of the Association,
... " In the Court sustained the validity of a
or at his known post-office address or by delivering the same person at
provision in the corporate by-law requiring that persons elected to the
least (5) days before the date set for such meeting. In lieu of addressing
Board of Directors must be holders of shares of the paid up value of
or serving personal notices to the members, notice of the members, notice
P5,000.00, which shall be held as security for their action, on the ground
of a regular annual meeting or of a special meeting of the members may
that section 21 of the Corporation Law expressly gives the power to the
be given by posting copies of said notice at the different departments and
corporation to provide in its by-laws for the qualifications of directors and
plants of the San Miguel Brewery Inc., not less than five (5) days prior to
is "highly prudent and in conformity with good practice
the date of the meeting. (Annex K.)”
ISSUE No. 3: WON stockholders have the vested right to be elected a
Notice of a special meeting of the members should be given at least five
director.
days before the date of the meeting. Therefore, the five days previous
notice required would not be complied with.
HELD: NO. Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders
and that he impliedly contracts that the will of the majority shall govern in (c) It must be called by the proper person;
all matters within the limits of the act of incorporation and lawfully enacted PONCE VS. ENCARNACION ETC., AND GAPOL 94 PHIL., 81,
by- laws and not forbidden by law." To this extent, therefore, the NOVEMBER 28, 1953
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FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a meeting permits shareholders or members to actively participate during
stockholder’s meeting that the said corporation shall be voluntarily the deliberations
dissolved, and was placed under the receivership of Gapol, the largest
stockholder. A petition for voluntary dissolution was drafted and signed by
Ponce, which was to be filed with the appropriate authorities. It was found
out that instead of filing the petition, Gapol filed a complaint in the CFI for
the accounting of the funds and assets of the corporation, and to
reimburse it the amounts expended for the purchase of a parcel of land, a
loan extended to the wife of Ponce, and an amount spent by Ponce in a
trip to the US. Gapol contends that such amount, taken from the
corporation, was misapplied, misappropriated and misspent by Ponce to
his own use and benefit, thus he prayed for the removal of Ponce as a
member of the board of directors. Such removal was rejected by the court,
but Gapol’s petition for the calling of a stockholders’ meeting, was
granted. At said meeting, a new set of board of directors was elected.
Ponce filed a petition in the lower court seeking to set aside its order, but
the same was denied. Thus, they filed for an appeal to the SC.

ISSUE: WON the Court may issue such order directing a stockholder to call
a meeting of the stockholders of a corporation.

HELD: YES. The corporation law provides that “whenever, from any cause,
there is no person authorized to call a meeting, or when the officer
authorized to do so refuses, fails or neglects to call a meeting, any judge
of a CFI on the showing of a good cause therefore, may issue an order to
any stockholder or member of a corporation, directing him to call a
meeting of the corporation by giving the proper notice required”. Thus,
on the showing of good cause therefore, the court may authorize a
stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stock present and permitted
to be voted shall have chosen one among them to preside. This showing
of good cause exists when the court is apprised of the fact that the by-laws
of the corporation require the calling of a general meeting of the
stockholders to elect the board of directors, but the call of the meeting
has not been done. There is no need to issue a notice of hearing, nor is
there any necessity to hold a hearing, upon the board of directors. The
court here found good cause in calling the meeting for the election of a
new board, because the chairman of the board of directors who is so
authorized to call such meeting, failed, neglected or refused to perform
his duty. Having the authority to grant such relief, the lower court did not
exceed its jurisdiction, nor did it abuse its discretion in granting it.

NOTE: In a case decided by the SEC, it rules that under the present state
of law, the Ponce case will apply ONLY “where there is no person
authorized to call the meeting:, thus an ex-parte proceeding may be
allowed as obviously there is no person to summon and no person whose
right to due process will be violated. However, where there is an officer
authorized to call the meeting and that officer refuses, fails or neglects to
call a meeting then the Ponce case WILL NOT APPLY. This is so, because
the phrase “or when the officer authorized to do so refuses, or fails, or
neglects to call a meeting” has been deliberately omitted in Sec. 50 of the
Corporation Code.

Likewise, in the same ruling of the SEC, the Ponce case likened the
questioned order to a writ of preliminary injunction which may be issued
, the said PI can no longer be issued without notice and hearing
under Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper
remedy.

IN SUMMARY: The following are authorized to call a meeting:

(a) The person or persons authorized under the by-laws;
(b) Absent any provision in the by-laws, it may be called by the President;
(c) By the secretary on order of the president or on written demand of
the stockholders representing at least a majority of the outstanding
capital stock or majority of the members entitled to vote, or the
stockholder or member making the demand if there is no secretary or
he refuses to do so, under Sec. 27; and
(d) A stockholder as empowered by the proper forum pursuant to Sec.
49
(e) It must be held at the proper place; and
(f) There must be quorum

NOTE: A mere referendum without a meeting is not sufficient. The

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PRESCRIBED QUORUM PRESCRIBED VOTE

SUBJECT OF MEETING Shareholders’ or Shareholders’ or
Board Meeting Board Approval
Members’ Meeting Members’ Approval
Regular corporate actions (including Presence of a majority n/a Majority of the n/a
declarations of ordinary dividends, of directors or trustees directors or members
issuance of unissued shares, present in a meeting
acquisition and reissuance of treasury with quorum (i.e.,
shares simple majority or
majority of the quorum
Appointment of corporate officers Presence of a majority n/a Majority of all members n/a
of directors or trustees of the board
Regular meeting of shareholders or n/a Presence of n/a See matters prescribed
members shareholders or vote on matters
members representing requiring shareholders’
at least a majority of the or members’ approval
outstanding capital
stock, or entire
membership
Grant of compensation to directors or n/a Presence of n/a Majority of the
trustees shareholders or outstanding stock
members representing capital stock or majority
at least a majority of the of the members
outstanding capital
stock, or entire
membership
Elections of directors or trustees n/a Presence of n/a Nominees receiving the
shareholders or highest number of
members representing votes shall be declared
at least a majority of the elected (cumulative
outstanding capital voting, one share one
stock (voting only), or vote, or one member
entire membership one vote, as applicable)
Removal of directors or trustees n/a Presence of n/a 2/3 of the outstanding
shareholders or capital stock (voting
members representing only), or entire
2/3 of the outstanding membership
capital stock (voting
only), or entire
membership
Special Corporate Actions
Special approval of material, self- Presence of at least 2/3 n/a At least 2/3 of the n/a
dealing contracts in public interest of the entire entire membership of
companies membership of the the board, and at least
board, and at least a a majority of
majority of independent directors
independent directors
Special approval of self-dealing n/a Presence of n/a 2/3 of the outstanding
contracts, where approved by a shareholders or capital (voting only), or
conflicted board or if not fair and members representing entire membership
reasonable under the circumstances 2/3 of the outstanding
capital stock (voting
only), or entire
membership
Amendments to the AOI, authorizing: Presence of majority of Presence of Majority of all members 2/3 of the outstanding
(a) Shortening or extension of all members of the shareholders or of the board (i.e., strict capital stock (voting
corporate term; board members representing majority) only), or entire
(b) Increase or decrease of authorized 2/3 of the outstanding membership
capital stock, or creating of capital stock (voting
increase of bonded indebtedness; and non-voting shares),
(c) Denial of pre-emptive right; or entire membership
(d) De facto merger or consolidation
with another corporation or other
corporation through the sale,

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PRESCRIBED QUORUM PRESCRIBED VOTE

SUBJECT OF MEETING Shareholders’ or Shareholders’ or
Board Meeting Board Approval
Members’ Meeting Members’ Approval
lease, exchange, mortgage,
pledge, or other disposition of all
or substantially all of the
corporate property;
(e) Investment of corporate funds in
another corporation or business;
(f) Statutory merger or consolidation
of the corporation with another
corporation with another
corporation or other corporations;
and
(g) Dissolution of the corporation
Denial of pre-emptive right (if not Presence of majority of Presence of Strict majority 2/3 of the outstanding
explicitly denied in corporate charter all members of the shareholders capital stock (voting
board representing 2/3 of the only), or entire
outstanding capital membership
stock (voting only)
Adoption or amendment of by-laws Presence of majority of Presence of Strict majority Majority of the
all members of the shareholders or outstanding capital
board members representing stock (voting and non-
majority of the voting), or entire
outstanding capital membership
stock (voting and non-
voting shares), or entire
membership
Revocation of previously delegated n/a Presence of n/a Majority of the
authority of the board to amend, shareholders or outstanding capital
repeal and adopt new by-laws members representing stock (voting and non-
majority of the voting), or entire
outstanding capital membership
stock (voting only), or
entire membership
Delegation to the board of the power n/a Presence of n/a 2/3 of the outstanding
to amend, repeal and adopt new by- shareholders or capital stock (voting
laws members representing only), or entire
2/3 of the outstanding membership
capital stock (voting
only), or entire
membership
Declaration of stock dividends (from Presence of a majority Presence of Majority of the 2/3 of the outstanding
unissued capital stock) of directors or trustees shareholders directors or members capital stock (voting
representing 2/3 of the present in a meeting only)
outstanding capital with quorum
stock (voting only)
Execution of management contract Presence of a majority Presence of Majority of the 2/3 of the outstanding
relative to the managed corporation of directors or trustees shareholders directors or members capital stock (voting
representing 2/3 of the present in a meeting only)
outstanding stock with quorum
(voting only)

1. Stockholders' / Members' Meeting mail or such other manner as the Commission shall allow under its
SEC. 49. Regular and Special Meetings of Stockholders or Members. – guidelines.
Regular meetings of stockholders or members shall be held annually on
a date fixed in the bylaws, or if not so fixed, on any date after April 15 At each regular meeting of stockholders or members, the board of
of every year as determined by the board of directors or trustees: directors or trustees shall endeavor to present to stockholders or
Provided, That written notice of regular meetings shall be sent to all members the following:
stockholders or members of record at least twenty-one (21) days prior to (a) The minutes of the most recent regular meeting which shall include,
the meeting, unless a different period is required in the bylaws, law, or among others:
regulation: Provided, further, That written notice of regular meetings (1) A description of the voting and vote tabulation procedures
may be sent to all stockholders or members of record through electronic used in the previous meeting;

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(2) A description of the opportunity given to stockholders or therefor, may issue an order directing the petitioning stockholder or
members to ask questions and a record of the questions asked member to call a meeting of the corporation by giving proper notice
and answers given; required by this Code or the bylaws. The petitioning stockholder or
(3) The matters discussed and resolutions reached; member shall preside thereat until at least a majority of the stockholders
(4) A record of the voting results for each agenda item; or members present have chosen from among themselves, a presiding
(5) A list of the directors or trustees, officers and stockholders or officer.
members who attended the meeting; and
(6) Such other items that the Commission may require in the Unless the bylaws provide for a longer period, the stock and transfer
interest of good corporate governance and the protection of book or membership book shall be closed at least twenty (20) days for
minority stockholders. regular meetings and seven (7) days for special meetings before the
(b) A members’ list for nonstock corporations and, for stock scheduled date of the meeting.
corporations, material information on the current stockholders, and
their voting rights; In case of postponement of stockholders’ or members’ regular
(c) A detailed, descriptive, balanced and comprehensible assessment meetings, written notice thereof and the reason therefor shall be sent to
of the corporation’s performance, which shall include information all stockholders or members of record at least two (2) weeks prior to the
on any material change in the corporation’s business, strategy, and date of the meeting, unless a different period is required under the
other affairs; bylaws, law or regulation.
(d) A financial report for the preceding year, which shall include
financial statements duly signed and certified in accordance with The right to vote of stockholders or members may be exercised in
this Code and the rules the Commission may prescribe, a statement person, through a proxy, or when so authorized in the bylaws, through
on the adequacy of the corporation’s internal controls or risk remote communication or in absentia. The Commission shall issue the
management systems, and a statement of all external audit and rules and regulations governing participation and voting through remote
non-audit fees; communication or in absentia, taking into account the company’s scale,
(e) An explanation of the dividend policy and the fact of payment of number of shareholders or members, structure, and other factors
dividends or the reasons for nonpayment thereof; consistent with the protection and promotion of shareholders’ or
(f) Director or trustee profiles which shall include, among others, their member’s meetings.
qualifications and relevant experience, length of service in the
corporation, trainings and continuing education attended, and The stockholders have no power to act as or for the corporation except
their board representations in other corporations; at a corporate meeting called and conducted according to law. This rule
(g) A director or trustee attendance report, indicating the attendance arises from the need to protect the stockholder by providing them with
of each director or trustee at each of the meetings of the board and notice of meeting and giving them opportunity to attend the meeting,
its committees and in regular or special stockholder meetings; discuss the issues and vote (an exception would be an ordinary
(h) Appraisals and performance reports for the board and the criteria amendment where “written asset” is acceptable).
and procedure for assessment;
(i) A director or trustee compensation report prepared in accordance DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
with this Code and the rules the Commission may prescribe; fixed, it will be held after April 15 of very year. April, because this is the
(j) Director disclosures on self-dealings and related party transactions; time the Audited Financial Statements are already available.
and/or
(k) The profiles of directors nominated or seeking election or DATE OF SPECIAL MEETING: At any time deemed necessary or as
reelection. provided for in the by-laws.

A director, trustee, stockholder, or member may propose any other REQUIREMENTS FOR A VALID STOCKHOLDERS’ MEETING:
matter for inclusion in the agenda at any regular meeting of stockholders (1) It must be held on the date fixed in the By-Laws or in accordance
or members. with the law.

Special meetings of stockholders or members shall be held at any time (2) Prior Notice Must Be Given
deemed necessary or as provided in the bylaws: Provided, however, Secs. 49 and 50 requires that written notice of regular meeting shall be
That at least one (1) week written notice shall be sent to all stockholders sent at least 21 days prior to the meeting, whereas, 1-week prior notice
or members, unless a different period is provided in the bylaws, law or is required for special meetings.
regulation.
EXCEPTIONS:
A stockholder or member may propose the holding of a special meeting (a) If the by-laws provide for a different period for sending out notice
and items to be included in the agenda. for regular or special meetings (failure to comply would render the
resolutions adopted at the option of the stockholder who was not
Notice of any meeting may be waived, expressly or impliedly, by any notified);
stockholder or member: Provided, That general waivers of notice in the (b) Waiver, either express or implied.
articles of incorporation or the bylaws shall not be allowed: Provided, Requirements of an effective waiver:
further, That attendance at a meeting shall constitute a waiver of notice (1) General waivers of notice in the articles of incorporation or the
of such meeting, except when the person attends a meeting for the bylaws shall not be allowed
express purpose of objecting to the transaction of any business because (2) All shareholders or members are present or duly represented
the meeting is not lawfully called or convened. at the meeting; and
(3) Not one of them expressly states at the beginning of the
Whenever for any cause, there is no person authorized or the person meeting that the purpose of their attendance is to object to
authorized unjustly refuses to call a meeting, the Commission, upon the transaction of any business because the meeting is not
petition of a stockholder or member on a showing of good cause lawfully called or convened
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The Notice must contain the agenda or business matter/s that may be DETERMINATION OF QUORUM
taken up before the meeting otherwise it may become voidable at the NON-STOCK
STOCK CORPORATION
instance of any objecting stockholder or member. CORPORATION
GENERALLY: There is a presence (in person Only those who are
(3) It must be called by the proper person; or by proxy) of shareholders representing actual, living
SEC. 53. Who Shall Preside at Meetings. – The chairman or, in his majority of the “outstanding capital stock” members with voting
absence, the president shall preside at all meetings of the directors or rights shall be
trustees as well as of the stockholders or members, unless the bylaws In cases where the law vests on non-voting counted in
provide otherwise. shares the right to vote (under Sec. 6) determining the
(a) Amendment of the articles of existence of a
(4) It must be held at the proper place; and incorporation; quorum during
SEC. 50. Place and Time of Meetings of Stockholders or Members. – (b) Adoption and amendment of bylaws; members meetings.
Stockholders’ or members’ meetings, whether regular or special, shall (c) Sale, lease, exchange, mortgage, Dead members shall
be held in the principal office of the corporation as set forth in the pledge, or other disposition of all or not be counted. x x x
articles of incorporation, or, if not practicable, in the city or municipality substantially all of the corporate
where the principal office of the corporation is located: Provided, That property; Majority of the
any city or municipality in Metro Manila, Metro Cebu, Metro Davao, and (d) Incurring, creating, or increasing members
other Metropolitan areas shall, for purposes of this section, be bonded indebtedness; representing the
considered a city or municipality. (e) Increase or decrease of authorized actual number of
capital stock; voting rights, not
Notice of meetings shall be sent through the means of communication (f) Merger or consolidation of the the number or
provided in the bylaws, which notice shall state the time, place and corporation with another corporation numerical constant
purpose of the meetings. or other corporations; that may originally be
Each notice of meeting shall further be accompanied by the following: (g) Investment of corporate funds in specified in the
(a) The agenda for the meeting; another corporation or business in articles of
(b) A proxy form which shall be submitted to the corporate secretary accordance with this Code; and incorporation,
within a reasonable time prior to the meeting; (h) Dissolution of the corporation. constitutes the
(c) When attendance, participation, and voting are allowed by remote quorum.
communication or in absentia, the requirements and procedures to Quorum shall be determined based on the
be followed when a stockholder or member elects either option; number of “outstanding voting stocks, SEC. 89. Non-
and including those issued and outstanding transferability of
(d) When the meeting is for the election of directors or trustees, the non-voting shares” Membership. –
requirements and procedure for nomination and election. Membership in a
In case of companies engaged in partly nonstock corporation
All proceedings and any business transacted at a meeting of the nationalized activities, MC No. 8 s. 2013 and all rights arising
stockholders or members, if within the powers or authority of the applies: therefrom are
corporation, shall be valid even if the meeting is improperly held or (a) the total number of outstanding shares personal and non-
called: Provided, That all the stockholders or members of the of stock entitled to vote in the election transferable, unless
corporation are present or duly represented at the meeting and not one of directors; AND the articles of
of them expressly states at the beginning of the meeting that the (b) the total number of outstanding shares incorporation or the
purpose of their attendance is to object to the transaction of any of stock, whether or not entitled to bylaws otherwise
business because the meeting is not lawfully called or convened. vote provide.

Shares in the name of deceased persons

(5) There must be quorum
should be counted, (see Sec. 54)
SEC. 51. Quorum in Meetings. – Unless otherwise provided in this Code
or in the bylaws, a quorum shall consist of the stockholders representing
SEC. 54. Right to Vote of Secured Creditors
a majority of the outstanding capital stock or a majority of the members
and Administrators. – In case a stockholder
in the case of nonstock corporations.
grants security interest in his or her shares in
stock corporations, the stockholder-grantor
GENERALLY: By-laws may provide a greater (NOT LESSER) quorum for
shall have the right to attend and vote at
the protection of minority shareholders
meetings of stockholders, unless the
secured creditor is expressly given by the
GENERALLY: “Where a quorum is once present to organize a meeting,
stockholder-grantor such right in writing
it is not broken by subsequent withdrawal of a party or faction those
which is recorded in the appropriate
present” UNLESS the by-laws may provide for the contrary
corporate books.

Note Sec. 73 (g) which provides:

Executors, administrators, receivers, and
SEC. 73. Books to be Kept; Stock Transfer Agent. – Every corporation
other legal representatives duly appointed
shall keep and carefully preserve at its principal office all information
by the court may attend and vote in behalf
relating to the corporation including, but not limited to:
of the stockholders or members without
(g) x x x. Upon the demand of a director, trustee, stockholder or
need of any written proxy.
member, the time when any director, trustee, stockholder or
QUORUM IN SPECIAL CASES
member entered or left the meeting must be noted in the minutes;

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NON-STOCK Directors or trustees who cannot physically attend or vote at board

STOCK CORPORATION
CORPORATION meetings can participate and vote through remote communication such
• ELECTION OF DIRECTORS & TRUSTEES: Presence of the as videoconferencing, teleconferencing, or other alternative modes of
“owners of majority of the outstanding capital stock, or if there communication that allow them reasonable opportunities to participate.
be no capital stock, a majority of the members entitled to vote” Directors or trustees cannot attend or vote by proxy at board meetings.
(Sec. 23) A director or trustee who has a potential interest in any related party
o IN EXCEPTIONAL CASES: In case of non-holding of transaction must recuse from voting on the approval of the related party
election: “Commission may, upon the application of transaction without prejudice to compliance with the requirements of
a stockholder, member, director or trustee, and after Section 31 of this Code.
verification of the unjustified non-holding of the
election, summarily order that an election be held” SEC Memorandum Circular No. 15, Series of 2001
additionally, “the shares of stock or membership Board Meeting Through Teleconferencing or Videoconferencing
represented at such meeting and entitled to vote ("Tele/Video Conferencing")
shall constitute a quorum for purposes of conducting In relation to Section 16 of the Electronic Commerce Act (R.A. 8792)
an election under Section 25” and Section 25 of the Corporation Code of the Philippines (BP68) the
• REMOVAL OF DIRECTORS & TRUSTEES: Any director or following are the guidelines for the conduct of teleconferencing and
trustee of a corporation may be removed from office by a vote videoconferencing (i.e. conferences or meetings through electronic
of the stockholders holding or representing at least two-thirds medium or telecommunications where the participants who are not
(2/3) of the outstanding capital stock, or in a nonstock physically present are located at different local or international places)
corporation, by a vote of at least two-thirds (2/3) of the of the Board of Directors for the information and guidance of all
members entitled to vote (Sec. 27) concerned:
• OTHER INSTANCES: Also requires approval of the 2/3 vote (1) The Secretary of the meeting shall assume the following
representing the outstanding capital stock or membership in the responsibilities:
following cases: (a) to safeguard the integrity of the meeting via
(1) Amendment of the AOI (including the shortening or tele/videoconferencing
extension of corporate term or Increase or decrease of (b) to find good tele/videoconference equipment/facilities
authorized capital stock) (c) to record the proceedings and prepare the minutes of the
(2) Issuance of increase of bonded indebtedness; meeting
(3) Denial of pre-emptive right; (d) to store for safekeeping and mark the tape recording/s
(4) Delegation of by-law amendment to the board; and/or other electronic recording mechanism as part of the
(5) De facto merger or consolidation with another corporation records of the corporation
or other corporation through the sale, lease, exchange, (2) The Secretary shall send out the notices of the meeting to all
mortgage, pledge, or other disposition of all or directors in accordance with the manner of giving notice as stated
substantially all of the corporate property; in the corporate by-laws.
(6) Investment of corporate funds in another corporation or (3) The notice shall include the following:
business; (a) Inquiry on whether the director will attend physically or
(7) Statutory merger or consolidation of the corporation with through tele/videoconferencing;
another corporation with another corporation or other (b) Contact number/s of the Secretary and office staff whom the
corporations; and director may call to notify and state whether he shall be
(8) Dissolution of the corporation physically present or attend through tele/videoconferencing;
(c) Agenda of the meeting;
2. Directors' / Trustees' Meeting (d) All documents to be discussed in the meeting, including
SEC. 52. Regular and Special Meetings of Directors or Trustees; attachments, shall be numbered and duly marked by the
Quorum. – Unless the articles of incorporation or the bylaws provides Secretary in such a way that all the directors, physically or
for a greater majority, a majority of the directors or trustees as stated in electronically present, can easily follow, refer to the
the articles of incorporation shall constitute a quorum to transact documents and participate in the meeting.
corporate business, and every decision reached by at least a majority of (4) If the director chooses tele/videoconferencing, he shall give
the directors or trustees constituting a quorum, except for the election notice of at least five days prior to the scheduled meeting to the
of officers which shall require the vote of a majority of all the members Secretary. The latter shall be informed of his contact number/s. In
of the board, shall be valid as a corporate act. the same way, the Secretary shall inform the director concerned
of the contact number/s he will call to join the meeting. The
Regular meetings of the board of directors or trustees of every Secretary shall keep the records of the details, and on the date of
corporation shall be held monthly, unless the bylaws provide otherwise. the scheduled meeting, confirm and note such details as part of
Special meetings of the board of directors or trustees may be held at the minutes of the meeting.
any time upon the call of the president or as provided in the bylaws. (5) In the absence of an arrangement, it is presumed that the director
will physically attend the Board meeting.
Meetings of directors or trustees of corporations may be held anywhere (6) At the start of the scheduled meeting, a roll call shall be made by
in or outside of the Philippines, unless the bylaws provide otherwise. the Secretary. Every director and participant shall state, for the
Notice of regular or special meetings stating the date, time and place of record, the following:
the meeting must be sent to every director or trustee at least two (2) (a) Full Name
days prior to the scheduled meeting, unless a longer time is provided in (b) Location
the bylaws. A director or trustee may waive this requirement, either (c) For those attending through tele/videoconferencing, he
expressly or impliedly. shall confirm that:
i. he can completely and clearly hear the others who can
clearly hear him at the end of the line
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ii. state whether he has received the agenda and all the
materials for the meeting ETI filed a motion for the reconsideration of the Order, contending that
iii. specify type of device used it was inappropriate for the court to take judicial notice of the said
teleconference without any prior hearing. The trial court denied the
Thereafter, the Secretary shall confirm and note the contact motion in its Order dated August 8, 2000. ETI then filed a petition for
numbers being used by the directors and participants not certiorari and mandamus, assailing the orders of the RTC.
physically present. After the roll call, the Secretary may
certify the existence of a quorum. The CA rendered judgment dismissing the petition, ruling that the
(7) All participants shall identify themselves for the record, before verification and certificate of non-forum shopping executed by Atty.
speaking and must clearly hear and/or see each other in the Aguinaldo was sufficient compliance with the Rules of Court. According
course of the meeting. If a person fails to identify himself, the to the appellate court, Atty. Aguinaldo had been duly authorized by the
Secretary shall quickly state the identity of the last speaker. If the board resolution approved on June 25, 1999 and was the resident agent
person speaking is not physically present and the Secretary is not of KAL. As such, the RTC could not be faulted for taking judicial notice
certain of the identity of the speaker, the Secretary must inquire of the said teleconference of the KAL Board of Directors.
to elicit a confirmation or correction.
ETI filed a motion for reconsideration of the said decision, which the CA
If a motion is objected to and there is a need to vote and divide denied. Hence, this petition.
the Board, the Secretary should call the roll and note the vote of
each director who should identify himself. ISSUE: WON the court should take judicial notice as to the use of
If a statement of a director/participant in the meeting via teleconference as a means of conducting meetings of board of directors
tele/videoconferencing is interrupted or garbled, the Secretary for purposes of passing a resolution.
shall request for a repeat or reiteration, and if need be, the
Secretary shall repeat what he heard the director/participant was HELD: YES. It was held that in this age of modern technology, the courts
saying for confirmation or correction. may take judicial notice that business transactions may be made by
(8) The Secretary shall require all the directors who attended the individuals through teleconferencing. Teleconferencing is interactive
meeting, whether personally or through tele/videoconferencing, group communication (three or more people in two or more locations)
to sign the minutes of the meeting to dispel all doubts on matters through an electronic medium. In general terms, teleconferencing can
taken up during the meeting. bring people together under one roof even though they are separated
by hundreds of miles. This type of group communication may be used
in a number of ways, and have three basic types: (1) video conferencing
- television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and
EXPERTRAVEL & TOURS, INC. VS. COURT OF APPEALS 459 SCRA 147, (3) audio-conferencing-verbal communication via the telephone with
MAY 26, 2005 optional capacity for tele-writing or telecopying.
FACTS: On September 6, 1999, Korean Airlines (KAL), through Atty.
Aguinaldo, filed a Complaint against Expertravel and Tours, Inc. (ETI) Teleconferencing can only facilitate the linking of people; it does not
with the Regional Trial Court (RTC) of Manila, for the collection of the alter the complexity of group communication. Although it may be easier
principal amount of P260,150.00, plus attorney’s fees and exemplary to communicate via teleconferencing, it may also be easier to
damages. The verification and certification against forum shopping was miscommunicate. Teleconferencing cannot satisfy the individual needs
signed by Atty. Aguinaldo, who indicated therein that he was the of every type of meeting.
resident agent and legal counsel of KAL and had caused the preparation
of the complaint. In the Philippines, teleconferencing and videoconferencing of members
of board of directors of private corporations is a reality, in light of
ETI filed a motion to dismiss the complaint on the ground that Atty. Republic Act No. 8792. The Securities and Exchange Commission issued
Aguinaldo was not authorized to execute the verification and certificate SEC Memorandum Circular No. 15, on November 30, 2001, providing
of non-forum shopping as required by Section 5, Rule 7 of the Rules of the guidelines to be complied with related to such conferences. Thus,
Court. the Court agrees with the RTC that persons in the Philippines may have
a teleconference with a group of persons in South Korea relating to
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he business transactions or corporate governance.
had been authorized to file the complaint through a resolution of the
KAL Board of Directors approved during a special meeting held on June However, even given the possibility that Atty. Aguinaldo and Suk Kyoo
25, 1999. KAL submitted on March 6, 2000 an Affidavit of even date, Kim participated in a teleconference along with the respondent’s Board
executed by its general manager Suk Kyoo Kim, alleging that the board of Directors, the Court is not convinced that one was conducted; even if
of directors conducted a special teleconference on June 25, 1999, which there had been one, the Court is not inclined to believe that a board
he and Atty. Aguinaldo attended. It was also averred that in that same resolution was duly passed specifically authorizing Atty. Aguinaldo to
teleconference, the board of directors approved a resolution authorizing file the complaint and execute the required certification against forum
Atty. Aguinaldo to execute the certificate of non-forum shopping and to shopping.
file the complaint. Suk Kyoo Kim also alleged, however, that the
corporation had no written copy of the aforesaid resolution. The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the
The trial court issued an Order denying the motion to dismiss, giving resolution allegedly approved by the respondent’s Board of Directors
credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the during the said teleconference was a mere concoction purposefully
KAL Board of Directors indeed conducted a teleconference on June 25, foisted on the RTC, the CA and this Court, to avert the dismissal of its
1999, during which it approved a resolution as quoted in the submitted complaint against the petitioner.
affidavit.
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3. Right to Vote and Manner of Voting corporate secretary within a reasonable time before the scheduled
Being a property right, a stockholder can vote his share the way he meeting. Unless otherwise provided in the proxy form, it shall be valid
pleases except in the following: only for the meeting for which it is intended. No proxy shall be valid and
(1) Non-voting shares are not entitled to vote except in those effective for a period longer than five (5) years at any one time.
instances provided in the penultimate paragraph of Sec. 6 of the
Code; PROXY
(2) Treasury shares have no voting rights while they remain in the A species of absentee voting by mail by a one-way ballot for the slate or
treasury (Sec. 56); proposals suggested by the management or even perhaps, the solicitor
(3) Shares of stock declared delinquent are not entitled to vote at any thereof. It is the authority given by the stockholder or member to
meeting; and another to vote for him at a stockholders’ or members’ meeting. The
(4) Unregistered transferee of shares of stock. term is also used to refer to the instrument or paper which is evidence
of the authority of an agent or the holder thereof to vote for and in behalf
PROXY VOTING: allowed or through a voting trust agreement, or by the of the stockholder or member
executor, administrator, receiver or other legal representative
appointed by the court. PROXY VOTING
A right granted by law to all stockholders entitled to vote in stock
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are corporations and cannot, therefore, be denied. EXCEPT: In a non-stock
entitled to vote in the absence of an agreement to the contrary: corporation with by-laws providing for a prohibition on the use of
SEC. 54. Right to Vote of Secured Creditors and Administrators. – In proxies (Sec. 88).
case a stockholder grants security interest in his or her shares in stock
corporations, the stockholder-grantor shall have the right to attend and REQUIREMENTS: In the absence of a by-law provision regulating the
vote at meetings of stockholders, unless the secured creditor is form and execution of proxy, Sec. 57 requires:
expressly given by the stockholder-grantor such right in writing which is (1) The proxy must be in writing;
recorded in the appropriate corporate books. (2) It is signed by the stockholder or member or his duly authorized
representative; and
Executors, administrators, receivers, and other legal representatives (3) It is filed on or before the schedule meeting with the corporate
duly appointed by the court may attend and vote in behalf of the secretary.
stockholders or members without need of any written proxy.
It is to be noted, however, that publicly listed companies are required
to observe and comply with SEC Memorandum Circular No. 5 -1996,

SHARES OWNED BY TWO OR MORE PERSONS JOINTLY: TYPES OF PROXIES:

SEC. 55. Voting in Case of Joint Ownership of Stock. – The consent of (1) General – gives a general discretionary power of attorney to vote
all the co-owners shall be necessary in voting shares of stock owned for directors and all ordinary matters that my properly come before
jointly by two (2) or more persons, unless there is a written proxy, signed a meeting. It is not an authority, however, to vote for fundamental
by all the co-owners, authorizing one (1) or some of them or any other changes in the corporate charter or for other unusual transactions,
person to vote such share or shares: Provided, That when the shares are unless so specified;
owned in an “and/or” capacity by the holders thereof, any one of the (2) Special – restricts the authority to vote on specified matters only
joint owners can vote said shares or appoint a proxy therefor. and may direct the manner in which the vote will be cast.

DURATION: May be fixed by the proxy’s own terms but it cannot exceed
SEC. 56. Voting Right for Treasury Shares. – Treasury shares shall have
5 years and for not more than 5 years for each renewal. Otherwise, it
no voting right as long as such shares remain in the Treasury.
expires after the meeting for which it was given.

(a) Proxy and other representative voting VOTING TRUST

SEC. 57. Manner of Voting; Proxies. – Stockholders and members may One created by an agreement between a group of stockholders of a
vote in person or by proxy in all meetings of stockholders or members. corporation and a trustee, or a group of identical agreements between
When so authorized in the bylaws or by a majority of the board of individual stockholders and a common trustee, whereby it is provided
directors, the stockholders or members of corporations may also vote that for a term of years, or for a period contingent upon a certain event,
through remote communication or in absentia: Provided, That the votes or until the agreement is terminated, control over the stock owned by
are received before the corporation finishes the tally of votes. such stockholders, shall be lodged in the trustee, either with or without
reservation to the owners or persons designated by them the power to
A stockholder or member who participates through remote direct how such control shall be issued
communication or in absentia, shall be deemed present for purposes of
quorum. SEC. 58. Voting Trusts. – One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
The corporation shall establish the appropriate requirements and a trustee or trustees the right to vote and other rights pertaining to the
procedures for voting through remote communication and in absentia, shares for a period not exceeding five (5) years at any time: Provided,
taking into account the company’s scale, number of shareholders or That in the case of a voting trust specifically required as a condition in a
members, structure and other factors consistent with the basic right of loan agreement, said voting trust may be for a period exceeding five (5)
corporate suffrage. years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized and shall specify
Proxies shall be in writing, signed and filed, by the stockholder or the terms and conditions thereof. A certified copy of such agreement
member, in any form authorized in the bylaws and received by the shall be filed with the corporation and with the Commission; otherwise,
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the agreement is ineffective and unenforceable. The certificate or VOTING TRUST PROXY
certificates of stock covered by the voting trust agreement shall be the SEC nor is it required to be filed with
cancelled and new ones shall be issued in the name of the trustee or the SEC.
trustees, stating that they are issued pursuant to said agreement. The
books of the corporation shall state that the transfer in the name of the VOTING TRUST POOLING OR
trustee or trustees is made pursuant to the voting trust agreement. AGREEMENT VOTING
AGREEMENT
The trustee or trustees shall execute and deliver to the transferors, Ownership Divorced from stock Shareholder remains
voting trust certificates, which shall be transferable in the same manner ownership therefore the the owner with the
and with the same effect as certificates of stock. Trustee acquires legal right to vote
title and shareholder
The voting trust agreement filed with the corporation shall be subject to holds beneficial title
examination by any stockholder of the corporation in the same manner Determination Trustee determines the Shareholder
as any other corporate book or record: Provided, That both the trustor of Policy policy and implements it possesses the initial
and the trustee or trustees may exercise the right of inspection of all by his vote. change to determine
corporate books and records in accordance with the provisions of this the policy and 3rd
Code. party identified as
arbitrator is necessary
Any other stockholder may transfer the shares to the same trustee or only in case of
trustees upon the terms and conditions stated in the voting trust disagreement.
agreement, and thereupon shall be bound by all the provisions of said Voting Trustee has continuous Right of the arbitrator
agreement. Control voting control for the to direct the vote is
duration of the Trust. limited to cases where
No voting trust agreement shall be entered into for purposes of shareholder vote is
circumventing the laws against anti-competitive agreements, abuse of necessary, and SH
dominant position, anti-competitive mergers and acquisitions, violation cannot agree.
of nationality and capital requirements, or for the perpetuation of fraud.

Pooling / Voting Agreement

Unless expressly renewed, all rights granted in a voting trust agreement
Agreement where shareholders agree to vote their shares as a unit for
shall automatically expire at the end of the agreed period. The voting
the election of directors and thus gain control of the management of the
trust certificates as well as the certificates of stock in the name of the
corporation.
trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the trustors.
NATIONAL INVESTMENT AND DEVELOPMENT CORP. VS. AQUINO
The voting trustee or trustees may vote by proxy or in any manner 163 SCRA 153, JUNE 30, 1988
authorized under the bylaws unless the agreement provides otherwise. FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into
a Voting Trust Agreement with petitioner NIDC, in order to assist the
DISTINCTION BETWEEN A VOTING TRUST AND A PROXY former with its financial obligations. The VTA was for a period of 5 years
VOTING TRUST PROXY constituting 60% of the outstanding paid-up and subscribed shares of
The beneficial owner of the Legal title to the shares remains Batjak. 5 years therafter, or on Aug. 31, 1970, Batjak represented by
shares ceased to be stockholder with the beneficial owner majority stockholders, through Atty. Amado Duran, legal counsel, wrote
of record of the corporation to NIDC inquiring if the atter was still interest in negotiating the renewal
since the shares are transferred of the VTA, but there was no reply even with the second letter sent on
to the trustee Sept. 22, 1970.
Trustee votes as owner of the Proxy votes merely as an agent
shares On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking
for a complete accounting of the assets, properties, management and
The beneficial owner is The owner of the shares may be
disqualified to be a director elected as such since legal title operation of Batjak, preparatory to their turn-over and transfer to the
thereof remains with him stockholders of Batjak.
Purpose is to acquire voting Generally used to secure voting
NIDC replied that it had no intention to comply with such demand.
control of the corporation a quorum requirement or merely
Batjak filed an action for mandamus with preliminary injunction which
for the purpose of representing
was granted.
an absent stockholder
Irrevocable Revocable anytime unless
ISSUE: WON Batjak has the personality to enforce the voting trust
coupled with an interest
agreement executed by its stockholders and whether it may compel the
The trustee can act and vote at Proxy can generally act as such
trustee to turn over the assets of the corporation.
any meeting during the duration only at a particular meeting
of the VTA
HELD: NO. In support of the third ground of their motion to dismiss,
Trustee may vote in person or by Proxy holder must vote in person
PNB and NIDC contend that Batjak's complaint for mandamus is based
proxy
on its claim or right to recovery of possession of the three (3) oil mills,
Duration may exceed five years Proxy is of a shorter duration and
on the ground of an alleged breach of fiduciary relationship. Noteworthy
may not exceed 5 years
is the fact that, in the Voting Trust Agreement, the parties thereto were
VTA to be valid and effective, Unless required by the by-laws,
NIDC and certain stockholders of Batjak. Batjak itself was not a signatory
must be notarized and filed with proxies need not be notarized
thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be

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prosecuted and defended in the name of the real party in interest. a trustee or trusties the right to vote and other rights pertaining to the
Applying the rule in the present case, the action should have been filed shares for a period not exceeding five (5) years at any one time: ...
by the stockholders of Batjak, who executed the Voting Trust Agreement
with NIDC, and not by Batjak itself which is not a party to said The acquisition by PNB-NIDC of the properties in question was not
agreement, and therefore, not the real party in interest in the suit to made or effected under the capacity of a trustee but as a foreclosing
enforce the same. creditor for the purpose of recovering on a just and valid obligation of
Batjak.
In addition, PNB claims that Batjak has no cause of action and prays that
the petition for mandamus be dismissed. A careful reading of the Voting LANUZA VS. COURT OF APPEALS 454 SCRA 54, MARCH 28, 2005
Trust Agreement shows that PNB was really not a party thereto. Hence, FACTS: In 1952, the Philippine Merchant Marine School, Inc. (PMMSI)
mandamus will not lie against PNB. was incorporated, with 700 founders’ shares and 76 common shares as
its initial capital stock subscription reflected in the articles of
Batjak has no clear right to be entitled to the writ prayed for. What Batjak incorporation. However, private respondents and their predecessors
seeks to recover is title to, or possession of, real property (the three (3) who were in control of PMMSI registered the company’s stock and
oil mills which really made up the assets of Batjak) but which the records transfer book for the first time in 1978, recording 33 common shares as
show already belong to NIDC. It is not disputed that the mortgages on the only issued and outstanding shares of PMMSI. Sometime in 1979, a
the three (3) oil mills were foreclosed by PNB and NIDC and acquired special stockholders’ meeting was called and held on the basis of what
by them as the highest bidder in the appropriate foreclosure sales. was considered as a quorum of 27 common shares, representing more
Ownership thereto was subsequently consolidated by PNB and NIDC, than 2/3 of the common shares issued and outstanding.
after Batjak failed to exercise its right of redemption. The three (3) oil
mills are now titled in the name of NIDC. From the foregoing, it is In 1982, the heirs of one of the original incorporators, Juan Acayan, filed
evident that Batjak had no clear right to be entitled to the writ prayed a petition with the SEC for the registration of their property rights over
for. In Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. 120 founders’ shares and 12 common shares owned by their father. The
Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said that the SEC hearing officer held that the heirs of Acayan were entitled to the
writ of mandamus will not issue to give to the applicant anything to claimed shares and called for a special stockholders’ meeting to elect a
which he is not entitled by law. new set of officers. As a result, the shares of Acayan were recorded in
the stock and transfer book.
Batjak premises its right to the possession of the three (3) off mills on
the Voting Trust Agreement, claiming that under said agreement, NIDC On May 6, 1992, a special stockholders’ meeting was held to elect a new
was constituted as trustee of the assets, management and operations of set of directors. Private respondents thereafter filed a petition with the
Batjak, that due to the expiration of the Voting Trust Agreement, on 26 SEC questioning the validity of the stockholders’ meeting, alleging that
October 1970, NIDC should tum over the assets of the three (3) oil mills the quorum for the said meeting should not be based on the 165 issued
to Batjak From the foregoing provisions, it is clear that what was and outstanding shares as per the stock and transfer book, but on the
assigned to NIDC was the power to vote the shares of stock of the initial subscribed capital stock of 776 shares, as reflected in the 1952
stockholders of Batjak, representing 60% of Batjak's outstanding shares, Articles of Incorporation.
and who are the signatories to the agreement. The power entrusted to
NIDC also included the authority to execute any agreement or ISSUE No. 1: WON it is the company’s stock and transfer book, or its
document that may be necessary to express the consent or assent to 1952 Articles of Incorporation, which determines stockholders’
any matter, by the stockholders. Nowhere in the said provisions or in shareholdings, and provides the basis for computing the quorum.
any other part of the Voting Trust Agreement is mention made of any
transfer or assignment to NIDC of Batjak's assets, operations, and HELD: The AOI has been described as one that defines the charter of
management. NIDC was constituted as trustee only of the voting rights the corporation and the contractual relationships between the State and
of 60% of the paid-up and outstanding shares of stock in Batjak. This is the corporation, the stockholders and the State, and between the
confirmed by paragraph No. 9 of the Voting Trust Agreement, thus: corporation and its stockholders. When PMMSI was incorporated, the
prevailing law was Act No. 1459,"The Corporation Law." Section 6
9. TERMINATION — Upon termination of this Agreement as heretofore thereof states: “ Five or more persons, not exceeding fifteen, a majority
provided, the certificates delivered to the TRUSTEE by virtue hereof of whom are residents of the Philippines, may form a private corporation
shall be returned and delivered to the undersigned stockholders as the for any lawful purpose or purposes by filing with the Securities and
absolute owners thereof, upon surrender of their respective voting trust Exchange Commission articles of incorporation duly executed and
certificates, and the duties of the TRUSTEE shall cease and terminate.- acknowledged before a notary public, setting forth: (7) If it be a stock
corporation, the amount of its capital stock, in lawful money of the
Under the aforecited provision, what was to be returned by NIDC as Philippines, and the number of shares into which it is divided, and if such
trustee to Batjak's stockholders, upon the termination of the agreement, stock be in whole or in part without par value then such fact shall be
are the certificates of shares of stock belonging to Batjak's stockholders, stated; Provided, however, That as to stock without par value the articles
not the properties or assets of Batjak itself which were never delivered, of incorporation need only state the number of shares into which said
in the first place to NIDC, under the terms of said Voting Trust capital stock is divided.
Agreement.
(8) If it be a stock corporation, the amount of capital stock or number of
In any event, a voting trust transfers only voting or other rights pertaining shares of no-par stock actually subscribed, the amount or number of
to the shares subject of the agreement or control over the stock. The shares of no-par stock subscribed by each and the sum paid by each on
law on the matter is Section 59, Paragraph 1 of the Corporation Code his subscription. ...”
(BP 68) which provides:
Sec. 59. Voting Trusts — One or more stockholders of a stock A review of PMMSI’s articles of incorporation shows that the corporation
corporation may create a voting trust for the purpose of confering upon complied with the requirements laid down by Act No. 1459. In the
instant case, the articles of incorporation indicate that at the time of
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incorporation, the incorporators were bona fide stockholders of 700 (d) The stockholder may designate any person of his choice to
founders’ shares and 76 common shares. Hence, at that time, the act as his proxy. Absent such designation, the Chairman of
corporation had 776 issued and outstanding shares. Moreover, quorum the meeting shall be deemed authorized and hereby
is based on the totality of the shares which have been subscribed and directed to cast the vote as indicated by the voting
issued, whether it be founders’ shares or common shares. In the instant stockholder or his proxy.
case, two figures are being pitted against each other— those contained (e) The proxy must be dated. If a duly accomplished and
in the articles of incorporation, and those listed in the stock and transfer executed proxy is undated, the postmark or date of dispatch
book. To base the computation of quorum solely on the obviously indicated in the electronic mail or, if not mailed, its actual
deficient, if not inaccurate stock and transfer book, and completely date of presentation, shall be considered as the date of the
disregarding the issued and outstanding shares as indicated in the proxy.
articles of incorporation would work injustice to the owners and/or (f) Where the corporation receives more than one (1) proxy from
successors in interest of the said shares. This case is one instance where the same stockholder and they are all undated, the postmark
resort to documents other than the stock and transfer books is or electronic dates shall be considered. If the proxies are
necessary. The stock and transfer book of PMMSI cannot be used as the mailed on the same date, the one bearing the latest time of
sole basis for determining the quorum as it does not reflect the totality day indicated in the postmark or latest time of dispatch
of shares which have been subscribed, more so when the articles of appearing in the electronic mail shall prevail. If the proxies
incorporation show a significantly larger amount of shares issued and are not mailed, then the time of their actual presentation is
outstanding as compared to that listed in the stock and transfer book. considered. That which is presented last will be recognized.
(g) If the stockholder intends to designate several proxies, the
At the time the corporation was set-up, there were already 776 issued number of shares of stock to be represented by each proxy
and outstanding shares as reflected in the articles of incorporation. No shall be specifically indicated in the proxy form. If some of
proof was adduced as to any transaction effected on these shares from the proxy forms do not indicate the number of shares, the
the time PMMSI was incorporated up to the time the instant petition was total shareholding of the stockholder shall be tallied and the
filed, except for the 33 shares which were recorded in the stock and balance thereof, if any, shall be allotted to the holder of the
transfer book in 1978, and the additional 132 in 1982. But obviously, the proxy form without the number of shares. If all are in blank,
shares so ordered recorded in the stock and transfer book are among the stocks shall be distributed equally among the proxies.
the shares reflected in the articles of incorporation as the shares The number of persons to be designated as proxies may be
subscribed to by the incorporators named therein. One who is actually limited by the By-laws.
a stockholder cannot be denied his right to vote by the corporation (2) One Share-One Vote Policy
merely because the corporate officers failed to keep its records (a) Pursuant to Section 24 of the Corporation Code, one share
accurately. A corporation’s records are not the only evidence of the is entitled to one vote. Voting shall always be on the basis of
ownership of stock in a corporation the number of shares and not on the number of stockholders
present in the stockholders' meeting.
ISSUE No. 2: WON the Espejo Decision should be applied for the (b) Common shares shall have complete voting rights and such
benefit of respondents. (The "Espejo Decision" is the decision of the shares cannot be deprived of such rights except as provided
SEC which ordered the recording of the shares of Jose Acayan in the by law.
stock and transfer book. (c) Each common share shall be equal in all respects to every
other common share. Corporations are hereby prohibited
HELD: The ruling in the Acayan case would ipso facto benefit the private from issuing multiple voting and non-voting common shares
respondents, since to require a separate judicial declaration to nor can they limit the maximum number of votes per
recognize the shares of the original incorporators would entail stockholder irrespective of the number of shares he holds.
unnecessary delay and expense. Besides, the incorporators have already (3) Outstanding Capital Stock
proved their stockholdings through the provisions of the articles of (a) The articles of incorporation and the certificate of stocks
incorporation. cannot deprive preferred shares of the right to vote in the
following cases (Section 6, Corporation Code)
SEC Memorandum Circular No. 4, Series of 2004 i. Amendment of the articles of incorporation;
Voting by Mail and One Share-One Vote Policy ii. Adoption and amendment of by-taws;
iii. Sale, lease, exchange, mortgage, pledge or other
Pursuant to the powers granted to the Commission by Presidential disposition of all or substantially all of the corporate
Decree No. 902-A, as amended, and the Securities Regulation Code, property;
the following provisions to implement Section 16, Section 24, and iv. Incurring, creating or increasing bonded
Section 52 of the Corporation Code of the Philippines (BP 68) are indebtedness;
hereby adopted: v. Increase or decrease of capital stock;
vi. Merger or consolidation of the corporation with
(1) Voting by Mail another corporation or other corporations;
(a) Stockholders attending stockholders' meetings shall vote vii. Investment of corporate funds in another corporation
their shares as provided by existing taws. or business in accordance with the Corporation Code;
(b) Stockholders shall have the right to vote at all stockholders’' and Dissolution of the corporation.
meetings in person or by proxy. The stockholder may deliver, (b) For purposes of the foregoing, phrase "outstanding capital
in person or by mail, his proxy vote directly to the stock" as defined under Section 137 of the Corporation
corporation. Code shall be deemed to include preferred shares.
(c) In cases provided in Section 16 of the Corporation Code of
the Philippines where written assent is allowed, the same
number of votes shall be observed, and voting can likewise
be done by proxy.
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IX. STOCK and STOCKHOLDERS subscriber a stockholder, and rendering him liable as such, as soon as
A person may become a stockholder in a corporation in either of three the subscription is accepted, the special term being an independent
ways: stipulation.
(1) By a contract of subscription with the corporation;
(2) By purchase of treasury shares from the corporation; and In case of doubt in the intention of the parties, a subscription should be
(3) By purchase or acquisition of shares from existing stockholders. considered as an absolute subscription upon special terms, rather than
conditional. The policy of giving protection to creditors and other
A. Subscription Contract subscribers has led to the adoption of this rule of construction favoring
A “subscription”, properly speaking, is the mutual agreement of the the immediate liability of the subscriber.
subscribers to take and pay for the stocks of the corporation. A
“subscription contract”, on the other hand is specifically defined in Sec. Conditional Subscriptions are valid provided: (1) there is nothing in the
59: charter or enabling act prohibiting the same; and (2) providing the
SEC. 59. Subscription Contract. – Any contract for the acquisition of conditions are not such as to render their performance beyond the
unissued stock in an existing corporation or a corporation still to be powers of the corporation or in violation of law or contrary to public
formed shall be deemed a subscription within the meaning of this Title, policy.
notwithstanding the fact that the parties refer to it as a purchase or some
other contract. TRILLANA VS. QUEZON COLLEGE, INC. 93 PHIL., 383, JUNE 27, 1953
FACTS: Damasa Crisostomo sent the following letter to the Board of
SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a Trustees of the Quezon College:
shareholder only upon full payment of the price. UNISSUE shares cannot
be the subject of a “purchase”. June 1, 1948
The BOARD OF TRUSTEES
“We may add that the law in force in this jurisdiction makes no Quezon College Manila
distinction, in respect to the liability of the subscriber, between shares
subscribed before incorporation is effected and shares subscribed Gentlemen:
thereafter. All like are bound to pay full value in cash or its equivalent, Please enter my subscription to dalawang daan (200) shares of your
and any attempt to discriminate in favor of one subscriber by relieving capital stock with a par value of P100 each. Enclosed you will find
him of this liability wholly or in part is forbidden. In what is here said we (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda)
have reference of course primarily to subscriptions to shares that have pesos as my initial payment and the balance payable in accordance with
not been previously issued. It is conceivable that the power of the law and the rules and regulations of the Quezon College. I hereby agree
corporation to make terms with the purchaser would be greater where to shoulder the expenses connected with said shares of stock. I further
the shares which are the subject of the transaction have been acquired submit myself to all lawful demands, decisions or directives of the Board
by the corporation in course of commerce, after they have already been of Trustees of the Quezon College and all its duly constituted officers or
once issued. But the shares with which are here concerned are not of authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang
this sort.” (National Exchange Co., Inc. vs. Dexter) tagalog na aking nalalaman).

EXAMPLE: If X corporation had P1M authorized capital divided into 1M

shares with a par value of P1. 500,000 has already been subscribed: Very respectfully,
(1) Z “purchased” 100,000 of the UNISSUED shares paying 50% down (Sgd.) DAMASA CRISOSTOMO
payment and the balance payable after 6 months, with a condition Signature of subscriber
that he will not be considered a shareholder until full payment. –
He is still liable for the balance because this will be considered a Nilagdaan sa aming harapan:
subscription no matter how the parties refer to it and accordingly, JOSE CRISOSTOMO EDUARDO CRISOSTOMO
Z is liable as a shareholder therein.
(2) Z was declared a delinquent shareholder and X Co. was declared On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions
as the winning bidder by paying P100,000 and acquired the appear to have been made, herein appellant filed a claim in her testate
delinquent shares. Later on, 20,000 of the shares were sold to Y – proceedings for P20,000 which was opposed by the administrator, and
here, the shares being from treasury and not from unissued shares, dismissed by the CFI.
may be the proper subject of a “purchase” and thus, a condition
that Y would not became a shareholder until full payment may be ISSUE: WON the subscription is valid and enforceable.
valid.
HELD: NO. It appears that the application sent by Damasa Crisostomo
ORAL: A subscription contract need not be in writing such that an oral to the Quezon College, Inc. was written on a general form indicating
contract of subscription is valid and enforceable under the Statute of that an applicant will enclose an amount as initial payment and will pay
Frauds. Thus, it was ruled by the SC that such an agreement does not the balance in accordance with law and the regulations of the College.
seem to fall within the definition of a sale under our substantive law and On the other hand, in the letter actually sent by Damasa Crisostomo, the
is therefore believed that an oral subscription agreement as latter (who requested that her subscription for 200 shares be entered)
distinguished from sale of stock is valid and enforceable. not only did not enclose any initial payment but stated that "babayaran
kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is
CONDITION: Subscriptions may be made upon a condition precedent nothing in the record to show that the Quezon College, Inc. accepted
or upon special terms (condition subsequent). A conditional the term of payment suggested by Damasa Crisostomo, or that if there
subscription, or one made upon a condition precedent, does not make was any acceptance the same came to her knowledge during her
the subscriber a stockholder, or render him to pay the amount of his lifetime. As the application of Damasa Crisostomo is obviously at
subscription, until performance of the condition. A subscription upon variance with the terms evidenced in the form letter issued by the
special terms, on the other hand, is an absolut subscription, making the Quezon College, Inc., there was absolute necessity on the part of the
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College to express its agreement to Damasa's offer in order to bind the land or real estate property is offered as consideration for
latter. Conversely, said acceptance was essential, because it would be subscription of shares of stock.
unfair to immediately obligate the Quezon College, Inc. under Damasa's
promise to pay the price of the subscription after she had caused fish to B. Pre-incorporation Subscription
be caught. In other words, the relation between Damasa Crisostomo Pre-incorporation subscriptions make reference to subscriptions for
and the Quezon whereby the latter offered its stock for subscription on shares of stock of a corporation still to be formed while post-
the terms stated in the form letter, and Damasa applied for subscription incorporation subscriptions are those made or executed after the
fixing her own plan of payment, — a relation, in the absence as in the formation or organization of the corporation
present case of acceptance by the Quezon College, Inc. of the counter
offer of Damasa Crisostomo, that had not ripened into an enforceable SEC. 60. Pre-incorporation Subscription. – A subscription of shares in a
contract. corporation still to be formed shall be irrevocable for a period of at least
six (6) months from the date of subscription, unless all of the other
Indeed, the need for express acceptance on the part of the Quezon subscribers consent to the revocation, or the corporation fails to
College, Inc. becomes the more imperative, in view of the proposal of incorporate within the same period or within a longer period stipulated
Damasa Crisostomo to pay the value of the subscription after she has in the contract of subscription. No pre-incorporation subscription may
harvested fish, a condition obviously dependent upon her sole will and, be revoked after the articles of incorporation is submitted to the
therefore, facultative in nature, rendering the obligation void, under Commission.
article 1115 of the old Civil Code which provides as follows: "If the
fulfillment of the condition should depend upon the exclusive will of the
IMMEDIATE BINDING EFFECT: This new provision gives an immediate
debtor, the conditional obligation shall be void. If it should depend
binding effect on pre-incorporation subscriptions as against the
upon chance, or upon the will of a third person, the obligation shall
subscribers of the capital stock of a corporation still to be formed. Pre-
produce all its effects in accordance with the provisions of this code." It
incorporation subscriptions are, in fact, mandatory as may be culled
cannot be argued that the condition solely is void, because it would
from the provisions of Sec. 13 and 14 of the Code which mandates that
have served to create the obligation to pay, unlike a case, exemplified
a corporation may be registered as such only if at least 25% of its
by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative
authorized capital stock has been subscribed and that at least 25% of
condition was held void because it referred merely to the fulfillment of
the subscribed capital has been paid.
an already existing indebtedness.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this
(1) For a period of at least six (6) months from the date of subscription
Court already held that "a condition, facultative as to the debtor, is
unless:
obnoxious to the first sentence contained in article 1115 and renders the
(a) all the subscribers consent to the revocation; or
whole obligation void."
(b) the incorporation fails to materialize within said period or within
a longer period as may stipulated in the contract of
SEC Memorandum Circular No. 11, Series of 2016 subscription; and
Subscription Contracts (2) After submission of the AOI to the SEC.
The Commission En Banc in its meeting held on August 2, 2016 had
resolved to amend Item No. 2 of Memorandum Circular No. 6 series of C. Stock Issuance
2012, which shall now be read, as amended, to wit: Stock issuance is generally the initial and primary source of corporate
capital. Other sources may include corporate borrowings, loans and
TO ALL CONCERNED: Consistent with the objectives of Republic Act advances from creditors or stockholders. Corporate earnings may also
9485 (otherwise known as the Anti Red Tape Act of 2007), the be a source of corporate funds if it is reinvested or ploughed back to the
Commission, in its meetings on July 12 and July 27, 2012, resolved to company.
dispense with the following requirements in the registration activities set
forth below: SEC. 61. Consideration for Stocks. – Stocks shall not be issued for a
(1) BANK CERTIFICATE OF DEPOSIT - for registration of the Articles consideration less than the par or issued price thereof. Consideration for
of Incorporation of new corporations where the subscription to the the issuance of stock may be:
authorized capital stock is paid in cash; if a portion cf the (a) Actual cash paid to the corporation;
subscription is other than cash, the non-cash subscription shall be (b) Property, tangible or intangible, actually received by the
proven by the appropriate supporting documents; corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
(2) SPECIAL AUDIT REPORT — for applications to increase the stock issued;
authorized capital stock of corporations where the subscription to (c) Labor performed for or services actually rendered to the
the increase is paid in cash except (a) listed companies, (b) public corporation;
companies defined in the Securities Regulation Code, (c) (d) Previously incurred indebtedness of the corporation;
companies that offer or sell securities to the public, (d) where the (e) Amounts transferred from unrestricted retained earnings to stated
payment to the subscription to the increase is more than Fifty capital;
Million pesos (P50,000,000.00); (f) Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
In lieu of each report, a notarized Subscription Contract among the (g) Shares of stock in another corporation; and/or
stockholder/s, treasurer president for the corporation stating the (h) Other generally accepted form of consideration.
number of additional shares subscribed to and paid for shall be
submitted by the corporation.

(3) PRIMARY ENTRY - for Deed of Assignment in the registration of

new corporations or increase ir the authorized capital stock where
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Where the consideration is other than actual cash or consists of conversion” speaks of shares of stock surrendered to the corporation in
intangible property such as patents or copyrights, the valuation thereof exchange for new or different type of shares. Example: Found Shares
shall initially be determined by the stockholders or the board of which, after 5 years, may be converted to common stocks.
directors, subject to the approval of the Commission.
PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in
Shares of stock shall not be issued in exchange for promissory notes or exchange for (1) promissory notes; or (2) future services – as their
future service. The same considerations provided in this section, insofar realization are not certain.
as applicable, may be used for the issuance of bonds by the corporation.
NATIONAL EXCHANGE CO. VS. DEXTER 51 PHIL. 601, FEBRUARY 25,
The issued price of no-par value shares may be fixed in the articles of 1928
incorporation or by the board of directors pursuant to authority FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a
conferred by the articles of incorporation or the bylaws, or if not so fixed, written subscription to the corporate stock of C. S. Salmon & Co. in the
by the stockholders representing at least a majority of the outstanding following form:
capital stock at a meeting duly called for the purpose.
“I hereby subscribe for three hundred (300) shares of the capital stock
“ISSUE”: is generally employed to indicate the making of a share of C. S. Salmon and Company, payable from the first dividends declared
contract or contract of subscription, that is, transaction by which a on any and all shares of said company owned by me at the time
person becomes the owner of shares and by which new share contracts dividends are declared, until the full amount of this subscription has
are created. It is often associated with the execution and delivery of a been paid”
share certificate, but the issuance of the shares is not dependent on the
delivery of a certificate of stock. Upon subscription, defendant Dexter paid P15,000 from the dividends
declared by the company and supplemented by money supplied
“PAR” or “ISSUED PRICE”: while it may not reflect the true value of the personally be the subscriber. No other payment was made.
shares which constantly fluctuates, merely indicates the amount which
the original subscribers are supposed to contribute to the corporate ISSUE: WON the subscription to be paid out of the dividends declared
capital as the basis of the privilege of profit sharing with limited liability. on the shares has the effect of relieving the subscriber from personal
liability in an action to recover the value of the shares.
PROPERTY: If shares are issued in exchange for property, the value of
such should at least be equal to the par or issued value of the stocks. HELD: NO. Under the American regime corporate franchises in the
Such value, may be determined with reference to Philippine Islands are granted subject to the provisions of section 74 of
(a) REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) the Organic Act of July 1, 1902, which, in the part here material, is
BIR Zonal Valuation; or (3) Market Value indicated in the Real Estate substantially reproduced in section 28 of the Autonomy Act of August
Tax Declaration. 29, 1916. In the Organic Act it is among other things, declared: "That
(b) INTANGIBLE PROPERTY – as determined by the incorporators or all franchises, privileges, or concessions granted under this Act shall
the BOD subject to the approval of the SEC. forbid the issue of stock or bonds except in exchange for actual cash or
for property at a fair valuation equal to the par value of the stock or
TRUE VALUE RULE: the motives and intent of those making the valuation bonds so issued; " (Act of Congress of July 1, 1902,
are disregarded and the sole and decisive factor or question is whether sec. 74.)
or not the property or services are in fact worth the value placed on
them. Pursuant to this provision we find that the Philippine Commission
inserted in the Corporation Law, enacted March 1, 1906, the following
GOOD FAITH RULE: is based on the proposition that the value of the provision: ". . .
property or services is a matter about which there can be an honest no corporation shall issue stock or bonds except in exchange for actual
difference of opinion. Therefore, if the parties have acted in good faith cash paid to the corporation or for property actually received by it at a
without fraud or intentional over-valuation, the transaction cannot be fair valuation equal to the par value of the stock or bonds so issued."
overturned even if it later becomes evident that the property or services (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
were in fact worth much less than the value fixed on them initially.
The prohibition against the issuance of shares by corporations except
Most jurisdiction follow the GOOD FAITH rule. for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
STOCK DIVIDENDS: Sec. 62(5) which states that “amounts transferred Philippine Islands; and it would seem that our lawmakers could scarcely
from unrestricted retained earnings to stated capital” refer to stock have chosen language more directly suited to secure absolute equality
dividends where corporate earnings are capitalized rather than being stockholders with respect to their liability upon stock subscriptions.
distributed as cash dividend. It merely converts income into capital, the Now, if it is unlawful to issue stock otherwise than as stated it is self-
consideration being the retained earnings itself which would have evident that a stipulation such as that now under consideration, in a
accrued to the stockholders in proportion to their respective stock subscription, is illegal, for this stipulation obligates the subscriber
stockholdings. to pay nothing for the shares except as dividends may accrue upon the
stock. In the contingency that dividends are not paid, there is no liability
NO CONSIDERATION: stocks may not be issued without consideration at all. This is a discrimination in favor of the particular subscriber, and
for the following reasons: hence the stipulation is unlawful.
(1) it is discriminatory against other stockholders; and
(2) it prejudices the rights of creditors under the Trust Fund Doctrine. The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken from
RECLASSIFICATION: Sec. 61 (f)) which provides that “outstanding the standard encyclopedia treatise, Corpus Juris:
shares exchanged for stocks in the event of reclassification or
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Nor has a corporation the power to receive a subscription upon such to do so to issue their securities or shares of stocks in uncertificated or
terms as will operate as a fraud upon the other subscribers or scripless form in accordance with the rules of the Commission.
stockholders by subjecting the particular subscriber to lighter burdens,
or by giving him greater rights and privileges, or as a fraud upon No shares of stock against which the corporation holds any unpaid claim
creditors of the corporation by withdrawing or decreasing the capital. It shall be transferable in the books of the corporation.
is well settled therefore, as a general rule, that an agreement between
a corporation and a particular subscriber, by which the subscription is REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
not to be payable, or is to be payable in part only, whether it is for the (1) It must be signed by the president or vice-president and
purpose of pretending that the stock is really greater than it is, or for the countersigned by the secretary or assistant secretary;
purpose of preventing the predominance of certain stockholders, or for (2) It must be sealed with the corporate seal, and
any other purpose, is illegal and void as in fraud of other stockholders (3) The entire value thereof (together with the interest or expenses, if
or creditors, or both, and cannot be either enforced by the subscriber any) should have been paid.
or interposed as a defense in an action on the subscription. (14 C. J., p.
570.) RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares
of stock cannot be entitled to the issuance of a certificate of stock until
The rule thus stated is supported by a long line of decisions from the full amount of his subscription together with interest and expenses
numerous courts, with little or no diversity of opinion. As stated in the (in case of delinquent shares) if any is due, has been paid, a subscriber,
headnote to the opinion of the Supreme Court of United States in the even if not yet fully paid, is entitled to exercise all the rights of a
case of Putnan vs. New Albany, etc. Railroad Co. as reported in 21 Law. stockholder and the corresponding liability that attach thereunder:
ed., 361, the rule is that "Conditions attached to subscriptions, which, if
valid, lessen the capital of the company, are a fraud upon the grantor of In essence, the issuance of a certificate of stock is not a condition sine
the franchise, and upon those who may become creditors of the qua non to consider a subscriber a stockholder. To all intents and
corporation, and upon unconditional stockholders." purposes, a subscriber is a shareholder upon subscription and entitled
to the all the rights as such, except:
In the appellant's brief attention is called to the third headnote to Bank (1) For the issuance of a certificate of stock;
vs. Cook (125 Iowa, 111), where it is stated that a collateral agreement (2) If his shares are declared delinquent; or
with a subscriber to stock that his subscription shall not be collectible (3) When he exercises appraisal right under Sec. 81.
except from dividends on the stock, is valid as between the parties and
a complete defense to a suit on notes given for the amount of the NEGOTIABILITY: A certificate of stock is not regarded as “negotiable”
subscription. A careful perusal of the decision will show that the rule thus in the sense same sense as a bill or a not, even if it endorsed in blank.
broadly stated in the headnote is not justified by anything in the Thus, while it may be transferred by endorsement coupled with delivery
reported decision; for what the court really held was that the making of thereof, it is nonetheless non-negotiable in that the transferee takes it
such promise by the agent of the corporation who sold the stock is without prejudice to all the rights and defenses which the true and lawful
admissible in evidence in support of the defense of fraud and failure of owner may have except in so far as the principles governing estoppel
consideration. Moreover, even if the decision had been to the effect may apply.
supposed, the rule announced in the headnote, could have no weight
in a jurisdiction like this where there is a statutory provision prohibiting NON-REGISTRATION: of shares disposed of by the holder will not affect
such agreements. the validity of the transfer at least in so far as the contracting parties are
concerned. As regards, the corporation, the transferee will not be
D. Certificates of Stock and their Transfer recognized as such stockholder and could not exercise the rights until
Share of Stock: may rightfully be described as a profit-sharing contract, the transfer has been duly recorded in the stock and transfer book. As
a series of units of interest and participation in a corporation in such, “he cannot vote or be vote for, and he will not be entitled to
consideration of a proportionate right to participate in dividend and dividends. The corporation may be protected when it pays dividends to
other distributions. They are personal properties and the owners thereof the registered owner despite a previous transfer of which it had no
have the unbridled right to transfer the same to anyone they please knowledge. The purpose of registration therefore is two-fold: (1) to
subject only to reasonable charter provisions. enable the transferee to exercise all the rights of stockholder, and (2) to
inform the corporation of any change in share ownership so that it can
Certificate of Stock: ascertain the person entitled to the rights and subject to the liabilities of
The piece of paper or document which evidences the ownership of a corporation” (De Erquiga vs. CA)
shares and a convenient instrument in the transfer of the title.
REGISTRATION: is necessary to:
SEC. 62. Certificate of Stock and Transfer of Shares. – The capital stock (1) Enable the corporation to know who its stockholders are;
of corporations shall be divided into shares for which certificates signed (2) Enable the transferee to exercise his rights as a stockholder;
by the president or vice president, countersigned by the secretary or (3) Afford the corporation an opportunity to object or refuse
assistant secretary, and sealed with the seal of the corporation shall be registration of the transfer in cases allowed by law (as when it has
issued in accordance with the bylaws. Shares of stock so issued are unpaid claims on the shares transferred);
personal property and may be transferred by delivery of the certificate (4) Avoid fictitious and fraudulent transfers; and
or certificates indorsed by the owner, his attorney-in-fact, or any other (5) Protect creditors who have the right to look upon stockholders, in
person legally authorized to make the transfer. No transfer, however, case of non-payment or watered shares, for the satisfaction of their
shall be valid, except as between the parties, until the transfer is claims.
recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the
certificate or certificates, and the number of shares transferred. The
Commission may require corporations whose securities are traded in
trading markets and which can reasonably demonstrate their capability
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MANDAMUS: If the corporate secretary refuses to registered or record

the transfer, mandamus will lie to compel the registration. This is In the present action, appellant HPL Jollye claims ownership of said
because such duty is ministerial. HOWEVER, he cannot be compelled to shares. Apparently, these shares were sold by Diosomito to Emetertio
do so when the transferee’s title to said shares has no prima facie validity Barcelon on Feb. 3, 1931 but the certificates were cancelled and a new
or is uncertain. one issued only on Sep. 16, 1932. Later on, the same shares were sold
to Jollye and registered in the books on Feb. 13, 1933.
TWO MODES OF TRANSFERRING STOCKS:
(1) Endorsement and delivery of certificate of stock; ISSUE: WON a bona fide transfer of the shares of a corporation, not
(2) Notarized deed. registered or noted on the books of the corporation, is valid as against
a subsequent lawful attachment of said shares, regardless of whether
The SEC has, however, ruled that when a corporation has already issued the attaching creditor had actual notice of said transfer or not.
stock certificates, any transfer of the shares can only be effectively made
by endorsement and delivery of the stock certificate. A deed of transfer, HELD: Section 35 (now Section 62 of the RCC) of the Corporation Law
sale or assignment alone would not suffice (as affirmed by the SC in i) is as follows:
for to rule otherwise would open the door to fraudulent or fictitious SEC. 35. The capital stock of stock corporations shall be divided into
transfer which the SEC seeks to avoid. In effect, while a formal contract shares for which certificates signed by the president or the vice-
of sale in a notarized document is equivalent to actual delivery of the president, countersigned by the secretary or clerk and sealed with the
certificate itself, this mode of transfer is available only if no certificate of by-laws. Shares of stock so issued are personal property and may be
stock has been issued. transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer.
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably No transfer, however, shall be valid, except as between the parties, until
restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and the transfer is entered and noted upon the books of the corporation so
Fleischer vs. Botica Nolasco, the SC held that every owner of corporate as to show the names of the parties to the transaction, the date of the
shares has the same uncontrollable right to alienate them and is under transfer, the number of the certificate, and the number of shares
no obligation from selling them at his sacrifice and for the welfare and transferred
benefit of the corporation and other stockholders. But while
unreasonable restrictions may not be allowed, the right to transfer may We prefer to adopt the line followed by the Supreme Courts of
be “regulated” to give the corporation protection against colorable or Massachusetts and of Wisconsin. (See Clews vs. Friedman, 182 Mass.,
fraudulent transfer or to enable it to know who its stockholders are. Also, 555; 66 N.E. 201, and In re. Murphy, 51 Wis., 519; 8 N.W., 419.) In this
as a matter of policy, the SEC allows the grant of “preferential rights” to case the court had under consideration a statute identical with our own
existing stockholders and/or the corporation, giving them the first section 35, supra, and the court said:
option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is We think the true meaning of the language is, and the obvious intention
contained in the AOI and in all the stock certificates to be issued. This is of the legislature in using it was, that all transfers of shares should be
considered “reasonable” since it merely suspends the right to transfer entered, as here required, on the books of the corporation. And it is
within the period specified. equally clear to us that all transfers of shares not so entered are invalid
as to attaching or execution creditors of the assignors, as well as to the
OTHER RESTRICTIONS: corporation and to subsequent purchasers in good faith, and indeed, as
(1) It is not valid, except as between the parties, until recorded in the to all persons interested, except the parties to such transfers. All
books of the corporation; transfers not so entered on the books of the corporation are absolutely
(2) Shares of stock against which the corporation holds any unpaid void; not because they are without notice or fraudulent in law or fact,
claim shall not be transferrable in the books of the corporation. but because they are made so void by statute.
Unpaid claims, refer to claims arising from unpaid subscription and
not to any indebtedness which a stockholder may owe the To us the language of the legislature is plain to the effect that the right
corporation such as monthly dues; of the owner of the shares of stock of a Philippine corporation to transfer
(3) Restrictions required to be indicated in the AOI, bylaws and stock the same by delivery of the certificate, whether it be regarded as
certificates of a close corporation; statutory on common law right, is limited and restricted by the express
(4) Restrictions imposed by special law, such as the Public Service Act provision that "no transfer, however, shall be valid, except as between
requiring the approval of the government agency concerned if it the parties, until the transfer is entered and noted upon the books of
will vest unto the transferee 40% of the capital of the public service the corporation." Therefore, the transfer of the 75 shares in the North
company; Electric Company, Inc., made by the defendant Diosomito to the
(5) Sale to aliens in violation of maximum ownership of shares under defendant Barcelon was not valid as to the plaintiff-appellee, Toribia
the Nationalization Laws; and Uson, on January 18, 1932, the date on which she obtained her
(6) Those covered by reasonable agreement of the parties. attachment lien on said shares of stock which still stood in the name of
Diosomito on the books of the corporation.
TRANSFER: as used in the Corporation Code, refers to absolute and
unconditional transfer to warrant registration in the books of the MONSERRAT VS. CERON 58 PHIL. 469, SEPTEMBER 27, 1933
corporation in order to bind the latter and other third persons. FACTS: Enrique Monserrat, president and manager of the Manila Yellow
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his
USON VS. DIOSOMITO 61 PHIL., 535, JUNE 17, 1935 1,200 shares in consideration of the interest shown and the financial aid
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an extended him (Monserrat) in the organization of the corporation. This
attachment was levied on Jan. 18, 1932 upon the property of defendant assignment allowed Ceron to derive the right to enjoy the profits (during
Vicente Diosmomito including the question 75 shares of North Electric his lifetim) that may be derived from the shares but prohibited him from
Company, Inc. On March 20, 1933, the said shares were sold at a public acts of absolute ownership, such acts and the right to vote, reserved to
auction to satisfy the claim of Uson. Monserrat and his heirs. Such assignment was recorded in the books of
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the corporation and the corresponding shares certificate was issued to security for the payment of a debt, or the performance of some other
Ceron. obligation specified therein, the condition being that the sale shall be
avoided upon the seller paying to the purchaser a sum of money or
Later on, Ceron mortgaged the shares to herein defendant Eduardo doing some other act named. If the condition is performed according to
Matute, the latter without knowledge of the existence of the assignment. its terms the mortgage and sale immediately become void, and the
Due to non- payment, Matute foreclosed the mortgage and the shares mortgage is hereby divested of his title.
were sold at a public auction.
According to the legal provision just quoted, although a chattel
Monserrat claims ownership over the shares and the lower court mortgage, accompanied by delivery of the mortgaged thing, transfers
rendered judgment in his favor, holding that the mortgage on the shares the title and ownership thereof to the mortgage creditor, such transfer
was null and void, but the mortgage on the usufruct is valid. is not absolute but constitutes a mere security for the payment of the
mortgage debt, the transfer in question becoming null and void from
ISSUE: WON it is necessary to enter upon the books of the corporation the time the mortgage debtor complies with his obligation to pay his
a mortgage constituted on shares of stock in order that such mortgage debt.
may be valid and may have force and effect as against third persons.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14,
HELD: NO. Section 35 (now Section 62 of the RCC) of the Corporation 17; 34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases,
Law provides the following: second series, vol. 4, p. 978, the following appears:
SEC. 35. The capital stock of stock corporations shall be divided into A "transfer" is the act by which owner of a thing delivers it to another
shares for which certificates signed by the president or the vice- with the intent of passing the rights which he has in it to the latter, and
president, counter signed by the secretary or clerk and sealed with the a chattel mortgage is not within the meaning of such term.
seal of the corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred Therefore, the chattel mortgage is not the transfer referred to in section
by delivery of the certificate indorsed by the owner or his attorney in fact 35 of Act No. 1459 commonly known as the Corporation law, which
or other person legally authorized to make the transfer. No transfer, transfer should be entered and noted upon the books of a corporation
however, shall be valid, except as between the parties, until the transfer in order to be valid, and which, as has already been said, means the
is entered and noted upon the books of the corporation so as to show absolute and unconditional conveyance of the title and ownership of a
the names of the parties to the transaction, the date of the transfer the share of stock.
number of the certificate, and the number of shares transferred. No
share of stock against which the corporation hold, any unpaid claim shall If, in accordance with said section 35 of the Corporation Law, only the
be transferable on the books of the corporation. transfer or absolute conveyance of the ownership of the title to a share
need be entered and noted upon the books of the corporation in order
The legal provision just quoted does not require any entry except of that such transfer may be valid, therefore, inasmuch as a chattel
transfers of shares of stock in order that such transfers may be valid as mortgage of the aforesaid title is not a complete and absolute alienation
against third persons. Now, what did the Legislature mean in using the of the dominion and ownership thereof, its entry and notation upon the
word "transfer?” books of the corporation is not necessary requisite to its validity.

Inasmuch as it does not appear from the text of the Corporation Law It is obvious, therefore, that the defendant entity Erma, Inc., as a
that an attempt was made to give a special signification to the word conditional purchaser of the shares of stock in question given as security
"transfer", we shall construe it according to its accepted meaning in for the payment of his credit, acquired in good faith Carlos G. Ceron's
ordinary parlance. right and title to the 600 common shares of stock evidenced by
certificate No. 7 of the MYTC, and as such conditional purchaser in good
The word "transferencia" (transfer) is defined by the "Diccionario de la faith, it is entitled to the protection of the law.
Academia de la Lengua Castellana" as "accion y efecto de transferir"
(the act and effect of transferring); and the verb "transferir", as "ceder o In view of the foregoing considerations, we are of the opinion and so
renunciar en otro el derecho o dominio que se tiene sobre una cosa, hold that, inasmuch as section 35 of the Corporation Law does not
haciendole dueno de ella" (to assign or waive the right in, or absolute require the notation upon the books of a corporation of transactions
ownership of, a thing in favor of another, making him the owner thereof). relating to its shares, except the transfer of possession and ownership
thereof, as a necessary requisite to the validity of such transfer, the
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. notation upon the aforesaid books of the corporation, of a chattel
589, the word "transfer" is defined as follows: mortgage constituted on the shares of stock in question is not necessary
"Transfer" means any act by which property of one person is vested in to its validity.
another, and "transfer of shares", as used in Uniform Stock Transfer Act
(Comp. St. Supp., 690), implies any means whereby one may be CHUA GUAN VS. SAMAHANG MAGSASAKA, INC. 62 PHIL. 472,
divested of and another acquire ownership of stock. (Wallach vs. Stein NOVEMBER 02, 1935
[N.J.], 136 A., 209, 210.)" FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage
his shares to Chua Chiu, such assignment recorded in the Office of the
In view of the definitions cited above, the question arises as to whether Register of Deeds and the books of the corporation. For non-payment,
or not a mortgage constituted on certain shares of stock in accordance the mortgage was foreclosed, and the shares were sold at a public
with Act No. 1508, as amended by Act No. 2496, is a transfer of such auction with plaintiff Chua Guan as the highest bidder.
shares in the abovementioned sense.
The Company refused to cancel the certificates of stock and issue new
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496, ones to herein plaintiff alleging that prior to the date of plaintiff’s
defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows: demand, nine attachments had been issued and served and noted on
SEC. 3. A chattel mortgage is a conditional sale of personal property as the books of the corporation. Thus, a prayer for a writ of mandamus.
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The validity of the assignments and the mortgage is not in question. By analogy with the foregoing and considering the ownership of shares
in a corporation as property distinct from the certificates which are
ISSUE: WON the registration of the mortgage in the registry of chattel merely the evidence of such ownership, it seems to us a reasonable
mortgage in the office of the register of deeds give constructive notice construction of section 4 of Act No. 1508 to hold that the property in
to the said attaching creditors and thus gave preference to the the shares may be deemed to be situated in the province in which the
mortgage over the other debts. corporation has its principal office or place of business. If this province
is also the province of the owner's domicile, a single registration
HELD: NO. In passing, let it be noted that the registration of the said sufficient. If not, the chattel mortgage should be registered both at the
chattel mortgage in the office of the corporation was not necessary and owner's domicile and in the province where the corporation has its
had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long principal office or place of business. In this sense the property
mooted question as to whether or not shares of a corporation could be mortgaged is not the certificate but the participation and share of the
hypothecated by placing a chattel mortgage on the certificate owner in the assets of the corporation.
representing such shares we now regard as settled by the case of
Monserrat vs. Ceron, supra. But that case did not deal with any question In view of the premises, the attaching creditors are entitled to priority
relating to the registration of such a mortgage or the effect of such over the defectively registered mortgage of the appellant and the
registration. Nothing appears in the record of that case even tending to judgment appealed from must be affirmed without special
show that the chattel mortgage there involved was ever registered pronouncement as to costs in this instance.
anywhere except in the office of the corporation, and there was no
question involved there as to the right of priority among conflicting PADGETT VS. BABCOCK & TEMPLETON, INC., AND BABCOCK 59
claims of creditors of the owner of the shares PHIL. 232, DECEMBER 21, 1933
FACTS: The appellee was an employee of the appellant corporation and
Section 4 of Act No. 1508 provides two ways for executing a valid chattel rendered services as such from January 1, 1923, to April 15, 1929.
mortgage which shall be effective against third persons. First, the During that period he bought 35 shares thereof at P100 a share at the
possession of the property mortgage must be delivered to and retained suggestion of the president of said corporation. He was also the
by the mortgagee; and, second, without such delivery the mortgage recipient of 9 shares by way of bonus during Christmas seasons. In this
must be recorded in the proper office or offices of the register or way the said appellee became the owner of 44 shares for which the 12
registers of deeds. If a chattel mortgage of shares of stock of a certificates, Exhibits F to F- 11, were issued in his favor. The word
corporation may validly be made without the delivery of possession of "nontransferable" appears on each and every one of these certificates.
the property to the mortgagee and the mere registration of the Before severing his connections with the said corporation, the appellee
mortgage is sufficient to constructive notice to third parties, we are proposed to the president that the said corporation buy his 44 shares at
confronted with the question as to the proper place of registration of par value plus the interest thereon, or that he be authorized to sell them
such a mortgage. Section 4 provides that in such a case the mortgage to other persons. The corporation bought similar shares belonging to
resides at the time of making the same or, if he is a non-resident, in the other employees, at par value. Sometime later, the said president
province in which the property is situated; and it also provides that if the offered to buy the appellee's shares first at P85 each and then at P80.
property is situated in a different province from that in which the The appellee did not agree thereto.
mortgagor resides the mortgage shall be recorded both in the province
of the mortgagor's residence and in the province where the property is ISSUE: WON the restriction imposed on the right to transfer the shares
situated. is valid.

If with respect to a chattel mortgage of shares of stock of a corporation, HELD: NO. The opinion seems to be unanimous that a restriction
registration in the province of the owner's domicile should be sufficient, imposed upon a certificate of shares, similar to the ones under
those who lend on such security would be confronted with the practical consideration, is null and void on the ground that it constitutes and
difficulty of being compelled not only to search the records of every unreasonable limitation of the right of ownership and is in restraint of
province in which the mortgagor might have been domiciled but also trade.
every province in which a chattel mortgage by any former owner of such Shares of corporate stock being regarded as property, the owner of such
shares might be registered. We cannot think that it was the intention of shares may, as a general rule, dispose of them as he sees fit, unless the
the legislature to put this almost prohibitive impediment upon the corporation has been dissolved, or unless the right to do so is properly
hypothecation of shares of stock in view of the great volume of business restricted, or the owner's privilege of disposing of his shares has been
that is done on the faith of the pledge of shares of stock as collateral. hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)

It is a common but not accurate generalization that the situs of shares of Any restriction on a stockholder's right to dispose of his shares must be
stock is at the domicile of the owner. The term situs is not one of fixed construed strictly; and any attempt to restrain a transfer of shares is
of invariable meaning or usage. Nor should we lose sight of the regarded as being in restraint of trade, in the absence of a valid lien
difference between the situs of the shares and the situs of the certificates upon its shares, and except to the extent that valid restrictive regulations
of shares. The situs of shares of stock for some purposes may be at the and agreements exist and are applicable. Subject only to such
domicile of the owner and for others at the domicile of the corporation; restrictions, a stockholder cannot be controlled in or restrained from
and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276 exercising his right to transfer by the corporation or its officers or by
Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 other stockholders, even though the sale is to a competitor of the
Norrie vs. Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general company, or to an insolvent person, or even though a controlling
rule that for purposes of execution, attachment and garnishment, it is interest is sold to one purchaser. (Ibid., sec. 1035, pp. 665, 666.)
not the domicile of the owner of a certificate but the domicile of the
corporation which is decisive. (Fletcher, Cyclopedia of the Law of Private In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have
Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450, Code discussed the validity of a clause in the by-laws of the defendant
of Civil Procedure.) corporation, which provided that, under the same conditions, the owner
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of a share of stock could not sell it to another person except to the the contract suspending the power to sell the stock referred to therein
defendant corporation. In deciding the legality and validity of said is an illegal stipulation, is in restraint of trade and, therefore, offends
restriction, we held: public policy. We do not so regard it. The suspension of the power to
sell has a beneficial purpose, results in the protection of the corporation
The only restraint imposed by the Corporation Law upon transfer of as well as of the individual parties to the contract and is reasonable as
shares is found in section 35 of Act No. 1459. This restriction is necessary to the length of time of the suspension. We do not here undertake to
in order that the officers of the corporation may know who are the discuss the limitations to the power to suspend the right of alienation of
stockholders, which is essential in conducting elections of officers, in stock, limiting ourselves to the statement that the suspension in this
calling meetings of stockholders, and for other purposes. But any particular case is legal and valid.
restriction of the nature of that imposed in the by-law now in question,
is ultra vires, violative of the property rights of shareholders, and in EMBASSY FARMS, INC. VS. COURT OF APPEALS 188 SCRA 492,
restraint of trade. (Id., p. 592.) AUGUST 13, 1990
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into
It is obvious, therefore, that the restriction consisting in the word a Memorandum of Agreement (MOA) with the following obligations:
"nontransferable", appearing on the 12 certificates, Exhibits F to F-11, EVANGELISTA:
is illegal and should be eliminated. (1) To transfer to Asuncion 19 parcels of agricultural land registered in
his name, together with the stocks, equipment and facilities of
ISSUE2: WON the corporation may be compelled to buy the shares of a Embassy Farms, Inc. wherein 90% of the shares of stock is owned
selling stockholder. by Evangelista;
(2) To cede, transfer and convey “in a manner absolute and
HELD: No. There is no existing law nor authority in support of the irrevocable any and all of his shares of stocks” in Embassy Farms,
plaintiff's claim to the effect that the defendants are obliged to buy his Inc. to Asuncion or his nominees “until the total of said shares of
shares of stock value at par value, plus the interest demanded thereon. stock so transferred shall constitute 90% of the paid-in equity of
In this respect, we hold that there has been no such contract, either said corporation” within a reasonable time from signing the
express or implied, between the plaintiff and the defendants. In the document.
absence of a similar contractual obligation and of a legal provision ASUNCION:
applicable thereto, it is logical to conclude that it would be unjust and (1) To pay Evangelista P8,630,999;
unreasonable to compel the said defendants to comply with a non- (2) To organize and register a new corporation with an authorized
existent or imaginary obligation. Whereupon, we are likewise compelled capital stock of P10M which upon registration will take over all the
to conclude that the judgment originally rendered to that effect is rights and liabilities of Asuncion.
untenable and should be set aside.
Effective control and management of the piggery at Embassy Farms, Inc.
LAMBERT VS. FOX. 26 PHIL., 588, JANUARY 29, 1914 was transferred by Evangelista to Asuncion pursuant to clause 8 of the
FACTS: Defendant and plaintiff, became two of the largest shareholders MOA. In accordance with clause 15, Evangelista served as President and
of John R. Edgar & Co., Inc. was incorporated. They were former Chief Executive of Embassy Farms.
creditors who agreed to aid the financially distressed predecessor John
R. Edgar & Co. They entered into an agreement a few days after Evangelista also endorsed in blank all his shares of stock including that
incorporation as follows: of his wife and three nominees with minor holdings but retained
possession of said shares and opted to deliver to Asuncion only upon
Whereas the undersigned are, respectively, owners of large amounts of full compliance of the latter of his obligations under the MOA.
stock in John R. Edgar and Co, Inc; and,
For failure to comply with his obligations, Evangelista intimated the
Whereas it is recognized that the success of said corporation depends, institution of the appropriate legal action. But Asuncion eventually filed
now and for at least one year next following, in the larger stockholders for the rescission of the MOA.
retaining their respective interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell, ISSUE: WON Evangelista has a better right to the shares and control of
transfer, or otherwise dispose of any part of their present holdings of the corporate affairs.
stock in said John R. Edgar & Co. Inc., till after one year from the date
hereof. HELD: YES. From the pleadings submitted by the parties it is clear that
although Evangelista has indorsed in blank the shares outstanding in his
Either party violating this agreement shall pay to the other the sum of name he has not delivered the certificate of stocks to Asuncion because
one thousand (P1,000) pesos as liquidated damages, unless previous the latter has not fully complied with his obligations under the MOA.
consent in writing to such sale, transfer, or other disposition be There being no delivery of the indorsed shares of stock Asuncion cannot
obtained. therefore effectively transfer to other person or his nominees the
undelivered shares of stock. For an effective transfer of shares of stock
Notwithstanding this contract the defendant Fox on October 19, 1911, the mode and manner of transfer as prescribed by law must be followed
sold his stock in the said corporation to E. C. McCullough of the firm of (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under
E. C. McCullough & Co. of Manila, a strong competitor of the said John Section 3 of Batas Pambansa Bilang 68, otherwise known as the
R. Edgar & Co., Inc. Corporation Code of the Philippines, shares of stock may be transferred
by delivery to the transferree of the certificate properly indorsed. Title
A complaint was filed and the trial court decided in favor of defendant. may be vested in the transferree by the delivery of the duly indorsed
certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA
ISSUE: WON the stipulation in the contract is valid. 643). However, no transfer shall be valid, except as between the parties
until the transfer is properly recorded in the books of the corporation
HELD: YES. It is urged by the appellee in this case that the stipulation in (Sec. 63, Corporation Code of the Philippines).
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the questioned shares of stock must show that the same were
In the case at bar the indorsed certificate of stock was not actually transferred to him by proving that all the requirements for the effective
delivered to Asuncion so that Evangelista is still the controlling transfer of shares of stock in accordance with the corporation's by laws,
stockholder of Embassy Farms despite the execution of the if any, were followed (See Nava v. Peers Marketing Corporation, 74
memorandum of agreement and the turn- over of control and SCRA 65 [1976]) or in accordance with the provisions of law.
management of the Embassy Farms to Asuncion on August 2, 1984. The petitioner failed in both instances. The petitioner did not present
any by- laws which could show that the 1,500 shares of stock were
When Asuncion filed on April 10, 1986 an action for the rescission of effectively transferred to him. In the absence of the corporation's by-
contracts with damages, the Pasig Court merely restored and laws or rules governing effective transfer of shares of stock, the
established the status quo prior to the execution of the MOA by the provisions of the Corporation Law are made applicable to the instant
issuance of a restraining order on July 10, 1987 and the writ of case.
preliminary injunction on July 30, 1987. It would be unjust and unfair to
allow Asuncion and his nominees to control and manage the Embassy The law is clear that in order for a transfer of stock certificate to be
Farms despite the fact that Asuncion, who is the source of their effective, the certificate must be properly indorsed and that title to such
supposed shares of stock in the corporation, is not asking for the delivery certificate of stock is vested in the transferee by the delivery of the duly
of the indorsed certificate of stock but for the rescission of the MOA. indorsed certificate of stock. (Section 35, Corporation Code) Since the
Rescission would result in mutual restitution (Magdalena Estate v. certificate of stock covering the questioned 1,500 shares of stock
Myrick, 71 Phil. 344) so it is but proper to allow Evangelista to manage registered in the name of the late Juan Chuidian was never indorsed to
the farm. Compared to Asuncion or his nominees Evangelista would be the petitioner, the inevitable conclusion is that the questioned shares of
more interested in the preservation of the assets, equipment and stock belong to Chuidian. The petitioner's asseveration that he did not
facilities of Embassy Farms during the pendency of the main case. require an indorsement of the certificate of stock in view of his intimate
friendship with the late Juan Chuidian cannot overcome the failure to
RAZON VS. INTERMEDIATE APPELLATE COURT 207 SCRA 234, follow the procedure required by law or the proper conduct of business
MARCH 16, 1992 even among friends. To reiterate, indorsement of the certificate of stock
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in is a mandatory requirement of law for an effective transfer of a certificate
1962. However, it began operations only in 1966 since the other of stock.
incorporators withdrew from the said corporation. The petitioner then
distributed the stocks previously placed in the names of the withdrawing Moreover, the preponderance of evidence supports the appellate
nominal incorporators to some friends, among them the late Juan T. court's factual findings that the shares of stock were given to Juan T.
Chuidian to whom he gave 1,500 shares. Chuidian for value. Juan T. Chuidian was the legal counsel who handled
the legal affairs of the corporation. We give credence to the testimony
The shares of stocks were registered in the name of Chuidian only as of the private respondent that the shares of stock were given to Juan T.
nominal stockholder and with the agreement that the said shares of Chuidian in payment of his legal services to the corporation. Petitioner
stock were owned and held by the petitioner but Chuidian was given Razon failed to overcome this testimony.
the option to buy the same

Chuidian delivered to petitioner the stock certificate in 1966, and since RURAL BANK OF SALINAS, INC. VS. COURT OF APPEALS 210 SCRA
then petitioner had in his possession such certificate, until the time, he 510, JUNE 26, 1992
delivered it for deposit with PBCom under the parties’ joint custody FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural
pursuant to their agreement embodied in the trial court’s order. Bank of Salinas, Inc., executed a Special Power of Attorney in favor of
his wife, private respondent Melania Guerrero, giving and granting the
ISSUE: WON petitioner Razon is the rightful owner of the shares. latter full power and authority to sell or otherwise dispose of and/or
mortgage 473 shares of stock of the Bank registered in his name
HELD: NO. In the case of Embassy Farms, Inc. v. Court of Appeals (188 (represented by the Bank's stock certificates nos. 26, 49 and 65), to
SCRA 492 [1990]) we ruled ... For an effective, transfer of shares of stock execute the proper documents therefor, and to receive and sign receipts
the mode and manner of transfer as prescribed by law must be followed for the dispositions.
(Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under
Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-
Corporation Code of the Philippines, shares of stock may be transferred in- Fact, executed the following assignments of shares of stocks: Luz
by delivery to the transferee of the certificate properly indorsed. Title Andico (457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero,
may be vested in the transferee by the delivery of the duly indorsed Jr. (5 shares); and Francisco Guerrero, Sr. (1 share). The last share was
certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA transferred two (2) months before the death of Clemente.
643). However, no transfer shall be valid, except as between the parties
until the transfer is properly recorded in the books of the corporation Subsequently, Melania Guerrero presented the Deeds of Assignments
(Sec. 63, Corporation Code of the Philippines; Section 35 of the and requested for the cancellation of the certificates of stock and new
Corporation Law) ones to be issued in the name of transferees. However, petitioner Bank
refused.
In the instant case, there is no dispute that the questioned 1,500 shares
of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in Melania Guerrero filed for an action for mandamus with the SEC. Maripol
the books of the corporation. Moreover, the records show that during Guerrero, a legally adopted daughter of Melania and Clemente filed for
his lifetime Chuidian was elected member of the Board of Directors of intervention claiming that two weeks before filing the action for
the corporation which clearly shows that he was a stockholder of the mandamus, a petition for the administration of the estate of Celemente
corporation. (See Section 30, Corporation Code) From the point of view has been filed and that the deeds of assignment were fictitious and
of the corporation, therefore, Chuidian was the owner of the 1,500 antedated. SEC denied the motion for intervention.
shares of stock. In such a case, the petitioner who claims ownership over
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Maripol filed a complaint before the CFI for the annulment of the Deeds Section 63 of the Corporation Code. Thus, respondent Court of Appeals
of Assignment. Later on, the SEC rendered a decision granting the did not err in upholding the Decision of respondent SEC affirming the
action for mandamus which was affirmed by the SEC en banc and still Decision of its Hearing Officer directing the registration of the 473
later, by the CA. shares in the stock and transfer book in the names of private
respondents. At all events, the registration is without prejudice to the
ISSUE: WON the mandamus was properly granted for the registration of proceedings in court to determine the validity of the Deeds of
the transfer of the 473 shares in question. Assignment of the shares of stock in question.

HELD: YES. Respondent SEC correctly ruled in favor of the registering TAN VS. SECURITIES AND EXCHANGE COMMISSION 206 SCRA 740,
of the shares of stock in question in private respondent's names. Such MARCH 03, 1992
ruling finds support under Section 63 of the Corporation Code, to wit: FACTS: With the withdrawal of two of the original incorporators,
petitioner Alfonso Tan assigned 50 of his 400 shares (covered by Stock
Sec. 63 Shares of stock so issued are personal property and may be Certificate No. 2) to his brother Angel S. Tan, private respondent.
transferred by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized to make Petitioner’s stock certificate was cancelled by the corporate secretary,
the transfer. No transfer, however, shall be valid, except as between the Patricia Aguilar, by virtue of Resolution No. 1981(b), while petitioner was
parties, until the transfer is recorded in the books of the corporation . . . still the president and member of the board.

In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court With the cancellation of Certificate of stock No. 2 and the subsequent
interpreted Sec. 63 in his wise: issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for
Said Section (Sec. 35 of Act 1459 [now Sec. 62 of the RCC]) the remaining 350 shares, Stock Certificate No. 8 was issued in the name
contemplates no restriction as to whom the stocks may be transferred. of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
It does not suggest that any discrimination may be created by the alleging that:
corporation in favor of, or against a certain purchaser. The owner of (1) That in view of his having taken 33 1/3 interest, I was personally
shares, as owner of personal property, is at liberty, under said section to requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make
dispose them in favor of whomever he pleases, without limitation in this proper endorsement in the cancelled Certificate of Stock No. 2 and
respect, than the general provisions of law. ... Certificate No. 8, but he did not endorse, instead he kept the
cancelled (1981) Certificate of Stock No. 2 and returned only to me
The only limitation imposed by Section 63 of the Corporation Code is Certificate of Stock No. 8, which I delivered to Tan Su Ching.
when the corporation holds any unpaid claim against the shares (2) That the cancellation of his stock (Stock No. 2) was known by him
intended to be transferred, which is absent here. in 1981; that it was Stock No. 8 that was delivered in March 1983
for his endorsement and cancellation.
A corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers, because: ... Restrictions in Petitioner filed with the SEC a case questioning the cancellation of the
the traffic of stock must have their source in legislative enactment, as the aforesaid Stock Nos. 2 and 8.
corporation itself cannot create such impediment. By-laws are intended
merely for the protection of the corporation, and prescribe regulation, ISSUE: WON the cancellation and transfer of stock certificate no. 2 was
not restriction; they are always subject to the charter of the corporation. valid.
The corporation, in the absence of such power, cannot ordinarily inquire
into or pass upon the legality of the transactions by which its stock HELD: YES. Petitioner claims that "(T)he cancellation and transfer of
passes from one person to another, nor can it question the consideration petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the
upon which a sale is based. . . . (Tomson on Corporation Sec. 4137, cited issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was
in Fleisher vs. Nolasco, Supra). patently and palpably unlawful, null and void, invalid and fraudulent."
(Rollo, p. 9) And, that Section 63 of the Corporation Code of the
The right of a transferee/assignee to have stocks transferred to his name Philippines is "mandatory in nature", meaning that without the actual
is an inherent right flowing from his ownership of the stocks. Thus: delivery and endorsement of the certificate in question, there can be no
transfer, or that such transfer is null and void.
Whenever a corporation refuses to transfer and register stock in cases
like the present, mandamus will lie to compel the officers of the Contrary to the understanding of the petitioner with respect to the use
corporation to transfer said stock in the books of the corporation" (26, of the word "may", in the case of Shauf v. Court of Appeals, (191 SCRA
Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47 713, 27 November 1990), this Court held, that "Remedial law statues
Phil. 583, 594). are to be construed liberally." The term 'may' as used in adjective rules,
is only permissive and not mandatory.
The corporation's obligation to register is ministerial. In transferring
stock, the secretary of a corporation acts in purely ministerial capacity This Court held in Chua v. Samahang Magsasaka, that "the word "may"
and does not try to decide the question of ownership. (Fletcher, Sec. indicate that the transfer may be effected in a manner different from that
5528, page 434). provided for in the law." (62 Phil. 472)

The duty of the corporation to transfer is a ministerial one and if it Moreover, it is safe to infer from the facts deduced in the instant case
refuses to make such transaction without good cause, it may be that, there was already delivery of the unendorsed Stock Certificate No.
compelled to do so by mandamus. (See. 5518, 12 Fletcher 394) 2, which is essential to the issuance of Stock Certificate Nos. 6 and 8 to
angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the
For the petitioner Rural Bank of Salinas to refuse registration of the problem was the return of the cancelled certificate (No. 2) to Alfonso S.
transferred shares in its stock and transfer book, which duty is ministerial Tan for his endorsement and his deliberate non-endorsement.
on its part, is to render nugatory and ineffectual the spirit and intent of

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For all intents and purposes, however, since this was already cancelled RURAL BANK OF LIPA CITY, INC. VS. COURT OF APPEALS 366 SCRA
which cancellation was also reported to the respondent Commission, 188, SEPTEMBER 28, 2001
there was no necessity for the same certificate to be endorsed by the FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of
petitioner. All the acts required for the transferee to exercise its rights Rural Bank of Lipa City, Inc. executed a Deed of Assignment wherein he
over the acquired stocks were attendant and even the corporation was assigned his shares, as well as those of eight stockholders under his
protected from other parties, considering that said transfer was earlier control with a total of 10,457 shares, in favor of stockholders of the Bank
recorded or registered in the corporate stock and transfer book. represented by its BOD. At the same time, He and his wife executed an
Following the doctrine enunciated in the case of Tuazon v. La Provisora agreement wherein he acknowledge their indebtedness of P4M and
Filipina, where this Court held, that: But delivery is not essential where stipulated that the said debt will be paid out of the proceeds of the sale
it appears that the persons sought to be held as stockholders are officers of their real property described in the agreement.
of the corporation, and have the custody of the stock book . . . (67 Phi.
36). The Villanueva spouses failed to settle their obligation on the due date,
and the BOD sent a demand letter for the surrender of the said shares
Furthermore, there is a necessity to delineate the function of the stock and for the delivery of sufficient collateral to cover the balance of the
itself from the actual delivery or endorsement of the certificate of stock debt, which the Villanueva spouses ignored. Their shares were
itself as is the question in the instant case. A certificate of stock is not converted into Treasury shares.
necessary to render one a stockholder in corporation.
The Villanueva spouses questioned the legality of the such conversion
Nevertheless, a certificate of stock is the paper representative or and filed with the SEC a petition for annulment of the stockholders’
tangible evidence of the stock itself and of the various interests therein. meeting and election of directors and officers because they were not
The certificate is not stock in the corporation but is merely evidence of notified of such meeting.
the holder's interest and status in the corporation, his ownership of the
share represented thereby, but is not in law the equivalent of such The SEC hearing officer dismissed the application for issuance of a
ownership. It expresses the contract between the corporation and the preliminary injunction, but was granted on reconsideration. The decision
stockholder but is not essential to the existence of a share in stock or was affirmed by the SEC en banc and later by the CA.
the nation of the relation of shareholder to the corporation. (13 Am. Jur.
2d, 769) ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks.
Under the instant case, the fact of the matter is, the new holder, Angel
S. Tan has already exercised his rights and prerogatives as stockholder HELD: YES. The Corporation Code specifically provides:
and was even elected as member of the board of directors in the
respondent corporation with the full knowledge and acquiescence of SECTION 63. Certificate of stock and transfer of shares. — The capital
petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was stock of stock corporations shall be divided into shares for which
clothed with rights and responsibilities in the board of the respondent certificates signed by the president or vice president, countersigned by
corporation when he was elected as officer thereof. the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
Besides, in Philippine jurisprudence, a certificate of stock is not a stocks so issued are personal property and may be transferred by
negotiable instrument. "Although it is sometime regarded as quasi- delivery of the certificate or certificates indorsed by the owner or his
negotiable, in the sense that it may be transferred by endorsement, attorney-in- fact or other person legally authorized to make the transfer.
coupled with delivery, it is well-settled that it is non-negotiable, because No transfer, however, shall be valid, except as between the parties, until
the holder thereof takes it without prejudice to such rights or defenses the transfer is recorded in the books of the corporation so as to show
as the registered owner/s or transferror's creditor may have under the the names of the parties to the transaction, the date of the transfer, the
law, except insofar as such rights or defenses are subject to the number of the certificate or certificates and the number of shares
limitations imposed by the principles governing estoppel." (De los transferred.
Santos vs. McGrath, 96 Phil. 577)
No shares of stock against which the corporation holds any unpaid claim
To follow the argument put up by petitioner which was upheld by the shall be transferable in the books of the corporation. (Emphasis ours)
Cebu SEC Extension Office Hearing Officer, Felix Chan, that the
cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack
of delivery of the cancelled "mother" Certificate No. 2 whose Petitioners argue that by virtue of the Deed of Assignment, private
endorsement was deliberately withheld by petitioner, is to prescribe respondents had relinquished to them any and all rights they may have
certain restrictions on the transfer of stock in violation of the corporation had as stockholders of the Bank. While it may be true that there was an
law itself as the only law governing transfer of stocks. While Section 47(s) assignment of private respondents' shares to the petitioners, said
grants a stock corporation the authority to determine in the by-laws "the assignment was not sufficient to effect the transfer of shares since there
manner of issuing certificates" of shares of stock, however, the power to was no endorsement of the certificates of stock by the owners, their
regulate is not the power to prohibit, or to impose unreasonable attorneys-in-fact or any other person legally authorized to make the
restrictions of the right of stockholders to transfer their shares. (Emphasis transfer. Moreover, petitioners admit that the assignment of shares was
supplied) not coupled with delivery, the absence of which is a fatal defect. The
rule is that the delivery of the stock certificate duly endorsed by the
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which owner is the operative act of transfer of shares from the lawful owner to
prohibits a transfer of stock without the consent or approval of all the the transferee. Thus, title may be vested in the transferee only by
stockholders or of the president or board of directors is illegal as delivery of the duly indorsed certificate of stock.
constituting undue limitation on the right of ownership and in restraint
of trade. (47 Phil. 583) We have uniformly held that for a valid transfer of stocks, there must be
strict compliance with the mode of transfer prescribed by law. The
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requirements are: (a) There must be delivery of the stock certificate: (b) between the Bragas and the Abejos "intra-corporate" in nature. Hence,
The certificate must be endorsed by the owner or his attorney-in-fact or the Court held that "the issue is not on ownership of shares but rather
other persons legally authorized to make the transfer; and (c) To be valid the non-performance by the corporate secretary of the ministerial duty
against third parties, the transfer must be recorded in the books of the of recording transfers of shares of stock of the corporation of which he
corporation. As it is, compliance with any of these requisites has not is secretary."
been clearly and sufficiently shown.
Unlike Abejo, however, petitioner's ownership over the shares in this
It may be argued that despite non-compliance with the requisite case was not yet perfected when the Complaint was filed. The contract
endorsement and delivery, the assignment was valid between the of pledge certainly does not make him the owner of the shares pledged.
parties, meaning the private respondents as assignors and the Further, whether prescription effectively transferred ownership of the
petitioners as assignees. While the assignment may be valid and binding shares, whether there was a novation of the contracts of pledge, and
on the petitioners and private respondents, it does not necessarily make whether laches had set in were difficult legal issues, which were
the transfer effective. Consequently, the petitioners, as mere assignees, unpleaded and unresolved when herein petitioner asked the corporate
cannot enjoy the status of a stockholder, cannot vote nor be voted for, secretary of Go Fay to effect the transfer, in his favor, of the shares
and will not be entitled to dividends, insofar as the assigned shares are pledged to him.
concerned. Parenthetically, the private respondents cannot, as yet, be
deprived of their rights as stockholders, until and unless the issue of In Rural Bank of Salinas: Melenia Guerrero executed deeds of
ownership and transfer of the shares in question is resolved with finality. assignment for the shares in favor of the respondents in that case. When
the corporate secretary refused to register the transfer, an action for
There being no showing that any of the requisites mandated by law was mandamus was instituted. Subsequently, a motion for intervention was
complied with, the SEC Hearing Officer did not abuse his discretion in filed, seeking the annulment of the deeds of assignment on the grounds
granting the issuance of the preliminary injunction prayed for by that the same were fictitious and antedated, and that they were in fact
petitioners in SEC Case No. 02-94-4683 (herein private respondents). donations because the considerations therefor were below the book
Accordingly, the order of the SEC en banc affirming the ruling of the value of the shares.
SEC Hearing Officer, and the Court of Appeals decision upholding the
SEC en banc order, are valid and in accordance with law and Like the Abejo spouses, the respondents in Rural Bank of Salinas were
jurisprudence, thus warranting the denial of the instant petition for already prima facie shareholders when the deeds of assignment were
review. questioned. If the said deeds were to be annulled later on, respondents
would still be considered shareholders of the corporation from the time
LIM TAY VS. COURT OF APPEALS 293 SCRA 634, AUGUST 05, 1998 of the assignment until the annulment of such contracts.
FACTS: To secure their separate loans, respondent Sy Guiok and
Alfonso Lim, each executed a contract of pledge covering their ISSUE No. 2: WON petitioner is entitled to the relief of mandamus as
respective 300 shares in favor of petitioner Lim Tay where they indorsed against the company.
in blank and delivered their shares of stock to Tay.
HELD: NO. Petitioner prays for the issuance of a writ of mandamus,
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC directing the corporate secretary of respondent corporation to have the
against Go Fay & Compny, Inc. to cancel the old certificates and issue a shares transferred to his name in the corporate books, to issue new
new one in his name, which was granted by the SEC but reversed by the certificates of stock and to deliver the corresponding dividends to him.
CA.
In order that a writ of mandamus may issue, it is essential that the person
ISSUE No. 1: WON the rulings in the Abejo case and the Rural Bank of petitioning for the same has a clear legal right to the thing demanded
Salinas case will apply. and that it is the imperative duty of the respondent to perform the act
required. It neither confers powers nor imposes duties and is never
HELD: NO. Petitioner's reliance on the doctrines set forth in Abejo v. De issued in doubtful cases. It is simply a command to exercise a power
la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced. already possessed and to perform a duty already imposed.

ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of In the present case, petitioner has failed to establish a clear legal right.
stock in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, Petitioner's contention that he is the owner of the said shares is
the corporate secretary, Norberto Braga, refused to record the transfer completely without merit. Quite the contrary and as already shown, he
of the shares in the corporate books and instead asked for the does not have any ownership rights at all. At the time petitioner
annulment of the sale, claiming that he and his wife had a pre-emptive instituted his suit at the SEC, his ownership claim had no prima facie leg
right over some of the shares, and that his wife's shares were sold to stand on. At best, his contention was disputable and uncertain
without consideration or consent. Mandamus will not issue to establish a legal right, but only to enforce
one that is already clearly established.
At the time the Bragas questioned the validity of the sale, the contract
had already been perfected, thereby demonstrating that Telectronic ISSUE No. 3: WON by Guiok and Lim’s failure to pay, the ownership of
Systems, Inc. was already the prima facie owner of the shares and, the shares automatically passed to Lim Tay.
consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the
sale were to be annulled later on, Telectronic Systems, Inc. had, in the HELD: NO. On appeal, petitioner claimed that ownership over the
meantime, title over the shares from the time the sale was perfected shares had passed to him, not via the contracts of pledge, but by virtue
until the time such sale was annulled. The effects of an annulment of prescription and by respondents' subsequent acts which amounted
operate prospectively and do not, as a rule, retroact to the time the sale to a novation of the contracts of pledge. We do not agree.
was made. Therefore, at the time the Bragas questioned the validity of
the tranfers made by the Abejos, Telectronic Systems, Inc. was already At the outset, it must be underscored that petitioner did not acquire
a prima facie shareholder of the corporation, thus making the dispute ownership of the shares by virtue of the contracts of pledge. Article 2112

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of the Civil Code states:

“The creditor to whom the credit has not been satisfied in due time, may As a rule, the shares which may be alienated are those which are covered
proceed before a Notary Public to the sale of the thing pledged. This by certificates of stock, as shown in the following provisions of the
sale shall be made at a public auction, and with notification to the debtor Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
and the owner of the thing pledged in a proper case, stating the amount (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil.
for which the public sale is to be held. If at the first auction the thing is 616, notes, and Hodges vs. Lezama, 14 SCRA 1030).
not sold, a second one with the same formalities shall be held; and if at
the second auction there is no sale either, the creditor may appropriate SEC. 35. The capital stock of stock corporations shall be divided into
the thing pledged. In this case he shall be obliged to give an acquittance shares for which certificates signed by the president or the vice-
for his entire claim.” president, countersigned by the secretary or clerk and sealed with the
seal of the corporation, shall be issued in accordance with the by-laws.
Furthermore, the contracts of pledge contained a common proviso, Shares of stock so issued are personal property and may be transferred
which we quote again for the sake of clarity: by delivery of the certificate indorsed by the owner or his attorney in fact
or other person legally authorized to make the transfer. No transfer,
“3. In the event of the failure of the PLEDGOR to pay the amount within however, shall be valid, except as between the, parties, until the transfer
a period of six (6) months from the date hereof, the PLEDGEE is hereby is entered and noted upon the books of the corporation so as to show
authorized to foreclose the pledge upon the said shares of stock hereby the names of the parties to the transaction, the date of the transfer, the
created by selling the same at public or private sale with or without number of the certificate, and the number of shares transferred.
notice to the PLEDGOR, at which sale the PLEDGEE may be the
purchaser at his option; and "the PLEDGEE is hereby authorized and No share of stock against which the corporation holds any unpaid claim
empowered at his option to transfer the said shares of stock on the shall be transferable on the books of the corporation.
books of the corporation to his own name, and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said SEC. 36. (re voting trust agreement) ...
shares to issue to him and to apply the proceeds of the sale to the The certificates of stock so transferred shall be surrendered and
payment of the said sum and interest, in the manner hereinabove cancelled, and new certificates therefor issued to such person or
provided;” persons, or corporation, as such trustee or trustees, in which new
certificates it shall appear that they are issued pursuant to said
There is no showing that petitioner made any attempt to foreclose or agreement.
sell the shares through public or private auction, as stipulated in the xxx xxx xxx
contracts of pledge and as required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could not have passed to him. The As prescribed in section 35, shares of stock may be transferred by
pledgor remains the owner during the pendency of the pledge and prior delivery to the transferee of the certificate properly indorsed. "Title may
to foreclosure and sale, as explicitly provided by Article 2103 of the be vested in the transferee by delivery of the certificate with a written
same Code; “Unless the thing pledged is expropriated, the debtor assignment or indorsement thereof" (18 C.J.S. 928). There should be
continues to be the owner thereof.” compliance with the mode of transfer prescribed by law (18 C.J.S. 930).

NAVA VS. PEERS MARKETING CORPORATION 74 SCRA 65, The usual practice is for the stockholder to sign the form on the back of
NOVEMBER 25, 1976 the stock certificate. The certificate may thereafter be transferred from
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and one person to another. If the holder of the certificate desires to assume
paid 25% of the subscription. No certificate of stock was issued to him. the legal rights of a shareholder to enable him to vote at corporate
elections and to receive dividends, he fills up the blanks in the form by
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par inserting his own name as transferee. Then he delivers the certificate to
value of P100, or P2,000. Nava requested herein private respondents, the secretary of the corporation so that the transfer may be entered in
officers of Peers Marketing Corporation, to register him as owner of the the corporation's books. The certificate is then surrendered and a new
shares, but they refused, Po being delinquent in the payment of the one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138, 143-4).
balance due his subscription.
That procedure cannot be followed in the instant case because, as
Po filed an action for mandamus in the CFI of Negros but it was already noted, the twenty shares in question are not covered by any
dismissed. certificate of stock in Po's name. Moreover, the corporation has a claim
on the said shares for the unpaid balance of Po's subscription. A stock
Po claims that the trial court erred in applying the ruling in Fua Cun vs. subscription is a subsisting liability from the time the subscription is
Summers and China Banking Corporation wherein it was ruled that the made. The subscriber is as much bound to pay his subscription as he
payment of one-half of the subscription does not entitle the subscriber would be to pay any other debt. The right of the corporation to demand
to a certificate for one-half of the number of shares subscribed. payment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802;
Lumanlan vs. Cura, 59 Phil. 746).
ISSUE: WON Peers Marketing Corporation may be compelled by
mandamus to enter in its stock and transfer book the sale made by Po A corporation cannot release an original subscriber from paying for his
to Nava of the 20 shares forming part of Po’s subscription of 80 shares, shares without a valuable consideration (Philippine National Bank vs.
it being admitted that the corporation has an unpaid claim of P6,000 as Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or
the balance on said subscription. without the unanimous consent of the stockholders (Lingayen Gulf
Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
HELD: No. We hold that the transfer made by Po to Nava is not the
"alienation, sale, or transfer of stock" that is supposed to be recorded Under the facts of this case, there is no clear legal duty on the part of
in the stock and transfer book, as contemplated in section 52 of the the officers of the corporation to register the twenty shares in Nava's
Corporation Law. name, Hence, there is no cause of action for mandamus

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200,000 shares from Carl Hess and much later 800,000 still from Hess
As already stressed, in this case no stock certificate was issued to Po. (for the account and benefit of Astraquillo). Both of the supposed
Without stock certificate, which is the evidence of ownership of vendors now deceased.
corporate stock, the assignment of corporate shares is effective only
between the parties to the transaction (Davis vs. Wachter, 140 So. 361). By virtue of vesting order P-12, title to the 1,600,000 shares in dispute
was, however, vested in the Alien Property Custodian of the US. In due
The delivery of the stock certificate, which represents the shares to be course, the Vested Property Claims Committee of the Philippine Alien
alienated, is essential for the protection of both the corporation and its Property Administration made a “determination” allowing said claims,
stockholders (Smallwood vs. Moretti, 128 So. 2d 628). which were considered and hear jointly. But upon personal review of the
Philippine Alien Property Administrator, the “determination” was
LEE E. WON alias RAMON LEE, plaintiff-appellant, vs. reversed and decreed that
WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee “title to the shares in question shall remain in the name of the Philippine
(G.R. No. L-10122; August 30, 1958) Alien Property Administrator”.
FACTS: The defendant corporation issued membership certificate no.
201 to Iwao Teruyama which on April 1944, was assigned to MT Reyes Consequently, plaintiffs instituted the present action to establish title to
and on the same year assigned to herein plaintiff-appellant. On April 26, the aforementioned shares of stock.
1955, the plaintiff filed an action against the defendant alleging that
shortly after its rehabilitation after the war, plaintiff asked that the Defendant Attorney General of the US contends that the shares were
assignment be registered in the books of the defendant and that the bought by Vicente Madrigal, in trust and for the benefit, of the Mistsui
latter refused and still refuses to do so unlawfully. Bussan, abranch office of a Japanese company; and that Madrigal
endorsed in blank and delivered the shares to Mistsui for safe keeping;
Defendant filed a motion to dismiss on the ground that 11 years have that Mitsui never sold or otherwise disposed of the said shares; and that
elapsed from the time of the assignment upto the time of the filing of the stock certificates must have been stolen or looted during the
the complaint, beyond the 5 year period provided under Art. 1149 of emergency from the liberation.
the Civil Code. The trial court dismissed the action and denied
reconsideration. ISSUE: WON plaintiffs are the rightful owners of the shares.

ISSUE: WON plaintiff was bound to present and register the certificate HELD: NO. Even, however, if Juan Campos and Carl Hess had sold the
assigned to him within any definite or fixed period. shares of stock in question, as testified to by De los Santos, the result,
insofar as plaintiffs are concerned, would be the same. It is not disputed
HELD: NO. The defendant has not made herein any pretense to that that said shares of stock were registered, in the records of the Lepanto,
effect; but it contends that from the moment the certificate was assigned in the name of Vicente Madrigal. Neither is it denied that the latter was,
to the plaintiff, the latter's right to have the assignment registered as regards said shares of stock, a mere trustee for the benefit of the
commenced to exist. This contention is correct, but it would not follow Mitsuis. The record shows — and there is no evidence to the contrary —
that said right should be exercised immediately or within a definite that Madrigal had never disposed of said shares of stock in any manner
period. The existence of a right is one thing, and the duration of said whatsoever, except by turning over the corresponding stock certificates,
right is another. late in 1941, to the Mitsuis, the beneficial and true owners thereof. It
has, moreover, been established, by the uncontradicted testimony of
On the other hand, it is stated in the appealed order of dismissal that Kitajima and Miwa, the managers of the Mitsuis in the Philippines, from
the plaintiff sought to register the assignment on April 13, 1955; whereas 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated
in plaintiff's brief it is alleged that it was only in February, 1955, when said shares of stock, nor delivered the aforementioned stock certificates,
the defendant refused to recognize the plaintiff. If, as already observed, to anybody during said period. Section 35 of the Corporation Law reads:
there is no fixed period for registering an assignment, how can the
complaint be considered as already barred by the Statute of Limitations The capital stock corporations shall be divided into shares for which
when it was filed on April 26, 1955, or barely a few days (according to certificates signed by the president or the vice-president, countersigned
the lower court) and two months (according to the plaintiff), after the by the secretary or clerk and sealed with the seal of the corporation,
demand for registration and its denial by the defendant. Plaintiff's right shall be issued in accordance with the by-laws. Shares of stock so issued
was violated only sometime in 1955, and it could not accordingly have are personal property and may be transferred by delivery of the
asserted any cause of action against the defendant before that. certificate endorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be
The defendant seems to believe that the plaintiff was compelled valid, except as between the parties, until the transfer is entered and
immediately to register his assignment. Any such compulsion is noted upon the books of the corporation so as to show the names of
obviously for the benefit of the plaintiff, because it is only after the parties to the transaction, the date of the transfer, the number of the
registration that the transfer would be binding against the defendant. certificate, and the number of shares transferred.
But we are not here concerned with a situation where the plaintiff claims
anything against the defendant allegedly accruing under the Pursuant to this provision, a share of stock may be transferred by
outstanding certificate in question between the date of the assignment endorsement of the corresponding stock certificate, coupled with its
to the plaintiff and the date of the latter’s demand for registration and delivery. However, the transfer shall "not be valid, except as between
issuance of a new certificate. the parties," until it is "entered and noted upon the books of the
corporation." no such entry in the name of the plaintiffs herein having
been made, it follows that the transfer allegedly effected by Juan
DE LOS SANTOS AND ASTRAQUILLO VS. REPUBLIC 96 PHIL. 577,
Campos and Carl Hess in their favor is "not valid, except as between"
FEBRUARY 28, 1955
themselves. It does not bind either Madrigal or the Mitsuis, who are not
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares
parties to said alleged transaction. What is more, the same is "not valid,"
of Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later
or, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc.

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519, 8 N. W. 419) — which were quoted approval in Uson vs. Diosomito (3) The corporation incurs no liability to the person in whose favor the
(61 Phil., 535) — "absolutely void" and, hence, as good as non-existent, certificate is endorsed or issued.
insofar as Madrigal and the Mitsuis are concerned. For this reason, (4) If the old certificate is cancelled and new one is issued by the
although a stock certificate is sometimes regarded as quasi-negotiable, corporation, the holder thereof may be required to return the same
in the sense that it may be transferred by endorsement, coupled with for its cancellation;
delivery, it is well settled that the instrument is non-negotiable, because (5) However, if new certificates are issued and passes into the hands
the holder thereof takes it without prejudice to such rights or defenses of a subsequent bona fide purchaser, the latter may rightfully
as the registered owner or creditor may have under the law, except acquire title thereto since the corporation will be estopped to deny
insofar as such rights or defenses are subject to the limitations imposed the validity thereof;
by the principles governing estoppel. (6) The subsequent purchaser in good faith took the shares, not by
virtue of a forged or unauthorized transfer but on reliance to the
Certificates of stock are not negotiable instruments (post, Par. 102), genuineness of the certificate issued by the corporation or by virtue
consequently, a transferee under a forged assignment acquires no title of the representation made by the corporation that the same is
which can be asserted against the true owner, unless his own negligence valid and therefore, compel the corporation to recognize him as a
has been such as to create an estoppel against him (Clarke on stockholder or claim reimbursement and damages against the
Corporations, Sec. Ed. p. 415). If the owner of the certificate has latter.
endorsed it in blank, and it is stolen from him, no title is acquired by an
innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Example: A owns 100 shares of X Co., B stole the stock certificate and
Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412). forged
A’s signature:
In the case at bar, neither madrigal nor the Mitsuis had alienated shares (a) If B indorsed and sold it to C:
of stock in question. It is not even claimed that either had, through (1) C will not acquire title to the shares whether he is innocent or
negligence, given — occasion for an improper or irregular disposition of not;
the corresponding stock certificates. (2) C cannot compel the corporation to register him as
stockholder;
PONCE VS. ALSONS CEMENT CORPORATION 393 SCRA 602, (3) X Co. does not incur any liability in favor of C
DECEMBER 10, 2002 (b) If X Co. cancelled the certificate and issued a new one to C:
FACTS: Fausto Gaid was an incorporator of Victory Cement Corporation (1) If A later on finds out that his certificate was stolen, C may still
having 239,500 shares. Vicente Ponce and Gaid executed a deed of be required to return the new certificate;
undertaking and endorsement whereby Gaid acknowledged the owner (2) If C sold it to D, an innocent purchaser, D may rightfully
of said shares. Victory Cement Corporation Incorporated was renamed acquire thereto since X Co. is estopped to deny the validity
to Alsons Cement Corporation. From the incorporation of Victory of the certificate;
Cement Corpoation up to the present, no certification of stock was (3) If A later on finds out that his certificate was stole, X Co. may
issued to Gaid. Alsons Cement Corporation refused. Ponce filed a be compelled to recognize both A and D as stockholders. *
complaint for mandamus against Alsons Cement Corporation to issue in * This is so because the A cannot be deprived of his rights as owner by
his name certificate of stock. virtue of a forged transfer, and B, because of X Co.’s representation
that the person named therein is the owner of shares in the
ISSUE: WON the complaint for mandamus will prosper corporation.
(c) If (b3) above would result in over-issuance of shares
HELD: NO. The deed of undertaking with indorsement presented by (1) Only A, the rightful owner may be recognized, and A will have
Ponce does not establish on its face his right to demand for registration a right to compel X Co. to issue him a new certificate;
of transfer and issuance of certificate of stock. A corporate secretary may (2) D will be entitled to damages from the X Co.;
not be compelled to register transfer of shares on the basis merely of an (3) X Co. will have a right of action against the who made false
endorsement of stock certificates without such registration. One may representation, and, in whose favor, a new certificate is
own shares of corporate stock without possessing stock certificate. It is issued. **
not essential to the existence of a share in stock or creation of relation ** In this sense, if D sues X Co., the latter will have no valid defense, but
of shareholder to the corporation. he may institute a third-party complaint against C. If C is an innocent
purchaser, X Co., may file a fourth party complaint against B.
E.Forged and Unauthorized Transfers
F. Issuance of Stock Certificates
FORGED AND UNAUTHORIZED ISSUANCE OF
UNAUTHORIZED TRANSFERS STOCK CERTIFICATE SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall be
issued to a subscriber until the full amount of the subscription together
what is forged or unauthorized is refers to the act of the
the transfer of the certificate corporation in issuing the with interest and expenses (in case of delinquent shares), if any is due,
from the true and lawful owner to certificate, either fraudulently or has been paid.
another person by mistake.
Subscriptions to shares of stock are indivisible such that a subscriber to
IN FORGED OR UNAUTHORIZED TRANSFER: such shares will not be entitled to the issuance of a stock certificate until
(1) The purchaser or purchasers, no matter how innocent they may he has paid the full amount of his subscription
have been, will acquire no title as against the lawful owner by virtue
of the doctrine of non-negotiability of certificates of stock; INDIVISIBILITY OF SHARES
(2) The purchaser will have no right or remedy against the corporation As the law stands now, subscription to shares of stock are deemed
because he took the shares not by virtue of a misrepresentation indivisible and no certificate of stock can be issued unless and until the
made by the corporation but on the faith of a forged endorsement full amount of his subscription including interest and expenses, if any is
or unauthorized transfer; paid.

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The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co Soco, by paying one-half of the subscription price of five hundred
where a subscriber may opt to apply his partial payment to a shares, in effect became the owner of two hundred and fifty shares, the
corresponding number of shares, will not hold true. Thus, even if under judgment appealed from is in the main correct.
the old law, where a corporation may, under a by-law provision or by
custom, practice or tradition, issue stock certificates covering the The claim of the defendant Banking Corporation upon which it brought
number of shares that might have been correspondingly paid, this the action in which the writ of attachment was issued, was for the non-
authority or practice is valid only two years after the effectivity of the payment of drafts accepted by Chua Soco and had no direct connection
Corporation Code and after which corporations, registered under the with the shares of stock in question. At common law a corporation has
said law should comply with the mandatory requirement of Sec. 63 of no lien upon the shares of stockholders for any indebtedness to the
the RCC thus provides: corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not
SEC. 185. Applicability to Existing Corporation. – A corporation lawfully been called to any statute creating such lien here. On the contrary,
existing and doing business in the Philippines affected by the new section 120 of the Corporation Act provides that "no bank organized
requirements of this Code shall be given a period of not more than two under this Act shall make any loan or discount on the security of the
(2) years from the effectivity of this Act within which to comply. shares of its own capital stock, nor be the purchaser or holder of any
such shares, unless such security or purchase shall be necessary to
prevent loss upon a debt previously contracted in good faith, and stock
DOCTRINE OF INDIVISIBILITY OF SHARES (S. 63)
so purchased or acquired shall, within six months from the time of its
Transfer Subscriptions:
purchase, be sold or disposed of at public or private sale, or, in default
(1) Fully paid = yes
thereof, a receiver may be appointed to close up the business of the
(2) Partially paid
bank in accordance with law."

Example:
There can be no doubt that an equity in shares of stock may be assigned
Stockholder “A” = 50,000 shares; 25% paid (unpaid is 37,500 shares)
and that the assignment is valid as between the parties and as to persons
“A” cannot retain 5,000 shares and assign to:
to whom notice is brought home. Such an assignment exists here,
“B” – 18,750 shares
though it was made for the purpose of securing a debt. The
“C” – 18,749 shares
endorsement to the plaintiff of the receipt above mentioned reads:
“D” – 1 share

For value received, I assign all my rights in these shares in favor of Mr.
BUT “A” can:
Tua Cun.
Transfer all 50,000 shares to “C” (single transferee) subject to the
following conditions:
Manila, P. I., May 18, 1921.
(1) corporation consents to the transfer (Art. 1293, NCC)
(2) transfer is recorded in the books of the corporation
(Sgd.) CHUA SOCO

MANDAMUS: Once a subscriber has paid his subscription in full, he This endorsement was accompanied by the delivery of the receipt to the
becomes entitled to be issued a stock certificate and, in the event, that plaintiff and further strengthened by the execution of the chattel
the corporation refuses to do so, the stockholder may institute a case mortgage, which mortgage, at least, operated as a conditional equitable
for mandamus with damages, such issuance being ministerial. assignment.

FUA CUN VS. SUMMERS AND CHINA, BANKING CORPORATION 44 As against the rights of the plaintiff the defendant bank had, as we have
PHIL. 705, MARCH 27, 1923 seen, no lien unless by virtue of the attachment. But the attachment was
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying levied after the bank had received notice of the assignment of Chua
50% of the subscription price and a corresponding receipt being issued Soco's interests to the plaintiff and was therefore subject to the rights of
therefor. Such shares were mortgaged to plaintiff Fua Cun to secure a the latter. It follows that as against these rights the defendant bank holds
loan evidenced by a promissory note, together with the receipt, which no lien whatever.
was endorsed and delivered to plaintiff mortgagee. Plaintiff informed
the manager of the Bank about the transaction but was told to await As we have already stated, the court erred in holding the plaintiff as the
action by the BOD. owner of two hundred and fifty shares of stock; "the plaintiff's rights
consist in an equity in five hundred shares and upon payment of the
In the meantime, Chua Soco became indebted to the bank, and in the unpaid portion of the subscription price he becomes entitled to the
action for recovery of money, his 500 shares were attached. issuance of certificate for said five hundred shares in his favor."

Fua Cun thereupon instituted the present action maintaining that the The judgment appealed from is modified accordingly, and in all other
payment of 50% of the subscription entitled Chua Soco to 250 shares respects it is affirmed, with the costs against the appellants Banking
and prayed that his lien on the shares by virtue of the chattel mortgage Corporation. So ordered.
be declared to have priority over the claim of defendant Bank.

The trial court rendered judgment in favor of plaintiff.

ISSUE:
(1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment.
(2) WON plaintiff had a superior claim over that of the Bank.

HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua

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G. Watered Stocks (2) If 3 days later, the members of the Board sold those purchased
SEC. 64. Liability of Directors for Watered Stocks. – A director or officer shares at P12.00 per share, making a profit of P10.00 per share,
of a corporation who: (a) consents to the issuance of stocks for a they cannot be held liable for stock watering but they can be
consideration less than its par or issued value; (b) consents to the question on their duty of loyalty. Since the whole P12.00 per share
issuance of stocks for a consideration other than cash, valued in excess could’ve gone to the coffers of the corporation instead of them
of its fair value; or (c) having knowledge of the insufficient consideration, reaping the profits for themselves.
does not file a written objection with the corporate secretary, shall be
liable to the corporation or its creditors, solidarily with the stockholder EFFECTS OF ISSUANCE OF WATERED STOCKS:
concerned for the difference between the value received at the time of (1) The corporation is deprived of its capital thereby hurting its
issuance of the stock and the par or issued value of the same. business prospects, financial capability and responsibility;
(2) Stockholder who paid their subscriptions in full, or promised to pay
Watered stocks may be defined as one which is issued by the the same, are injured and prejudiced by the reduction of their
corporation as fully paid-up shares, when in fact the whole amount of proportionate interest in the corporation; and
the value thereof has not been paid. If the shares have thus been issued (3) Present and future creditors are deprived of the corporate assets
by the corporation as fully paid, when in fact it has intentionally and for the protections of their interest.
knowingly received or agreed to receive nothing at all for them, or less
than their par value, either in money, property or services, the shares are BASIS OF LIABILITY:
said to be “watered” or “fictitiously paid-up” to the extent to which they (1) “Trust Fund Doctrine” – the capital stock of the corporation is
have not been issued or are not to be paid for” treated as inclusive of the unpaid portion of subscriptions to said
capital, as a “trust fund” which the creditors have a right to look up
RIGHT OF CORPORATION AND CREDITORS: The law does not make to for the satisfaction of their claims. Stockholders, therefore, are
any distinction as to the right of the corporation and its creditors to mandated to pay the full value of their shares.
enforce payment of the water in the stocks issued, thus, it applies to all (2) “Fraud or Misrepresentation Theory” – liability is based on the false
creditors whether prior or subsequent to the issuance of the watered representation made by the corporation and the stockholder
stock. concerned to the creditors that the true par value or issued price
of the shares has been paid or promised to be paid in full.
SOLIDARY LIABILITY: All consenting directors and officers are solidarily
liable for the “water” in the stock. CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER):
(1) As to the corporation – when a corporation is guilty of ultra-vires or
NON-CONSENTING DIRECTORS: may be absolved of liability by their illegal acts which constitute an injury to or fraud upon the public,
written dissent. Otherwise, if they did not issue such written dissent or or which will tend to injure or defraud the public, the State may
are passive, they may be held liable for not objecting thereto. institute a quo-warranto proceeding to forfeit its charter for the
misuse or abuse of its franchise;
ISSUANCE OF WATERED STOCKS: may be effected in the following (2) As between the corporation and the subscriber – the subscription
ways: is void. Such being the case, the subscriber is liable to pay the full
(1) For a monetary consideration less than its par or issue value; or par issued value thereof, to render it valid and effective;
(2) For a consideration in property, tangible or intangible, valued in (3) As to the consenting stockholders – they are estopped from raising
excess of its market value; any objection thereto;
(3) Gratuitously or under an agreement that nothing shall be paid at (4) As to dissenting stockholders – in view of the dilution of their
all; or proportionate interest in the corporation, they may compel the
(4) In the guise of stock dividends when there are no surplus profits of payment of the “water” in the stock solidarily against the
the corporation. responsible and consenting directors and officers inclusive of the
holder of the watered stock;
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (5) As to creditors – they may enforce payment of the difference in the
(1) 5M shares at P1.00 par value; and (2) 1M no par value shares with price, or the water in the stock, solidarily against the responsible
issued value at P5.00. A acquired 1M of the par value shares for P.80 directors/officers and the stockholders concerned; and
and 100,000 no par value shares at P4.00: (6) As against the transferees of the watered stocks – his right is the
(1) WATERED STOCK: There is stock watering for both shares. Sec. 65 same as that of his transferor. If, however, a certificate of stock has
speaks of issuance of shares at “less than its par or issued value”;\ been issued and duly indorsed to a bona fide purchaser, without
(2) LIABILITY FOR PAR VALUE SHARES: The directors who consented knowledge, actual or constructive, the latter cannot be held liable,
to the issuance or were passive about it, without written dissent, at least as against the corporation, since he took the shares on
are solidarily liable with A for the difference of P.20; reliance of the misrepresentation made by the corporation that the
(3) LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable stock certificate is valid and subsisting. This is because a
because the no par value shares are “deemed fully paid and non- corporation is prohibited from issuing certificates of stock until the
assessable” (Sec. 6). Accordingly, only the directors or officers full value of the subscriptions have been paid and could not,
consenting to the issuance are liable. therefore, deny the validity of the stock certificate it issued as
against a purchaser in good faith. Thus, Ballantine states that
ILLUSTRATION: X Co. has P100M Authorized Capital Stock divided into whether there is any liability on the part of the transferee of watered
100M shares at P1.00 par value, there is a provision in the by-laws stock is made to depend upon whether he acquired the same
denying the pre-emptive right of the shareholders. The Board of without notice, either as purchaser or donee. If he had knowledge
Directors subscribed to 1M of the unissued shares at P2.00 each when thereof, he is subject to the same liability as his transferor.
the fair market value of the shares was P12.00.
(1) WATERED STOCK: No stock watering, since the shares were
subscribed for more than the par value, notwithstanding if it less
than the fair market value;
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LIABILITY FOR INTEREST the shares of stock covered by the subscription shall be vested in the
Aside from the value of their subscription, subscribers may likewise be corporation as treasury shares and may be disposed of by said
required to pay interest on all unpaid subscriptions if so imposed in the corporation in accordance with the provisions of this Code.
contract or in the corporate by-laws at such rate as may be indicated
thereat or the legal rate if so not fixed. Unless so required or provided,
however, the subscribers to shares of stock, not fully paid, are not liable
to pay interest on their unpaid subscriptions.

SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to stocks shall

be liable to the corporation for interest on all unpaid subscriptions from
the date of subscription, if so required by and at the rate of interest fixed
in the subscription contract. If no rate of interest is fixed in the
subscription contract, the prevailing legal rate shall apply.

H. Enforcement and Payment of Unpaid Subscriptions

SEC. 66. Payment of Balance of Subscription. – Subject to the provisions
of the subscription contract, the board of directors may, at any time,
declare due and payable to the corporation unpaid subscriptions and
may collect the same or such percentage thereof, in either case, with
accrued interest, if any, as it may deem necessary.

Payment of unpaid subscription or any percentage thereof, together

with any interest accrued shall be made on the date specified in the
subscription contract or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire balance due
and payable and shall make the stockholder liable for interest at the
legal rate on such balance, unless a different interest rate is provided in
the subscription contract. The interest shall be computed from the date
specified, until full payment of the subscription. If no payment is made
within thirty (30) days from the said date, all stocks covered by the
subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders
TIME OF PAYMENT: Unpaid subscription or any percentage thereof,
otherwise.
together with interest if required by the by-laws or the contract of
subscription, shall be paid either:
SEC. 67. Delinquency Sale. – The board of directors may, by resolution,
(1) On the date or dates fixed in the contract or subscription;
order the sale of delinquent stock and shall specifically state the amount
(2) On the date or dates that may be specified by the BOD pursuant
due on each subscription plus all accrued interest, and the date, time
to a “call” declaring any or all unpaid portion thereof to be so
and place of the sale which shall not be less than thirty (30) days nor
payable.
more than sixty (60) days from the date the stocks become delinquent.
Notice of the sale, with a copy of the resolution, shall be sent to every
REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION:
delinquent stockholder either personally, by registered mail, or through
(1) By board action in accordance with the procedure laid down in Sec.
other means provided in the bylaws. The same shall be published once
66 to 68 of the RCC; and
a week for two (2) consecutive weeks in a newspaper of general
(2) By a collection case in court as provided for in section 69.
circulation in the province or city where the principal office of the
corporation is located.
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect
payment of unpaid subscription will not prevent the creditors or the
Unless the delinquent stockholder pays to the corporation, on or before
receiver of the corporation to institute a court action to collect the
the date specified for the sale of the delinquent stock, the balance due
unpaid portion thereof. This is because the capital of the corporation is
on the former’s subscription, plus accrued interest, costs of
the basis of the credit of and financial responsibility of the corporation.
advertisement and expenses of sale, or unless the board of directors
Persons dealing with a corporation and extending credit to it have a
otherwise orders, said delinquent stock shall be sold at a public auction
right to insist that the unpaid subscription shall be paid in when this
to such bidder who shall offer to pay the full amount of the balance on
becomes necessary for the satisfaction of their claims. This is otherwise
the subscription together with accrued interest, costs of advertisement
known as the Trust Fund Doctrine which states that subscriptions to the
and expenses of sale, for the smallest number of shares or fraction of a
capital of a corporation constitute a fund to which creditors have the
share. The stock so purchased shall be transferred to such purchaser in
right to look up to for the satisfaction of their claims.
the books of the corporation and a certificate for such stock shall be
issued in the purchaser’s favor. The remaining shares, if any, shall be
PROCEDURE
credited in favor of the delinquent stockholder who shall likewise be
(1) The BOD, by a formal Resolution, declares the whole or any
entitled to the issuance of a certificate of stock covering such shares.
percentage unpaid subscriptions to be due and payable on a
Should there be no bidder at the public auction who offers to pay the
specified date. However, if the contract of subscription provides
full amount of the balance on the subscription together with accrued
the date or dates when payment is due, no ”call” or declaration by
interest, costs of advertisement, and expenses of sale, for the smallest
the board is necessary;
number of shares or fraction of a share, the corporation may, subject to
(2) The stockholders concerned are given notice of the board
the provisions of this Code, bid for the same, and the total amount due
resolution by the corporation either personally or by registered
shall be credited as fully paid in the books of the corporation. Title to all
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mail. Publication of the notice of call is not required unless the by- needs 1 to qualify as a director.
laws provide otherwise. Notice is not likewise necessary if the
contract of the subscription stipulates a specific date when any QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE
unpaid portion is due and payable; NOTICE OR IN THE SALE ITSELF:
(3) Payment shall be made on the date specified in the call or on the SEC. 68. When Sale May be Questioned. – No action to recover
date provided for in the contract of subscription; delinquent stock sold can be sustained upon the ground of irregularity
(4) Failure to pay on the date required in the call or as specified in the or defect in the notice of sale, or in the sale itself of the delinquent stock,
contract of subscription will render the entire balance due and unless the party seeking to maintain such action first pays or tenders to
payable and making the stockholder liable for the interest; the party holding the stock the sum for which the same was sold, with
(5) If within 30 days from the date, no payment is made, all the stock interest from the date of sale at the legal rate. No such action shall be
covered by the subscription shall become delinquent and shall be maintained unless a complaint is filed within six (6) months from the date
subject to a delinquency sale; of sale.
(6) The board, by resolution, orders the sale of the delinquent stock
stating the amount due and the date, time and place of the sale; TWO CONDITIONS:
(7) The sale shall be made not less than 30 days nor more than 60 days (1) The party seeking to maintain such action first pays or tenders to
from the date the stocks become delinquent; the party holding the stock the sum for which the same was sold,
(8) Publication of the notice of sale must be made once a week for two with interest from the date of the sale at the legal rate; and
(2) consecutive weeks in the newspaper of general circulation in the (2) The action shall be commenced by the filing of a complaint within
province or city where the principal office is located; 6 months from the date of sale.
(9) Sale at public auction, if no payment is made by the delinquent
stockholder, in favor of the bidder who offered to pay the full ACTION BY THE CORPORATION:
amount of the balance in the subscription, inclusive of interest, cost Notwithstanding the provisions of Sec. 66 to 68, the corporation may
of advertisement and expenses for the smallest number of shares; enforce payment of unpaid subscriptions by court action.
(10) registration or transfer of the shares of stock in the name of the
SEC. 69. Court Action to Recover Unpaid Subscription. – Nothing in this
bidder and corresponding issuance of the stock certificate covering
Code shall prevent the corporation from collecting through court action,
the shares successfully bidded;
the amount due on any unpaid subscription, with accrued interest, costs
(11) If there be any remaining shares, the same shall be credited in favor
and expenses.
of the delinquent stockholder who shall be entitled to the issuance
of a certificate of stock covering such shares;
CALL: Consistent with Art. 1169 of the Civil Code, a “call” is a condition
(12) If there is no bidder at the public auction, the corporation may,
precedent before the right of action to institute a recovery suit accrues.
subject to the provisions of the Code, bid for the same and the
This is because a demand is required before a debtor may incur a delay
total amount due shall be credited or paid in full in the corporate
in the performance of his obligation. As earlier said however, a call is not
books; and
necessary if the contract of subscription provides for a date or dates
(13) The shares so purchased by the corporation shall be vested in the
when payment is due, or when the corporation has become insolvent.
latter as treasury shares.

HIGHEST BIDDER: in the case of sale of delinquent stock, and as VELASCO VS. POIZAT. 37 PHIL. 802, MARCH 15, 1918
indicated in number 10 above, is such bidder who shall offer to pay the FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of
full amount of the balance on the subscription together with accrued The Philippine Chemical Product Co., of which 5 were paid. In an action
interest, cost of advertisement and expenses of sale, for the smallest instituted by Miguel Velasco as assignee of the company, he seeks to
number of shares or fraction of a share. It should be properly termed recover the balance of the subscription. The CFI rendered a judgment
“Lowest” Bidder because the bidders are offering to pay the same dismissing the complaint. Hence, this appeal.
amount, and their bids are based on the number of shares they are
willing to receive, the lowest of which is the winning bid. ISSUE: WON defendant is liable for the balance.

Example: A subscribed to 100 shares of stock for P100.00 each and paid HELD: YES. We think that Poizat is liable upon this subscription. A stock
only 50% and later on declared to be delinquent. For the full amount of subscription is a contract between the corporation on one side, and the
P5,000 (unpaid balance) and the interests, costs, and expenses, the subscriber on the other, and courts will enforce it for or against either. It
following bidders are willing to accept - X: 70 shares; Y: 80 shares; Z: 90 is a rule, accepted by the Supreme Court of the United States, that a
shares. In this case, X would be the highest bidder. The remaining 30 subscription for shares of stock does not require an express promise to
shares would be credited to A. pay the amount subscribed, as the law implies a promise to pay on the
part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the
*NO BIDDER: If there was no bidder, the company has to have Corporation Law clearly recognizes that a stock subscription is subsisting
unrestricted retained earnings in order to acquire the shares as thus liability from the time the subscription is made, since it requires the
provided under Sec. 40 of the Corporation Code (Power to Acquire Own subscriber to pay interest quarterly from that date unless he is relieved
Shares). Accordingly, if the company has no unrestricted retained from such liability by the by-laws of the corporation. The subscriber is as
earnings, it cannot acquire the said shares by virtue of a delinquency much bound to pay the amount of the share subscribed by him as he
sale, however, it may institute an action for the recovery of the would be to pay any other debt, and the right of the company to
subscription price under Sec. 69. demand payment is no less incontestable.

MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS The provisions of the Corporation Law (Act No. 1459) has given
SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS recognition of two remedies for the enforcement of stock subscriptions.
SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights The first and most special remedy given by the statute consists in
as such, and pending the sale, the shares still stand in his name. Even permitting the corporation to put up the unpaid stock for sale and
after the sale, he may still be credited to some of the shares and he only dispose of it for the account of the delinquent subscriber. In this case

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the provisions of section 38 to 48, inclusive of the Corporation Law are give the stockholders any right in connection with the determination of
applicable and must be followed. The other remedy is by action in court, the question whether or not there should be deducted from the 70
concerning which we find in section 49 the following provision: percent of the profit distributable among the stockholders such amount
as may be deemed fit for the payment of subscriptions due and unpaid.
“Nothing in this Act shall prevent the directors from collecting, by action Therefore, it is evident that the defendant corporation has not violated,
in any court of proper jurisdiction, the amount due on any unpaid nor disregarded any right of the plaintiff recognized by the said by-laws,
subscription, together with accrued interest and costs and expenses nor exceeded its authority in the discharge of its executive functions, nor
incurred.” abused its discretion when it performed the acts mentioned in the
complaint as grounds thereof, and, consequently, the facts therein
DE SILVA VS. ABOITIZ & CO. 44 PHIL. 755, MARCH 31, 1923 alleged do not constitute a cause of action.
FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company
and paid 200 of such subscription leaving a balance of P225,000. On LINGAYEN GULF ELECTRIC POWER, INC., VS. BALTAZAR 93 PHIL.,
April 22, 1922, he was informed by the corporate secretary that he has 404, JUNE 30, 1953
been declared delinquent by the BOD and that he should pay the FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at
unpaid subscription otherwise such shares shall be sold at a public P100.000 par value per share, of the plaintiff corporation paying P15,000
auction. and making further payments leaving a balance of P18,500.

De Silva filed a complaint in the CFI of Cebu, contending among others On July 23, 1946, the stockholders, including herein defendant,
that the resolution adopted was violative of Art. 46 of the by-laws stating approved Resolution No. 17 agreeing: (1) to “call” of the balance of the
that all shares subscribed and were not paid at the time of the unpaid subscription to be paid: 50% within 60 days beginning Aug. 1,
incorporation shall be paid out of the 70% of the profit obtained until 1946; the remaining 50% 60 days beginning October 1, 1946; (2) that
such shares are paid in full. De Silva contends that such article provides all unpaid subscriptions after the due dates of both calls to be subject
for the operative method of payment of the shares, and by declaring the to 12% interest per annum; (3) that after the expiration of a grace period
unpaid subscription to have become due and payable on May 31st and of 60 days, all unpaid subscribed shares would revert to the corporation.
in publishing the notice declaring his shares to be delinquent, the
company has exceeded its executive authority. A demand was made against defendant but was ignored. Hence this
action.
ISSUE: WON the BOD may declare the unpaid shares delinquent or
collect or enforce payment of the same despite the provision of the by- ISSUE No. 1: WON Baltazar is liable to pay the unpaid portion of his
laws. subscription.

HELD: YES. It is discretionary on the part of the board of directors to do HELD: NO. We agree with the lower court that the law requires that
whatever is provided in the said article relative to the application of a notice of any call for the payment of unpaid subscription should be
part of the 70 percent of the profit distributable in equal parts on the made not only personally but also by publication. This is clear from the
payment of the shares subscribed to and not fully paid. provisions of section 40 of the Corporation Law, Act No. 1459, as
amended.
If the board of directors does not wish to make, or does not make, use
of said authority it has two other remedies for accomplishing the same It will be noted that section 40 is mandatory as regards publication,
purpose. As was said by this court in the case of Velasco vs. Poizat (37 using the word "must". As correctly stated by the trial court, the reason
Phil., 802): for the mandatory provision is not only to assure notice to all subscribers,
but also to assure equality and uniformity in the assessment on
“The first and most special remedy given by the statute consists in stockholders. (14 C.J. 639).
permitting the corporation to put the unpaid stock for sale and dispose
of it for the account of the delinquent subscriber. In this case the We find the citation of authorities made by the plaintiff and appellant
provisions of sections 38 to 48, inclusive, of the Corporation Law are inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the
applicable and must be followed. The other remedy is by action in corporation involved was insolvent, in which case all unpaid stock
court.” subscriptions become payable on demand and are immediately
recoverable in an action instituted by the assignee. Said the court in that
Admitting that the provision of article 46 of the said by-laws maybe case:
regarded as a contract between the defendant corporation and its “. it is now quite well settled that when the corporation becomes
stockholders, yet as it is only to the board of directors of the corporation insolvent, with proceedings instituted by creditors to wind up and
that said articles gives the authority or right to apply on the payment of distribute its assets, no call or assessment is necessary before the
unpaid subscriptions such amount of the 70 percent of the profit institution of suits to collect unpaid balance on subscription.”
distributable among the shareholders in equal parts as may be deemed
fit, it cannot be maintained that the said article has prescribe an But when the corporation is a solvent concern, the rule is:
operative method for the payment of said subscription continuously “It is again insisted that plaintiffs cannot recover because the suit was
until their full amortization. not proceeded by a call or assessment against the defendant as a
subscriber, and that until this is done no right of action accrues. In a suit
In the instant case, the defendant corporation, through its board of by a solvent going corporation to collect a subscription, and in certain
directors, made use of its discretionary power, taking advantage of the suits provided by statute this would be true; (Id.)”
first of the two remedies provided by the aforesaid law. On the other
hand, the plaintiff has no right whatsoever under the provision of the ISSUE No. 2: WON the Baltazar is correct in claiming that Resolution No.
above cited article 46 of the said by-laws to prevent the board of 17 of 1946 of the BOD released him from the obligation to pay for his
directors from following, for that purpose, any other method than that unpaid subscription.
mentioned in the said article, for the very reason that the same does not
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HELD: NO. There must be unanimous consent of the stockholders of the unpaid subscriptions. No doubt such set-off was without lawful basis, if
corporation. We quote some authorities: not premature. As there was no notice or call for the payment of unpaid
subscriptions, the same is not yet due and payable.
Subject to certain exceptions, considered in subdivision (3) of this
section, the general rule is that a valid and binding subscription for stock LUMANLAN VS. CURA 59 PHIL. 746, MARCH 21, 1934
of a corporation cannot be cancelled so as to release the subscriber from FACTS: Lumanlan subscribed to 300 shares of stock of appellant
liability thereon without the consent of all the stockholders or company at a par value of P50.
subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for cancellation Layag was appointed the receiver of said company, at the instance of its
made with the subscriber at the time of the subscription, as against creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect
persons who subsequently subscribed or purchased without notice of the unpaid subscriptions, there appearing that the company had no
such agreement. (18 C.J.S. 874). assets except the credits against those who had subscribed for shares of
stock.
“(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide The CFI rendered a decision in favor of Julio Valenzuela and held
compromise, or to set off a debt due from the corporation, a release, Lumanlan liable for the unpaid subscription and loans and advances
supported by consideration, will be effectual as against dissenting together with interests.
stockholders and subsequent and existing creditors. A release which
might originally have been held invalid may be sustained after a Pending appeal, the parties entered into an agreement where Lumanlan
considerable lapse of time. (18 C.J.S. 874).” would dismiss the appeal and the corporation would collect only 50% of
the amount subscribed by him for stock, provided that in case the 50%
In the present case, the release claimed by defendant and appellant was inufficient to pay Valenzuela he should pay an additional amount
does not fall under the exception above referred to, because it was not not to exceed the judgment against him in that case. Lumanlan paid
given pursuant to a bona fide compromise, or to set off a debt due from Valenzuela the sum of P11,840 including interest.
the corporation, and there was no consideration for it.
Disregarding the agreement, appellant company asked for and order of
In conclusion we hold that under the Corporation Law, notice of call for execution of the CFI decision which was granted and the provincial
payment for unpaid subscribed stock must be published, except when sheriff levied upon two parcels of land of Lumanlan.
the corporation is insolvent, in which case, payment is immediately
demandable. We also rule that release from such payment must be ISSUE: WON Lumanlan is still liable to the corporation.
made by all the stockholders.
HELD: YES. In the promissory note given by the corporation to
APODACA VS. NATIONAL LABOR RELATIONS COMMISSION 172 Valenzuela the former obligated itself to pay Valenzuela the sum of
SCRA 442, APRIL 18, 1989 P8,000 with interest at 12 per cent per annum and, upon failure to pay
FACTS: Petitioner, an employee of respondent company, subscribed to said sum and interest when due, 25 per cent of the principal as expenses
1,500 shares at P100 per share. He paid an initial payment P37,500. On of collection and judicial costs in case of litigation.
Sept. 1, 1975, he was appointed President and General Manager of the
company but on Jan. 2, 1986, he resigned. By virtue of these facts Lumanlan is entitled to a credit against the
judgment in case No. 37492 for P11,840 and an additional sum of
He filed a complaint with the NLRC claiming unpaid wages, cost of living P2,000, which is 25 per cent on the principal debt, as he had to file this
allowance, the balance of his gasoline and representation expenses and suit to collect, or receive credit for the sum which he had paid Valenzuela
his bonus compensation for 1986. Respondent admitted that petitioner for and in place of the corporation, or a total of P13,840. This leaves a
was entitled to P17,060.07 but the same was already set-off against his balance due Dizon & co., Inc., of P1,269 on that judgment with interest
unpaid subscription. Petitioner questioned such set-off claiming that no thereon at 6 per cent per annum from August 30, 1930.
call or notice was made. The Labor Arbiter decided in favor of petitioner.
On appeal, such decision was reversed by the NLRC. It appears from the record that during the trial of the case now under
consideration, the Bank of the Philippine Islands appeared in this case
ISSUE: WON the set-off was properly made. as assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank
was appointed assignee in case No. 43065 of the Court of First Instance
HELD: NO. Firstly, the NLRC has no jurisdiction to determine such intra- of the City of Manila on November 28, 1932. It is therefore evident that
corporate dispute between the stockholder and the corporation as in there are still other creditors of Dizon & Co., Inc. This being the case
the matter of unpaid subscriptions. This controversy is within the that corporation has a right to collect all unpaid stock subscriptions and
exclusive jurisdiction of the Securities and Exchange Commission. any other amounts which may be due it.

Secondly, assuming arguendo that the NLRC may exercise jurisdiction It is established doctrine that subscriptions to the capital of a
over the said subject matter under the circumstances of this case, the corporation constitute a fund to which the creditors have a right to look
unpaid subscriptions are not due and payable until a call is made by the for satisfaction of their claims and that the assignee in insolvency can
corporation for payment. Private respondents have not presented a maintain an action upon any unpaid stock subscription in order to realize
resolution of the board of directors of respondent corporation calling for assets for the payment of its debts. (Philippine Trust Co. vs. Rivera, 44
the payment of the unpaid subscriptions. It does not even appear that a Phil., 469, 470.)
notice of such call has been sent to petitioner by the respondent
corporation.

What the records show is that the respondent corporation deducted the
amount due to petitioner from the amount receivable from him for the
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PHILIPPINE NATIONAL BANK VS. BITULOK SAWMILL, INC. 23 SCRA

1366, JUNE 29, 1968 The BOD of COB Group Marketing were apprised by Jose E. Bax that
FACTS: In various suits decided jointly, PNB as creditor, and therefore the firm owed Keller about P179,000.
the real party in interest, was allowed by the lower court to substitute
the receiver of the Philippine Lumber Distributing Agency in these Keller sued COB Marketing and its stockholders.
respective actions for the recovery from the defendant lumber
producers the balance of their stock subscriptions. ISSUE: WON Keller can collect the unpaid subscriptions of the
stockholders.
The defendant lumber producers were convinced by the late President
Manuel Roxas to form a cooperative and ensure the stable supply of HELD: YES. It is settled that a stockholder is personally liable for the
lumber in the country and to eliminate alien middlemen. To induce financial obligations of a corporation to the extent of his unpaid
them, the president promised and agreed to invest P9.00 for every subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs
P1.00 that the members would invest therein. 1311-2).

There was no appropriation made by congress for the P9.00 investment. GARCIA VS. SUAREZ. 67 PHIL. 441, APRIL 21, 1939
The President then instructed Hon. Emilio Abello, then Executive FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano-
Secretary and chairman of the BOD of PNB to grant an overdraft of Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or
P250,000 (later increased to P350,000) which was approved by the BOD P400. Plaintiff-appellee Garcia was appointed by the court as receiver of
of PNB with interest at 6%. the company, to collect the unpaid subscription, among others. On June
18, 1931, Garcia brought an action to recover from Suarez and other
The Philippines did not invest the P9.00 for every peso coming from shareholders the balance of their subscriptions, but the complaint was
defendant lumber producers. The loan extended by PNB was not paid. dismissed for lack of prosecution.
Hence, these suits which the trial court dismissed.
On Oct. 10, 1935, a similar action was instituted which was granted by
ISSUE: WON the lumber producers are liable for the full value of their the CFI holding defendant liable for the balance of his unpaid
subscriptions. subscription and interest. On appeal, the defendant raises the issue of
prescription.
HELD: YES. In Philippine Trust Co. v. Rivera, citing the leading case of
Velasco v. Poizat, this Court held: "It is established doctrine that ISSUE: WON defendant Suarez is liable.
subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the HELD: YES. The premise of the argument is wrong because it confuses
assignee in insolvency can maintain an action upon any unpaid stock two distinct obligations: the obligation to pay interest and that to pay
subscription in order to realize assets for the payment of its debt A the amount of the subscription. The said section 37 of the Corporation
corporation has no power to release an original subscriber to its capital Law provides when the obligation to pay interest arises and when
stock from the obligation of paying for his shares, without a valuable payment should be made, but it is absolutely silent as to when the
consideration for such release; and as against creditors a reduction of subscription to a stock should be paid. Of course, the obligation to pay
the capital stock can take place only in the manner and under the arises from the date of the subscription, but the coming into being of
conditions prescribed by the statute or the charter or the articles of an obligation should not be confused with the time when it becomes
incorporation. Moreover, strict compliance with the statutory regulations demandable. In a loan for example, the obligation to pay arises from the
is necessary...." The Poizat doctrine found acceptance in later cases. time the loan is taken; but the maturity of that obligation, the date when
One of the latest cases, Lingayen Gulf Electric Power v. Baltazar, Speaks the debtor can be compelled to pay, is not the date itself of the loan,
to this effect: "In the case of Velasco v. Poizat, the corporation involved because this would be absurd. The date when payment can be
was insolvent, in which case all unpaid stock subscriptions become demanded is necessarily distinct from and subsequent to that the
payable on demand and are immediately recoverable in an action obligation is contracted.
instituted by the assignee."
By the same token, the subscription to the capital stock of the
It would be unwarranted to ascribe to the late President Roxas the view corporation, unless otherwise stipulation, is not payable at the moment
that the payment of the stock subscriptions, as thus required by law, of the subscription but on a subsequent date which may be fixed by the
could be condoned in the event that the counterpart fund to be invested corporation. Hence, section 38 of the Corporation Law, amended by Act
by the Government would not be available. Even if such were the case, No. 3518, provides that:
however, and such a promise were in fact made, to further the laudable
purpose to which the proposed corporation would be devoted and the “The board of directors or trustees of any stock corporation formed,
possibility that the lumber producers would lose money in the process, organized, or existing under this Act may at any time declare due and
still the plain and specific wording of the applicable legal provision as payable to the corporation unpaid subscriptions to the capital stock”
interpreted by this Court must be controlling. It is a well-settled principle
that with all the vast powers lodged in the Executive, he is still devoid The board of directors of the Compañia Hispano-Filipino, Inc., not
of the prerogative of suspending the operation of any statute or any of having declared due and payable the stock subscribed by the appellant,
its terms. the prescriptive period of the action for the collection thereof only
commenced to run from June 18, 1931 when the plaintiff, in his capacity
EDWARD A. KELLER & CO., LTD. VS. COB GROUP MARKETING, INC. as receiver and in the exercise of the power conferred upon him by the
141 SCRA 86, JANUARY 16, 1986 said section 38 of the Corporation Law, demanded of the appellant to
FACTS: Petitioner-appellant appointed defendant COB Group pay the balance of his subscription. The present action having been filed
Marketing, Inc. as exclusive distributor of its household products in on October 10, 1935; the defense of prescription is entirely without
Panay and Negros. Under its sales agreement, Keller sold on credit its basis.
products to COB Group Marketing.
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I. Effects of Delinquency that after the expiration of one (1) year from the date of the last
SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, publication, if no contest has been presented to said corporation
be entitled to vote, or be represented at any stockholder’s meeting, nor regarding said certificate of stock, the right to make such contest
shall the holder thereof be entitled to any of the rights of a stockholder shall be barred and said corporation shall cancel in its books the
except the right to dividends in accordance with the provisions of this certificate of stock which has been lost, stolen or destroyed and
Code, until and unless payment is made by the holder of such issue in lieu thereof new certificate of stock, unless the registered
delinquent stock for the amount due on the subscription with accrued owner files a bond or other security in lieu thereof as may be
interest, and the costs and expenses of advertisement, if any. required, effective for a period of one (1) year, for such amount and
in such form and with such sureties as may be satisfactory to the
DELINQUENT: Shares of stock become delinquent when no payment is board of directors, in which case a new certificate may be issued
made on the balance of all or any portion of the subscription on the date even before the expiration of the one (1) year period provided
or dates fixed in the contract of subscription without need of call, or on herein: Provided, That if a contest has been presented to said
the date specified by the BOD pursuant to a call made by it in corporation or if an action is pending in court regarding the
accordance with the provisions of Sec. 67. ownership of said certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in lieu
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses thereof shall be suspended until the final decision by the court
the right to vote and be voted upon or represented in any stockholders regarding the ownership of said certificate of stock which has been
meeting as well as all the rights pertaining to a stockholder except the lost, stolen or destroyed.
right to receive dividends in accordance with the Code
Except in case of fraud, bad faith, or negligence on the part of the
J. Rights of Unpaid Shares corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of
lost, stolen or destroyed pursuant to the procedure above described.
subscribed shares not fully paid which are not delinquent shall have all
the rights of a stockholder.
RATIONALE:
(1) To avoid duplication of certificates of stock;
RIGHT TO RECEIVE DIVIDENDS: Sec. 42 provides that “any cash
(2) To avoid fictitious and fraudulent transfers; and
dividend due on delinquent stockholders shall first be applied to the
(3) To protect the corporation against damage from whatever source
unpaid balance on his subscription plus cost and expenses, while stock
arising from the issuance of the duplicate certificate including
dividends shall be withheld until his unpaid subscription is paid in full”
liability to the holder of the original certificate or to innocent
holders of certificate based on the duplicate.
RIGHTS OF UNPAID SHARES: If the shares are not delinquent, however,
subscribers to the capital stock of a corporation though not fully paid,
Thus, the BOD has the authority to decide the amount and the kind of
are entitled to all the rights of a stockholder (Sec. 71) EXCEPT the
surety bond that may be required for the issuance of a certificate of
issuance of certificate of stocks (Sec. 63). They can vote and be voted
stock, in lieu of the lost or destroyed one, if the same is to be issued
upon and entitled to receive all dividends due their shares
prior to the expiration of the 1 year period provided by Sec. 72.
NON-STOCK CORPORATIONS: The rules on delinquent shareholders
ISSUANCE OF NEW CERTIFICATES:
applies to non-stock corporations, such as when members are
(1) After the above procedures have been complied with, the new
delinquent in paying membership dues.
certificate will be issued 1 year from the date of the last publication;
(2) Nevertheless, the stockholder may file a bond or other security to
K. Lost or Destroyed Certificates
have the shares issued before the 1 year prescribed.
SEC. 72. Lost or Destroyed Certificates. – The following procedure shall
(3) If a contest has been present to the corporation or an action is
be followed by a corporation in issuing new certificates of stock in lieu
pending in court, the issuance of the new certificate shall be
of those which have been lost, stolen or destroyed:
suspended until final decision.

(a) The registered owner of a certificate of stock in a corporation or

L. Rights and Liabilities of Stockholders
such person’s legal representative shall file with the corporation (A)
RIGHTS OF A STOCKHOLDER:
an affidavit in triplicate setting forth, if possible, (1) the
(1) Participation in the management of the corporate affairs by
circumstances as to how the certificate was lost, stolen or
exercising their right to vote and be voted upon either personally
destroyed, (2) the number of shares represented by such
or by proxy as provided for under Sec. 49 and 57 of the Code;
certificate, (3) the serial number of the certificate and (4) the name
(2) To enter into a voting trust agreement subject to the procedure,
of the corporation which issued the same. The owner of such
requirements and limitations imposed under Sec. 49;
certificate of stock shall also submit such (B) other information and
(3) To receive dividends and to compel their declaration if warranted
evidence as may be deemed necessary; and
under Sec. 41;
(4) To transfer shares of stock subject only to reasonable restrictions
(b) After verifying the affidavit and other information and evidence
such as the options and preferences as may be allowed by law
with the books of the corporation, said corporation shall publish a
inclusive of the right of the transferee to compel the registration of
notice in a newspaper of general circulation published in the place
the transfer in the books of the corporation as provided for in Sec.
where the corporation has its principal office, once a week for three
62;
(3) consecutive weeks at the expense of the registered owner of
(5) To be issued a certificate of stock for fully paid-up shares in
the certificate of stock which has been lost, stolen or destroyed.
accordance with Sec. 63;
The notice shall state (1) the name of said corporation, (2) the name
(6) To exercise pre-emptive rights as provided for in Sec. 38;
of the registered owner and (3) the serial number of said certificate,
(7) To exercise their appraisal right in accordance with the provision of
and (4) the number of shares represented by such certificate, and
Sec. 80 and in those instances allowed by law such as Sec. 41 and
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104;
(8) To institute and file a derivative suit;
(9) To recover shares of stock unlawfully sold for delinquency as may
be allowed under Sec. 68;
(10) To inspect the books of the corporation subject only to the
limitations imposed by Sec. 74;
(11) To be furnished by the most recent financial statement of the
corporation as by Sec. 74;
(12) To be issued a new stock certificate in lieu of the lost or destroyed
one subject to the procedure laid down in Sec. 72;
(13) To have the corporation dissolved under Sec. 134 to 138, and Sec.
104 in a close corporation;
(14) To participate in the distribution of assets of the corporation upon
dissolution under Sec. 139;
(15) In the case of a close corporation, to petition the SEC to arbitrate
in the event of a deadlock as allowed under Sec. 103; and
(16) Also in the case of a close corporation, to withdraw therefrom, for
any reason, and compel the corporation to purchase his shares as
provided for in Sec. 104.

OBLIGATIONS AND LIABILITIES:

(1) To pay the corporation the balance of his unpaid subscriptions
subject to the provision of Sec. 66-69;
(2) To pay interest on his unpaid subscription, if required by the by-
laws or by the contract of subscription in accordance with Sec. 65;
(3) To answer to the creditor for the unpaid portion of his subscription
under the Trust Fund Doctrine;
(4) To answer the “water” in his stocks as provided for in Sec. 64;
(5) To be liable, as general partners, for all debts, liabilities and
damages of determinable corporation as envisioned under Sec. 21
(corporation by estoppel); and
(6) To be personally liable for torts, in the event that a stockholder in
a close corporation actively participates in the management of
corporate affairs.

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X. CORPORATE BOOKS AND RECORDS for such refusal: Provided, further, That it shall be a defense to any action
A. Books and Records to be Kept under this section that the person demanding to examine and copy
SEC. 73. Books to be Kept; Stock Transfer Agent. – Every corporation excerpts from the corporation’s records and minutes has improperly
shall keep and carefully preserve at its principal office all information used any information secured through any prior examination of the
relating to the corporation including, but not limited to: records or minutes of such corporation or of any other corporation, or
(a) The articles of incorporation and bylaws of the corporation and all was not acting in good faith or for a legitimate purpose in making the
their amendments; demand to examine or reproduce corporate records, or is a competitor,
(b) The current ownership structure and voting rights of the director, officer, controlling stockholder or otherwise represents the
corporation, including lists of stockholders or members, group interests of a competitor.
structures, intra-group relations, ownership data, and beneficial
ownership; If the corporation denies or does not act on a demand for inspection
(c) The names and addresses of all the members of the board of and/or reproduction, the aggrieved party may report such to the
directors or trustees and the executive officers; Commission. Within five (5) days from receipt of such report, the
(d) A record of all business transactions; Commission shall conduct a summary investigation and issue an order
(e) A record of the resolutions of the board of directors or trustees and directing the inspection or reproduction of the requested records.
of the stockholders or members;
(f) Copies of the latest reportorial requirements submitted to the Stock corporations must also keep a stock and transfer book, which shall
Commission; and contain a record of all stocks in the names of the stockholders
(g) The minutes of all meetings of stockholders or members, or of the alphabetically arranged; the installments paid and unpaid on all stocks
board of directors or trustees. Such minutes shall set forth in detail, for which subscription has been made, and the date of payment of any
among others: the time and place of the meeting held, how it was installment; a statement of every alienation, sale or transfer of stock
authorized, the notice given, the agenda therefor, whether the made, the date thereof, by and to whom made; and such other entries
meeting was regular or special, its object if special, those present as the bylaws may prescribe. The stock and transfer book shall be kept
and absent, and every act done or ordered done at the meeting. in the principal office of the corporation or in the office of its stock
Upon the demand of a director, trustee, stockholder or member, transfer agent and shall be open for inspection by any director or
the time when any director, trustee, stockholder or member stockholder of the corporation at reasonable hours on business days.
entered or left the meeting must be noted in the minutes; and on
a similar demand, the yeas and nays must be taken on any motion A stock transfer agent or one engaged principally in the business of
or proposition, and a record thereof carefully made. The protest of registering transfers of stocks in behalf of a stock corporation shall be
a director, trustee, stockholder or member on any action or allowed to operate in the Philippines upon securing a license from the
proposed action must be recorded in full upon their demand. Commission and the payment of a fee to be fixed by the Commission,
which shall be renewable annually: Provided, That a stock corporation is
Corporate records, regardless of the form in which they are stored, shall not precluded from performing or making transfers of its own stocks, in
be open to inspection by any director, trustee, stockholder or member which case all the rules and regulations imposed on stock transfer
of the corporation in person or by a representative at reasonable hours agents, except the payment of a license fee herein provided, shall be
on business days, and a demand in writing may be made by such applicable: Provided, further, That the Commission may require stock
director, trustee or stockholder at their expense, for copies of such corporations which transfer and/or trade stocks in secondary markets to
records or excerpts from said records. The inspecting or reproducing have an independent transfer agent.
party shall remain bound by confidentiality rules under prevailing laws,
such as the rules on trade secrets or processes under Republic Act No. THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE
8293, otherwise known as the “Intellectual Property Code of the CORPORATION:
Philippines”, as amended, Republic Act No. 10173, otherwise known as (1) Records of all business transactions which include, among others,
the “Data Privacy Act of 2012”, Republic Act No. 8799, otherwise known (1) journals, (2) ledger, (3) contracts, (4) vouchers and receipts, (5)
as “The Securities Regulation Code”, and the Rules of Court. financial statements and other books of accounts, (6) income tax
returns, and (7) voting trust agreements - which must be kept and
A requesting party who is not a stockholder or member of record, or is carefully preserved at its principal office;
a competitor, director, officer, controlling stockholder or otherwise (2) Minutes of all meetings of stockholders or members and of the
represents the interests of a competitor shall have no right to inspect or directors or trustees setting forth in detail (1) the date, time and
demand reproduction of corporate records. place of meeting, (2) how authorized, (3) the notice given, (4)
whether the same be regular or special, and if special, the purpose
Any stockholder who shall abuse the rights granted under this section thereof shall be specified, (5) those present and absent, and (6)
shall be penalized under Section 158 of this Code, without prejudice to every act done or ordered done thereat - which must likewise be
the provisions of Republic Act No. 8293, otherwise known as the kept at the principal office of the said corporation; and
“Intellectual Property Code of the Philippines”, as amended, and (3) Stock and Transfer Book showing the (1) names of the stockholders,
Republic Act No. 10173, otherwise known as the “Data Privacy Act of (2) the amount paid or unpaid on all stocks for which the
2012”. subscription has been made, (3) a statement of every alienation,
sale or transfer of stock made, if any (4) the date thereof, and (5) by
Any officer or agent of the corporation who shall refuse to allow the whom and to whom which must also be kept at the principal office
inspection and/or reproduction of records in accordance with the of the corporation or in the office of its stock transfer agent.
provisions of this Code shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of STOCK AND TRANSFER AGENT: is the person who records every
an offense which shall be punishable under Section 161 of this Code: movement of the shares by the minute or by the hour.
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for NON-STOCK CORPORATIONS: can also have a stock and transfer
such action shall be imposed upon the directors or trustees who voted agent for purposes of the club share-membership.
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PARDO VS. THE HERCULES LUMBER CO., INC. AND FERRER 47 PHIL.
B. Right of Inspection 964, AUGUST 01, 1924
SEC. 74. Right to Financial Statements. – A corporation shall furnish a FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to
stockholder or member, within ten (10) days from receipt of their written compel respondent company to permit petitioner and his duly
request, its most recent financial statement, in the form and substance authorized agent and representative to examine the records and
of the financial reporting required by the Commission. business transactions of said company.

At the regular meeting of stockholders or members, the board of Respondents raised the defense that under Art. 10 of the by-laws, it is
directors or trustees shall present to such stockholders or members a declared that “every shareholder may examine the books of the
financial report of the operations of the corporation for the preceding company and other documents pertaining to the same upon the days
year, which shall include financial statements, duly signed and certified which the board of directors’ shall annually fix”. And thus was set from
in accordance with this Code, and the rules the Commission may 15th to 25th of March by virtue of a board resolution.
prescribe.
ISSUE: WON the BOD may choose specific performance and particular
However, if the total assets or total liabilities of the corporation is less dates when the right of inspection may be exercised
than Six hundred thousand pesos (P600,000.00), or such other amount
as may be determined appropriate by the Department of Finance, the HELD: NO. The general right given by the statute may not be lawfully
financial statements may be certified under oath by the treasurer and abridged to the extent attempted in this resolution. It may be admitted
the president. that the officials in charge of a corporation may deny inspection when
sought at unusual hours or under other improper conditions; but neither
PHILPOTTS VS. PHILIPPINE MANUFACTURING CO. AND BERRY. 40 the executive officers nor the board of directors have the power to
PHIL. 471, NOVEMBER 08, 1919 deprive a stockholder of the right altogether. A by-law unduly restricting
FACTS: Petitioner seeks to obtain a writ of mandamus to compel the the right of inspection is undoubtedly invalid. Authorities to this effect
respondents to permit him, in person or by some authorized agent or are too numerous and direct to require extended comment. (14 C.J.,
attorney, to inspect and examine the records of the business by 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517;
Philippine Manufacturing Company, of which he is a stockholder. Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.)
Respondents interposed a demurrer.
The demurrer is, therefore, sustained; and the writ of mandamus will
ISSUE: WON the right the law concedes to a stockholder may be issue as prayed, with the costs against the respondent.
exercised by a proper agent or attorney.
VERAGUTH VS. ISABELA SUGAR CO. 57 PHIL., 266, OCTOBER 04,
HELD: YES. The right of inspection given to a stockholder can be 1932
exercised either by himself or by any proper representative or attorney FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute
in fact, and either with or without the attendance of the stockholder. writ of mandamus to be issued to each and all of the respondents to,
This is in conformity with the general rule that what a man may do in among others, place at his disposal at reasonable hours the minutes,
person he may do through another; and we find nothing in the statute documents and books of Isabela Sugar Company, Inc. (which he is a
that would justify us in qualifying the right in the manner suggested by director and stockholder) for his inspection and to issue immediately,
the respondents. upon payment of the fees, certified copies of any documentation in
connection with said minutes, documents and the books of the aforesaid
This conclusion is supported by the undoubted weight of authority in corporation.
the United States, where it is generally held that the provisions of law
conceding the right of inspection to stockholders of corporations are to Director Veraguth telegraphed the secretary of the company, asking the
be liberally construed and that said right may be exercised through any latter to forward in the shortest possible time a certified copy of the
other properly authorized person. As was said in Foster vs. White (86 resolution of the board of directors concerning the payment of
Ala., 467), "The right may be regarded as personal, in the sense that attorney's fees in the case against the Isabela Sugar Company and
only a stockholder may enjoy it; but the inspection and examination may others. To this the secretary made answer by letter stating that, since
be made by another. Otherwise it would be unavailing in many the minutes of the meeting in question had not been signed by the
instances." An observation to the same effect is contained in Martin vs. directors present, a certified copy could not be furnished and that as to
Bienville Oil Works Co. (28 La., 204), where it is said: "The possession of other proceedings of the stockholders a request should be made to the
the right in question would be futile if the possessor of it, through lack president of the Isabela Sugar Company, Inc. It further appears that the
of knowledge necessary to exercise it, were debarred the right of board of directors adopted a resolution providing for inspection of the
procuring in his behalf the services of one who could exercise it." In books and the taking of copies "by authority of the President of the
Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That corporation previously obtained in each case."
stockholders have the right to inspect the books of the corporation,
taking minutes from the same, at all reasonable times, and may be aided ISSUE: WON the corporate secretary is justified in refusing to furnish
in this by experts and counsel, so as to make the inspection valuable to copies of the minutes of the meeting of the BOD.
them, is a principle too well settled to need discussion." Authorities on
this point could be accumulated in great abundance, but as they may HELD: YES. The Corporation Law, section 51 (now Sec. 50, RCC),
be found cited in any legal encyclopedia or treaties devoted to the provides that:
subject of corporations, it is unnecessary here to refer to other cases “All business corporations shall keep and carefully preserve a record of
announcing the same rule. The demurrer is overruled; and it is ordered all business transactions, and a minute of all meetings of directors,
that the writ of mandamus shall issue as prayed, unless within 5 days members, or stockholders, in which shall be set forth in detail the time
from notification hereof the respondents answer to the merits. and place of holding the meeting was regular or special, if special its
object, those present and absent, and every act done or ordered done
at the meeting. .. .
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curiosity, or for speculative or vexatious purposes. The weight of judicial

The record of all business transactions of the corporation and the opinion appears to be, that on application for mandamus to enforce the
minutes of any meeting shall be open to the inspection of any director, right, it is proper for the court to inquire into and consider the
member, or stockholder of the corporation at reasonable hours.” stockholder's good faith and his purpose and motives in seeking
inspection. Thus, it was held that "the right given by statute is not
The above puts in statutory form the general principles of Corporation absolute and may be refused when the information is not sought in
Law. Directors of a corporation have the unqualified right to inspect the good faith or is used to the detriment of the corporation." But the
books and records of the corporation at all reasonable times. Pretexts "impropriety of purpose such as will defeat enforcement must be set up
may not be put forward by officers of corporations to keep a director or the corporation defensively if the Court is to take cognizance of it as a
shareholder from inspecting the books and minutes of the corporation, qualification. In other words, the specific provisions take from the
and the right of inspection is not to be denied on the ground that the stockholder the burden of showing propriety of purpose and place upon
director or shareholder is on unfriendly terms with the officers of the the corporation the burden of showing impropriety of purpose or
corporation whose records are sought to be inspected. A director or motive. It appears to be the general rule that stockholders are entitled
stockholder cannot of course make copies, abstracts, and memoranda to full information as to the management of the corporation and the
of documents, books, and papers as an incident to the right of manner of expenditure of its funds, and to inspection to obtain such
inspection, but cannot, without an order of a court, be permitted to take information, especially where it appears that the company is being
books from the office of the corporation. We do not conceive, however, mismanaged or that it is being managed for the personal benefit of
that a director or stockholder has any absolute right to secure certified officers or directors or certain of the stockholders to the exclusion of
copies of the minutes of the corporation until these minutes have been others."
written up and approved by the directors. (See Fisher's Philippine Law
of Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, While the right of a stockholder to examine the books and records of a
vol. 4, Chap. 45.) Combining the facts and the law, we do not think that corporation for a lawful purpose is a matter of law, the right of such
anything improper occurred when the secretary declined to furnish stockholder to examine the books and records of a wholly- owned
certified copies of minutes which had not been approved by the board subsidiary of the corporation in which he is a stockholder is a different
of directors, and that while so much of the last resolution of the board thing.
of directors as provides for prior approval of the president of the
corporation before the books of the corporation can be inspected puts Some state courts recognize the right under certain conditions, while
an illegal obstacle in the way of a stockholder or director, that resolution, others do not. Thus, it has been held that where a corporation owns
so far as we are aware, has not been enforced to the detriment of approximately no property except the shares of stock of subsidiary
anyone. In addition, it should be said that this is a family dispute, the corporations which are merely agents or instrumentalities of the holding
petitioner and the individual respondents belonging to the same family; company, the legal fiction of distinct corporate entities may be
that a test case between the petitioner and the respondents has not disregarded and the books, papers and documents of all the
been begun in the Court of First Instance of Occidental Negros involving corporations may be required to be produced for examination, and that
hundreds of thousands of pesos, and that the appellate court should a writ of mandamus, may be granted, as the records of the subsidiary
not intrude its views to give an advantage to either party. We rule that were, to all in contents and purposes, the records of the parent even
the petitioner has not made out a case for relief by mandamus. though subsidiary was not named as a party. Mandamus was likewise
held proper to inspect both the subsidiary's and the parent corporation's
GOKONGWEI, JR. VS. SECURITIES AND EXCHANGE COMMISSION 89 books upon proof of sufficient control or dominion by the parent
SCRA 336, APRIL 11, 1979 (SUPRA, CHAPTER 7 AND 8) – showing the relation of principal or agent or something similar thereto.
ISSUE: WON petitioner may be properly denied examination of the
books and records of San Miguel International, Inc., a fully owned On the other hand, mandamus at the suit of a stockholder was refused
subsidiary of SMC where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
HELD: NO. Pursuant to the second paragraph of section 51 of the not legally subject to the control of the parent company, although it
Corporation Law, "(t)he record of all business transactions of the owned a vast majority of the stock of the subsidiary. Likewise, inspection
corporation and minutes of any meeting shall be open to the inspection of the books of an allied corporation by stockholder of the parent
of any director, member or stockholder of the corporation at reasonable company which owns all the stock of the subsidiary has been refused on
hours." the ground that the stockholder was not within the class of "persons
having an interest."
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of the In the Nash case, The Supreme Court of New York held that the
corporation. It is, therefore, an incident of ownership of the corporate contractual right of former stockholders to inspect books and records of
property, whether this ownership or interest be termed an equitable the corporation included the right to inspect corporation's subsidiaries'
ownership, a beneficial ownership, or a ownership. This right is books and records which were in corporation's possession and control
predicated upon the necessity of self- protection. It is generally held by in its office in New York."
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with In the Bailey case, stockholders of a corporation were held entitled to
respect to his interest as a stockholder and for some purpose germane inspect the records of a controlled subsidiary corporation which used
thereto or in the interest of the corporation. In other words, the the same offices and had identical officers and directors.
inspection has to be germane to the petitioner's interest as a
stockholder and has to be proper and lawful in character and not In the case at bar, considering that the foreign subsidiary is wholly
inimical to the interest of the corporation. In Grey v. Insular Lumber, this owned by respondent San Miguel Corporation and, therefore, under its
Court held that "the right to examine the books of the corporation must control, it would be more in accord with equity, good faith and fair
be exercised in good faith, for specific and honest purpose, and not to dealing to construe the statutory right of petitioner as stockholder to
gratify curiosity, or for specific and honest purpose, and not to gratify inspect the books and records of the corporation as extending to books

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and records of such wholly-owned subsidiary which are in respondent

corporation's possession and control. Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
The Court voted unanimously to grant the petition insofar as it prays that and copy excerpts from its records or minutes, in accordance with the
petitioner be allowed to examine the books and records of San Miguel provisions of this Code, shall be liable to such director, trustee,
International, Inc., as specified by him. stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
GONZALES VS. PHILIPPINE NATIONAL BANK 122 SCRA 489, MAY 30, Provided, That if such refusal is made pursuant to a resolution or order
1983 of the board of directors or trustees, the liability under this section for
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a such action shall be imposed upon the directors or trustees who voted
special civil action for mandamus against the herein respondent PNB for such refusal; and Provided, further, That it shall be a defense to any
praying that the latter be ordered to allow him to look into the books action under this section that the person demanding to examine and
and records of PNB to satisfy himself as to the truth of the published copy excerpts from the corporation's records and minutes has
report that (1) the respondent has guaranteed the obligation of South improperly used any information secured through any prior examination
Negros Development Corporation in the purchase of a US$ 23M sugar- of the records or minutes of such corporation or of any other
mill to be financed by Japanese suppliers and financiers; that the corporation, or was not acting in good faith or for a legitimate purpose
respondent; (2) the respondent is financing the construction of the P21M in making his demand.”
Cebu-Mactan Bridge to be constructed by VC Ponce, Inc.; and (3) the
construction of Passi Sugar Mill at Iloilo by the Homion Philippines, Inc.; As may be noted from the above-quoted provisions, among the
as well as (4) to inquire into the validity of said transactions. changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following (1) the records
The CFI dismissed the special civil action. must be kept at the principal office of the corporation; (2) the inspection
must be made on business days; (3) the stockholder may demand a copy
Assailing the conclusions of the lower court, the petitioner has assigned of the excerpts of the records or minutes; (4) and the refusal to allow
the single error to the lower court of having ruled that his alleged such inspection shall subject the erring officer or agent of the
improper motive in asking for an examination of the books and records corporation to civil and criminal liabilities.
of the respondent bank disqualifies him to exercise the right of a
stockholder to such inspection under Section 51 of Act No. 1459, as However, while seemingly enlarging the right of inspection, the new
amended. Said provision reads in part as follows: Code has prescribed limitations to the same. It is now expressly required
as a condition for such examination that (1) the one requesting it must
Sec. 51 The record of all business transactions of the corporation and not have been guilty of using improperly any information through a prior
the minutes of any meeting shall be open to the inspection of any examination, and (2) that the person asking for such examination must
director, member or stockholder of the corporation at reasonable hours. be "acting in good faith and for a legitimate purpose in making his
demand."
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate The unqualified provision on the right of inspection previously contained
records may be denied on the ground that it is intended for an improper in Section 51, Act No. 1459, as amended, no longer holds true under
motive or purpose, the law having granted such right to a stockholder the provisions of the present law. The argument of the petitioner that
in clear and unconditional terms. He further argues that, assuming that the right granted to him under Section 51 of the former Corporation Law
a proper motive or purpose for the desired examination is necessary for should not be dependent on the propriety of his motive or purpose in
its exercise, there is nothing improper in his purpose for asking for the asking for the inspection of the books of the respondent bank loses
examination and inspection herein involved. whatever validity it might have had before the amendment of the law. If
there is any doubt in the correctness of the ruling of the trial court that
the right of inspection granted under Section 51 of the old Corporation
ISSUE No.: WON Petitioner is correct in saying that he has an unqualified Law must be dependent on a showing of proper motive on the part of
right to inspect the books as provided under Sec. 51 of the Corporation the stockholder demanding the same, it is now dissipated by the clear
Law. language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
HELD: NO. Petitioner may no longer insist on his interpretation of
Section 51 of Act No. 1459, as amended, regarding the right of a ISSUE No.2: WON petitioner is in good faith in the exercise of his right
stockholder to inspect and examine the books and records of a to inspect the books of PNB.
corporation. The former Corporation Law (Act No. 1459, as amended)
has been replaced by Batas Pambansa Blg. 68, otherwise known as the HELD: NO. Although the petitioner has claimed that he has justifiable
"Corporation Code of the Philippines." motives in seeking the inspection of the books of the respondent bank,
he has not set forth the reasons and the purposes for which he desires
The right of inspection granted to a stockholder under Section 51 of Act such inspection, except to satisfy himself as to the truth of published
No. 1459 has been retained, but with some modifications. The second reports regarding certain transactions entered into by the respondent
and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide bank and to inquire into their validity. The circumstances under which
the following: he acquired one share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of his good faith
“The records of all business transactions of the corporation and the and proper motivation. Admittedly he sought to be a stockholder in
minutes of any meeting shall be open to inspection by any director, order to pry into transactions entered into by the respondent bank even
trustee, stockholder or member of the corporation at reasonable hours before he became a stockholder. His obvious purpose was to arm
on business days and he may demand, in writing, for a copy of excerpts himself with materials which he can use against the respondent bank for
from said records or minutes, at his expense. acts done by the latter when the petitioner was a total stranger to the

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same. He could have been impelled by a laudable sense of civic

consciousness, but it could not be said that his purpose is germane to
his interest as a stockholder

ISSUE No. 3: WON the right of a stockholder to inspect the books

provided under Sec. 74 of the Corporation Code is applicable to PNB.

HELD: NO. We also find merit in the contention of the respondent bank
that the inspection sought to be exercised by the petitioner would be
violative of the provisions of its charter. (Republic Act No. 1300, as
amended.) Sections 15, 16 and 30 of the said charter provide
respectively as follows

Sec. 15. Inspection by Department of Supervision and Examination of

the Central Bank. — The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central Bank'

Sec. 16. Confidential information. —The Superintendent of Banks and

the Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in
its custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order of a Court
of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act.— Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by
imprisonment of not more than five years, or both such fine and
imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a

charter of its own, it is not governed, as a rule, by the Corporation Code
of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. —

Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them. supplemented by the provisions of this Code,
insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new

Corporation Code with respect to the right of a stockholder to demand
an inspection or examination of the books of the corporation may not
be reconciled with the abovequoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in
a supplementary capacity to the charter of the respondent bank.

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XI. MERGER AND CONSOLIDATION (c) As to each corporation, the number of shares or members voting
Sec. 33, par. 8 of the Corporation Code of the Philippines expressly for or against such plan, respectively;
empowers a corporation to merge or consolidate with another (d) The carrying amounts and fair values of the assets and liabilities of
corporation subject to the requirements and procedure prescribed in the respective companies as of the agreed cut-off date;
TITLE IX. (e) The method to be used in the merger or consolidation of accounts
of the companies;
A. Requirements and Procedure (f) The provisional or pro forma values, as merged or consolidated,
SEC. 75. Plan of Merger or Consolidation. – Two (2) or more using the accounting method; and
corporations may merge into a single corporation which shall be one of (g) Such other information as may be prescribed by the Commission.
the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation. SEC. 78. Effectivity of Merger or Consolidation. – The articles of merger
or of consolidation, signed and certified as required by this Code, shall
The board of directors or trustees of each corporation, party to the be submitted to the Commission for its approval: Provided, That in the
merger or consolidation, shall approve a plan of merger or consolidation case of merger or consolidation of banks or banking institutions, loan
setting forth the following: associations, trust companies, insurance companies, public utilities,
(a) The names of the corporations proposing to merge or consolidate, educational institutions, and other special corporations governed by
hereinafter referred to as the constituent corporations; special laws, the favorable recommendation of the appropriate
(b) The terms of the merger or consolidation and the mode of carrying government agency shall first be obtained. If the Commission is satisfied
the same into effect; that the merger or consolidation of the corporations concerned is
(c) A statement of the changes, if any, in the articles of incorporation consistent with the provisions of this Code and existing laws, it shall issue
of the surviving corporation in case of merger; and, in case of a certificate approving the articles and plan of merger or of
consolidation, all the statements required to be set forth in the consolidation, at which time the merger or consolidation shall be
articles of incorporation for corporations organized under this effective.
Code; and
(d) Such other provisions with respect to the proposed merger or REASON FOR REORGANIZATION: The reasons inducing a
consolidation as are deemed necessary or desirable. reorganization are not in every case the same, but for the most part, they
are to be found in the weak financial or insolvent condition of the
SEC. 76. Stockholders’ or Members’ Approval. – Upon approval by a particular corporations. The aim of corporate reorganization or
majority vote of each of the board of directors or trustees of the combination is generally to put the company upon a sound financial
constituent corporations of the plan of merger or consolidation, the basis and to enable it to take care of its obligations thereby avoiding
same shall be submitted for approval by the stockholders or members liquidation or bankruptcy. But in some cases, a reorganization is effected
of each of such corporations at separate corporate meetings duly called notwithstanding the fact that the corporation is solvent.
for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations in the same ILLEGAL COMBINATIONS: While a merger or consolidation is a right,
manner as giving notice of regular or special meetings under Section 49 granted by law, to corporations registered under the Code, Act 3518
of this Code. The notice shall state the purpose of the meeting and proscribes illegal combination. It provides, under Sec. 20 thereof that
include a copy or a summary of the plan of merger or consolidation. “no corporation engaged in commerce may acquire, directly or
indirectly, the whole or any part of the stock or other share capital of
The affirmative vote of stockholders representing at least two-thirds (2/3) another corporation or corporations engaged in commerce, where the
of the outstanding capital stock of each corporation in the case of stock effect of such acquisitions may be to substantially lessen competition
corporations or at least two-thirds (2/3) of the members in the case of between the corporation or corporations whose stock is so acquired and
nonstock corporations shall be necessary for the approval of such plan. the corporation making the acquisition, or between any of them, or to
Any dissenting stockholder may exercise the right of appraisal in restrain such commerce in any section community, or ten to create a
accordance with this Code: Provided, That if after the approval by the monopoly of any line of commerce.” Corollary to this is Art. 186 of the
stockholders of such plan, the board of directors decides to abandon Revised Penal Code which imposes a penalty of imprisonment and/or
the plan, the right of appraisal shall be extinguished. fine on any person who enters into a contract or conspiracy to create
monopolies and combinations in restraint of trade.
Any amendment to the plan of merger or consolidation may be made:
Provided, That such amendment is approved by a majority vote of the MERGER CONSOLIDATION
respective boards of directors or trustees of all the constituent A union effected by absorbing The uniting or amalgamation of
corporations and ratified by the affirmative vote of stockholders one or more existing two or more existing
representing at least two-thirds (2/3) of the outstanding capital stock or corporations by another which corporations to form a new
of two-thirds (2/3) of the members of each of the constituent survives and continues the corporation. It signifies a union
corporations. Such plan, together with any amendment, shall be combined business. It is the as necessarily results in the
considered as the agreement of merger or consolidation. uniting of two or more creation of a new corporation
corporations by the transfer of and the termination of existence
SEC. 77. Articles of Merger or Consolidation. – After the approval by the property to one of them which of old ones. The united concern
stockholders or members as required by the preceding section, articles continue in existence, the other resulting from such union is
of merger or articles of consolidation shall be executed by each of the or the others being dissolved called consolidated corporation.
constituent corporations, to be signed by the president or vice president and merged therein.
and certified by the secretary or assistant secretary of each corporation Thus, in the example given, if B
setting forth: EXAMPLE: It was agreed that B and C agreed to form a new
(a) The plan of the merger or the plan of consolidation; Company will take over and corporation, A Company, which
(b) As to stock corporations, the number of shares outstanding, or in acquire all the business, assets, will absorb both business, and all
the case of nonstock corporations, the number of members; properties, rights and liabilities of B’s and C’s assets, properties,
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MERGER CONSOLIDATION and vested in such surviving or consolidated corporation without

of C Corporation and by virtue of rights and liabilities are further act or deed; and
which B will absorb C which is to transferred to A which will (e) The surviving or consolidated corporation shall be responsible for
be dissolved continue their combined all the liabilities and obligations of each constituent corporation as
business while B and C will be though such surviving or consolidated corporation had itself
dissolved, a consolidation takes incurred such liabilities or obligations; and any pending claim,
place. action or proceeding brought by or against any constituent
corporation may be prosecuted by or against the surviving or
In effect, in a consolidation, the consolidated corporation. The rights of creditors or liens upon the
constituent corporations are all property of such constituent corporations shall not be impaired by
dissolved, while in a merger, the the merger or consolidation.
absorbing or surviving EFFECTS OF MERGER OR CONSOLIDATION
corporation is not, only the (1) There will only be a single corporation. In case of merger, the
absorbed. surviving corporation or the consolidate corporation in case of
consolidation;
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR (2) The termination of corporate existence of the constituent
CONSOLIDATION: corporations, except that of the surviving corporation or the
(1) The BOD/T of each constituent corporations shall approve a plan consolidated corporation;
or merger or consolidation setting for the matters required in Sec. (3) The surviving corporation or the consolidated corporation will
75; possess all the rights, privileges, immunities and powers and shall
(2) Approval of the plan by the stockholders representing 2/3 be subject to all the duties and liabilities of a corporation organized
outstanding capital stock or 2/3 of the member in non-stock under the Code;
corporations of each of such corporations at separate corporate (4) The surviving or consolidated corporation shall possess all the
meetings called for the purpose; rights, privileges, immunities and franchises of the constituent
(3) Prior notice of such meeting, with a copy or summary of the plan corporations, and all property and all receivables due, including
of merger or consolidation shall be given to all stockholders or subscriptions to shares and other choses in action, and every other
members at least 2 weeks prior to the scheduled meeting, either interest of, or belonging to or due to the constituent corporations
personally or by registered mail stating the purpose thereof; shall be deemed transferred to and vested in such surviving or
(4) Execution of the articles of merger or consolidation by each consolidated corporation without further act or deed; and
constituent corporations to be signed by the president or vice- (5) The rights of creditors or any lien on the property of the constituent
president and certified by the corporate secretary or assistant corporations shall not be impaired by the merger or consolidation.
secretary setting forth the matters required in Sec. 77;
(5) Submission of the articles of merger or consolidation in LIQUIDATION: There would be no need to liquidate or wind-up the
quadruplicate to the SEC subject to the requirement of Sec. 78 that affairs of the corporation because (1) there are no assets to distribute;
if it involve corporations under direct supervision of any other (2) no debts and liabilities to pay – since all these are transferred to the
government agency or governed by special laws the favorable surviving or consolidated corporation.
recommendation of the government agency concerned shall first
be secured; and ASSOCIATED BANK VS. COURT OF APPEALS 291 SCRA 511, JUNE 29,
(6) Issuance of the certificate of merger or consolidation by the SEC at 1998
which time the merger or consolidation shall be effective. If the FACTS: Associated Banking Corporation and Citizens Bank and Trust
plan, however, is believed to be contrary to law, the SEC shall set Company merged to form Associated Citizens Bank which subsequently
a hearing to give the corporations concerned an opportunity to be changed its corporate name to Associate Bank.
heard upon notice and thereafter, the Commission shall proceed
as provided in the Code. The defendant Lorenzo Sarmiento Jr. executed a promissory note in
favor of Associated Bank for P2.5M of which P2.25M remains unpaid.
B. Effects Despite repeated demands, the defendant failed to pay the sum due.
SEC. 79. Effects of Merger or Consolidation. – The merger or
consolidation shall have the following effects: Defendant denied all pertinent allegations in the complaint and alleged
(a) The constituent corporations shall become a single corporation as affirmative and/or special defense that Associated Bank is not the real
which, in case of merger, shall be the surviving corporation party in interest because the promissory note was executed in favor of
designated in the plan of merger; and, in case of consolidation, Citizens Bank and Trust Company.
shall be the consolidated corporation designated in the plan of
consolidation; Defendant was declared in default for not appearing in the Pre-Trial
(b) The separate existence of the constituent corporations shall cease, Conference and the plaintiff was allowed to present evidence ex-parte,
except that of the surviving or the consolidated corporation; the Motion to Life Order of Default and or Reconsideration of the Order
(c) The surviving or the consolidated corporation shall possess all the being dismissed. The trial court ruled in favor of Associated Bank. On
rights, privileges, immunities, and powers and shall be subject to appeal, the CA reversed the trial court.
all the duties and liabilities of a corporation organized under this
Code; ISSUE: WON Associated Bank, the surviving corporation, may enforce
(d) The surviving or the consolidated corporation shall possess all the the promissory note made by Sarmiento in favor of CBTC, the absorbed
rights, privileges, immunities and franchises of each constituent company after the effectivity of the merger
corporation; and all real or personal property, all receivables due
on whatever account, including subscriptions to shares and other HELD: YES. Ordinarily, in the merger of two or more existing
choses in action, and every other interest of, belonging to, or due corporations, one of the combining corporations survives and continues
to each constituent corporation, shall be deemed transferred to the combined business, while the rest are dissolved and all their rights,
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properties and liabilities are acquired by the surviving corporation. specifically, to avoid giving the merger agreement a farcical
Although there is a dissolution of the absorbed corporations, there is no interpretation aimed at evading fulfillment of a due obligation.
winding up of their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their rights, privileges Thus, although the subject promissory note names CBTC as the payee,
and powers, as well as their liabilities. the reference to CBTC in the note shall be construed, under the very
provisions of the merger agreement, as a reference to petitioner bank,
The merger, however, does not become effective upon the mere "as if such reference [was a] direct reference to" the latter "for all intents
agreement of the constituent corporations. The procedure to be and purposes."
followed is prescribed under the Corporation Code. Section 79 of said
Code requires the approval by the Securities and Exchange Commission No other construction can be given to the unequivocal stipulation. Being
(SEC) of the articles of merger which, in turn, must have been duly clear, plain and free of ambiguity, the provision must be given its literal
approved by a majority of the respective stockholders of the constituent meaning and applied without a convoluted interpretation. Verba lelegis
corporations. The same provision further states that the merger shall be non est recedendum.
effective only upon the issuance by the SEC of a certificate of merger.
The effectivity date of the merger is crucial for determining when the In light of the foregoing, the Court holds that petitioner has a valid cause
merged or absorbed corporation ceases to exist; and when its rights, of action against private respondent. Clearly, the failure of private
privileges, properties as well as liabilities pass on to the surviving respondent to honor his obligation under the promissory note
corporation. constitutes a violation of petitioner's right to collect the proceeds of the
loan it extended to the former.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, which Associated Banking Corporation (ABC) ONG VS. BPI FAMILY SAVINGS BANK, INC. 852 SCRA 614, JANUARY
and Citizens Bank and Trust Company (CBTC) entered into, provided 24, 2018
that its effectivity "shall, for all intents and purposes, be the date when FACTS: Spouses Ong owned Melbrose Printing Center. To cover their
the necessary papers to carry out this [m]erger shall have been approved operational expenses in line with their business expansion plans, they
by the Securities and Exchange Commission." As to the transfer of the applied for Bank of Southeast Asia’s (BSA) credit facilities. In April 1997,
properties of CBTC to ABC, the agreement provides: they executed a real estate mortgage (REM) over their property situated
in Paco, Manila, covered by Transfer Certificate of Title No. 143457, in
“10. Upon effective date of the Merger, all rights, privileges, powers, favor of BSA as security for a P15,000,000.00 term loan and
immunities, franchises, assets and property of [CBTC], whether real, P5,000,000.00 credit line or a total of P20,000,000.00. However, the
personal or mixed, and including [CBTC's] goodwill and tradename, and money released by BSA was not exactly the amount it promised to
all debts due to [CBTC] on whatever act, and all other things in action release. BSA promised to release the remaining P2,000,000.00
belonging to [CBTC] as of the effective date of the [m]erger shall be conditioned upon the payment of the P3,000,000.00 initially released to
vested in [ABC], the SURVIVING BANK, without need of further act or petitioners. Spouses Ong acceded to the condition and paid the
deed” The records do not show when the SEC approved the merger. P3,000,000.00 in full. However, BSA still refused to release the
Private respondent's theory is that it took effect on the date of the P2,000,000.00. So, Spouses Ong then refused to pay the amortizations
execution of the agreement itself, which was September 16, 1975. due on their term loan. Thereafter, BPI Family Savings Bank (BPI) merged
Private respondent contends that, since he issued the promissory note with BSA, thus, acquired all the latter's rights and assumed its
to CBTC on September 7, 1977 — two years after the merger agreement obligations. BPI filed a petition for extrajudicial foreclosure of the REM
had been executed — CBTC could not have conveyed or transferred to for petitioners' default in the payment of their term loan. Spouses Ong
petitioner its interest in the said note, which was not yet in existence at argued there was no perfected contract between the parties with
the time of the merger. Therefore, petitioner, the surviving bank, has no respect to the omnibus credit line and that being so, no delay could be
right to enforce the promissory note on private respondent; such right attributed to BPI, the successor-in-interest of BSA. BPI insisted good
properly pertains only to CBTC. faith on its part when it extrajudicially foreclosed the mortgage insisting
further that it was not responsible for acts committed by its predecessor,
Assuming that the effectivity date of the merger was the date of its BSA.
execution, we still cannot agree that petitioner no longer has any
interest in the promissory note. A closer perusal of the merger ISSUE: WON BPI use good faith as an excuse to exempt BPI from the
agreement leads to a different conclusion. The provision quoted earlier effects of the merger or consolidation.
has this other clause:
HELD: NO. BPI cannot rely on good faith as its defense in this case.
Upon the effective date of the [m]erger, all references to [CBTC] in any Section 80 (5) of the Corporation Code states that the surviving or
deed, documents, or other papers of whatever kind or nature and consolidated corporation shall be responsible and liable for all the
wherever found shall be deemed for all intents and purposes, references liabilities and obligations of each of the constituent corporations in the
to [ABC], the SURVIVING BANK, as if such references were direct same manner as if such surviving or consolidated corporation had itself
references to [ABC]... incurred such liabilities or obligations. Applying the pertinent provisions
of the Corporation Code, BPI did not only acquire all the rights,
Thus, the fact that the promissory note was executed after the effectivity privileges and assets of BSA but likewise acquired the liabilities and
date of the merger does not militate against petitioner. The agreement obligations of the latter as if BPI itself incurred it. Pursuant to such
itself clearly provides that all contracts — irrespective of the date of merger and consolidation, BPI's right to foreclose the mortgage on
execution — entered into in the name of CBTC shall be understood as petitioner's property depends on the status of the contract and the
pertaining to the surviving bank, herein petitioner. Since, in contrast to corresponding obligations of the parties originally involved, that is, the
the earlier aforequoted provision, the latter clause no longer specifically agreement between its predecessor BSA and petitioner. Since BSA
refers only to contracts existing at the time of the merger, no distinction incurred delay in the performance of its obligations and subsequently
should be made. The clause must have been deliberately included in cancelled the omnibus line without petitioners' consent, its successor
the agreement in order to protect the interests of the combining banks; BPI cannot be permitted to foreclose the loan for the reason that its
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successor BSA violated the terms of the contract even prior to different matter if there was an express provision in the articles of merger
petitioners' justified refusal to continue paying the amortizations. that as a condition for the merger, BPI was being required to assume all
the employment contracts of all existing FEBTC employees with the
BANK OF THE PHILIPPINE ISLANDS VS. BPI EMPLOYEES UNION- conformity of the employees. In the absence of such a provision in the
DAVAO CHAPTER-FEDERATION OF UNIONS IN BPI UNIBANK 627 articles of merger, then BPI clearly had the business management
SCRA 590, AUGUST 10, 2010 decision as to whether or not employ FEBTC’s employees. FEBTC
FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved employees likewise retained the prerogative to allow themselves to be
the Articles of Merger executed on January 20, 2000 by and between absorbed or not; otherwise, that would be tantamount to involuntary
BPI, herein petitioner, and FEBTC. This Article and Plan of Merger was servitude.
approved by the Securities and Exchange Commission on April 7, 2000.
There appears to be no dispute that with respect to FEBTC employees
Pursuant to the Article and Plan of Merger, all the assets and liabilities that BPI chose not to employ or FEBTC employees who chose to retire
of FEBTC were transferred to and absorbed by BPI as the surviving or be separated from employment instead of "being absorbed," BPI’s
corporation. FEBTC employees, including those in its different branches assumed liability to these employees pursuant to the merger is FEBTC’s
across the country, were hired by petitioner as its own employees, with liability to them in terms of separation pay, retirement pay or other
their status and tenure recognized and salaries and benefits maintained. benefits that may be due them depending on the circumstances.

BPI has an existing Union Shop Clause agreement with the BPI Although not binding on this Court, American jurisprudence on the
Employees Union-Davao Chapter-Federation of Unions in BPI Unibank consequences of voluntary mergers on the right to employment and
(BPI Union) whereby it is a pre-condition that new employees must join seniority rights is persuasive and illuminating. We quote the following
the union before they can be regularized otherwise, they will not have a pertinent discussion from the American Law Reports:
continued employment. By reason of the failure of the FEBTC
employees to join the union, BPI Union recommended to BPI their Several cases have involved the situation where as a result of mergers,
dismissal. BPI refused. The issue went to voluntary arbitration where BPI consolidations, or shutdowns, one group of employees, who had
won but the Court of Appeals reversed the Voluntary Arbitrator. Hence, accumulated seniority at one plant or for one employer, finds that their
this petition. jobs have been discontinued except to the extent that they are offered
employment at the place or by the employer where the work is to be
ISSUE: WON employees of a dissolved corporation in a merger are carried on in the future. Such cases have involved the question whether
considered absorbed by the surviving corporation. such transferring employees should be entitled to carry with them their
accumulated seniority or whether they are to be compelled to start over
HELD: NO. Absorbed FEBTC Employees are neither assets nor at the bottom of the seniority list in the "new" job. It has been
liabilities. In legal parlance, however, human beings are never embraced recognized in some cases that the accumulated seniority does not
in the term "assets and liabilities." Moreover, BPI’s absorption of former survive and cannot be transferred to the "new" job. In Carver v Brien
FEBTC employees was neither by operation of law nor by legal (1942) 315 Ill App 643, 43 NE2d 597, the court saying that, absent some
consequence of contract. There was no government regulation or law specific contract provision otherwise, seniority rights were ordinarily
that compelled the merger of the two banks or the absorption of the limited to the employment in which they were earned, and concluding
employees of the dissolved corporation by the surviving corporation. that the contract for which specific performance was sought was not
Had there been such law or regulation, the absorption of employees of such a completed and binding agreement as would support such
the non-surviving entities of the merger would have been mandatory on equitable relief, since the railroad, whose concurrence in the
the surviving corporation. In the present case, the merger was voluntarily arrangements made was essential to their effectuation, was not a party
entered into by both banks presumably for some mutually acceptable to the agreement.
consideration. In fact, the Corporation Code does not also mandate the
absorption of the employees of the non-surviving corporation by the Indeed, from the tenor of local and foreign authorities, in voluntary
surviving corporation in the case of a merger. Section 80 of the mergers, absorption of the dissolved corporation’s employees or the
Corporation Code provides. recognition of the absorbed employees’ service with their previous
employer may be demanded from the surviving corporation if required
This Court believes that it is contrary to public policy to declare the by provision of law or contract. The dissent of Justice Arturo D. Brion
former FEBTC employees as forming part of the assets or liabilities of tries to make a distinction as to the terms and conditions of employment
FEBTC that were transferred and absorbed by BPI in the Articles of of the absorbed employees in the case of a corporate merger or
Merger. Assets and liabilities, in this instance, should be deemed to refer consolidation which will, in effect, take away from corporate
only to property rights and obligations of FEBTC and do not include the management the prerogative to make purely business decisions on the
employment contracts of its personnel. A corporation cannot unilaterally hiring of employees or will give it an excuse not to apply the CBA in
transfer its employees to another employer like chattel. Certainly, if BPI force to the prejudice of its own employees and their recognized
as an employer had the right to choose who to retain among FEBTC’s collective bargaining agent. In this regard, we disagree with Justice
employees, FEBTC employees had the concomitant right to choose not Brion.
to be absorbed by BPI. Even though FEBTC employees had no choice
or control over the merger of their employer with BPI, they had a choice Justice Brion takes the position that because the surviving corporation
whether or not they would allow themselves to be absorbed by BPI. continues the personality of the dissolved corporation and acquires all
Certainly nothing prevented the FEBTC’s employees from resigning or the latter’s rights and obligations, it is duty-bound to absorb the
retiring and seeking employment elsewhere instead of going along with dissolved corporation’s employees, even in the absence of a stipulation
the proposed absorption. in the plan of merger. He proposes that this interpretation would
provide the necessary protection to labor as it spares workers from
Employment is a personal consensual contract and absorption by BPI of being "left in legal limbo."
a former FEBTC employee without the consent of the employee is in
violation of an individual’s freedom to contract. It would have been a
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However, there are instances where an employer can validly discontinue and to pay the same, or commensurate salaries and other benefits that
or terminate the employment of an employee without violating his right these employees previously enjoyed with FEBTC.
to security of tenure. Among others, in case of redundancy, for example,
superfluous employees may be terminated, and such termination would As the Union likewise pointed out in its pleadings, there were benefits
be authorized under Article 283 of the Labor Code. under the CBA that the former FEBTC employees did not enjoy with
their previous employer. As BPI employees, they will enjoy all these CBA
The lack of a provision in the plan of merger regarding the transfer of benefits upon their "absorption." Thus, although in a sense BPI is
employment contracts to the surviving corporation could have very well continuing FEBTC’s employment of these absorbed employees, BPI’s
been deliberated on the part of the parties to the merger, in order to employment of these absorbed employees was not under exactly the
grant the surviving corporation the freedom to choose who among the same terms and conditions as stated in the latter’s employment
dissolved corporation’s employees to retain, in accordance with the contracts with FEBTC. This further strengthens the view that BPI and the
surviving corporation’s business needs. If terminations, for instance due former FEBTC employees voluntarily contracted with each other for their
to redundancy or labor-saving devices or to prevent losses, are done in employment in the surviving corporation.
good faith, they would be valid. The surviving corporation too is duty-
bound to protect the rights of its own employees who may be affected C. Philippine Competition Act (RA 10667) and its Implementing
by the merger in terms of seniority and other conditions of their Rules and Regulations
employment due to the merger. Thus, we are not convinced that in the 1. Acquisition, defined
absence of a stipulation in the merger plan the surviving corporation was 2. Merger, defined
compelled, or may be judicially compelled, to absorb all employees 3. Rules on Mergers & Acquisitions (Sections 16-23)
under the same terms and conditions obtaining in the dissolved Thresholds for Compulsory Notification
corporation as the surviving corporation should also take into 4. Prohibited Mergers & Acquisitions
consideration the state of its business and its obligations to its own 5. Exemptions from Prohibited Mergers & Acquisitions
employees, and to their certified collective bargaining agent or labor
union. Merger of iPeople, Inc. and AC Education, Inc.
Commission Decision No. 42-M-038/2018
Even assuming we accept Justice Brion’s theory that in a merger
situation the surviving corporation should be compelled to absorb the
Acquisition by The Walt Disney Company of Shares in Twenty-First
dissolved corporation’s employees as a legal consequence of the
Century Fox, Inc.
merger and as a social justice consideration, it bears to emphasize his
Commission Decision No. M-33-028/2018
dissent also recognizes that the employee may choose to end his
employment at any time by voluntarily resigning. For the employee to
be "absorbed" by BPI, it requires the employees’ implied or express Acquisition by Robinsons Retail Holdings Inc. of Shares in Rustan
consent. It is because of this human element in employment contracts Supercenters Inc.
and the personal, consensual nature thereof that we cannot agree that, Commission Decision No. 28-M-024/2018
in a merger situation, employment contracts are automatically
transferable from one entity to another in the same manner that a Acquisition by Grab Holdings Inc. and MyTaxi.PH Inc. of Assets of
contract pertaining to purely proprietary rights – such as a promissory Uber B.V. and Uber Systems Inc. (PCC Case No. M-2018-001)
note or a deed of sale of property – is perfectly and automatically
transferable to the surviving corporation.
Acquisition by City Savings Bank, Inc. and Union Properties, Inc. of
Shares in PETNET, Inc.
That BPI is the same entity as FEBTC after the merger is but a legal
Commission Decision No. 16-M-014/2018
fiction intended as a tool to adjudicate rights and obligations between
and among the merged corporations and the persons that deal with
them. Although in a merger it is as if there is no change in the personality In the Matter of the Acquisition by Grab Holdings, Inc. and MyTaxi.PH,
of the employer, there is in reality a change in the situation of the Inc., of Assets of Uber B.V. and Uber Systems, Inc.
employee. Once an FEBTC employee is absorbed, there are presumably Commission Order No. M-2018-001
changes in his condition of employment even if his previous tenure and
salary rate is recognized by BPI. Joint Venture between Robinsons Land Corporation and Shang
It is reasonable to assume that BPI would have different rules and Properties, Inc.
regulations and company practices than FEBTC and it is incumbent Commission Decision No. 11-M-008/2018
upon the former FEBTC employees to obey these new rules and adapt
to their new environment. Not the least of the changes in employment
condition that the absorbed FEBTC employees must face is the fact that
prior to the merger they were employees of an unorganized
establishment and after the merger they became employees of a
unionized company that had an existing collective bargaining
agreement with the certified union. This presupposes that the union who
is party to the collective bargaining agreement is the certified union that
has, in the appropriate certification election, been shown to represent a
majority of the members of the bargaining unit.

Likewise, with respect to FEBTC employees that BPI chose to employ

and who also chose to be absorbed, then due to BPI’s blanket
assumption of liabilities and obligations under the articles of merger, BPI
was bound to respect the years of service of these FEBTC employees

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XII. APPRAISAL RIGHT depreciation in anticipation of such corporate action.

A. Definition; when exercised
Appraisal Right is the method of paying a shareholder for the taking of If, within sixty (60) days from the approval of the corporate action by the
his property. It is a statutory means whereby a stockholder can avoid the stockholders, the withdrawing stockholder and the corporation cannot
conversion of this property into another property not of his own agree on the fair value of the shares, it shall be determined and
choosing and is given to a shareholder as compensation for the appraised by three (3) disinterested persons, one of whom shall be
abrogation of the common- law rule that a single stockholder could named by the stockholder, another by the corporation, and the third by
block a certain corporate act such as merger. the two (2) thus chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the corporation within
PURPOSE thirty (30) days after such award is made: Provided, That no payment
Protect the property rights of dissenting stockholders from actions by shall be made to any dissenting stockholder unless the corporation has
the majority shareholders which alters the nature and character of their unrestricted retained earnings in its books to cover such payment:
investment. In effect, it is a right granted to dissenting stockholders on Provided, further, That upon payment by the corporation of the agreed
certain corporate or business decisions to demand payment of the fair or awarded price, the stockholder shall forthwith transfer the shares to
market value of their shares. the corporation.

SEC. 80. When the Right of Appraisal May Be Exercised. – Any REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
stockholder of a corporation shall have the right to dissent and demand THIS RIGHT ARE:
payment of the fair value of the shares in the following instances: (1) The stockholder must have voted against the proposed corporate
(a) In case an amendment to the articles of incorporation has the effect action in any of the instances allowed by law for the exercise of the
of changing or restricting the rights of any stockholder or class of right of appraisal;
shares, or of authorizing preferences in any respect superior to (2) The written demand for payment must be made by the dissenting
those of outstanding shares of any class, or of extending or stockholder within 30 days after the date on which the vote was
shortening the term of corporate existence; taken. Failure to make the demand within the said period shall be
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or deemed a waiver on the part of the stockholder concerned to
other disposition of all or substantially all of the corporate property exercise his appraisal right;
and assets as provided in this Code; (3) Surrender of the certificate of stock by the dissenting stockholder
(c) In case of merger or consolidation; and for notation in the corporate books and the payment of the
(d) In case of investment of corporate funds for any purpose other than corporation of the fair market value of the said shares as of the day
the primary purpose of the corporation. prior to the date on which the vote was taken. If the stockholder
and the corporation cannot agree on the fair market value thereof,
ENUMERATION NOT EXCLUSIVE the same shall be determined in accordance with the provisions of
it may also cover in a close corporation, a stockholder has the unbridled paragraph 2 of Sec. 81;
right to compel the corporation “for any reason” to purchase his shares (4) The fair value of the shares of the dissenting stockholder must be
at their fair value which shall not be less than the par or issued value, paid by the corporation only if it has “unrestricted retained
when the corporation has sufficient assets to cover its debts and earnings” in its books to cover such payment. If the corporation has
liabilities, exclusive of capital stock (Sec. 104). no unrestricted retained earnings, the dissenting stockholder may
not, therefore, be able to effectively exercise his appraisal right,
NOT ALL AMENDMENTS: the right may only be exercised in cases of EXCEPT in the case of a close corporation under Sec. 104;
amendment which “has the effect of changing or restricting the rights of (5) Upon payment of the shares by the corporation, the dissenting
any stockholder or class of shares, or of authorizing preferences in any stockholder shall transfer his shares to the corporation.
respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence”. C. Effect
SEC. 82. Effect of Demand and Termination of Right. – From the time of
Accordingly, if the amendment is to increase or decrease the number of demand for payment of the fair value of a stockholder’s shares until
directors, or change the corporate name, or change of principal office, either the abandonment of the corporate action involved or the
the appraisal right is not available. purchase of the said shares by the corporation, all rights accruing to such
shares, including voting and dividend rights, shall be suspended in
STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the accordance with the provisions of this Code, except the right of such
appraisal right, since the subscriber is entitled to all the rights of a stockholder to receive payment of the fair value thereof: Provided, That
stockholder under Sec. 71 and although Sec. 81 provides for the if the dissenting stockholder is not paid the value of the said shares
submission of certificate of stock, Sec. 85 provides that the notation to within thirty (30) days after the award, the voting and dividend rights
such certificate of stock is OPTIONAL at the instance of the corporation. shall immediately be restored.

B. Requirements and Procedure SUSPENSION OF STOCKHOLDER RIGHTS

SEC. 81. How Right is Exercised. – The dissenting stockholder who votes Upon completion of the steps provided in Sec. 81, the stockholder
against a proposed corporate action may exercise the right of appraisal concerned is regarded as having made an election to withdraw from the
by making a written demand on the corporation for the payment of the corporate enterprise and take the value of his stock. Such a procedure
fair value of shares held within thirty (30) days from the date on which suspends (for a maximum period of 30 days) certain ownership rights
the vote was taken: Provided, That failure to make the demand within associated with stockholder status, such as the right to receive dividends
such period shall be deemed a waiver of the appraisal right. If the or distribution and the right to vote which cannot be restored without
proposed corporate action is implemented, the corporation shall pay compliance with the governing statutory conditions.
the stockholder, upon surrender of the certificate or certificates of stock
representing the stockholder’s shares, the fair value thereof as of the
day before the vote was taken, excluding any appreciation or
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DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to

function as such, prior to payment, unless there is a contrary provision
in the by-laws.

D. When Right Ceases

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

INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER

TO BE PAID THE FAIR VALUE OF HIS SHARES CEASES:
(1) When he withdraws his demand for payment and the corporation
consents thereto;
(2) When the proposed action is abandoned or rescinded by the
corporation;
(3) When the proposed action is disapproved by the SEC where such
approval is necessary;
(4) When the SEC determines that he is not entitled to exercise his
appraisal right;
(5) When he fails to submit the stock certificate within ten (10) days
from demand to the corporation for notation that such shares are
dissenting shares; and,
(6) If the shares are transferred and the certificate subsequently
cancelled.

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

THE CORPORATION BEARS THE COST IF:

(a) The price offered by the corporation is lower than the fair value of
the shares of the dissenting stockholder as determined by the
appraisers;
(b) Where an action is filed by the dissenting stockholder to recover
such fair value and the refusal of the stockholder to receive
payment is found by the court to be justified.
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND
EXPENSES OF APPRAISAL WHEN
(a) When the price offered by the corporation is approximately the
same as the fair value ascertained by the appraisers;
(b) Where the action filed by the dissenting stockholder and his refusal
to accept payment is found by the court to be unjustified.

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XIII. NON-STOCK CORPORATIONS B. Membership and Voting Rights

A. Definition; Purpose SEC. 88. Right to Vote. – The right of the members of any class or
SEC. 86. Definition. – For purposes of this Code and subject to its classes to vote may be limited, broadened, or denied to the extent
provisions on dissolution, a nonstock corporation is one where no part specified in the articles of incorporation or the bylaws. Unless so
of its income is distributable as dividends to its members, trustees, or limited, broadened, or denied, each member, regardless of class, shall
officers: Provided, That any profit which a nonstock corporation may be entitled to one (1) vote. Page 41 of 73
obtain incidental to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which the Unless otherwise provided in the articles of incorporation or the bylaws,
corporation was organized, subject to the provisions of this Title. a member may vote by proxy, in accordance with the provisions of this
Code. The bylaws may likewise authorize voting through remote
The provisions governing stock corporations, when pertinent, shall be communication and/or in absentia.
applicable to nonstock corporations, except as may be covered by
specific provisions of this Title. CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is not
allowed, accordingly, even if the members may cast as many votes are
CAPITAL STOCK: the old notion is that a non-stock corporation is one there are trustees to be elected, he may not cast more than one vote for
which has no capital stock divided into shares – this may no longer hold one candidate, UNLESS: allowed in the AOI or the by-laws.
true under the definition provided by Sec. 87. Thus, even if it may have
capital stock divided into shares, proprietary or otherwise, a corporation CLASSIFICATION: The by-laws or the AOI may provide for classification
is considered “non-stock” so long as it does not distribute dividends to as to members with voting or non-voting rights, since it is provided that
its members and officers. We have, for instance, Club shares issued t the “the right of the members of any class or classes to vote may be limited,
members, the totality of which may rightfully represent “capital” of the broadened or denied”.
corporation but whose income (if there be any) is not distributed by way
of dividends during its corporate existence. The corporation, in such a PROXY VOTING: Generally, allowed unless disallowed by the AOI or the
case, is legally “non-stock”. by- laws.

PROFITS: A non-stock corporation is generally not allowed to engage in VOTING OTHER THAN IN PERSON: may also be allowed by the AOI or
any business undertaking or activity for profit as it would run counter to by-laws. Contrary to a stock corporation, a stockholder has to vote in the
its very nature as a non-profit entity. However, as may be allowed and meeting called for the purpose except in case of a general amendment
specified in its AOI or incidental to the objects and purposes indicated where “written assent” is allowed.
therein, it may engage in certain money-making ventures or economic
activities provided that any profits derived therefrom shall be used for SEC. 89. Nontransferability of Membership. – Membership in a nonstock
the furtherance of the purposes for which the corporation was organized corporation and all rights arising therefrom are personal and non-
or to defray the operating expenses of the entity. It has thus been said transferable, unless the articles of incorporation or the bylaws otherwise
that the fact that a non-profit corporation earns a profit, gain or income provide.
for the corporation or members does not make it a profit-making
corporation where such profit or income is used for the purpose set forth SEC. 90. Termination of Membership. – Membership shall be terminated
in the AOI and is not distributable to its incorporators, members or in the manner and for the causes provided in the articles of incorporation
officers, since mere intangible or pecuniary benefits to the members do or the bylaws. Termination of membership shall extinguish all rights of a
not change the nature of the corporation. member in the corporation or in its property, unless otherwise provided
in the articles of incorporation or the bylaws.
The determination of whether or not a non-stock corporation can
engage in profit-making business or activity depends largely on the MEMBERSHIP: non-stock corporations have the right to adopt rules
purpose or purposes indicated in the AOI. If the business activity is prescribing the mode and manner in which membership thereat can be
authorized in the said articles, necessary, incidental or essential thereto, obtained or maintained. This includes the right to limit membership. In
the same may be undertaken by the corporation, otherwise, not, as it other words, membership in non-stock corporations may be acquired by
would be an ultra-vires act under Sec. 44 complying with the provisions of its rules prescribed in the by-laws. This
is in consonance with the express power granted by law under Sec. 35,
SEC. 87. Purposes. – Nonstock corporations may be formed or par. 6 of the Code, authorizing them to admit members thereof and that
organized for charitable, religious, educational, professional, cultural, authority carries with it the power to prescribe rules on membership.
fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination It has thus been stated that in the absence of charter or statutory
thereof, subject to the special provisions of this Title governing restrictions, non-stock corporations may determine who shall be
particular classes of nonstock corporations admitted to membership and how they shall be admitted. It may exclude
any person whom it deems unfit for membership. Indeed, in the absence
Non-stock corporations may be organized or formed for any purpose or of restrictions, it may act arbitrarily and exclude any persons it may see
purposes allowed or indicated in the above provision. The enumeration, fit, and the courts have no power to interfere. In other words, it is free
however, is not exclusive as the law itself recognizes similar or allied to fix qualifications for membership and to provide for termination of
purpose or purposes for which non-stock corporations may be membership.
organized. Recreational, sports club, athletic or allied activities of similar
import, for instance, may likewise be lawful purpose of a non-stock AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if any,
corporation. shall govern. Absent any provision to the contrary, it must necessarily be
lodged with the BOT since it is the body that exercises all corporate
powers as enunciated in Sec. 22 of the Code.

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SPECIAL CASES: the law itself may provide certain limitations or even in a negative manner with its statement that it is "not improbable" that
perhaps proscription on transfer of membership. Thus, RA 4726, "some of those applications filed after said deadline". If there were
otherwise known as the Condominium Act requires that membership indeed any applications filed after the deadline, they certainly should
therein shall not be transferred separately from the condominium unit of have been positively pin-pointed and specifically annulled.
which it is appurtenant and that when a member ceases to own a unit,
he shall automatically cease to be a member. What is worse, 175 membership applications were undisputedly filed
within the deadline (including the 75 withdrawn by respondent) and yet
TERMINATION OF MEMBERSHIP: Membership may be terminated in the 100 remaining unquestioned memberships were nullified by the
the manner and for causes provided in the AOI or by-laws and when a questioned decision without the individuals concerned ever having
member is so terminated it shall extinguish all his rights in the been impleaded or heard (except the individual petitioners president
corporation or in its property unless otherwise provided in the said and secretary).
articles or by-laws.
The appealed decision thus contravened the established principle that
The power or authority to terminate members in non-stock corporations the courts cannot strip a member of a non-stock non-profit corporation
is said to be inherent but strict compliance with the manner and of his membership therein without cause. Otherwise, that would be an
procedure laid down in the by-laws must be observed, otherwise it may unwarranted and undue interference with the well-established right of a
render the expulsion ineffective and invalid. corporation to determine its membership, as announced by Fletcher, as
follows:
In the absence of any provision in the AOI or by-laws relative to the
manner and causes of termination or expulsion of member, the decided Compliance with provisions of charter, constitution or by-laws. —In
weight of authority is to the effect that the power is inherent and may order that membership may be acquired in a non-stock corporation and
be exercised in certain situations, namely: valid by- laws must be complied with, except in so far as they may be
(1) When an offense is committed which, although it has no immediate and are waived. *** But provisions in the by-laws as to formal steps to
relation to a member’s duty as such, it is so infamous as to render be taken to acquire membership may be waived by the corporation, or
him unfit for society of honest men, and which is indictable at it may be estopped to assert that they have not been taken. [12A
common law; Fletcher Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis
(2) When the offense is a violation of his duty as member of the supplied.]
corporation; and
(3) When the offense is of a mixed nature, being both against his duty Finally, the appealed decision did not give due importance to the
as a member of the corporation, and also indictable at common undisputed fact therein stated that "at the board meeting of the
law. association held on December 7, 1965, a list of 174 applications for
membership, old and new, was submitted to the board and approved
As to whether or not a member should be expelled or maintained is the by the latter, over the objection of the petitioner [therein private
established right of the corporation to determine and the courts are respondent] who was present at said meeting." Such action of the
without authority to strip a member of his membership without cause petitioner association's board of directors approving the 174
membership applications of old and new members constituting its active
CHINESE YOUNG MEN’S CHRISTIAN ASSOCIATION OF THE PHIL. membership as duly processed and screened by the authorized
ISLANDS VS. CHING 71 SCRA 460, JUNE 18, 1976 committee just be deemed a waiver on its part of any technicality or
FACTS: Respondent Ching, a member of the BOD of petitioner Chinese requirement of form, since otherwise the association would be
YMCA, filed an action in the CFI, alleging that on the Membership practically paralyzed and deprived of the substantial revenues from the
Campaign of the Chinese YMCA held from Sept. 27, 1965, only 175 membership dues of P17,400.00 (at P100.00 per application).
applicants were submitted, canvassed and accepted on the last day of
the membership campaign, which was Nov. 26, 1965, NOT more than WHEREFORE the respondent court's decision is hereby set aside and in
240, as reported in the Nov. 28, 1965 issue of the Chinese Commercial lieu thereof judgment is rendered dismissing private respondent's
News. petition in the Court of First Instance of Manila and dissolving the
preliminary injunction, with costs against private respondent.
The trial court rendered a decision in favor of herein respondent
declaring that only 174 applications constitute the present active CEBU COUNTRY CLUB, INC. VS. ELIZAGAQUE 542 SCRA 65,
membership of the association. JANUARY 18, 2008
FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic
ISSUE: WON the trial court is justified in stripping members of their corporation operating as a non-profit and non-stock private
membership in a non-stock corporation. membership club, having its principal place of business in Banilad, Cebu
City. Petitioners herein are members of its Board of Directors.
HELD: NO. The documentary evidence itself as cited by the trial court,
consisting of the applications and the receipts for payment of the Sometime in 1987, San Miguel Corporation, a special company
membership fees show that they were filed and paid not later than the proprietary member of CCCI, designated respondent Ricardo F.
November 26, 1965 deadline, and this was further supported by the Elizagaque, its Senior Vice President and Operations Manager for the
bank statement of the petitioner YMCA deposit account with the China Visayas and Mindanao, as a special non-proprietary member. The
Banking Corporation and the checks paid by certain members to the designation was thereafter approved by the CCCI’s Board of Directors.
YMCA which show that the application fees corresponding to the
questioned 74 applications (that raised the total to 249 from 175) were In 1996, respondent filed with CCCI an application for proprietary
already paid to petitioner YMCA as the time of the said deadline. membership. The application was indorsed by CCCI’s two (2) proprietary
(Exhibits 4, 6, 6-A, 6-B and 6-C). No evidence could be cited by the trial members, namely: Edmundo T. Misa and Silvano Ludo.
court to rebut this well nigh conclusive documentary evidence other
than respondent's unsupported suspicion which the trial court adopted As the price of a proprietary share was around the P5 million range,
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Benito Unchuan, then president of CCCI, offered to sell respondent a have been filed or if there are, the Board considers the objections
share for only P3.5 million. Respondent, however, purchased the share unmeritorious, the candidate shall be qualified for inclusion in the
of a certain Dr. Butalid for only P3 million. Consequently, on September "Eligible- for-Membership List";
6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to (d) Once included in the "Eligible-for-Membership List" and after the
respondent. candidate shall have acquired in his name a valid POC duly
recorded in the books of the corporation as his own, he shall
During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI become a Proprietary Member, upon a non-refundable admission
Board of Directors, action on respondent’s application for proprietary fee of P1,000.00, provided that admission fees will only be
membership was deferred. In another Board meeting held on July 30, collected once from any person.
1997, respondent’s application was voted upon. Subsequently, or on
August 1, 1997, respondent received a letter from Julius Z. Neri, CCCI’s On March 1, 1978, Section 3(c) was amended to read as follows:
corporate secretary, informing him that the Board disapproved his (c) After the expiration of the aforesaid thirty (30) days, the Board may,
application for proprietary membership. by unanimous vote of all directors present at a regular or special
meeting, approve the inclusion of the candidate in the "Eligible-
On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote for- Membership List".
CCCI a letter of reconsideration. As CCCI did not answer, respondent,
on October 7, 1997, wrote another letter of reconsideration. Still, CCCI As shown by the records, the Board adopted a secret balloting known
kept silent. On November 5, 1997, respondent again sent CCCI a letter as the "black ball system" of voting wherein each member will drop a
inquiring whether any member of the Board objected to his application. ball in the ballot box. A white ball represents conformity to the
Again, CCCI did not reply. admission of an applicant, while a black ball means disapproval.
Pursuant to Section 3(c), as amended, cited above, a unanimous vote of
Consequently, on December 23, 1998, respondent filed with the the directors is required. When respondent’s application for proprietary
Regional Trial Court (RTC), Branch 71, Pasig City a complaint for membership was voted upon during the Board meeting on July 30,
damages against petitioners, docketed as Civil Case No. 67190. 1997, the ballot box contained one (1) black ball. Thus, for lack of
unanimity, his application was disapproved.
After trial, the RTC rendered its Decision dated February 14, 2001 in
favor of respondent. Obviously, the CCCI Board of Directors, under its Articles of
Incorporation, has the right to approve or disapprove an application for
On appeal by petitioners, the Court of Appeals, in its Decision dated proprietary membership. But such right should not be exercised
January 31, 2003, affirmed the trial court’s Decision and denied the arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human
Motion for Reconsideration subsequently filed. Relations provide restrictions.

Hence, the present petition. In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated
it with Article 21, thus:
ISSUE: WON in disapproving respondent’s application for proprietary
membership with CCCI, petitioners are liable to respondent for “This article, known to contain what is commonly referred to as the
damages. principle of abuse of rights, sets certain standards which must be
observed not only in the exercise of one's rights but also in the
HELD: YES. Petitioners contend, inter alia, that the Court of Appeals performance of one's duties. These standards are the following: to act
erred in awarding exorbitant damages to respondent despite the lack of with justice; to give everyone his due; and to observe honesty and good
evidence that they acted in bad faith in disapproving the latter’s faith. The law, therefore, recognizes a primordial limitation on all rights;
application; and in disregarding their defense of damnum absque that in their exercise, the norms of human conduct set forth in Article 19
injuria. For his part, respondent maintains that the petition lacks merit, must be observed. A right, though by itself legal because recognized or
hence, should be denied. granted by law as such, may nevertheless become the source of some
illegality. When a right is exercised in a manner which does not conform
CCCI’s Articles of Incorporation provide in part: with the norms enshrined in Article 19 and results in damage to another,
a legal wrong is thereby committed for which the wrongdoer must be
SEVENTH: That this is a non-stock corporation and membership therein held responsible. But while Article 19 lays down a rule of conduct for the
as well as the right of participation in its assets shall be limited to government of human relations and for the maintenance of social order,
qualified persons who are duly accredited owners of Proprietary it does not provide a remedy for its violation. Generally, an action for
Ownership Certificates issued by the corporation in accordance with its damages under either Article 20 or Article 21 would be proper.
By-Laws. (Emphasis in the original)”

Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides: In rejecting respondent’s application for proprietary membership, we
find that petitioners violated the rules governing human relations, the
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the basic principles to be observed for the rightful relationship between
admission of new members of the Club shall be as follows: human beings and for the stability of social order. The trial court and the
(a) Any proprietary member, seconded by another voting proprietary Court of Appeals aptly held that petitioners committed fraud and
member, shall submit to the Secretary a written proposal for the evident bad faith in disapproving respondent’s applications. This is
admission of a candidate to the "Eligible-for-Membership List"; contrary to morals, good custom or public policy. Hence, petitioners are
(b) Such proposal shall be posted by the Secretary for a period of thirty liable for damages pursuant to Article 19 in relation to Article 21 of the
(30) days on the Club bulletin board during which time any member same Code.
may interpose objections to the admission of the applicant by
communicating the same to the Board of Directors It bears stressing that the amendment to Section 3(c) of CCCI’s
(c) After the expiration of the aforesaid thirty (30) days, if no objections Amended By- Laws requiring the unanimous vote of the directors

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present at a special or regular meeting was not printed on the exemplary damages is reduced from P1,000,000.00 to P25,000.00; and
application form respondent filled and submitted to CCCI. What was (c) the award of attorney’s fees and litigation expenses is reduced from
printed thereon was the original provision of Section 3(c) which was P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00,
silent on the required number of votes needed for admission of an respectively.
applicant as a proprietary member.
C. Trustees and Officers
Petitioners explained that the amendment was not printed on the SEC. 91. Election and Term of Trustees. – The number of trustees shall
application form due to economic reasons. We find this excuse flimsy be fixed in the articles of incorporation or bylaws which may or may not
and unconvincing. Such amendment, aside from being extremely be more than fifteen (15). They shall hold office for not more than three
significant, was introduced way back in 1978 or almost twenty (20) years (3) years until their successors are elected and qualified. Trustees elected
before respondent filed his application. We cannot fathom why such a to fill vacancies occurring before the expiration of a particular term shall
prestigious and exclusive golf country club, like the CCCI, whose hold office only for the unexpired period.
members are all affluent, did not have enough money to cause the
printing of an updated application form. Except with respect to independent trustees of nonstock corporations
vested with public interest, only a member of the corporation shall be
It is thus clear that respondent was left groping in the dark wondering elected as trustee.
why his application was disapproved. He was not even informed that a
unanimous vote of the Board members was required. When he sent a Unless otherwise provided in the articles of incorporation or the bylaws,
letter for reconsideration and an inquiry whether there was an objection the members may directly elect officers of a nonstock corporation.
to his application, petitioners apparently ignored him. Certainly,
respondent did not deserve this kind of treatment. Having been
The word “trustees” as used in Sec. 91 makes reference to the
designated by San Miguel Corporation as a special non-proprietary
governing board or body in a non-stock corporation
member of CCCI, he should have been treated by petitioners with
courtesy and civility. At the very least, they should have informed him
QUALIFICATIONS OF TRUSTEES:
why his application was disapproved.
(1) He is a member of the association (Sec. 91);
(2) Majority thereof must be residents of the Philippines (Sec. 22); and
The exercise of a right, though legal by itself, must nonetheless be in
(3) Other qualifications as may be provided for in the by-laws (Sec.
accordance with the proper norm. When the right is exercised arbitrarily,
46[f]]).
unjustly or excessively and results in damage to another, a legal wrong
is committed for which the wrongdoer must be held responsible. It bears
DISQUALIFICATIONS and REMOVAL: Sec. 26 as to disqualifications,
reiterating that the trial court and the Court of Appeals held that
and Sec. 30 and 31 as to removal also apply to Trustees.
petitioners’ disapproval of respondent’s application is characterized by
bad faith.
NUMBER OF TRUSTEES: may or may not be more than fifteen (15) as
may be fixed in the AOI or by- laws, contrary to a stock corporation
As to petitioners’ reliance on the principle of damnum absque injuria or
whose BOD must not exceed 15 members.
damage without injury, suffice it to state that the same is misplaced. In
Amonoy v. Gutierrez, we held that this principle does not apply when
TERM: Sec. 91 allows the AOI or by-laws to provide a desired term of
there is an abuse of a person’s right, as in this case.
office and may vary depending on the needs of a specific corporation.
By analogy of the provisions of Sec. 7, however, a term in excess of five
As to the appellate court’s award to respondent of moral damages, we
(5) years is not allowed as it would unduly deprive other members to
find the same in order. Under Article 2219 of the New Civil Code, moral
take active part in corporate management.
damages may be recovered, among others, in acts and actions referred
to in Article 21. We believe respondent’s testimony that he suffered
STAGGERED TERM: The term of office may also be staggered unless
mental anguish, social humiliation and wounded feelings as a result of
the AOI or by-laws otherwise provide. If such be the case, the board
the arbitrary denial of his application.
shall classify themselves in order that 1/3 of their number shall expire
every year and subsequent elections of trustees comprising 1/3 shall be
ISSUE No. 2: WON the liability is solidary considering that only one
held annually. The trustees so elected to fill up any vacancy occurring
voted for disapproval.
before the expiration of a particular term shall hold office only for the
unexpired portion of his predecessor.
HELD: YES. Section 31 (now Sec. 30, RCC) of the Corporation Code
provides:
GOVERNING BOARDS: While the Code speaks of the BOT as the
governing board or body in a non-stock corporation the same law allows
SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
a non-stock corporation or any other special corporation to designate
who willfully and knowingly vote for or assent to patently unlawful acts
their governing board by any other name other than BOD/T. The Rotary
of the corporation or who are guilty of gross negligence or bad faith in
Club for instance, designates it as Board of Governors while the
directing the affairs of the corporation or acquire any personal or
Evangelica Independence Metodista En Las Islas Filipinas calls it as the
pecuniary interest in conflict with their duty as such directors, or trustees
Consistory of Elders.
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
ELECTION BY MEMBERS OF OFFICERS: One of the significant features
persons. (Emphasis ours)
of a non-stock corporation is that it allows the AOI or by-laws to provide
that the officers thereof shall be directly elected by the members. Unlike
WHEREFORE, we DENY the petition. The challenged Decision and
in a stock corporation where corporate officers are elected by the BOD
Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are
AFFIRMED with modification in the sense that (a) the award of moral
damages is reduced from P2,000,000.00 to P50,000.00; (b) the award of

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SEC. 174. Designation of Governing Boards. – The provisions of specific concerns only the Lions association and/or its members, and We find
provisions of this Code to the contrary notwithstanding, nonstock or from the records that the same was resolved within the organization of
special corporations may, through their articles of incorporation or their Lions Clubs International in accordance with the Constitution and By-
bylaws, designate their governing boards by any name other than as Laws which are not immoral, unreasonable, contrary to public policy, or
board of trustees. in contravention of the laws of the land

At the meeting of the International Board of Directors held on June 27,

LIONS CLUBS INTERNATIONAL VS. AMORES 121 SCRA 621, APRIL 26,
1982, the election of petitioner James L. So to serve as District Governor
1983
of District 301-Al for the fiscal year 1982-83 was approved and said
FACTS: Vicente Josefa and James L. So entered into an agreement
petitioner was duly informed thereof by Richard G. Rice, Manager,
whereby So would withdraw his candidacy for the post of Governor of
District Operations Department, Lions Clubs International in his letter
District 301-A of herein petitioner Lions Club International. Such
dated July 8, 1982 and marked Annex "K" to the petition, p. 79,
withdrawal was accepted by Governor Huang, however news items were
Records. Petitioner attended and completed the District Governors'
published conveying the idea that So had not withdrawn from the
Executive Seminar as District Governor of 301-Al (see Annex "L", P. 80,
gubernatorial race.
Records). On June 29, 1982, petitioner So was proclaimed, sworn to and
installed to office as District Governor of District 301-Al by the President
Josefa filed a complaint before the CFI for quo warranto, injunction or
of Lions International at the close of the 65th Lions Clubs International
at least a temporary restraining order alleging irregularities in the
Convention held in Atlanta, Georgia, U.S.A
election; that although at the old site of the election, Josefa won, the
Lions Club Internation unlawfully recognized So as the winner.
The findings upon the evidence submitted and examined at the hearing
of the election protest before the Committee personally attended by
The trial court issued the TRO which was later on lifted and on appeal,
both petitioner So and respondent Josefa may not be disturbed by the
the CA issued a new TRO.
courts. The decision of the Association's tribunal, the International Board
of Directors, is controlling since respondent Josefa alleges no invasion
ISSUE: WON the dispute between petitioners and Josefa is a justiciable
of this property or civil rights and neither is it claimed that the
issue cognizable by the courts.
government of the Association is not fairly and honestly administered in
conformity with its laws and the law of the land.
HELD: NO. We adopt the general rule that "... the courts will not
interfere with the internal affairs of an unincorporated association so as
to settle disputes between the members, or questions of policy, SEC. 92. List of Members and Proxies, Place of Meetings. – The
discipline, or internal government, so long as the government of the corporation shall, at all times, keep a list of its members and their proxies
society is fairly and honestly administered in conformity with its laws and in the form the Commission may require. The list shall be updated to
the law of the land, and no property or civil rights are invaded. Under reflect the members and proxies of record twenty (20) days prior to any
such circumstances, the decision of the governing body or established scheduled election. The bylaws may provide that the members of a
private tribunal of the association is binding and conclusive and not nonstock corporation may hold their regular or special meetings at any
subject to review or collateral attack in the courts. " (7 C.J.S. pp. 38- 39). place even outside the place where the principal office of the
corporation is located: Provided, That proper notice is sent to all
The general rule of non-interference in the internal affairs of associations members indicating the date, time and place of the meeting: Provided,
is, however, subject to exceptions, but the power of review is extremely further, That the place of meeting shall be within Philippine territory.
limited. Accordingly, the courts have and will exercise power to interfere
in the internal affairs of an association where (1) law and justice so PLACE OF MEETING: another distinctive feature of a non-stock
require, and (2) the proceedings of the association are subject to judicial corporation is that membership meeting may be held anywhere in the
review where there is fraud, oppression, or bad faith, or (3) where the Philippines whereas in a stock corporation, the stockholders’ meeting is
action complained of is capricious, arbitrary, or unjustly discriminatory. mandated to be held or conducted within the city or municipality where
Also, the courts will usually entertain jurisdiction to grant relief (4) in case the principal office is located, and as far as practicable, within the
property or civil rights are invaded, although it has also been held that principal office of the corporation.
the involvement of property rights does not necessarily authorize judicial
intervention, in the absence of arbitrariness, fraud or collusion. SEC. 93. Rules of Distribution. – The assets of a nonstock corporation
Moreover, the courts will intervene (5) where the proceedings in undergoing the process of dissolution for reasons other than those set
question are violative of the laws of the society, or the law of the land, forth in Section 139 of this Code, shall be applied and distributed as
as by depriving a person of due process of law. Similarly, judicial follows:
intervention is warranted (6) where there is a lack of jurisdiction on the (a) All liabilities and obligations of the corporation shall be paid,
part of the tribunal conducting the proceedings, where the organization satisfied and discharged, or adequate provision shall be made
exceeds its powers, or where the proceedings are otherwise illegal. (7 therefor;
C.J.S., pp. 39-41). (b) Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of
In accordance with the general rules as to judicial interference cited the dissolution, shall be returned, transferred or conveyed in
above, the decision of an unincorporated association on the question of accordance with such requirements;
an election to office is a matter peculiarly and exclusively to be (c) Assets received and held by the corporation subject to limitations
determined by the association, and, in the absence of fraud, is final and permitting their use only for charitable, religious, benevolent,
binding on the courts. (7 C.J.S., p. 44). educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the
The instant controversy between petitioner So and respondent Josefa dissolution, shall be transferred or conveyed to one (1) or more
falls squarely within the ambit of the rule of judicial non-intervention or corporations, societies or organizations engaged in activities in the
non- interference. The elections in dispute, the manner by which it was Philippines substantially similar to those of the dissolving
conducted and the results thereof, is strictly the internal affair that
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corporation according to a plan of distribution adopted pursuant officer-in-charge;

to this Chapter; ii. Complete address and contact number of project office; and
(d) Assets other than those mentioned in the preceding paragraphs, if (c) Application of Funds,
any, shall be distributed in accordance with the provisions of the
articles of incorporation or the bylaws, to the extent that the articles Section 5. A registered Foundation shall attach to the sworn statement
of incorporation or the bylaws determine the distributive rights of mentioned in the immediately preceding paragraph a Certification from
members, or any class or classes of members, or provide for the Office of the Mayor, or the Office of the Barangay Captain, or the
distribution; and Head of either the Department of Social Welfare and Development or
(e) In any other case, assets may be distributed to such persons, Department of Health, on the existence of the subject Program/Activity
societies, organizations or corporations, whether or not organized in the locality on which it exercises jurisdiction.
for profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter. Section 6. In case a registered Foundation has not yet submitted to the
Commission a statement of willingness to allow the conduct of an audit,
SEC. 94. Plan of Distribution of Assets. – A plan providing for the it shall attach such statement when it submits the documents required
distribution of assets, consistent with the provisions of this Title, may be in Sections 4 and 5.
adopted by a nonstock corporation in the process of dissolution in the
following manner: Section 7. For purposes of the audit to be conducted, a registered
(a) The board of trustees shall, by majority vote, adopt a resolution Foundation shall allow the Commission's representatives access to its
recommending a plan of distribution and directing the submission corporate and accounting books, records, names of beneficiaries,
thereof to a vote at a regular or special meeting of members having agreements entered into, correspondences and all pertinent documents
voting rights; for the preceding five (5) years.
(b) Each member entitled to vote shall be given a written notice setting
forth the proposed plan of distribution or a summary thereof and Section 8. All funds of the Foundation shall be deposited in a banking
the date, time and place of such meeting within the time and in the institution regulated by the Bangko Sentral ng Pilipinas.
manner provided in this Code for the giving of notice of meetings;
and Section 9. Failure to comply with any of these rules or any violation of
(c) Such plan of distribution shall be adopted upon approval of at least the provisions hereof shall render the Foundation liable to pay a fine in
two-thirds (2/3) of the members having voting rights present or an amount that shall be determined by the Commission which shall not
represented by proxy at such meeting. be less than Ten Thousand Pesos (P 10,000.00). In case the Foundation
fails to submit the required documents for two (2) consecutive years, the
Corporations, stock and non-stock, may be dissolved in accordance and Commission may, after due notice and hearing, revoke the registration
pursuant to the provisions of Sections 117 to 120 of the Revised of the Foundation. The penalties enumerated herein shall be without
Corporation Code and the pertinent provisions of P.D. 902-A, as prejudice to whatever other legal action may be available under existing
amended. If such be the case, the assets of the corporation are to be laws.
distributed in accordance with law and established jurisprudence.
Section 10. All other circulars, rules, orders and issuances, or parts
D. Other references: thereof that are inconsistent with this Memorandum Circular are hereby
SEC Memorandum Circular No. 8, Series of 2006 repealed or modified accordingly.
Revised Guidelines on Foundations
Section 11. These Revised Guidelines shall take effect fifteen (15) days
Section 1. A "Foundation" is a non-stock, non-profit corporation after its publication in a newspaper of general circulation.
established for the purpose of extending grants or endowments to
support its goals or raising funds to accomplish charitable, religious, SEC Memorandum Circular No. 4, Series of 2013
educational, athletic, cultural, titerary, scientific, social welfare or other Amendment of Part I (4) (A) & (B) of SRC Rule 68, as amended
similar objectives.
To provide relevant information to users of financial statements of Non-
Section 2. A Foundation applying for registration with the Commission Stock and Non-Profit Organizations and Foundations under SRC Rule
shall, in addition to the requirements for non-stock, non-profit 68, as amended, the Commission En Bane at its meeting held on 07
corporations, submit the following documents: Notarized Certification March 2013, approved the amendment of Part I, Paragraphs 4(A)&(B) of
of Bank Deposit of the amount of not SRC Rule 68, as amended. The provisions of the said Rule as hereinafter
(a) less than One Million Pesos (P 1,000,000.00); and cited shall now read as follows:
(b) Statement of willingness to allow the Commission to conduct an
audit. "4. OTHER DOCUMENTS TO BE FILED WITH THE FINANCIAL
STATEMENTS
Section 3. The applicant's corporate name shall contain the word
"Foundation" The following documents shall be filed with the annual audited financial
statements and in the interim financial statements, if required herein:
Section 4. Upon the effectivity of this Circular, al registered Foundations
shall submit, in addition to the General Information Sheet, its Audited A. Non-stock and non-profit organizations
Financial Statement which shall include a sworn Statement of its A sworn statement of the organization's President and Treasurer on
President and Treasurer on the following information that relates to the the accuracy and completeness of the following schedules:
preceding fiscal year:
(a) Source and Amount of Funds; i. Schedule of Receipts or Income Other Than Contributions and
(b) Program/Activity planned, ongoing and accomplished; Donations. This schedule shall provide the nature and amount
i. Complete name, address and contact number of project of each item;
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 NOTES ON THE REVISED CORPORATION CODE

ii. Schedule of Contributions and Donations that is prepared in Commission's Company Registration and Monitoring
accordance with the prescribed form per Annex "A"; and Department for a fee in the in the amount of Five Thousand
iii. Schedule of Disbursements according to sources and (Php5,00C.00) Pesos. 3. 4. The Corporate Secretary shall
activities. This schedule shall provide the nature and amount submit the following: a. b. c. Membership Book duly
of each item. If material in amount (10% or more of the total), registered with the SEC; Sworn certified list of members
the details of such disbursement shall likewise be indicated. indicating thereon their nationalities; and Sworn certification
executed by the Corporate Secretary on voting power of the
B. Foundations members. This Memorandum Circular shall take effect
A sworn statement of the organization's President and Treasurer on immediately after its publication in a newspaper of general
the accuracy and completeness of the following schedules: circulation.
i. Schedule of Sources of Funds Other Than Contributions and
Donations. This schedule shall provide the nature and amount
of each item;
ii. Schedule of Contributions and Donations that is prepared in
accordance with the prescribed form per Annex "A"; and
iii. Schedule of Disbursements according to sources and
activities. This schedule shall provide the nature and amount
of each item. If material in amount (10% or more of the total),
the details of such disbursement shall likewise be indicated.
iv. Schedule of application of funds with the following
information on activities accomplished, on-going and
planned:
a. Complete name, address and contact number of
project officer-in- charge; and
b. Complete address and contact number of project
office.
v. As supporting documents to the above information, copies of
the certifications from the Office of the Mayor or the Head of
either the Department of Social Welfare and Development or
Department of Health, on the existence of the subject
program or activity in the locality on which it exercises
jurisdiction.

For purposes of the above requirements, contributions or

donations reportable on the Schedule per paragraphs A(ii) and B(ii)
shall be grants, bequests, devises, and gifts of money or property,
amounting to P100,000.00 or more from each contributor or donor.
A contributor or donor includes individuals, partnerships,
corporations, associations, trusts and organizations."

The old provisions of Part I, Paragraphs 4(A)&(B) of SRC Rule 68, as

amended, are hereby deleted.

This Circular shall cover annual financial statements for the period ended
December 31, 2012 and onwards.

SEC Memorandum Circular No. 10, Series of 2016

Guidelines on the Issuance of Certificate on the Nationality of Non-Stock
Corporations

The Commission En Banc, in its Resolution No. 433, series of 2016 dated
30 June 2016, resolved to issue guidelines on the issuance of
certification on the nationality of non-stock corporations as follows:

A. Non-stock" corporation registered with the Commission is a

Philippine National:
a. If all its members are citizens of the Philippines; or
b. If at least sixty (60%) percent of its members entitled to vote
are citizens of the Philippines; or
c. If at least sixty (60%) percent of its members' total number of
votes as broadened in the By-laws are held by citizens of the
Philippines; or If all members of a foreign non-stock
corporation licensed to do business by the Commission are
citizens of the Philippines. A certification on the nationality of
a non-stock corporation shall be issued upon request to the
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XIV. CLOSE CORPORATIONS Code lays down a similar policy authorizing NEDA to recommend to the
A. Definition; Permissive Provisions legislature the setting of maximum limits to family or group ownership
SEC. 95. Definition and Applicability of Title. – A close corporation, of stock in corporations vested with public interest, and the
within the meaning of this Code, is one whose articles of incorporation determination of whether or not it should be vested with public interest
provides that: (a) all the corporation’s issued stock of all classes, within its domain.
exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (b) all the SEC. 96. Articles of Incorporation. – The articles of incorporation of a
issued stock of all classes shall be subject to one or more specified close corporation may provide for:
restrictions on transfer permitted by this Title; and (c) the corporation (a) A classification of shares or rights, the qualifications for owning or
shall not list in any stock exchange or make any public offering of its holding the same, and restrictions on their transfers, subject to the
stocks of any class. Notwithstanding the foregoing, a corporation shall provisions of the following section;
not be deemed a close corporation when at least two-thirds (2/3) of its (b) A classification of directors into one (1) or more classes, each of
voting stock or voting rights is owned or controlled by another whom may be voted for and elected solely by a particular class of
corporation which is not a close corporation within the meaning of this stock; and
Code. (c) Greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance companies, The articles of incorporation of a close corporation may provide that the
public utilities, educational institutions and corporations declared to be business of the corporation shall be managed by the stockholders of the
vested with public interest in accordance with the provisions of this corporation rather than by a board of directors. So long as this provision
Code. continues in effect, no meeting of stockholders need be called to elect
directors: Provided, That the stockholders of the corporation shall be
The provisions of this Title shall primarily govern close corporations: deemed to be directors for the purpose of applying the provisions of
Provided, That other Titles in this Code shall apply suppletorily, except this Code, unless the context clearly requires otherwise: Provided,
as otherwise provided under this Title. further, That the stockholders of the corporation shall be subject to all
liabilities of directors.
The ultimate effect of the special provisions of the law on close
corporations is to furnish another form of business organization – a “de The articles of incorporation may likewise provide that all officers or
facto corporation with a corporate shell”. It is referred to sometimes as employees or that specified officers or employees shall be elected or
a hybrid of both the corporate and partnership forms, an “incorporated appointed by the stockholders, instead of by the board of directors.
partnership” or “corporation de jure but a de facto partnership”.
CLASSIFICATION OF SHARES: Under letter (a) above, the close
This is because a close corporation may partake the nature of a corporation may classify its shares into different classes to be held of
partnership in that the stockholders thereof take an active role in the record only by specified persons.
management of the corporate affairs either as directors, officers or even
perhaps as partners in management which is akin to the partnership form Example: Classes A, B and C. Class A is to be held only by the
of business. This, in fact, is the main distinction between a close incorporators; Class B by their relatives within the third civil degree of
corporation and the ordinary stock corporation where, in the latter, the consanguinity or affinity; Class C by their close business associates.
stockholders have hardly a voice in management except perhaps to
elect the directors. CLASSIFICATION OF DIRECTORS: Under letter (b) above, a close
corporation may provide for a classification of directors into one or more
Despite this, the stockholders who are active in management still enjoy class, each of whom may be voted for and elected solely by a particular
limited liability to the extent of their subscription in so far as corporate class of stock.
obligations are concerned. It will be noted, however, that under no. 5 of
Sec. 99 of the Code, they are made personally liable for corporate torts Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C
unless they have obtained a reasonably adequate insurance liability. shares. The AOI may provide that each class shall have a representation
in the BOD regardless of the number of shares within each class. So, if
CLOSE CORPORATIONS: must contain the three provisions required to the close corporation has 5 directors, then the AOI may allocate 3
be indicated in the AOI as provided by Sec. 95. Absent any of the directors for Class A shares, 1 for B and 1 for C. Within each class,
provisions required by the said section, the corporation, will not, for all cumulative voting may also be exercised by the stockholders of such
legal intents and purposes, be considered as a close corporation and class to elect their representative in the board. But to the extent that
would thus not be governed by TITLE XII of the Code, but by the general each class can elect its own directors regardless of the number of shares
provisions governing ordinary corporation. “A corporation does not in such class, cumulative voting may, in effect be restricted. This is so
become a close corporation just because man and his wife owns 99.86% because if there is no provision for a classification of directors, then Class
if the capital stock” (San Juan Structural Steel vs. CA). The qualifying A stockholders, by cumulating their votes (5x1000) will have 5,000 votes
conditions required by law must be complied with. and can elect 3 directors with 1,666 votes each. Class B shares, having
2,500 votes can vote 2 members and Class C shares having only 1,000
2/3 OWNED BY ANOTHER CORPORATION: Even if another votes cannot be guaranteed to any seat in the board.
corporation owns or controls 2/3 of the “voting” stocks of a close
corporation, the latter may still be considered as such close corporation QUORUM AND VOTING REQUIREMENT
if the corporation owning or controlling the shares is also a close A close corporation may provide for a greater quorum or voting
corporation. requirement under no. 3 above. Although the AOI or by-laws of other
stock corporations may provide for greater quorum and voting
BUSINESS WITH PUBLIC INTEREST: may not be formed as close requirements in directors’ meeting as provided in Sec. 25 of the Code,
corporation under the second paragraph of Sec. 94. Sec. 176 of the those for stockholder’ meeting, unlike in a close corporation, may not
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be altered or increased. This provisions in effect, increases the veto such number of persons, the person to whom such stock is issued
power of the minority stockholders. or transferred is conclusively presumed to have notice of this fact.
DIRECT MANAGEMENT BY STOCKHOLDERS (c) If a stock certificate of any close corporation conspicuously shows
The AOI of the close corporation may provide that the corporation shall a restriction on transfer of stock of the corporation, the transferee of
be managed by the stockholders rather than by the BOD. If such be the the stock is conclusively presumed to have notice of the fact that
case, the stockholders are deemed directors and are subject to all the he has acquired stock in violation of the restriction, if such
rights and liabilities of a director. However, their liability would be more acquisition violates the restriction.
extensive in that they are personally lilable for torts unless, again, the (d) Whenever any person to whom stock of a close corporation has
corporation has obtained reasonably adequate liability insurance. As been issued or transferred has, or is conclusively presumed under
distinguished from the ordinary stock corporation, directors hereof are this section to have, notice either (a) that he is a person not eligible
liable for corporate torts only if they have been negligent or acted to be a holder of stock of the corporation, or (b) that transfer of
fraudulently in the performance of their functions. As to what is stock to him would cause the stock of the corporation to be held
“reasonably adequate liability insurance” would vary depending on the by more than the number of persons permitted by its articles of
facts and circumstances of the case. incorporation to hold stock of the corporation, or (c) that the
transfer of stock is in violation of a restriction on transfer of stock,
In order that the provision allowing a close corporation to do away with the corporation may, at its option, refuse to register the transfer of
a BOD may be effective, the same must contain the continuing stock in the name of the transferee.
provisions required in par. 2 of Sec. 96: (e) The provisions of subsection (4) shall not applicable if the transfer
(1) No meeting of stockholders need be called to elect directors; of stock, though contrary to subsections (1), (2) of (3), has been
(2) Unless the context clearly requires otherwise, the stockholders of consented to by all the stockholders of the close corporation, or if
the corporation shall be deemed to be directors for the purpose of the close corporation has amended its articles of incorporation in
applying the provisions of this Code; and accordance with this Title.
(3) The stockholders of the corporation shall be subject to all liabilities (f) The term “transfer”, as used in this section, is not limited to a
of directors. transfer for value.
(g) The provisions of this section shall not impair any right which the
ELECTION OF OFFICERS: transferee may have to either rescind the transfer or recover the
Sec. 96 likewise allows the AOI of a close corporation to provide that all stock under any express or implied warranty.
officers or employees shall be elected or appointed by the stockholders
instead of the BOD. SALE OF SHARES: Apparently, a selling stockholder may not be able to
transfer his shares if to do so would violate the qualifying conditions
B. Effects of Breach of Qualifying Provisions indicated in the AOI unless of course, all the stockholder consents to the
SEC. 97. Validity of Restrictions on Transfer of Shares. – Restrictions on transfer or the AOI is amended (no. 5 above).
the right to transfer shares must appear in the articles of incorporation,
in the bylaws, as well as in the certificate of stock; otherwise, the same STOCKHOLDER: concerned is not, however, left without any recourse
shall not be binding on any purchaser in good faith. Said restrictions as he may compel the close corporation to purchase his shares at their
shall not be more onerous than granting the existing stockholders or the fair value for any reason subject only to the condition laid down in Sec.
corporation the option to purchase the shares of the transferring 104.
stockholder with such reasonable terms, conditions or period stated. If,
upon the expiration of said period, the existing stockholders or the TRANSFEREE: may rescind the transaction or to recover from the
corporation fails to exercise the option to purchase, the transferring transferor under any applicable warranty, express or implied.
stockholder may sell their shares to any third person.
C. Stockholders' Agreement
The restriction must be indicated not only in the AOI and the stock SEC. 99. Agreements by Stockholders. –
certificates but also in the by-laws. The restrictions, however, shall not (a) Agreements by and among stockholders executed before the
be more onerous than granting existing stockholders or the corporation formation and organization of a close corporation, signed by all
the option to purchase the shares of the selling or transferring stockholders, shall survive the incorporation of such corporation
stockholder within reasonable terms, conditions and period. If, after the and shall continue to be valid and binding between and among
expiration of the period, the existing stockholders or the corporation such stockholders, if such be their intent, to the extent that such
fails to exercise the option, the stockholder concerned may transfer his agreements are not inconsistent with the articles of incorporation,
shares to any third person subject to the provisions, however, of Sec. 98: irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in
SEC. 98. Effects of Issuance or Transfer of Stock in Breach of Qualifying said articles of incorporation.
Conditions. – (b) A written agreement signed by two (2) or more stockholders may
(a) If stock of a close corporation is issued or transferred to any person provide that in exercising any voting right, the shares held by them
who is not entitled under any provision of the articles of incorporation shall be voted as provided or as agreed, or in accordance with a
to be a holder of record of its stock, and if the certificate for such procedure agreed upon by them.
stock conspicuously shows the qualifications of the persons entitled (c) No provision in any written agreement signed by the stockholders,
to be holders of record thereof, such person is conclusively relating to any phase of the corporate affairs, shall be invalidated as
presumed to have notice of the fact of his ineligibility to be a between the parties on the ground that its effect is to make them
stockholder. partners among themselves.
(b) If the articles of incorporation of a close corporation states the (d) A written agreement among some or all of the stockholders in a
number of persons, not exceeding twenty (20), who are entitled to be close corporation shall not be invalidated on the ground that it so
holders of record of its stock, and if the certificate for such stock relates to the conduct of the business and affairs of the corporation
conspicuously states such number, and if the issuance or transfer of as to restrict or interfere with the discretion or powers of the board
stock to any person would cause the stock to be held by more than of directors: Provided, That such agreement shall impose on the
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stockholders who are parties thereto the liabilities for managerial F. Amendment to Articles of Incorporation
acts imposed by this Code on directors. SEC. 102. Amendment of Articles of Incorporation. – Any amendment
(e) Stockholders are actively engaged in the management or to the articles of incorporation which seeks to delete or remove any
operation of the business and affairs of a close corporation; the provision required by this Title or to reduce a quorum or voting
stockholders shall be held to strict fiduciary duties to each other and requirement stated in said articles of incorporation shall require the
among themselves. Said stockholders shall be personally liable for affirmative vote of at least two-thirds (2/3) of the outstanding capital
corporate torts unless the corporation has obtained reasonably stock, whether with or without voting rights, or of such greater
adequate liability insurance. proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid
PRE-INCORPORATION AGREEMENTS under paragraph a, do not provisions, at a meeting duly called for the purpose.
ordinarily survive the corporation in ordinary stock corporations unless it
has been ratified or adopted by the corporation after incorporation Only G. Deadlocks
in such case may the corporation be bound by said agreement. In a close SEC. 103. Deadlocks. – Notwithstanding any contrary provision in the
corporation, these pre-incorporation agreements survive and continue close corporation’s articles of incorporation, bylaws, or stockholders’
to be valid and binding, if such be the intent of the stockholders, agreement, if the directors or stockholders are so divided on the
provided that the agreement is not inconsistent with the AOI management of the corporation’s business and affairs that the votes
required for a corporate action cannot be obtained, with the
VOTING AGREEMENTS or rights or the manner of exercising voting consequence that the business and affairs of the corporation can no
rights under par. 2 may be the subject of agreement of stockholders, longer be conducted to the advantage of the stockholders generally,
such as to vote for a specific person or group or to maintain a certain the Commission, upon written petition by any stockholder, shall have
stockholder as their president or chairman. the power to arbitrate the dispute. In the exercise of such power, the
Commission shall have authority to make appropriate orders, such as:
CONDUCT OF CORPORATE AFFAIRS under paragraph. c and d, may (a) cancelling or altering any provision contained in the articles of
be the subject of an agreement, in writing, and will be effective and incorporation, bylaws, or any stockholder’s agreement; (b) cancelling,
binding despite the fact that it may make them partners among altering or enjoining a resolution or act of the corporation or its board
themselves. Agreements may also be entered into by and between the of directors, stockholders, or officers; (c) directing or prohibiting any act
stockholders of a close corporation which relates to the management of of the corporation or its board of directors, stockholders, officers, or
the corporate affairs which would not otherwise be valid and binding in other persons party to the action; (d) requiring the purchase at their fair
other corporations. This is because stockholders’ agreement in the latter value of shares of any stockholder, either by the corporation regardless
cannot limit or restrict the discretion and powers of the BOD to manage of the availability of unrestricted retained earnings in its books, or by the
the corporate affairs. other stockholders; (e) appointing a provisional director; (f) dissolving
the corporation; or (g) granting such other relief as the circumstances
D. When Board Meeting Not Necessary may warrant.
As a rule, directors in ordinary stock corporations must act as a body at
a duly constituted meeting to have a valid corporate transaction. In a A provisional director shall be an impartial person who is neither a
close corporation, directors may validly act even without a meeting stockholder nor a creditor of the corporation or any of its subsidiaries or
subject only to the conditions laid down in the Code under Sec. 10 affiliates, and whose further qualifications, if any, may be determined by
SEC. 100. When a Board Meeting is Unnecessary or Improperly Held. – the Commission. A provisional director is not a receiver of the
Unless the bylaws provide otherwise, any action taken by the directors corporation and does not have the title and powers of a custodian or
of a close corporation without a meeting called properly and with due receiver. A provisional director shall have all the rights and powers of a
notice shall nevertheless be deemed valid if: duly elected director, including the right to be notified of and to vote at
(a) Before or after such action is taken, a written consent thereto is meetings of directors until removed by order of the Commission or by
signed by all the directors; or all the stockholders. The compensation of the provisional director shall
(b) All the stockholders have actual or implied knowledge of the action be determined by agreement between such director and the
and make no prompt objection in writing; or corporation, subject to approval of the Commission, which may fix the
(c) The directors are accustomed to take informal action with the compensation absent an agreement or in the event of disagreement
express or implied acquiescence of all the stockholders; or between the provisional director and the corporation.
(d) All the directors have express or implied knowledge of the action
in question and none of them makes a prompt objection in writing. The provision above quoted gives the SEC a very wide discretion in
respect to management of a close corporation in the event of a
An action within the corporate powers taken at a meeting held without deadlock. It may:
proper call or notice, is deemed ratified by a director who failed to (1) Cancel or alter any provision in the AOI, by-laws or any
attend, unless after having knowledge thereof, the director promptly stockholders’ agreement;
files his written objection with the secretary of the corporation. (2) Cancel, alter or enjoin any resolution or other act of the corporation
or its BOD, stockholders or officers;
E. Pre-Emptive Right (3) Prohibit any act of the corporation or its BOD, stockholders or
SEC. 101. Preemptive Right in Close Corporations. – The preemptive officers or other persons party to the action;
right of stockholders in close corporations shall extend to all stock to be (4) Requiring the purchase of the par value of the shares of any
issued, including reissuance of treasury shares, whether for money, stockholders, either by the corporation regardless of availability of
property or personal services, or in payment of corporate debts, unless unrestricted retained earnings, or by the other shareholders;
the articles of incorporation provide otherwise. (5) Appointment of a provisional director; - the second paragraph of
Sec. 103 will govern. The provisional director may break the
deadlock by casting the deciding vote.
(6) Dissolving the corporation; or

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(7) Other relief as the circumstances may warrant. ORDINARY STOCK

CLOSE CORPORATION
CORPORATION
H. Withdrawal of Stockholders / Dissolution classes and to be voted solely by voting
If a stockholder wishes to withdraw therefrom, he may do so “for any a particular class of stock,
reason” and compel the corporation to purchase his shares at their fair cumulative voting may, in effect,
value provided only that the corporation has sufficient assets in its books be restricted
to cover its debts and liabilities exclusive of capital stock. This can be The articles of incorporation may Officers are elected by the Board
done by a stockholder in ordinary stock corporation only upon the provide that all officers shall be of Directors
exercise of his appraisal right in those instances allowed under Sec. 80 elected or appointed by the
of the Code. stockholders
It may provide for greater Although the articles of
Likewise, a corporation may be dissolved on petitioner of only one quorum and voting incorporation or by-laws may
stockholder on the grounds indicated in Sec. 104 which include even requirements in meetings of provide for greater quorum and
mere dishonesty. It provides: stockholders and directors voting requirements in
SEC. 104. Withdrawal of Stockholder or Dissolution of Corporation. – In directors’ meeting under
addition and without prejudice to other rights and remedies available section 24, those for
under this Title, any stockholder of a close corporation may, for any stockholders’ meeting cannot
reason, compel the corporation to purchase shares held at fair value, generally be altered
which shall not be less than the par or issued value, when the Restriction on transfer of shares Valid and binding if indicated in
corporation has sufficient assets in its books to cover its debts and should be indicated in the the articles of incorporation and
liabilities exclusive of capital stock: Provided, That any stockholder of a articles of incorporation, by-laws stock certificates
close corporation may, by written petition to the Commission, compel and stock certificates
the dissolution of such corporation whenever any of acts of the directors, Pre-emptive rights of Pre-emptive rights may be
officers, or those in control of the corporation is illegal, fraudulent, stockholders are broader as it denied as provided for in Section
dishonest, oppressive or unfairly prejudicial to the corporation or any include all issues without 38
stockholder, or whenever corporate assets are being misapplied or exception
wasted. A stockholder may withdraw and Unless he sells his shares, a
compel the corporation to stockholder cannot get back his
I. CLOSE CORPORATION VS. ORDINARY STOCK purchase his shares for any investment nor compel the
CORPORATION reason with the limitation only corporation to buy his shares
ORDINARY STOCK that the corporation has except in the exercise of his
CLOSE CORPORATION
CORPORATION sufficient assets to cover its appraisal right
The number of stockholders No limitation as to number of liabilities exclusive of capital
cannot exceed twenty (20) shareholders stock
To the extent that all Maximum number of directors is The proper forum may interfere Courts cannot interfere in the
stockholders can be deemed 15 in the management of a close business judgment of the
directors, the number of corporation in case of deadlocks directors/stockholders under the
directors can effectively be more under Section 102, even of the principle of “BUSINESS
than 15 directors/stockholders are acting JUDGMENT RULE”
Shares of stock are subject to Generally, no restriction on in good faith
specified restrictions transfer of shares Any stockholder may petition Dissolution may be had only on
Shares of stock are prohibited No prohibition the SEC for corporate the grounds provided by the
from being listed in the stock dissolution on grounds among provisions of the Code on
exchange or offered for sale to others, provides for in Section dissolution and P.D. 902-A, as
the public 104. amended
Stockholders may take an active Management is lodged in the Shares of stock are prohibited No prohibition
part in corporate management Board of Directors from being listed in the stock
by vesting management to them exchange or offered for sale to
rather than a Board of Director the public
Those active in management are Directors are liable for torts only
personally liable for corporate if they have acted negligently or MANUEL R. DULAY ENTERPRISES, INC. VS. COURT OF APPEALS 225
torts unless the corporation has fraudulently SCRA 678, AUGUST 27, 1993
obtained FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises,
an adequate liability insurance Inc., through Board Resolution No. 18 sold the subject property, known
Directors can validly act even Directors must, as a rule, act as a as the Dulay Apartment, to private respondent Maria Theresa Veloso
without a meeting body at a duly constituted where a Memorandum to the Deed of Absolute Sale was executed
meeting giving Manuel Dulay within 2 years to repurchase the property.
Agreements between Not valid and binding since
stockholders regarding the stockholders’ agreement Respondent Veloso mortgaged said property to secure a loan from
operations of the business can cannot limit the discretion of private respondent Manuel Torres. For non-payment of the said loan,
validly be made the Board to manage corporate Torres foreclosed the mortgage and was declared the highest bidder in
affairs the public auction.
To the extent that directors may Ordinarily, no such classification
be classified into one or more and no restrictions on cumulative For Dulay’s and Veloso’s failure to redeem said property, Torres applied

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for consolidation of title, to which petitioner Virgilio Dulay, vice effect that he never participated nor was even aware of any meeting or
president of the corporation intervened alleging that Manuel Dulay was resolution authorizing the mortgage or sale of the subject premises (see
never authorized by the corporation to sell the property. Instead of par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21")
impleading Virgilio Dulay, Torres withdrew his petition and moved for is difficult to believe. On the contrary, he is very much privy to the
its dismissal which was granted. transactions involved. To begin with, he is a incorporator and one of the
board of directors designated at the time of the organization of Manuel
Later on, Torres and Edgardo Pabalan, real estate administrator of R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely
Torres, filed an action against petitioners (Redovan as tenant of Dulay referred to as a "family corporation". The nomenclature, if imprecise,
Apartment) for the recovery of possession, sum of money and damages however, fairly reflects the cohesiveness of a group and the parochial
with preliminary injunction. instincts of the individual members of such an aggrupation of which
Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators
Private respondents and Torres later on filed an action against spouses being close relatives namely, three (3) children and their father whose
Florentino Manalastas, a tenant of Dulay Apartment with petitioner name identifies their corporation (Articles of Incorporation of Manuel R.
corporation for ejectment. Dulay Enterprises, Inc. Exh. "31-A").

The MTC decided in favor of respondents which was affirmed by the Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
RTC and later by the CA. executed an affidavit that he was a signatory witness to the execution of
the post-dated Deed of Absolute Sale of the subject property in favor
ISSUE: WON the sale of the subject property between private of private respondent Torres indicates that he was aware of the
respondents spouses Veloso and Manuel Dulay has no binding effect on transaction executed between his father and private respondents and
petitioner corporation as Board Resolution No. 18 which authorized the had, therefore, adequate knowledge about the sale of the subject
sale of the subject property was resolved without the approval of all the property to private respondents.
members of the board of directors and said Board Resolution was
prepared by a person not designated by the corporation to be its Consequently, petitioner corporation is liable for the act of Manuel
secretary. Dulay and the sale of the subject property to private respondents by
Manuel Dulay is valid and binding. As stated by the trial court:
HELD: NO. Section 101 (now Sec. 100, RCC) of the Corporation Code
of the Philippines provides: . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act
Sec. 101. When board meeting is unnecessary or improperly held. of the former and not a personal transaction of Manuel R. Dulay. This is
Unless the by-laws provide otherwise, any action by the directors of a so because Manuel R. Dulay was not only president and treasurer but
close corporation without a meeting shall nevertheless be deemed valid also the general manager of the corporation. The corporation was a
if: closed family corporation and the only non-relative in the board of
(1) Before or after such action is taken, written consent thereto is directors was Atty. Plaridel C. Jose who appeared on paper as the
signed by all the directors, or secretary. There is no denying the fact, however, that Maria Socorro R.
(2) All the stockholders have actual or implied knowledge of the action Dulay at times acted as secretary, the Court cannot lose sight of the fact
and make no prompt objection thereto in writing; or that the Manuel R. Dulay Enterprises, Inc. is a closed family corporation
(3) The directors are accustomed to take informal action with the where the incorporators and directors belong to one single family. It
express or implied acquiesce of all the stockholders, or cannot be concealed that Manuel R. Dulay as president, treasurer and
(4) All the directors have express or implied knowledge of the action general manager almost had absolute control over the business and
in question and none of them makes prompt objection thereto in affairs of the corporation.
writing.
NAGUIAT VS. NATIONAL LABOR RELATIONS COMMISSION 269
If a directors' meeting is held without call or notice, an action taken SCRA 564, MARCH 13, 1997
therein within the corporate powers is deemed ratified by a director who FACTS: Private respondents were employed as taxi drivers of Clark Field
failed to attend, unless he promptly files his written objection with the Taxi, Inc. which held a concessionaire’s contract with Army Air Force
secretary of the corporation after having knowledge thereof. Exchange Services (AAFES) for the operation of taxi services within the
Clark Air Base. Due to the phase-out of the US Military Bases in the
In the instant case, petitioner corporation is classified as a close Philippines, which Clark Air Base was not spared, the AAFES was
corporation and consequently a board resolution authorizing the sale or dissolved and the services of individual respondents were officially
mortgage of the subject property is not necessary to bind the terminated. The AAFES Taxi Drivers’ Association (drivers’ union) and
corporation for the action of its president. At any rate, corporate action CFTI agreed on a separation pay of P500 per year of service to which
taken at a board meeting without proper call or notice in a close private respondents did not agree. Private respondents filed a complaint
corporation is deemed ratified by the absent director unless the latter against Sergio Naguiat, president of CFTI, doing business under the
promptly files his written objection with the secretary of the corporation name and style of Sergio F. Naguiat Enterprises, Inc., AAFES and the
after having knowledge of the meeting which, in his case, petitioner drivers’ union for separation pay which was granted by the Labor Arbiter
Virgilio Dulay failed to do. at P1,200 per year of service for humanitarian considerations. On
appeal, the NLRC granted separation pay to private respondents.
Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondent spouses Veloso is null and void as ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily
the alleged Board Resolution No. 18 was passed without the knowledge liable with CFTI.
and consent of the other members of the board of directors cannot be
sustained. As correctly pointed out by the respondent Court of Appeals: HELD: NO. From the evidence proffered by both parties, there is no
substantial basis to hold that Naguiat Enterprises is an indirect employer
Appellant Virgilio E. Dulay's protestations of complete innocence to the of individual respondents much less a labor only contractor. On the
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contrary, petitioners submitted documents such as the drivers' Nothing in the records show whether CFTI obtained "reasonably
applications for employment with CFTI, and social security remittances adequate liability insurance;" thus, what remains is to determine
and payroll of Naguiat Enterprises showing that none of the individual whether there was corporate tort.
respondents were its employees. Moreover, in the contract between
CFTI and AAFES, the former, as concessionaire, agreed to purchase Our jurisprudence is wanting as to the definite scope of "corporate tort."
from AAFES for a certain amount within a specified period a fleet of Essentially, "tort" consists in the violation of a right given or the omission
vehicles to be "ke(pt) on the road" by CFTI, pursuant to their of a duty imposed by law. Simply stated, tort is a breach of a legal duty.
concessionaire's contract. This indicates that CFTI became the owner of Article 283 of the Labor Code mandates the employer to grant
the taxicabs which became the principal investment and asset of the separation pay to employees in case of closure or cessation of
company. operations of establishment or undertaking not due to serious business
losses or financial reverses, which is the condition obtaining at bar. CFTI
Private respondents failed to substantiate their claim that Naguiat failed to comply with this law-imposed duty or obligation.
Enterprises managed, supervised and controlled their employment. It Consequently, its stockholder who was actively engaged in the
appears that they were confused on the personalities of Sergio F. management or operation of the business should be held personally
Naguiat as an individual who was the president of CFTI, and Sergio F. liable.
Naguiat Enterprises, Inc., as a separate corporate entity with a separate
business. They presumed that Sergio F. Naguiat, who was at the same As pointed out earlier, the fifth paragraph of Section 100 of the
time a stockholder and director of Sergio F. Naguiat Enterprises, Inc., Corporation Code specifically imposes personal liability upon the
was managing and controlling the taxi business on behalf of the latter. stockholder actively managing or operating the business and affairs of
A closer scrutiny and analysis of the records, however, evince the truth the close corporation.
of the matter: that Sergio F. Naguiat, in supervising the taxi drivers and
determining their employment terms, was rather carrying out his The Court here finds no application to the rule that a corporate officer
responsibilities as president of CFTI. Hence, Naguiat Enterprises as a cannot be held solidarily liable with a corporation in the absence of
separate corporation does not appear to be involved at all in the taxi evidence that he had acted in bad faith or with malice. In the present
business. case, Sergio Naguiat is held solidarily liable for corporate tort because
he had actively engaged in the management and operation of CFTI, a
And, although the witness insisted that Naguiat Enterprises was his close corporation.
employer, he could not deny that he received his salary from the office
of CFTI inside the base. Antolin T. Naguiat was the vice president of the CFTI. Although he
carried the title of "general manager" as well, it had not been shown
Another driver-claimant admitted, upon the prodding of counsel for the that he had acted in such capacity. Furthermore, no evidence on the
corporations, that Naguiat Enterprises was in the trading business while extent of his participation in the management or operation of the
CFTI was in taxi services. business was proferred. In this light, he cannot be held solidarily liable
for the obligations of CFTI and Sergio Naguiat to the private
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association respondents.
which, admittedly, was the union of individual respondents while still
working at Clark Air Base, states that members thereof are the
employees of CFTI and "(f)or collective bargaining purposes, the
definite employer is the Clark Field Taxi Inc."

ISSUE No. 2: WON Sergio F. Naguiat and his son Antolin Naguiat,
officers of CFTI may be solidarily liable with CFTI.

HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as

president of CFTI, cannot be exonerated from joint and several liability
in the payment of separation pay to individual respondents.

Sergio F. Naguiat, admittedly, was the president of CFTI who actively

managed the business. Thus, applying the ruling in A.C. Ransom, he falls
within the meaning of an "employer" as contemplated by the Labor
Code, who may be held jointly and severally liable for the obligations of
the corporation to its dismissed employees.

Moreover, petitioners also conceded that both CFTI and Naguiat

Enterprises were "close family corporations" owned by the Naguiat
family. Section 100, paragraph 5, (under Title XII on Close Corporations)
of the Corporation Code, states:

(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. (emphasis supplied)

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XV. SPECIAL CORPORATIONS Philippines or corporations or associations at least sixty per centum of
A. Educational Corporations the capital of which is owned by such citizens. The Congress may,
SEC. 105. Incorporation. – Educational corporations shall be governed however, require increased Filipino equity participation in all
by special laws and by the general provisions of this Code. educational institutions. The control and administration of educational
institutions shall be vested in citizens of the Philippines.
EDUCATIONAL INSTITUTIONS
Those that provide facilities for teaching or instruction. It includes both No educational institution shall be established exclusively for aliens and
public and private schools or colleges and universities and are subject no group of aliens shall comprise more than one-third of the enrollment
to the provisions of special laws and by the general provisions of the in any school. The provisions of this sub section shall not apply to
Code. schools established for foreign diplomatic personnel and their
dependents and, unless otherwise provided by law, for other foreign
PUBLIC SCHOOLS or those created by the government are, however, temporary residents.
subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Culled from this is that while foreigners may own a maximum of 40% of
Insofar as they may be applicable however, the provisions of any special the capital stock of an educational corporation, not one of them may sit
law or the Corporation Code supplement the law of their creation. as a member of the governing board thereof. Neither may they act as
an officer with the power of control and administration of the institution.
PRIVATE SCHOOLS OR COLLEGES In effect their ownership of any capital would be limited to “non-
Any private institutions for teaching, managed by private individuals or controlling” interest.
corporations which offer courses of kindergarten, primary, intermediary
or secondary instructions or superior courses in vocational, technical, B. Religious Corporations
professional or special schools by which diploma or certificates are to be 1. Corporation Sole
granted or titles and degrees conferred (Sec. 2, Act No. 2076, as SEC. 107. Classes of Religious Corporations. – Religious corporations
amended by CA 180). may be incorporated by one or more persons. Such corporations may
be classified into corporations sole and religious societies.
These instructions of learning once recognized by the government as
such are mandated by law to be incorporated within 90 days under the Religious corporations shall be governed by this Chapter and by the
provisions of the Corporation Code and must, perforce, comply with the general provisions on nonstock corporations insofar as applicable.
requirements and procedure laid down thereunder. (Sec. 5, supra)
RELIGIOUS CORPORATIONS
Their failure to do so will not immune the educational institution from Those composed entirely of spiritual persons, which are created for the
suit as a corporation (Chang Kai Shek School vs. CA; April 18, 1989, furtherance of religion or perpetuating the rights of the church or for the
supra) administration of church or religious work or property.

SEC. 106. Board of Trustees. –Trustees of educational institutions CORPORATION SOLE: consists of one person only and his successor in
organized as nonstock corporations shall not be less than five (5) nor some particular station, who are incorporated by law in order to give
more than fifteen (15): Provided, That the number of trustees shall be in them some legal capacities and advantages, particularly that of
multiples of five (5). Unless otherwise provided in the articles of perpetuity, which in their natural persons they could not have had.
incorporation or bylaws, the board of trustees of incorporated schools,
colleges, or other institutions of learning shall, as soon as organized, so PURPOSE OF INCORPORATION AND PERSONS WHO MAY
classify themselves that the term of office of one-fifth (1/5) of their INCORPORATE
number shall expire every year. Trustees thereafter elected to fill SEC. 108. Corporation sole. – For the purpose of administering and
vacancies, occurring before the expiration of a particular term, shall hold managing, as trustee, the affairs, property and temporalities of any
office only for the unexpired period. Trustees elected thereafter to fill religious denomination, sect or church, a corporation sole may be
vacancies caused by expiration of term shall hold office for five (5) years. formed by the chief archbishop, bishop, priest, minister, rabbi, or other
A majority of the trustees shall constitute a quorum for the transaction presiding elder of such religious denomination, sect, or church.
of business. The powers and authority of trustees shall be defined in the
bylaws. CONTENTS OF THE ARTICLES OF INCORPORATION
SEC. 109. Articles of incorporation. – In order to become a corporation
For institutions organized as stock corporations, the number and term
sole, the chief archbishop, bishop, priest, minister, rabbi or presiding
of directors shall be governed by the provisions on stock corporations.
elder of any religious denomination, sect or church must file with the
Commission articles of incorporation setting forth the following:
BOARD OF DIRECTORS/TRUSTEES: or the governing board by any (a) That the applicant chief archbishop, bishop, priest, minister, rabbi,
name of an educational institution is similar in number as to any other or presiding elder represents the religious denomination, sect, or
corporation except that in case it is non-stock, the number must be in church which desires to become a corporation sole;
multiples of five (5). As compared to stock corporation, their number (b) That the rules, regulations and discipline of the religious
may be within the vicinity of five (5) to fifteen (15). denomination, sect or church are consistent with becoming a
corporation sole and do not forbid it;
TERM OF OFFICE: Members of the Board may hold office for five years, (c) That such chief archbishop, bishop, priest, minister, rabbi, or
but they shall be staggered so that 1/5 of their number shall expire every presiding elder is charged with the administration of the
year. temporalities and the management of the affairs, estate and
properties of the religious denomination, sect or church within the
Educational institutions, other than those established by religious territorial jurisdiction, so described succinctly in the articles of
groups and mission boards, shall be owned solely by citizens of the incorporation;

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(d) The manner by which any vacancy occurring in the office of chief priest, minister, rabbi, or presiding elder acting as corporation sole, and
archbishop, bishop, priest, minister, rabbi, or presiding elder is may be opposed by any member of the religious denomination, sect or
required to be filled, according to the rules, regulations or church represented by the corporation sole: Provided, That in cases
discipline of the religious denomination, sect or church; and where the rules, regulations, and discipline of the religious
(e) The place where the principal office of the corporation sole is to be denomination, sect or church, religious society, or order concerned
established and located, which place must be within the territory represented by such corporation sole regulate the method of acquiring,
of the Philippines. holding, selling, and mortgaging real estate and personal property, such
rules, regulations and discipline shall govern, and the intervention of the
The articles of incorporation may include any other provision not courts shall not be necessary.
contrary to law for the regulation of the affairs of the corporation.
OWNERSHIP OF PROPERTY: does not vest unto the head upon
PROCEDURE FOR THE ORGANIZATION registration of real property in the name of the corporation sole, such
SEC. 110. Submission of the Articles of Incorporation. – The articles of devolving upon the church or congregation acquiring it.
incorporation must be verified, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi, or presiding elder, as the CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED
case may be, and accompanied by a copy of the commission, certificate DOES NOT apply to corporation sole with regards ownership of real
of election or letter of appointment of such chief archbishop, bishop, property in its own name. It has thus been held that the Roman Catholic
priest, minister, rabbi, or presiding elder, duly certified to be correct by Church of the Philippines, a corporation sole, has no nationality and that
any notary public. the framers of the Constitution did not have in mind the religious
corporation sole when they provided that 60% of the capital of the
From and after filing with the Commission of the said articles of corporation acquiring it must be owned by Filipino citizens.
incorporation, verified by affidavit or affirmation, and accompanied by
the documents mentioned in the preceding paragraph, such chief CHARACTER OF THE LAND: at the time of institution of registration
archbishop, bishop, priest, minister, rabbi, or presiding elder shall proceedings must first be determined before a corporation sole, or any
become a corporation sole and all temporalities, estate and properties private corporation for that matter, can acquire the land must first be
of the religious denomination, sect or church theretofore administered determined. If it does not form part of public domain, the constitutional
or managed as such chief archbishop, bishop, priest, minister, rabbi, or prohibition against its acquisition by private corporation will not apply.
presiding elder shall be personally held in trust as a corporation sole, for Thus, it has likewise been earlier held that under the Public Land Act,
the use, purpose, exclusive benefit and on behalf of the religious alienable public land may be subject to registration by a possessor if he,
denomination, sect or church, including hospitals, schools, colleges, personally or through his predecessors-in-interest, had openly
orphan asylums, parsonages, and cemeteries thereof. continuously and exclusively possessed the same for 30 years as the
same is converted into private property by mere lapse or completion of
TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a the said period.
corporation sole does not require a provision for its term of existence.
For obvious reasons, since a corporation sole is supposed to exist in ROMAN CATH. APOSTOLIC ADM. OF DAVAO, INC. VS. LAND REG.
perpetuity. It may, however, be dissolved in accordance with Sec. 113 COM., ET AL. 102 PHIL. 596, DECEMBER 20, 1957
of the Code. FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman
Catholic Apostolic Administrator of Davao, Inc., with Mgr. Clovit
BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified Thibault, a Canadian citizen, as actual incumbent. When the deed of sale
AOI with the SEC and the documents required under Sec. 110. This was presented to the Register of Deeds of Davao for registration, the
serves as an exception to the rule that a corporation acquires juridical latter required the corporation to submit an affidavit declaring that 60%
personality only upon the issuance of a certificate of incorporation by of the members thereof were Filipino citizens.
the said government agency.
Entertaining some doubts as to the registrability of the deed of sale, the
POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its Register of Deeds referred the matter to the Land Registration
power to mortgage or sell real properties is, however, subject to certain Commission which held that by virtue of the provisions of Sec. 1 and 5
restriction, that is, a proper court order must first be secured for that of Art. XIII of the Philippine Constitution, the vendee was not qualified
purpose, which is not otherwise imposed in any other corporation to acquire private lands in the Philippines in the absence of proof that
at least 60% of the capital, property, or assets of the Roman Catholic
Intervention of the court may dispense with only if the rules, regulations Apostolic Administrator of Davao, Inc. was actually owned or controlled
and discipline of the religious denomination, sect or church concerned by Filipino citizens.
provide or regulate the manner or method of holding or alienating
properties. Sec. 113 provides: ISSUE: WON the corporation sole may register the property transferred.
SEC. 111. Acquisition and Alienation of Property. – A corporation sole
may purchase and hold real estate and personal property for its church, HELD: YES. In solving the problem thus submitted to our consideration,
charitable, benevolent, or educational purposes, and may receive We can say the following: A corporation sole is a special form of
bequests or gifts for such purposes. Such corporation may sell or corporation usually associated with the clergy. Conceived and
mortgage real property held by it by obtaining an order for that purpose introduced into the common law by sheer necessity, this legal creation
from the Regional Trial Court of the province where the property is which was referred to as "that unhappy freak of English law" was
situated upon proof that the notice of the application for leave to sell or designed to facilitate the exercise of the functions of ownership carried
mortgage has been made through publication or as directed by the on by the clerics for and on behalf of the church which was regarded as
Court, and that it is in the interest of the corporation that leave to sell or the property owner (See I Couvier's Law Dictionary, p. 682-683).
mortgage be granted. The application for leave to sell or mortgage must
be made by petition, duly verified, by the chief archbishop, bishop, A corporation sole consists of one person only, and his successors (who
will always be one at a time), in some particular station, who are
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incorporated by law in order to give them some legal capacities and

advantages, particularly that of perpetuity, which in their natural persons It can, therefore, be noticed that the power of a corporation sole to
they could not have had. In this sense, the king is a sole corporation; so purchase real property, like the power exercised in the case at bar, it is
is a bishop, or dens, distinct from their several chapters (Reid vs. Barry, not restricted although the power to sell or mortgage sometimes is,
93 Fla. 849, 112 So. 846). depending upon the rules, regulations, and discipline of the church
concerned represented by said corporation sole. If corporations sole can
That leaves no room for doubt that the bishops or archbishops, as the purchase and sell real estate for its church, charitable, benevolent, or
case may be, as corporation's sole are merely administrators of the educational purposes, can they register said real properties? As
church properties that come to their possession, in which they hold in provided by law, lands held in trust for specific purposes me be subject
trust for the church. It can also be said that while it is true that church of registration (section 69, Act 496), and the capacity of a corporation
properties could be administered by a natural person, problems sole, like petitioner herein, to register lands belonging to it is
regarding succession to said properties cannot be avoided to rise upon acknowledged, and title thereto may be issued in its name (Bishop of
his death. Through this legal fiction, however, church properties Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is
acquired by the incumbent of a corporation sole pass, by operation of absurd that while the corporations sole that might be in need of
law, upon his death not his personal heirs but to his successor in office. acquiring lands for the erection of temples where the faithful can pray,
It could be seen, therefore, that a corporation sole is created not only to or schools and cemeteries which they are expressly authorized by law to
administer the temporalities of the church or religious society where he acquire in connection with the propagation of the Roman Catholic
belongs but also to hold and transmit the same to his successor in said Apostolic faith or in furtherance of their freedom of religion they could
office. If the ownership or title to the properties do not pass to the not register said properties in their name. As professor Javier J.
administrators, who are the owners of church properties. Nepomuceno very well says "Man in his search for the immortal and
imponderable, has, even before the dawn of recorded history, erected
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise temples to the Unknown God, and there is no doubt that he will continue
comment: to do so for all time to come, as long as he continues 'imploring the aid
In matters regarding property belonging to the Universal Church and to of Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law
the Apostolic See, the Supreme Pontiff exercises his office of supreme Journal, No. 1, p. 41, September, 1956). Under the circumstances of this
administrator through the Roman Curia; in matters regarding other case, We might safely state that even before the establishment of the
church property, through the administrators of the individual moral Philippine Commonwealth and of the Republic of the Philippines every
persons in the Church according to that norms, laid down in the Code corporation sole then organized and registered had by express
of Cannon Law. This does not mean, however, that the Roman Pontiff is provision of law the necessary power and qualification to purchase in its
the owner of all the church property; but merely that he is the supreme name private lands located in the territory in which it exercised its
guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. functions or ministry and for which it was created, independently of the
764). nationality of its incumbent unique and single member and head, the
bishop of the dioceses. It can be also maintained without fear of being
We must therefore, declare that although a branch of the Universal gainsaid that the Roman Catholic Apostolic Church in the Philippines
Roman Catholic Apostolic Church, every Roman Catholic Church in has no nationality and that the framers of the Constitution, as will be
different countries, if it exercises its mission and is lawfully incorporated hereunder explained, did not have in mind the religious corporations
in accordance with the laws of the country where it is located, is sole when they provided that 60 per centum of the capital thereof be
considered an entity or person with all the rights and privileges granted owned by Filipino citizens.
to such artificial being under the laws of that country, separate and
distinct from the personality of the Roman Pontiff or the Holy See, DIRECTOR OF LANDS VS. COURT OF APPEALS 158 SCRA 568,
without prejudice to its religious relations with the latter which are MARCH 14, 1988 (SUPRA, POWER TO ACQUIRE PROPERTY)
governed by the Canon Law or their rules and regulations. FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of
Cavite for registration of a parcel of land which it claimed to have
The Corporation Law also contains the following provisions: acquired by virtue of a Deed of Absolute Sale from Aquelina de la Cruz,
alleging that the applicant and its predecessors-in-interest have been in
SECTION 159. Any corporation sole may purchase and hold real estate actual, continuous, public, peaceful and adverse possession and
and personal; property for its church, charitable, benevolent, or occupation of the said land for more than 30 years, which was opposed
educational purposes, and may receive bequests or gifts of such by the Government as represented by the Director of Lands. The CFI
purposes. Such corporation may mortgage or sell real property held by and the CA ruled in favor of INC.
it upon obtaining an order for that purpose from the Court of First
Instance of the province in which the property is situated; but before ISSUE: WON the registration of the land should be upheld
making the order proof must be made to the satisfaction of the Court
that notice of the application for leave to mortgage or sell has been HELD: As observed at the outset, had this case been resolved
given by publication or otherwise in such manner and for such time as immediately after it was submitted for decision, the result may have
said Court or the Judge thereof may have directed, and that it is to the been quite adverse to private respondent. For the rule then prevailing
interest of the corporation that leave to mortgage or sell must be made under the case of Manila Electric Company v. Castro-Bartolome et al.,
by petition, duly verified by the bishop, chief priest, or presiding elder 114 SCRA 799, reiterated in Republic v. Villanueva, 114 SCRA 875 as
acting as corporation sole, and may be opposed by any member of the well as the other subsequent cases involving private respondent
religious denomination, society or church represented by the adverted to above', is that a juridical person, private respondent in
corporation sole: Provided, however, That in cases where the rules, particular, is disqualified under the 1973 Constitution from applying for
regulations, and discipline of the religious denomination, society or registration in its name alienable public land, as such land ceases to be
church concerned represented by such corporation sole regulate the public land "only upon the issuance of title to any Filipino citizen
methods of acquiring, holding, selling and mortgaging real estate and claiming it under section 48[b]" of Commonwealth Act No. 141, as
personal property, such rules, regulations, and discipline shall control amended. These are precisely the cases cited by petitioner in support
and the intervention of the Courts shall not be necessary. of its theory of disqualification.
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reconsideration on the following grounds:

Since then, however, this Court had occasion to re-examine the rulings (1) Article XIV, Section 11 of the New Constitution (1973) disqualifies
in these cases vis-a-vis the earlier cases of Carino v. Insular Government, a private corporation from acquiring alienable lands for the public
41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, domain;
among others. Thus, in the recent case of Director of Lands v. (2) In the case at bar the application was filed after the effectivity on
Intermediate Appellate Court, 146 SCRA 509, We categorically stated the New Constitution on January 17, 1973;
that the majority ruling in Meralco is "no longer deemed to be binding which was denied by the lower court for lack of merit.
precedent", and that "[T]he correct rule, ... is that alienable public land
held by a possessor, personally or through his predecessors-in-interest, Still insisting of the alleged unconstitutionality of the registration (a point
openly, continuously and exclusively for the prescribed statutory period which, incidentally, the appellant never raised in the lower court prior to
[30 years under the Public Land Act, as amended] is converted to private its Motion for Reconsideration), the Republic elevated this appeal, and
property by mere lapse or completion of said period, ipso jure." We the IAC affirmed the lower court’s decision.
further reiterated therein the timehonored principle of non- impairment
of vested rights. ISSUE: WON private respondent, corporation sole, is entitled to
confirmation of its title to the 4 parcels of land.
The crucial factor to be determined therefore is the length of time
private respondent and its predecessors-in-interest had been in HELD: The parties herein do not dispute that since the acquisition of the
possession of the land in question prior to the institution of the instant four (4) lots by the applicant, it has been in continuous possession and
registration proceedings. The land under consideration was acquired by enjoyment thereof, and such possession, together with its predecessors-
private respondent from Aquelina de la Cruz in 1947, who, in turn, in-interest, covering a period of more than 52 years (at least from the
acquired by same by purchase from the Ramos brothers and sisters, date of survey in 1928) with respect to lots 1 and 2, about 62 years with
namely: Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under respect to lot 3, all of plan PSU-65686; and more than 39 years with
section 48[b] of Commonwealth Act No. 141, as amended, "those who respect to the fourth parcel described in plan PSU-11 2592 (at least from
by themselves or through their predecessors- in-interest have been in the date of the survey in 1940) have been open, public, continuous,
open, continuous, exclusive and notorious possession and occupation peaceful, adverse against the whole world, and in the concept of owner.
of agricultural lands of the public domain, under a bona fide claim of
acquisition or ownership, for at least thirty years immediately preceding Petitioner argues that considering such constitutional prohibition,
the filing of the application for confirmation of title except when private respondent is disqualified to own and register its title to the lots
prevented by war or force majeure" may apply to the Court of First in question. Further, it argues that since the application for registration
Instance of the province where the land is located for confirmation of was filed only on February 2, 1979, long after the 1973 Constitution took
their claims, and the issuance of a certificate of title therefor, under the effect on January 17, 1973, the application for registration and
Land Registration Act. Said paragraph [b] further provides that "these confirmation of title is ineffectual because at the time it was filed, private
shall be conclusively presumed to have performed all the conditions corporation had been declared ineligible to acquire alienable lands of
essential to a Government grant and shall be entitled to a certificate of the public domain pursuant to Art. XIV, Sec. 11 of the said constitution.
title under the provisions of this chapter." Taking the year 1936 as the (Rollo, p. 41)
reckoning point, there being no showing as to when the Ramoses first
took possession and occupation of the land in question, the 30-year The questioned posed before this Court has been settled in the case of
period of open, continuous, exclusive and notorious possession and DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509
occupation required by law was completed in 1966. [1986]) which reversed the ruling first enunciated in the 1982 case of
Manila Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982])
The completion by private respondent of this statutory 30-year period imposing the constitutional ban on public land acquisition by private
has dual significance in the light of Section 48[b] of Commonwealth Act corporations which ruling was declared emphatically as res judicata on
No. 141, as amended and prevailing jurisprudence: [1] at this point, the January 7, 1986 in Director of Lands vs. Hermanos y Hermanas de Sta.
land in question ceased by operation of law to be part of the public Cruz de Mayo, Inc., (141 SCRA 21 [1986]). In said case, (Director of Lands
domain; and [2] private respondent could have its title thereto confirmed v. IAC, supra), this Court stated that a determination of the character of
through the appropriate proceedings as under the Constitution then in the lands at the time of institution of the registration proceedings must
force, private corporations or associations were not prohibited from be made. If they were then still part of the public domain, it must be
acquiring public lands, but merely prohibited from acquiring, holding or answered in the negative.
leasing such type of land in excess of 1,024 hectares.
If, on the other hand, they were already private lands, the constitutional
If in 1966, the land in question was converted ipso jure into private land, prohibition against their acquisition by private corporation or association
it remained so in 1974 when the registration proceedings were obviously does not apply. In affirming the Decision of the Intermediate
commenced. This being the case, the prohibition under the 1973 Appellate Court in said case, this Court adopted the vigorous dissent of
Constitution would have no application. Otherwise construed, if in 1966, the then Justice, later Chief Justice Claudio Teehankee, tracing the line
private respondent could have its title to the land confirmed, then it had of cases beginning with CARINO, in 1909, thru SUSI, in 1925, down to
acquired a vested right thereto, which the 1973 Constitution can neither HERICO, in 1980, which developed, affirmed and reaffirmed the
impair nor defeat. doctrine that open, exclusive and undisputed possession of alienable
public land for the period prescribed by law creates the legal fiction
REPUBLIC VS. INTERMEDIATE APPELLATE COURT 168 SCRA 165, whereby the land, upon completion of the requisite period ipso jure and
NOVEMBER 29, 1988 without the need of judicial or other sanction, ceases to be public land
FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by and becomes' private property. (DIRECTOR OF LANDS vs. IAC, supra,
Msgr. Jose T. Sanchez, filed an application for confirmation of title to 4 p. 518).
parcels of land which were said to have been obtained either by
purchase or donation dating as far back as 1928, which was granted by It must be emphasized that the Court is not here saying that a
the CFI. Against this decision, the Solicitor General filed a Motion for corporation sole should be treated like an ordinary private corporation.

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(b) The reason for dissolution and winding up;

In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land (c) The authorization for the dissolution of the corporation by the
Registration Commission, et al. (L-8451, December 20,1957,102 Phil. particular religious denomination, sect or church; and
596). We articulated: (d) The names and addresses of the persons who are to supervise the
In solving the problem thus submitted to our consideration, We can say winding up of the affairs of the corporation.
the following: A corporation sole is a special form of corporation usually
associated with the clergy. Conceived and introduced into the common Upon approval of such declaration of dissolution by the Commission,
law by sheer necessity, this legal creation which was referred to as "that the corporation shall cease to carry on its operations except for the
unhappy freak of English Law" was designed to facilitate the exercise of purpose of winding up its affairs.
the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because
Law Dictionary, p. 682-683). of the doctrine of separation of the Church and the State. However, the
State may exercise its police power if the corporation is being carried
A corporation sole consists of one person only, and his successors (who out and is being used for illegal purposes.
will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and C. Religious Societies
advantages, particularly that of perpetuity, which in their natural persons Under common law, a religious society is a body of persons associated
they could not have had. together for the purpose of maintaining religious worship. The religious
society and the church are distinct bodies, independent of each other,
There is no doubt that a corporation sole by the nature of its though they may exist with each other
Incorporation is vested with the right to purchase and hold real estate
and personal property. It need not therefore be treated as an ordinary Under Philippine Law, a religious society, order, diocese, synod or
private corporation because whether or not it be so treated as such, the district organization of any religious denomination, sect or church may
Constitutional provision involved will, nevertheless, be not applicable. incorporate for the administration of its temporalities or for the
management of its affairs, properties and estate in accordance with the
In the light of the facts obtaining in this case and the ruling of this Court Code:
in Director of Lands vs. IAC, (supra, 513), the lands subject of this SEC. 114. Religious Societies. – Unless forbidden by competent
petition was already private property at the time the application for authority, the Constitution, pertinent rules, regulations, or discipline of
confirmation of title was filed in 1979. There is therefore no cogent the religious denomination, sect or church of which it is a part, any
reason to disturb the findings of the appellate court. religious society, religious order, diocese, synod, or district organization
of any religious denomination, sect or church, may, upon written consent
(a) Filling up of Vacancies and/or by an affirmative vote at a meeting called for the purpose of at
VACANCY: in the office of the “head” of the corporation, the person least two-thirds (2/3) of its membership, incorporate for the
authorized by the rules, regulations or discipline of the denomination administration of its temporalities or for the management of its affairs,
shall exercise all the powers and authority of the corporation sole during properties, and estate by filing with the Commission, articles of
such vacancy and until such vacancy has been filled-up. The manner in incorporation verified by the affidavit of the presiding elder, secretary,
which the vacancy is to be filled in clearly spelled out in Sec. 112 of the or clerk or other member of such religious society or religious order, or
Code: diocese, synod, or district organization of the religious denomination,
SEC. 112. Filling of Vacancies. – The successors in office of any chief sect or church, setting forth the following:
archbishop, bishop, priest, minister, rabbi, or presiding elder in a (a) That the religious society or religious order, or diocese, synod, or
corporation sole shall become the corporation sole on their accession district organization is a religious organization of a religious
to office and shall be permitted to transact business as such upon filing denomination, sect or church;
a copy of their commission, certificate of election, or letters of (b) That at least two-thirds (2/3) of its membership has given written
appointment, duly certified by any notary public with the Commission. consent or has voted to incorporate, at a duly convened meeting
of the body;
During any vacancy in the office of chief archbishop, bishop, priest, (c) That the incorporation of the religious society or religious order, or
minister, rabbi, or presiding elder of any religious denomination, sect or diocese, synod, or district organization is not forbidden by
church incorporated as a corporation sole, the person or persons competent authority or by the Constitution, rules, regulations or
authorized by the rules, regulations or discipline of the religious discipline of the religious denomination, sect or church of which it
denomination, sect or church represented by the corporation sole to forms part;
administer the temporalities and manage the affairs, estate, and (d) That the religious society or religious order, or diocese, synod, or
properties of the corporation sole shall exercise all the powers and district organization desires to incorporate for the administration of
authority of the corporation sole during such vacancy. its affairs, properties and estate;
(e) The place within the Philippines where the principal office of the
Under the above provision, it is required that the successor, in order to corporation is to be established and located; and
be permitted to transact business as a corporation sole, must file with (f) The names, nationalities, and residence addresses of the trustees,
the SEC a copy of his commission, certificate of election, or letter of not less than five (5) nor more than fifteen (15), elected by the
appointment, duly certified by a notary public. religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may
(b) Dissolution be prescribed by the laws of the religious society or religious order,
SEC. 113. Dissolution. – A corporation sole may be dissolved, and its or of the diocese, synod, or district organization.
affairs settled voluntarily by submitting to the Commission a verified
declaration of dissolution, setting forth: Apparent from the foregoing, is that a religious society is not mandated
(a) The name of the corporation; by law to register as a corporation but may do so to acquire juridical
personality and for the purpose of administration of its temporalities and
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properties and even to acquire properties of its own. Thus, it has been A single stockholder who is likewise the self-appointed treasurer of the
held that an unincorporated religious association cannot acquire private corporation shall give a bond to the Commission in such a sum as may
agricultural lands in the Philippines (Register of Deeds vs. Ung Sui be required: Provided, That the said stockholder/treasurer shall
Temple) undertake in writing to faithfully administer the One Person
Corporation’s funds to be received as treasurer, and to disburse and
TERM OF EXISTENCE: Like the corporation sole, the AOI of a religious invest the same according to the articles of incorporation as approved
society need not contain a term of its existence as it is supposed to exist by the Commission. The bond shall be renewed every two (2) years or
in perpetuity. as often as may be required.

BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the SEC. 123. Special Functions of the Corporate Secretary. – In addition to
certificate of registration by the SEC. Absent any specific provision of the functions designated by the One Person Corporation, the corporate
the law, it must be deemed to fall within the general rule under Sec. 18. secretary shall:
(a) Be responsible for maintaining the minutes book and/or records of
D. One Person Corporation (OPC) the corporation;
SEC. 115. Applicability of Provisions to One Person Corporations. – The (b) Notify the nominee or alternate nominee of the death or incapacity
provisions of this Title shall primarily apply to One Person Corporations. of the single stockholder, which notice shall be given no later than
Other provisions of this Code apply suppletorily, except as otherwise five (5) days from such occurrence;
provided in this Title. (c) Notify the Commission of the death of the single stockholder within
five (5) days from such occurrence and stating in such notice the
SEC. 116. One Person Corporation. – A One Person Corporation is a names, residence addresses, and contact details of all known legal
corporation with a single stockholder: Provided, That only a natural heirs; and
person, trust, or an estate may form a One Person Corporation. (d) Call the nominee or alternate nominee and the known legal heirs
to a meeting and advise the legal heirs with regard to, among
Banks and quasi-banks, pre-need, trust, insurance, public and publicly- others, the election of a new director, amendment of the articles of
listed companies, and non-chartered government-owned and - incorporation, and other ancillary and/or consequential matters.
controlled corporations may not incorporate as One Person
Corporations: Provided, further, That a natural person who is licensed to SEC. 124. Nominee and Alternate Nominee. – The single stockholder
exercise a profession may not organize as a One Person Corporation for shall designate a nominee and an alternate nominee who shall, in the
the purpose of exercising such profession except as otherwise provided event of the single stockholder’s death or incapacity, take the place of
under special laws. the single stockholder as director and shall manage the corporation’s
affairs.
SEC. 117. Minimum Capital Stock Required for One Person Corporation.
– A One Person Corporation shall not be required to have a minimum The articles of incorporation shall state the names, residence addresses
authorized capital stock except as otherwise provided by special law. and contact details of the nominee and alternate nominee, as well as the
extent and limitations of their authority in managing the affairs of the
SEC. 118. Articles of Incorporation. – A One Person Corporation shall One Person Corporation.
file articles of incorporation in accordance with the requirements under
Section 14 of this Code. It shall likewise substantially contain the The written consent of the nominee and alternate nominee shall be
following: attached to the application for incorporation. Such consent may be
(a) If the single stockholder is a trust or an estate, the name, withdrawn in writing any time before the death or incapacity of the single
nationality, and residence of the trustee, administrator, executor, stockholder.
guardian, conservator, custodian, or other person exercising
fiduciary duties together with the proof of such authority to act on SEC. 125. Term of Nominee and Alternate Nominee. – When the
behalf of the trust or estate; and incapacity of the single stockholder is temporary, the nominee shall sit
(b) Name, nationality, residence of the nominee and alternate as director and manage the affairs of the One Person Corporation until
nominee, and the extent, coverage and limitation of the authority. the stockholder, by self-determination, regains the capacity to assume
such duties.
SEC. 119. Bylaws. – The One Person Corporation is not required to
submit and file corporate bylaws. In case of death or permanent incapacity of the single stockholder, the
nominee shall sit as director and manage the affairs of the One Person
SEC. 120. Display of Corporate Name. – A One Person Corporation shall Corporation until the legal heirs of the single stockholder have been
indicate the letters “OPC” either below or at the end of its corporate lawfully determined, and the heirs have designated one of them or have
name. agreed that the estate shall be the single stockholder of the One Person
Corporation.
SEC. 121. Single Stockholder as Director, President. – The single
stockholder shall be the sole director and president of the One Person The alternate nominee shall sit as director and manage the One Person
Corporation. Corporation in case of the nominee’s inability, incapacity, death, or
refusal to discharge the functions as director and manager of the
SEC. 122. Treasurer, Corporate Secretary, and Other Officers. – Within corporation, and only for the same term and under the same conditions
fifteen (15) days from the issuance of its certificate of incorporation, the applicable to the nominee.
One Person Corporation shall appoint a treasurer, corporate secretary,
and other officers as it may deem necessary, and notify the Commission SEC. 126. Change of Nominee or Alternate Nominee. – The single
thereof within five (5) days from appointment. stockholder may, at any time, change its nominee and alternate
nominee by submitting to the Commission the names of the new
The single stockholder may not be appointed as the corporate secretary.
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nominees and their corresponding written consent. For this purpose, the Code and applicable rules. Such notice shall be filed with the
articles of incorporation need not be amended. Commission within sixty (60) days from the occurrence of the
circumstances leading to the conversion into an ordinary stock
SEC. 127. Minutes Book. – A One Person Corporation shall maintain a corporation. If all requirements have been complied with, the
minutes book which shall contain all actions, decisions, and resolutions Commission shall issue a certificate of filing of amended articles of
taken by the One Person Corporation. incorporation reflecting the conversion.
In case of death of the single stockholder, the nominee or alternate
SEC. 128. Records in Lieu of Meetings. – When action is needed on any nominee shall transfer the shares to the duly designated legal heir or
matter, it shall be sufficient to prepare a written resolution, signed and estate within seven (7) days from receipt of either an affidavit of heirship
dated by the single stockholder, and recorded in the minutes book of or self-adjudication executed by a sole heir, or any other legal document
the One Person Corporation. The date of recording in the minutes book declaring the legal heirs of the single stockholder and notify the
shall be deemed to be the date of the meeting for all purposes under Commission of the transfer. Within sixty (60) days from the transfer of
this Code. the shares, the legal heirs shall notify the Commission of their decision
to either wind up and dissolve the One Person Corporation or convert it
SEC. 129. Reportorial Requirements. – The One Person Corporation into an ordinary stock corporation.
shall submit the following within such period as the Commission may
prescribe: The ordinary stock corporation converted from a One Person
(a) Annual financial statements audited by an independent certified Corporation shall succeed the latter and be legally responsible for all
public accountant: Provided, That if the total assets or total the latter’s outstanding liabilities as of the date of conversion.
liabilities of the corporation are less than Six Hundred Thousand
Pesos (P600,000.00), the financial statements shall be certified E. Corporations Vested with Public Interest
under oath by the corporation’s treasurer and president.
(b) A report containing explanations or comments by the president on
every qualification, reservation, or adverse remark or disclaimer
made by the auditor in the latter’s report;
(c) A disclosure of all self-dealings and related party transactions
entered into between the One Person Corporation and the single
stockholder; and
(d) Other reports as the Commission may require.
(e) For purposes of this provision, the fiscal year of a One Person
Corporation shall be that set forth in its articles of incorporation or,
in the absence thereof, the calendar year.
(f) The Commission may place the corporation under delinquent
status should the corporation fail to submit the reportorial
requirements three (3) times, consecutively or intermittently, within
a period of five (5) years.

SEC. 130. Liability of Single Shareholder. – A sole shareholder claiming

limited liability has the burden of affirmatively showing that the
corporation was adequately financed.

Where the single stockholder cannot prove that the property of the One
Person Corporation is independent of the stockholder’s personal
property, the stockholder shall be jointly and severally liable for the
debts and other liabilities of the One Person Corporation.

The principles of piercing the corporate veil applies with equal force to
One Person Corporations as with other corporations

SEC. 131. Conversion from an Ordinary Corporation to a One Person

Corporation. – When a single stockholder acquires all the stocks of an
ordinary stock corporation, the latter may apply for conversion into a
One Person Corporation, subject to the submission of such documents
as the Commission may require. If the application for conversion is
approved, the Commission shall issue a certificate of filing of amended
articles of incorporation reflecting the conversion. The One Person
Corporation converted from an ordinary stock corporation shall succeed
the latter and be legally responsible for all the latter’s outstanding
liabilities as of the date of conversion.

SEC. 132. Conversion from a One Person Corporation to an Ordinary

Stock Corporation. – A One Person Corporation may be converted into
an ordinary stock corporation after due notice to the Commission of
such fact and of the circumstances leading to the conversion, and after
compliance with all other requirements for stock corporations under this

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XVI. DISSOLUTION AND WINDING UP ISSUE: WON the cancellation of entries on respondents’ title is valid and
The extinguishment of the corporate franchise and the termination of proper.
corporate existence.
HELD: YES. The contract of lease expressly provides that the term of the
When a corporation is dissolved, it ceases to be a juridical entity and can lease shall be twenty years from the execution of the contract but can
no longer pursue the business for which it was incorporated. It will be extended for another period of twenty years at the option of the
nevertheless continue as a body corporate for another period of three lessee should the corporate term be extended in accordance with law.
years from the time it is dissolved but only for the purpose of winding Clearly, the option of the lessee to extend the lease for another period
up its affairs and the liquidation of its assets. of twenty years can be exercised only if the lessee as corporation renews
or extends its corporate term of existence in accordance with the
A. Methods of Dissolution Corporation Code which is the applicable law. Contracts are to be
THREE WAYS OF DISSOLUTION: interpreted according to their literal meaning and should not be
(1) Expiration of its corporate term; interpreted beyond their obvious intendment. Thus, in the instant case,
(2) Voluntary surrender of its primary franchise (voluntary dissolution); the initial term of the contract of lease which commenced on March 1,
and 1954 ended on March 1, 1974. PBM as lessee continued to occupy the
(3) The revocation of its corporate franchise (involuntary dissolution) leased premises beyond that date with the acquiescence and consent
Sec. 133, however, mentions only two methods: of the respondents as lessor. Records show however, that PBM as a
SEC. 133. Methods of Dissolution. – A corporation formed or organized corporation had a corporate life of only twenty-five (25) years which
under the provisions of this Code may be dissolved voluntarily or ended on January 19, 1977. It should be noted however that PBM
involuntarily. allowed its corporate term to expire without complying with the
requirements provided by law for the extension of its corporate term of
Expiration of corporate term can be considered voluntary dissolution it existence.
being the intention of the stockholders that it shall exist only for such
period. Section 11 of Corporation Code provides that a corporation shall exist
for a period not exceeding fifty (50) years from the date of incorporation
1. Expiration of Corporate Term unless sooner dissolved or unless said period is extended. Upon the
A corporation registered under the Corporation Code, with the expiration of the period fixed in the articles of incorporation in the
exception of religious ones, is required to indicate its term of existence absence of compliance with the legal requisites for the extension of the
in the AOI. It ceases to exist and is deemed automatically dissolved period, the corporation ceases to exist and is dissolved ipso facto (16
upon the expiration of the term indicated thereat without the need of Fletcher 671 cited by Aguedo F. Agbayani, Commercial Laws of the
any formal proceedings. Philippines, Vol. 3, 1988 Edition p. 617). When the period of corporate
life expires, the corporation ceases to be a body corporate for the
EXTENSION: It is to be observed, however, that the original term of purpose of continuing the business for which it was organized. But it
existence indicated in the AOI is subject to extension in accordance with shall nevertheless be continued as a body corporate for three years after
the provisions of Sec. 11 and 36 of the Code. If such be the case, the the time when it would have been so dissolved, for the purpose of
corporation continues to be possessed with juridical personality and prosecuting and defending suits by or against it and enabling it
may carry out its business for the period of time granted by virtue of gradually to settle and close its affairs, to dispose of and convey its
such extension. property and to divide its assets (Sec. 122 [now Sec. 139, RCC],
Corporation Code). There is no need for the institution of a proceeding
The extension should nonetheless be made before the expiration of the for quo warranto to determine the time or date of the dissolution of a
original term, but not earlier than 5 years prior to such expiration, corporation because the period of corporate existence is provided in
otherwise the corporation is dissolved, ipso facto. the articles of incorporation. When such period expires and without any
extension having been made pursuant to law, the corporation is
dissolved automatically insofar as the continuation of its business is
PHILIPPINE NATIONAL BANK VS. CFI OF RIZAL, PASIG, BR. XXI 209
concerned. The quo warranto proceeding under Rule 66 of the Rules of
SCRA 294, MAY 27, 1992
Court, as amended, may be instituted by the Solicitor General only for
FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with
the involuntary dissolution of a corporation on the following grounds: a)
corporate existence of 25 years, entered into a lease contract with
when the corporation has offended against a provision of an Act for its
private respondents, whereby the latter shall lease the parcels of land
creation or renewal; b) when it has forfeited its privileges and franchises
owned by them to PBM for a period of 20 years, extendible to another
by non-user; c) when it has committed or omitted an act which amounts
20 years, provided that PBM extend its corporate existence in
to a surrender of its corporate rights, privileges or franchises; d) when it
accordance with law. PBM introduced improvements on the land which
has mis-used a right, privilege or franchise conferred upon it by law, or
were annotated with the Register of Deeds.
when it has exercised a right, privilege or franchise in contravention of
law. Hence, there is no need for the SEC to make an involuntary
Later on, PBM executed a deed of assignment in favor of PNB over its
dissolution of a corporation whose corporate term had ended because
leasehold rights and later on a real estate mortgage covering all the
its articles of incorporation had in effect expired by its own limitation.
improvements to secure a loan.

Considering the foregoing in relation to the contract of lease between

PBM filed a petition for registration of improvements in the titles of real
the parties herein, when PBM's corporate life ended on January 19, 1977
property of private respondents which was opposed by private
and its 3-year period for winding up and liquidation expired on January
respondents on the ground that PBM failed to renew the contract of
19, 1980, the option of extending the lease was likewise terminated on
lease and apply for extension of its corporate existence.
January 19, 1977 because PBM failed to renew or extend its corporate
life in accordance with law. From then on, the respondents can exercise
The CFI issued an order directing the cancellation of the inscriptions on
their right to terminate the lease pursuant to the stipulations in the
respondents’ certificates of title.
contract.

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institutions, preneed, insurance and trust companies, NSSLAs,

The rights of the lessor and the lessee over the improvements which the pawnshops, and other financial intermediaries shall be approved by the
latter constructed on the leased premises is governed by Article 1678 of Commission unless accompanied by a favorable recommendation of the
the Civil Code. appropriate government agency.

The provision gives the lessee the right to remove the improvements if (1) Majority vote of the board of directors or trustees;
the lessor chooses not to pay one-half of the value thereof. However, in (2) Sending of notice of each stockholders or member of record
the case at bar, the law will not apply because the parties herein have personally, by registered mail, or by any means authorized under
stipulated in the contract their own terms and conditions concerning the its bylaws whether or not entitled to vote at the meeting at least
improvements, to wit, that the lessee, namely PBM, bound itself to twenty (20) days prior to the meeting (scheduled by the board for
remove the improvements before the termination of the lease. the purpose of submitting the board action to dissolve the
Petitioner PNB, as assignee of PBM succeeded to the obligation of the corporation for approval of the stockholder or members.);
latter under the contract of lease. It could not possess rights more than (3) Notice of the time, place, and object of the meeting shall be
what PBM had as lessee under the contract. Hence, petitioner was duty published once prior to the date of the meeting in a newspaper
bound to remove the improvements before the expiration of the period published in the place where the principal office of said corporation
of lease as what we have already discussed in the preceding paragraphs. is located, or if no newspaper is published in such place, in a
Its failure to do so when the lease was terminated newspaper of general circulation in the Philippines
(4) Resolution adopted by the affirmative vote of the stockholders
2. Voluntary Dissolution owning at least majority of the outstanding capital stock or majority
MODES OF VOLUNTARY DISSOUTION: of the members of a meeting to be held upon the call of the
(1) Voluntary Dissolution where no creditors are affected (Sec. 134); directors or trustees;
(2) Voluntary Dissolution where creditors are affected (Sec. 135); (5) A verified request for dissolution shall be filed with the Commission
(3) Shortening of corporate term (Sec. 136). stating: (a) the reason for the dissolution; (b) the form, manner, and
time when the notices were given; (c) names of the stockholders
(a) Where no creditors are affected and directors or members and trustees who approved the
SEC. 134. Voluntary Dissolution Where No Creditors are Affected. – If dissolution; (d) the date, place, and time of the meeting in which
dissolution of a corporation does not prejudice the rights of any creditor the vote was made; and (e) details of publication.
having a claim against it, the dissolution may be effected by majority (6) The corporation shall submit the following to the Commission: (1)
vote of the board of directors or trustees, and by a resolution adopted a copy of the resolution authorizing the dissolution, certified by a
by the affirmative vote of the stockholders owning at least majority of majority of the board of directors or trustees and countersigned by
the outstanding capital stock or majority of the members of a meeting the secretary of the corporation; (2) proof of publication; and (3)
to be held upon the call of the directors or trustees. favorable recommendation from the appropriate regulatory
agency, when necessary.
At least twenty (20) days prior to the meeting, notice shall be given to (7) Issuance of a certificate of dissolution by the SEC within fifteen (15)
each shareholder or member of record personally, by registered mail, or days from receipt of the verified request for dissolution, and in the
by any means authorized under its bylaws whether or not entitled to vote absence of any withdrawal within said period. The dissolution shall
at the meeting, in the manner provided in Section 50 of this Code and take effect only upon the issuance by the Commission of a
shall state that the purpose of the meeting is to vote on the dissolution certificate of dissolution
of the corporation. Notice of the time, place, and object of the meeting
shall be published once prior to the date of the meeting in a newspaper FAILURE TO COMPLY with the above requirements will have no effect
published in the place where the principal office of said corporation is on the legal existence of the corporation. Elsewise stated, a corporation
located, or if no newspaper is published in such place, in a newspaper being a creation of the law by the grant of its existence by the State,
of general circulation in the Philippines. may only be dissolved in the manner prescribed by the law of its
creation. Since it is the State that grants its right to exist, it is only
A verified request for dissolution shall be filed with the Commission through the State which can allow the termination of existence. Unless
stating: (a) the reason for the dissolution; (b) the form, manner, and time dissolved pursuant thereto, a corporation does not cease to have a
when the notices were given; (c) names of the stockholders and directors juridical personality.
or members and trustees who approved the dissolution; (d) the date,
place, and time of the meeting in which the vote was made; and (e) A mere resolution by the stockholders or the BOD of a corporation to
details of publication. dissolve the same does not affect the dissolution but that some other
steps, administrative or judicial is necessary (Daguhoy Enterprises vs.
The corporation shall submit the following to the Commission: (1) a copy Ponce)
of the resolution authorizing the dissolution, certified by a majority of
the board of directors or trustees and countersigned by the secretary of (b) Where creditors are affected
the corporation; (2) proof of publication; and (3) favorable SEC. 135. Voluntary Dissolution Where Creditors are Affected;
recommendation from the appropriate regulatory agency, when Procedure and Contents of Petition. – Where the dissolution of a
necessary. corporation may prejudice the rights of any creditor, a verified petition
for dissolution shall be filed with the Commission. The petition shall be
Within fifteen (15) days from receipt of the verified request for signed by a majority of the corporation’s board of directors or trustees,
dissolution, and in the absence of any withdrawal within said period, the verified by its president or secretary or one of its directors or trustees,
Commission shall approve the request and issue the certificate of and shall set forth all claims and demands against it, and that its
dissolution. The dissolution shall take effect only upon the issuance by dissolution was resolved upon by the affirmative vote of the
the Commission of a certificate of dissolution. stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or at least two-thirds (2/3) of the members at a meeting of
No application for dissolution of banks, banking and quasi-banking its stockholders or members called for that purpose. The petition shall
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likewise state: (a) the reason for the dissolution; (b) the form, manner, paragraph of Sec. 135, it uses the phrase “and may appoint a receiver”,
and time when the notices were given; and (c) the date, place, and time showing the clear intent of the aw that the same is merely discretionary
of the meeting in which the vote was made. The corporation shall submit on the part of the proper forum. Such language, held by the High Court,
to the Commission the following: (1) a copy of the resolution authorizing “tends to recognize that in cases of voluntary dissolution, there is no
the dissolution, certified by a majority of the board of directors or occasion for the appointment of a receiver except under special
trustees and countersigned by the secretary of the corporation; and (2) circumstances and upon proper showing” (China Bank vs. Michellin)
a list of all its creditors.
3. Shortening of Corporate Term
If the petition is sufficient in form and substance, the Commission shall, SEC. 136. Dissolution by Shortening Corporate Term._ – A voluntary
by an order reciting the purpose of the petition, fix a deadline for filing dissolution may be effected by amending the articles of incorporation
objections to the petition which date shall not be less than thirty (30) to shorten the corporate term pursuant to the provisions of this Code. A
days nor more than sixty (60) days after the entry of the order. Before copy of the amended articles of incorporation shall be submitted to the
such date, a copy of the order shall be published at least once a week Commission in accordance with this Code.
for three (3) consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal office of the Upon the expiration of the shortened term, as stated in the approved
corporation is situated, or if there be no such newspaper, then in a amended articles of incorporation, the corporation shall be deemed
newspaper of general circulation in the Philippines, and a similar copy dissolved without any further proceedings, subject to the provisions of
shall be posted for three (3) consecutive weeks in three (3) public places this Code on liquidation.
in such municipality or city.
In the case of expiration of corporate term, dissolution shall
Upon five (5) days’ notice, given after the date on which the right to file automatically take effect on the day following the last day of the
objections as fixed in the order has expired, the Commission shall corporate term stated in the articles of incorporation, without the need
proceed to hear the petition and try any issue raised in the objections for the issuance by the Commission of a certificate of dissolution.
filed; and if no such objection is sufficient, and the material allegations
of the petition are true, it shall render judgment dissolving the Section 136 was inserted to incorporate the long-standing practice of
corporation and directing such disposition of its assets as justice dissolving a corporation by amendment of the AOI by shortening the
requires, and may appoint a receiver to collect such assets and pay the corporate existence.
debts of the corporation.
PERPETUAL SUCCESSION: In fact, a corporation may be given the
The dissolution shall take effect only upon the issuance by the capacity of “perpetual succession” like the corporation sole and the
Commission of a certificate of dissolution. religious society. It does not mean, however, that it shall continue to
exist forever. It merely means that it has the capacity of continuous
FORMAL AND PROCEDURAL REQUIREMENTS: existence during a particular period or until dissolved in accordance with
(1) Affirmative vote of the stockholders representing at least 2/3 of the law.
outstanding capital stock or at least 2/3 of the members at a
meeting duly called for that purpose; It may thus amend its AOI and provide a term of existence or shorten it
(2) Petition for dissolution shall be filed with the SEC (the proper which may have the effect of a dissolution. Thus, while Sec. 115 of the
forum) signed by a majority of its board of directors or trustees or Code provides for the process and procedure for the dissolution of a
other officers having the management of its affairs, verified by the corporation sole, there is nothing in the law itself which would prohibit
president or secretary or one of its directors or trustees, setting it from amending its AOI. It is believed, however, that authorization for
forth all claims and demands against it. the dissolution by the particular religious denomination, sect or church,
(3) Issuance of an order by the SEC reciting the purpose of the petition as required in sub- paragraph 3 of Sec. 113 would still be necessary in
and fixing the date on or before which objections thereto may be the case of amending the AOI to affect dissolution.
filed by any person, which date shall not be less than thirty days
nor more than sixty days after entry of the order. SPECIAL AMENDMENT: Shortening of the corporate term with the
(4) Before such date, a copy of the order must be published once a effect of dissolution is a special type of amendment covered and
week for three (3) consecutive weeks in a newspaper of general governed by the special provisions of Sec. 36 of the Code. Thus, while
circulation published in the city or municipality where the principal the general provision on amendment under Sec. 15 allows “written
office is situated or in a newspaper of general circulation in the assent” in determining the voting requirement for ordinary
Philippines. amendments, Sec. 36 mandates that the vote must be cast at a duly
(5) Posting of the same order for three (3) consecutive weeks in three constituted meeting.
(3) public places in such city or municipality.
(6) Upon five (5) days’ notice, given after the date on which the right Likewise, Sec. 15 provides that amendment of the AOI is deemed
to file objections has expired, the SEC shall hear the petition and approved if not acted upon by the SEC within six (6) months from the
try any issue made by the objections filed. date of filing for a cause not attributable to the corporation. This is not
(7) Judgment dissolving the corporation and directing of its assets as applicable in case of shortening the corporate term which will have the
justice requires and the appointment of a receiver (if necessary, in effect of dissolution in Sec. 136, which requires the approval of the SEC.
its discretion) to collect such assets and pay the debts of the
corporation 4. Involuntary Dissolution
(8) The dissolution shall take effect only upon the issuance by the SEC. 138. Involuntary Dissolution. – A corporation may be dissolved
Commission of a certificate of dissolution. by the Commission motu proprio or upon filing of a verified complaint
by any interested party. The following may be grounds for dissolution
APPOINTMENT OF A RECEIVER of the corporation:
While the foregoing are mandatory requirements, the appointment of a (a) Non-use of corporate charter as provided under Section 21 of this
receiver is only permissive. As can be gleaned from the second Code;
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(b) Continuous inoperation of a corporation as provided under (2) In case of deadlock in a close corporation as provided for in Section
Section 21 of this Code; 103;
(c) Upon receipt of a lawful court order dissolving the corporation; (3) In a close corporation, any acts of directors, officers or those in
(d) Upon finding by final judgment that the corporation procured its control of the corporation which is illegal or fraudulent or dishonest
incorporation through fraud; or oppressive or unfairly prejudicial to the corporation or any
(e) Upon finding by final judgment that the corporation: stockholder or whenever corporate assets are being misapplied or
(1) Was created for the purpose of committing, concealing or wasted under section 103.
aiding the commission of securities violations, smuggling,
tax evasion, money laundering, or graft and corrupt SEC. 158. Administrative Sanctions. – If, after due notice and hearing,
practices; the Commission finds that any provision of this Code, rules or
(2) Committed or aided in the commission of securities regulations, or any of the Commission’s orders has been violated, the
violations, smuggling, tax evasion, money laundering, or Commission may impose any or all of the following sanctions, taking into
graft and corrupt practices, and its stockholders knew; and consideration the extent of participation, nature, effects, frequency and
(3) Repeatedly and knowingly tolerated the commission of graft seriousness of the violation:
and corrupt practices or other fraudulent or illegal acts by its (a) Imposition of a fine ranging from Five thousand pesos (P5,000.00)
directors, trustees, officers, or employees. to Two million pesos (P2,000,000.00), and not more than One
thousand pesos (P1,000.00) for each day of continuing violation but
If the corporation is ordered dissolved by final judgment pursuant to in no case to exceed Two million pesos (P2,000,000.00);
the grounds set forth in subparagraph (e) hereof, its assets, after (b) Issuance of a permanent cease and desist order;
payment of its liabilities, shall, upon petition of the Commission with (c) Suspension or revocation of the certificate of incorporation; and
the appropriate court, be forfeited in favor of the national government. (d) Dissolution of the corporation and forfeiture of its assets under the
Such forfeiture shall be without prejudice to the rights of innocent conditions in Title XIV of this Code.
stockholders and employees for services rendered, and to the
application of other penalty or sanction under this Code or other laws. INVOLUNTARY DISSOLUTION
A harsh remedy akin to a capital punishment. Thus, it has been laid to
The Commission shall give reasonable notice to, and coordinate with, rest in the case of Government vs. Philippine Sugar Estate that courts
the appropriate regulatory agency prior to the involuntary dissolution proceed with extreme caution which have for their object the forfeiture
of companies under their special regulatory jurisdiction. of corporate franchise, and forfeiture will not be allowed, except under
express limitation, or for plain abuse of power by which the corporation
JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by fails to fulfil the design and purpose of its organization. But when the
the SC, actions, for quo warranto against corporations or against abuse or violation constitutes or threatens a substantial injury to the
persons who usurps an office in a corporation fall under the jurisdiction public or such as to amount to a violation of the fundamental conditions
of the SEC (Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999). of its charter, or its conduct is characterized by “obduracy or pertinacity
in contempt of law”, dissolution will be granted.
This, however, is no longer exclusive and absolute in view of the
amendments introduced by the Securities Regulations Code (SRC) of Likewise, it has been held that the relief of dissolution will be awarded
2000, or RA 8799, which transferred the jurisdiction of the SEC under only where no other adequate remedy is available and it will not be
Sec. 5 of PD 902-A to the regional trial courts as designated by the SC allowed where the rights of the stockholders can be, or are, protected
(Sec. 5.2, RA 8799). The jurisdiction of the courts and the SEC over in some other way.
revocation proceedings seems to be concurrent under the present set
up since Sec. 5 of RA 8799, particularly par. (m) thereof, provides that GOVERNMENT VS. PHILIPPINE SUGAR ESTATES CO. 38 PHIL. 15,
the SEC has the power to “suspend, or revoke, after proper notice and APRIL 02, 1918
hearing the franchise and certificate of registration of corporations, FACTS: Defendant corporation by its charter is authorized among
partnership or associations, upon any ground provided by law”. This, others:
despite the transfer of its jurisdiction under the SRC. (j) To buy shares of the Compañia de Navegacion, Ferrocarriles,
Diques, y Almacenes de Depositos, and, in this manner or
GROUNDS FOR INVOLUNTARY DISSOLUTION otherwise, to engage in any mercantile or industrial enterprise.
(1) Verified complaint under Section 138 (k) With no other restrictions than those provided by law, place funds
(2) Under the powers of the SEC under SEC Reorganization Act of the corporation in hypothecary or pignorative loans, in public
(Presidential Decree No. 902-A): (F-S-R-C-F-F) securities of the United States, in stocks or shares issued by firms,
(a) Fraud in procuring its certificate of registration corporations, or companies that are legally organized and
(b) Serious misrepresentation as to what the corporation can do operated, and in rural and urban property. It may also contract and
or is doing to the great prejudice of or damage to the general guarantee all kinds of obligations, in conformity with existing laws
public;
(c) Refusal to comply or defiance of any lawful order of the These powers are necessarily limited by Sec. 75 of the Act of Congress
Commission restraining commission of acts which would of July 1, 1902, and by the Section 13 Act of 1459, the latter being a
amount to a grave violation of its franchise; reproduction of the former, which is as follows:
(d) Continuous inoperation for a period of at least five (5) years;
(e) Failure to file by-laws within the required period That no corporation shall be authorized to conduct the business of
(f) Failure to file required reports in appropriate forms as buying and selling real estate or be permitted to hold or own real estate
determined by the Commission within the prescribed period. except such as may be reasonably necessary to enable it to carry out the
(3) Quo warranto proceedings purposes for which it is created ...

OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE:

(1) Violation of any provision of the Code under section 158;
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Corporations, however, may loan funds upon real estate, security, and ordinarily the wrong or evil must be one remediable in no other form of
purchase real estate when necessary for the collection of loans, but they judicial proceeding.
shall dispose of real estate so obtained within five years after receiving
the title... Courts always proceed with great caution in declaring a forfeiture of
franchises, and require the prosecutor seeking the forfeiture to bring the
The defendant corporation entered into a contract with The Tayabas case clearly within the rules of law entitling him to exact so severe a
Land Company (TLC) where PSEC invested P400,000 in the TLC and that penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39;
“All lands bought or which may be bought with the credit, which The State vs. Portland Natural Gas Co., 153, Ind., 483.)
Philippine Sugar brings to The Tayabas Land Company and which lie
within and without the railway line from Pagbilao to Lopez, shall be held While it is true that the courts are given a wide discretion in ordering the
as security for such credit, at their respective cost price, until their dissolution of corporations for violations of its franchises, etc., yet
alienation, except the part thereof which pertains to D. Mariano Lim in nevertheless, when such abuses and violations constitute or threaten a
The Tayabas Land Company” and that if TLC is to sell the land and its substantial injury to the public or such as to amount to a violation of the
improvements at a price lower than P0.50 per square meter TLC is to fundamental conditions of the contract (charter) by which the franchises
obtain the consent of PSEC first. were granted and thus defeat the purpose of the grant, then the power
of the courts should be exercised for the protection of the people.
An action for quo warranto was brought by the Attorney General for and
in behalf of the Government of the Philippine Islands for the purpose of Under the law the people of the Philippine Islands have guaranteed the
having the charter of the defendant corporation PSEC declared forfeited payment of the interest upon cost of the construction of the railroad
for engaging in the “buying and selling of real estate” along the right of which occupied or occupies at least some of the lands purchased by the
way of Manila Railroad Company with the view of reselling the same to defendant. Every additional dollar of increase in the price of the land
Manila Railroad for a profit; that it had continuously offended against purchased by the railroad company added that much to the costs of
the laws of the Philippine Islands and had misused its corporate construction and thereby increased the burden imposed upon the
authority, franchise and privileges and had assumed privileges and people. The very and sole purpose of the intervention of the defendants
franchises not granted. in the purchase of the land from the original owners was for the purpose
of selling the same to the Railroad Company at profit — at an increased
ISSUE: WON defendant corporation should be dissolved. price, thereby directly increasing the burden of the people by way of
additional taxation. The purpose of the intervention of the defendant in
HELD: NO. Section 212 of Act No. 190 provides a judgment which may the transactions in question, was to enrich itself at the expense of the
be rendered in said case: taxpayers of the Philippine Islands, who had, by a franchise granted,
permitted the defendant to exist and do business as a corporation. The
When in any such action, it is found and adjudged that the corporation defendant was not willing to allow the Railroad Company to purchase
has, by any act done or omitted surrendered, or forfeited its corporate the land of the original owners. Its intervention with The Tayabas Land
rights, privileges, and franchise, or has not used the same during the Company was to obtain an increase in the price of the land in a resale
term of five years, judgment shall be entered that it be ousted and of the same to the railroad company. The conduct of the defendant in
excluded therefrom and that it be dissolved; but when it is found and the premises merits the severest condemnation of the law.
adjudged that a corporation has offended in any matter or manner
which does not by law work as a surrender or forfeiture, or has misused The judgment of the lower court should be modified. It is hereby
a franchise or exercised a power not conferred by law, but not of such a ordered and decreed that the franchise heretofore granted to the
character as to work a surrender or forfeiture of its franchise, judgment defendant by which it was permitted to exist and do business as a
shall be rendered that it be ousted from the continuance of such offense corporation in the Philippine Islands, be withdrawn and annulled and
or the exercise of such power. that it be disallowed to do and to continue doing business in the
Philippine Islands, unless it shall within a period of six months after final
It will be seen that said Section (212) gives the court a wide discretion in decision, liquidate, dissolve and separate absolutely in every respect
its judgment in depriving corporations of their franchise. High, in his and in all of its relations, complained of in the petition, with The Tayabas
work on Extraordinary Legal Remedies, says at page 606: Land Company, without any findings to costs.

It is to be observed in the outset that the courts proceed with extreme GOVERNMENT OF THE PHILIPPINE ISLANDS VS. EL HOGAR FILIPINO
caution in the proceeding which have for their object the forfeiture of 50 PHIL. 399, JULY 13, 1927
corporate franchises, and a forfeiture will not be allowed, except under FACTS: The Attorney General of the Government of the Philippine
express limitation, or for a plain abuse of power by which the Islands instituted the present quo warranto for the purpose of depriving
corporation fails to fulfill the design and purpose of its organization. defendant corporation of its franchise upon 17 distinct causes of action,
the first of which is:
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Plaintiff “alleged illegal holding by the respondent of the title to real
Co. (3 L.R.A. 510) the court said (p. 518): property for a period in excess of five years after the property had been
bought in by the respondent at one of its own foreclosure sales. The
The scope of the remedy furnished by its (quo warranto) is to forfeit the provision of law relevant to the matter is found in section 75 of Act of
franchises of a corporation for misuser or nonuser. It is therefore Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the
necessary in order to secure a judicial forfeiture of respondent's charter Corporation Law.) In both of these provisions it is in substance declared
to show a misuser of its franchises justifying such a forfeiture. And as that while corporations may loan funds upon real estate security and
already remarked the object being to protect the public, and not to purchase real estate when necessary for the collection of loans, they
redress private grievances, the misuser must be such as to work or shall dispose of real estate so obtained within five years after receiving
threaten a substantial injury to the public, or such as to amount to a the title”
violation of the fundamental condition of the contract by which the
franchise was granted and thus defeat the purpose of the grant; and

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ISSUE No. 1: WON the corporation should be dissolved on the first the buying and holding or real property for speculative purposes in
cause of action. contravention of its charter and contrary to the express provisions of law.
Moreover, in that case the offending corporation was found to be still
HELD: NO. It is evident that the strict letter of the law was violated by interested in the properties so purchased for speculative at the time the
the respondent; but it is equally obvious that its conduct has not been action was brought. Nevertheless, instead of making an absolute and
characterized by obduracy or pertinacity in contempt of the law. unconditional order for the dissolution of the corporation, the judgment
Moreover, several facts connected with the incident tend to mitigate the of ouster was made conditional upon the failure of the corporation to
offense. discontinue its unlawful conduct within six months after final decision. In
the case before us the respondent appears to have rid itself of the San
It has been held by this court that a purchaser of land registered under Clemente property many months prior to the institution of this action. It
the Torrens system cannot acquire the status of an innocent purchaser is evident from this that the dissolution of the respondent would not be
for value unless his vendor is able to place in his hands an owner's an appropriate remedy in this case. We do not of course undertake to
duplicate showing the title of such land to be in the vendor (Director of say that a corporation might not be dissolved for offenses of this nature
Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 26615). perpetrated in the past, especially if its conduct had exhibited a willful
It results that prior to May 7, 1921, El Hogar Filipino was not really in a obduracy and contempt of law.
position to pass an indefeasible title to any purchaser. In this connection
it will be noted that section 75 of the Act of Congress of July 1, 1902, Third cause of action. — Under the third cause of action the respondent
and the similar provision in section 13 of the Corporation Law, allow the is charged with engaging in activities foreign to the purposes for which
corporation "five years after receiving the title," within which to dispose the corporation was created and not reasonably necessary to its
of the property. A fair interpretation of these provisions would seem to legitimate ends. The specifications under this cause of action relate to
indicate that the date of the receiving of the title in this case was the three different sorts of activities. The first consist of the administration
date when the respondent received the owner's certificate, or May 7, of the offices in the El Hogar building not used by the respondent itself
1921, for it was only after that date that the respondent had an and the renting of such offices to the public.
unequivocal and unquestionable power to pass a complete title. The
failure of the respondent to receive the certificate sooner was not due The second specification under the third cause of action has reference
in any wise to its fault, but to unexplained delay on the part of the to the administration and management of properties belonging to
register of deeds. For this delay the respondent cannot be held delinquent shareholders of the association
accountable.
The third specification under this cause of action relates to certain
The question then arises whether the failure of the respondent to get rid activities which are described in the following paragraphs contained in
of the San Clemente property within five years after it first acquired the the agreed statements of facts:
deed thereto, even supposing the five-year period to be properly
counted from that date, is such a violation of law as should work a El Hogar Filipino has undertaken the management of some parcels of
forfeiture of its franchise and require a judgment to be entered for its improved real estate situated in Manila not under mortgage to it, but
dissolution in this action of quo warranto. owned by shareholders, and has held itself out by advertisement as
prepared to do so. For the services so rendered in the management of
Upon this point we do not hesitate to say that in our opinion the such properties El Hogar Filipino receives compensation in the form of
corporation has not been shown to have offended against the law in a commissions upon the gross receipts from such properties at rates
manner that should entail a forfeiture of its charter. Certainly, no court varying from two and one-half per centum to five per centum of the sums
with any discretion to use in the matter would visit upon the respondent so collected, according to the location of the property and the effort
and its thousands of shareholders the extreme penalty of the law as a involved in its management.
consequence of the delinquency here shown to have been committed.
The administration of property in the manner described is more befitting
The law applicable to the case is in our opinion found in section 212 of to the business of a real estate agent or trust company than to the
the Code of Civil Procedure, as applied by this court in Government of business of a building and loan association.
the Philippine Islands vs. Philippine Sugar Estates Development Co. (38
Phil., 15). This section (212), in prescribing the judgment to be rendered ISSUE No. 2: WON the defendant should be dissolved on the above
against a corporation in an action of quo warranto, among other things ground.
says:
HELD: NO. It is a general rule of law that corporations possess only such
...When it is found and adjudged that a corporation has offended in any express powers. The management and administration of the property of
matter or manner which does not by law work as a surrender or the shareholders of the corporation is not expressly authorized by law,
forfeiture, or has misused a franchise or exercised a power not conferred and we are unable to see that, upon any fair construction of the law,
by law, but not of such a character as to work a surrender or forfeiture these activities are necessary to the exercise of any of the granted
of its franchise, judgment shall be rendered that it be outset from the powers. The corporation, upon the point now under the criticism, has
continuance of such offense or the exercise of such power. clearly extended itself beyond the legitimate range of its powers. But it
does not result that the dissolution of the corporation is in order, and it
This provision clearly shows that the court has a discretion with respect will merely be enjoined from further activities of this sort.
to the infliction of capital punishment upon corporation and that there
are certain misdemeanors and misuses of franchises which should not Fourth cause of action. — It appears that among the by-laws of the
be recognized as requiring their dissolution. association there is an article (No. 10) which reads as follows:

Government of the Philippine Islands vs. Philippine Sugar Estates The board of directors of the association, by the vote of an absolute
Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the majority of its members, is empowered to cancel shares and to return to
offending corporation had been largely (though indirectly) engaged in the owner thereof the balance resulting from the liquidation thereof

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whenever, by reason of their conduct, or for any other motive, the defendant corporation is, accordingly, ordered dissolved.
continuation as members of the owners of such shares is not desirable.
REPUBLIC VS. BISAYA LAND TRANSPORTATION CO., INC. 81 SCRA 9,
ISSUE No. 3: WON if the above by-law is invalid, the corporation may JANUARY 06, 1978
be dissolved. FACTS: The Solicitor General initiated this quo warranto proceedings
against respondent corporation on the following nine causes of action:
HELD: NO. This by-law is of course a patent nullity, since it is in direct (1) To conceal its illegal transaction, respondent corporation falsely
conflict with the latter part of section 187 of the Corporation Law, which reconstituted its articles of incorporation in July 1948 by adding
expressly declares that the board of directors shall not have the power new cattle ranch, agriculture, and general merchandise;
to force the surrender and withdrawal of unmatured stock except in case (2) On May 25, 1948, respondent corporation through its Board of
of liquidation of the corporation or of forfeiture of the stock for Directors, adopted a resolution authorizing it to acquire 1,024
delinquency. It is agreed that this provision of the by-laws has never hectares of public land in Zamboanga and 10,000 hectares of
been enforced, and in fact no attempt has ever been made by the board timber concession in Mindanao in violation of Section 6, Act No.
of directors to make use of the power therein conferred. 143);
(3) In May, 1949, respondent office constituting themselves as Board
It is supposed, in the fourth cause of action, that the existence of this of Directors of respondent corporation, passed a resolution
article among the by-laws of the association is a misdemeanor on the authorizing the corporation to lease a pasture land of 2,000
part of the respondent which justifies its dissolution. In this view we are hectares of cattle ranch on a public land in Bayawan, Negros
unable to concur. The obnoxious by-law, as it stands, is a mere nullity, Occidental;
and could not be enforced even if the directors were to attempt to do (4) From August 1946 to the end of 1952, respondent corporation
so. There is no provision of law making it a misdemeanor to incorporate operated a general merchandise store, a business which is neither
an invalid provision in the by-laws of a corporation; and if there were for, nor incidental to, the accomplishment of its principal business
such, the hazards incident to corporate effort would certainly be largely for which it was organized, i.e., the operation of land and water
increased. There is no merit in this cause of action. transportation;
(5) Respondent corporation snowed Mariano Cuenco and Manuel
REPUBLIC VS. SECURITY CREDIT AND ACCEPTANCE CORP., ET AL. Cuenco to act as president in 1945 to 1948 and 1953 to 1954,
19 SCRA 58, JANUARY 23, 1967 respectively, when at that time, neither of them owned a single
FACTS: The AOI of defendant corporation were registered with the SEC stock;
on March 27, 1961. Based on the opinion of legal counsel of the Central (6) In violation of its charter and articles of incorporation, as well as
Bank of the Philippines, that the defendant corporation is a banking applicable statutes concerning its operation, it engaged in mining
institution, the Monetary Board promulgated Resolution No. 1095, by organizing the Jose P. Velez Coal Mines, and allowing said
declaring that the corporation is performing banking operations without corporation to use the facilities and assets of respondent
having first complied with the provisions of Sec. 2 and 6 of RA No. 337. corporation;
Despite such resolution, the company still continued with its operations (7) It imported and sold at black market prices to third persons truck
and was able to establish 74 branches all over the Philippines and spare Parts, the of which were appropriated by respondent
induced the public to open 59,643 savings deposit accounts. directors;
(8) It paid its laborers and employees’ wages below the minimum
The Solicitor General initiated this quo warranto proceeding to dissolve wage law to the great prejudice of its labor force, and in violation
said company. of the laws of the state, manipulating its books and records so as
to make it appear that its laborers and employees were and have
ISSUE: WON the company should be dissolved been paid their salaries and wages in accordance with the minimum
wage law;
HELD: YES. Although, admittedly, defendant corporation has not
secured the requisite authority to engage in banking, defendants deny It deliberately failed to maintain accurate and faithful stock and transfer
that its transactions partake of the nature of banking operations. It is books since 1945 up to the filing of the petition, enabling it to defraud
conceded, however, that, in consequence of a propaganda campaign the state, mislead the general public, its creditors, investors and its
therefor, a total of 59,463 savings account deposits have been made by stockholders by not accurately and faithfully making
the public with the corporation and its 74 branches, with an aggregate (a) an adequate, accurate and complete record of dividend
deposit of P1,689,136.74, which has been lent out to such persons as distribution, and
the corporation deemed suitable therefor. It is clear that these (b) an adequate, accurate and complete record of transfers of its
transactions partake of the nature of banking, as the term is used in stocks
Section 2 of the General Banking Act.
Later on, the Solicitor General filed a motion for the dismissal of the
Accordingly, defendant corporation has violated the law by engaging in complaint which was granted by the lower court.
banking without securing the administrative authority required in
Republic Act No. 337. ISSUE: WON the lower court is correct in not dissolving the corporation.

That the illegal transactions thus undertaken by defendant corporation HELD: YES. After a very careful and deliberate consideration of the
warrant its dissolution is apparent from the fact that the foregoing evidence adduced by petitioner, the lower court came to the conclusion
misuser of the corporate funds and franchise affects the essence of its that the same did not really warrant a quo warranto by the State that
business, that it is willful and has been repeated 59,463 times, and that could truly justify to decapitate corporate life, and that the corporate
its continuance inflicts injury upon the public, owing to the number of acts or missions complained of had not resulted in substantial injury to
persons affected thereby. the public, nor were they wilful and clearly obdurate. The court found
that the several acts of misuse and misapplication of the funds and/or
Wherefore, the writ prayed for should be, as it is hereby granted and assets of the Bisaya Land Transportation Co., Inc. were committed new
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particularly by the respondent Dr. Manuel Cuenco with the cooperation to obtain redress and protection of their rights within the corporation,
of Jose P. Velez, for the commission of which they may be personally must not and should not be left without redress and remedy. This was
held liable. There appears to be no reason for us to disregard the what probably prompted this Court to state in the case of Hall, et al. vs.
findings of the trial court, which, applying well settled doctrines, ought Judge Piccio, * G.R. No. L-2598 (47 Off. Gaz. No. 12 Supp., p. 200) that
to be given due weight and credit (De la Rama vs. Ma-ao Sugar Central, even the existence of a de jure corporation may be terminated in a
L-17504 & L-17506, Feb. 28, 1969). Besides, the court a quo found that private suit for its dissolution by the stockholders without the
the controversy between the parties was more personal than anything intervention of the State.
else and did not at all affect public interest.
We repeat that although as a rule, minority stockholders of a corporation
The Solicitor General himself asserts that the only purpose of his ration may not ask for its dissolution in a private suit, and that such action
for the of this quo warranto is to take the State out of an unnecessary should be brought by the Government through its legal officer in a quo
court litigation, so that the dismissal of the case would result in the warranto case, at their instance and request, there might be exceptional
disposition solely of the quo warranto by and between petitioner cases wherein the intervention of the State, for one reason or another,
Republic of the Philippines and the respondents named therein. Other cannot be obtained, as when the State is not interested because the
interested parties who might feel aggrieved, therefore, would not be complaint is strictly a matter between the stockholders and does not
without their remedies since they can still maintain whatever claims they involve, in the opinion of the legal officer of the Government, any of the
may have against each other. It has been held that relief by dissolution acts or omissions warranting quo warranto proceedings, in which
will be awarded only where no other adequate remedy is available, and minority stockholders are entitled to have such dissolution. When such
is not available where the rights of the stockholders can be, or are, action or private suit is brought by them, the trial court had jurisdiction
protected in some other way and may or may not grant the prayer, depending upon the facts and
circumstances attending it. The trial court's decision is of course subject
ACCORDINGLY, without prejudice to the rights of the private parties to review by the appellate tribunal. Having such jurisdiction, the
herein to take proper steps to enforce whatever causes of action they appointment of a receiver pendente lite is left to the sound discretion of
may have against each other, the order of the lower court embodied in the trial court. As was said in the case of Angeles vs. Santos (64 Phil.,
its "Resolution" dated April 3, 1968, granting the Solicitor General's 697), the action having been properly brought and the trial court having
motion to dismiss the quo warranto proceedings is hereby upheld. entertained the same, it was within the power of said court upon proper
showing to appoint a receiver pendente lite for the corporation; that
FINANCING CORPORATION OF THE PHIL. AND ARANETA VS. although the appointment of a receiver upon application of the minority
TEODORO, ETC. AND VDA. DE PAALILIO 93 PHIL., 678, AUGUST 31, stockholders is a power to be exercised with great caution, nevertheless,
1953 it should be exercised necessary in order not to entirely ignore and
FACTS: In civil case No. 1924 of the Court of First Instance of Negros disregard the rights of said minority stockholders, especially when said
Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. minority stockholders are unable to obtain redress and protection of
de Panlilio and Efigenia Vda. de Paredes, in their own behalf and in their rights within the corporation itself.
behalf of the other minority stockholders of the Financing Corporation
of the Philippines, filed a complaint against the said corporation and J. PRESENT STATE OF LAW: any stockholder or member of a corporation
Amado Araneta, its president and general manager, claiming among can institute a dissolution proceeding against his own corporation
other things alleged gross mismanagement and fraudulent conduct of before the proper forum. This is clear from the provisions of PD 902-A,
the corporate affairs of the defendant corporation by J. Amado Araneta, as amended, when it provides that the SEC, now the Special
and asking that the corporation be dissolved; that J. Amado Araneta be Commercial Courts, shall hear and decide cases involving “intra-
declared personally accountable for the amounts of the unauthorized corporate dispute or partnership relations between and among
and fraudulent disbursements and disposition of assets made by him, stockholders, members or associates; between any or all of them and
and that he be required to account for said assets, and that pending trial the corporation, partnership or association of which they are
and disposition of the case on its merits a receiver be appointed to take stockholders, members or associates, respectively; and between such
possession of the books, records and assets of the defendant corporations, partnerships or association and the State insofar as it
corporation preparatory to its dissolution and liquidation and concerns their individual franchise or right to exist as such entity” (Sec.
distribution of the assets. Over the strong objection of the defendants, 5(b) as further amended by Sec. 5.2 of RA 8799). Of note, however, is
the trial court granted the petition for the appointment of a receiver and that under Sec. 5(m) of RA 8799, the SEC appears to have concurrent
designated Mr. Alfredo Yulo as such receiver with a bond of P50,000. jurisdiction to “suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
ISSUE: The main contention of the petitioners in opposing the associations upon any of the grounds provided by law.
appointment of a receiver in this case is that said appointment is merely
an auxiliary remedy; that the principal remedy sought by the It has thus been held as early as 1950 that “even the existence of a de
respondents in the action in Negros Occidental was the dissolution of jure corporation may be determined in a private suit for its dissolution
the Financing Corporation of the Philippines; that according to the law between stockholders, without the intervention of the state” (Hall vs.
a suit for the dissolution of a corporation can be brought and maintained Piccio). Likewise, in a close corporation, a petition for the dissolution of
only by the State through its legal counsel, and that respondents, much the corporation may be instituted by any one individual shareholder on
less the minority stockholders of said corporation, have no right or the ground, even by mere dishonesty.
personality to maintain the action for dissolution, and that inasmuch as
said action cannot be maintained legally by the respondents, then the B. Effects of Dissolution
auxiliary remedy for the appointment of a receiver has no basis. Dissolution terminates its power to enter into contracts or to continue
the business as a going concern.
HELD: True it is that the general rule is that the minority stockholders of
a corporation cannot sue and demand its dissolution. However, there The SC held that a corporation, whose corporate life expired, cannot
are cases that hold that even minority stockholders may ask for lawfully pursue the business for which it was organized. It cannot apply
dissolution, this, under the theory that such minority members, if unable for a new certificate or a secondary franchise for it is incapable of
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receiving a grant (Buenaflor vs. Camarines Sur Industry Corp). Neither Corporation Law, Sec. 77, after November 1953, it could not lawfully
can it enforce a contract executed prior to its dissolution for the purpose continue the business for which it had been established (operate ice
of continuing the business of its organization (Cebu Ports vs. State plant, sell ice, etc). After November 1953, it could only continue to exist
Marine). for three years for the purpose of prosecuting and defending suits by or
against it, and of enabling it gradually to settle and close its affairs, to
Debts due to or by a corporation are not extinguished. It has thus been dispose and convey its property and to divide its capital stock. It could
held that the termination of the life of a juridical entity does not, by itself, not, without violating the law, continue to sell ice. And yet, the
imply the diminution or extinction of rights demandable against such Commission awarded the certificate on the basis of such serve and
juridical entity (Gonzales vs. Sugar Regulatory Adm.) distribution of ice — applying the "prior operator" rule. In other words,
the new Camarines Corporation is rewarded, precisely because the old
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms, corporation, its predecessor, had violated the law during that period
terminate where the corporation cease to exist. But unless the lease so (1953-1957). We cannot and should not countenance such anomalous
provides, the rights and obligations thereunder are not extinguished by result.
the corporation’s dissolution since leases affect property rights and
survives the death of the parties. The stockholders succeed to the rights On the other hand, when the old Camarines Corporation docketed its
and liabilities of the dissolved corporation in an unexpired leasehold application October 1, 1957, it had no juridical personality, it had ceased
state which may be enforced by or against the receiver or liquidating to exist as a corporation and could not sue nor apply for certificate, for
trustee. it was incapable of receiving a grant. It was not even a corporation de
facto. And then, there is no application subscribed by the new
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not Camarines Corporation. Far from being mere technicality, these point
hold true in cases of contracts for personal services which are deemed support a conclusion which appears to be just and equitable, not only
terminated by the dissolution of the corporation. In such cases, there is for the reasons already indicated, but also to compensate Buenaflor's
found an “implied condition” that the contract shall terminate in such diligence and courage in exposing the irregular practice of a "ghost"
event. corporation foisting its services upon the unsuspecting public of Sabang
and neighboring territory — enjoying a franchise without paying,
PERIOD OF LIQUIDATION: Despite its dissolution, a corporation perhaps, the corporate income tax and other burdens attached to
nonetheless, continues to be a body corporate for a period of 3 years corporate existence.
for purposes of liquidation and winding up its affairs (Sec. 122). Upon
expiration of the 3-year period to wind up its affairs, the juridical Remembering the Camarines Corporation's automatic cessation in
personality of the corporation ceases for all intent and purposes, and as November 1956 (three years after November 1953) we must decline to
a general rule, it can no longer sue and be sued (see Gelano vs. CA). regard the new Camarines Corporation (formed October 30, 1957) as a
continuation of the old. At most, it is the transferee of the properties of
BUENAFLOR VS. CAMARINES SUR INDUSTRY CORP. 108 PHIL. 472, the old corporation (or more properly, the assets of the stockholders)
MAY 30, 1960 plus the certificate of public convenience to operate the ice plant in
FACTS: In August and September 1957, Jaime Buenaflor filed Naga and Magarao. And yet, as stated, the new corporation has not
applications before the Public Service Commission for the construction filed any application for certificate of public convenience in Sabang, and
of a 5-ton ice plant and to establish a cold storage and refrigeration has not published such application
service of about 6,000 cubic feet capacity in Sabang, respectively. After
being served a copy of the application of petitioner, respondent Wherefore, revoking the appealed decision in so far as it awarded the
corporation also filed the same applications on October 1957. certificate to said Corporation, we hereby approve Buenaflor's
application for five tons, instead of one ton, subject to the usual
Counsel for Buenaflor presented a motion to dismiss on the ground that conditions imposed by the Public Service Commission on ice plant
the corporate life of respondent already expired in November 1953. establishments.
Respondent Corporation then registered on October 1957, a new AOI
and transferred all assets of the old corporation together with existing CEBU PORT LABOR UNION VS. STATES MARINE CO., ET AL. 101 PHIL.
certificate of public convenience to the new corporation. 468, MAY 20, 1957
FACTS: On Sept. 12, 1953, petitioner filed a petition for “recognition of
The PSC provisionally approved the transfer of the assets, as well as the stevedoring services and injunction” against respondents claiming that
certificate of public convenience to the new corporation. it was awarded a contract for the exclusive right of loading and
unloading of the cargoes of the vessel MV Bisayas formerly owned by
On November 1957, the new corporation answered the motion to Elizalde & CO., though at the time of the filing of the petition it was
dismiss by alleging its recent incorporation. owned and operated by the States Marine Corporation.

ISSUE: WON Buenaflor’s application should be approved. Respondent corporation filed a motion to dismiss on the ground that it
has no legal capacity to sue or be sued, it having been dissolved on Oct.
HELD: YES. It is admitted — and the Commission found – that the needs 17, 1952 and therefore has no personality to enter or refuse to enter into
of Sabang Barrio will be conveniently served with the establishment of any contract, much less of threatening the petitioner as alleged in the
a 5-ton ice plant. But it elected to deny Buenaflor's application, even as petition.
it awarded the privilege to the new Camarines Corporation on the
ground that it (the old corporation) had been serving ice in Sabang up Petitioner relied on Sec. 77 to include said corporation as party
to the time of Buenaflor's application, and was, consequently, the respondent despite the fact that counsel for the other respondents
pioneer operator there. called already the attention of the Court that the State Marine
Corporation was non-existing and suggested that proper substitution or
The fact, however, is that since 1953, the old Corporation had been amendment of the petition be made.
illegally plying its business of selling ice in Sabang because, under the
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ISSUE: WON State Marine Corp can be made a party respondent We believe, that Section 13 of Executive Order No. 18 is not to be
interpreted as authorizing respondent SRA to disable Philsucom from
HELD: Section 77 (now Section 76, RCC) of the Corporation Law reads paying Philsucom's demandable obligations by simply taking over
as follows: Philsucom's assets and immunizing them from legitimate claims against
SEC. 77. Every corporation whose charter expires by its own limitation Philsucom. The right of those who have previously contracted with, or
or is annulled by forfeiture or otherwise, or whose corporate existence otherwise acquired lawful claims against, Philsucom, to have the assets
for other purposes is terminated in any other manner, shall nevertheless of Philsucom applied to the satisfaction of those claims, is a substantive
be continued as a body corporate for three years after the time when it right and not merely a procedural remedy. Section 13 cannot be read as
would have been so dissolved, for the purpose of prosecuting and permitting the SRA to destroy that substantive right. We think that such
defending suits by or against it and of enabling it gradually to settle and an interpretation would result in Section 13 of Executive Order No. 18
close its affairs, to dispose of and convey its property and to divide its colliding with the non- impairment of contracts clause of the
capital stock, but not for the purpose of continuing the business for Constitution insofar as contractual claims are concerned, and with the
which it was established. due process clause insofar as the non- contractual claims are concerned.
To avoid such a result, we believe and so hold that should the assets of
Even a cursory reading of the above-quoted provision would convey the Philsucom remaining in Philsucom at the time of its abolition not be
idea clearly manifested in the limitation "but not for the purpose of adequate to pay for all lawful claims against Philsucom, respondent SRA
continuing the business for which it was established", that the 3-year must be held liable for such claims against Philsucom to the extent of
period allowed by the law is only for the purpose of winding up its affairs. the fair value of assets actually taken over by the SRA from Philsucom, if
Petitioner-appellee prayed that it be declared to have the right to any. To this extent, claimants against Philsucom do have a right to follow
stevedoring work in question "thereby respecting the contract entered Philsucom's assets in the hands of SRA or any other agency for that
into by petitioner and the Elizalde & Co. and subsequently enforced and matter.
continued by the respondent States Marine Corporation". It appearing
that the said States Marine Corporation was already dissolved at the We conclude that dismissal of petitioners' complaint against respondent
time said petition was filed, and the vessel subject of the agreement SRA was clearly premature. Petitioners have a cause of action against
having changed hands, it cannot be compelled now to respect such SRA to the extent that they are able to prove lawful claims against
agreement specially considering the fact that it cannot even be made a Philsucom, which claims Philsucom is or may be unable to satisfy, and to
party to this suit (See. 1, Rule 3, of the Rules of Court. the extent respondent SRA did, or does, in fact take over all or some of
the assets of Philsucom. At the very least, the motion to dismiss was not
GONZALES VS. SUGAR REGULATORY ADMINISTRATION 174 SCRA shown to rest upon indubitable grounds and should, therefore, have
377, JUNE 28, 1989 been denied not only in respect of Philsucom but also in respect of
FACTS: Petitioner spouses file a complaint seeking cancellation of a respondent SRA.
mortgage and recovery of a sum of money for the overpayment they
made, on a loan secured from RP Bank, by virtue of an alleged deduction C. Liquidation and Winding Up
made by Philippine Sugar Commission (Philsucom) of the proceeds of SEC. 139. Corporate Liquidation. – Except for banks, which shall be
sugar exports. Petitioners filed an amended complaint which assailed covered by the applicable provisions of Republic Act No. 7653,
the constitutionality of EO No. 18 abolishing Philsucom which in effect otherwise known as the “New Central Bank Act”, as amended, and
destroyed petitioners’ right to recover from PSC. They assert that the Republic Act No. 3591, otherwise known as the Philippine Deposit
transfer from Philsucom to SRA are unconstitutional and ineffective. On Insurance Corporation Charter, as amended, every corporation whose
August 2, 1988, the trial court granted the motion to dismiss insofar as charter expires pursuant to its articles of incorporation, is annulled by
SRA is concerned while denying that same motion insofar as RP Bank forfeiture, or whose corporate existence is terminated in any other
and Philsucom were concerned. manner, shall nevertheless remain as a body corporate for three (3) years
after the effective date of dissolution, for the purpose of prosecuting
ISSUE: WON SRA could be made a party-respondent liable to the claim and defending suits by or against it and enabling it to settle and close
of the petitioners. its affairs, dispose of and convey its property, and distribute its assets,
but not for the purpose of continuing the business for which it was
HELD: YES. The termination of the life of a juridical entity does not by established.
itself imply the diminution or extinction of rights demandable against
such juridical entity. At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
Executive Order No. 18, promulgated on 28 May 1986, abolished the stockholders, members, creditors and other persons in interest. After
Philsucom, created the SRA and authorized the transfer of assets from any such conveyance by the corporation of its property in trust for the
Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part: benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal
Assets and records that, as determined by the Sugar Regulatory interest vests in the trustees, and the beneficial interest in the
Administration, are required in its operation are hereby transferred to stockholders, members, creditors or other persons-in-interest.
the Sugar Regulatory Administration.
Except as otherwise provided for in Sections 93 and 94 of this Code,
Although the Philsucom is hereby abolished, it shall nevertheless upon the winding up of corporate affairs, any asset distributable to any
continue as a juridical entity for three years after the time when it would creditor or stockholder or member who is unknown or cannot be found
have been so abolished, for the purpose of prosecuting and defending shall be escheated in favor of the national government.
suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not Except by decrease of capital stock and as otherwise allowed by this
for the purpose of continuing the functions for which it was established, Code, no corporation shall distribute any of its assets or property except
under the supervision of the Sugar Regulatory Administration. upon lawful dissolution and after payment of all its debts and liabilities.

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During the course of liquidation and winding up, the assets will be
collected and realized, the rights and claims of creditors will be settled NATIONAL ABACA & OTHER FIBERS CORP. VS. PORE 2 SCRA 989,
or provided for and a distribution of the remaining assets to the AUGUST 16, 1961
shareholders who are entitled thereto. Therefore, liquidation or winding FACTS: On November 3, 1953, plaintiff filed a complaint before the
up of corporate affairs therefore means the collection of all corporate Municipal Court of Tacloban, Leyte, against defendant for the recovery
assets, the payments of all its debts and settlement of its obligations and of advances the latter failed to account for, amounting to P1,213.34. The
the ultimate distribution of corporate assets, if any of it remains, to all court rendered a decision holding that defendant is liable for P272.49.
stockholders in accordance with their proportionate stockholdings in the
corporation or in accordance with their respective contracts of Said court denying reconsideration, plaintiff appealed before the CFI to
subscription. which a motion to dismiss was filed by defendant on the ground that EO
No. 372 abolished plaintiff and thus it no longer had capacity to sue.
After dissolution, a body corporate continues to exist for three (3) years
for the purpose of liquidation and winding up of its affairs Plaintiff objected there to on the ground that the said EO granted
plaintiff to continue in existence for 3 years from Nov. 30, 1950, the
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS: effectivity date of the EO, for the purpose of prosecuting and defending
(1) BY THE CORPORATION ITSELF THROUGH THE BOD suits by or against it and of enabling the Board of Liquidators to
(a) This is the usual method or procedure of liquidating a gradually settle the its affairs and that the case was filed on Nov. 14,
corporation (China Banking Corp vs. Michelin) and although 1953, or before the expiration of the 3 year period.
there is no law authorizing it, neither is there anything that
prohibits the BOD from undertaking the same ISSUE: WON the action commenced within the 3-year period may be
(b) If this method is resorted to, the board will only have a period continued after the expiration of the said period.
of three (3) years to finish its task of liquidation
(c) Claims for or against the corporate entity not filed within the HELD: NO. The rule appears to be well settled that, in the absence of
period will become unenforceable as there exist no corporate statutory provision to the contrary, pending actions by or against a
entity against which they can be enforced. corporation are abated upon expiration of the period allowed by law for
(d) Actions pending for or against the corporation when the 3- the liquidation of its affairs.
year period expires are abated, since after the period, the
corporation ceases for all intents and purposes and is no It is generally held, that where a statute continues the existence of a
longer capable of suing or being sued (National Abaca & corporation for a certain period after its dissolution for the purpose of
Other Fibers Co. vs. Pore) prosecuting and defending suits, etc., the corporation becomes defunct
upon the expiration of such period, at least in the absence of a provision
(2) BY A TRUSTEE APPOINTED BY THE CORPORATION to the contrary, so that no action can afterwards be brought by or
(a) The corporation may opt to convey all corporate assets to a against it, and must be dismissed. Actions pending by or against the
trustee who will take charge of liquidation corporation when the period allowed by the statute expires, ordinarily
(b) If this method is used, the three-year period limitation abate.
imposed by Section 139 will not apply provided the
designation of the trustee is made within that period. ... This time limit does not apply unless the circumstances are such as to
(c) Thus, during the period of liquidation, but before the bring the corporation within the provision of the statute. However, the
completion thereof, a dissolved corporation is still liable for all wording of the statutes, in some jurisdictions authorize suits after the
its debts and liabilities in an action filed against it through its expiration of the time limit, where the statute provides that for the
trustee even if the case is filed beyond the 3-year period of purpose of any suit brought by or against the corporation shall continue
liquidation. beyond such period for a further named period after final judgment.
(Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892-893.).
(3) BY APPOINTMENT OF A RECEIVER
(a) A receiver may be appointed by the proper forum on petition Our Corporation Law contains no provision authorizing a corporation,
or motu proprio upon the dissolution of the corporation (Sec. after three (3) years from the expiration of its lifetime, to continue in its
135) corporate name actions instituted by it within said period of three (3)
(b) The appointment of a receiver is, however, permissive rather years. In fact, section 77 of said law provides that the corporation shall
than mandatory and the law tends to recognize that in cases "be continued as a body corporate for three (3) years after the time when
of voluntary dissolution there is no occasion for the it would have been . . . dissolved, for the purpose of prosecuting and
appointment of a receiver except under special circumstances defending suits by or against it . . .", so that, thereafter, it shall no longer
and upon proper showing (China Banking vs. Michelin) enjoy corporate existence for such purpose. For this reason, section 78
(c) If a receiver is appointed, the 3-year period fixed by law within of the same law authorizes the corporation, "at any time during said
which to complete the task of liquidation will not likewise three years . . . to convey all of its property to trustees for the benefit of
apply because the dissolved corporation is substituted by the members, stockholders, creditors and other interested", evidently for
receiver who may sue or be sued even after that period the purpose, among others, of enabling said trustees to prosecute and
(Sumera vs. Valencia). defend suits by or against the corporation begun before the expiration
(d) Thus, it has been held that when a corporation is dissolved of said period. Hence, commenting on said sections, Judge Fisher, in
and the liquidation of assets is placed in the hands of a his work entitled Philippines Law on Stock Corporations (1929 ed.), has
receiver or assignee, the 3 year period is not applicable and the following to say:
the assignee may institute all actions leading to the liquidation
of the corporation even after the expiration of three (3) years. It is to be noted that the time during which the corporation, through its
(e) Note however, that a receiver may be appointed by the court own officers, may conduct the liquidation of its assets and sue and be
even while the corporation is a going concern and does not sued as a corporation is limited to three years from the time the period
always imply dissolution of a corporation. of dissolution commences; but that there is no time limit within the
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trustees must complete a liquidation placed in their hands. It is provided Fletcher, in volume 8, page 9226, of his Encyclopedia of Private
only (Corp. Law, Sec. 78) that the conveyance to the trustees must be Corporations, says:
made within the three-year period. It may be found impossible to 6537. Effect of expiration of statutory extension of life. — In general. —
complete the work of liquidation within the three-year period or to The qualified existence after dissolution, as provided for by statute,
reduce disputed claims to judgment. The authorities are to the effect terminates at the expiration of the time fixed, or, no time is fixed, at the
that suits by or against a corporation abate when it ceased to be an expiration of a reasonable time. Where the extreme limit to which the
entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but statute has extended the life of a corporation after its dissolution has
trustees to whom the corporate assets have been conveyed pursuant to expired, it has no offices which can bind it by agreement, but only has
the authority of section 78 may sue and be sued as such in all matters statutory trustees. After the expiration of such time, it is generally held
connected with the liquidation. By the terms of the statute the effect of not only that the corporation cannot sue or be sued but that actions
the conveyance is to make the trustees the legal owners of the property pending at such time are abated. But a statute authorizing the
conveyed, subject to the beneficial interest therein of creditors and continuance of a corporation for three years to wind up its affairs, does
stockholders. (pp. 389-390; see also Sumera v. Valencia [67 Phil. 721, not preclude an action to wind up brought after the three years.
726-727).

Obviously, the complete loss of plaintiff's corporate existence after the In the light of the legal provisions and authorities cited, interpretative of
expiration of the period of three (3) years for the settlement of its affairs said laws, if the corporation carries out the liquidation of its assets
is what impelled the President to create a Board of Liquidators, to through its own officers and continues and defends the actions brought
continue the management of such matters as may then be pending. The by or against it, its existence shall terminate at the end of three years
first question must, therefore, be answered in the negative. from the time of dissolution; but if a receiver or assignee is appointed,
as has been done in the present case, with or without a transfer of its
Wherefore, actions commenced within the 3-year period of liquidation properties within three years, the legal interest passes to the assignee,
may be continued by the trustee despite the expiration of the said the beneficial interest remaining in the members, stockholders, creditors
period. and other interested persons; and said assignee may bring an action,
prosecute that which has already been commenced for the benefit of
SUMERA VS. VALENCIA. 67 PHIL. 721, MAY 03, 1939 the corporation, or defend the latter against any other action already
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary instituted or which may be instituted even outside of the period of three
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 years fixed for the offices of the corporation. For the foregoing
appointing Damaso Nicolas as assignee to take charge of liquidation. considerations, we are of the opinion and so hold that when a
Nicolas was substituted by herein appellant Sumera who filed a motion corporation is dissolved and the liquidation of its assets is placed in the
with the court asking defendant Valencia to deliver to him the P400.00 hands of a receiver or assignee, the period of three years prescribed by
funds of the corporation which was denied, reserving, however to said section 77 of Act No. 1459 known as the Corporation Law is not
assignee the right to bring the proper action. Accordingly, on June 5, applicable, and the assignee may institute all actions leading to the
1936, Sumera filed the present complaint for recovery of money. liquidation of the assets of the corporation even after the expiration of
three years.
The defendant interposed the defense that the right against him had
already prescribed which was found by the lower court to be tenable, Wherefore, the order appealed from is reversed and it is ordered that
the case not being filed within the 3 year period prescribed under Sec. the case be remanded to the court of origin to the end that it may decide
77 of Act No. 1459. the same on the merits, with costs against the appellee.

ISSUE: WON the 3-year period prescribed by the Corporation Law is BOARD OF LIQUIDATORS VS. KALAW 20 SCRA 987, AUGUST 14, 1967
applicable if the liquidation is placed on the hands of a receiver or FACTS: A suit was filed by the Board of Liquidators for the recovery of a
assignee. sum of money from National Coconut Corporation’s (NACOCO) general
manager and board chairman Maximo Kalaw and other defendants as
HELD: NO. Passing now to discuss the question raised by plaintiff and directors.The defendants pose that since the three-year period has
appellant in his sole assignment of alleged error, section 77 of Act No. elapsed since its abolition by virtue of EO 372, the Board of Liquidators
1459 provides that "Every corporation whose charter expires by its own may not now continue with, and prosecute, the present case to its
limitation or is annulled by forfeiture or otherwise, or whose corporate conclusion.
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the ISSUE: WON the Board of Liquidators has personality to proceed as
time when it would have been so dissolved, for the purpose of party- plaintiff in this case.
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs to dispose of and convey its HELD: YES. The executive order abolishing NACOCO and creating the
property and to divide its capital stock, but not for the purpose of Board of Liquidators should be examined in context. The proviso in
continuing the business for which it was established." And section 77 of Section 1 of Executive Order 372, whereby the corporate existence of
the same Act provides, "At any time during said three years said NACOCO was continued for a period of three years from the effectivity
corporation is authorized and empowered to convey all of its property of the order for "the purpose of prosecuting and defending suits by or
to trustees for the benefit of members, stockholders, creditors, and against it and of enabling the Board of Liquidators gradually to settle
others interested. From and after any such conveyance by the and close its affairs, to dispose of and convey its property in the manner
corporation of its property in trust for the benefit of its members, hereinafter provided", is to be read not as an isolated provision but in
stockholders, creditors, and others in interest, all interest which the conjunction with the whole. So reading, it will be readily observed that
corporation had in the property terminates, the legal interest vests in the no time limit has been tacked to the existence of the Board of
trustees, and the beneficial interest in the members, stockholders, Liquidators and its function of closing the affairs of the various
creditors, or other persons in interest. government owned corporations, including NACOCO.

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By Section 2 of the executive order, while the boards of directors of the abated by a dissolution of the corporation. Section 77 of the
various corporations were abolished, their powers and functions and Corporation Law provides that the corporation shall "be continued as a
duties under existing laws were to be assumed and exercised by the body corporate for three (3) years after the time when it would have
Board of Liquidators. The President thought it best to do away with the been ... dissolved, for the purpose of prosecuting and defending suits
boards of directors of the defunct corporations; at the same time, By or against it ...," so that, thereafter, it shall no longer enjoy corporate
however, the President had chosen to see to it that the Board of existence for such purpose. For this reason, Section 78 of the same law
Liquidators step into the vacuum. And nowhere in the executive order authorizes the corporation, "at any time during said three years ... to
was there any mention of the lifespan of the Board of Liquidators. A convey all of its property to trustees for the benefit of members,
glance at the other provisions of the executive order buttresses our Stockholders, creditors and other interested," evidently for the purpose,
conclusions. among others, of enabling said trustees to prosecute and defend suits
by or against the corporation begun before the expiration of said period
Not that our views on the power of the Board of Liquidators to proceed
to the final determination of the present case is without jurisprudential When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
support. The first judicial test before this Court is National Abaca and Section 77 of the Corporation Law, it still has the right until December
Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that 31, 1963 to prosecute in its name the present case. After the expiration
case, the corporation, already dissolved, commenced suit within the of said period, the corporation ceased to exist for all purposes, and it
three-year extended period for liquidation. That suit was for recovery of can no longer sue or be sued.
money advanced to defendant for the purchase of hemp in behalf of the
corporation. She failed to account for that money. We there said that However, a corporation that has a pending action and which cannot be
"the rule appears to be well settled that, in the absence of statutory terminated within the three-year period after its dissolution is authorized
provision to the contrary, pending actions by or against a corporation under Section 78 to convey all its property to trustees to enable it to
are abated upon expiration of the period allowed by law for the prosecute and defend suits by or against the corporation beyond the
liquidation of its affairs." We there said that "[o]ur Corporation Law Three- year period. Although private respondent did not appoint any
contains no provision authorizing a corporation, after three (3) years from trustee, yet the counsel who prosecuted and defended the interest of
the expiration of its lifetime, to continue in its corporate name actions the corporation in the instant case and who in fact appeared in behalf
instituted by it within said period of three (3) years." However, these of the corporation may be considered a trustee of the corporation at
precepts notwithstanding, we, in effect, held in that case that the Board least with respect to the matter in litigation only. Said counsel had been
of Liquidators escapes from the operation thereof for the reason that handling the case when the same was pending before the trial court
"[o]bviously, the complete loss of plaintiff's corporate existence after the until it was appealed before the Court of Appeals and finally to this
expiration of the period of three (3) years for the settlement of its affairs Court. We therefore hold that there was a substantial compliance with
is what impelled the President to create a Board of Liquidators, to Section 78 of the Corporation Law and as such, private respondent
continue the management of such matters as may then be pending. Insular Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of its dissolution.
GELANO VS. HON. COURT OF APPEALS 103 SCRA 90, FEBRUARY 24,
1981 The word "trustee" as sued in the corporation statute must be
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal understood in its general concept which could include the counsel to
property of petitioner-wife Guillermina Mendoza de Gelano. It was while whom was entrusted in the instant case, the prosecution of the suit filed
private respondent was leasing the property that its officers and by the corporation. The purpose in the transfer of the assets of the
directors had come to know petitioner-husband Carlos Gelano who corporation to a trustee upon its dissolution is more for the protection
received from the corporation cash advances on account of rent to be of its creditor and stockholders. Debtors like the petitioners herein may
paid by the corporation to the land. not take advantage of the failure of the corporation to transfer its assets
to a trustee, assuming it has any to transfer which petitioner has failed
Despite repeated demands by the private respondent refused to pay to show, in the first place. To sustain petitioners' contention would be
the cash advances. Petitioner-wife refused to pay on the ground that the to allow them to enrich themselves at the expense of another, which all
cash advances was for the personal account of her husband asked for enlightened legal systems condemn.
by, and given to him, without the knowledge and consent and did not
benefit the family. REPUBLIC VS. MARSMAN DEVELOPMENT COMPANY 44 SCRA 418,
APRIL 27, 1972
On May 29, 1959, the corporation, through its lawyer, filed a complaint FACTS: Sometime before October 15, 1953, an investigation was
for collection against petitioners. Meanwhile, the corporation amended conducted on the business operation and activities of defendant
its AOI to shorten its term of existence up to Dec. 31, 1960 only which corporation leading to the discovery of deficiency taxes on logs
was approved by the SEC but the trial court was not notified of such produced from its concession. The Collector of Internal Revenue
amendment. On November 20, 1964, almost 4 years after the demanded payment for forest charges and 25% surcharge. After further
dissolution, the trial court rendered a decision in favor of private investigation, another assessment was sent to the defendant by the BIR
respondent. demanding a total sum of P45,541.66 representing deficiency taxes,
forest charges, surcharges and penalties. Later on, another assessment
ISSUE: WON a corporation whose corporate life had ceased by the was sent to defendant corporation for discharging lumber without
expiration of its term of existence, could still continue prosecuting and permit.Defendant contend that the present action was barred by Sec.
defending suits after its dissolution and beyond the period of 3 years to 77 of the Corporation Law which allows corporate existence to continue
wind up its affairs, without having undertaken any step to transfer its after dissolution only for a period of 3 years. That the company was
assets to a trustee or assignee. extra-judicially dissolved on April 23, 1954, the original complaint was
filed only on September 8, 1958 and the amended complaint on August
HELD: YES. In American corporate law, upon which our Corporation Law 26, 1956.
was patterned, it is well settled that, unless the statutes otherwise
provide, all pending suits and actions by and against a corporation are
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The trial court ruled in favor of the government holding that the was undertaken, those having pecuniary interest in the corporate assets,
amended complaint was precisely to include FH Burgess, liquidator of including not only the stockholders but likewise the creditors, acting for
the company, as party defendant. and in behalf, may make proper representations with the SEC for
working out a final settlement of the corporate concern (Clemente vs.
ISSUE: WON the case should prosper. CA).

HELD: YES. It is to be recalled that the assessments against appellant RECEPIENT UNKNOWN OR CANNOT BE FOUND: Any asset
corporation for deficiency taxes due for its operations since 1947 were distributable to any creditor or stockholders or member who is unknown
made by the Bureau of Internal Revenue on October 15, 1953, or cannot be found shall be escheated to the city or municipality where
September 13, 1954 and November 8, 1954, such that the first was such assets are located (Sec. 139).
before its dissolution and the last two not later than six months after
such dissolution. Thus, in whatever way the matter may be viewed, the CHUNG KA BIO VS. INTERMEDIATE APPELLATE COURT 163 SCRA
Government became the creditor of the corporation before the 534, JULY 26, 1988
completion of its dissolution by the liquidation of its assets. Appellant FACTS: Chung Ka Bio and other petitioners are stockholders of the old
F.H. Burgess, whom it chose as liquidator, became in law the trustee of Philippine Blooming Mills Company, Inc. (PBM) which has been
all its assets for the benefit of all persons enumerated in Section 78, reincorporated on July 14, 1977 after the old was dissolved on Jan. 19
including its creditors, among whom is the Government, for the taxes 1977. The assets and liabilities of the old PBM was transferred by the
herein involved. To assume otherwise would render the extra-judicial BOD to the new PBM.
dissolution illegal and void, since, according to Section 62 of the
Corporation Law, such kind of dissolution is permitted only when it Ching Ka Bio and other petitioners filed with the SEC a petition for
"does not affect the rights of any creditor having a claim against the liquidation of both the old and new PBM (for non-usage of its charter
corporation." It is immaterial that the present action was filed after the and failure to operate within 2 years).
expiration of three years after April 23, 1954, for at the very least, and
assuming that judicial enforcement of taxes may not be initiated after ISSUE: WON the BOD was justified to convey all the assets of the old
said three years despite the fact that the actual liquidation has not been PBM to the new corporation without the express consent of its
terminated and the one in charge thereof is still holding the assets of stockholders.
the corporation, obviously for the benefit of all the creditors thereof, the
assessment aforementioned, made within the three years, definitely HELD: YES. As the contention is based on the negative averment that
established the Government as a creditor of the corporation for whom no stockholders' meeting was held and the 2/3 consent vote was not
the liquidator is supposed to hold assets of the corporation. And since obtained, there is no need for affirmative proof. Even so, there is the
the suit at bar is only for the collection of taxes finally assessed against presumption of regularity which must operate in favor of the private
the corporation within the three years invoked by appellants, their respondents, who insist that the proper authorization as required by the
assignment of error cannot be sustained. Judgment of the trial court is Corporation Law was duly obtained at a meeting called for the purpose.
affirmed. (That authorization was embodied in a unanimous resolution dated
March 19, 1977, which was reproduced verbatim in the deed of
STOCKHOLDERS UPON DISSOLUTION: Upon dissolution of a assignment.) Otherwise, the new PBM would not have been issued a
corporation, it is considered in equity, even in the absence of a statute certificate of incorporation, which should also be presumed to have
that its assets are held for the benefit of its stockholders after payment been done regularly. It must also be noted that under Section 28-1/2,
of its debts and will be so distributed to the said stockholders in "any stockholder who did not vote to authorize the action of the board
accordance with their proportionate interest in the corporation or their of directors may, within forty days after the date upon which such action
contracts of subscription. was authorized, object thereto in writing and demand payment for his
shares." The record does not show, nor have the petitioners alleged or
PREFERRED SHAREHOLDERS: It must herein be remembered that proven, that they filed a written objection and demanded payment of
holders of preferred shares may be granted certain rights or privileges their shares during the reglementary forty-day period. This circumstance
upon dissolution of the corporation. The preference may be in the form should bolster the private respondents' claim that the authorization was
of receiving a certain part or portion of corporate assets upon unanimous.
dissolution. And, depending on their contracts of subscription, they may
or may not be entitled to share any of the assets remaining, after they While we agree that the board of directors is not normally permitted to
may have received their respective preference in accordance therewith. undertake any activity outside of the usual liquidation of the business of
the dissolved corporation, there is nothing to prevent the stockholders
INCORPORATION OF A NEW CORPORATION: During the 3 year from conveying their respective shareholdings toward the creation of a
period granted to a corporation to liquidate or wind up its affairs, the new corporation to continue the business of the old. Winding up is the
BOD is not normally permitted to undertake any activity outside of the sole activity of a dissolved corporation that does not intend to
usual liquidation of the corporation. There is, however, nothing to incorporate anew. If it does, however, it is not unlawful for the old board
prevent the stockholders from conveying their respective shareholdings of directors to negotiate and transfer the assets of the dissolved
toward the creation of a new corporation to continue the business of the corporation to the new corporation intended to be created as long as
old. This is because winding up is the sole activity of a dissolved the stockholders have given their consent. This was not prohibited by
corporation that does not intend to incorporate a new. If it does, the Corporation Act. In fact, it was expressly allowed by Section 28-1/2.
however, it is not unlawful for the old BOD to incorporate and transfer
the assets of a dissolved corporation to the new corporation intended What the Court finds especially intriguing in this case is the fact that
to be created as long as the stockholders have given their consent although the deed of assignment was executed in 1977, it was only in
(Chung Ka Bio vs. IAC) 1981 that it occurred to the petitioners to question its validity. All of four
years had elapsed before the petitioners filed their action for liquidation
LAPSE OF THE THREE YEAR PERIOD: If the 3 year period of liquidation of both the old and the new corporations, and during this period, the
has elapsed and no effort to finally settle or close the corporate affairs new PBM was in full operation, openly and quite visibly conducting the
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same business undertaken earlier by the old dissolved PBM. The directors or trustees, those having any pecuniary interest in the assets,
petitioners and the private respondents are not strangers but relatives including not only the shareholders but likewise the creditors of the
and close business associates. The PBM office is in the heart of Metro corporation, acting for and in its behalf, might make proper
Manila. The new corporation, like the old, employs as many as 2,000 representations with the Securities and Exchange commission, which
persons, the same personnel who worked for the old PBM. Additionally, has primary and sufficiently broad jurisdiction in matters of this nature,
one of the petitioners, Chung Siong Pek was one of the directors who for working out a final settlement of the corporate concerns.
executed the deed of assignment in favor of the old PBM and it was he
also who received the deeded assets on behalf and as treasurer of the WHEREFORE, the decision appealed from is AFFIRMED.
new PBM. Surely, these circumstances must operate to bar the
petitioners now from questioning the deed of assignment after this long ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122,
period of inaction in the protection of the rights they are now belatedly such that, in the absence of a known stockholder, member of the BOD
asserting. Laches has operated against them. or creditor, the properties should have been escheated in favor of the
local government. Following the rule laid down in Clemente will open
CLEMENTE VS. COURT OF APPEALS 242 SCRA 717, MARCH 27, 1995 the door to fraud in a way that any person claiming interest as heir of
FACTS: Petitioners herein initiated an action to be declared owners of the corporation may still go to the SEC to make proper representations
the property in question and to received rentals and other fruits as with the SEC for working out a final settlement. Moreover, the
consequence of such ownership. corporation being non-existent for all intents and purposes, after the
expiration of the three-year period provided by law, could not have
The trial court rendered a decision in favor of respondents holding, legally transferred such property to any person. The Gonzales case is
among others, that since there is no liquidation, it is the corporation, not misapplied, because SRA was a successor of Philsucom, while in the
the stockholders, which can assert, if at all, any title to the corporate Gelano case, there was a lawyer who prosecuted the case who was
assets. deemed as trustee. In the Clemente case, there was no such successor
nor a lawyer who can be deemed a trustee.
ISSUE: WON petitioners can be held, given their submissions, to have
succeeded in establishing for themselves a firm title to the property in
question.

HELD: NO. Like the courts below, we find petitioners' evidence to be

direly wanting; all that appear to be certain are that the "Sociedad
Popular Calambeña," believed to be a "sociedad anonima" and for a
while engaged in the operation and management of a cockpit, has
existed sometime in the past; that it has acquired the parcel of land here
involved; and that the plaintiffs' predecessors, Mariano Elepaño and
Pablo Clemente, had been original stockholders of the sociedad. Except
in showing that they are the
successors-in-interest of Elepaño and Clemente, petitioners have been
unable to come up with any evidence to substantiate their claim of
ownership of the corporate asset.

If, indeed, the sociedad has long become defunct, it should behoove
petitioners, or anyone else who may have any interest in the corporation,
to take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes
provided by the Corporation Code (see Sees. 117-122) for dissolving,
liquidating or winding up, and terminating the life of the corporation.
Among the causes for such dissolution are when the corporate term has
expired or when, upon a verified complaint and after notice and hearing,
the Securities and Exchange Commission orders the dissolution of a
corporation.

The corporation continues to be a body corporate for three (3) years

after its dissolution for purposes of prosecuting and defending suits by
and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its remaining assets. It
may, during the three-year term, appoint a trustee or a receiver who may
act beyond that period. The termination of the life of a juridical entity
does not by itself cause the extinction or diminution of the rights and
liabilities of such entity (see Gonzales vs. Sugar Regulatory
Administration, 174 SCRA 377) nor those of its owners and creditors. If
the three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation within that period,
the board of directors (or trustees) itself, following the rationale of the
Supreme Court's decision in Gelano vs. Court of Appeals (103 SCRA 90)
may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. Still in the absence of a board of
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XVII. FOREIGN CORPORATIONS (4) Regional or Area Headquarters – is an office whose purpose is to
(read together with Retail Trade Law and Foreign Investments Act) act as an administrative branch of a multinational company
A. Definition engaged in international trade which principally serves as a
SEC. 140. Definition and Rights of Foreign Corporations. – For purposes supervision, communications and coordinating center for its
of this Code, a foreign corporation is one formed, organized or existing subsidiaries, branches or affiliates in the Asia-Pacific Region and
under laws other than those of the Philippines’ and whose laws allow other foreign markets and which does not earn or derive income in
Filipino citizens and corporations to do business in its own country or the Philippines (Sec. 2(2), RA 8756).
State. It shall have the right to transact business in the Philippines after
obtaining a license for that purpose in accordance with this Code and a It cannot in any manner, participate in the management of any
certificate of authority from the appropriate government agency. subsidiary or branch office in the Philippines nor shall it market
goods and services in behalf of its mother company, branches or
As to the Philippines, any corporation, which owe its existence to the affiliates.
laws of another state, government or country is a “foreign corporation”.
Elsewise stated, a foreign corporation is one created or organized under (5) Regional Operating Headquarters – is a foreign business entity
the laws of any state or government other than those of the forum. which is allowed to derive income in the Philippines by performing
qualifying services exclusively to its affiliates, subsidiaries or
AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND branches in the Philippines, in the Asia-Pacific Region and in other
CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY OR foreign markets (Sec. 2(3), RA 8756).
STATE:” is not an accurate inclusion in the definition as any
corporation registered or organized under the laws of another state is Qualifying services, under RA 8756, include among others: general
necessarily a foreign corporation WON the state of its corporation allow administration and planning, business planning and coordination,
Filipino citizens or corporations to do business in that forum. sourcing or procurement of raw materials and components,
corporate finance advisory services, marketing control and sales
The said phrase was inserted by framers of the law only as a condition promotion, training and personnel management, logistic service,
precedent to the grant of a license to do business in the Philippines. research and development services and the like.

INCORPORATION TEST: is applied in determining whether a The Regional or Area Headquarters and Regional Operating
corporation is domestic or foreign. If it is incorporated in another state, Headquarters are granted certain tax incentives such as exemption
it is a foreign corporation, while if it is registered under Philippine laws, from all kinds of local taxes, fees or charges imposed by local
it is deemed a Filipino or domestic corporation irrespective of the government units except real property tax on land improvements;
nationality of its stockholders. tax and duty-free importation of training materials and equipment;
and importation of motor vehicles.
Thus, a corporation registered under the Foreign Investments Act of
1991 (RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. (6) Regional Warehouse – one whose activities are limited to serving
8762) with 100% foreign equity is considered a Filipino or domestic as supply depot of Regional or Area Headquarters or Regional
corporation and not foreign. Operating Headquarters in the Philippines, after securing a license
therefor from the Philippine Economic Zone Authority (PEZA) or the
CONTROL TEST: In times of war and for purposes of security of the concerned ecozone authorities. The regional warehouse shall only
state, however, the “control test” would apply in determining the be used for the storage, deposit and safekeeping of its spare parts,
corporate nationality, i.e., the citizenship of the controlling stockholders components, marking, labelling and cutting or altering to
determines the nationality of the corporation. customer’s specifications but shall not directly engage in trade nor
solicit business, promote any sale nor enter into contracts for the
B. Modes of Entry sale or disposition of goods in the Philippines, except those for
(1) Branch Office – of a foreign corporation is one which carries out the delivery to an authorized distributor in the country.
business activities of the foreign corporation itself and derives
income from the Philippines (Sec. 1, C, IRR of RA No. 7042). As (7) Joint Venture – is a one-time grouping of two or more persons,
such, the juridical entity involved is one and the same; natural or juridical, for carrying out a specified undertaking. Under
Sec. 1, L of RA 7042, it is combination of property, money, efforts,
(2) Representative or Liaison Office – one which deals directly with the skill or knowledge to carry out a single business enterprise for
clients of the parent company but does not derive income from the profit, which is duly registered with the SEC as a corporation or
host country and is fully subsidized by the head office. It undertakes partnership. No license to do business is required on the part of
activities such as but not limited to information dissemination and the foreign corporation entering into such kind of a business
promotion of the company’s products; venture since mere investment does no constitute doing business
as per the Implementing Rules and Regulations of RA 7042 unless,
(3) Local Subsidiary – A foreign corporation may form or organize a of course, the foreign corporation actively participates in the
separate corporation under the Foreign Investment Act (RA 7042) management thereof.
by making at least a majority of the investments therein. The
corporation thus formed becomes known as a local subsidiary of C. Application of License
the investing foreign corporation which becomes a legally CORPORATE PERSONALITY BEYOND BORDERS:
independent unit governed by the laws of the Philippines. Under Section 140, a foreign corporation cannot transact business in the
Ballantine calls it “domestication” in the sense that the foreign Philippines unless it has obtained a license or permit to do so in
corporation is granted the right to obtain a charter or organize itself accordance with the laws of the country and a certificate of authority
into a domestic corporation under the general laws of the other from the appropriate government agency such as the Banko Sentral ng
state; Pilipinas for banking institutions or the Office of the Insurance
Commission for insurance companies, etc.

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to the above requirements, comply with the provisions of existing laws

A certificate of authority from the Board of Investments is no longer applicable to them. In the case of all other foreign corporations, no
required under RA 7042. Said certificate of authority is only necessary application for license to transact business in the Philippines shall be
for the purpose of availing the incentives granted and allowed under the accepted by the Commission without previous authority from the
Omnibus Investments Code. appropriate government agency, whenever required by law.

The manner in which a foreign corporation may obtain a license to do Foreign corporations already issued a license to transact business in the
business in the Philippines is laid down in Sec. 142: Philippine prior to the effectivity of the Code continues to have such
SEC. 142. Application for a License. – A foreign corporation applying for authority under the terms and conditions of the license. Section 141
a license to transact business in the Philippines shall submit to the provides:
Commission a copy of its articles of incorporation and bylaws, certified SEC. 141. Application to Existing Foreign Corporations. – Every foreign
in accordance with law, and their translation to an official language of corporation which, on the date of the effectivity of this Code, is
the Philippines, if necessary. The application shall be under oath and, authorized to do business in the Philippines under a license issued to it
unless already stated in its articles of incorporation, shall specifically set shall continue to have such authority under the terms and conditions of
forth the following: its license, subject to the provisions of this Code and other special laws.

(a) The date and term of incorporation; Upon compliance with the provision of Sec. 142, other special laws and
(b) The address, including the street number, of the principal office of the rules and regulations implementing them, the SEC shall thereafter
the corporation in the country or State of incorporation; issue the license.
(c) The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and all notices Within 60 days after the issuance of the license, a foreign corporation,
affecting the corporation, pending the establishment of a local except those engaged in foreign banking or insurance, shall deposit with
office; the SEC, for the benefit of creditors, securities consisting of (1) bonds or
(d) The place in the Philippines where the corporation intends to other evidence of indebtedness of the Philippine government or its
operate; political subdivision, or of a GOCC, (2) shares of stock in “registered
(e) The specific purpose or purposes which the corporation intends to enterprises” as this term is defined under RA 5186, (3) shares of stock in
pursue in the transaction of its business in the Philippines: domestic corporations registered in the stock exchange and (4) shares
Provided, That said purpose or purposes are those specifically of stock in domestic insurance companies and banks or any combination
stated in the certificate of authority issued by the appropriate thereof with an actual market value of P100,000.00
government agency;
(f) The names and addresses of the present directors and officers of Additional securities may be required by the SEC if the market value of
the corporation; the securities in deposit has decreased by at least 10%. Sec. 143
(g) A statement of its authorized capital stock and the aggregate provides:
number of shares which the corporation has authority to issue,
SEC. 143. Issuance of a License. – If the Commission is satisfied that the
itemized by class, par value of shares, shares without par value, and
applicant has complied with all the requirements of this Code and other
series, if any;
special laws, rules and regulations, the Commission shall issue a license
(h) A statement of its outstanding capital stock and the aggregate
to transact business in the Philippines to the applicant for the purpose
number of shares which the corporation has issued, itemized by
or purposes specified in such license. Upon issuance of the license, such
class, par value of shares, shares without par value, and series, if
foreign corporation may commence to transact business in the
any;
Philippines and continue to do so for as long as it retains its authority to
(i) A statement of the amount actually paid in; and
act as a corporation under the laws of the country or State of its
(j) Such additional information as may be necessary or appropriate in
incorporation, unless such license is sooner surrendered, revoked,
order to enable the Commission to determine whether such
suspended, or annulled in accordance with this Code or other special
corporation is entitled to a license to transact business in the
laws. Within sixty (60) days after the issuance of the license to transact
Philippines, and to determine and assess the fees payable.
business in the Philippines, the licensee, except foreign banking or
insurance corporations, shall deposit with the Commission for the
Attached to the application for license shall be a certificate under oath
benefit of present and future creditors of the licensee in the Philippines,
duly executed by the authorized official or officials of the jurisdiction of
securities satisfactory to the Commission, consisting of bonds or other
its incorporation, attesting to the fact that the laws of the country or
evidence of indebtedness of the Government of the Philippines, its
State of the applicant allow Filipino citizens and corporations to do
political subdivisions and instrumentalities, or of government-owned or
business therein, and that the applicant is an existing corporation in
-controlled corporations and entities, shares of stock or debt securities
good standing. If the certificate is in a foreign language, a translation
that are registered under Republic Act No. 8799, otherwise known as
thereof in English under oath of the translator shall be attached to the
“The Securities Regulation Code”, shares of stock in domestic
application.
corporations listed in the stock exchange, shares of stock in domestic
insurance companies and banks, any financial instrument determined
The application for a license to transact business in the Philippines shall
suitable by the Commission, or any combination thereof with an actual
likewise be accompanied by a statement under oath of the president or
market value of at least Five hundred thousand pesos (P500,000.00) or
any other person authorized by the corporation, showing to the
such other amount that may be set by the Commission: Provided,
satisfaction of the Commission and when appropriate, other
however, That within six (6) months after each fiscal year of the licensee,
governmental agencies that the applicant is solvent and in sound
the Commission shall require the licensee to deposit additional
financial condition, setting forth the assets and liabilities of the
securities or financial instruments equivalent in actual market value to
corporation as of the date not exceeding one (1) year immediately prior
two percent (2%) of the amount by which the licensee’s gross income
to the filing of the application.
for that fiscal year exceeds Ten million pesos (P10,000,000.00). The
Commission shall also require the deposit of additional securities or
Foreign banking, financial, and insurance corporations shall, in addition
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financial instruments if the actual market value of the deposited

securities or financial instruments has decreased by at least ten percent As to who may be appointed as resident agent, the Corporation Code
(10%) of their actual market value at the time they were deposited. The provides:
Commission may, at its discretion, release part of the additional deposit SEC. 144. Who May be a Resident Agent. – A resident agent may be
if the gross income of the licensee has decreased, or if the actual market either an individual residing in the Philippines or a domestic corporation
value of the total deposit has increased, by more than ten percent (10%) lawfully transacting business in the Philippines: Provided, That an
of their actual market value at the time they were deposited. The individual resident agent must be of good moral character and of sound
Commission may, from time to time, allow the licensee to make financial standing: Provided, further, That in case of a domestic
substitute deposits for those already on deposit as long as the licensee corporation who will act as a resident agent, it must likewise be of sound
is solvent. Such licensee shall be entitled to collect the interest or financial standing and must show proof that it is in good standing as
dividends on such deposits. In the event the licensee ceases to do certified by the Commission.
business in the Philippines, its deposits shall be returned, upon the
licensee’s application and upon proof to the satisfaction of the Culled from the provisions of Sec. 128 is that the necessity of the
Commission that the licensee has no liability to Philippine residents, appointment of a resident agent is only for the purpose of receiving
including the Government of the Republic of the Philippines. For summons and other legal processes in any legal action or proceeding
purposes of computing the securities deposit, the composition of gross against the foreign corporation. And, when a foreign corporation has
income and allowable deductions therefrom shall be in accordance with designated a person to receive summons in judicial proceedings
the rules of the Commission. affecting the corporation that designation is exclusive, and service of
summons is without force and effect unless made on him (Poizat vs.
Subsidiary (FIA Form F-100) Branch Office (FIA Form F-103) Mogan). Thus, while the law allows service upon the SEC (Sec. 128), or
Representative Office (FIA Form F104) Regional Operating Area any of its officers or agents within the Philippines (Sec. 13, Rule 14, Rules
Headquarters Regional Area Headquarters of Civil Procedure), the latter two modes may become effective only if
the foreign corporation failed or neglected to designate such a person
D. Resident Agent or an agent. In a decision, therefore, rendered by the SC in the case of
As a condition precedent to the grant of license to do or transact General Corporation of the Philippines vs. Union Insurance Soc. Of
business in the Philippines, the foreign corporation is required to Canton Ltd (87 Phil 313), it was held that “where such foreign
designate its resident agent on whom summons, and other legal corporation actually doing business here has not applied for a license to
processes may be served in all actions or legal proceedings against such do and has not designated an agent to receive summons, then service
corporation. Sec. 145 provides: of summons on it will be made pursuant to the provisions of the Rules
of Court”. If such foreign corporation has a license to do business, then
summons to it will be served on the agent designated by it for the
SEC. 145. Resident Agent; Service of Process. – As a condition to the purpose, or otherwise in accordance with the Corporation Law.
issuance of the license for a foreign corporation to transact business in
the Philippines, such corporation shall file with the Commission a written E. Effect of Doing Business Without a License
power of attorney designating a person who must be a resident of the A foreign corporation must secure the necessary license before it can
Philippines, on whom summons and other legal processes may be transact or do business in the Philippines. This is the clear import of Sec.
served in all actions or other legal proceedings against such corporation, 140 when it states that it shall have the right to transact business in the
and consenting that service upon such resident agent shall be admitted Philippines after it shall have obtained a license. Without such a license,
and held as valid as if served upon the duly authorized officers of the the law provides for certain consequences
foreign corporation at its home office. Such foreign corporation shall
likewise execute and file with the Commission an agreement or SEC. 150. Doing Business Without a License. – No foreign corporation
stipulation, executed by the proper authorities of said corporation, in transacting business in the Philippines without a license, or its successors
form and substance as follows: or assigns, shall be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency of the Philippines;
“The (name of foreign corporation) hereby stipulates and agrees, in but such corporation may be sued or proceeded against before
consideration of being granted a license to transact business in the Philippine courts or administrative tribunals on any valid cause of action
Philippines, that if the corporation shall cease to transact business in the recognized under Philippine laws.
Philippines, or shall be without any resident agent in the Philippines on RESPONSIBLE OFFICERS: of a foreign corporation doing business in the
whom any summons or other legal processes may be served, then Philippines without the requisite license may be subject to the penal
service of any summons or other legal process may be made upon the sanctions provided for in Sec. 158 of the Code which may either be
Commission in any action or proceeding arising out of any business or imprisonment or fine
transaction which occurred in the Philippines and such service shall have
the same force and effect as if made upon the duly authorized officers CAPACITY TO SUE and BE SUED: The corporation may not likewise sue
of the corporation at its home office.” or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines while it may be sued or
Whenever such service of summons or other process is made upon the proceeded against before such court or agency on any valid cause of
Commission, the Commission shall, within ten (10) days thereafter, action recognized under the law.
transmit by mail a copy of such summons or other legal process to the
corporation at its home or principal office. The sending of such copy by WHETHER OR NOT IT CAN SUE:
the Commission shall be a necessary part of and shall complete such (1) A foreign corporation transacting or doing business in the
service. All expenses incurred by the Commission for such service shall Philippines with a license can sue before Philippine Courts;
be paid in advance by the party at whose instance the service is made. (2) Subject to certain exceptions, a foreign corporation doing business
It shall be the duty of the resident agent to immediately notify the in the country without a license cannot sue in Philippine Courts;
Commission in writing of any change in the resident agent’s address. and

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(3) If it is not transacting business in the Philippines, even without a represent its interest in such corporation; nor appointing a
license, it can sue before the Philippine Courts. representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account.
“It is not the lack of required license but doing business without a license
which bars a foreign corporation from access to our courts” (Universal ISOLATED TRANSACTION
Shipping vs. IAC) Even if it is pursuant of the usual business does not constitute doing
business the doing of which would not bar a foreign corporation from
EXCEPTIONS: access to Philippine Courts (Facilities Mgt. vs. Dela Osa)
(1) Foreign corporations can sue before the Philippine Courts if the act
or transaction involved is an “isolated transaction” or the MENTHOLATUM CO. VS. MANGALIMAN ET AL. 72 PHIL. 524, JUNE
corporation is not seeking to enforce any legal or contractual rights 27, 1941
arising from, or growing out of, any business which it has transacted FACTS: A complaint was filed by herein petitioner, a foreign corporation
in the Philippines (Western Equipment Supply vs. Reyes) having Philippine-American Drug Co. as its sole distributor, for
(2) Neither is a license required before a foreign corporation may sue infringement of trademark for its product “Mentholatum” and unfair
before the forum if the purpose of the suit is to protect its competition alleging that herein respondents Anacleto and Florencio
trademark, trade name, corporate name, reputation or goodwill; Mangaliman prepared a medicament and salve named “Mentholiman”
(Western Equipment Supply vs. Reyes) which they sold to the public packed in the same size, color and shape
(3) Or where it is based on a violation of the Revised Penal Code (Le as its product Metholatum.
Chemise Lacoste, SA vs. Fernandez);
(4) Or merely defending a suit filed against it (Time, Inc. vs. Reyes) ISSUE: WON petitioner corporation is transacting business in the
(5) Or where a party is estopped to challenge the personality of the Philippines.
corporation by entering into a contract with it (Communications
Materials and Design, Inc. vs. CA and ITEC) HELD: NO. No general rule or governing principle can be laid down as
to what constitutes "doing" or "engaging in" or "transacting" business.
WHETHER OR NOT IT CAN BE SUED: Indeed, each case must be judged in the light of its peculiar
(1) A foreign corporation transacting business in the Philippines with environmental circumstances. The true test, however, seems to be
the requisite license can be sued in Philippine Courts; whether the foreign corporation is continuing the body or substance of
(2) A foreign corporation transacting business in the Philippines the business or enterprise for which it was organized or whether it has
without a license can be sued in Philippine Courts; substantially retired from it and turned it over to another. (Traction Cos.
(3) If it is not doing business in the Philippines, it cannot be sued in v. Collectors of Int. Revenue [C. C. A. Ohio], 223 F. 984, 987.) The term
Philippine Courts for lack of jurisdiction. implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the
“DOING BUSINESS”: As to what constitutes “doing business” or exercise of some of the functions normally incident to, and in
“transacting business” which would bar a foreign corporation from progressive prosecution of, the purpose and object of its organization.
access to our courts, no general rule or governing principle can be laid (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77;
down. Indeed, such case must be judged in the light of its peculiar Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl.
environmental circumstance. However, the TRUE TEST seems to be 111; Automotive Material Co. v. American Standard Metal Products
whether the foreign corporation is continuing the body or substance of Corp., 158 N. E. 698, 703, 327 III. 367.)
the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another. The term In its decision of June 29, 1940, the Court of Appeals concluded that "it
implies a continuity of commercial dealings and arrangements and is undeniable that the Mentholatum Co., through its agent, the
contemplates, to the extent, the performance of acts or works or the Philippine- American Drug Co., Inc., has been doing business in the
exercise of some functions normally incident to and in progressive Philippines by selling its products here since the year 1929, at least."
prosecution of, the purpose and objects of its organization (Metholatum, This is assailed by petitioners as a pure conclusion of law. This finding is
Inc. vs. Mangaliman) predicated upon the testimony of Mr. Roy Springer of the Philippine-
American Drug Co., Inc., and the pleadings filed by petitioners. The
PRESENT STATE OF LAW AS TO “DOING BUSINESS”: under the complaint filed in the Court of First Instance of Manila on October 1,
Foreign Investment Act (Sec. 3, d), “doing business” would include: 1935, clearly stated that the Philippine-American Drug Co., Inc., is the
(1) Soliciting orders, service contracts; exclusive distributing agent in the Philippine Islands of the Mentholatum
(2) Opening offices, whether called “liaison offices” or branches; Co., Inc., in the sale and distribution of its product known as the
(3) Appointing representatives or distributor domiciled in the “Mentholatum." The object of the pleadings being to draw the lines of
Philippines or who in any calendar year stay in the country for a battle between litigants and to indicate fairly the nature of the claims or
period or periods totaling 180 days or more; defenses of both parties, a party cannot subsequently take a position
(4) Participating in the management, supervision or control of any contradictory to, or inconsistent with, his pleadings, as the facts therein
domestic business, firm, entity or corporation in the Philippines; admitted are to be taken as true for the purpose of the action. It follows
(5) Any other act that imply a continuity of commercial dealings or that whatever transactions the Philippine-American Drug Co., Inc., had
arrangements and contemplate to that extent the performance of executed in view of the law, the Mentholatum Co., Inc., did it itself. And,
acts or works, or the exercise of functions normally incident to and the Mentholatum Co., Inc., being a foreign corporation doing business
in progressive prosecution of commercial gain or of the purpose in the Philippines without the license required by section 68 of the
and object of the business organization. Corporation Law, it may not prosecute this action for violation of trade
mark and unfair competition.
Provided, however, that the phrase “doing business” shall not be
deemed to include mere investment as a shareholder by a foreign entity The writ prayed for should be, as it hereby is, denied, with costs against
in domestic corporations duly registered to do business, and/or exercise the petitioners.
of rights as such investor, nor having a nominee director or officer to

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ISOLATED TRANSACTION
MARSHALL-WELLS CO. VS. HENRY W. ELSER & CO. 46 PHIL. 70, It is settled that if a foreign corporation is not engaged in business in
SEPTEMBER 01, 1924 the Philippines, it may not be denied the right to file an action in
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods Philippine courts for isolated transactions.
amounting to P2,660.74, for which the plaintiff holds accepted drafts.
The object of Sections 68 and 69 of the Corporation Law was not to
Defendant demurred on the ground that plaintiff had no capacity to sue prevent the foreign corporation from performing single acts, but to
which the trial court granted. And in as much as the plaintiff could not prevent it from acquiring a domicile for the purpose of business without
allege compliance with the statute, the order was allowed to become taking the steps necessary to render it amenable to suit in the local
final and no appeal was perfected. courts. It was never the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated order for business from
ISSUE: WON obtaining a license is required before a foreign corporation the Philippines, from securing redress in the Philippine courts.
can maintain any kind of action in the courts of the Philippine Islands.
And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this
HELD: NO. The object of the statute was to subject the foreign Court held that:
corporation doing business in the Philippines to the jurisdiction of its (d) While plaintiff is a foreign corporation without license to transact
courts. The object of the statute was not to prevent the foreign business in the Philippines, it does not follow that it has no capacity to
corporation from performing single acts, but to prevent it from acquiring bring the present action. Such license is not necessary because it is not
a domicile for the purpose of business without taking the steps engaged in business in the Philippines. In fact, the transaction herein
necessary to render it amenable to suit in the local courts. The involved is the first business undertaken by plaintiff in the Philippines,
implication of the law is that it was never the purpose of the Legislature although on a previous occasion plaintiff's vessel was chartered by the
to exclude a foreign corporation which happens to obtain an isolated National Rice and Corn Corporation to carry rice cargo from abroad to
order for business from the Philippines, from securing redress in the the Philippines. These two isolated transactions do not constitute
Philippine courts, and thus, in effect, to permit persons to avoid their engaging in business in the Philippines within the purview of Sections
contracts made with such foreign corporations. The effect of the statute 68 and 69 of the Corporation Law so as to bar plaintiff from seeking
preventing foreign corporations from doing business and from bringing redress in our courts. (Marshall Wells Co. vs. Henry W. Elser & Co. 49
actions in the local courts, except on compliance with elaborate Phil., 70; Pacific Vegetable Oil Corporation vs. Angle O. Singson, G.R.
requirements, must not be unduly extended or improperly applied. It No. L-7917, April 29, 1955.)
should not be construed to extend beyond the plain meaning of its
terms, considered in connection with its object, and in connection with Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131,
the spirit of the entire law. 139, following Aetna Casualty & Surety Co. vs. Pacific Star Line, supra,
held a foreign corporation not engaged in business in the Philippines is
The law simply means that no foreign corporation shall be permitted "to not barred from seeking redress from the courts of the Philippines.
transact business in the Philippine Islands," as this phrase is known in
corporation law, unless it shall have the license required by law, and, WHEREFORE, the order of respondent Court dismissing the petitioner's
until it complies with the law, shall not be permitted to maintain any suit complaint is hereby set aside and the case remanded for further
in the local courts. A contrary holding would bring the law to the verge proceedings, with costs against private respondent.
of unconstitutionality, a result which should be and can be easily
avoided. THE SWEDISH EAST ASIA CO., LTD. VS. MANILA PORT SERVICE 25
SCRA 633, OCTOBER 26, 1968
The order appealed from shall be set aside and the record shall be FACTS: MS SUDAN, owned and operated by petitioner, a swedish
returned to the court of origin for further proceedings. Without special company without license in the Philippines, discharged cargo to herein
finding as to costs in this instance, it is so ordered. respondent. By mistake, cargo destined for Hongkong consisting of 16
bundles of “lifts and mild steel tees window sections” covering which
BULAKHIDAS VS. NAVARRO 142 SCRA 1, APRIL 07, 1986 the petitioner had issued a bill of lading to a Hongkong consignee, were
FACTS: Petitioner, a foreign partnership, filed a complaint for damages also landed at Manila. The erroneous discharge was obviously
against respondent Diamond Shipping Corporation having failed to engendered by the fact that the same ship on the same day discharged
deliver the goods shipped to it by petitioner to their proper destination. 40 similar bundles destined for consignee in the Philippines.

Said complaint alleged that the plaintiff is “not doing business in the Petitioner, through a complaint filed in the CFI of Manila, sought for the
Philippines” and that it is “suing under an isolated transaction”. recovery of the value of the missing goods which it paid to the
Hongkong consignee, which was granted by the lower court.
Defendant filed a motion to dismiss on the ground that plaintiff has no
capacity to sue which was granted. On appeal, the CA reversed the trial court’s decision.

ISSUE: WON a corporation not engaged in business in the Philippines ISSUE: WON petitioner should be barred from access to our courts.
can institute an action before our courts.
HELD: NO. The respondents challenge the petitioner's capacity to sue,
HELD: YES. This issue is already well-settled in this jurisdiction. In Aetna it being admittedly a foreign corporation without license to engage in
Casualty and Surety Co. vs. Pacific Star Lines, 80 SCRA 635, is a case business in the Philippines, citing section 69 of the Corporation Law. It
similar to the present one in that the action is also one for recovery of must be stated however that this section is not applicable to a foreign
damages sustained by cargo shipped on defendants' vessels. corporation performing single acts or "isolated transactions." There is
Defendants set up the defense that plaintiff is a foreign corporation not nothing in the record to show that the petitioner has been in the
duly licensed to do business in the Philippines and, therefore, without Philippines engaged in continuing business or enterprise for which it was
capacity to sue and be sued. In overruling said defense, this Court said: organized, when the sixteen bundles were erroneously discharged in
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Manila, for it to be considered as transacting business in the Philippines. 'doing' or 'engaging in' or 'transacting' business in the Philippines. (Far
The fact is that the bundles, the value of which is sought to be East International Import and Export Corporation v. Nankai Kogyo, Co.,
recovered, were landed not as a result of a business transaction, 6 SCRA 725).
"isolated" or otherwise, but due to a mistaken belief that they were part
of the shipment of forty similar bundles consigned to persons or entities In the Mentholatum Co. v. Mangaliman case earlier cited, this Court
in the Philippines. There is no justification, therefore, for invoking the held: ...The true test, however, seems to be whether the foreign
provisions of section 69 of the Corporation Law. corporation is continuing the body or substance of the business or
enterprise for which it warning-organized or whether it has substantially
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and was retired from it and turned it over to another. (Traction Cos. v.
another judgment is hereby rendered ordering the respondents, jointly Collectors of Int. Revenue [CCA., Ohio], 223 F. 984, 987.) The term
and severally, to pay the petitioner the sum of P2,349.62 with interest implies a continuity of commercial dealings and arrangements, and
thereon at the rate of 6% per annum from March 13, 1961, the date of contemplates, to that extent, the performance of acts or workers or the
the filing of the complaint, until the amount shall have been fully paid, exercise of some of the functions normally incident to, and in
and the sum of P600 as attorney's fees. Costs against the respondents. progressive prosecution of, the purpose and object of its organization.
(Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77,
ANTAM CONSOLIDATED, INC. VS. COURT OF APPEALS 143 SCRA Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl.
288, JULY 31, 1986 111; Automotive Material Co. v. American Standard Metal Products
FACTS: Respondent Stokely Van Camp, Inc., a corporation organized Corp., 158 N.E. 698, 703, 327 111. 367.) '
and existing under the laws of the state of Indiana, filed a complaint
against Banahaw Milling Corporation, Antam Consolidated, Inc., In the case at bar, the transactions entered into by the respondent with
Tambunting Trading Corporation, Aurora Consolidated Securities and the petitioners are not a series of commercial dealings which signify an
Investment Corporation and United Coconut Oil Mills, Inc. (Unicom) for intent on the part of the respondent to do business in the Philippines
collection of sum of money. but constitute an isolated one which does not fall under the category of
"doing business." The records show that the only reason why the
One of respondent’s subdivision “Capital City Product Company” respondent entered into the second and third transactions with the
(Capital City) entered into a contracts where Coconut Oil Manufacturing petitioners was because it wanted to recover the loss it sustained from
(Phil), Inc. (Comphil) were to sell to the former 500 long tons of crude the failure of the petitioners to deliver the crude coconut oil under the
coconut oil at US$0.30/lb, which it failed to comply with and Capital City first transaction and in order to give the latter a chance to make good
was forced to buy its coconut oil needs from the open market at a higher on their obligation. Instead of making an outright demand on the
price resulting in a loss of US$103,600. petitioners, the respondent opted to try to push through with the
transaction to recover the amount of US$103,600.00 it lost. This explains
A 2nd contract was entered into to settle Capital City’s loss, Comphil was why in the second transaction, the petitioners were supposed to buy
supposed to repurchase the coconut oil earlier purchased from the open back the crude coconut oil they should have delivered to the respondent
market at a price of US$ 0.3925/lb, but the latter failed to pay. in an amount which will earn the latter a profit of US$103,600.00. When
this failed the third transaction was entered into by the parties whereby
To compensate for the loss, Comphil entered into a 3rd contract the petitioners were supposed to sell crude coconut oil to the
agreeing to sell the same quantity of coconut oil at a price of respondent at a discounted rate, the total amount of such discount
US$0.3425/lb which was below the market price. That by the discounted being US$103,600.00. Unfortunately, the petitioners failed to deliver
amount, Comphil would have compensated for the loss Capital City again, prompting the respondent to file the suit below.
sustained. But still, Comphil failed to deliver.
From these facts alone, it can be deduced that in reality, there was only
Petitioners filed a motion to dismiss the complaint on the ground that one agreement between the petitioners and the respondent and that
respondent had no personality to maintain a suit which was denied. The was the delivery by the former of 500 long tons of crude coconut oil to
subsequent petition for certiorari was dismissed by the appellate court. the latter, who in turn, must pay the corresponding price for the same.
The three seemingly different transactions were entered into by the
ISSUE: WON respondent is doing business in the Philippines. parties only in an effort to fulfill the basic agreement and in no way
indicate an intent on the part of the respondent to engage in a continuity
HELD: NO. In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. of transactions with petitioners which will categorize it as a foreign
(138 SCRA 118,127-128), we stated: corporation doing business in the Philippines. Thus, the trial court, and
There is no general rule or governing principle laid down as to what the appellate court did not err in denying the petitioners' motion to
constitutes ‘doing' or 'engaging in' or 'transacting business in the dismiss not only because the ground thereof does not appear to be
Philippines. Each case must be judged in the Light of its peculiar indubitable but because the respondent, being a foreign corporation
circumstance (Mentholatum Co. v. Mangaliman, 72 Phil.524). Thus, a not doing business in the Philippines, does not need to obtain a license
foreign corporation with a settling agent in the Philippines which issues to do business in order to have the capacity to sue
twelve marine policies covering different shipments to the Philippines
(General Corporation of the Philippines v. Union Insurance Society of We agree with the respondent that it is a common ploy of defaulting
Canton, Ltd., 87 Phil. 313) and a foreign corporation which had been local companies which are sued by unlicensed foreign companies not
collecting premiums on outstanding policies (Manufacturing Life engaged in business in the Philippines to invoke lack of capacity to sue.
Insurance Co., v. Meer, 89 Phil. 351) were regarded as doing business The respondent cites decisions from 1907 to 1957 recognizing and
here. The acts of these corporations should be distinguished from a rejecting the improper use of this procedural tactic. (Damfschieffs
single or isolated business transaction or occasional, incidental and Rhedered Union v. Cia Trans-atlantica, 8 Phil. 766 11907]; Marshall-Wells
casual transactions which do not come within the meaning of the law. Co. v. Henry W. Elser & Co., 49 Phil. 70 [1924]; Western Equipment Co.
Where a single act or transaction, however, is not merely incidental or v. Reyes, 51 Phil. 115 [1927]; Central Republic Bank v. Bustamante, 71
casual but indicates the foreign corporation's intention to do other Phil. 359 [1941]; Pacific Vegetable Oil Co. v. Singson, 96 Phil.-986 [1955];
business in the Philippines, said single act or transaction constitutes Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1

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[1957]). The doctrine of lack of capacity to sue based on failure to first Investments which took effect Feb. 3, 1969, implementing Rep. Act No.
acquire a local license is based on considerations of sound public policy. 5455, which took effect Sept. 30, 1968, the phrase 'doing business' has
It intended to favor domestic corporations who enter was never into been exemption with illustrations, among them being as follows:
solitary transactions with unwary foreign firms and then repudiate their xxx xxx xxx
obligations simply because the latter are not licensed to do business in (1) the performance within the Philippines of any act or combination
this country. The petitioners in this case are engaged in the exportation of acts enumerated in section l(l) of the Act shall constitute 'doing
of coconut oil, an export item so vital in our country's economy. They business' therein. in particular, 'doing business includes: Soliciting
filed this petition on the ground that Stokely is an unlicensed foreign orders, purchases (sales) or service contracts. Concrete and specific
corporation without a bare allegation or showing that their defenses in solicitations by a foreign firm, not acting independently of the
the collection case are valid and meritorious. We cannot fault the two foreign firm amounting to negotiation or fixing of the terms and
courts below for acting as they did. conditions of sales or service contracts, regardless of whether the
contracts are actually reduced to writing, shall constitute doing
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is business even if the enterprise has no office or fixed place of
DISMISSED for lack of merit. The Temporary Restraining Order dated business in the Philippines. xxx
February 2, 1983 is hereby DISSOLVED. Costs against the petitioners.
(2) Appointing a representative or distributor who is domiciled in the
HAVING A REPRESENTATIVE IN THE PHILIPPINES Philippines, unless said representative or distributor has an
FACILITIES MANAGEMENT CORPORATION VS. DE LA OSA 89 SCRA independent status, i.e., it transacts business in its name and for its
131, MARCH 26, 1979 own account, and not in the name or for the account of the
FACTS: Respondent Leonardo dela Osa filed a petition for principal.
reinstatement with recovery of his overtime compensation, swing shift xxx xxx xxx
and graveyard shift differentials. (4) Opening offices, whether called 'liaison’ offices, agencies or
branches, unless proved otherwise.
Petitioner corporation filed a letter-answer interposing special defenses: xxx xxx xxx
(1) Facilities Management Corporation and JS Deyer are domiciled in
Wake Islands and is beyond the territorial jurisdiction of the (10) Any other act or acts that imply a continuity of commercial dealings
Philippine Government; and or arrangements, and contemplate to that extent the performance
(2) JV Catuira, though an employee of respondent corporation and of acts or works, or the exercise of some of the functions normally
stationed in Manila does not have power and authority of legal incident to, or in the progressive prosecution of, commercial gain
representation; and or of the purpose and objective of the business organization
(3) The employment of respondent is with approval of the Department
of Labor of the Philippines. Indeed, if a foreign corporation, not engaged in business in the
Subsequently, a motion to dismiss was filed which was denied. Philippines, is not banned from seeking redress from courts in the
Philippines, a fortiori, that same corporation cannot claim exemption
ISSUE: WON petitioner, FMC, has been doing business in the from being sued in Philippine courts for acts done against a person or
Philippines to vest the Philippine court with jurisdiction. persons in the Philippines.

HELD: YES. From the facts of record, the petitioner may be considered WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS
as doing business in the Philippines within the scope of Section 14, Rule AGAINST THE PETITIONERS
14 of the Rules of the Court which provide:
SEC 14. Service upon private foreign corporations. If the defendant is a SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
foreign corporation or a non-resident joint stock company or FAR EAST INT’L IMPORT AND EXPORT CORP. VS. NANKAI KOGYO
association: doing business in the Philippines, service may be made on CO., LTD. 6 SCRA 725, NOVEMBER 30, 1962
its resident agent designated in accordance with law for that purpose FACTS: Plaintiff Far East entered into a contract with herein appellant
or, if there be no such agent, on the government official designated by Nankai for the sale of steel scrap. Only 1,058.6 metric tons were
law to that effect, or on any of its officers or agents within the Philippines. delivered upon the expiration of the export license of Far East.

Indeed, the petitioner, in compliance with Act 2486 as implemented by Far East later on wrote to Everett Steamship Corporation, requesting the
Department of Labor Order No. IV dated May 20, 1968 had to appoint issuance of a complete set of the Bill of Lading for the shipment, in order
Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with that payment thereof be effected against the letter of credit opened by
authority to execute Employment Contracts and receive, in behalf of that Nankai.
corporation, legal services from and be bound by processes of the
Philippine Courts of Justice, for as long as he remains an employee of For failure of Nankai and the shipping agent to comply, Far East filed a
FMC (Annex 'I', rollo, p. 56). It is a fact that when the summons for the complaint for specific performance.Nankai filed a motion to dismiss, on
petitioner was served on Jaime V. Catuira he was still in the employ of the ground of lack of jurisdiction over its person and the subject matter,
the FMC. which was denied.

In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that ISSUE No. 1: WON the trial court acquired jurisdiction over the subject
Mr. Catuira represented it in this country 'for the purpose of making matter and over the person of the defendant-appellant through the
arrangements for the approval by the Department of Labor of the proper service of summons.
employment of Filipinos who are recruited by the Company as its own
employees for assignment abroad.' In effect, Mr. Catuira was an officer HELD: YES. Defendant contends that Philippine Courts have no
representing petitioner in the Philippines. jurisdiction to take cognizance of the case because the Nankai is not
doing business in the islands; and that while it has entered into the
Under the rules and regulations promulgated by the Board of transaction in question, same, however, does not constitute "doing
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business", so as to make it amenable to summons and subject it to the less than Nabuo Yoshida, one of appellant's officers, that he was sent to
Court's jurisdiction. It bolstered this claim by a provision in the contract the Philippines by his company to look into the operation of mines,
which provides that "In case of disputes, Board of Arbitration may be thereby revealing the defendant's desire to continue engaging in
formed in Japan. Decision of the Board of Arbitration shall be final and business here, after receiving the shipment of the iron under
binding on both BUYER and SELLER". consideration, making the Philippines a base thereof.

The rule pertinent to the questions in issue provides — The rule stated in the preceding section that the doing of a single act
SEC. 14. Service upon private foreign corporations. — If the defendant doesnot constitute business within the meaning of statutes prescribing
is a foreign corporation, or a non-resident joint stock company or the conditions to be complied with the foreign corporations must be
association, doing business in the Philippines, service may be made on qualified to this extent, that a single act may bring the corporation. In
its resident agent designated in accordance with law for that purpose, such a case, the single act of transaction is not merly incidental or casual,
or, if there be no such agent, on the government official designated by but is of such character as distinctly to indicate a purpose on the part of
law to that effect, or on any officer or agent within the Philippines. (Rule the foreign corporation to do other business in the state, and to make
7). the state a basis of operations for the conduct of a part of corporation's
ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp.
The above rule indicates three modes of effecting service of summons 572- 573, and authorities cited therein.) (Emphasis ours.) WHEREFORE,
upon a private, foreign corporation, viz: (1) by serving upon the agent the judgment appealed from is hereby affirmed, with costs against
designated in accordance with law to accept service of summons; (2) if defendant-appellant Nankai Kogyo.
there is no resident agent, by service on the government cial designated
by law to that effect; and (3) by serving on any officer or agent of said ESTOPPED TO QUESTION PERSONALITY TO SUE
corporation with Philippines. The plaintiff complied with the third stated COMMUNICATION MATERIALS AND DESIGN, INC. VS. COURT OF
above, for it has been shown that Mr. Ishida, who personally signed the APPEALS 260 SCRA 673, AUGUST 22, 1996
contract for the purchase of the scrap in question in behalf of the Nankai FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
Kogyo, the Trade Manager of said Company, Mr. Tominaga the Chief of referred to as “Representative Agreement” where ASPEC was assigned
the Petroleum Section of the same company and Mr. Yoshida was the as ITEC’s “exclusive representative” in the Philippines for the sale of
man-in-charge of the Import Section of the company's Tokyo Branch. All ITEC’s products.
these three, including the first two who were served with Summons,
were officers of the defendant company. By virtue of said contract, ASPAC sold electronic products exported by
ITEC, to their sole customer PLDT. ASPAC and PLDT executed a
Not only did appellant allege non-jurisdictional grounds in its pleadings document entitled “PLDT-ASPAC/ITEC PROTOCOL” which defined the
to have the complaint dismissed, but it also went into trial on the merits project detais for the supply of ITEC’s Interface Equipment in connection
and presented evidence destined to resist appellee's claim. Verily, there with the 5th Expansion Program of PLDT.
could not be a better situation of acquired jurisdiction based on consent.
Consequently, the provision of the contract wherein it was agreed that ITEC later on terminated its representative agreement with ASPAC and
disputes should be submitted to a Board of Arbitration which may be fied a complaint alleging that the latter and another corporation Digital
formed in Japan (in the supposition that it can apply to the matter in Base Communications, Inc. (DIGITAL), the president of which is
dispute - payment of the scrap), seems to have been waived with Francisco Aguirre who is also the president of ASPAC, used knowledge
appellant's voluntary submission. Apart from the fact that the clause and information of ITEC’s product specifications to develop their own
employs the word "may". line of equipment and product support, which are similar, if not identical
to ITEC’s own and offering them to ITEC’s customers.
From the proven facts obtaining in this particular case, the appellant's
defense of lack of jurisdiction appears unavailing. The case of Pacific Defendants filed a motion to dismiss on the ground that ITEC had no
Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-7154, legal capacity to sue as it is a foreign corporation doing business in the
October 23, 1954, relied upon in the Motion to Dismiss and other Philippines without the required license, which was denied. On appeal,
pleadings presented by defendant-appellant, stand on a different the CA affirmed the decision of the trial court.
footing. Therein, We made the following pronouncements:
ISSUE: WON private respondents ITEC is an unlicensed corporation
... And the only act it did here was to secure the services of Luceno doing business in the Philippines, and WON it is barred from invoking
Pelingon to act as cook and chief steward in one of its vessels authorizing the injunctive authority of the courts.
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation,
and the contract of employment was entered into on July 18, 1951. It HELD: YES AND NO (BY ESTOPPEL). Generally, a "foreign corporation"
further appears that petitioner has never sent its ships to the Philippines has no legal existence within the state in which it is foreign. This
nor has it transported nor even solicited the transportation passengers proceeds from the principle that juridical existence of a corporation is
and cargoes to and from the Philippines. In words, petitioner engaged confined within the territory of the state under whose laws it was
the services of Pelingon not as part of the operation of its business but incorporated and organized, and it has no legal status beyond such
merely to employ him as member of the crew in one of its ships. That territory. Such foreign corporation may be excluded by any other state
act apparently is an isolated one, incidental, or casual, and "not of a from doing business within its limits, or conditions may be imposed on
character to indicate a purpose to engage in business" within the the exercise of such privileges. Before a foreign corporation can transact
meaning of the rule. (Emphasis ours.) business in this country, it must first obtain a license to transact business
in the Philippines, and a certificate from the appropriate government
ISSUE No. 2: WON the single act done in this case can be considered agency. If it transacts business in the Philippines without such a license,
as doing business in the Philippines. it shall not be permitted to maintain or intervene in any action, suit, or
proceeding in any court or administrative agency of the Philippines, but
HELD: YES. In the instant case, the testimony of Atty. Pablo Ocampo it may be sued on any valid cause of action recognized under Philippine
that appellant was doing business in the Philippines corroborated by no laws.
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which do not come within the meaning of the law, for in such case, the
In a long line of decisions, this Court has not altogether prohibited foreign corporation is deemed not engaged in business in the
foreign corporation not licensed to do business in the Philippines from Philippines.
suing or maintaining an action in Philippine Courts. What it seeks to
prevent is a foreign corporation doing business in the Philippines Where a single act or transaction, however, is not merely incidental or
without a license from gaining access to Philippine Courts. casual but indicates the foreign corporation's intention to do other
business in the Philippines, said single act or transaction constitutes
The purpose of the law in requiring that foreign corporations doing "doing" or "engaging in" or "transacting" business in the Philippines.
business in the Philippines be licensed to do so and that they appoint
an agent for service of process is to subject the foreign corporation
doing business in the Philippines to the jurisdiction of its courts. The In determining whether a corporation does business in the Philippines
object is not to prevent the foreign corporation from performing single or not, aside from their activities within the forum, reference may be
acts, but to prevent it from acquiring a domicile for the purpose of made to the contractual agreements entered into by it with other entities
business without taking steps necessary to render it amenable to suit in in the country. Thus, in the Top-Weld case (supra), the foreign
the local courts. The implication of the law is that it was never the corporation's LICENSE AND TECHNICAL AGREEMENT and
purpose of the legislature to exclude a foreign corporation which DISTRIBUTOR AGREEMENT with their local contacts were made the
happens to obtain an isolated order for business from the Philippines, basis of their being regarded by this Tribunal as corporations doing
and thus, in effect, to permit persons to avoid their contracts made with business in the country. Likewise, in Merill Lynch Futures, Inc. vs. Court
such foreign corporations. of Appeals, etc., the FUTURES CONTRACT entered into by the
petitioner foreign corporation weighed heavily in the court's ruling.
There is no exact rule or governing principle as to what constitutes
"doing" or "engaging" or "transacting" business. Indeed, such case With the above-stated precedents in mind, we are persuaded to
must be judged in the light of its peculiar circumstances, upon its conclude that private respondent had been "engaged in" or "doing
peculiar facts and upon the language of the statute applicable. The true business" in the Philippines for some time now. This is the inevitable
test, however, seems to be whether the foreign corporation is result after a scrutiny of the different contracts and agreements entered
continuing the body or substance of the business or enterprise for which into by ITEC with its various business contacts in the country, particularly
it was organized. ASPAC and Telephone Equipment Sales and Services, Inc. (TESSI, for
brevity). The latter is a local electronics firm engaged by ITEC to be its
Article 44 of the Omnibus Investments Code of 1987 defines the phrase local technical representative, and to create a service center for ITEC
to include: “soliciting orders, purchases, service contracts, opening products sold locally. Its arrangements, with these entities indicate
offices, whether called "liaison" offices or branches; appointing convincingly ITEC's purpose to bring about the situation among its
representatives or distributors who are domiciled in the Philippines or customers and the general public that they are dealing directly with
who in any calendar year stay in the Philippines for a period or periods ITEC, and that ITEC is actively engaging in business in the country.
totalling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business firm, In its Master Service Agreement with TESSI, private respondent required
entity or corporation in the Philippines, and any other act or acts that its local technical representative to provide the employees of the
imply a continuity or commercial dealings or arrangements and technical and service center with ITEC identification cards and business
contemplate to that extent the performance of acts or works, or the cards, and to correspond only on ITEC, Inc., letterhead. TESSI personnel
exercise of some of the functions normally incident to, and in are instructed to answer the telephone with "ITEC Technical Assistance
progressive prosecution of, commercial gain or of the purpose and Center.", such telephone being listed in the telephone book under the
object of the business organization.” heading of ITEC Technical Assistance Center, and all calls being
recorded and forwarded to ITEC on a weekly basis.
Thus, a foreign corporation with a settling agent in the Philippines which
issued twelve marine policies covering different shipments to the What is more, TESSI was obliged to provide ITEC with a monthly report
Philippines and a foreign corporation which had been collecting detailing the failure and repair of ITEC products, and to requisition
premiums on outstanding policies were regarded as doing business monthly the materials and components needed to replace stock
here. consumed in the warranty repairs of the prior month.

The same rule was observed relating to a foreign corporation with an A perusal of the agreements between petitioner ASPAC and the
"exclusive distributing agent" in the Philippines, and which has been respondents shows that there are provisions which are highly restrictive
selling its products here since 1929, and a foreign corporation engaged in nature, such as to reduce petitioner ASPAC to a mere extension or
in the business of manufacturing and selling computers worldwide, and instrument of the private respondent.
had installed at least 26 different products in several corporations in the
Philippines, and allowed its registered logo and trademark to be used The "No Competing Product" provision of the Representative
and made it known that there exists a designated distributor in the Agreement between ITEC and ASPAC provides: "The Representative
Philippines. shall not represent or offer for sale within the Territory any product which
competes with an existing ITEC product or any product which ITEC has
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the under active development." Likewise pertinent is the following
uninterrupted performance by a foreign corporation of acts pursuant to provision: "When acting under this Agreement, REPRESENTATIVE is
its primary purposes and functions as a regional area headquarters for authorized to solicit sales within the Territory on ITEC's behalf but is
its home office, qualifies such corporation as one doing business in the authorized to bind ITEC only in its capacity as Representative and no
country. other, and then only to specific customers and on terms and conditions
expressly authorized by ITEC in writing."
These foregoing instances should be distinguished from a single or
isolated transaction or occasional, incidental, or casual transactions, When ITEC entered into the disputed contracts with ASPAC and TESSI,

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they were carrying out the purposes for which it was created, i.e., to license requirement was imposed to subject the foreign corporation
market electronics and communications products. The terms and doing business in the Philippines to the jurisdiction of its courts. It was
conditions of the contracts as well as ITEC's conduct indicate that they never intended to favor domestic corporations who enter into solitary
established within our country a continuous business, and not merely transactions with unwary foreign firms and then repudiate their
one of a temporary character. obligations simply because the latter are not licensed to do business in
this country.
Notwithstanding such finding that ITEC is doing business in the country,
petitioner is nonetheless estopped from raising this fact to bar ITEC from In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed
instituting this injunction case against it. our chagrin over this commonly used scheme of defaulting local
companies which are being sued by unlicensed foreign companies not
A foreign corporation doing business in the Philippines may sue in engaged in business in the Philippines to invoke the lack of capacity to
Philippine Courts although not authorized to do business here against a sue of such foreign companies. Obviously, the same ploy is resorted to
Philippine citizen or entity who had contracted with and benefited by by ASPAC to prevent the injunctive action filed by ITEC to enjoin
said corporation. To put it in another way, a party is estopped to petitioner from using knowledge possibly acquired in violation of
challenge the personality of a corporation after having acknowledged fiduciary arrangements between the parties.
the same by entering into a contract with it. And the doctrine of estoppel
to deny corporate existence applies to a foreign as well as to domestic By entering into the "Representative Agreement" with ITEC, Petitioner
corporations. One who has dealt with a corporation of foreign origin as is charged with knowledge that ITEC was not licensed to engage in
a corporate entity is estopped to deny its corporate existence and business activities in the country, and is thus estopped from raising in
capacity: The principle will be applied to prevent a person contracting defense such incapacity of ITEC, having chosen to ignore or even
with a foreign corporation from later taking advantage of its presumptively take advantage of the same.
noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract. In Top-Weld, we ruled that a foreign corporation may be exempted from
the license requirement in order to institute an action in our courts if its
The rule is deeply rooted in the time-honored axiom of Commodum ex representative in the country maintained an independent status during
injuria sua non habere debet — no person ought to derive any the existence of the disputed contract. Petitioner is deemed to have
advantage of his own wrong. This is as it should be for as mandated by acceded to such independent character when it entered into the
law, "every person must in the exercise of his rights and in the Representative Agreement with ITEC, particularly, provision 6.2 (supra).
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith." IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
Concededly, corporations act through agents, like directors and officers. upholding the RTC Order dated February 22, 1991, denying the
Corporate dealings must be characterized by utmost good faith and petitioners' Motion to Dismiss, and ordering the issuance of the Writ of
fairness. Corporations cannot just feign ignorance of the legal rules as in Preliminary Injunction, is hereby affirmed in toto.
most cases, they are manned by sophisticated officers with tried
management skills and legal experts with practiced eye on legal TRADEMARK INFRINGEMENT
problems. Each party to a corporate transaction is expected to act with WESTERN EQUIPMENT AND SUPPLY CO. VS. REYES 51 PHIL. 115,
utmost candor and fairness and, thereby allow a reasonable proportion DECEMBER 02, 1927
between benefits and expected burdens. This is a norm which should FACTS: The present case was filed and tried on the following facts:
be observed where one or the other is a foreign entity venturing in a (1) Petitioner Western Equipment and Supply Company, through its
global market. duly authorized agent, the plaintiff, Felix Reyes, applied to the
defendant Director of Bureau of Commerce and Industry (BCI) for
As observed by this Court in TOP-WELD (supra), viz: the issuance of a license to engage in business in the Philippine
The parties are charged with knowledge of the existing law at the time Islands which was granted on Aug. 23, 1926.
they enter into a contract and at the time it is to become operative.
(Twiehaus v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). (2) On the other hand, Western Electric Company, Inc, also organized
Moreover, a person is presumed to be more knowledgeable about his and existing under the laws of Nevada, was not issued such license
own state law than his alien or foreign contemporary. In this case, the but it was alleged that it has never engaged in business herein.
record shows that, at least, petitioner had actual knowledge of the
applicability of R.A. No. 5455 at the time the contract was executed and (3) That a Philippine corporation known as Electric Supply Company,
at all times thereafter. This conclusion is compelled by the fact that the Inc., where defendant Henry Herman was president, has been
same statute is now being propounded by the petitioner to bolster its importing the manufactures of plaintiff Western Electric Company,
claim. We, therefore, sustain the appellate court's view that "it was Inc.
incumbent upon TOP-WELD to know whether or not IRTI and ECED
were properly authorized to engage in business in the Philippines when (4) That defendant Henry Herman signed and filed AOI with the
they entered into the licensing and distributorship agreements." The defendant Fidel Reyes, as Director of BCI, with the intention to
very purpose of the law was circumvented and evaded when the organize a domestic corporation to be known as “Western Electric
petitioner entered into said agreements despite the prohibition of R.A. Company, Inc.” for the purpose, among others things, of
No. 5455. The parties in this case being equally guilty of violating R.A. manufacturing, buying, selling and dealing generally in electrical
No. 5455, they are in pari delicto, in which case it follows as a and telephone apparatus and supplies” in violation of a trademark
consequence that petitioner is not entitled to the relief prayed for in this over “Western Electric” existing in Washington, DC.
case.
The lower court decided in favor of plaintiffs.
The doctrine of lack of capacity to sue based on the failure to acquire a
local license is based on considerations of sound public policy. The ISSUE: WON plaintiff corporation can maintain an action to restraint
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residents and inhabitants of the Philippines from organizing a organized and exiting under the laws of the State of Pennsylvania, USA
corporation, when said inhabitants have knowledge of the existence of filed a petition with the Philippine Patent Office for the cancellation of
such foreign corporation. the petitioner’s trademark “Puritan”, alleging ownership and prior use
in the Philippines of the said trademark for assorted men’s wear, such
HELD: YES. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. as sweaters, shirts, jackets, undershirts and briefs, which has not been
(46 Phil., 70, 76), this court held: abandoned. It further alleged that the registration thereof by petitioner
had been obtained fraudulently and in violation of Sec. 17(c) of RA 166,
The noncompliance of a foreign corporation with the statute may be in relation to Sec. 4(d) thereof.
pleaded as an affirmative defense. Thereafter, it must appear from the
evidence, first, that the plaintiff is a foreign corporation, second, that it Petitioner filed a motion to dismiss on several grounds which may be
is doing business in the Philippines, and third, that it has not obtained synthesized to respondent’s lack of capacity to maintain suit in the
the proper license as provided by the statute. Philippines which was denied.

If it had been stipulated that the plaintiff, Western Electric Company, ISSUE: WON Respondent Puritan Sportswear can maintain the suit.
Inc., had been doing business in the Philippine Islands without first
obtaining a license, another and a very different question would be HELD: YES. That respondent is a juridical person should be beyond
presented. That company is not here seeking to enforce any legal or serious dispute. The fact that it may not transact business in the
contract rights arising from, or growing out of, any business which it has Philippines unless it has obtained a license for that purpose, nor maintain
transacted in the Philippine Islands. The sole purpose of the action: a suit in Philippine courts for the recovery of any debt, claim or demand
without such license (Secs. 68 and 69, Corporation Law) does not make
"Is to protect its reputation, its corporate name, its goodwill, whenever respondent any less a juridical person. Indeed, an exception to the
that reputation, corporate name or goodwill have, through the natural license requirement has been recognized in this jurisdiction, namely,
development of its trade, established themselves." And it contends that where a foreign corporation sues on an isolated transaction. As first
its rights to the use of its corporate and trade name: enunciated in Marshall-Wells Co. v. Elser & Co. "the object of the statute
(Secs. 68 and 69, Corporation Law) was not to prevent the foreign
Is a property right, a right in rem, which may assert and protect against corporation from performing single acts, but to prevent it from acquiring
all the world, in any of the courts of the world — even in jurisdictions a domicile for the purpose of business without taking the steps
where it does not transact business — just the same as it may protect its necessary to render it amenable to suit in the local courts ... the
tangible property, real or personal, against trespass, or conversion. implication of the law (being) that it was never the purpose of the
Citing sec. 10, Nims on Unfair Competition and Trade-Marks and cases legislature to exclude a foreign corporation which happens to obtain an
cited; secs. 21-22, Hopkins on Trade-Marks, Trade Names and Unfair isolated order for business from the Philippines, from securing redress
Competition and cases cited." That point is sustained by the authorities, in the Philippine Courts. " The principle has since then been applied in
and is well stated in Hanover Star Milling Co. vs. Allen and Wheeler Co. a number of other
(208 Fed., 513), in which they syllabus says: cases.

Since it is the trade and not the mark that is to be protected, a trade- A more or less analogous question arose in Western Equipment &
mark acknowledges no territorial boundaries of municipalities or states Supply Co. Reyes, 51 Phil. 115. The syllabus of the report, which is a
or nations, but extends to every market where the trader's goods have correct statement of the doctrine laid down in the decision, reads as
become known and identified by the use of the mark follows:
It is very apparent that the purpose and intent of Herman and his
associates in seeking to incorporate under the name of Western Electric A foreign corporation which has never done business in the Philippine
Company, Inc., was to unfairly and unjustly compete in the Philippine Islands and which is unlicensed and unregistered to do business here,
Islands with the Western Electric Company, Inc., in articles which are but is widely and favorably known in the Islands through the use therein
manufactured by, and bear the name of, that company, all of which is of its products bearing its corporate and trade name has a legal right to
prohibited by Act No. 666, and was made known to the defendant Reyes maintain an action in the Islands.
by the letter known in the record to the defendant Reyes by the letter
known in the record as Exhibit A. Parenthetically, it may be stated that the ruling in the Mentholatum case
was subsequently derogated when Congress, purposely to "counteract
The plaintiff, Western Electric Company, Inc., has been in existence as a the effects" of said case, enacted Republic Act No. 638, inserting
corporation for over fifty years, during which time it has established a Section 21-A in the Trademark Law, which allows a foreign corporation
reputation all over the world including the Philippine Islands, for the kind or juristic person to bring an action in Philippine courts for infringement
and quality of its manufactured articles, and it is very apparent that the of a mark or trade-name, for unfair competition, or false designation of
whole purpose and intent of Herman and his associates in seeking to origin and false description, "whether or not it has been licensed to do
incorporate another corporation under the identical name of Western business in the Philippines under Act Numbered Fourteen hundred and
Electric Company, Inc., and for the same identical purpose as that of the fifty-nine, as amended, otherwise known as the Corporation Law, at the
plaintiff, is to trespass upon and profit by its good name and business time it brings complaint."
reputation. The very fact that Herman and his associates have sought
the use of that particular name for that identical purpose is conclusive Petitioner argues that Section 21-A militates against respondent's
evidence of the fraudulent intent with which it is done. capacity to maintain a suit for cancellation, since it requires, before a
foreign corporation may bring an action, that its trademark or tradename
The judgment of the lower court is affirmed, with costs has been registered under the Trademark Law. The argument misses the
essential point in the said provision, which is that the foreign corporation
GENERAL GARMENTS CORPORATION VS. DIRECTOR OF PATENTS is allowed there under to sue "whether or not it has been licensed to do
41 SCRA 50, SEPTEMBER 30, 1971 business in the Philippines" pursuant to the Corporation Law (precisely
FACTS: Respondent Puritan Sportswear Corporation, a corporation to counteract the effects of the decision in the Mentholatum case).

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products bearing its corporate and tradename, has a legal right to

In any event, respondent in the present case is not suing for maintain an action in the Philippines to restrain the residents and
infringement or unfair competition under Section 21-A, but for inhabitants thereof from organizing a corporation therein bearing the
cancellation under Section 17, on one of the grounds enumerated in same name as the foreign corporation, when it appears that they have
Section 4. The first kind of action, it maybe stated, is cognizable by the personal knowledge of the existence of such a foreign corporation, and
Courts of First Instance (Sec. 27); the second partakes of an it is apparent that the purpose of the proposed domestic corporation is
administrative proceeding before the Patent Office (Sec. 18, in relation to deal and trade in the same goods as those of the foreign corporation.
to Sec. 8). And while a suit under Section 21-A requires that the mark or
tradename alleged to have been infringed has been "registered or Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T.
assigned" to the suing foreign corporation, a suit for cancellation of the Eaton, Co. (234 F. 2d 633), this Court further said:
registration of a mark or tradename under Section 17 has no such
requirement. For such mark or tradename should not have been By the same token, the petitioner should be given the same treatment
registered in the first place (and consequently may be cancelled if so in the Philippines as we make available to our own citizens. We are
registered) if it "consists of or comprises a mark or tradename which so obligated to assure to nationals of 'countries of the Union' an effective
resembles a mark or tradename ... previously used in the Philippines by protection against unfair competition in the same way that they are
another and not abandoned, as to be likely, when applied to or used in obligated to similarly protect Filipino citizens and firms.
connection with goods, business or services of the applicant, to cause
confusion or mistake or to deceive purchasers; ..."(Sec. 4d). In the case of of Cerverse Rubber Corporation V. Universal Rubber
Products, Inc. (174 SCRA 165), we likewise re-aafirmed our adherence
WHEREFORE, the petition is dismissed, and the resolution of the to the Paris Convention:
Director of Patents dated August 6, 1964 is affirmed, with costs.
The ruling in the aforecited case is in consonance with the Convention
PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G. VS. of Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47
INTERMEDIATE APPELLATE COURT 158 SCRA 233, FEBRUARY 26, SCRA 165), we likewise re-affirmed our adherence to the Paris
1988 Convention: the Union of Paris for the Protection of Industrial Property
FACTS: Petitioner, a corporation organized and existing under the laws to which the Philippines became a party on September 27, 1965. Article
of the Federal Republic of Germany filed a complaint of patent or 8 thereof provides that 'a trade name [corporation name] shall be
trademark infringement against herein respondent before the RTC of protected in all the countries of the Union without the obligation of filing
Makati. Private respondent filed a motion to dismiss on the ground that or registration, whether or not it forms part of the trademark.'
petitioner had no capacity to sue which was denied. On appeal, the CA
reversed the trial court. The mandate of the aforementioned Convention finds implementation
in Section 37 of RA No. 166, otherwise known as the trademark Law:
ISSUE: WON petitioner had capacity to sue.
Rights of Foreign Registrants. — Persons who are nationals of, domiciled
HELD: YES. Petitioner maintains that it has substantially complied with in, or have a bona fide or effective business or commercial establishment
the requirements of Section 21-A of Republic Act R.A. No. 166, as in any foreign country, which is a party to an international convention or
amended. According to the petitioner, its complaint specifically alleged treaty relating to marks or tradenames on the repression of unfair
that it is not doing business in the Philippines and is suing under the said competition to which the Philippines may be party, shall be entitled to
Republic Act; that Section 21-A thereof provides that "the country of the benefits and subject to the provisions of this Act ...
which the said corporation or juristic person is a citizen, or in which it is
domiciled, by treaty, convention or law, grants a similar privilege to Tradenames of persons described in the first paragraph of this section
corporate or juristic persons of the Philippines" but does not shall be protected without the obligation of filing or registration whether
mandatorily require that such reciprocity between the Federal Republic or not they form part of marks.
of Germany and the Philippines be pleaded; that such reciprocity
arrangement is embodied in and supplied by the Union Convention for We, therefore, hold that the petitioner had the legal capacity to file the
the Protection of Industrial Property Paris Convention) to which both the action below.
Philippines and Federal Republic of Germany are signatories and that
since the Paris 'Convention is a treaty which, pursuant to our SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING
Constitution, forms part of the law of the land, our courts are bound to BUSINESS UNDER ITS OWN NAME
take judicial notice of such treaty, and, consequently, this fact need not LA CHEMISE LACOSTE, S.A. VS. FERNANDEZ 129 SCRA 373, MAY 21,
be averred in the complaint. 1984
FACTS: Petitioner, a corporation organized and existing under the laws
We agree. In the leading case of La Chemise Lacoste, S.A .v. Fernandez, of France and not doing business in the Philippines, filed with the NBI a
(129 SCRA 373), we ruled: letter- complaint alleging therein the acts of unfair competition being
But even assuming the truth of the private respondents allegation that committed by respondent Hemandas and requesting their assistance in
the petitioner failed to allege material facto in its petition relative to his apprehension and prosecution, after Hermandas acquired a patent
capacity to sue, the petitioner may still maintain the present suit against for the use of “CHEMISE LACOSTE & DEVICE”.
respondent Hernandes. As early as 1927, this Court was, and it still is, of
the view that a foreign corporation not doing business in the Philippines NBI filed with the respondent court for two search warrant which was
needs no license to sue before Philippine courts for infringement of issued and for which a motion to quash was filed by Hermandas alleging
trademark and unfair competition. Thus, in Western Equipment and that his trademark is different from that of petitioner, which was granted
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign by respondent court.
corporation which has never done any business in the Philippines and
which is unlicensed and unregistered to do business here, but is widely ISSUE: WON petitioner, having a representative, is doing business in the
and favorably known in the Philippines through the use therein of its Philippines.
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tradenames. In other words, Rustan is not a mere agent or conduit of

HELD: NO. Respondent states that not only is the petitioner not doing the petitioner.
business in the Philippines, but it also is not licensed to do business in
the Philippines. He also cites the case of Leviton Industries v. Salvador The rules and regulations promulgated by the Board of Investments
(114 SCRA 420) to support his contention The Leviton case, however, pursuant to its rule-making power under Presidential Decree No. 1789,
involved a complaint for unfair competition under Section 21-A of otherwise known as the Omnibus Investment Code, support a finding
Republic Act No. 166 which provides: that the petitioner is not doing business in the Philippines. Rule I, Sec. 1
(g) of said rules and regulations defines "doing business" as one" which
Sec. 21 — A. Any foreign corporation or juristic person to which a mark includes, inter alia:
or tradename has been registered or assigned under this Act may bring (1) ... A foreign firm which does business through middlemen acting
an action hereunder for infringement, for unfair competition, or false on their own names, such as indentors, commercial brokers or
designation of origin and false description, whether or not it has been commission merchants, shall not be deemed doing business in the
licensed to do business in the Philippines under Act numbered Fourteen Philippines. But such indentors, commercial brokers or commission
Hundred and Fifty-Nine, as amended, otherwise known as the merchants shall be the ones deemed to be doing business in the
Corporation Law, at the time it brings the complaint; Provided, That the Philippines.
country of which the said foreign corporation or juristic person is a (2) Appointing a representative or distributor who is domiciled in the
citizen, or in which it is domiciled, by treaty, convention or law, grants a Philippines, unless said representative or distributor has an
similar privilege to corporate or juristic persons of the Philippines. independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus,
We held that it was not enough for Leviton, a foreign corporation where a foreign firm is represented by a person or local company
organized and existing under the laws of the State of New York, United which does not act in its name but in the name of the foreign firm
States of America, to merely allege that it is a foreign corporation. It the latter is doing business in the Philippines.
averred in Paragraph 2 of its complaint that its action was being filed
under the provisions of Section 21-A of Republic Act No. 166, as Applying the above provisions to the facts of this case, we find and
amended. Compliance with the requirements imposed by the above- conclude that the petitioner is not doing business in the Philippines.
cited provision was necessary because Section 21-A of Republic Act No. Rustan is actually a middleman acting and transacting business in its own
166 having explicitly laid down certain conditions in a specific proviso, name and or its own account and not in the name or for the account of
the same must be expressly averred before a successful prosecution may the petitioner.
ensue. It is therefore, necessary for the foreign corporation to comply
with these requirements or aver why it should be exempted from them, ISSUE No. 2: WON the criminal case can be maintained even if the
if such was the case. The foreign corporation may have the right to sue foreign corporation is doing business without a license.
before Philippine courts, but our rules on pleadings require that the
qualifying circumstances necessary for the assertion of such right should HELD: YES. But even assuming the truth of the private respondent's
first be affirmatively pleaded. allegation that the petitioner failed to allege material facts in its petition
relative to capacity to sue, the petitioner may still maintain the present
In contradistinction, the present case involves a complaint for violation suit against respondent Hemandas. As early as 1927, this Court was, and
of Article 189 of the Revised Penal Code. The Leviton case is not it still is, of the view that a foreign corporation not doing business in the
applicable. Philippines needs no license to sue before Philippine courts for
infringement of trademark and unfair competition.
Asserting a distinctly different position from the Leviton argument,
Hemandas argued in his brief that the petitioner was doing business in Our recognizing the capacity of the petitioner to sue is not by any means
the Philippines but was not licensed to do so. To support this argument, novel or precedent setting. Our jurisprudence is replete with cases
he states that the applicable ruling is the case of Mentholatum Co., Inc. illustrating instances when foreign corporations not doing business in
v. Mangaliman: (72 Phil. 524) where Mentholatum Co. Inc., a foreign the Philippines may nonetheless sue in our courts. In East Board
corporation and Philippine- American Drug Co., the former's exclusive Navigation Ltd, v. Ysmael and Co., Inc. (102 Phil. 1), we recognized a
distributing agent in the Philippines filed a complaint for infringement right of foreign corporation to sue on isolated transactions. In General
of trademark and unfair competition against the Mangalimans. Garments Corp. v. Director of Patents (41 SCRA 50), we sustained the
right of Puritan Sportswear Corp., a foreign corporation not licensed to
The argument has no merit. The Mentholatum case is distinct from and do and not doing business in the Philippines, to file a petition for
inapplicable to the case at bar. Philippine American Drug Co., Inc., was cancellation of a trademark before the Patent Office.
admittedly selling products of its principal Mentholatum Co., Inc., in the
latter's name or for the latter's account. Thus, this Court held that More important is the nature of the case which led to this petition. What
"whatever transactions the Philippine-American Drug Co., Inc. had preceded this petition for certiorari was a letter complaint filed before
executed in view of the law, the Mentholatum Co., Inc., did it itself. And, the NBI charging Hemandas with a criminal offense, i.e., violation of
the Mentholatum Co., Inc., being a foreign doing business in the Article 189 of the Revised Penal Code. If prosecution follows after the
Philippines without the license required by Section 68 of the completion of the preliminary investigation being conducted by the
Corporation Law, it may not prosecute this action for violation of Special Prosecutor the information shall be in the name of the People of
trademark and unfair competition." the Philippines and no longer the petitioner which is only an aggrieved
party since a criminal offense is essentially an act against the State. It is
In the present case, however, the petitioner is a foreign corporation not the latter which is principally the injured party although there is a private
doing business in the Philippines. The marketing of its products in the right violated. Petitioner's capacity to sue would become, therefore, of
Philippines is done through an exclusive distributor, Rustan Commercial not much significance in the main case. We cannot snow a possible
Corporation. The latter is an independent entity which buys and then violator of our criminal statutes to escape prosecution upon a far-fetched
markets not only products of the petitioner but also many other products contention that the aggrieved party or victim of a crime has no standing
bearing equally well-known and established trademarks and to sue.

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simple reason that he was the first registrant in the Supplemental

ISSUE No. 3: WON petitioner has a right to maintain a suit for Register of a trademark used in international commerce and not
infringement of trademarks. belonging to him is to render nugatory the very essence of the law on
trademarks and tradenames.
HELD: YES. We are moreover recognizing our duties and the rights of
foreign states under the Paris Convention for the Protection of Industrial WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED.
Property to which the Philippines and France are parties. We are simply The order dated April 22, 1983 of the respondent regional trial court is
interpreting and enforcing a solemn international commitment of the REVERSED and SET ASIDE.
Philippines embodied in a multilateral treaty to which we are a party and
which we entered into because it is in our national interest to do so. F. Capacity to Sue
GENERAL RULE: A corporation’s capacity to sue must be affirmatively
The Paris Convention provides in part that: pleaded in order that it may proceed and effectively institute a case in
ARTICLE 2 Philippine courts. Thus, in the case for instance of a complaint for unfair
(2) Nationals of each of the countries of the Union shall as regards the labor competition under Sec. 21-A of RA No. 166, it was held that it is
protection of industrial property, enjoy in all the other countries of the necessary for the foreign corporation to comply with the provision
Union the advantages that their respective laws now grant, or may thereof or aver why it should be exempted from them, if such be the
hereafter grant, to nationals, without prejudice to the rights specially case. The foreign corporation may have the right to sue before our
provided by the present Convention. Consequently, they shall have the courts but our rules on pleadings require that the qualifying
same protection as the latter, and the same legal remedy against any circumstances necessary for the assertion of such right should first be
infringement of their rights, provided they observe the conditions and affirmatively pleaded (Leviton Industries vs Salvador).
formalities imposed upon nationals.
EXCEPTIONS:
ARTICLE 6 (a) EFFECT OF NON-PLEADING: If the dismissal of the case is based
(1) The countries of the Union undertake, either administratively if their on the failure of the foreign corporation to aver its capacity to sue,
legislation so permits, or at the request of an interested party, to refuse would not, however, bar the institution of the same action,
or to cancel the registration and to prohibit the use of a trademark which dismissal should not be allowed, especially so if it would be an idle,
constitutes a reproduction, imitation or translation, liable to create circuitous ceremony considering the absence of any meritorious
confusion, of a mark considered by the competent authority of the substantial defense of the defendant. Technical rules should not be
country of registration or use to be well-known in that country as being accorded undue importance to frustrate and defeat a plainly valid
already the mark of a person entitled to the benefits of the present claim (Olympia Business Machines vs. E. Razon, Inc.)
Convention and used for Identical or similar goods. These provisions (b) COMPLAINT BASED ON VIOLATION OF RPC OR THE
shall also apply when the essential part of the mark constitutes a CORPORATION IS MERELY DEFENDING ITSELF: averment of
reproduction of any such well- known mark or an imitation liable to capacity to sue is not likewise necessary as laid down in the case of
create confusion therewith. Chemise Lacoste vs. Fernandez, or when the foreign corporation is
not suing or maintaining a suit but is merely defending itself from
ARTICLE 8 one filed against it (Times, Inc. vs. Reyes).
A trade name shall be protected in all the countries of the Union without
the obligation of filing or registration, whether or not it forms part of a ATLANTIC MUTUAL INS. CO. VS. CEBU STEVEDORING CO., INC. 17
trademark. SCRA 1037, AUGUST 31, 1966
xxx xxx xxx FACTS: Plaintiff-appellants, organized and existing under the laws of the
US, sued herein defendant-appellee, as subrogee to the shipper and
ARTICLE 10 consignee, alleging that the latter undertook to carry a shipment of
(1) The countries of the Union are bound to assure to persons entitled copra for delivery to P&G Company at Cebu City but upon discharge, a
to the benefits of the Union effective protection against unfair portion of the copra was found damaged.
competition
Defendant moved to dismiss on the ground that the complaints on the
A treaty or convention is not a mere moral obligation to be enforced or ground of failure to allege compliance with Sec. 69 of the Corporation
not at the whims of an incumbent head of a Ministry. It creates a legally Law which was granted after failure of the plaintiff to comply with the
binding obligation on the parties founded on the generally accepted amendment of the complaint.
principle of international law of pacta sunt servanda which has been
adopted as part of the law of our land. (Constitution, Art. II, Sec. 3). ISSUE: WON plaintiff-appellants have the right to sue as to the defects
n the pleadings and procedures.
We have carefully gone over the records of all the cases filed in this
Court and find more than enough evidence to sustain a finding that the HELD: No. It should be noted that insofar as the allegations in the
petitioner is the owner of the trademarks "LACOSTE", "CHEMISE complaint have a bearing on appellants' capacity to sue, all that is
LACOSTE", the crocodile or alligator device, and the composite mark averred is that they are both foreign corporations existing under the laws
of LACOSTE and the representation of the crocodile or alligator. Any of the United States. This averment conjures two alternative possibilities:
pretensions of the private respondent that he is the owner are absolutely either they are engaged in business in the Philippines or they are not so
without basis. Any further ventilation of the issue of ownership before engaged. If the first, they must have been duly licensed in order to
the Patent Office will be a superfluity and a dilatory tactic. maintain this suit; if the second, if the transaction sued upon is singular
and isolated, no such license is required. In either case, the qualifying
The records show that the goodwill and reputation of the petitioner's circumstance is an essential part of the element of plaintiffs' capacity to
products bearing the trademark LACOSTE date back even before 1964 sue and must be affirmatively pleaded.
when LACOSTE clothing apparels were first marketed in the Philippines.
To allow Hemandas to continue using the trademark Lacoste for the To be sure, under the Rules of Court (Section 11, Rule 15) in force prior
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to the promulgation of the Revised Rules on January 1, 1964, it was not American firms, brought suit as subrogees of the shipper and/or
necessary to aver the capacity of a party to sue except to the extent consignee of the goods ensured without joining the latter. In the case at
required to show jurisdiction of the court. In our opinion, however, such hand, the action was instituted by both the subrogee, California
rule does not apply in all situations and under all circumstances. The Insurance Co., Ltd., and the subrogor, a domestic corporation, Olympia
theory behind a similar rule in the United States is "that capacity ... of a (Philippines) about whose capacity to sue no dispute exists. In Atlantic
party for purpose of suit is not in dispute in the great bulk of cases, and Mutual, the plaintiffs' lack of capacity to sue was raised by the defendant
that pleading and proof can be simplified by a rule that an averment of at the earliest opportunity, through a motion to dismiss filed within the
such matter is not necessary, except to show jurisdiction."1 But whereas reglementary period to answer in accordance with Rule 16 of the Rules
in the present case, the law denies to a foreign corporation the right to of Court. In the case at bar, the defendant was twice declared in default,
maintain suit unless it has previously complied with a certain and the defense of lack of capacity to sue, was not raised until after 'the
requirement, then such compliance, or the fact that the suing first declaration of default had been lifted. Moreover, there Is a
corporation is exempt therefrom, becomes a necessary averment in the pronouncement by the Court of Appeals in the instant case, that the
complaint. These are matters peculiarly within the knowledge of defendant had no meritorious defenses save that of lack of capacity to
appellants alone, and it would be unfair to impose upon appellee the sue on the part of the plaintiff.
burden of asserting and proving the contrary. It is enough that foreign
corporations are allowed by law to seek redress in our courts under These circumstances proscribe the application to the controversy at bar
certain conditions: the interpretation of the law should not go so far as of the doctrine in Atlantic Mutual. The defendant's conduct in this case
to include, in effect, an inference that those conditions have been met strongly indicates the absence of any valid defense on its part against
from the mere fact that the party suing is a foreign corporation. the plaintiffs' claims: the defendant failed to appear for pre-trial despite
notice, not once, but twice and was in consequence twice declared in
It was indeed in the light of these and other consideration that this Court default. The lack of any meritorious defense on its part was in fact
has seen fit to amend the former rule by requiring in the Revised Rules confirmed by the declaration of the Court of Appeals, which it has not
(Section 4, Rule 8) that "facts showing the capacity of a party to sue or challenged, that three (3) errors attributed by it to the Trial Court were
be sued or the authority of a party to sue or be sued in a representative "unmeritorious except the second," i.e., plaintiff's lack of capacity to
capacity or the legal existence of an organized association of persons sue. Even assuming incapacity on the part of California, no such
that is made a party, must be averred." incapacity may be attributed to its co- plaintiff, Olympia Business
Machines Co. (Phil.), Inc. And if strictly necessary, the latter could quite
The orders appealed from are affirmed, with costs against plaintiffs- easily execute a cancellation of the deed of subrogation or of re-
appellants assignment of the right of action from California back to Olympia.
Moreover, the dismissal of the case at this stage, would not bar the
OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. VS. E. RAZON, INC. institution by California of the same action, this time alleging in its
155 SCRA 208, OCTOBER 28, 1987 complaint that it was suing on a single, isolated transaction. But this
FACTS: Olympia Office Machines, Ltd., a foreign corporation with would be an Idle, circuitous ceremony in the light of the unchallenged
offices at Hongkong, shipped 300 portable typewriters to its sister declaration by the Court of Appeals of the absence of any meritorious
company in Manila, Olympia Business Machines Company (Phil.), Inc., substantial defense on the part of defendant Razon. This would be to
such shipment insured with California Insurance Co., Ltd. another accord undue importance and significance to technical rules, to allow an
foreign corporation. inflexible, unreasoning adherence to such technical rules to frustrate and
defeat a plainly valid claim.
The typewriters were discharged at North Harbor, Manila into the
custody of the carrier’s agent which in turn turned it over to E. Razon, WHEREFORE, the judgment of the Intermediate Appellate Court
Inc. While in the latter’s possession, part of the shipment was stolen. subject of the appeal is reverse and that of the Trial Court, dated
California Insurance was subrogated to the claim for loss after paying February 1, 1980 reinstated and affirmed, with costs against the
Olympia (Phil). respondents.

Both Olympia (Phil.) and California thereafter brought a suit against E. TIME, INC. VS. REYES 39 SCRA 303, MAY 31, 1971
Razon, Inc., the carrier and the container company, which had earlier FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile
refused to make good the loss of the goods. sought to recover from herein petitioner damages upon an alleged libel
arising from a publication of Time (Asia Edition) magazine, in its issue
For E.Razon’s failure to appear at the pre-trial and after ex-parte entitled “Corruption in Asia”.
reception of evidence, the trial court decided for California. On Razon’s
motion, the order was set aside and Razon amended his answer that Petitioner filed a motion to dismiss on lack of jurisdiction and improper
California is a foreign corporation doing business in the Philippines venue which was deferred until after the trial of the case.
without a license to do so and that it cannot maintain suit in this
jurisdiction. But once again, Razon failed to appear at the pre-trial, as a ISSUE: WON the petition for certiorari and prohibition will prosper.
result, the trial court revived the decision.
HELD: The dismissal of the present petition is asked on the ground that
On appeal, the IAC reversed the decision holding, among others, that the petitioner foreign corporation failed to allege its capacity to sue in
California failed to allege in the complaint its capacity to sue. the courts of the Philippines. Respondents rely on section 69 of the
Corporation law, which provides:
ISSUE: WON the failure of California to aver its capacity to sue is fatal.
SEC. 69. No foreign corporation or corporations formed, organized, or
HELD: The slightest reflection will however immediately make — Tear existing under any laws other than those of the Philippines shall be
that between the factual settings of the Atlantic Mutual case and the permitted to ... maintain by itself or assignee any suit for the recovery of
case at bar, there are distinctions of no little significance. In the former, any debt, claim, or demand whatever, unless it shall have the license
Atlantic Mutual Insurance Co. and Continental Insurance Co., two (2) prescribed in the section immediately preceding. ..." ...;
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law, plaintiff has the right to be furnished by the treasurer or other fiscal
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 officer of the corporation with statement of its affairs embracing a
that no foreign corporation may be permitted to maintain any suit in the particular account of all its assets and liabilities. In the third place,
local courts unless it shall have the license required by the law, and the inasmuch as plaintiff, either at the hearing or in his motion for new trial,
ruling in Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 did not ask to have the stipulation of facts altered or changed, he cannot
that "where ... the law denies to a foreign corporation the right to now, for the first time on appeal, raise the question that aside from the
maintain suit unless it has previously complied with a certain right conferred upon him by section 77 of the Stock Corporation Law of
requirement, then such compliance or the fact that the suing corporation New York, he also entitled under the common law to examine and
is exempt therefrom, becomes a necessary averment in the complaint." inspect the books and records of the defendant corporation. In the
We fail to see how these doctrines can be a propos in the case at bar, fourth place, neither can this right under the common law be granted
since the petitioner is not "maintaining any suit" but is merely defending the defendant in the present case, since the same can only be granted
one against itself; it did not file any complaint but only a corollary at the discretion of the court, under certain conditions, to wit:
defensive petition to prohibit the lower court from further proceeding (a) That the stockholder of a corporation in New York has the right to
with a suit that it had no jurisdiction to entertain. inspect its books and records if it can be shown that he seeks
Petitioner's failure to aver its legal capacity to institute the present information for an honest purpose (14 C. J., 853), or to protect his
petition is not fatal, for ... interest as stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E.,
1103; 45 L. R. A., 461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
A foreign corporation may, by writ of prohibition, seek relief against the (b) That said right to examine and inspect the books of the corporation
wrongful assumption of jurisdiction. And a foreign corporation seeking must be exercised in good faith, for a specific and honest purpose,
a writ of prohibition against further maintenance of a suit, on the ground and not to gratify curiosity, or for speculative or vexatious
of want of jurisdiction in which jurisdiction is not bound by the ruling of purposes. (14 C. J., 854, 855.)
the court in which the suit was brought, on a motion to quash service of
summons, that it has jurisdiction. The appellant has made no effort to prove or even allege that the
information he desired to obtain through the examination and
WHEREFORE, the writs applied for are granted: the respondent Court inspection of defendant's books was necessary to protect his interests
of First Instance of Rizal is declared without jurisdiction to take as stockholder of the corporation, or that it was for a specific and honest
cognizance of its Civil Case No. 10403; and its orders issued in purpose, and not to gratify curiosity, nor for speculative or vexatious
connection therewith are hereby annulled and set aside. Respondent purposes.
court is further commanded to desist from further proceedings in Civil
case No. 10403 aforesaid. Costs against private respondents, Antonio In view of the foregoing, we affirm the judgment of the lower court, with
J. Villegas and Juan Ponce Enrile. costs against the appellant.

G. Laws Governing Foreign Corporations H. Amendment of the License

SEC. 146. Law Applicable. – A foreign corporation lawfully doing SEC. 147. Amendments to Articles of Incorporation or Bylaws of Foreign
business in the Philippines shall be bound by all laws, rules and Corporations. – Whenever the articles of incorporation or bylaws of a
regulations applicable to domestic corporations of the same class, foreign corporation authorized to transact business in the Philippines are
except those which provide for the creation, formation, organization or amended, such foreign corporation shall, within sixty (60) days after the
dissolution of corporations or those which fix the relations, liabilities, amendment becomes effective, file with the Commission, and in the
responsibilities, or duties of stockholders, members, or officers of proper cases, with the appropriate government agency, a duly
corporations to each other or to the corporation. authenticated copy of the amended articles of incorporation or bylaws,
indicating clearly in capital letters or underscoring the change or
GREY VS. INSULAR LUMBER COMPANY 67 PHIL. 139, APRIL 03, 1939 changes made, duly certified by the authorized official or officials of the
FACTS: Herein defendant-appellee Insular Lumber Company is a country or State of incorporation. Such filing shall not in itself enlarge or
corporation existing and organized under the laws of the State of New alter the purpose or purposes for which such corporation is authorized
York licensed to engage business in the Philippines. to transact business in the Philippines.

The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% SEC. 148. Amended License. – A foreign corporation authorized to
of the outstanding capital stock of defendant corporation), was denied transact business in the Philippines shall obtain an amended license in
access to the books and records of the company because, as alleged, the event it changes its corporate name, or desires to pursue other or
the laws of New York provide that only a stockholder who own at least additional purposes in the Philippines, by submitting an application with
3% of the outstanding capital stock of a corporation may make a written the Commission, favorably endorsed by the appropriate government
request to the treasurer or other fiscal officer for a statement of its affairs; agency in the proper cases.
that plaintiff neither has the 3% requirement nor made the written
request. I. Merger / Consolidation
SEC. 149. Merger or Consolidation Involving a Foreign Corporation
Plaintiff raises the Corporation Law which does not provide such Licensed in the Philippines. – One or more foreign corporations
requirements and gives any stockholder the right to examine the books authorized to transact business in the Philippines may merge or
of the corporation. Such law, being the law upon which the defendant consolidate with any domestic corporation or corporations if permitted
corporation was issued a license to do business in the Philippines. under Philippine laws and by the law of its incorporation: Provided, That
the requirements on merger or consolidation as provided in this Code
ISSUE: WON appellant, as a stockholder, is entitled to inspect and are followed.
examine the books and records of transactions of appellee
Whenever a foreign corporation authorized to transact business in the
HELD: Under Section 77 Stock Corporation Law of New York. Under this Philippines shall be a party to a merger or consolidation in its home

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country or State as permitted by the law authorizing its incorporation, L. Control Test vs. Grandfather Rule
such foreign corporation shall, within sixty (60) days after the effectivity
of such merger or consolidation, file with the Commission, and in proper
cases, with the appropriate government agency, a copy of the articles
of merger or consolidation duly authenticated by the proper official or
officials of the country or State under whose laws the merger or
consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines,
the latter shall at the same time file a petition for withdrawal of its license
in accordance with this Title.

J. Revocation of License
SEC. 151. Revocation of License. – Without prejudice to other grounds
provided under special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked or suspended by
the Commission upon any of the following grounds:
(a) Failure to file its annual report or pay any fees as required by this
Code;
(b) Failure to appoint and maintain a resident agent in the Philippines
as required by this Title;
(c) Failure, after change of its resident agent or address, to submit to
the Commission a statement of such change as required by this
Title;
(d) Failure to submit to the Commission an authenticated copy of any
amendment to its articles of incorporation or bylaws or of any
articles of merger or consolidation within the time prescribed by
this Title;
(e) A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
NARRA NICKEL MINING AND DEVELOPMENT CORP. VS. REDMONT
pursuant to this Title;
CONSOLIDATED MINES CORP. 722 SCRA 382 , APRIL 21, 2014
(f) Failure to pay any and all taxes, imposts, assessments or penalties,
FACTS: Redmont Consolidated Mines, Inc. (Redmont) filed before the
if any, lawfully due to the Philippine Government or any of its
Panel of Arbitrators (POA) of the DENR separate petitions for denial of
agencies or political subdivisions;
McArthur Mining, Inc. (McArthur), Tesoro and Mining and Development,
(g) Transacting business in the Philippines outside of the purpose or
Inc. (Tesoro), and Narra Nickel Mining and Development Corporation
purposes for which such corporation is authorized under its license;
(Narra) applications Mineral Production Sharing Agreement (MPSA) on
(h) Transacting business in the Philippines as agent of or acting on
the ground that they are not “qualified persons” and thus disqualified
behalf of any foreign corporation or entity not duly licensed to do
from engaging in mining activities through MPSAs reserved only for
business in the Philippines; or
Filipino citizens. McArthur Mining, Inc., is composed, among others, by
(i) Any other ground as would render it unfit to transact business in
Madridejos Mining Corporation (Filipino) owning 5,997 out of 10,000
the Philippines
shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out of
10,000 shares; MBMI also owns 3,331 out of 10,000 shares of
SEC. 152. Issuance of Certificate of Revocation. – Upon the revocation
Madridejos Mining Corporation.Tesoro and Mining and Development,
of the license to transact business in the Philippines, the Commission
Inc., is composed, among others, by Sara Marie Mining, Inc. (Filipino)
shall issue a corresponding certificate of revocation, furnishing a copy
owning 5,997 out of 10,000 shares, and MBMIResources, Inc. (Canadian)
thereof to the appropriate government agency in the proper cases.
owning 3,998 out of 10,000 shares; MBMI also owns3,331 out of 10,000
shares of Sara Marie Mining, Inc.. Narra Nickel Mining and Development
The Commission shall also mail the notice and copy of the certificate of
Corporation is composed, among others, by Patricia Louise Mining &
revocation to the corporation, at its registered office in the Philippines.
Development Corporation (Filipino) owning 5,997 out of 10,000 shares,
and MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000shares;
K. Withdrawal of License
MBMI also owns 3,396 out of 10,000 shares of Patricia Louise Mining &
SEC. 153. Withdrawal of Foreign Corporations. – Subject to existing laws Development Corporation.
and regulations, a foreign corporation licensed to transact business in
the Philippines may be allowed to withdraw from the Philippines by filing ISSUES:
a petition for withdrawal of license. No certificate of withdrawal shall be (1) Is the Grandfather Rule applicable.
issued by the Commission unless all the following requirements are met: (2) Whether McArthur, Tesoro and Narra are Filipino nationals.
(a) All claims which have accrued in the Philippines have been paid,
compromised or settled; HELD:
(b) All taxes, imposts, assessments, and penalties, if any, lawfully due (1) YES.
to the Philippine Government or any of its agencies or political The instant case presents a situation which exhibits a scheme employed
subdivisions, have been paid; and by stockholders to circumvent the law, creating a cloud of doubt in the
(c) The petition for withdrawal of license has been published once a Court’s mind. To determine, therefore, the actual participation, direct or
week for three (3) consecutive weeks in a newspaper of general indirect, of MBMI, the grandfather rule must be used. The Strict Rule or
circulation in the Philippines. the Grandfather Rule pertains to the portion in Paragraph 7 of the 1967
SEC Rules which states, “but if the percentage of Filipino ownership in

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the corporation or partnership is less than 60%, only the number of

shares corresponding to such percentage shall be counted as of
Philippine nationality.” Under the Strict Rule or Grandfather Rule Proper,
the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., “grandfathered”) to determine the
total percentage of Filipino ownership.

2) NO.
[P]etitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or more of their equity interests.
Such conclusion is derived from grandfathering petitioners’ corporate
owners. Xxx Noticeably, the ownership of the “layered” corporations
boils down to xxx group wherein MBMI has joint venture agreements
with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the
underlying relationships between and among the corporations,
petitioners are NOT Filipino nationals and must be considered foreign
since 60% or more of their capital stocks or equity interests are owned
by MBMI.

SEC Memorandum Circular No. 8, Series of 2013

Guidelines on the Compliance with the Filipino-Foreign Ownership
Requirements Prescribed in the Constitution and/or Existing Laws by
Corporations Engaged in Nationalized and Partly Nationalized Activities

M. Securities Deposit
SEC Memorandum Circular No .17, Series of 2019
Revised Guidelines on Securities Deposit of Branch Offices of Foreign
Corporations

XVIII. MISCELLANEOUS PROVISIONS

A. Investigations, Offenses, Penalties

B. Arbitration for Corporations

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 NOTES ON THE REVISED CORPORATION CODE

DAY 11 IV. Title VII: Prohibitions on Fraud, Manipulation and Insider Tradin
A. Rule 24.1 Manipulative Practices Rule 24.2 Short Sales
PART 2 B. Rule 25 Option Trading
PRESIDENTIAL DECREE 902-A C. Rule 26 Fraudulent Transactions Rule 27 Insider Trading
D. Others:
I. Devices or Schemes Amounting to Fraud 1. Civil and Administrative Sanctions
2. Penal Sanctions]
II. Intra-Corporate Controversies 3. Settlement Offer
4. Limitation of Actions
Medical Plaza Makati Condominium Corporation vs. Cullen GR No. 5. Amount of Damages
181416; 11 November 2013

III. Controversies in the Election, Appointment or Removal of V. Title VIII: Registration of Securities Market Professionals
Directors / Officers
A. Rule 28.1.1 Broker Dealer
IV. Appointment of Management Committee, Board or Body B. Rule 28.1.2 Registration Requirements
C. Rule 28.1.5 Registration of Salesmen and Associated Persons
R.J. Jacinto vs. FWCC (410 SCRA 140) of Broker Dealers
Sy Chim vs. Sy Siy Ho & Sons (480 SCRA 206) D. Rule 28.1.5.4 Registration Requirements

PART 3 SECURITIES REGULATION CODE

2015 IMPLEMENTING RULES AND REGULATIONS VI. Title IX: Exchanges and other Securities Trading Markets
A. Rule 38 Requirements on Nomination and Election of
I. Rule 3: Definition of Terms Independent Directors

II. Rule 5: Powers and Functions of the Commission SEC Memorandum Circular No. 9, Series of 2011
Term Limits for Independent Directors
SEC Memorandum Circular No. 11, Series of 2003
Supervision Over Registered Corporations SEC Advisory dated 20 July 2015
Clarification on the Term Limits of Independent Directors

III. Title III: Registration of Securities SEC Advisory dated 31 March 2016
A. Rule 8.1 Registration Statement Term Limits for Independent Directors

SEC Memorandum Circular No. 13, Series of 2017 SEC Memorandum Circular No. 7, Series of 2018
Rules and Regulations on Minimum Public Ownership (MPO) on Initial Amendment to Rule 38.2.7 of the 2015 IRR of the SRC
Public Offerings.

B. Rule 9.1 Exempt Securities

C. Rule 9.2 Other Exempt Transactions Rule 10.1 Exempt

Transactions

D. Rule 10.1.7 Isolated Transactions Rule 10.1.11 Qualified

Buyers

E. Rule 10.2 Limited Public Offerings and other Exempt

Transactions Rule 10.3 Application for Confirmation of
Exemption

F. Rule 13 Suspension or Revocation of Registration of Securities

Rule 14 Amendments to the Registration Statement and
Prospectus Rule 15 Reportorial Requirements

G. Rule 19 Tender Offer; Mandatory Tender Offer and

Exemptions

Justee Terms Enterprise vs. SEC (CA GR. SP. No. 48013,
July 30, 1999) China Banking vs. CA (270 SCRA 503)
People vs. Petralba (439 SCRA 158)

H. Rule 23 Reports to be Filed by Directors, Officers and Principal

Stockholders

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