Golden Notes - Mercantile Law - Removed

The Corporation Code
NOTE: There is no willful misconduct if the airplane incorporation law or charter or by means of general
was lost without a trace. In such case, no willful corporation law.
misconduct can be proved because if the airplane is
lost without a trace, there is no proof of the act or XPN: For corporations by prescription, such
omission or the proximate cause of the accident. authority is not necessary (De Leon, 2010).
(Wyman and Barlett v. Pan American Airways, Inc.,
CCH 1 AVI 1093 (1943) NOTE: A corporation by prescription is one which
has exercised powers for an indefinite period
without interference on the part of the sovereign
power and which by fiction of law, is given the status
THE CORPORATION CODE (CC)
of a corporation (De Leon, 2010).
The creation of a corporation is by operation of

law
CORPORATION
NOTE: The Philippine jurisprudence adopted the
Concession or fiat theory, which states that a
(Note: Those which are affected by the Revised corporation is conceived as an artificial person
Corporation Code is not included in the 2019 Bar owing existence through creation by a foreign
Syllabus. The reader must be guided accordingly.) power. Further, a corporation has without any
existence until it has received the imprimatur of the
DEFINITION State acting according to law, through the SEC
(Tayag v. Benguet Consolidated, Inc., GR No. L-23145,
A corporation is an artificial being created by November 29, 1968).
operation of law, having the right of succession and
the powers, attributes and properties expressly Q: Since February 8, 1935, the legislature has
authorized by law or incident to its existence (CC, not passed even a single law creating a private
Sec. 2). corporation. What provision of the constitution
precludes the passage of such law? (2008 Bar)
ATTRIBUTES OF A CORPORATION
A: Article XII, Section 16 of the 1987 Constitution
[ALS– PAPI] provides that Congress shall not, except by general
law, provide for the formation, organization, or
1. It is an Artificial being regulation of private corporations. Government-
2. It is created by operation of Law owned and controlled corporations may be created
3. It enjoys the right of Succession or established by special charters in the interest of
4. It has the Powers, Attributes and Properties the common good and subject to the test of
expressly authorized by law or Incident to its economic viability.
existence.
Private corporations owned or controlled by the
1. Artificial Personality government can only be created by special law often
referred to as “Charters”.
A corporation is a legal or juridical person with a
personality separate and apart from individual Q: A corporation was created by a special law.
stockholders or members and from any other legal Later, the law creating it was declared invalid.
entity into which it may be connected or related. May such corporation claim to be a de facto
corporation?
2. Corporation as a Creation of Law or By
Operation of Law A: NO. A private corporation may be created only
under the Corporation Code. Only public
No corporation can exist without the consent or corporations may be created under a special law.
grant of the sovereign, and that the power to create Where a private corporation is created under a
corporations is one of the attributes of sovereignty. special law, there is no attempt at a valid
Corporations cannot come into existence by mere incorporation and it cannot claim a de facto status.
agreement of the parties (De Leon, 2010).
Q: A Special Audit Team from COA audited the
GR: A legislative grant or authority is required for accounts of Leyte Metropolitan Water District
the creation of a corporation, either by a special (LMWD). Subsequently, LMWD and received a
requested for payment of auditing fees from
UNIVERSITY OF SANTO TOMAS 162

2019 GOLDEN NOTES
Mercantile Law
COA. As LMWD GM Feliciano sent a reply government assets and does not receive any
informing COA that the water district could not appropriation from the Philippine Congress. It is a
pay the auditing fees, citing as basis for his non-profit, donor-funded, voluntary organization,
action Presidential Decree 198 (PD 198) as well whose mission is to bring timely, effective and
as Republic Act No. 6758 (RA 6758). Thereafter, compassionate humanitarian assistance for the
Feliciano asked COA for refund of all auditing most vulnerable without consideration of
fees LMWD previously paid to COA. The COA nationality, race, religion, gender, social status or
Chairman denied LMWD’s request. Feliciano political affiliation. This does not mean however
maintains that LWDs are not GOCCs with that the charter of PNRC is unconstitutional. PNRC
original charters. He argues that LWDs are is sui generis. Although it is neither a subdivision,
private corporations, and thus not subject to agency or instrumentality of the government nor a
COA’s jurisdiction. Is a Local Water District GOCC or a subsidiary thereof, so much so that
created under PD 198, as amended, a GOCC Gordon was correctly allowed to hold his position as
subject to the audit jurisdiction of COA? Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
A: YES. LWDs are GOCCs subject to the audit that the PNRC is a private corporation within the
jurisdiction of COA. The Constitution and existing contemplation of the provision of the Constitution
laws mandate COA to audit all government agencies, that must be organized under the Corporation Code.
including GOCCs with original charters. An LWD is a The PNRC enjoys a special status as an important
GOCC with an original charter. The Constitution ally and auxiliary of the government in the
recognizes two classes of corporations. The first humanitarian field in accordance with its
refers to private corporations created under a commitments under international law (Liban, et al.,
general law. The second refers to GOCCs created by v. Gordon, G. R. No. 175352, January 18, 2011, in
special charters. Congress cannot enact a law Divina, 2014).
creating a private corporation with a special
charter. Such legislation would be Q: Dennis A.B. Funa requested the COA for a copy
unconstitutional. Private corporations may exist of the latest financial and audit report of the
only under a general law. The Constitution Manila Economic and Cultural Office (MECO).
authorizes Congress to create GOCCs through The MECO was organized as a non-stock, non-
special charters. Since private corporations cannot profit corporation under the Corporation Code,
have special charters, it follows that Congress can in view of the desire of the Philippines and
create corporations with special charters only if Taiwan to maintain an unofficial relationship in
such corporations are government-owned or lieu of official diplomatic ties severed by the
controlled. Obviously, LWDs are not private One-China policy. Upon receipt of COA’s reply
corporations because they are not created under the that it does not audit MECO, Funa filed a petition
Corporation Code (Engr. Ranulfo C. Feliciano v. COA, for mandamus to compel COA to audit MECO as
et al., G.R. No. 147402, January 14, 2004). the latter was a GOCC as it performs functions
relating to public needs and is controlled by the
Q: In Liban, et al. v. Gordon (July 15, 2009) the government through the appointment of its
Court held that Richard Gordon did not forfeit board of directors. Is Funa correct?
his seat in the Senate when he accepted the
chairmanship of the Philippine National Red A: NO. The MECO is not owned or controlled by the
Cross Board of Governors, as the office of the government, hence it is not a GOCC or a government
PNRC Chairman is neither a government office instrumentality. GOCCs are "stock or non-stock"
nor an office in a government-owned or corporations "vested with functions relating to
controlled corporation for purposes of the public needs" that are "owned by the Government
prohibition in Section 13, Article VI of the 1987 directly or through its instrumentalities." By
Constitution. However, the decision declared definition, three attributes thus make an entity a
void the PNRC Charter as it creates the PNRC as GOCC:
a private corporation and ruled that the PNRC
should incorporate under the Corporation Code a. First, its organization as stock or non-
and register with the SEC if it wants to be a stock corporation;
private corporation. Is PNRC a private b. Second, the public character of its
corporation? function; and
c. Third, government ownership over the
A: NO. Although the PNRC was created by a special same.
charter, it cannot be considered as a GOCC in
absence of the essential elements of ownership and Possession of all three attributes is necessary to
control by the government. It does not have deem an entity a GOCC. In this case, there is not
UNIVERSITY OF SANTO TOMAS

163 FACULTY OF CIVIL LAW
much dispute that the MECO possesses the first and its non-governmental character, the MECO handles
second attributes. It is the third attribute, which the government funds in the form of the "verification
MECO lacks. fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Section 2(6) of EO
The MECO is not owned or controlled by the No. 15, s. 2001. Hence, under existing laws, the
government. Organization as a non-stock accounts of the MECO pertaining to its collection of
corporation and the mere performance of functions such "verification fees" and "consular fees" should
with a public aspect, however, are not by be audited by the COA (Funa v. Manila Economic and
themselves sufficient to consider the MECO as a Cultural Office and COA, G.R. No. 193462, February,
GOCC. In order to qualify as a GOCC, a corporation 2014).
must also, if not more importantly, be owned by the
government. Franchise
The government owns a stock or non-stock A franchise includes any special privilege or right
corporation if it has controlling interest in the affected with public interest, conferred by the State
corporation. In a stock corporation, the controlling on corporations or persons and which does not
interest of the government is assured by its belong to the citizens of the country, generally as a
ownership of at least fifty-one percent (51%) of the matter of common right (De Leon, 2010, citing JRS
corporate capital stock. In a non-stock corporation, Business Corp. v. Imperial Insurance, Inc., G.R. No. L-
like the MECO, jurisprudence teaches that the 19891, July 31, 1964)
controlling interest of the government is affirmed
when "at least majority of the members are Kinds of franchise
government officials holding such membership by
appointment or designation" or there is otherwise Primary vs. Secondary Franchise
"substantial participation of the government in the
selection" of the corporation’s governing board. PRIMARY
SECONDARY FRANCHISE
FRANCHISE
The fact of the incorporation of the MECO under the Special authority given to a
Corporation Code is the key. The MECO was correct corporation to engage in a
in postulating that, as a corporation organized specialized business (e.g.
under the Corporation Code, it is governed by the banks, insurance companies,
appropriate provisions of the said code, its articles right to use the streets of a
of incorporation and its by-laws. In this case, it is the municipality to lay pipes of
by-laws of the MECO that stipulates that its tracks, erect poles, or string
directors are elected by its members; its officers are wires).
elected by its directors; and its members, other than
the original incorporators, are admitted by way of a Certain rights and privileges
unanimous board resolution. conferred upon existing
The franchise corporations (J.R.S. Business
It is significant to note that none of the original or authority to Corp. v. Imperial Insurance,
incorporators of the MECO were shown to be exist as a supra).
government officials at the time of the corporation’s corporation
organization. Indeed, none of the members, officers The franchise to exercise
or board of directors of the MECO, from its powers and privileges granted
incorporation up to the present day, were to such corporation to the
established as government appointees or public business for which it was
officers designated by reason of their office. There created, including those
is, in fact, no law or executive order that authorizes conferred for purposes of
such an appointment or designation. Hence, from a public benefit such as the
strictly legal perspective, it appears that the power of eminent domain and
presidential "desire letters" pointed out by Funa other powers and privileges
are, no matter how strong its persuasive effect may enjoyed by public utilities (De
be, merely recommendatory. Leon, 2010).
GR: Granted by
It is a sui generis private entity especially entrusted the
by the government with the facilitation of unofficial Granted by a Government
Corporation
relations with the people in Taiwan without Agency, or a Municipal
Code
jeopardizing the country’s faithful commitment to Corporation
XPN: In GOCC’s
the One China policy of the PROC. However, despite with a special

2019 GOLDEN NOTES
Mercantile Law
charter, a using the right to take property for private use (De
special law Leon, 2010, citing SEC Opinion, October 28, 1968).
grants the
franchise Rule on whether a defective incorporation
It may ordinarily be conveyed result into a partnership
or mortgaged under a general
power granted to a The answer depends on whether or not there is a
corporation to dispose of its clear intent to participate in the management of the
Cannot be business affairs on the part of the investor. Parties
property (i.e. Through board
transferred who intend to participate or has actually
resolution or approval of
without the participated in the business affairs of the proposed
stockholders (Villarey v. Ferrer
approval of corporation would be considered as partners under
G.R. No. L-23893, October 29,
Congress a de facto partnership. On the other hand, parties
1968).
(Sundiang Sr. & who took no part notwithstanding their
Aquino, 2011) subscriptions do not become partners with other
It can be subject to levy and
sale on execution together with subscribers (Pioneer Insurance vs. CA, GR No. 84197,
corporate property (Sundiang July 28, 1989).
Sr. & Aquino, 2011).
Engagement into a contract of partnership or a
3. Right to succession joint venture
A corporation has a capacity of continuous existence GR: Corporations have no power to enter into
irrespective of the death, withdrawal, insolvency, or partnership.
incapacity of the individual stockholders or
members and regardless of the transfer of their XPN: The SEC allowed corporations to enter into
interest or shares of stock (De Leon, 2010). partnerships with other corporations and
individuals provided: (ENLiT)
A corporation may exist up to the period stated in
the articles of incorporation not exceeding 50 years 1. The authority to enter into partnership relation
from the date of incorporation, unless sooner is expressly conferred by the Charter or the
dissolved or unless said period is extended (CC, Sec. Articles of Incorporation (AOI)
11). Note: The Revised Corporation Code now allows 2. The nature of the business venture to be
corpotations to have perpetual existence. undertaken by the partnership is in line with
the business authorized by the charter or the
4. Powers, attributes and properties of a AOI (SEC Opinions, Feb. 29, 1980, December 1,
Corporation 1993, and February 23, 1994).
3. The partnership must be a limited partnership
The powers that a corporation can exercise are only and the corporation must be a limited partner.
those which are granted by the law of its creation. 4. If it is a foreign corporation, it must obtain a
All powers which may be implied from those license to transact business in the country.
expressly provided by law and those which are
incidental or essential to the corporation’s existence Q: May a corporation enter into a joint venture?
may also be exercised (CC, Sec. 36). (1996 Bar)
TEST: Whether the act of the corporation is in direct A: YES. A corporation may enter into a joint venture
and immediate furtherance of its business, fairly with another where the nature is in line with the
incidental to the express powers and reasonably business authorized by its charter. (Tuason v.
necessary to their exercise. Bolanos, G.R. L-4935, May 28, 1954).
The power to institute expropriation However, in as much as the term “joint venture” has
proceedings is not granted to all corporations no precise legal definition, it may take various
forms. It could take the form of a simple pooling of
Only quasi-public corporations or those affected resources (not involving incorporation) between
with public interest are given the power to institute two or more corporations for a specific project,
condemnation proceedings against owners of purpose or undertaking, or for a limited time. It may
private property. To grant the right of eminent involve the creation of a more formal structure, and,
domain to purely private entities exercising hence, the formation of a corporation. What is
functions, which are not public in nature, would be prohibited by law is the creation of partnership

between corporations but not the creation of joint Existence of
venture. the
corporation
Advantages vs. Disadvantages of a Corporation commences
from the date
ADVANTAGES DISADVANTAGES of issuance of
More complicated in the Certificate
The capacity to act as a From the
formation and of
legal unit moment of
management Incorporation
meeting of
Limitation of, or by the
Higher cost of minds of the
exemption from Securities and
formation and partners
liability of Exchange
operation Commenceme
shareholders Commission
nt of juridical The term of a
Lack of personal (SEC).
Continuity of Existence personality partnership
element and term of may be
Transferability of Greater government Existence
existence established
shares control and regulation CANNOT be
for any
Management and for a term in
Centralized period of
control are separate excess of 50
management of BOD time
from ownership years. The
stipulated by
Standardized method Stockholders have term of a
the partners
of organization and little voice in the corporation
finance conduct of business may be
extended to
Joint Account vs. Partnership not more than
50 years at
JOINT ACCOUNT PARTNERSHIP any single
Has no firm name and is instance.
conducted in the name GR: Requires
Has a firm name. at least 5
of the ostensible
partner. incorporators
May be
Has no juridical but not more
Has juridical Number of organized by
personality and can sue than 15
personality and may incorporators at least 2
or be sued only in the persons
sue or be sued under XPN:
name of the ostensible
its firm name Corporation
partner.
sole
Has no common fund. Has a common fund.
GR: May
The ostensible partner All general partners
manages its business have the right of exercise any
power May exercise
operations. management.
authorized only such
Liquidation may, by
Liquidation thereof can by the powers as may
agreement, be
only be done by the partners. be granted by
entrusted to a partner
ostensible partner. law and its
or partners.
Powers XPN: Acts articles of
which are incorporation,
contrary to implied
Corporation vs. Partnership
law, morals, therefrom or
good incidental
BASIS PARTNERS CORPORATIO
customs, thereto.
HIP N
public order,
Created by public policy
Created by
mere
operation of When GR: Power to
agreement of
As to creation law and management do business
the parties
and governed by is not agreed and manage
and
governing law the Management upon, every its affairs is
governed by
Corporation partner is an vested in the
the Civil
Code agent of the Board of
Code
partnership Directors

2019 GOLDEN NOTES
Mercantile Law
(BOD) / Board debts to third
of Trustees persons
(BOT)
XPN: Limited
XPNs: partner
1. Executive No right of
Committe succession
e (Sec. 35, (ie. a
Right of Has right of
CC) partnership
Succession succession
2. Managem dissolves
ent upon death
Contract of a partner)
(Sec. 44, Stockholder
CC) has the right
3. The AOI of Partner
to transfer his
a close cannot
shares
corporati transfer his
without prior
on may interest in
Transferabilit consent of the
provide the
y of other
that the partnership
Shareholder’s stockholders
business without the
interest unless the
of the consent of all
right of first
corporati the other
refusal is
on shall be existing
embodied in
managed partners.
the articles of
by the incorporation.
stockhold May be
ers of the dissolved
corporati Can only be
any time by
on rather dissolved with
the will of
than by a the consent of
any or all of
board of the State.
the partners.
directors.
(Sec. 97, Dissolution Death or
Death, civil
CC) insolvency of
interdiction
The suit shareholders
and
against a cannot
insolvency of
member of the dissolve the
a partner
BOD or BOT corporation.
dissolve the
who partnership.
A partner as mismanages
Effect of such can sue must be
mismanagem a co-partner brought in the CLASSES OF CORPORATION
ent who name of the
mismanages. corporation;
this is The following are the classes of corporation:
commonly 1. As to whether their membership is represented
known as by shares of stock or not:
“derivative a. Stock –one which has:
suit”. 1. Capital stock divided into shares;
GR: Partners and
are liable Stockholders 2. Are authorized to distribute to the
personally are liable only holders of such shares dividends
Extent of and to the extent of or allotments or the surplus profits
liability to subsidiarily the shares on the basis of the shares held (Sec.
third persons (sometimes subscribed by 3, CC).
solidarily) them whether
for paid or not.
partnership

b. Non-Stock – is one which does - not b. Open ‐open to any person who
issue shares and is - created not for may wish to become a stockholder
profit but for public good and welfare or member thereto.
and where no part of its income is
distributable as dividends to its 8. As to their relation to another corporation:
members, trustees, or officers. (Sec. 87, a. Parent or Holding ‐ related to another
CC) corporation that it has the power
either, directly or indirectly to, elect
2. As to the number of persons who compose the majority of the director of such
them: other corporation.
a. Corporation Aggregate b. Subsidiary ‐ so related to another
- corporation consisting of more corporation that the majority of its
than one member or corporator. directors can be elected either, directly
The CC requires that these or indirectly, by such other corporation
corporations must be formed by
“not less than 5 persons” (Sec. 10, 9. As to whether they are corporations in a true
CC). sense or only in a limited sense:
b. Corporation Sole a. True ‐ exists by statutory authority
‐ Religious corporation which b. Quasi ‐ exist without formal legislative
consists of one member which is grant:
the head of the religious sect or i. Corporation by prescription ‐ has
corporator only and his successor. exercised corporate powers for an
indefinite period without interference
3. As to whether they are for religious purpose or on the part of the sovereign power and
not: which by fiction of law, is given the
a. Ecclesiastical Corporation ‐ one status of a corporation;
organized for religious purpose. ii. Corporation by estoppel ‐ in reality is
b. Lay Corporation ‐ one organized not a corporation, either de jure or de
for a purpose other than for facto, because it is so defectively
religion. formed, but is considered a corporation
in relation to those only who, by reason
4. As to whether they are for charitable purpose of theirs acts or admissions, are
or not: precluded from asserting that it is not a
a. Eleemosynary ‐ one established corporation (Sec. 21, CC).
for charitable purposes.
b. Civil ‐ one established for business 10. As to whether they are for public (government)
or profit. or private purpose: (2001, 2004 Bar)
a) Public - formed or organized for the
5. As to state or country under or by whose laws government of a portion of the State (like
they have been created: cities and municipalities) for the purpose of
a. Domestic ‐ incorporated under the serving the general good and welfare.
laws of the Philippines. (Aquino, 2014)
b. Foreign ‐ formed, organized, or b) Private - one formed for some private
existing under any laws other than purpose, benefit or end. It may either be a
those of the Philippines and whose stock or non-stock (Aquino, 2014).
laws allow Filipino citizens and
corporations to do business in its The fact that a certain juridical entity is impressed
own country or state (Sec. 123, CC). with public interest does not, by that circumstance
alone, make the entity a public corporation,
6. As to their legal right to corporate existence: inasmuch as a corporation may be private although
a. De jure ‐existing both in fact and in law. its charter contains provisions of a public character,
b. De facto ‐existing in fact but not in law. incorporated solely for the public good. This class of
corporations may be considered quasi-public
7. As to whether they are open to the public or not: corporations, which are private corporations that
a. Close ‐limited to selected persons render public service, supply public wants, or
or members of the family (Sec. 96‐ pursue other eleemosynary objectives. While
105, CC). purposely organized for the gain or benefit of its
members, they are required by law to discharge
functions for the public benefit. Examples of these

2019 GOLDEN NOTES
Mercantile Law
corporations are utility, railroad, warehouse, 3. Name of the corporation closely resembles that
telegraph, telephone, water supply corporations of a pre-existing corporation that will tend to
and transportation companies. It must be stressed deceive the public;
that a quasi-public corporation is a species of 4. Incorporators or a certain number of them are
private corporations, but the qualifying factor is not residents of the Philippines;
the type of service the former renders to the public: 5. Acknowledgment of the articles of
if it performs a public service, then it becomes a incorporation or certificate of incorporation is
quasi-public corporation (Philippine Society for the insufficient or defective in form, or it was
Prevention of Cruelty to Animals v. COA, G.R. No. acknowledged before the wrong officer;
169752, September 25, 2007). 6. Percentage of Filipino ownership of the capital
stock required for the business is less than that
Requisites for the formation of a stock prescribed by law; or
corporation 7. Failure to submit by-laws on time.
For a stock corporation to exist, two requisites must Defects precluding creation of corporation
be complied with, to wit:
1. A capital stock divided into shares and 1. Absence of articles of incorporation;
2. An authority to distribute to the holders of such 2. Failure to file articles of incorporation with SEC;
shares, dividends or allotments of the surplus 3. Lack of certificate of incorporation from SEC.
profits on the basis of the shares held (Sec. 3, CC;
CIR v. Club Filipino de Ceb, G.R. No. L-12719, May NOTE: In this case, neither a de jure nor a de facto
31, 1962). corporation is created.
DE FACTO CORPORATION Q: University Publishing Company (UPC),

through its president, entered into a contract
A de facto corporation is one which actually exists with Albert to publish the commentaries on the
for all practical purposes as a corporation but which Revised Penal Code. UPC published the
has no legal right to corporate existence as against commentaries but it did not remit the amount
the State (8 Fletcher, pp. 62-63). due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When
Requisites of a de facto corporation (LAP) the Sheriff were about to implement the writ of
execution against the company, he discovered
1. Organized under a valid Law. that UPC is not a registered corporation.
2. Colorable Compliance - Attempt in good faith to Consequently, the president of UPC was
form a corporation according to the substituted in the writ of execution. The
requirements of the law. president invoked the separate legal
personality of the corporation as his defense.
NOTE: Issuance of Certificate of Incorporation
by SEC is a minimum requirement for the a. Is UPC a de facto corporation?
formation of the corporation in good b. Can the defense that UPC is a corporation by
faith.(Sundiang Sr. & Aquino, 2009) estoppel be invoked by the president?
c. Who is liable for the debts of the
3. Actual User - Use of corporate Powers; The corporation?
corporation must have performed the acts
which are peculiar to a corporation like A:
entering into a subscription agreement, a. NO. UPC cannot be a considered a de facto
adopting by-laws, and electing directors. corporation because it was not registered with
the SEC.
Defects resulting in creation of de facto b. NO. One who has induced another to act upon
corporation: (IM-CRAPS) his willful misrepresentation that a corporation
was duly organized and existing under the law,
1. Articles of incorporation fails to state all the cannot thereafter set up against his victim the
matters required by the Code to be stated, or principle of corporation by estoppel.
state some of them incorrectly; c. The president who negotiated with Albert is
2. Minimum paid-up capital stock has not been liable. A person acting or purporting to act on
paid to and received by the corporate treasurer behalf of a corporation which has no valid
contrary to his affidavit; existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts

performed as such agent (Albert v. University corporate existence as requirements for
Publishing Co., G.R. No. L-19118, January 30, against the State. incorporation.
1965). There is a colorable There is substantial
compliance with the compliance with the
Liabilities of officers and directors/trustees of a requirements of the requirements of the
de facto corporation law creating the law creating the
corporation. corporation.
The liabilities and penalties attending to officers Its right to exist as a
and directors/ trustees of a de jure corporation shall corporation cannot be
be the same as those of a de facto corporation. This successfully attacked
includes the liability under the criminal law. Can be attacked
or questioned by any
directly but not
party even in direct
Members of a de facto corporation cannot be collaterally.
proceeding for that
held liable as partners by third persons purpose by the State.
(De Leon, 2010)
The members of a de facto corporation cannot be Stockholders enjoy exemption from personal
held liable as partners by third persons who deal liability for corporate obligations
with them in their supposed corporate capacity,
merely on account of a technical defect in the CORPORATION BY ESTOPPEL
formation of the corporation.
A corporation by estoppel has no real existence in
On the other hand, where an attempt to organize a law. It is neither a de jure nor de facto corporation,
corporation fails by omission of some substantial but is a “mere fiction existing for the particular case,
step or proceeding required by the law, its members and vanishing where the element of estoppels is
or stockholders are liable as partners (De Leon, absent” (8 Fletcher, p. 219).
2010).
Rules governing a corporation by estoppel
The existence of a de facto corporation cannot be
collaterally attacked 1. All persons who assume to act as a corporation
knowing it to be without authority to do so shall
GR: The existence of a de facto corporation shall not be liable as general partners for all debts,
be inquired into collaterally in any private suit to liabilities and damages incurred or arising as a
which such corporation may be a party. Such result.
inquiry may be made by the Solicitor General in a 2. When any such ostensible corporation is sued
quo warranto proceeding (Sec. 20, CC). on any transaction entered by it as a
corporation or on any tort committed by it as
XPN: Collateral attack can be permitted when the such, it shall not be allowed to use as a defense
lack of right or the wrong doing of the corporation its lack of corporate personality.
is in issue because it is in violation of public policy 3. One who assumes an obligation to an ostensible
or of express or implied statutory requirement, such corporation as such, cannot resist performance
as denial of its right to enforce contracts entered thereof on the ground that there was in fact no
into without compliance with prohibitions of corporation (CC, Sec. 21).
express or implied statutory or public policy.
NOTE: Where there is no third person involved and
Thus, the defendant may question the personality of the conflict arises only among those assuming the
a foreign corporation transacting business in the form of a corporation who know that the
Philippines to maintain a suit on the ground that it corporation has not been registered, there is NO
is not duly licensed to do business in our country corporation by estoppel (Lozano v. Santos, G. R. No.
(De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133 125221, June 19, 1997).
of the CC).
Q: On behalf of Ocean Quest Fishing Corporation,
De facto Corporation vs. De jure Corporation Antonio Chua and Peter Yao entered into a
contract for the purchase of fishing nets of
DE FACTO DE JURE various sizes from the Philippine Fishing Gear
One which actually Industries, Inc. They claimed that they were
One created in strict or
exists for all practical engaged in a business venture with Lim Tong
substantial conformity
purposes as a Lim, who however was not a signatory to the
with the mandatory
corporation but which agreement. The buyers failed to pay for the
statutory
has no legal right to fishing nets and the floats; hence, Philippine

2019 GOLDEN NOTES
Mercantile Law
Fishing Gear filed a collection suit against Chua, Abante Tonite as a party defendant despite its
Yao and Lim Tong Lim. The suit was brought lack of juridical personality?
against the three in their capacities as general
partners, on the allegation that Ocean Quest A: YES. In rejecting the contention, the CA
Fishing Corporation was a nonexistent categorized Abante Tonite as a corporation by
corporation. The trial court ruled in favor of estoppel as the result of its having represented itself
Philippine Fishing Gear and that Chua, Yao and to the reading public as a corporation despite its not
Lim are liable as general partners. Lim contends being incorporated. The non-incorporation of
that the doctrine of corporation by estoppel Abante Tonite with the SEC was of no consequence,
applies only to Yao and Chua. Lim insists that for, otherwise, whoever of the public who would
only those who dealt in the name of the suffer any damage from the publication of articles in
ostensible corporation should be held the pages of its tabloids would be left without
liable. Since his name does not appear on any of recourse. The SC cannot disagree with the CA,
the contracts and since he never directly considering that the editorial box of the daily tabloid
transacted with the Ocean Quest Fishing disclosed that although Monica Publishing
Corporation, he cannot be held liable. Is Lim Corporation had published the tabloid on a daily
jointly liable with Chua and Yao? basis, nothing in the box indicated that Monica
Publishing Corporation had owned Abante Tonite
A: YES. Lim should be held liable jointly with Chua (Macasaet, et al.v. Co, G.R. No. 156759, June 5, 2013).
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat De facto corporation vs. Corporation by estoppel
which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a CORPORATION BY
DE FACTO
corporation. Although it was never legally formed ESTOPPEL (2004
CORPORATION
for unknown reasons, this fact alone does not Bar)
preclude the liabilities of the three as contracting There is existence in There is no existence in
parties in representation of it. Clearly, under the law law
law on estoppel, those acting on behalf of a The dealings among The dealings among
corporation and those benefited by it, knowing it to the parties on a the parties on a
be without valid existence, are held liable as general corporate basis is not corporate basis is
partners. Technically, it is true that Lim did required required
not directly act on behalf of the The State reserves the
corporation. However, having reaped the benefits right to question its Quo warranto
of the contract entered into by persons with whom existence through a proceeding is not
he previously had an existing relationship, he is quo warranto applicable
deemed to be part of said association and is covered proceeding
by the scope of the doctrine of corporation by Stockholders in a de
estoppel (Lim Tong Lim v. Philippine Fishing Gear Stockholders are liable
facto corporation are
Industries, Inc., G.R. No. 136448, November 3, 1999). as general partners for
liable as a de jure
all debts, liabilities and
corporation
Q: Francisco Co, Jr. sued Abante Tonite, a daily damages incurred
tabloid of general circulation, and its publisher
and staffs - claiming damages because of an SPECIAL CORPORATIONS
allegedly libelous article they published in an
issue. Macasaet, et al moved, among others, to A religious group is not required to be registered
drop Abante Tonite as a defendant by virtue of as a corporation
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil The Corporation Code does not require any religious
action. groups to be registered as a corporation but if it
wants to acquire legal personality, its members
The RTC denied the staffs’motion, holding that should incorporate under the Code.
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a corporation by estoppel Organization of a corporation sole
considering that it possesses attributes of a
juridical person, otherwise it cannot be held A corporation sole is organized by the mere filing of
liable for damages and injuries it may inflict to the verified articles of incorporation by the head of
other persons. The CA affirmed the RTC ruling. any religious denomination, sect or church with the
Was the CA correct in upholding the inclusion of SEC without the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical

character is acquired which is separate and distinct nationality of the actual incumbent of the parish
from his natural character. (the Corporation Sole or the head of the church or
NOTE: A corporation sole is not required to file by- congregation) (De Leon, 2010, citing SEC Opinions,
laws. It is governed by the rules, regulations and Nov. 6, 1990 and Sept. 21, 1993).
discipline of its religious denomination, sect or
church. Alienation of properties by a corporation sole
Nationality of a corporation sole A corporation sole may alienate properties by:
A corporation sole does not have any nationality but 1. Obtaining an order from the RTC of the
for purposes of applying nationalization laws, province where the property is situated after
nationality is determined not by the nationality of notice of the application for leave to sell or
its presiding elder but by the nationality of its mortgage has been given by publication or
members, constituting the sect in the Philippines. otherwise and by showing that it is for the
Thus, the Roman Catholic Church can acquire lands interest of the corporation that leave to sell or
in the Philippines even if it is headed by the Pope mortgage should be granted;
(Roman Catholic Apostolic Church v. Land 2. In cases where the rules, regulations and
Registration Commission, G.R. No. L-8451, December discipline of the religious denomination, sect or
20, 1957). church, religious society or order concerned
represented by such corporation sole regulate
Acquisition of property by a corporation sole the method of acquiring, holding, selling and
mortgaging real estate and personal property,
A corporation sole may acquire property even such rules, regulations and discipline shall
without court intervention by purchase, donation control, and the intervention of the courts shall
and other lawful means (Ibid). not be necessary (Sec. 113, CC).
The minority of Filipinos Catholic congregation who In a case, the Canons of the Iglesia Filipino
separated and refused to recognize the authority of Independiente provide that all real properties of the
the Roman Catholic Church has no right to claim the church can be disposed of only with the approval
property, because they committed schism. (Canelo and conformity of the laymen’s committee, the
vs. CA 171 SCRA 13) parish priest, the Diocesan Bishop, with sanction of
the Supreme Council, and finally with the approval
Q: Father X, an American priest who came from of the Supreme Bishop, as administrator of all the
New York, registered the Diocese of Bacolod of temporalities of the Church, yet the Supreme Bishop
the Roman Catholic Church which was sold motu propio a parcel of land of the IFI despite
incorporated as a corporation sole. There were the objection of the laymen, the sale is void and the
years when the head of the Diocese was a land must be reconveyed to IFI (Iglesia Filipina
Filipino, but there were more years when the Independiente v. Heirs of Bernardino Tazea, G.R. No.
heads were foreigners. Today, the head is an 179597, February 3, 2014).
American again. Y donated a piece of land
located in Bacolod City for use as a school. Which Dissolution of a corporation sole is not
statement is most accurate? (2012 Bar) necessary for it to become a corporation
aggregate
A: C. “Any corporation sole may purchase and hold
real estate and personal property for its church, There is no point in dissolving the corporation sole
charitable, benevolent or educational purposes, and of one member to enable the corporation aggregate
may receive bequests or gifts for such purposes” to emerge from it. The Corporation Code provides
(Sec. 113, CC). no specific mechanism for amending the articles of
incorporation of a corporation sole but Section 109
Being a mere administrator of the temporalities or of the Corporation Code allows the application to
properties titled in his name, the constitutional religious corporations of the general provisions
provisions requiring 60% (or 100%) Filipino governing non-stock corporations.
ownership are not applicable to the corporation
sole. The ownership thereof devolves upon the In non-stock corporations, the amendment needs
church or congregation acquiring the same. To own the concurrence of at least two-thirds of its
the property, compliance with the constitutionally membership. If such approval mechanism is made
required 60% (or 100%) Filipino capital is to operate in a corporation sole, its one member in
determined by the nationality of the constituents of whom all the powers of the corporation technically
the diocese (church or congregation), and not the belongs, needs to get the concurrence of two-thirds

2019 GOLDEN NOTES
Mercantile Law
of its membership (Iglesia Evangelica Metodista v. own stocks in a SEC-registered enterprise, at
Bishop Lazaro, GR. 184088, July 6, 2010). least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least
60% of the members of the board of directors of
NATIONALITY OF CORPORATIONS both corporations must be Filipino citizens
(DOUBLE 60% RULE).
Tests in determining the nationality of 2. Corporations organized abroad and registered

corporations as doing business in the Philippines under the
Corporation Code of which 100% of the capital
1. Place of Incorporation test stock entitled to vote belong to Filipinos.
2. Control test
3. Grandfather rule – Nationality is attributed to Q: What is the nationality of a corporation
the percentage of equity in the corporation used organized and incorporated under the laws of a
in nationalized or partly nationalized area. This foreign country, but owned 100% by Filipinos?
test is an exception to the Control Test and was (1998 Bar)
applied by the SEC in several cases.
4. Domiciliary test – Determined by the principal A: Under the control test of corporate nationality, a
place of business of the corporation. corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
PLACE OF INCORPORATION TEST Filipinos is classified as a Philippine National.
Where the grounds for piercing the veil of corporate
In using the Place of Incorporation test, the entity are present, the corporation will follow the
nationality of a corporation is determined by the nationality of the controlling members or
state of incorporation, regardless of the nationality stockholders, since the corporation will then be
of the stockholders. considered as one and the same.
CONTROL TEST NOTE: The fact that the religious organization has
no capital stock does not suffice to escape the
In determining the nationality of a corporation, the constitutional inhibition, since it is admitted that its
control test uses the nationality of the controlling members are of foreign nationality. The purpose of
stockholders or members of the corporation. the 60% requirement is obviously to ensure that
corporations or associations allowed to acquire
A corporation organized/incorporated abroad and agricultural land or to exploit natural resources
registered as doing business in the Philippines shall be controlled by Filipinos; and the spirit of the
under the Corporation Code, of which 100% of the Constitution demands that in the absence of capital
capital stock outstanding and entitled to vote is stock, the controlling membership should be
wholly owned by Filipinos, may be considered a composed of Filipino citizens (Register of Deeds vs.
Philippine National under the Foreign Investments Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955).
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3, GRANDFATHER RULE
2004; De Leon, 2010). This test was adopted by the
said law as a general guideline in determining the To ensure compliance with the constitutional
nationality of corporations engaged in a limitation(s) of corporations engaging in
nationalized activity (Sec Opinion No. 07-20, nationalized activities, the nationality of a
November 20, 2007). corporation must be determined by ascertaining if
60% of the investing corporation’s outstanding
Who are considered as Philippine Nationals capital stock is owned by “Filipino citizens”, or as
interpreted, by natural or individual Filipino
Under RA 7042 (Foreign Investment Act of 1991), citizens. If such investing corporation is in turn
the following are considered Philippine Nationals: owned to some extent by another investing
corporation, the same process must be observed.
1. Corporations organized under Philippine laws
of which 60% of the capital stock outstanding Reason: One must not stop until the citizenships of
and entitled to vote is owned and held by the individual or natural stockholders of layer after
Filipino citizens. layer of investing corporations have been
established, for this is the very essence of the
NOTE: RA 7042 provides that where a Grandfather Rule (Redmont Consolidated Mines
corporation and its non-Filipino stockholders

Corp. vs. McArthur Mining Corp., SEC En Banc Case owned by citizens of the Philippines. They
No. 09-09-177, March 25, 2010). asserted that though MBMI owns 40% of the
shares of PLMDC (which owns majority shares of
Rules governing the application of the Narra), 40% of the shares of MMC (which owns
Grandfather Rule majority shares of McArthur) and 40% of the
shares of SMMC (which, in turn, owns majority
1. The grandfather rule should be used in shares of Tesoro), the shares of MBMI will not
determining the nationality of a corporation make it the owner of at least 60% of the capital
engaged in a partly nationalized activity. This stock of each of petitioners. They added that the
applies in cases where the stocks of a best tool used in determining the nationality of
corporation are owned by another corporation a corporation is the “control test,” embodied in
with foreign stockholders exceeding 40% of the Sec. 3 of RA 7042 or the Foreign Investments Act
capital stock of the corporation (SEC-OGC of 1991.
Opinion No. 10-31, December 9, 2010).
2. The Grandfather Rule will not apply in cases The controversy reached the CA, which used the
where the 60-40 Filipino-alien equity grandfather rule to hold that MBMI in effect
ownership in a particular natural resource owned majority of the common stocks of Narra,
corporation is not in doubt. If the stockholder et al., and thus the latter were foreign
corporation is 60% or more owned by Filipinos, corporations.
all the stock held by the stockholder
corporation is deemed to be held by Filipinos a. Was the CA wrong in applying the
(DOJ Opinion No. 19, s. 1989). Grandfather Rule instead of the Control
3. When there is doubt as to the actual extent of Test?
Filipino equity in the investee corporation, the b. Will the Grandfather Rule apply only when
SEC is not precluded from using the less than 60% of the capital stock are
Grandfather Rule (SEC-OGC Opinion No. 22-07 Filipino-owned? (2016 Bar)
dated December 7, 2007).
A:
As further defined by Dean Cesar Villanueva, the a. NO. Basically, there are two acknowledged tests
Grandfather Rule is "the method by which the in determining the nationality of a corporation:
percentage of Filipino equity in a corporation the control test and the grandfather rule. The
engaged in nationalized and/or partly nationalized "control test" is still the prevailing mode of
areas of activities, provided for under the determining whether or not a corporation is a
Constitution and other nationalization laws, is Filipino corporation, within the ambit of Sec. 2,
computed, in cases where corporate shareholders Art. XII of the 1987 Constitution, entitled to
are present, by attributing the nationality of the undertake the exploration, development and
second or even subsequent tier of ownership to utilization of the natural resources of the
determine the nationality of the corporate Philippines. When in the mind of the Court
shareholder." (Villanueva, Cesar Lapuz, Philippine there is doubt, based on the attendant facts and
Corporate Law (2001), p. 54.) circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it
Note: To arrive at the actual Filipino ownership and may apply the "grandfather rule".
control in a corporation, both the direct and indirect b. NO. The assertion of Narra, et al. that “doubt”
shareholdings in the corporation are determined. only exists when the stockholdings are less than
60% fails to convince this Court. It would be
Q: Redmont, a mining company, sought to ludicrous to limit the application of the said
invalidate the Mining Production and Sharing word only to the instances where the
Agreement applications of three domestic stockholdings of non-Filipino stockholders are
mining companies, namely: Narra, Tesoro and more than 40% of the total stockholdings in a
McArthur, on the ground that at least 60% of the corporation. The corporations interested in
capital stock of Narra, et al. are owned and circumventing our laws would clearly strive to
controlled by MBMI, a 100% Canadian have “60% Filipino Ownership” at face value. It
corporation; thus they were disqualified to would be senseless for these applying
engage in mining activities though MPSAs, which corporations to state in their respective articles
are reserved only for Filipino Citizens. of incorporation that they have less than 60%
Filipino stockholders since the applications will
Narra, et al. claimed that the issue on nationality be denied instantly. Thus, various corporate
should not be raised since they are in fact schemes and layerings are utilized to
Philippine Nationals as 60% of their capital is circumvent the application of the Constitution.

2019 GOLDEN NOTES
Mercantile Law
A corporation that complies with the 60-40 Filipino 100% Filipino Owned
to foreign equity requirement can be considered a (Zero percent (0%) foreign equity)
Filipino corporation if there is no doubt as to who Code: CoFi AMMaN Co. – MiSe- US$2.5M
has the “beneficial ownership” and “control” of the
corporation. In this case, a further investigation as 1. COoperatives(Art. 26, Ch. III, R.A. 6938)
to the nationality of the personalities with the 2. Manufacture of FIrecrackers and other
beneficial ownership and control of the corporate pyrotechnic devices. (Sec. 5, R.A. 7183)
shareholders in both the investing and investee 3. Manufacture, repair, stockpiling and/or
corporations is necessary. “Doubt” refers to various distribution of biological, chemical and
indicia that the “beneficial ownership” and “control” radiological weapons and Anti-personnel
of the corporation do not in fact reside in Filipino mines (Various treaties to which the
shareholders but in foreign stakeholders. Even if at Philippines is a signatory and conventions
first glance the petitioners comply with the 60-40 supported by the Philippines)
Filipino to foreign equity ratio, doubt exists in the 4. Mass media except recording
present case that gives rise to a reasonable 5. Utilization of MArine resources (Sec. 2, Art. XII,
suspicion that the Filipino shareholders do not Constitution)
actually have the requisite number of control and 6. Manufacture, repair, stockpiling and/or
beneficial ownership in petitioners Narra, Tesoro, distribution of Nuclear weapons (Sec. 8, Art. II,
and McArthur. Constitution)
7. COckpits (Sec. 5, P.D. 449)
Moreover, the ultimate Filipino ownership of the 8. Small-scale MIning (Sec. 3, R.A. 7076)
shares must first be traced to the level of the 9. Private SEcurity agencies (Sec. 4, R.A. 5487)
Investing Corporation and added to the shares 10. Retail trade enterprises with paid-up capital of
directly owned in the Investee Corporation x x x. less than US$2.5 M(Sec. 5, R.A. 8762)
Concluding from the above-stated facts, it is quite
safe to say that petitioners McArthur, Tesoro and 80 % Filipino Owned
Narra are not Filipino since MBMI, a 100% Canadian (Up to twenty percent (20%) foreign equity)
corporation, owns 60% or more of their equity Code: Prc
interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, 1. Private Radio Communications network (R.A.
namely: MMI, SMMI and PLMDC. Going further and 3846)
adding to the picture, Noticeably, the ownership of
the "layered" corporations boils down to MBMI, 75 % Filipino Owned
Olympic or corporations under the "Alpha" group (Up to twenty percent (25%) foreign equity)
wherein MBMI has joint venture agreements with, Code: LoRD F
practically exercising majority control over the
corporations mentioned. In effect, whether looking 1. Contracts for the construction and repair of
at the capital structure or the underlying LOcally-funded public works (Sec. 1, CA 541, LOI
relationships between and among the corporations, 630) except:
petitioners are NOT Filipino nationals and must be a) infrastructure/development projects
considered foreign since 60% or more of their covered in R.A. 7718; and
capital stocks or equity interests are owned by b) projects which are foreign funded or
MBMI assisted and required to undergo
international competitive bidding (Sec.
Hence, the Court is correct in using the Grandfather 2[a], R.A. 7718)
Rule in determining the nationality of the
petitioners (Narra Nickel Mining and Development 2. Private Recruitment, whether for local or
Corp., et al. v. Redmont Consolidated Mines, G.R. No. overseas employment (Art. 27, P.D. 442)
195580, January 28, 2015). 3. Contracts for the construction of Defense-
related structures; (Sec. 1, CA 541)
Note: "Corporate layering" is admittedly allowed 4. Under the Flag Law, in the purchase of articles
by the FIA; but if it is used to circumvent the for the Government, preference shall be given
Constitution and pertinent laws, then it becomes to materials and supplies produced, made, or
illegal. manufactured in the Philippines, and to
domestic entities. Domestic entities means any
NATIONALIZED ACTIVITIES RESERVED FOR citizen of the Philippines or commercial
FILIPINOS UNDER THE CONSTITUTION company at least 75% of the capital of which is
AND SPECIAL LAWS owned by citizens of the Philippines (Sec. 1, CA
138)

70 % Filipino Owned registered with the SEC. Its authorized capital
(Up to twenty percent (30%) foreign equity) stock consists of voting common shares and
Code: AdPawn non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
1. Advertising (Art. XVI, Constitution) and outstanding capital stock of BellPhil
2. Corporations engaged in pawnshop business consists only of common shares shared between
(Sec. 8, P.D. 114) Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
60 % Filipino Owned with 40%.
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
1. Contracts for the supply of materials, goods and equivalent to the currently outstanding
commodities to GOCC, agency or municipal common shares. A suit was filed questioning the
corporation (Sec. 1, R.A. 5183) corporation action on the ground that the
2. Ownership of private Lands (Sec. 7, Art. XII, foreign equity holdings in the company would
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. now exceed 40% foreign equity limit allowed
9182) under the Constitution for public utilities.
3. Ownership/establishment and administration
of Educational institutions (Sec. 4, Art. XIV, Rule on the legality of Bernard Fleet’s current
Constitution) holdings. (2013 Bar)
4. Adjustment Companies (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading A: The holding of Bernard Fleet equivalent to the
excepting retailing, of rice and corn and outstanding common shares is illegal. His holdings
acquiring, by barter, purchase or otherwise, of preferred shares could not exceed 40%. Since the
Rice and corn and the by-products thereof (Sec. constitutional requirement of 60% Filipino
5, P.D. 194) ownership of the capital of public utilities applies
6. Exploration, development and utilization of not only to voting control but also to beneficial
Natural resources (Sec. 2, Art. XII, Constitution) ownership of the corporation, it should also apply to
7. Ownership of Condominium units where the the preferred shares. Preferred shares are also
common areas in the condominium project are entitled to vote in certain corporate matters. The
co-owned by the owners of the separate units state shall develop a self-reliant and independent
or owned by a corporation (Sec. 5, R.A. 4726) national economy effectively controlled by Filipinos
8. Operation and management of public Utilities The effective control here should be mirrored
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146) across the board on all kinds of shares (Gamboa v.
9. Project Proponent and Facility Operator of a Teves, G.R. No. 176579, June 28, 2011; 1987
BOT project requiring a public utilities Constitution, Art. II, Sec. 19).
franchise (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. 7718)
10. Manufacture, repair, storage and/ or CORPORATE JURIDICAL PERSONALITY
distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A.
8179) DOCTRINE OF SEPARATE JURIDICAL
11. Operation of Deep sea commercial fishing PERSONALITY
vessel (Sec. 27, R.A. 8550)
12. Corporations engaged in Coastwise shipping The doctrine of corporate juridical personality
(Sec. 806, P.D. 1464) states that a corporation is a juridical entity with
legal personality separate and distinct from those
40 % Filipino Owned acting for and in its behalf and, in general, from the
(Up to twenty percent (60%) foreign equity) people comprising it (Francisco v. Mallen Jr. G.R. No.
Code: FI [SEC] 173169, September 22, 2010).
1. Financing companies regulated by the SEC (Sec. Q: The Olongapo City filed a complaint for sum
6, R.A. 5980 as amended by R.A. 8556) of money and damages against Olongapo City
2. Investment houses regulated by the SEC (Sec. 5, Water District (OCWD). It alleged that OCWD
P.D. 129 as amended by R.A. 8366) failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
Q: Bell Philippines, Inc. (BellPhil.) is a public pursuant to OCWD’s acquisition of Olongapo
utility company, duly incorporated and City’s water system. In the interim, OCWD

2019 GOLDEN NOTES
Mercantile Law
entered into a Joint Venture Agreement with Note between Puyat and NSI, represented by
SBMA, Biwater and DMCI. Pursuant to this Nuccio. It was agreed that Puyat would extend a
agreement, Subic Water – a new corporate entity credit line with a limit of P500,000.00 to NSI, to
– was incorporated, with the following equity be paid within 30 days from the time of the
participation from its shareholders: SBMA signing of the document. The loan carried an
19.99% or 20%; OCWD 9.99% or 10%; Biwater interest rate of 17% per annum, or at an
29.99% or 30%; and DMCI 39.99% or 40%. adjusted rate of 25% per annum if payment is
Subic Water was granted the franchise to beyond the stipulated period. NSI and Nuccio
operate and to carry on the business of received a total amount of P300,000.00 and
providing water and sewerage services in the certain machineries intended for their business.
Subic Bay Free Port Zone, as well as in Olongapo The proposed business, however, failed to
City. Hence, Subic Water took over OCWD’s materialize. When the petitioners defaulted in
water operations in Olongapo City. To finally the payment of the loan, Puyat filed a collection
settle their money claims against each other, suit alleging mainly that the NSI and Nuccio still
Olongapo City and OCWD entered into a owe him the value of the machineries.The RTC
compromise agreement. ordered them, jointly and severally, to pay the
balance. CA also affirmed the RTC ruling that
To enforce the compromise agreement, they are one and the same. Did CA commit a
Olongapo City filed a motion for the issuance of reversible error in affirming the RTC’s decision
a writ of execution with the RTC. OCWD’s former holding them jointly and severally liable for the
counsel filed a manifestation alleging that amount claimed?
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because A: YES. Piercing the veil of corporate fiction is not
of this assertion, Subic Water also filed a justified. The NSI and Nuccio are not one and the
manifestation informing the RTC that as borne same. The records of the case, however, do not show
out by the articles of incorporation and general that Nuccio had control or domination over NSI’s
information sheet of Subic Water, OCWD is not finances. The mere fact that it was Nuccio who, in
Subic Water. The manifestation also indicated behalf of the corporation, signed the MOA is not
that OCWD was only a ten percent (10%) sufficient to prove that he exercised control over the
shareholder of Subic Water; and that its 10% corporation’s finances. Neither the absence of a
share was already in the process of being board resolution authorizing him to contract the
transferred to Olongapo City pursuant to a Deed loan nor NSI’s failure to object thereto supports this
of Assignment. conclusion. These may be indicators that, among
others, may point the proof required to justify the
Can Subic Water be made liable under the writ piercing the veil of corporate fiction, but by
of execution issued by RTC in favor of Olongapo themselves, they do not rise to the level of proof
City? required to support the desired conclusion. It
should be noted in this regard that while Nuccio was
A: NO. OCWD and Subic Water are two separate and the signatory of the loan and the money was
different entities. Subic Water clearly demonstrated delivered to him, the proceeds of the loan were
that it was a separate corporate entity from OCWD. unquestionably intended for NSI’s proposed
OCWD is just a ten percent (10%) shareholder of business plan. That the business did not materialize
Subic Water. As a mere shareholder, OCWD’s is not also sufficient proof to justify a piercing, in the
juridical personality cannot be equated nor absence of proof that the business plan was a
confused with that of Subic Water. It is basic in fraudulent scheme geared to secure funds from the
Corporation Law that a corporation is a juridical respondent for the petitioners’ undisclosed goals.
entity vested with a legal personality separate and NSI’s liability should not attach to Nuccio (Saverio v.
distinct from those acting for and in its behalf and, Puyat, G.R. No. 186433, November 27, 2013).
in general, from the people comprising it. Under this
corporate reality, Subic Water cannot be held liable Q: Richard owns 90% of the shares of the capital
for OCWD’s corporate obligations in the same stock of GOM Co. On one occasion, GOM
manner that OCWD cannot be held liable for the represented by Richard as President and
obligations incurred by Subic Water as a separate General Manager executed a contract to sell a
entity (Olongapo City v. Subic Water and Sewerage subdivision lot in favor of Tomas. For failure of
Co., Inc., G.R. No. 171626, August 6, 2014). GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
Q: Puyat granted a loan to NS International, Inc. and Richard. Will the action prosper? Explain
(NSI). The loan was made pursuant to the (1996 Bar)
Memorandum of Agreement and Promissory

A: The action will prosper against GOM Corporation 5. Changes in individual membership – corporation
but it shall not be the same with regard to the action remains unchanged and unaffected in its
against Richard. Such is the case because Richard identity by changes in its individual
has a separate and distinct personality from the membership or ownership of its stocks.
corporation. His mere ownership of 90% of the
shares of the capital stock of GOM does not make Q: As a result of perennial business losses, a
him as one with the corporation. Mere ownership by corporation's net worth has been wiped out. In
a single stockholder, or by another corporation, of fact, it is now in negative territory. Nonetheless,
all or nearly all of the capital stock of a corporation the stockholders did not like to give up.
is not itself a sufficient ground for disregarding the Creditor-banks, however, do not share the
separate corporate personality (Secosa v. Heirs of confidence of the stockholders and refuse to
Erwin Suarez Francisco, G.R. No. 160039, June 29, grant more loans.
2004).
a. What tools are available to the stockholders
Significance of the doctrine of separate to replenish capital?
personality b. Assuming that the corporation continues to
operate even with depleted capital, would
1. Liability for acts or contracts – As a general rule, the stockholders or the managers be
the obligation of the corporation is not the solidarily liable for the obligations incurred
liability of the stockholders, officers or by the corporations? (1999 Bar)
directors (1992, 1996, 2010 Bar).
A:
A corporation may not, generally, be made to a. In the case where the creditor-banks refused to
answer for acts or liabilities of its stockholders grant more loans to the stockholders, the
or those of the legal entities to which it may be stockholders can publicly sell their shares and
connected, and vice versa (Cease vs. CA, G.R. No. assets. They can also demand payment from
L-33172, October 18, 1979). Note: XPN to this is stockholders of their unpaid subscriptions
the reverse piercing of the corporate veil. where there is no due date inscribed in the
subscription contract.
2. Right to bring actions – may bring civil and b. No, the stockholders or managers cannot be
criminal actions in its own name in the same held solidarily liable for the obligations
manner as natural persons (Art. 46, Civil Code). incurred by the corporation. They cannot be
held personally liable for as long as their acts
NOTE: Rights belonging to the corporation are for and in behalf of the corporation, within
cannot be invoked by the stockholders (or the scope of their authority and in good faith.
directors and officers) even if the latter owns Also, a corporation has a personality separate
substantial majority of the shares of the shares and distinct from its individual stockholders
in that corporation and rights of the (Consolidated Bank and Trust Corp. v. CA, G.R.
stockholders, directors and officers cannot be No. 114286, April 19, 2001).
invoked by the corporation (Stonehill vs.
Diokno, G.R. 19550, June 19, 1967). Stockholders are not the owners of corporate
properties and assets
3. Right to acquire and possess property – property
conveyed to or acquired by the corporation is in The interest of the shareholder in the properties of
law the property of the corporation itself as a the corporation is inchoate only. The interest of the
distinct legal entity and not that of the shareholder on a particular property becomes
stockholders or members (Art. 44[3], Civil actual, direct and existing only upon the liquidation
Code). of the assets of the corporation and provided that
the same property is assigned to the shareholder
NOTE: The interest of the stockholders over the concerned.
properties are merely inchoate (Saw vs. CA, G.R.
No. 90580, April 8, 1991; 1996, 2000 Bar). Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are
4. Acquisition of jurisdiction – service of summons regarded as equity in trust for the payment of
may be made only on the president, general corporate creditors which are preferred over the
manager, corporate secretary, treasurer or in- stockholders in the distribution of corporate assets.
house counsel (Rules of Court, Rule 14, Sec. 11). The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of

2019 GOLDEN NOTES
Mercantile Law
the corporation unless the indispensable conditions Dick Seldon issued a check for P50,000 in favor
and procedures for the protection of corporate of Shamron. A week later, Turtle sold the tractor
creditors are followed (Yamamoto v. Nishino to Briccio Industries (Briccio) for P 60,000.
Leather Industries, Inc., G.R. No. 150283, April 16, Briccio discovered that the engine of the tractor
2008). was reconditioned so he refused to pay Turtle.
As a result, Dick Seldon ordered “Stop Payment”
Q: RISCO ceased operation due to business of the check issued to Shamron. Shamron sued
reverses. Due Aznar et. al’s desire to rehabilitate Turtle and Dick Seldon. Shamron obtained a
RISCO, they contributed a total amount of favourable judgment holding co-defendants
P212,720.00 which was used in the purchase of Turtle and Dick Seldon jointly and severally
the three (3) parcels of land located in various liable. Comment on the decision of the trial
areas in the Cebu Province. Pursuant to the court. Discuss fully. (1995 Bar)
Minutes of the Special Meeting of the Board of
Directors of RISCO, the contributed amounts A: I disagree with the trial court’s ruling. Dick
constitute liens and encumbrances on the Seldon should not be solidarily liable with Turtle
aforementioned properties as annotated in the because of his position as President and Manager of
titles of the said lots. Such annotation was made. the corporation. Turtle Corporation has a separate
Thereafter, various subsequent annotations juridical personality from its officers. Corporate
were made on the same titles in favor of PNB. As officers cannot be personally liable for the
a result, a Certificate of Sale was issued in favor consequences of their acts, for as long as these are
of PNB, being the lone and highest bidder of the for and behalf of the corporation, within the scope
three (3) parcels of land and was also issued of their authority and in good faith (Consolidated
Transfer Certificate of Title over the said parcels Bank and Trust Corp. v. CA, G.R. No. 114286, April 19,
of land. Aznar, et. al filed a complaint seeking the 2001).
quieting of their supposed title to the subject
properties. They alleged that the subsequent Entitlement of corporations to Constitutional
annotations on the titles are subject to the prior rights
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere Corporations are entitled to the following rights
stockholders of RISCO, they do not have any under the constitution:
legal or equitable right over the properties of
the corporation. Do the defendants herein 1. Right to Due Process (Sec. 1, Art. III,
(Aznar et. al.) have the legal or equitable rights Constitution)
over the subject properties? 2. Right against unreasonable searches and
seizures (Sec. 2, ibid)
A: NO. Stockholders cannot claim ownership over
corporate properties by virtue of the Minutes of a NOTE: Corporations are not entitled to the right
Stockholder’s Meeting which merely evidence a against self-incrimination, being a mere creature of
loan agreement between the stockholders and the law (Bataan Shipyard & Engineering v. PCGG, G.R. No.
corporation. As such, their interest over the 75885, May 27, 1987).
properties is merely inchoate (PNB v. Merelo B.
Aznar, et al, G.R. No. 171805, May 30, 2014). It cannot refuse to produce the books and papers if
Stockholders are not real parties in interest to lawfully required by the appropriate government
claim damages and recover compensation agency. It is presumed that they are incorporated
for the benefit of the public thereby making its
The personality of a corporation is distinct and power limited.
separate from the personalities of its stockholders.
Hence, its stockholders are not themselves the real LIABILITY FOR TORTS AND CRIMES
parties in interest to claim and recover
compensation for the damages arising from the A corporation may be held liable for torts
wrongful attachment of corporate assets. Only the
corporation is the real party in interest for that The corporation is liable for every tort which it
purpose (Stronghold Insurance Company, Inc. v. expressly directs or authorizes (PNB v. CA, G.R. No.
Cuenca, G.R. No. 173297, March 6, 2013). L-27155, May 18, 1978).
Q: Ronald Sham doing business under the name Reason for liability in cases of torts
of SHAMRON Machineries (Shamron) sold to
Turtle Mercantile (Turtle) a diesel farm tractor. A corporation is civilly liable in the same manner as
In payment, Turtle’s President and Manager natural persons for torts, because generally

speaking, the rules governing the liability of a NOTE: While the court may allow the grant of moral
principal or master for a tort committed by an agent damages to corporation, it is not automatically
or servant are the same, whether the servant or granted; there must still be proof of the existence of
agent is a natural or artificial person (Ibid) the factual basis of the damage and its causal
relation to the defendant’s acts. Moral damages is
Corporations incapable of intent designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
Corporations are incapable of intent, hence they wrongdoer (Crystal vs. BPI, G.R. No. 172428,
cannot commit felonies that are punishable under November 28, 2008)
the Revised Penal Code. They cannot commit crimes
that are punishable under special laws because Q: "Exposé" is a radio documentary program
crimes are personal in nature. In addition, the hosted by Rima and Alegre. It is aired every
penalty of imprisonment cannot be imposed. morning over DZRC-AM which is owned by FBNI.
However, the corporation may be dissolved for One morning, Rima and Alegre exposed various
violations of the Corporation Code (CC, Sec. 144). alleged complaints from students, teachers and
parents against AMEC and its administrators.
Liability of a corporation in cases of crimes Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
GR: Since a corporation is a mere creation of legal Medicine, filed a complaint for damages against
fiction, it cannot be held liable for crimes committed FBNI, Rima and Alegre. As a defense, FBNI claims
by its officers; in such case the responsible officers that AMEC is not entitled to moral damages
would be criminally liable (People v. Tan Boon Kong, because it is a corporation. Is AMEC is entitled to
G.R. No. L-32066, March 15, 1930). moral damages?
XPN: If the penalty of the crime is only fine or A: YES. AMEC is entitled to moral damages. A
forfeiture of license or franchise (Ching v Secretary juridical person is generally not entitled to moral
of Justice, supra). damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
RECOVERY OF MORAL DAMAGES wounded feelings, serious anxiety, mental anguish
or moral shock. Nevertheless, AMEC’s claim for
Recovery of moral damages moral damages falls under item 7 of Article 2219 of
the Civil Code. This provision expressly authorizes
GR: A corporation is not entitled to moral damages the recovery of moral damages in cases of libel,
because it has no feelings, no emotions, no senses slander or any other form of defamation. Article
(ABS-CBN Broadcasting Corp. v. CA, G.R. No. 128690 2219(7) does not qualify whether the plaintiff is a
January 21, 1999). natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
XPNs: for libel or any other form of defamation and claim
1. The corporation may recover moral damages for moral damages (Filipinas Broadcasting Network,
under item 7 of Article 2219 of the New Civil Inc., v. AMEC-BCCM, supra).
Code because said provision expressly
authorizes the recovery of moral damages in Q: Meralco and T.E.A.M. Electronics Corporation
cases of libel, slander, or any other form of (TEC) were parties to two separate contracts for
defamation. the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
NOTE: Article 2219(7) does not qualify electric power. One day, Meralco conducted a
whether the injured party is a natural or surprise inspection of the electric meters
juridical person. Therefore, a corporation, as a installed at the DCIM building. Two meters
juridical person, can validly complain for libel were found to be allegedly tampered with and
or any other form of defamation and claim for did not register the actual power consumption
moral damages (Filipinas Broadcasting in the building. Meralco informed TEC of the
Network, Inc. v. AMEC-BCCM, G.R. No. 141994, results of the inspection and demanded from the
January 17, 2005). latter the payment of its unregistered
consumption. TEC failed to pay the same.
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business For failure to pay, Meralco disconnected the
realm (MERALCO v. T.E.A.M. Electronics Corp., et. al., electricity supply to the DCIM building. TEC
G.R. No. 131723, December 13, 2007). demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to

2019 GOLDEN NOTES
Mercantile Law
do with the alleged tampering but the latter and the liability will attach directly to the
refused to heed the demand. The ERB officers and stocholders.
immediately ordered the reconnection of the 2. Where there are two (2) corporations, they will
service but Meralco did not immediately be merged into one, the one being merely
comply. TEC filed a complaint for damages regarded as the instrumentality, agency,
against Meralco before the RTC. The RTC ruled conduit or adjunct of the other.
in favor of TEC and it awarded, among others,
moral damages. Is TEC entitled to moral NOTE: Notwithstanding that the corporate veil has
damages? been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
A: NO. TEC is not entitled to moral damages. TEC’s necessarily abrogated (Reynoso IV vs. CA, G.R. Nos.
claim was premised allegedly on the damage to its 116124-25, November 22, 2000).
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a GROUNDS FOR APPLICATION OF DOCTRINE
natural person, it cannot experience physical
suffering or sentiments like wounded feelings, It applies upon the following circumstances: (FACO)
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the a. if the fiction is used to perpetrate fraud (Fraud
corporation has a reputation that is debased, Test)
resulting in its humiliation in the business realm. b. if the complete control of one corporate entity
But in such a case, it is imperative for the claimant to another which perpetuated the wrong is the
to present proof to justify the award. It is essential proximate cause of the injury (Control Test)
to prove the existence of the factual basis of the c. if a certain corporation is only an adjunct or an
damage and its causal relation to Meralco’s acts. In extension of the personality of the corporation
the present case, the records are bereft of any (Alter ego or Instrumentality Test)
evidence that the name or reputation of TEC/TPC d. if the fiction is pierced to make the stockholders
has been debased as a result of Meralco’s acts liable for the obligation of the corporation
(MERALCO v. T.E.A.M. Electronics Corpet al., supra). (Objective Test)
DOCTRINE OF PIERCING THE CORPORATE VEIL Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System, informing
The doctrine of piercing the corporate veil is the her that she cannot avail of their retirement
doctrine that allows the State to disregard, for benefits since per their record she has only paid
certain justifiable reasons, the notion that a 16 months. Aggrieved, Lorezo then filed her
corporation has a personality separate and distinct Amended Petition before the SSC, alleging that
from the persons composing it. she was employed as laborer in. Cataywa
managed by Jose Marie Villanueva in 1970 but
Where it appears that business enterprises are was reported to the SSS only in 1978. She alleged
owned, conducted and controlled by the same that SSS contributions were deducted from her
parties, law and equity will disregard the legal wages from 1970 to 1995, but not all were
fiction that these corporations are distinct entities remitted to the SSS which, subsequently, caused
and shall treat them as one. This is in order to the rejection of her claim. She also impleaded
protect the rights of third persons (Vicmar Talisay Farms, Inc. by virtue of its Investment
Development Corporation v. Elarcos, et al., G.R. No. Agreement with Mancy and Sons Enterprises.
202215, December 09, 2015, Del Castillo, J.). She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and
In order to justify the piercing of the corporate veil, Sons Enterprises and Manuel and Jose Marie
allegation or proof of fraud or other public policy Villanueva are one and the same. Should Mancy
considerations is needed (Hacienda Luisita and Sons Enterprises’ veil of corporate fiction be
Incorporated vs. Presidential Agrarian Reform pierced?
Council, G.R. No. 171101, November 22, 2011).
A: NO. The Court has expressed the language of
NOTE: This is an exception to the Doctrine of piercing doctrine when applied to alter ego cases, as
Separate Corporate Entity. follows: Where the stock of a corporation is owned
by one person whereby the corporation functions
Effect of piercing the corporate veil only for the benefit of such individual owner, the
corporation and the individual should be deemed
1. The corporation will be treated merely as an the same.
association of persons -undertaking a business

This Court agrees with the petitioners that there is Kukan International Corporation (KIC) filed a
no need to pierce the corporate veil. Lorezo failed to third-party complaint, alleging that it was the
substantiate her claim that Mancy and Sons owner of the levied properties. Morales prayed
Enterprises, Inc. and Manuel and Jose Marie that the principle of piercing the veil of
Villanueva are one and the same. She based her corporate fiction be applied in order to satisfy
claim on the SSS form wherein Manuel Villanueva the judgment debt of Kukan. The RTC granted
appeared as employer. However, this does not the motion of Morales and declared KIC and
prove, in any way, that the corporation is used to Kukan as one and the same corporation. The CA
defeat public convenience, justify wrong, protect affirmed the RTC. Did the RTC properly apply the
fraud, or defend crime, or when it is made as a shield doctrine?
to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Also, A: NO. The principle of piercing the veil of
it was not alleged nor proven that Mancy and Sons corporate fiction, and the resulting treatment of
Enterprises, Inc. functions only for the benefit of two related corporations as one and the same
Manuel Villanueva, thus, one cannot be an alter ego juridical person with respect to a given transaction,
of the other (Hacienda Cataywa/Manuel Villanueva, is basically applied only to determine established
et al. v. Rosario Lorezo, G.R. No. 179640, March 18, liability; it is not available to confer on the court a
2015). jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
Q: Mr. Pablo, a rich merchant in his early forties, impleaded in a suit cannot be subject to the courts
was a defendant in a lawful suit which could process by piercing the veil of its corporate fiction.
subject him to substantial damages. A year In that situation, the court has not acquired
before the court rendered judgment, Pablo jurisdiction over the corporation and, hence, any
sought his lawyer’s advice on how to plan his proceedings taken against that corporation and its
estate to avoid taxes. He suggested that he property would infringe on its right to due process.
should form a corporation with himself, his wife, Aguedo Agbayani, a recognized authority on
and his children (all students and still Commercial Law, stated that piercing the veil of
unemployed) as stockholders and then transfer corporate entity applies to determination of liability
all his assets and liabilities to this corporation. not of jurisdiction because the doctrine of piercing
Mr. Pablo followed the recommendation of his the veil of corporate fiction comes to play only
lawyer. 1 year later, the court rendered during the trial of the case after the court has
judgment against Pablo and the plaintiff sought already acquired jurisdiction over the corporation.
to enforce this judgment. The sheriff, however, Hence, before this doctrine can be applied, based
could not locate any property in the name of on the evidence presented, it is imperative that the
Pablo and therefore returned the writ of court must first have jurisdiction over the
execution unsatisfied. What remedy, if any, is corporation.
available to the plaintiff? (1994 Bar)
Two-fold Implication:
A: The plaintiff can avail himself of the doctrine of 1. The court must first acquire jurisdiction over
piercing the veil of corporate fiction which can be the corporation or corporations involved
invoked when a corporation is formed or used in before its or their separate personalities are
avoiding a just obligation. While it is true that a disregarded; and
family corporation may be organized to pursue an 2. The doctrine of piercing the veil of corporate
estate tax planning of which is not per se illegal or entity can only be raised during a full-blown
unlawful (Delpher Trades Corp. v. IAC, G.R. No L- trial over a cause of action duly commenced
69259, January 26, 1988). The factual settings, involving parties duly brought under the
however, indicate the existence of a lawful suit that authority of the court by way of service of
could subject Pablo to a substantial amount of summons or what passes as such service
damages. It would thus be difficult for Pablo to (Kukan International Corp v. Reyes, G.R. No.
convincingly assert that the incorporation of the 182729, September 29, 2010).
family corporation was intended merely as a case of
“estate tax planning” (Tan Boon Bee v. Jarencio, G.R. Q: Ma. Concepcion Lacsa was riding a Goldline
No. 41337, June 30, 1988). passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
Q: Romeo Morales was able to obtain a favorable with a passenger jeepney, which resulted to her
judgment for a sum of money against Kukan, Inc. instant death. The Heirs of Concepcion instituted
With the judgment attaining finality, the sheriff a suit in the RTC for damages due to breach of
levied on execution various personal properties contract, with the complaint set against “Travel &
found at what was supposed to be Kukan’s office. Tours Advisers, Inc. (Goldline)” and the bus driver.

2019 GOLDEN NOTES
Mercantile Law
The RTC ruled in favor of the Heirs, holding TTAI alter ego or that CBB and Binswanger are one and
liable to pay the heirs damages and expenses. A the same corporation. There are also indications of
writ of execution was served upon TTAI and badges of fraud in Binswanger’s incorporation. It
Cheng, operator of the Goldline bus. Cheng failed was a business strategy to evade CBB’s financial
to settle the judgment, thus a tourist bus was liabilities, including its outstanding obligation to
levied. Livesey (Livesey v. Binswanger Philippines, Inc. and
Keith Elliot, G.R. No. 177493, March 19, 2014).
Gold Line filed a third-party claim, claiming that
the levied tourist bus be returned to it because it NOTE: There appears to be a lack of conclusive
was its owner and that it had not been made a yardstick as to when the court may pierce the veil
party to the case, and it was a corporation of corporate fiction of a corporation which has not
entirely different from TTAI. Is Gold Line’s been brought to its jurisdiction by summons,
contention correct? voluntary appearance, or other recognized modes
of acquiring jurisdiction. To be safe, any bar
A: NO. There is sufficient factual basis to find that question should be answered based on similarity
Goldline and TTAI were one and the same entity, with the facts of each case (Divina, 2014).
specifically: (a) documents submitted showing that
Cheng, who claimed to be the operator of TTAI,is also Circumstances which do not warrant the
the President/Manager and an incorporator of Gold piercing of the corporate veil
Line; and (b) Travel and Tours Advisers, Inc. had
been known in Sorsogon as Goldline (Gold Line Tours, The mere fact that: (FiCoS)
Inc. v. Heirs of Maria Concepcion Lacsa, G.R. No.
159108, June 18, 2012). 1. A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
Q: Eric Livesey filed a complaint for illegal ownership of the stocks of a corporation is not
dismissal with money claims against CBB per se a cause for piercing the veil.
Philippines Strategic Property Services, Inc. 2. Two corporations have Common directors or
(CBB) and Paul Dwyer, its president. Livesey and same or single stockholder who has all or nearly
CBB entered into a compromise agreement all of the capital stock of both corporations is
Unless and until the agreement is fully satisfied, not in itself sufficient ground to disregard
CBB shall not sell, alienate, or otherwise dispose separate corporate entities.
of all or substantially all of its assets or business; 3. There is a Substantial identity of the
suspend its business operations; substantially incorporators of the 2 corporations does not
change the nature of its business; and declare necessarily imply fraud and does not warrant
bankruptcy or insolvency. piercing the corporate veil.
CBB failed to pay the rest of the amount as the Q: Land Bank of the Philippines (LBP) extended
company ceased operations. Livesey moved for a series of credit accommodations to ECO using
the issuance of an alias writ of execution, the trust funds of PVTA. The proceeds of the
alleging that CBB and Keith Elliot have credit accommodations were received on behalf
organized another corporation, “Binswanger of ECO by Emmanuel Oñate. Upon maturity of
Philippines, Inc.” He claimed that there was the loans, ECO failed to pay the same. ECO then
evidence showing that CBB and Binswanger submitted a Plan of Payment to LBP, however,
Philippines, Inc. are one and the same the latter rejected the same. LBP filed a
corporation, pointing out that CBB stands for complaint for collection of sum of money against
Chesterton Blumenauer Binswanger. ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
Is the doctrine of piercing the veil of corporate treated as one holding Oñate liable for the loans
fiction applicable? incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
A: YES. Shortly after Elliot forged the compromise loans incurred from LBP?
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s A: NO. Oñate should not be held jointly and
closure and Binswanger’s incorporation. CBB severally liable with ECO. A corporation, upon
ceased to exist only in name; it re–emerged — to coming into existence, is invested by law with a
avoid payment by CBB of the last two installments personality separate and distinct from those
of its monetary obligation to Livesey, as well as its persons composing it as well as from any other legal
other financial liabilities. A reasonable mind would entity to which it may be related. By this attribute, a
arrive at the conclusion that Binswanger is CBB’s stockholder may not, generally, be made to answer

for acts or liabilities of the said corporation, and vice 2. Such control must have been used by the
versa. The mere fact that Oñate owned the majority defendant to commit fraud or wrong, to
of the shares of ECO is not a ground to conclude that perpetuate the violation of a statutory or other
Oñate and ECO are one and the same. Mere positive legal duty, or dishonest and unjust act
ownership by a single stockholder of all or nearly all in contravention of plaintiff’s legal right (Fraud
of the capital stock of a corporation is not by itself test); and
sufficient reason for disregarding the fiction of 3. The aforesaid control and breach of duty must
separate corporate personalities. Neither is the fact have proximately caused the injury or unjust
that the name “ECO” represents the first three loss complained of (Harm test).
letters of Oñate’s name sufficient reason to pierce
the veil. Even if it did, it does not mean that the said 1. Instrumentality or Control Test
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is This test requires that the subsidiary be completely
lawful. There is nothing illegal in a corporation under the control and domination of the parent. It
acquiring the name or as in this case, the initials of examines the parent corporation’s relationship with
one of its shareholders (Land Bank ofthe Philippines the subsidiary. It inquires whether a subsidiary
v. CA, et al., G.R. No. 127181, September 4, 2001). corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
TEST IN DETERMINING APPLICABILITY instrumentality or agent of the parent corporation
such that its separate existence as a distinct
The following are the tests in determining the corporate entity will be ignored. It seeks to establish
applicability of the doctrine of piercing the whether the subsidiary corporation has no
corporate veil (ECAO) autonomy and the parent corporation, though
acting through the subsidiary in form and
1. When the corporation is used to defeat public appearance, “is operating the business directly for
convenience as when the corporate fiction is itself.
used as a vehicle for the evasion of an existing
obligation (Equity Cases) 2. Fraud Test
2. In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend This test requires that the parent corporation’s
a crime (Control Test) conduct in using the subsidiary corporation be
3. In Alter ego cases, where a corporation is unjust, fraudulent or wrongful. It examines the
merely a farce since it is a mere alter ego or relationship of the plaintiff to the corporation. It
business conduit of a person, or where the recognizes that piercing is appropriate only if the
corporation is so organized and controlled and parent corporation uses the subsidiary in a way that
its affairs are so conducted as to make it merely harms the plaintiff creditor. As such, it requires a
an instrumentality, agency, conduit or adjunct showing of “an element of injustice or fundamental
of another corporation (Sarona vs. NLRC, Royale unfairness.”
Security Agency, et al., G.R. No. 185280, January
18, 2012). 3. Harm Test
4. The Objective test where the end result in
piercing the veil of corporate fiction is to make This test requires the plaintiff to show that the
the stockholders liable for debts and defendant’s control, exerted in a fraudulent, illegal
obligations of the Corporation not to make the or otherwise unfair manner toward it, caused the
Corporation liable for the debts and obligations harm suffered. A causal connection between the
of the stockholders (Umali v CA, G.R. No. 89561, fraudulent conduct committed through the
September 13, 1990). instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
Three-pronged test to determine the should be established. The plaintiff must prove that,
application of the alter ego/ instrumentality unless the corporate veil is pierced, it would have
theory: been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
1. Control, not mere majority or complete stock thereby, suffer damages.
control, but complete domination, not only of
finances but of policy and business practice in NOTE: Piercing the corporate veil based on the alter
respect to the transaction attacked so that the ego theory requires the concurrence of the three
corporate entity as to this transaction had at the elements – control(1), fraud or fundamental
time no separate mind, will or existence of its unfairness(2), and harm or damage(3). The absence
own (Instrumentality or Control test); of any of these elements prevents piercing the

2019 GOLDEN NOTES
Mercantile Law
corporate veil (DBP v. Hydro Resources Contractors 11. The formal legal requirements of the subsidiary
Corp., G.R. Nos. 167603, 167561, & 167530, March 13, are not observed (PNB v. Ritratto Group, G.R. No.
2013). 142616, July 31, 2001).
Piercing the veil of corporate fiction on the basis Piercing the Corporate Veil may Apply to
of equity Natural Persons
Equity cases applying the piercing doctrine are 1. When the Corporation is the Alter Ego of a
what are termed the "dumping ground", where no Natural Person. The piercing of the corporate veil
fraud or alter ego circumstances can be culled by the may apply to corporations as well as natural
Court to warrant piercing. persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
The main feature of equity cases is the need to pierced when a corporation is just but the alter ego
render justice in the situation at hand or to brush of a person or of another corporation."
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types 2. Reverse Piercing of the Corporate Veil. From
of piercing (Villanueva, 2010). American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
Specifically, the equity test can be applied when: corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership,
1. The corporate personality would be 50 "in a traditional veil-piercing action, a court
inconsistent with the business purpose of the disregards the existence of the corporate entity so a
legal fiction; claimant can reach the assets of a corporate insider.
2. The piercing the corporate fiction is necessary In a reverse piercing action, however, the plaintiff
to achieve justice or equity for those who deal seeks to reach the assets of a corporation to satisfy
in good faith with the corporation; or claims against a corporate insider." "Reverse-
3. When the use of the separate juridical piercing flows in the opposite direction (of
personality is used to confuse legitimate issues. traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders."
Indications that a subsidiary corporation is a
mere instrumentality of its parent corporation It has two (2) types:
a. Outsider reverse piercing occurs when a party with
1. The parent corporation owns all or most of the a claim against an individual or corporation
capital stock of the subsidiary. attempts to be repaid with assets of a corporation
2. The parent and subsidiary corporations have owned or substantially controlled by the defendant.
common directors or officers. b. Insider reverse piercing, the controlling members
3. The parent corporation finances the subsidiary. will attempt to ignore the corporate fiction in order
4. The parent corporation subscribes to all the to take advantage of a benefit available to the
capital stock of the subsidiary or otherwise corporation, such as an interest in a lawsuit or
causes its incorporation. protection of personal assets. (IAM/Es vs. Litton and
5. The subsidiary has grossly inadequate capital. Company Inc. December 13, 2017, G.R. No. 191525)
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary. Q: Plaintiffs filed a collection action against X
7. The subsidiary has substantially no business Corporation. Upon execution of the court's
except with the parent corporation or no assets decision, X Corporation was found to be without
except those conveyed to or by the parent assets. Thereafter, the plaintiffs filed an action
corporation. against its present and past stockholder, Y
8. In the papers of the parent corporation or in the Corporation, which owned substantially all of
statements of its officers, the subsidiary is the stocks of X corporation. The two
described as a department or division of the corporations have the same board of directors
parent corporation, or its business or financial and Y Corporation financed the operations of X
responsibility is referred to as the parent corporation. May Y Corporation be held liable
corporation’s own. for the debts of X Corporation? Why? (2001 Bar)
9. The parent corporation uses the property of the
subsidiary as its own. A: YES. Y Corporation may be held liable for the
10. The directors or executives of the subsidiary do debts of X Corporation. The doctrine of piercing the
not act independently in the interest of the veil of corporation fiction applies to this case. The
subsidiary but take their orders from the parent two corporations have the same board of directors
corporation. and Y Corporation owned substantially all of the

stocks of X Corporation, which facts justify the 8. Subscribers – persons who have agreed to take
conclusion that the latter is merely an extension of and pay for original, unissued shares of a
the personality of the former, and that the former corporation formed or to be formed.
controls the policies of the latter. Added to this is the 9. Underwriter – a person who guarantees on a
fact that Y Corporation controls the finances of X firm commitment and/or declared best effort
Corporation which is merely an adjunct, business basis the distribution and sale of securities of
conduit or alter ego of Y Corporation (CIR v. Norton any kind by another (Securities and Regulation
& Harrison Company, G.R. No. L‐17618, August 31, Code [SRC], Sec. 3.15).
1964).
Kinds of Underwriting Agreement
INCORPORATION a. English – the underwriter sells what the

AND ORGANIZATION corporation cannot sell.
b. Firm Commitment – the underwriter purchases
outright the securities and then resells the
Incorporation same.
Best Efforts – the underwriter merely sells for
It is the performance of conditions, acts, deeds, and commission.
writings by incorporators, and the official acts,
certification or records, which give the corporation NUMBER AND QUALIFICATIONS OF
its existence. INCORPORATORS
Steps in the creation of a corporation Number and the qualifications of incorporators

in a stock corporation (NILaRO)
1. Promotion
2. Incorporation (Sec. 10, CC) 1. GR: Natural person
3. Formal organization and commencement of
business operations (Sec. 22, CC) XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to be
Components of a corporation (DUMP-ISCO) incorporators of rural banks.
1. Corporators – Those who compose a Note: Under the Revised Corporation Code,
corporation, whether as stockholders or partnership, association or corporation, singly or
members jointly with others may now form a corporation
2. Incorporators –Those mentioned in the Articles
of Incorporation as originally forming and 2. GR: Incorporators must not be less than 5 but
composing the corporation and who are not more than 15
signatories thereof.
3. Directors and trustees – The Board of Directors XPNS: (SEC)
is the governing body in a stock corporation
while the Board of Trustees is the governing 1. Corporation sole
body in a non-stock corporation. 2. Educational institutions
4. Corporate Officers – Officers who are identified 3. Close corporations
as such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the Note: The Revised Corporation Code is silent as to
corporation. the minimum number of incorporators. However, it
5. Stockholders – Owners of shares of stock in a retained the maximum number of incorporators
stock corporation. which must not be more than 15.
6. Members – Corporators of a non-stock
corporation. They are not owners of shares of 3. An incorporator must be of Legal age
stocks, and their membership depends on 4. Majority of the incorporators must be
terms provided in the articles of incorporation Residents of the Philippines (2006 Bar)
or by-laws (CC, Sec. 91,CC). 5. Each must own or subscribe to at least one
7. Promoter – A person who, acting alone or with share (Sec.10, CC)
others, takes initiative in founding and
organizing the business or enterprise of the Note:
issuer and receives consideration therefor
(Securites and Regulation Code [SRC], Sec. 3.10). Q: What is the minimum and maximum number
of incorporators required to incorporate a stock

2019 GOLDEN NOTES
Mercantile Law
corporation? Is this also the same minimum and number of directors shall not be more than 15 while
maximum number of directors required in a the number of trustees may be more than 15
stock corporation? (2006, 2010 Bar)
Q: Must all incorporators and directors be
A: Any number of natural persons not less than five residents of the Philippines? (2006 Bar)
(5) but not more than fifteen (15) may form a
private corporation (CC, Section 10). Likewise, the A: NO. The Corporation Code only provides that
number of directors must not be less than five (5) majority of incorporators and directors of a
nor more than fifteen (15) as indicated in the AOI corporation must be residents of the Philippines
(CC, Sec. 14). (CC, Secs. 10 and 23).
Note: No required minimum number of

incorporators under the RCC. Under the RCC, the
Corporator vs. Incorporator
BASIS INCORPORATOR CORPORATOR

Those stockholders or members
Those who compose a corporation,
mentioned in the AOI as originally
Who are they whether as stockholders or as
forming and composing the corporation
members.
and who are signatories thereof.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
Ceases to be a corporator by sale of his
shares in case of stock corporation.
Effect upon the sale of Does not cease to be an incorporator
his shares upon sale of his shares
In case of non-stock corporation, the
corporator ceases to be a member.
GR: 5 to 15 GR: No limit
XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number
incorporator than a specified number of persons,
ofincorporators/
usually not exceeding 20 (CC, Sec. 96)
corproator
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator.
GR: Filipino citizenship is not a requirement.
Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be citizens.
Incorporator vs. Subscriber (2012 Bar)
BASIS INCORPORATORS SUBSCRIBER

Those stockholders or members They are persons who have agreed to
mentioned in the AOI as originally take and pay for original, unissued
Who are they
forming and composing the shares of a corporation formed or to be
corporation. formed.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
GR: 5 to 15 GR: No limit
XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number of
incorporator than a specified number of persons,
incorporators/
usually not exceeding 20 (CC, Sec. 96)
subscriber
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator

GR: Filipino citizenship is not a requirement.

Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be Filipino citizens.
Residence Majority of the incorporators must be Residency requirement is not
requirement residents of the Philippines. applicable.
NOTE: Non-residents may be incorporators that already reserved or registered for the use of
because the law only requires that the majority of another corporation, or if such name is already
incorporators be residents of the Philippines. protected by law, or when its use is contrary to
existing law, rules and regulations.
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in A name is not distinguishable even if it contains
Quezon City, Philippines. Z is a resident alien one or more of the following:
residing in Makati City. GGG Corporation is a
domestic corporation – 40% owned by (a) The word “corporation”, “company”,
foreigners and 60% owned by Filipinos, with T “incorporated”,“limited”, “limited liability”,
as authorized representative. CCC Corporation or an abbreviation of one of such words; and
is a foreign corporation registered with the (b) Punctuations, articles, conjunctions,
Philippine Securities and Exchange contractions, prepositions, abbreviations,
Commission. KKK Corporation is a domestic different tenses, spacing, or number of the
corporation (100%) Filipino owned. S is a same word or phrase.
Filipino, 16 years of age, and the daughter of Y.
Who can be incorporators? Who can be 3. If the name applied for is similar to the name of
subscribers? a registered firm, the applicant shall at least
contain one or more distinctive words to the
A: X, Y, and Z can be incorporators. Sec. 10 of the CC proposed name to remove the similarity or
merely requires majority of the incorporators to be differentiate it from the registered name.
residents (not necessarily citizens) of the However, the addition of these distinctive
Philippines. Further, said incorporators must be words shall not be allowed if the registered
natural persons, of legal age and must own or name is coined or unique unless the board of
subscribe to at least 1 share. directors of the subject corporation gives its
consent to the applied name (De Leon, 2010,
Meanwhile, X, Y, Z, GGG, CCC, KKK can be citing SEC Memo, Cir. No. 5, Series of 2008).
subscribers. Residency requirement is immaterial in 4. The corporate name shall contain the word
subscription contracts. However, the citizenship “Corporation” or its abbreviation “Corp.” or
requirement is material in subscription contracts Incorporated”, or “Inc.”.“The corporate name of
if the corporation is engaged in nationalized a foundation shall use the word “Foundation”.
activities requiring at least majority Filipino This is to distinguish the corporation from a
citizenship as a requirement. partnership and other business organizations
(SEC Memo. Circ. No. 5, Series of 2008).
CORPORATE NAME; LIMITATION ON USE OF 5. A person’s full name or surname may be used in
CORPORATE NAME a corporate name:
a. If he is a stockholder of the corporation and
1. No corporate name may be allowed by the SEC has consented to such use;
if the proposed name is identical or deceptively b. If the person is already deceased, the
or confusingly similar to that of any existing consent shall be given by his estate;
corporation or to any other name already c. The Commission may require a registrant
protected by law (CC, Sec. 18). to explain to its satisfaction the reason for
the use of a person’s name;
d. The meaning of initials used in a name shall
2. The proposed name is patently deceptive, be stated by the registration the articles of
confusing or contrary to existing laws (Sec. 18, incorporation in a separate document
CC). signed by an incorporator or director (SEC
Memo. Circ. No. 5, Series of 2008).
Note: Sec. 17 of the Revised Corporation Code
provides that no corporate name shall be allowed by 6. The name of a dissolved firm shall not be
the Commission if it is not distinguishable from allowed to be used by other firms within 3 years

2019 GOLDEN NOTES
Mercantile Law
after the approval of the dissolution of the corporate name, the corporate names must be
corporation by SEC, unless allowed by the last evaluated in their entirety (Lyceum of the
stockholders representing at least majority of Philippines v. CA, G.R. No. 101897, March 5, 1993).
the outstanding capital stock of the dissolved
firm (SEC Memo. Circ. 14, Series of 2000). Q: Refractories Corporation of the Philippines
7. For as long as a corporation is existing (RCP) is a corporation engaged in the business
regardless of whether or not it is in operation, of manufacturing, producing, selling, exporting
its corporate name cannot be used by any other and otherwise dealing in any and all refractory
group or corporation (SEC Opinion, Sept. 2, bricks, its by-products and derivatives. On June
1993). 22, 1977, it registered its corporate and
8. The practice of a profession regulated by business name with the Bureau of Domestic
special law which among others provides for Trade. On the other hand, Synclaire
the permissible use of the profession’s name in Manufacturing Corporation amended its AOI on
a firm, partnership or association shall govern August 23, 1985 to change its corporate name to
the use of the name e.g. “Engineer” or Industrial Refractories Corp. of the Philippines
“Engineering”. (RA 1582) (IRCP). Both companies are the only local
9. Unless otherwise authorized by the Commision, suppliers of monolithic gunning mix.
the following words and phrases can only be Discovering that IRCP was using such corporate
used by the entities mentioned: name, RCP filed with SEC a petition to compel
a. “Investment or Capital” – IRCP to change its corporate name on the
investment houses, investment or ground that its corporate name is confusingly
holding company similar with that of RCP’s such that the public
b. “Asset/Fund/Financial/Financial may be confused or deceived into believing that
Management or Adviser” – they are one and the same corporation. Is
licensed by BSP to hold investment Industrial Refractories Corporation of the
management activities Philippines confusingly similar with
c. “National, Bureau, Commision, Refractories Corporation of the Philippines?
State and other words acronyms
that have gained wide acceptance A: YES. To fall within the prohibition of the law, two
in the Philippines” – by entities requisites must be proven, to wit: (1) that the
performing governmental complainant corporation acquired a prior right over
functions. the use of such corporate name; and (2) the
Note: These names are already proposed name is either: (a) identical, or (b)
preserved for governmental use. deceptively or confusingly similar to that of any
existing corporation or to any other name already
XPNs: IF there is a Vested Right, protected by law; or (c) patently deceptive,
(i.e. National Bookstore) or IF confusing or contrary to existing law. In this case,
Authorized by the Commission. RCP was incorporated on October 13, 1976 and
since then has been using the corporate name
d. Association, Organization – non “Refractories Corp. of the Philippines”. Meanwhile,
stock corporations. IRCP was incorporated on August 23, 1979
e. “Stock/Futures/Derivatives originally under the name “Synclaire Manufacturing
Exchange or Broker, Plans, Corporation”. It only started using the name
Securities/Stock Clearing Agency “Industrial Refractories Corp. of the Philippines”
or any similar words or phrases – when it amended its Articles of Incorporation on
by entities organized as an August 23, 1985, or nine (9) years after respondent
exchange, broker dealer, RCP started using its name. Thus, being the prior
commodity futures broker, registrant, respondent RCP has acquired the right to
clearing agency, or pre-need use the word “Refractories” as part of its corporate
company under RA 8799 or name (Industrial Refractories Corporation of the
Securities and Regulation Code. Philippines v. CA, et al., G.R. No. 122174, October 3,
(SEC Memo Circ. No. 21, Dec. 4, 2002).
2013)
Doctrine of Secondary Meaning
NOTE: Priority of adoption determines the right to
the exclusive use of a corporate name with freedom It is the doctrine which states that a word or phrase
from infringement. Further, to determine whether a originally incapable of exclusive appropriation with
given corporate name is “identical” or “confusingly reference to an article on the market, because
or deceptively similar” with another entity’s geographically or otherwise descriptive, might

nevertheless have been used so long and so and delineated the different modes of dissolving a
exclusively by one producer with reference to his corporation, and amendment of the articles of
article that, in that trade and to that branch of the incorporation was not one of such modes. The effect
purchasing public, the word or phrase has come to of the change of name was not a change of the
mean that the article was his product (Philippine corporate being. In short, Zeta and Zuellig remained
Nut Industry, Inc. vs. Standard Brands. Inc. G.R. No.L- one and the same corporation. The change of name
23035, July 31, 1975). did not give Zuelligthe license to terminate
employees of Zeta like San Miguel without just or
The doctrine of secondary meaning requires that authorized cause. The situation was not similar to
the word or phrase used in the corporate name has that of an enterprise buying the business of another
been for such length of time with such exclusivity as company where the purchasing company had no
to have associated or identified the corporation in obligation to rehire terminated employees of the
the mind of the general public (or at least that latter. Zuellig, despite its new name, was the mere
portion of the general public to do with the continuation of Zeta's corporate being, and still held
corporation’s market) (Lyceum of the Philippines vs. the obligation to honor all of Zeta's obligations, one
CA, supra). of which was to respect San Miguel's security of
tenure. The dismissal of San Miguel from
NOTE: The application of this Trademark Law employment on the pretext that Zuellig, being a
doctrine has been extended to corporate names different corporation, had no obligation to accept
since the right to use a corporate name to the him as its employee was illegal and ineffectual
exclusion of others is based upon the same principle (Zuellig Freight and Cargo Systems vs. NLRC, et al.,
which underlies the right to use a particular G.R. No. 157900, July 22, 2013).
trademark or trade name (De Leon, 2010).
Q: P.C. Javier and Sons Services, Inc., (PC) applied
A corporation that changes its corporate name is with First Summa Savings and Mortgage Bank,
not considered as a new corporation later on renamed as PAIC Savings and Mortgage
Bank (The Bank) for a loan accommodation
A corporation that changes its corporate name is under the Industrial Guarantee Loan Fund
not considered as a new corporation. It is the same (IGLF). Upon maturity, PC failed to pay, hence,
corporation with a different name, and its character the Bank initiated an extrajudicial foreclosure
is in no respect changed (Republic Planters Bank v. of the real estate mortgage. The instant
CA, G.R. No. 93073, December 21, 1992). complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land mortgaged by
Q: San Miguel brought a complaint for unfair PC in favor of PAIC Savings and Mortgage Bank,
labor practice, illegal dismissal, non-payment of Inc. PC argues that they are legally justified to
salaries and moral damages against Zuellig withhold their amortized payments to the bank
Freight and Cargo Systems, formerly known as until such time they would have been properly
Zeta. He alleged that he had been a notified of the change in the corporate
checker/customs representative of Zeta since name. They claim that they have never received
December 16, 1985; that in January 1994, he and any formal notice of the alleged change of
other employees of Zeta were informed that corporate name of First Summa Savings and
Zeta would cease operations, and that all Mortgage Bank to PAIC Savings & Mortgage
affected employees, including him, would be Bank, Inc. Is the Bank required to notify PC
separated. Javier & Sons, Inc., of the change in its corporate
San Miguel contended that the amendments of name?
the articles of incorporation of Zeta were for the
purpose of changing the corporate name, A: NO. Supreme Court held that the bank is not
broadening the primary functions, and required to notify PC of its change of name as it is
increasing the capital stock; and that such not required under the Corporation Code and
amendments could not mean that Zeta had been Banking Laws. Therefore, the Court cannot impose
thereby dissolved. Did the change of corporate on a bank that changes its corporate name to notify
name result in the dissolution of the a debtor of such change absent any law, circular or
corporation? regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
A: NO. The amendments of the articles of discretionary on the bank and remains to be a mere
incorporation of Zeta to change the corporate name internal policy that banks may or may not adopt.
to Zuellig Freight and Cargo Systems, Inc. did not The corporation, upon such change in its name, is in
produce the dissolution of the former as a no sense a new corporation, nor the successor of the
corporation. For sure, the Corporation Code defined original corporation. It is the same corporation with

2019 GOLDEN NOTES
Mercantile Law
a different name, and its character is in no respect GR: The filing and recording of a certificate of
changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No. extension after the term cannot relate back to the
129552, June 29, 2005). date of the passage of the resolution of the
stockholders to extend the life of the corporation.
CORPORATE TERM
XPNs: The doctrine of relation applies if the failure
Term of corporate existence to file the application for extension within the term
of the corporation is due to:
GR: The period stated in the AOI, provided it does 1. The neglect of the SEC officer with whom the
not exceed 50 years. certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
XPN: Unless sooner dissolved or unless said period (Aquino, 2006)
is extended (CC, Sec. 11)
Q: The term of GGG Corporation in accordance
NOTE: Extension may be made for periods not with its Articles of Incorporation ended last
exceeding 50 years in any single instance by an January 30, 2012. The term was not extended.
amendment of the articles of incorporation. What will happen to the corporation? (2012
However, extension must be made within 5 years Bar)
before the expiry date of the corporate term, unless
there are justifiable reasons for an earlier extension A: The corporation ceases to exist and is dissolved
as may be determined by the SEC (CC, Sec. 11). ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
NOTE: The Revised Corporation Code introduced the legal requisites of extension of period (PNB vs.
substantial changes with respect to the term of CFI, G.R. No. 63201, May 27, 1992).
corporate existence. Sec. 11 provides that a
corporation shall have perpetual existence unless MINIMUM CAPITAL STOCK AND SUBSCRIPTION
its Articles of Incorporation provides otherwise. REQUIREMENTS
Also, the Code mandates that corporations with
certificates of incorporation issued prior to this Capital stock requirements
code and which continue to exist shall likewise have
perpetual existence unless the corporation elects to GR: There is no minimum authorized capital stock
retain its specific corporate term. as long as the paid-up capital is not less than
P5,000.00.
Under the RCC, if a corporation wishes to change its
corporate term, it may amend its AOI at least 3 years XPN: As provided by special law
prior to the expiration of its term. Previously, such
change should be made at least 5 years prior to the Minimum stock subscription and paid-up
expiration. capital requirements
If the term has already expired, the corporation may At least 25% of the authorized capital stock as
now ask the SEC to revive their corporate existence, stated in the AOI must be subscribed at the time of
which option was not present in the old code. Upon incorporation, and at least 25% of the total
approval by the SEC, it will then issue a certificate of subscription must be paid upon subscription (Sec
revival giving it perpetual existence, unless it 13, CC).
requests for a limited term. NOTE: It is not required that each subscriber pay
25% of each subscribed share. It is only required
XPN: No revival is allowed for companies under the that at least 25% of the total subscribed capital
supervision of other government agencies, such as must be paid.
banks, insurance and trust companies.
Note: Sec. 13 has no counterpart in the RCC
XPN to XPN: Unless, Revival is first approved by the
appropriate government agency. Paid-up capital
Extension must also comply with procedural Paid-up capital forms part of the authorized capital
requirements for amendment of AOI. stock of the corporation, subscribed and then
actually paid for. The assets transferred and the
Doctrine of Relation or Relating Back Doctrine loans extended to a corporation should not be
considered in computing the paid-up capital of the

corporation (MISCI-NACUSIP Local Chapter v. NWPC, 1. NAme of corporation;
G.R. No. 125198, March 3, 1997). 2. Purpose/s, indicating the primary and
secondary purposes (Purpose Clause);
NOTE: The term “capital” in Section 11, Article XII 3. PLAce of principal office;
of the Constitution refers only to shares of stock that 4. Term of existence;
can vote in the election of directors. To construe 5. Names, nationalities and residences of
broadly the term “capital” as the total outstanding Incorporators;
capital stock, including both common and non- 6. NUMber of directors or trustees, which shall
voting preferred shares, grossly contravenes the not be less than 5 nor more than 15, except for
intent and letter of the Constitution. A broad corporation sole;
definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates Note: Under the Revised Corporation Code, the
to control of the public utility (Wilson Gamboa vs. number of directors shall not be more than
Finance Secretary Margarito Teves, et. al., G.R. No. fifteen (15) while the number of trustees which
176579, October 9, 2012). may be more than fifteen (15) and the term of
existence is generally perpetual;
Time when the unpaid subscription is payable
7. Names, nationalities, and residences of the
The balance or the unpaid subscription shall be persons who shall Act as directors or trustees
payable: until the first regular ones are elected and
qualified;
1. On a date or dates fixed in the contract of 8. If a Stock corporation, the amount of its
subscription without need of call; or authorized capital stock, number of shares and
2. In the absence of a fixed date or dates, upon call in case the shares are par value shares, the par
for payment by the BOD (Sec. 13, CC). value of each share;
9. Names, nationalities, number of shares, and the
ARTICLES OF INCORPORATION (AOI) amounts subscribed and paid by each of the
Original subscribers which shall not be less
NATURE AND FUNCTION OF ARTICLES than 25% of authorized capital stock;
10. If Non-stock, the amount of capital, the names,
Articles of Incorporation residences, and amount paid by each
contributor, which shall not be less than 25% of
The Articles of Incorporation (AOI) is one that total subscription; name of treasurer elected by
defines the charter of the corporation and the subscribers; and
contractual relationships between the State and the 11. Other matters as are not inconsistent with law
corporation, the stockholders and the State, and and which the incorporators may deem
between the corporation and its stockholders necessary and convenient (Sec. 14, CC).
(Government of the Philippine Islands v. Manila
Railroad Co., G.R. No. L-30646, January 30, 1929). Note: An arbitration agreement may be provided in
the articles of incorporation pursuant to Section
Three-fold nature of AOI 181 of the RCC.
An AOI, which stands as the corporate charter, is a Incorporator may delegate the signing of the AOI
contract of three-fold nature because it is a contract
between: An incorporator may delegate to an attorney-in-fact
1. The State and the corporation; the signing of the AOI in a special power of attorney
2. The corporation and the stockholders; and to such effect. However, the acknowledgment
3. The stockholders inter se. required under Sec. 15 of the CC must reflect this
fact (De Leon, 2010, citing SEC Opinion, Dec. 26,
CONTENTS 1972).
All corporations organized under the Code shall file Reason for the statement of the purpose clause
with the SEC an AOI in any of the official languages in the AOI
duly signed and acknowledged by all of the
incorporators, containing substantially the The purpose clause determines whether the acts
following matters, except as otherwise prescribed performed by the corporation are authorized or
by the Code or by special law: (NaP- PlaTINum- beyond its powers. Acts beyond the corporation’s
ASONO) powers are called ultra vires acts.

2019 GOLDEN NOTES
Mercantile Law
Rules in the statement of the purpose clause The SEC’s discretion can only be exercised on
matters of form and does not extend to the merits of
1. If there is more than one stated purpose, specify an application for incorporation.
which the is main or primary purpose and
which is or are the secondary or subsidiary NOTE: If the SEC refuses to file the AOI, which
purpose/s. substantially complied with the statute, the
remedy of the applicant is to file a petition for
NOTE: This specification is important in the mandamus.
application of the prohibition under Sec. 42 CC
which states that the corporation is prohibited XPN: However, SEC has authority to pass upon the
from investing corporate funds “for any lawfulness of the object or purpose of the
purpose other than the primary purpose for corporation as expressed in the AOI. Such
which it was organized” unless such investment determination is an exercise of judgment, that is,
is approved by both majority of the BOD or BOT judicial function on a question of law.
and ratified by the stockholders representing at
least 2/3 of the outstanding capital stock or by NOTE: If the SEC errs in the determination of
at least 2/3 of the members in the case of a non- the lawfulness of the purpose of the corporation
stock corporation. stated in the AOI and refuses to file the said AOI,
its decision is subject to review and correction
2. The purposes must be capable of being lawfully by the court (Asuncion vs. De Yriarte, GR No.
combined. 9321, Sepember 24, 1914).
3. A non-stock corporation may not include a
purpose which would change or contradict its AMENDMENT
nature as such (Sec. 14[2], CC).
Limitations in the amendment of AOI (LAV-
Requirements of the SEC as regards the address ProCSA)
specification of the corporation in the AOI
1. The amendment must be for legitimate
SEC requires that the applicant corporation must purposes and must not be contrary to other
state in its AOI the: provisions of the CC and special laws
1. Specific address of their principal office, which 2. Approved by majority of BOD/BOT
shall include, if feasible, the street name, 3. Vote or written assent of stockholders
barangay, city or municipality; and representing 2/3 of the outstanding capital
2. Specific residence address of each incorporator, stock or 2/3 of members
stockholder, director, trustee, or partner. 4. The original and amended articles together
shall contain all provisions required by law to
NOTE: SEC likewise prohibits the use of be set out in the AOI. Such articles, as amended,
“Metro Manila” as address of the principal office. shall be indicated by underscoring the change/s
made
Residence of the corporation 5. Certification under oath by corporate secretary
and a majority of the BOD/BOT stating the fact
The corporation is “in a metaphysical sense a that said amendment/s have been duly
resident of the place where its principal office is approved by the required vote of the
located as stated in the AOI” (Golden Arches Dev’t stockholders or members, shall be submitted to
Corp. vs. St. Francis Square Holdings, Inc., GR 183843, the SEC
January 19, 2011). 6. Must be approved by SEC (Sec. 16, CC)
This ruling regarding the residence of the 7. Must be accompanied by a favorable
corporation holds true even though the corporation recommendation of the appropriate
has closed its office therein and relocated to another government agency in cases of:
place (Hyatt Elevators and Escalators Corp. vs. a. Banks
Goldstar Elevators Phils., Inc., GR 161026, Oct. 24, b. Banking and quasi-banking institutions
2005). c. Building and loan associations
d. Trust companies and other financial
Duty of the SEC to file the AOI and to issue a intermediaries
certificate of incorporation e. Insurance companies
f. Public utilities
GR: The duty of the SEC to file the AOI and to issue a g. Educational institutions
certificate of incorporation is ministerial provided h. Other corporations governed by special
that the AOI substantially comply with the statute. laws (Sec. 17 [2], CC)

Time when the amendment of the AOI takes 1. If such is not substantially in accordance with
effect the form prescribed by the CC.
2. The purpose/s of the corporation is/are
The amendment of the AOI takes effect either: patently unconstitutional, illegal, immoral, or
1. Upon approval by the SEC, that is, upon contrary to government rules and regulations.
issuance of amended certificate of 3. The treasurer’s affidavit concerning the amount
incorporation; or of capital stock subscribed and/or paid is false.
2. From the date of filing with the SEC: 4. The required percentage of ownership of the
a. If not acted upon within 6 months from the capital stock to be owned by Filipino citizens
date of filing; and has not been complied with (CC, Sec. 17).
b. For a cause not attributable to the
corporation. NOTE: The above grounds are not exclusive.
NOTE: The provision on automatic approval in Sec. Other grounds as provided by PD No. 902‐A are:
16 does not apply to the dissolution of the
corporations in light of Sec. 120, CC (SEC Opinion, 1. Fraud in procuring its certificate of
March 30, 1982). incorporation;
2. Serious misrepresentation as to what the
Conversion of a stock corporation into a non- corporation can do or is doing to the great
stock corporation (2001 Bar) prejudice of, or damage to, the general
A stock corporation may be converted into a non- public;
stock corporation by mere amendment, provided all 3. Refusal to comply with, or defiance or a
the requirements are complied with. Its rights and lawful order of the SEC restraining the
liabilities will remain (CC, Sec. 16). commission of acts which would amount to
a grave violation of its franchise;
NOTE: A non-stock corporation cannot be 4. Continuous inoperation for a period of at
converted into a stock corporation through mere least five (5) years after commencing the
amendment of its Articles of Incorporation. This transaction of its business (CC, Sec. 22);
would violate Section 87 CC, which prohibits 5. Failure to file the by‐laws within the
distribution of income as dividends to members. required period; or
Giving the members shares, is tantamount to 6. Failure to file required reports.
distribution of its assets or income (SEC Opinion,
March 20, 1995). No automatic rejection of the AOI or any
amendment thereto
Under Section 122 of the Corporation Code, the non-
stock corporation must be dissolved first. There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the
NON-AMENDABLE ITEMS incorporators a reasonable time within which to
correct or modify the objectionable portions of the
Non-amendable items in the AOI AOI or amendment (Sec. 17[1], CC).
Those matters referring to accomplished facts, Effect of non-use of corporate charter and
except to correct mistakes, such as: continuous inoperation of a corporation
1. Names of incorporators; 1. Failure to organize and commence business

2. Names of original subscribers to the capital within 2 years from incorporation – its corporate
stock of the corporation and their powers ceases and the corporation shall be
subscribed and paid up capital; deemed dissolved.
3. Names of the original directors;
4. Treasurer elected by the original Note: The 2 year period is now modified by the RCC
subscribers; Under such law, the failure of a corporation to
5. Members who contributed to the initial organize and commence its business should be
capital of the non‐stock corporation; or within five (5) years from the date of its
6. Witnesses to and acknowledgment with incorporation. In effect, its certificate of
AOI. incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.
Grounds for the rejection or disapproval of the
AOI or amendment thereto 2. Continuous inoperation for at least 5 years –
ground for the suspension or revocation of

2019 GOLDEN NOTES
Mercantile Law
corporate franchise or certificate of a. Articles of Incorporation
incorporation (Sec. 22, CC). b. Treasurer’s Affidavit
c. Certificate of Authority by the Monetary Board
Note: Sec. 21 of the Revised Corporation Code of BSP
provides that continuous inoperation for at least 5 d. Verification slip from the records of the SEC
years allows the Commission, after due notice and whether or not the proposed name has already
hearing, to place the corporation under delinquent been registered under a different entity
status e. An undertaking stating the proposed name
shall be changed in case another entity has been
NOTE: The above shall not be applicable if it is due registered under the proposed name
to causes beyond the control of the corporation as f. Registration sheet
determined by SEC. g. Bank certificate of deposit covering the paid-up
capital
Suspension or revocation of the certificate of h. Letter containing authorization to the SEC or
registration due to failure to operate or Monetary Board or any of its duly authorized
continuous inoperation is not automatic representative to inspect bank records
concerning the paid-up capital
Under PD No. 902-A, SEC should afford due process i. Favorable endorsement from proper
or proper notice and hearing before the suspension government agency in case of special
or revocation of certificate of registration. The corporations
suspension or revocation of the certificate of
registration due to failure to operate or continuous Doctrine of corporate entity
inoperation is not automatic.
GR: A corporation comes into existence upon the
REGISTRATION AND ISSUANCE OF issuance of the certificate of incorporation by the
CERTIFICATE OF INCORPORATION SEC under its official seal. Then and only then will it
acquire a juridical personality (CC, Sec. 19).
Basic requirements for the registration and
issuance of a certificate of incorporation of a XPN: In case of a corporation sole, the corporation
stock corporation sole commences existence upon the filing of the
articles of incorporation.
1. Name verification slip
2. AOI and by-laws ADOPTION OF BY-LAWS
3. Treasurer’s affidavit
By-laws are rules and regulations or private laws
Note; The articles of incorporation and applications enacted by the corporation to regulate, govern and
for amendments thereto may be filed with the control its own actions, affairs and concerns and of
Commission in the form of an electronic document, its stockholders or members and directors and
in accordance with the Commission’s rules and officers in relation thereto and among themselves in
regulations on electronic filing. their relation to it (Valley Golf & Country Club, Inc. vs.
Vda. De Caram, GR 158805, April 16, 2009).
Contents of a treasurer’s affidavit
By-laws are relatively permanent and continuing
That at least 25% of the authorized capital stock of rules of action adopted by the corporation for its for
the corporation has been subscribed, and at least its own government and that of individuals
25% of the total subscription has been fully paid in composing of it and those having the direction,
actual cash and/or property; such paid-up capital management, and control of its affairs, in whole or
being not less than P5,000 (Sec. 14, 15, CC). in part, in the management and control of its
affairs and activities (China Banking Corporation v.
Q: You are asked to incorporate a new company CA, G.R. No. 117604, March 26, 1997).
to be called FSB Savings & Mortgage Bank, Inc.
List the documents that you must submit to the NATURE AND FUNCTIONS OF BY-LAWS
Securities and Exchange Commission(SEC) to
obtain a Certificate of Incorporation for FSB The corporate power to adopt by-laws is inherent in
Savings & Mortgage Bank, Inc. (2002 Bar) every corporation. To give emphasis to such
necessary corporate incident, said power is
A: The documents to be submitted for the issuance expressed in Sec. 36(5) and Sec. 46 of the CC.
of a certificate of incorporation in favor of FSB
Savings & Mortgage Bank, Inc. are the following:

The by-laws supplement the AOI. The function of 7. Manner of election or appointment and the
by-laws is to define the rights and duties of term of office of all officers other than
corporate officers and directors or trustees, and of directors or trustees.
stockholders or members towards the corporation 8. Penalties for violation of the by-laws.
and among themselves with reference to the 9. In case of stock corporations, the manner of
management of corporate affairs and to regulate issuing certificates.
transaction of the business of the corporation in a 10. Such other matters as may be necessary for
particular way (De Leon, 2010). the proper or convenient transaction of its
corporate business and affairs for the
A corporation sole is not governed by by-laws promotion of good governance and anti-
graft and corruption measures. (CC, Sec.
A corporation sole is not governed by by-laws. It is 47).
instead governed by Rules, Regulations and
Discipline of its religious denomination which Note: There are additional contents mentioned
already contain the provisions embodied in the by- under the Revised Corporation Code:
laws of ordinary corporations.
1. The modes by which a stockholder, member,
REQUISITES OF VALID BY-LAWS director, or trustee may attend meetings and cast
(2000, 2001 BAR) their votes;
2. The directors’ or trustees’ qualifications, duties
The following are the requisites for the validity of and responsibilities, the guidelines for setting the
by-laws: (CoMorO-RAG) compensation of directors or trustees and officers,
and the maximum number of other board
1. Must be consistent with the COrporation Code, representations that an independent director or
other pertinent laws and regulations; trustee may have which shall, in no case, be more
2. Must not be contrary to MORals and public than the number prescribed by the Commission;
policy;
3. Must not impair Obligations and contracts or Also, an arbitration agreement may be provided in
property rights of stockholders; the bylaws pursuant to Section 181 of this Code.
4. Must be Reasonable;
5. Must be consistent with the charter or AOI; and Adoption of the Original By-laws
NOTE: In case of conflict between the by-laws GR: It must be filed within one (1) month from
and the AOI, the AOI prevails because the by- notice of issuance of certificate of incorporation.
laws are intended merely to supplement the
former. XPN: By- laws may be adopted and filed prior to the
incorporation. Such shall be approved and signed by
6. Must be of General application and not directed all the incorporators and submitted to the SEC
against a particular individual. together with the AOI.
Contents of by-laws Note: The one month period to adopt by-laws was
deleted in RCC.
1. Time, place and manner of calling and
conducting regular or special meetings of Procedures in adopting by-laws
directors or trustees.
2. Time and manner of calling and conducting The by-laws may be adopted before or after
regular or special meetings of the incorporation. In all cases, the by-laws shall be
stockholder or members. effective only upon the issuance by the SEC of a
3. The required quorum in meeting of certification that the by-laws are not inconsistent
stockholders or members and the manner with the AOI.
of voting therein.
4. The form for proxies of stockholders and 1. Pre - incorporation – It shall be approved
members and the manner of voting them. and signed by all the incorporators and
5. The qualification, duties and compensation submitted to the SEC, together with AOI.
of directors or trustees, officers and 2. Post – incorporation:
employees. a. Vote of the majority of the stockholders
6. Time for holding the annual election of representing the outstanding capital stock
directors or trustees and the mode or or members;
manner of giving notice thereof.

2019 GOLDEN NOTES
Mercantile Law
b. By-laws shall be signed by the succeeding rendition of services. Despite
stockholders or members voting for them repeated demands, PMI failed to pay and hence,
c. It shall be kept in the principal office of the Galvan filed a complaint seeking payment for
corporation and subject to the inspection of salaries earned. PMI sought to avoid liability on
the stockholders or members during office the ground that under PMI’s by-laws only the
hours. Chairman is authorized to sign any contract.
d. Copy thereof, duly certified by the BOD or Hence, according to PMI, the employment
BOT countersigned by the secretary of the contract of Galman, which was not signed by the
corporation, shall be filed with the SEC and Chairman, is not binding upon PMI.
shall be attached with the original AOI (Sec.
46, CC). Is the employment contract invalid because it
violated PMI’s by-laws stating that the Chairman
BINDING EFFECTS of the BOD should be the signatory thereon?
The following are the binding effects of by-laws: A: NO. The employment contract is not invalidated
by the failure of the Chairman to sign such. Since by-
1. As to members/ stockholders, officers, laws operate merely as internal rules among the
trustees/ directors and corporation stockholders, they cannot affect or prejudice third
They are bound by and must comply with it. persons who deal with the corporation, unless they
They are presumed to know the provisions of have knowledge of the same. No proof appears on
the by-laws. record that Galvan ever knew anything about the
provisions of said by-laws (PMI Colleges v. NLRC, et
2. As to third persons al., supra)
GR: They are not bound.
Effect of non-filing of the by-laws within the
XPN: They have knowledge or notice of the by- required period
laws at the time the contract was executed
(China Banking Corp. v. CA, G.R. No. 117604, Failure to submit the by-laws within 30 days from
March 26, 1997). incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
Q: PMI Colleges (PMI) an educational institution, revocation of its charter after proper notice and
it hiredGalvan as contractual hearing, under Section 6(I) of PD 902-A. The
instructor. Initially, Galvan and other corporation is, at the very least, a de facto
instructors were compensated for services corporation whose existence may not be collaterally
rendered. However, for unknown reasons, attacked (Sawadjaan v. CA, G.R. No. 142284, June 8,
Galvan stopped receiving payment for the 2005).
Articles of incorporation vs. By-laws
BASIS AOI BY-LAWS

Condition subsequent; its absence merely
Requirement for Condition precedent in the
furnishes a ground for the revocation of the
corporate existence acquisition of corporate existence
franchise
For the internal government of the
Essentially a contract between the:
corporation but has the force of a contract
1. corporation and SH/M;
Essence between the:
2. SH/M inter se; and
1. corporation and the SH/M and
3. corporation and the State;
2. between the SH/M inter se;
May be executed after incorporation. Sec. 46
allows the filing of the by-laws
Time of execution Executed before incorporation
simultaneously with the Articles of
Incorporation
Amended by a majority of the
May be amended by a majority vote of the
directors/ trustees and stockholders
Manner of BOD and majority vote of outstanding
representing 2/3 of the outstanding
amendment capital stock or a majority of the member in
capital stock, or 2/3 of the members
non-stock corporation
in case of non-stock corporations

AMENDMENT OR REVISION Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
Ways of amending, repealing or adopting new and mandamus against National Power
by-laws: Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
1. Amendment may be made by stockholders NPC had acted in bad faith and with grave abuse
together with the Board – by majority vote of discretion in not renewing its contract for
of directors and owners of at least a stevedoring services for coal-handling
majority of the outstanding capital operations at NPC's plant, and in taking over its
stock/members; or stevedoring services.NPC seeks to annul the
2. By the board only after due delegation by the order of the RTC in issuing a writ of preliminary
stockholders owning 2/3 of the outstanding injunction which enjoined NPC from further
capital stock/members. Provided, that such undertaking stevedoring and arrastre services
power delegated to the board shall be in its pier and directing it either to enter into a
considered as revoked whenever stockholders contract for stevedoring and arrastre services
owning at least majority of the outstanding or to conduct a public bidding therefor. Does
capital stock or members, shall vote at a regular NPC have the power to undertake stevedoring
or special meeting (CC, Sec. 48) and arrastre services in its pier?
A: YES. NPC has the power to undertake stevedoring

CORPORATE POWERS and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
1. Express powers – granted by law, the operate and maintain power plants, reservoirs,
Corporation Code, and its Articles of transmission lines, and other works, but also to
Incorporation or Charter, and administrative exercise such powers and do such things as may be
regulations; reasonably necessary to carry out the business and
2. Inherent/incidental powers – not expressly purposes for which it was organized, or which, from
stated but are deemed to be within the capacity time to time, may be declared by the Board to be
of corporate entities; necessary, useful, incidental or auxiliary to
3. Implied/necessary powers – exists as a accomplish said purpose. If that act is one which is
necessary consequence of the exercise of the lawful in itself and not otherwise prohibited, and is
express powers of the corporation or the done for the purpose of serving corporate ends, and
pursuit of its purposes as provided for in the reasonably contributes to the promotion of those
Charter. ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the
Q: The board of directors of Lopez Realty, Inc. corporation's charter powers. The rule is that a
passed a resolution providing gratuity pay for corporation is not restricted to the exercise of
its employees in a special meeting called for the powers expressly conferred upon it by its charter,
purpose. At the time, however, Asuncion Lopez but has the power to do what is reasonably
Gonzales (a member of the board), was still out necessary or proper to promote the interest or
of the country. Asuncion assailed the validity of welfare of the corporation. The stevedoring services
the said board resolution contending that the which involve the unloading of the coal shipments
same was ultra vires on the ground that she was into the NPC pier for its eventual conveyance to the
not duly notified of the special meeting in which power plant are incidental and indispensable to the
it was passed. Is the disputed board resolution operation of the plant (NPC, v. Vera, et al., G.R. No.
ultra vires as urged by Asuncion? 83558, February 17, 1989).
A: NO. The assailed resolution covers a subject Exercise of corporate powers

which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity The Corporation Code of the Philippines vests in the
pay for its employees is one of the express powers of board of directors the exercise of the corporate
the corporation under the Corporation Code, hence, powers of a (stock) corporation, save in those
Asuncion cannot invoke the doctrine of ultra vires to instances where the Code requires stockholders’
avoid any liability arising from the issuance of the approval for certain specific acts (Great Asian Sales
subject resolution (Lopez Realty, Inc. v. Fontecha, Center Corp. v CA, G.R. No. 105774, April 25, 2002).
G.R. No. 76801, August 11, 1995). Note: The CC vestes in the Board of Trustees the
exercise of the corporate powers of a Non-stock
Corporation.

2019 GOLDEN NOTES
Mercantile Law
Q: Eliodoro C. Cruz was the former president of often have wide latitude in determining the
Filport. During the general stockholders’ course of business operations;
meeting, he wrote a letter to the corporation’s 3. The stockholders - have the residual power
Board of Directors questioning the board’s over fundamental corporate changes, like
creation of certain positions and their amendments of the articles of incorporation
corresponding monthly renumeration. Because (City Bank NA vs. Chua, G.R. No. 102300, March
his letter was not heeded favorably, Cruz, 17, 1993).
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he GENERAL POWERS, THEORY OF
describes as a derivative suit against the the GENERAL CAPACITY
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to Theory of General Capacity
the interest of the corporation and its
shareholders at large. Did Filport’s BOD act The general powers of a corporation also called
within its powers in creating the executive Theory of General Capacity are the following:
committee and the positions of AVPs for
Corporate Planning, Operations, Finance and (SuSuCo-ABS-PEDRO)
Administration, and those of the Special
Assistants to the President and the Board 1. To Sue and be sued;
Chairman, each with corresponding 2. Of Succession (To have perpetual existence
remuneration? unless the certificate of incorporation provides
otherwise;);
A: YES. The governing body of a corporation is its 3. To adopt and use of Corporate seal;
board of directors. Section 23 of the Corporation 4. To amend its Articles of Incorporation;
Code explicitly provides that unless otherwise 5. To adopt its By-laws;
provided therein, the corporate powers of all 6. For Stock corporations: issue and sell stocks to
corporations formed under the Code shall be subscribers and treasury stocks; for non-stock
exercised, all business conducted and all property of corporations: admit members;
the corporation shall be controlled and held by a 7. To Purchase, receive, take or grant, hold,
board of directors. Thus, with the exception only of convey, sell, lease, pledge, mortgage and deal
some powers expressly granted by law to with real and personal property, securities and
stockholders (or members, in case of non-stock bonds subject to the Constitution and existing
corporations), the board of directors (or trustees, in laws;
case of non-stock corporations) has the sole 8. To Enter into merger or consolidation, (To
authority to determine policies, enter into contracts, enter into a partnership, joint venture, merger,
and conduct the ordinary business of the consolidation, or any other commercial
corporation within the scope of its charter, i.e., its agreement with natural and juridical persons);
articles of incorporation, by-laws and relevant 9. To make reasonable Donations for public
provisions of law. Verily, the authority of the board welfare, hospital, charitable, cultural, scientific,
of directors is restricted to the management of the civic or similar purposes, provided that no
regular business affairs of the corporation, unless donation is given to any:
more extensive power is expressly conferred. In the a. Political party,
present case, the board’s creation of the subject b. Candidate and
positions was in accordance with the regular c. Partisan political activity.
business operations of Filport as it is authorized to 10. To establish pension, Retirement, and other
do so by the corporation’s by-laws, pursuant to the plans for the benefit of its directors, trustees,
Corporation Code (Filipinas Port Services, Inc., v. Go, officers and employees – basis of which is the
et al., G.R. No. 161886, March 16, 2007). Labor code; and
11. To exercise Other powers essential or
Three levels of control in the corporate necessary to carry out its purposes (CC, Sec. 36)
hierarchy
Commencement of the power to sue and be sued
1. The board of directors - responsible for
corporate policies and the general The power to sue and be sued commences upon
management of the business affairs of the issuance by SEC of Certificate of Incorporation.
corporation;
2. The officers of the corporation - execution of the The power of the corporation to sue and be sued
policies laid down by the board, but in practice is exercised by the board of directors.

The power of the corporation to sue and be sued is Limitations of the corporation in dealing with
exercised by the board of directors. The physical property
acts of the corporation, like the signing of
documents, can be performed only by natural 1. It must be in the furtherance of the purpose for
persons duly authorized for the purpose by which the corporation was organized.
corporate bylaws or by a specific act of the board. 2. Constitutional limitations – cannot acquire
Absent the said board resolution, a petition may not public lands except by lease.
be given due course (Ligaya Esguerra, et al. vs
Holcim Philippines, Inc., G.R. No. 182571, September With regard to private land, 60% of the
2, 2013). corporation must be owned by the Filipinos,
same with the acquisition of a condominium
If the real party in interest is a corporate body, an unit.
officer of the corporation can sign the verification
against forum shopping so long as he has been duly NOTE: No law disqualifies a person from
authorized by a resolution of its board of directors. purchasing shares in a landholding corporation
The court did not commit grave abuse of discretion even if the latter will exceed the allowed foreign
in dismissing the petition for lack of authority of the equity, what the law disqualifies is the corporation
officer who signed the certification of forum from owning land (JG Summit Holdings, Inc. vs. CA,
shopping in representation of corporation (San G.R. No. 124293, January 31, 2005).
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al, G.R. No. 153653, October 2, 2009; 3. Special law – subject to the provisions of the
Republic of the Philippines v. Coalbrine International Bulk Sales Law and law against monopoly,
Philippines, et al, G.R. No. 161838, April 7, 2010). illegal combination or restraint of trade.
GR: The verification and certification against forum Requisites for a valid donation (RPAI)
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution. 1. Donation must be Reasonable.
2. Must be for valid Purposes including public
XPN: The following officers may sign even in the welfare, hospital, charitable, cultural, scientific,
absence of a board resolution: civic or similar purposes.
3. Must not be an Aid in any:
a. Chairperson of the Board of Directors; a. Political party;
b. President; b. Candidate; or
c. General Manager; c. Partisan political activity.
d. Personnel Officer; or
e. Employment Specialist in labor case. 4. Donation must bear a reasonable relation to the
corporation’s Interest and not be so remote and
These officers are in the position to verify the fanciful.
truthfulness and correctness of the allegations in
the petition (Mid Pasig Land and Development Corporation as surety or guarantor
Corporation v. Tablante, G.R. No. 162924, February 4,
2010; Skyway Traffic Management and Security GR: A corporation cannot act as a surety or
Division Workers Organization v. PNCC Skyway Corp., guarantor because it will be contrary to the primary
G.R. No. 171231, February 17, 2010). purpose for which the corporation was created.
An unregistered corporation has no right to sue XPN: Such guaranty may be given in the
or be sued for want of corporate personality. accomplishment of any object for which the
corporation was created, or when the particular
“Lideco Corporation” had no personality to transaction is reasonably necessary or proper in the
intervene since it had not been duly registered as a conduct of its business.
coporation. If petitioner “Laureano Investment &
Devlopment Corporation” legally and truly wanted Implied powers of a corporation
to intervene, it should have used its corporate name
as the law requires and not another name which it A corporation is not restricted to the exercise of
had not registered (Laureano Investment & powers expressly conferred upon it by its charter
Development Corp. v. CA., GR No. 100468, May 6, but has the power to do what is reasonably
1997). necessary or proper to promote the interest or
welfare of the corporation (NAPOCOR v. Vera, G.R.
No. 83558, February 27, 1989).

2019 GOLDEN NOTES
Mercantile Law
SPECIFIC POWERS, THEORY OF SPECIFIC 7. Entering into management contract
CAPACITY
POWER TO EXTEND OR SHORTEN
Theory of Specific Capacity CORPORATE TERM
The specific powers of a corporation, also called Procedural requirements in extending/

Theory of Specific Capacity, are the following: shortening corporate term
(ESB-PA-SIDE-A)
1. Majority vote of the BOD or BOT
1. Power to Extend or shorten corporate term (CC, 2. Ratification by 2/3 of the SH representing
Sec. 37) outstanding capital stock or by at least 2/3 of
2. Increase or decrease corporate Stock (CC, Sec. the members in case of non-stock corporation.
38) 3. Written notice of the proposed action and of the
Note: Now, Section 36 RCC, in addition to the time and place of the meeting shall be
provision, ALLOWANCE OF SENDING OF addressed to each stockholder or member at his
NOTICE OF MEETING REGARDING PROPOSED place of residence as shown on the books of the
ACTION THRU ELECTRONIC MEANS SUCH AS corporation and deposited to the addressee in
ELECTRONIC DATA MESSAGES IF ALLOWED the post office with postage prepaid, or served
BY THE BY-LAWS IN ACCORDANCE WITH E- personally or when allowed in the bylaws or
COMMERCE ACT) done with the consent of the stockholder, sent
3. Incur, create, or increase Bonded indebtedness electronically in accordance with the rules and
(CC, Sec. 38) regulations of the Commission on the use of
4. Deny Pre-emptive right (CC, Sec. 39) electronic data messages.
5. Sell, dispose, lease, encumber all or 4. Copy of the amended AOI shall be submitted to
substantially all of corporate Assets (CC, Sec. 40) the SEC for its approval;
6. Purchase or acquire Shares (CC, Sec. 41) 5. In case of Special Corporation, a favorable
7. Invest corporate funds in another corporation recommendation of appropriate government
or business for other purpose other than agency (CC, Sec. 37)
primary purpose (CC, Sec. 42) 6. The extension must be done during the lifetime
8. Declare Dividends out of unrestricted retained of the corporation not earlier than 5 years prior
earnings (CC, Sec. 43) to the expiry date unless exempted. The
9. Enter into management contract with another extension must not exceed 50 years (CC, Sec 16).
corporation (not with an individual or a
partnership – within general powers) whereby NOTE: After the term had expired without
one corporation undertakes to manage all or extension, the corporation is deemed ipso facto
substantially all of the business of the other dissolved. The remedy of the stockholders is
corporation for a period not longer than five (5) reincorporation. Any dissenting stockholder may
years for any one term (CC, Sec. 44) exercise his appraisal right in case of shortening or
10. Amend Articles of Incorporation (CC, Sec. 16) extending corporate term (CC, Sec. 37). (THERE IS A
NEW PROVISION REGARDING THE REVIVAL OF
Authority to enter into contract (1996 Bar) THE CORPORATION)
The Board of Directors or Trustees must act Q: T Corp. has a corporate term of 20 years
together as a body in order to bind the corporation under its Articles of Incorporation or from June
by their acts (Yao KaSinTrading v. CA, et. al. G.R. No. 1, 1980 to June 1, 2000. On June 1, 1991 it
53820, June 15, 1992). amended its AOI to extend its life by 15 years
from June 1, 1980 to June 1, 2015. On June 1,
Corporate powers which are exercised by the 2011, however, T Corp decided to shorten its
BOD and stockholders jointly (ASIA-FuSE) term by 1 year or until June 1, 2014. Both the
1991 and 2011 amendments were approved by
1. Amendments to by-laws majority vote of its Board of Directors and
2. Extending or Shortening the corporate term ratified in a special meeting by its stockholders
3. Increase or decrease of capital stock representing at least 2/3 of its outstanding
4. The sale or other disposition of All or capital stock. The SEC, however, disapproved
substantially all of the corporate assets the 2011 amendment on the ground that it
5. Investment of corporate funds in another cannot be made earlier than 5 years prior to the
corporation or business or for any other expiration date of the corporate term, which is
purpose; June 1, 2014. Is this SEC disapproval correct?
6. Issuance of stock dividends (2011 Bar)

A: NO. The 5-year rule on amendment of corporate incurring, creating or increasing of any
term applies only to extension, not to shortening, of bonded indebtedness.
term.
NOTE: The increase or decrease in the capital stock
POWER TO INCREASE OR DECREASE CAPITAL or the incurring, creating or increasing bonded
STOCK OR INCUR, CREATE, INCREASE BONDED indebtedness shall require prior approval of the SEC.
INDEBTEDNESS
Prior to the approval of the SEC of the increase in
Procedural requirements in increasing or the authorized capital stock, such payments cannot
decreasing capital stock yet be deemed part of the corporation’s paid-up
capital, technically speaking, because its capital
1. Majority vote of the BOD stock has not yet been legally increased. Such
2. Ratification by stockholders representing 2/3 payments constitute deposits on future
of the outstanding capital stock subscriptions, money which the corporation will
3. Written notice of the proposed increase or hold in trust for the subscribers until it files a
diminution of the capital stock and of the time petition to increase its capitalization and a
and place of the stockholder’s meeting at which certificate of filing of increase of capital stock is
the proposed increase or diminution of the approved and issued by the SEC (Central Textile
capital stock must be addressed to each Mills, Inc. v. NWPC, et al., GR No. 104102, August 7,
stockholder at his place of residence as shown 1996).
on the books of the corporation and deposited
to the addressee in the post office with postage Additional requirement with respect to increase
prepaid, or served personally or through of capital stock – Treasurer’s Affidavit
electronic means recognized in the
corporation’s bylaws and/or the Commission’s The application to be filed with the SEC shall be
rules as a valid mode for service of notices. accompanied by the sworn statement of the
4. A certificate in duplicate must be signed by a treasurer of the corporation, showing that at least
majority vote of the directors of the corporation 25% of the increase in the capital stock was
and countersigned by the subscribed and 25% of the said amount has been
chairman(chairperson) and the secretary of the paid either in actual cash to the corporation or that
stockholder’s meeting, setting forth: there has been transferred to the corporation
a. That the foregoing requirements have been property the valuation of which is equal to 25% of
complied with; the subscription.
b. The amount of increase or diminution of
the capital stock; NOTE: A corporation is not prohibited from
c. If an increase of the capital stock, the increasing its authorized capital stock even if the
amount of capital stock or number of same has not yet been fully subscribed. Once an
shares of no par stock actually subscribed, increase in authorized capital stock is effected, it
the names, nationalities and residences of may be necessarily accompanied by an actual
the persons subscribing, the amount of increase in the assets and additional subscriptions
capital stock or number of no par stock in order to comply with the 25% subscription
subscribed by each, and the amount paid by requirement. However, if such increase is for the
each on his subscription in cash or purpose of effecting a stock dividend previously
property, or the amount of capital stock or authorized, then additional subscriptions are NOT
number of shares of no par stock allotted to urgent.
each stockholder if such increase is for the
purpose of making effective stock dividend Reason: The actual capital is increased by
authorized (and the amount paid by each accumulated profits and such profits are distributed
on the subscription in cash or property, or to the stockholders in the form of stock dividends,
the amount of capital stock or number of the capital stock is increased, for the profits are
shares of no-par stock allotted to each reinvested in the corporation by transferring the
stockholder if such increase is for the same from surplus account to a capital account. The
purpose of making effective stock dividend amount corresponding to the stock dividends
therefor authorized); declared may be used to cover the required 25%
d. The amount of stock represented at the subscription to increase the authorized capital stock
meeting; and and, if sufficient, will obviate the necessity of taking
e. The vote authorizing the increase or in new subscription (De Leon, supra).
diminution of the capital stock, or the
Basis of the required 25% subscription

2019 GOLDEN NOTES
Mercantile Law
The 25% subscription shall be based on the NOTE: The distribution stated above is not
additional amount by which the capital stock mandatory, notwithstanding the authority granted
increased and not on the total capital stock as by the CC for the same under Sec. 122, last par.
increased.
Over-issue of shares is not allowed
NOTE: Treasurer’s affidavit is required in
increasing capital stock, NOT in decreasing capital An issue of stock by a corporation in excess of the
stock. amount prescribed or limited by its AOI is ultra vires
and the stock so issued is void even in the hands of
Additional requirement with respect to the a bona fide purchaser for value.
decrease of capital stock
An over-issued stock is a spurious stock (De Leon,
In case of decrease in capital stock, the same must 2010).
not prejudice the right of the creditors.
NOTE: Over-issue of stock does not avoid the
Ways of increasing or decreasing the capital original issue
stock
There is no over-issue in the case of shares, which
By increasing or decreasing the: were surrendered and new shares issued in their
1. Number of shares and retaining the par value; stead. The new issue in such case merely takes the
2. Par value of existing shares and retaining the place of the shares surrendered.
number of shares;
3. Number of shares and increasing or decreasing Effects of an attempted unauthorized increase of
the par value. capital stock
NOTE: In decreasing the capital stock, resorting to An attempted unauthorized increase of capital stock
reduction of number of shares may also be done amounts to an over-issue and such stock is,
through: therefore, absolutely void and cannot be validated
by application of the doctrine of estoppel.
1. Redeeming redeemable shares (CC, Sec. 8);
2. Purchasing of own shares (CC, Sec. 41); Thus, the following are the effects of such
3. Cancelling or retiring the shares, including the unauthorized increase:
treasury shares (CC, Sec. 9); 1. Subscriptions for such stock are likewise void
4. The corporation may accept a surrender of both on the ground of illegality and for want of
shares and give the holders in exchange consideration;
therefor a proportionate amount of its assets, 2. Subscribers for or purchasers of such stock
provided no rights of creditors are involved; acquire none of the rights of stockholders;
5. Issue bonds for that purpose; 3. Subscribers for or purchasers of such shares do
6. Exchange another class of stock for that retired; not become liable to creditors of the
7. Exchange the corporation’s outstanding shares corporation or on a winding up as stockholders
for a smaller number of shares; or for unpaid subscriptions, and are not subject to
8. Cancelling shares which have not yet been a statutory liability to creditors imposed upon
issued (De Leon, 2010). stockholders; and
4. Subscribers for or purchasers of such shares
Q: Can there be a distribution of surplus on from the corporation may recover from it,
reduction? money paid to it under their subscription or
purchase as upon a failure of consideration, or
A: It depends whether there is an impairment of breach of warranty for the existence of the thing
capital. sold, unless they are precluded from such relief
as parties in pari delicto.
1. If there is no impairment of capital - the surplus
may be equitably distributed by the directors or The board of directors may issue additional
so much thereof as may not be required in issuances of shares of stock without approval of
carrying on the business for the best interests the stockholders.
of the stockholders: Provided the rights of
creditors will not be affected nor the capital A stock corporation is expressly granted the power
impaired. to issue or sell stocks. The power to issue stocks is
2. If there is reduction to meet an impairment – lodged with the Board of Directors and no
there will be no distribution. stockholder’s meeting is required to consider it

because additional issuance of stock (unlike persons, or for a short extends over a period
increase in capital stock) does not need approval of time. of years.
the stockholders. What is only required is the board
resolution approving the additional issuance of the Bonded indebtedness
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the It is a long-term indebtedness secured by real or
registration requirements under the SRC (Majority personal property (corporate assets).
Stockholders of Ruby Industrial Corp v. Lim &
MinorityStockholders of Ruby Industrial Corp, supra). NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
Q: The stockholders of People Power, Inc. (PPI) same with the power to increase or decrease capital
approved two resolutions in a special stock.
stockholders' meeting:
Registration of the bonds issued by the
1. Resolution increasing the authorized capital corporation
stock of PPI; and
2. Resolution authorizing the Board of Bonds issued by a corporation shall be registered
Directors to issue, for cash payment, the new with the SEC which shall have the authority to
shares from the proposed capital stock determine the sufficiency of the terms thereof (CC,
increase in favor of outside investors who Sec. 38).
are non‐stockholders.
Stockholders’ approval is not required for all
The foregoing resolutions were approved by borrowings of the corporation
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter Not all borrowings of the corporation need
was Jimmy Morato who owned 1% of the stock. stockholders’ approval. Only bonded indebtedness
requires such approval.
a. Are the resolutions binding on the
corporation and its stockholders including POWER TO DENY PRE-EMPTIVE RIGHTS
Jimmy Morato, the dissenting stockholder?
b. What remedies, if any, are available to Pre-emptive right
Morato? (1998 Bar)
It is the preferential right of shareholders to
A: subscribe to all issues or disposition of shares of any
a. NO. The resolutions are not binding on the class in proportion to their present shareholdings
corporation and its stockholders including (CC, Sec. 39). (now sec. 38)
Jimmy Morato. While these resolutions were
approved by the stockholders, the directors' NOTE: The stockholder must exercise his pre-
approval, which is required by law in such case, emptive right within the time fixed in the resolution
does not exist. authorizing the increase of capital stock.
b. Jimmy Morato can petition the Securities and Purpose of pre-emptive right
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken The purpose of pre-emptive right is to enable the
by the Board of Directors thereunder, null and shareholder to retain his proportionate control in
void. the corporation and to retain his equity in the
surplus.
Evidence of the corporation’s indebtedness Exercise of pre-emptive right
When a corporation borrows money, its Pre-emptive right must be exercised within the
indebtedness may be evidenced by notes or bonds period stated in the AOI or the By-Laws. When the
as its primary security (De Leon, 2010). AOI and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
Difference between a note and a bond exercise the right.
NOTE BOND NOTE: Pre-emptive right can only be exercised to

Amount borrowed is Amount is large and the same class of shares issued or disposed with that
small and it is obtained from a owned by the stockholder (Share-a-like basis).
borrowed in a single number of people and
sum, or from a few

2019 GOLDEN NOTES
Mercantile Law
Pre-emptive right is available on the re-issuance The corporation can deny pre-emptive right if the
of treasury shares AOI or any amendment thereto denies such right
(Sec. 39, CC).
When a corporation reacquires its own shares
which thereby become treasury shares, all NOTE: A stockholder whose pre-emptive right is
shareholders are entitled to pre-emptive right when violated may maintain an action to compel the
the corporation reissues or sells these treasury corporation to give him that right. If the denial is by
shares. The re-issuance of treasury shares is not amendment to the AOI, he may exercise his
among the exception provided by Sec. 39 when pre- appraisal right under Sec. 81(1).
emptive right does not exist.
Instances when pre-emptive right is not
Pre-emptive right may be waived available
1. Preemptive right may be waived by the stockholder. 1. Shares to be issued to comply with laws
However, the waiver should be given individually requiring stock offering or minimum stock
by the stockholder concerned or by another by way ownership by the public.
of Special Power of Attorney. Being a personal right, 2. Shares issued in good faith with the approval of
the waiver cannot be waived by the corporation the stockholders representing 2/3 of the
itself through a stockholders’ resolution (SEC outstanding capital stock in exchange for
Opinion, Dec. 12, 1994). property needed for corporate purposes.
2. 3. Shares issued in payment of previously
3. A stockholder cannot be forced to waive the right contracted debts.
even if the majority of the stockholders opt to waive 4. In case the right is denied in the AOI.
it (SEC Opinion No. 08-08, March 31, 2008). 5. Waiver of the right by the stockholder.
NOTE: Pre-emptive right may be waived impliedly The validity of issuance of additional shares may
as when the stockholder fails to exercise his pre- be questioned if done in breach of trust by the
emptive right after being notified and given an controlling stockholders notwithstanding the
opportunity to avail of such right. non-existence of the pre-emptive right.
Transferability of pre-emptive right of a Even if pre-emptive right does not exist either
stockholder because the issue comes within the exceptions in
Sec. 39 of the CC or because it is denied in the AOI,
The pre-emptive right of a stockholder is an issue of shares may still be objectionable if the
transferable unless there is an express restriction in directors acted in breach of trust and their primary
the AOI. purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
Q: X Corporation has already issued the 1000 The issuance of unissued shares out of the original
originally authorized shares of the corporation authorized capital stock pursuant to a rehabilitation
so that its Board of Directors and stockholders plan the propriety or validity of which was on
wish to increase X's authorized capital stock. question by the minority stockholders and
After complying with the requirements of the subsequently disapproved by the Supreme Court
law on increase of capital stock, X issued an amounts to unlawful dilution of the minority
additional 1000 shares of the same value. shareholdings (Majority Stockholders of Ruby
Assume that stockholder A presently holds 200 Industrial Corp. vs. Miguel Lim and Minority
out of the 1000 original shares. Would A have a Stockholders of Ruby Industrial Corp., G.R. Nos.
pre‐emptive right to 200 of the new issue of 165887 & 165929, June 6, 2011, in Divina, 2014).
1000 shares? Why?
Pre-emptive right vs. Right of first refusal
A: YES, A would have a pre‐emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of BASIS RIGHT OF
PRE-EMPTIVE
record holding 200 shares in X Corporation. FIRST
RIGHT
According to the Corporation Code, each REFUSAL
stockholder has the pre‐emptive right to all issues Right to
of shares made by the corporation in proportion to Right to
subscribe to all
the number of shares he holds on record in the purchase
issuance or
corporation. Description shares of a
dispositions of
stockholder.
shares of the
Denial by the corporation of pre-emptive right corporation

even to the as shown on the books of the corporation and
subsequent sale deposited to the addressee in the post office
of treasury with postage prepaid, or served personally
stocks. (ALLOWANCE OF ELECTRONIC NOTICE IN
ACCORDANCE WITH E-COMMERCE AND
WHEN ALLOWED BY THE BY-LAWS)
Pertains to Pertains to
To what unsubscribed the sale of the NOTE: The sale of the assets shall be subject to the
does it portion of the stocks by provisions of existing laws on illegal combinations
pertain authorized another and monopolies.
capital stock. stockholder
Right Further, in case of non-stock corporations, where
Against Right exercised
exercised there are no members with voting rights, the vote of
who is it against the
against a co- at least a majority of the trustees in office will be
exercised corporation.
stockholder. sufficient authorization for the corporation to enter
Can only be into any transaction authorized by this section (Sec.
May be
exercised 40, CC).
exercised even
Effect of the when so
when there is no
absence of provided in Instances when the corporation may forego the
express
express the AOI, by- ratification by stockholders / members:
provision in the
provision laws and
AOI or
in the AOI printed in the 1. If sale is necessary in the usual and regular
amendment
stock course of business;
thereto.
certificate. 2. If the proceeds of the sale or other disposition
Does not of such property and assets are to be
Treasury It includes include appropriated for the conduct of the remaining
shares treasury shares. treasury business; or
shares 3. If the transaction does not cover all or
substantially all of the assets.
POWER TO SELL OR DISPOSE OF CORPORATE
ASSETS (SLEMPAD) Remedy of a stockholder who disagrees with the
plan of SLEMPAD of all or substantially all of
Substantially all of corporate assets corporate assets
There is a sale, lease, exchange, mortgage, pledge, Any dissenting stockholder shall have the option to
and any other disposition (SLEMPAD) of exercise his appraisal right.
substantially all of corporate asset if in the
SLEMPAD thereof, the corporation would be Abandonment of the plan for SLEMPAD even
rendered: after the vote of the stockholders or members
1. Incapable of continuing the business; or The BOD, in its discretion, may abandon the plan for
2. Incapable of accomplishing the purpose for SLEMPAD even after such authorization or approval
which it was incorporated (Sec 40, CC). (now by the stockholders, subject to the rights of third
Sec, 39) parties under any contract relating thereto, without
Note: This is subject to the provisions of Republic further action or approval by the stockholders or
Act No. 10667, otherwise known as the “Philippine members (Sec. 40, CC).
Competition Act.”
Effect of sale of all or substantially all of assets of
Procedural requirements for SLEMPAD of all or one corporation to another corporation (1996,
substantially all of corporate assets 2005 Bar)
1. Majority vote of the BOD or BOT GR: The corporation who acquired all or
2. Ratification by stockholders representing at substantially all of the assets of the selling
least 2/3 of the outstanding capital stock or by corporation shall not be liable for the debts of the
at least 2/3 of the members in case of non-stock latter.
corporation
3. Written notice of the proposed action and of the XPNs:
time and place of the meeting addressed to each 1. Express or implied assumption of liabilities;
stockholder or member at his place of residence 2. Merger or consolidation;

2019 GOLDEN NOTES
Mercantile Law
3. If the purchase was in fraud of creditors; Where an asset constitutes the only property of the
4. If the purchaser becomes a continuation of the corporation, its sale to a 3rd party is a sale or
seller; disposition of all the corporate property and assets
5. If there is violation of the Bulk Sales Law of the corporation falling squarely within the
contemplation of Sec. 40 of the Corporation Code.
Q: Divine Corporation, engaged in the Hence, for the sale to be valid, the majority vote of
manufacture of garments for export, was able to the legitimate Board of Trustees, concurred in by
obtain loans from individuals and financing the vote of at least 2/3 of the bona fide members of
institutions. However, due to the drop in the the corporation should have been obtained (Islamic
demand for garments in the international Directorate of the Philippines, et al., v. CA, G.R. No.
market, Divine Corporation could not meet its 117897, May 14, 1997).
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines, POWER TO ACQUIRE OWN SHARES
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials Instances when a corporation may acquire its
to Top Grade Fashion Corporation, its own shares (1991, 1992, 2005 Bar)
competitor.
1. To eliminate fractional shares out of stock
a. How would you classify the transaction? dividends (CC, Sec. 41)
b. Can Divine Corporation sell aforesaid items 2. To collect or compromise an indebtedness to
to its competitor, Top Grade Fashion the corporation, arising out of unpaid
Corporation? What are the requirements to subscription, in a delinquency sale and to
validly sell the items? Explain. (Bar 2005) purchase delinquent shares sold during said
sale (Ibid.)
A: 3. To pay dissenting or withdrawing stockholders
a. The transaction is deemed classified as a sale of (in the exercise of the stockholder’s appraisal
all or substantially all of the corporate assets right) (Ibid.)
because the corporation would be rendered 4. To acquire treasury shares (CC, Sec. 9)
incapable of continuing the business or 5. To acquire Redeemable shares regardless of
accomplishing the purpose for which it was existence of retained earnings (CC, Sec 8)
incorporated. 6. To effect a decrease of capital stock (CC, Sec. 38)
b. YES. The law does not prohibit sale of all or 7. In close corporations, when there is a deadlock
substantially all of corporate assets to in the management of the business, the SEC may
competitor-company provided said sale is order the purchase at their fair value of the
subject to laws against illegal combination, shares of any stockholder by a corporation
monopoly, or restraint of trade and Bulk Sales regardless of the availability of unrestricted
Law. Nowhere in the facts state that the retained earnings (URE’s) in its books (CC, Sec.
competitor-company lies within the 104, par. 1 [4]).
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote NOTE: Where a corporation reacquires its own
of its board of directors and stockholder’s shares, it does not thereby become a subscriber
approval representing at least 2/3 of thereof.
outstanding capital stock. Further, since bulk Rule in order that a corporation may acquire its
sales apply to sale of all or substantially all of own shares
corporate assets, it also requires the following:
GR: The corporation may only acquire its own
a. list of creditors under oath must be given stocks in the presence of unrestricted retained
by the seller to the buyer 10 days before earnings (URE).
the sale containing the lists of their
respective names, addresses, due dates XPNs: (RDC)
and amount owing each; 1. Redeemable shares may be acquired even
b. inventory of goods or properties to be without surplus profit for as long as it will not
sold, cost price and the amount for which result to the insolvency of the Corporation
it has been sold; and 2. In cases that the corporation conveys its stocks
c. the list of inventory is filed with the DTI, in payment of a Debt
otherwise, it will be null and void for being 3. In a Close corporation, a stockholder may
in fraud of creditors. demand the payment of the fair value of shares
regardless of existence of retained earnings for

as long as it will not result to the insolvency of XPN: The purpose will be amended to include the
the corporation. desired business activity among its secondary
purpose.
Unrestricted retained earnings (URE)
NOTE: However, in the case of pawnshops
It represents the surplus profits of the corporation. organized as corporations and partnerships, they
It is determined by subtracting the liabilities (L), the may be allowed to engage in ancillary activity of
Capital Stock (CS) and the Restricted Retained directly purchasing or selling goods or articles. The
Earnings (RRE) from the assets (A) of the Pawnshop Regulation Act contains no prohibition to
corporation (URE = A – (L + CS+ RRE)). engage in ancillary activities. Hence, by implication,
their scope may be extended to other unrelated
Unrestricted Retained Earnings shall include business unless clearly prohibited by the said Act.
accumulated profits and gains realized out of the
normal and continuous operations of the company The only requirement is that the person or entity
after deducting therefrom distributions of engaged at the same time in other business not
stockholders and transfers to capital stock or other directly related or not incidental to pawnshop
accounts. It does NOT include: business, shall keep such business distinct and
separate from his pawnshop operations (De Leon,
1. Funds appropriated by its BOD for corporate 2010 citing SEC Opinion, March 28, 1985).
expansion projects or programs;
2. Funds covered by a restriction for dividend Rule in case a corporation wants to invest in an
declaration under a loan agreement; and undertaking
3. Funds required to be retained under special
circumstances obtaining in the corporation such GR: Investment of a corporation in a business which
as when there is a need for a special reserve for is in line with its primary purpose requires only the
probable circumstances. approval of the board.
Guidelines for the acquisition of its own shares XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose
1. The capital of the corporation must not be other than a primary purpose, it has to comply with
impaired. There shall be URE’s to purchase the the statutory requirements before it can do so (Sec.
shares. 42, CC).
2. Legitimate or proper corporate objective is
advanced. Statutory requirements that the corporation
3. Condition of the corporate affairs warrants it. needs to comply with to invest in another
4. Transaction is designed and carried out in good corporation or business or for any purpose
faith. other than a primary purpose (1995, 1996 Bar)
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine 1. Approval by the majority vote of the BOD or
(Sec. 41, SEC Opinions, October. 12, 1992, BOT
September 11, 1985, and April 11, 1994). 2. Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
The requirement of unrestricted retained earnings at least 2/3 of the members in case of non-stock
to cover the share is based on the trust fund doctrine corporations
which means that the capital stock, property and 3. Ratification must be made at a meeting duly
other assets of a corporation are regarded as equity called for the purposes
in trust for the payment of corporate creditors. The 4. Prior written notice of the proposed investment
reason is that the creditors of a corporation are and the time and place of the meeting shall be
preferred over the stockholders in the distribution made addressed to each stockholder or
of corporate assets (Boman Environmental member by mail or by personal service
Development Corp v. CA, GR No. 77860, November 22,
1988). NOTE: Investment of a corporation in a business
which is in line with its primary purpose requires
POWER TO INVEST CORPORATE FUNDS IN only the approval of the board. Any dissenting
ANOTHER CORPORATION OR BUSINESS stockholder shall have appraisal right.
GR: The corporation is not allowed to engage in a Q: Stikki Cement Co. was organized primarily for
business different from those enumerated in its AOI. cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest

2019 GOLDEN NOTES
Mercantile Law
in: a) a powerplant project; b) a concrete road stock dividends, a ratification of the stockholders
project; and c) quarry operations for limestone representing two-thirds (2/3) of the outstanding
in the manufacture of cement. capital stock.
a. What corporate approvals or votes are Q: At least 2/3 of the stockholders of Solar
needed for the proposed investments? Corporation, upon the recommendation of the
Explain. BOD, declared a 50% stock dividend during
b. Describe the procedure in securing these their annual meeting. The notice of the annual
approvals (1992 Bar) stockholders’ meeting did not mention anything
about a stock dividend declaration. The matter
A: was taken up only under the item “other
a. Since a powerplant project and a concrete road business” in the agenda of the meeting. C.K.
project are neither primary purposes nor Senwa, a stockholder, who received his copy of
reasonably necessary for the accomplishment the notice but did not attend the meeting,
thereof, majority votes of the board of directors subsequently learned about the 50% stock
plus the ratification of the stockholders dividend declaration. He desires to have the
representing 2/3 of the outstanding capital stock dividend declaration cancelled and set
stock are needed. aside, and wishes to retain your services as a
lawyer for the purpose. Will you accept the case?
On the other hand, quarry operations for Discuss with reasons. (1990 Bar)
limestone are reasonably necessary or
incidental to attain the primary purpose of the A: NO, I will not accept the case. Sec 43 of the CC
corporation, i.e. the manufacture of cement. states that no stock dividend shall be issued without
Hence, only the majority approval of the board the approval of the stockholders representing not
of directors is needed. The ratification by the less than 2/3 of the outstanding capital stock at a
stockholders is no longer necessary. regular or special meeting duly called for that
purpose. Conformably with Sec 50 of the CC, a
b. To secure the aforementioned approvals, there written notice of the holding of the regular meeting
must be a written notice of the proposed sent to the shareholders will suffice. The notice
investment and the time and place of the itself specified the said subject matter.
meeting shall be addressed to each stockholder
or member at his place of residence as shown Alternative answer:
on the books of the corporation and deposited
to the addressee in the post office with postage YES, I will accept the case. The problem does not
prepaid, or served personally (CC, Sec. 42). indicate that there is action by the BOD which is also
necessary for the declaration of 50% stock dividend.
POWER TO DECLARE DIVIDENDS
Q: During the annual stockholders meeting,
Requirements for the declaration of dividends Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
1. Existence of URE’s. (Unrestricted Retained capitalized and stock dividends be distributed
Earnings) to the stockholders, arguing that as owners of
2. Resolution of the board. the company, the stockholders, by a majority
vote, can do anything. As chairman of the
NOTE: In case stock dividend is to be declared, an meeting, how would you rule on the motion to
additional requirement of: declare stock dividends? (1991, 2001 Bar)
a. A vote representing 2/3 of outstanding A: As the chairman of the meeting, I would rule
capital. (Sec. 43, CC) against the motion considering that a declaration of
b. A corporation must have also a sufficient stock dividends should initially be taken by the BOD
number of authorized unissued shares for and thereafter to be concurred in by a 2/3 vote of
distribution to stockholders. the stockholders (CC, Sec. 43). There is no
prohibition, however, against the stockholders’
Q: Under what circumstances may a corporation resolving to recommend to the BOD that it consider
declare dividends? (2005 Bar) a declaration of stock dividends for concurrence
thereafter by the stockholders. A stockholder
A: A corporation may declare dividends when there cannot compel the corporation to declare either
are unrestricted retained earnings, a resolution of cash or stock dividends as it rests with the sound
the Board of Directors and in case of declaration of discretion of the board.

Forms of dividends Note: The declaration of cash dividends cannot be
recalled, because it can affect the market for the
1. Cash shares of stock. Stock Dividends can be revoked
before their issuance, because they do not give
Cash dividends due on delinquent stock shall any additional assets to the stockholders.
first be applied to the unpaid balance on the (Ballante p. 559)
subscription plus cost and expenses (Sec. 43,
CC). Q: From what funds are cash and stock
dividends sourced? Explain why (Bar 2005)
2. Stock
A: Dividends either cash or stock dividend must be
Stock dividends are withheld from the declared out of unrestricted retained earnings
delinquent stockholder until his unpaid because of the Trust Fund Doctrine. The Trust Fund
subscription is fully paid(Ibid). Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
3. Property creditors have the right to look for the satisfaction
of their claims (Ong v. Tiu, G.R. No. 144476, April 8,
Stockholders are entitled to dividends PRO‐ 2003). Thus, dividends must never impair the
RATA based on the total number of shares and subscribed capital stock.
not on the amount paid on shares.
Scrip dividend
Cash dividends vs. Stock dividends
A scrip dividend is dividend issued by the
CASH DIVIDENDS STOCK DIVIDENDS corporation when the obligation to pay becomes
Part of general fund Part of capital absolute. Thus, it becomes a debt absolutely due to
Results in cash outlay No cash outlay the stockholders although payment is postponed to
Once issued, can be a future date (De Leon, supra).
Not subject to levy by levied by corporate
corporate creditors creditors because they’re Stock split
part of corporate capital
Declared only by the Declared by the board It is merely a dividing up of the outstanding shares
board of directors at with the concurrence of of a corporation into a greater number of units,
its discretion the stockholders without disturbing the stockholder’s original
(majority of the representing at least 2/3 proportional participating interest in the
quorum only, not of the outstanding corporation.
majority of all the capital stock at a
board) regular/special meeting STOCK SPLIT STOCK DIVIDENDS
Does not increase the Corporate capital is A mere increase in the Capitalization of
corporate capital increased number of shares earnings or profits,
Its declaration which evidence together with a
creates a debt from ownership without distribution of the
No debt is created by its altering the amount of added shares which
the corporation to
declaration the capital, surplus, or evidence the assets
each of its
stockholders segregated earnings. transferred to capital
If received by
individual: subject to Sources of retained earnings
Not subject to tax either
tax;
received by individual or 1. Paid-in surplus – It is the difference between the
If received by
a corporation par value and the issued value or selling price of
corporation: not
subject to tax the shares. It cannot be declared as dividend
Can be revoked despite because it is a part of the capital.
Cannot be revoked
announcement but
after announcement Exception: The SEC allows the distribution of paid-
before issuance
Can be withheld until in surplus in exceptional cases when the following
Applied to the unpaid are present:
payment of unpaid
balance of a. that they be declared only as
balance of delinquent
delinquent shares stock dividends and not as
shares
cash dividends

2019 GOLDEN NOTES
Mercantile Law
b. no creditor shall be prejudiced Planters Bank v. Agana, G.R. No. 51765. March 3,
therefrom 1997).
c. there is no resulting
impairment of capital Prohibition imposed by law on URE's of a stock
corporation
2. Operational Income - The amount of profit
realized from a business's operations after GR: Stock corporations are prohibited from
taking out operating expenses. It is available for retaining surplus profits in excess of one hundred
both cash and stock dividends (100%) percent of their paid-in capital stock.
3. Revaluation surplus – Increase in the value of a
fixed asset as a result of its appreciation. They XPNs: (2001 Bar)
are by nature subject to fluctuations. 1. When justified by definite corporate
expansion projects or programs approved by
GR: It cannot be declared as dividends because the board of directors;
there is no actual gain. 2. When the corporation is prohibited under any
loan agreement with any financial institution
XPN: It can be used in the declaration of or creditor, whether local or foreign, from
dividends provided the following conditions declaring dividends without its/his consent,
exist: and such consent has not yet been secured; or
3. When it can be clearly shown that such
a. The corporation has sufficient income from retention is necessary under special
operations from which the depreciation on circumstances obtaining in the corporation,
the appraisal increase was charged; such as when there is need for special reserve
b. It has no deficit at the time the depreciation for probable contingencies (CC, Sec. 43).
on the appraisal increase was charged to
operations; and Q: For the past three years of its commercial
c. Such depreciation on appraisal increase operation, X, an oil company, has been earning
previously charged to operations has not tremendously in excess of 100% of the
been erased or impaired by subsequent corporation’s paid-in capital. All of the
losses; otherwise, only that portion not stockholders have been claiming that they share
impaired by subsequent losses is available in the profits of the corporation by way of
for dividend (SEC Opinions, Oct. 2, 1981 and dividends but the Board of Directors failed to lift
March 19, 1992). its finger. Is Corporation X guilty of violating a
law? If in the affirmative, state the basis. (2001
4. Reduction surplus – the surplus arises from the Bar)
reduction of the par value of the issued shares A: YES. Corporation X is guilty of violating Section
of stocks. It cannot be declared as cash dividend 43 of the CC. This provision prohibits stock
but can be declared only as stock dividend corporations from retaining surplus profits in
provided that: excess of 100% of their paid-in capital.
a. No creditor is prejudiced
b. There is no resulting impairment of Penalty in case of unjustifiable retention of
capital surplus profits
5. Gain from Sale of Real Property - Available as The penalty in case a corporation unjustifiably
dividends. retains surplus profits in excess of one hundred
6. Treasury Shares – Gain realized from reissuance (100%) percent of the paid-in accumulated capital
of treasury shares. It cannot be declared as is the payment of Improperly Accumulated
stock or cash dividends but it may be declared Earnings Tax equal to 10% of the improperly
as property dividend. accumulated taxable income (NIRC OF 1997, Sec.
29 [A]).
Q: Can the board be compelled to declare
dividends every year? Sources of dividends
A: NO. Declaration of dividends is discretionary GR: Dividends can only be declared out of actual and
upon the board. Dividends are payable only when bona fide unrestricted retained earnings
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the XPN: Dividends can be declared out of capital in the
Board of Directors has the discretion to determine following instances:
whether or not dividends are declared (Republic

1. Dividends from investments wasting assets distribution may properly be treated as incomplete
corporation or engage in “wasting business” or partial liquidation and as payment by the
(e.g. timber cutting or mining); or corporation to the stockholder for his stock or as
2. Liquidating a business. return of the capital invested by him(Wise & Co., Inc.
3. Utilization of lease or patent. v. Meer,G.R. No. 48231, June 30, 1947).
Wrongful or illegal declaration of dividends POWER TO ENTER INTO

MANAGEMENT CONTRACT
The Board of Director is liable in case of wrongful or
illegal declaration of dividends. The stockholders Management Contract is any contract whereby a
should return the dividends to the corporation corporation undertakes to manage or operate all or
based on the principle of solution indebiti. substantially all of the business of another
corporation, whether such contracts are called
Persons entitled to receive dividends service contracts, operating agreements or
otherwise (CC, Sec. 44).
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or NOTE: Sec. 44 refers only to a management contract
holders of record. (Cojuanco and Prime Holdings, with another corporation. Hence, it does not apply
Inc., v. Sandiganbayan G.R. No. 183278, April 24, to management contracts entered into by a
2009). corporation with natural persons. Corollary to this,
management contract with a natural person need
Rule on transfer of shares which is not recorded not comply with the requisites of Sec. 44.
in the books of the corporation
Requirements for a management contract to be
Such transfer is valid only as between the parties valid
(CC, Sec. 63); hence, the transferor has the right to
dividends as against the corporation without notice 1. Contract must be approved by the majority of
of the transfer but he is the trustee of the real owner the BOD or BOT of both managing and managed
of the dividends subject to the contract between the corporation.
transferor and transferee as to who is entitled to 2. Ratified by the stockholders owning at least the
receive the dividends (De Leon, supra). majority of the outstanding capital stock, or
members in case of a non-stock corporation, of
Rule on the receipt of dividends in case of both the managing and the managed
mortgaged or pledged shares corporation, at a meeting duly called for the
GR: The mortgagor or the pledgor has the right to purpose.
receive the dividends. 3. Contract must be approved by the stockholders
of the managed corporation owning at least 2/3
XPN: When the mortgagor or pledgor defaults and of the outstanding capital stock entitled to vote
the mortgagee or pledgee acquires the pledged or 2/3 of the members when:
stocks and the transfer is recorded in the books of a. Stockholders representing the same
the corporation, the mortgagee or pledgee is interest in both of the managing and the
entitled to receive the dividends. managed corporation own or control more
than 1/3 of the total outstanding capital
Q: May stock dividends be issued to a person stock entitled to vote of the managing
who is not a stockholder in payment of services corporation (Interlocking stockholders);
rendered? b. Majority of the members of the BOD of the
managing corporation also constitute a
A: NO. Only stockholders are entitled to payment of majority of the BOD of the managed
stock dividends (Nielson & Co., Inc. v. Lepanto corporation. (Interlocking Directors)(CC,
Consolidated Mining Co., G.R. No. 21763, December Sec. 44)
17, 1966).
Q: ABC Management Inc. presented to the DEF
Distinction between distribution in liquidation Mining Co, the draft of its proposed Management
and ordinary dividend Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
If the distribution is in the nature of a recurring entitled to 10% of any stock dividend which DEF
return on stock, it is an ordinary dividend. However, may declare during the lifetime of the
if the corporation is really winding up its business Management Contract. Would you approve of
or recapitalizing and narrowing its activities, the

2019 GOLDEN NOTES
Mercantile Law
such provision? If not, what would you suggest or public duty, and are void, ultra vires acts are not
as an alternative? (1991 Bar) illegal but not merely within the scope of the articles
of incorporation and the by-laws. They are merely
A: NO. I would not approve a proposed stipulation voidable and may become binding and enforceable
in the management contract that the managing when ratified by the stockholders (Maria Clara
corporation, as an additional compensation to it, Pirovana, et al. v. the De La Rama Steamship Co., G.R.
should be entitled to 10% of any stock dividend that No. L-5377, December 29, 1954).
may be declared. Stockholders are the only ones
entitled to receive stock dividends. (Nielson & Co v. Types of UVA
Lepanto Mining G.R. No. L-21601, December 17,
1966). 1. Acts done beyond the powers of the corporation
(through BOD)
I would add that the unsubscribed capital stock of a 2. Ultra vires acts by corporate officers
corporation may only be issued for cash or property 3. Acts or contracts which are per se illegal as being
or for services already rendered constituting a contrary to law
demandable debt. (CC, Sec. 62) As an alternative, I
would suggest that the managing corporation Ultra vires acts by reason of lack of authority vs.
should instead be given a net profit participation Ultra vires acts by reason of illegality (illegal
and, if it later so desires, to then convert the amount acts)
that may be due thereby to equity or shares of stock
at no less than the par value thereof. ULTRA ILLEGAL
BASIS
VIRES ACT ACTS
Period for every management contract entered Not
into by the corporation Unlawful;
necessarily
against law,
unlawful, but
GR: Management contract shall be entered into for Lawfulness morals, public
outside the
a period not longer than 5 years for any one term. policy, and
powers of the
public order
corporation
XPN: In cases of service contracts or operating Merely
agreements which relate to the exploitation, voidable and
development, exploration or utilization of natural may be Cannot be
resources, it may be entered for such periods as may Enforceability enforced by validated.
be provided by the pertinent laws or regulations. performance, VOID
ratification or
ULTRA VIRES ACTS (UVA) estoppel
Can be Cannot be
No corporation shall possess or exercise any Ratification
ratified ratified
corporate powers except those conferred by this Can bind the
Code or by its articles of incorporation and except parties if
such as are necessary or incidental to the exercise of Cannot bind
Binding effect wholly or
the powers so conferred (CC, Sec. 45). the parties
partly
executed
An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers. Distinguished from acts that do not comply with
The concept also includes those acts that may formalities and unauthorized acts
ostensibly be within such powers but are, by
general or special laws, either proscribed or ACTS THAT DO NOT
declared illegal. (Rural Bank of Milaor v. Ocefemia, COMPLY WITH UNAUTHORIZED ACTS
G.R. No. 137686, February 8, 2000). FORMALITIES
If certain procedures The act may be within
It is one committed outside the object for which a or formalities are the powers of the
corporation is created as defined by the law of its prescribed in the AOI corporation but not
organization and therefore beyond the power or BL and the same within the powers of the
conferred upon it by law. (Atrium Management are not complied particular officer. The
Corporation vs. CA, G.R. No. 109491, February 28, with, the resulting act latter is sometimes
2001). is not an ultra vires referred to as ultra vires
act of the act of the officer. The law
Unlike illegal acts which contemplate the doing of an corporation. on agency applies.
act that is contrary to law, morals, or public policy

Instances when the acts of the officers bind the Where the practice of the corporation has been to
corporation(PRADa) allow its general manager to negotiate and execute
contracts in its copra trading activities for and in
1. If it is provided in the by-laws behalf of the corporation without board approval,
2. When the act was ratified the board itself, by its acts through acquiescence,
3. If authorized by the board practically laid aside the by-law requirement of
4. Under the doctrine of apparent authority prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
Doctrine of apparent authority matter of general practice, custom, and policy, the
general manager may bind the company without
If a corporation knowingly permits one of its formal authorization from the board of
officers, or any other agent, to act within the scope directors(The Board of Liquidators, representing the
of an apparent authority, it holds him out to the Government of the Philippines v. Heirs of Maximo M.
public possessing the power to do those acts; and Kalaw, et al., G.R. No. L-18805, August 14, 1967).
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be A corporation cannot deny the authority of a lawyer
estopped from denying the agent’s authority. when they clothed him with apparent authority to
act in their behalf such as when he entered his
Its existence may be ascertained through: appearance accompanied by the corporation’s
general manager and the corporation never
1. The general manner in which the corporation questioned his acts and even took time and effort to
holds out an officer or agent as having the forward all the court’s documents to him. The
power to act, or in other words, the apparent lawyer may not have been armed with a board
authority to act in general, with which it clothes resolution but the doctrine of apparent authority
him; or imposes liability not as a result of contractual
2. The acquiescence in his acts of a particular relationship but rather because of the actions of the
nature, with actual or constructive notice principal or an employer in somehow misleading
thereof, within or beyond the scope of his the public that the relationship or authority exists
ordinary powers. (Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
NO. 170352, June 1, 2011).
It is not the quantity of similar acts which
establishes apparent authority but the vesting of a Q: May the board of directors of a rural banking
corporate officer with the power to bind the corporation be compelled to confirm a deed of
corporation (Advance Paper Corp. v. Arma Traders absolute sale of real property owned by the
Corp., GR No. 176897, December 11, 2013). corporation which deed of sale was executed by
the bank manager without prior authority of the
Instances when the corporation is estopped to board of directors of the rural banking
deny ratification of contracts or acts entered by corporation?
its officers or agents
A: YES, the corporation may be compelled. A bank is
Generally, when the corporation has knowledge liable to innocent third persons where
that its officers or agents exceed their power, it must representation is made in the course of its normal
promptly disaffirm the contract or act, and allow the business by an agent like the bank manager, even
other party or third person to act in the belief that it though such agent is abusing her authority. Clearly,
was authorized or has been ratified. Otherwise, if it persons dealing with her could not be blamed for
acquiesces, with knowledge of the facts, or if it fails believing that she was authorized to transact
to disaffirm, ratification will be implied. (Premiere business for and on behalf of the bank. The bank is
Development Bank v. CA, G.R. No. 159352, April 14, estopped from questioning the authority of the bank
2004). manager to enter into the contract of sale. If a
corporation knowingly permits one of its officers or
So settled is the precept that ratification can be any other agent to act within the scope of an
made by the corporate board either expressly or apparent authority, it holds the agent out to the
impliedly. Implied ratification may take various public as possessing the power to do those acts;
forms - like silence or acquiescence; by acts showing thus, the corporation will, as against anyone who
approval or adoption of the contract; or by has in good faith dealt with it through such agent, be
acceptance and retention of benefits flowing estopped from denying the agent’s
therefrom (MWSS v. CA, G.R. No. 126000, Oct. 7, authority. Unquestionably, the bank has authorized
1998). its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the

2019 GOLDEN NOTES
Mercantile Law
board resolution sought by. Having authorized her thereon owned by the Sps. Cortel. Sps.
to sell the property, it behooves the bank to confirm Magsalang and Sps. Cortel asked permission
the Deed of Sale so that the buyers may enjoy its full from PCRB to sell the subject properties.
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No. Mondigo, Branch Manager of PCRB, verbally
137686, February 8, 2000). agreed to their request but first required full
payment of the loan. The subject properties
Q: Associated Bank (the Bank) purchased in a were later sold to Banate. The title issued to
foreclosure sale the real properties of Sps. Vaca Banate, however, carried over the mortgage lien
mortgaged in its favor. The Sps. Vaca, however, in PCRB’s favor. PCRB refused to release the
prayed for the nullification of the mortgage and property from the lien.
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and Did the purported agreement between Banate
the Sps. Pronstroller offered to buy the same. and Mondigo novate the mortgage contract over
The offer was made through Atty. Soluta, the the subject properties and is thus binding upon
Bank’s Vice-President, Corporate Secretary and PCRB?
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer. A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
Sps. Pronstroller and Atty. Soluta executed two consider the power to undo or nullify solemn
Letters-Agreement wherein the balance of the agreements validly entered into as within the
purchase price will be paid upon receipt of a doctrine’s ambit. Although a branch manager,
final order from the Supreme Court in the Vaca within his field and as to third persons, is the
case and the delivery of the property to the Sps. general agent and is in general charge of the
Pronstroller free from occupants. corporation, with apparent authority
commensurate with the ordinary business
The Bank was later on reorganized, and Atty. entrusted him and the usual course and conduct
Soluta was relieved from his duties. The Bank, thereof, yet the power to modify or nullify corporate
through its Assistant Vice-President, Atty. contracts remains generally in the board of
Dayday, informed Sps. Pronstroller that their directors. Being a mere branch manager alone is
request for extension was disapproved and, in insufficient to support the conclusion that Mondigo
view of their breach of the contract, the Bank has been clothed with “apparent authority” to
was rescinding the same and forfeiting their verbally alter terms of written contracts, especially
deposit. when viewed against the telling circumstances of
this case: the unequivocal provision in the mortgage
Is the Associated Bank bound by the Letter- contract; PCRB’s vigorous denial that any
Agreement signed by Atty. Soluta under the agreement to release the mortgage was ever
doctrine of apparent authority? entered into by it; and, the fact that the purported
agreement was not even reduced into writing
A: YES. The authority of a corporate officer or agent considering its legal effects on the parties’
in dealing with third persons may be actual or interests. To put it simply, the burden of proving
apparent. Accordingly, the authority to act for and the authority of Mondigo to alter or novate the
to bind a corporation may be presumed from acts of mortgage contract has not been established
recognition in other instances, wherein the power (Banate,et al., v. Philippine Countryside Rural Bank,
was exercised without any objection from its board Inc., et al., G.R. No. 163825, July 13, 2010).
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the Q: PPI, a fertilizer manufacturer, entered into an
first agreement without a board resolution arrangement with Janet Layson for the delivery
expressly authorizing him; thus, it had clothed him of fertilizers to her, payable from the proceeds
with apparent authority to modify the same via the of the loan that UCPB extended to her. Layson
second letter-agreement. It is not the quantity of executed a document called “pagares,” written
similar acts which establishes apparent authority, on the dorsal side of a UCPB promissory
but the vesting of a corporate officer with the power note. The pagares stated that Layson had an
to bind the corporation. (Associated Bank v. approved loan with UCPB-Iloilo Branch. The
SpousesPronstroller, G.R. No. 148444, July 14, 2008). second portion of the pagares, signed by that
branch’s manager Gregory Grey, stated that the
Q: Sps. Magsalang obtained a loan from assignment has been duly accepted and
Philippine Countryside Rural Bank (PCRB), payment duly guaranteed within 60 days from
secured by a real estate mortgage over their PPI’s Invoice. But contrary to her undertakings,
property, including the house constructed Layson withdrew with branch manager Grey’s

connivance, the loan that UCPB granted her. On A. YES. Apparent authority is derived not merely
the strength of the three documents, PPI from practice. Its existence may be ascertained
delivered quantities of fertilizers to through (1) the general manner in which the
Layson. When PPI presented the documents of corporation holds out an officer or agent as having
the financed transactions to UCPB for collection, the power to act or, in other words the apparent
the bank denied the claim on the ground that it authority to act in general, with which it clothes
neither authorized the transactions nor the him; or (2) the acquiescence in his acts of a
execution of the documents which were not part particular nature, with actual or constructive
of its usual banking transactions. UCPB claimed knowledge thereof, within or beyond the scope of
that branch manager Grey exceeded his his ordinary powers. It requires presentation of
authority in guaranteeing payment of Layson’s evidence of similar act(s) executed either in its favor
purchases on credit. UCPB contends that the or in favor of other parties. It is not the quantity of
pagares were illegal and void since banking laws similar acts which establishes apparent authority,
prohibit bank officers from guaranteeing loans but the vesting of a corporate officer with the power
of bank clients. Is UCPB bound by Grey’s to bind the corporation.
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment of the The Court held that Arma Traders is liable to pay the
fertilizers Laysonbought? loans. To begin with, Arma Traders’ Articles of
Incorporation provides that the corporation may
A: NO, UCPB is not bound. A corporation like UCPB borrow or raise money to meet the financial
is liable to innocent third persons where it requirements of its business by the issuance of
knowingly permits its officer, or any other agent, to bonds, promissory notes and other evidence of
perform acts within the scope of his general or indebtedness. Likewise, it states that Tan and Uy are
apparent authority, holding him out to the public as not just ordinary corporate officers and authorized
possessing power to do those acts. But, here, it is bank signatories because they are also Arma
plain from the guarantee Grey executed that he was Traders’ incorporators. Furthermore, Arma
acting for himself, not in representation of UCPB. Traders, et al., through Ng who is Arma Traders’
The latter cannot be bound by Grey’s above corporate secretary, incorporator, stockholder and
undertaking since he appears to have made it in his director, testified that the sole management of Arma
personal capacity. He signed it under his own name, Traders was left to Tan and Uy and that he and the
not in UCPB’s name or as its branch other officers never dealt with the business and
manager. Indeed, the wordings of the undertaking management of Arma Traders for 14 years
do not at all make any allusion to UCPB(UCPB v.
Planters Products, Inc., et al., G.R. No. 179015, June Thus, Arma Traders bestowed upon Tan and Uy
13, 2012). broad powers by allowing them to transact with
third persons without the necessary written
Q:. Tan was formerly the President of Arma authority from its non-performing board of
Traders while Uy is the Treasurer. They directors. Arma Traders failed to take precautions
represented Arma Traders when dealing with to prevent its own corporate officers from abusing
its supplier, Advance Paper, for about 14 years. their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped
Upon the representation of Tan and Uy, Arma from denying Tan and Uy’s authority to obtain loan
Traders was able to obtain a loan from Advance from Advance Paper. (Advance Paper Corporation vs.
Paper, which the latter granted due to its good Arma Traders Corporation, G.R. No 176897,
business relations with Arma Traders. December 11, 2013).
Arma Traders issued postdated checks signed Consequences of Ultra Vires Acts
by Tan and Yu, who were its authorized bank
signatories. Thechecks were dishonored due to Ultra vires acts entered into by the board of
insufficient balance. Arma Traders failed to directors bind the corporation, and the courts will
settle the loan despite several demands, not interfere unless terms are oppressive and
claiming thatthe purchase on credit and the loan unconscionable. (Gamboa vs. Victoriano, G.R. No. L-
were spurious as the Board of Arma Traders did 43324. May 5, 1979).
not issue a resolution authorizing the same.
These are the effects for the specific acts:
Is the Doctrine of Apparent Authority
applicable? 1. Executed contract – courts will not set aside or
interfere with such contracts;

2019 GOLDEN NOTES
Mercantile Law
2. Executory contracts – no enforcement even at corporation(CC, Sec. 32). Such contract can be
the suit of either party (void and ratified by the vote of the stockholders
unenforceable); representing at least two-thirds of the
3. Partly executed and partly executory – outstanding capital stock in a meeting called for
principle of “no unjust enrichment at expense of the purpose: Provided, that full disclosure of the
another” shall apply; adverse interest of the directors or trustees
4. Executory contracts apparently authorized involved is made at such meeting: Provided,
but ultra vires – the principle of estoppel shall however, That the contract is fair and
apply. reasonable under the circumstances.
b. Valid – Approval of the stockholders is not
Remedies in case of ultra vires act required in declaring cash dividends
c. Void – This is an ultra vires act on part of XL
1. State Foods Corporation, and is not one of the powers
a. Obtain a judgment of forfeiture; or provided for in Sec. 36 of the Corporation Code.
b. The SEC may suspend or revoke the It can be ratified provided it is not illegal per se
certificate of registration but merely beyond the powers of the
corporation by the approval of the majority of
2. Stockholders the board and vote of the stockholders
a. Injunction; or representing at least two thirds of the
b. Derivative suit outstanding capital stock. Where the contract
or act is not illegal per se but merely beyond the
3. Creditors- Nullification of contract in fraud of power of the corporation, the same is merely
creditors. voidable and may be enforced by performance,
ratification, or estoppels, or on equitable
Q: X Corp., whose business purpose is to grounds (Republic v. Acoje Mining Co., Inc.)
manufacture and sell vehicles, invested its funds especially if no creditors are prejudiced thereby
in Y Corp., an investment firm, through a and no rights of the state or the public are
resolution of its Board of Directors. The involved(Flecher, p.585).
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a HOW EXERCISED
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so, BY THE SHAREHOLDERS
what is the status of the investment? (2011 Bar)
The shareholders participate in controlling the
A: YES, it is an ultra vires act of its Board of Directors affairs of the corporation by exercising their right to
but voidable only, subject to stockholders’ vote. They can elect the directors who will actually
ratification. govern the corporation and they can also vote on
important matters that are still reserved to them by
Q: Which of the following corporate acts is valid, the Corporation Code(Aquino, 2006).
void or voidabe?
BY THE BOARD OF DIRECTORS
a. XL Food Corporation, which is engaged in
the fast-food business, entered into a The Board of Directors is primarily responsible for
contract with its President, Jose Cruz, the governance of the corporation. Their primary
whereby the latter would supply the duty is to set the policies for the accomplishment of
corporation with its meat and poultry the corporate objectives. (Revised Code of Corporate
requirements. Governance, Art. 3).
b. The Board of Drectors of XL Foods
Corporation declared and paid cash They elect the officers who carry out the policies
dividends without approval of the that they have established.
stockholders.
c. XL Foods Corporation guaranteed the loan The general rule is that a corporation, through its
of its sister company XL Meat Products, Inc. Board of Directors, should act in a manner and
(2002 Bar) within the formalities, if any, prescribed by its
charter or by the general law. Directors must act as
A: a body in a meeting called for the pursuant to the
a. Voidable – A contract of the corporation with law or the corporation’s by laws, otherwise, any
one or more of its directors or trustees or action taken therein may be questioned by any
officers is voidable, at the option of such objecting director or shareholder; but an action of

the Board of Directors during a meeting, which was NOTE: Court has recognized the authority of some
illegal for lack of notice, may be ratified expressly, corporate officers to sign the verification and
by the action of directors in a subsequent legal certification against forum shopping. In sum, the
meeting, or impliedly, by the corporation’s following officials or employees of the company can
subsequent course of conduct(Lopez Realty, Inc., v. sign the verification and certification without need
Fontecha, et al., GR No. 76801, August 11, 1995). of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a
Q: Sheryl Oabel was initially hired by Maranaw corporation, (3) the General Manager or Acting
Hotel as an extra beverage attendant. Oabel General Manager, (4) Personnel Officer, and (5) an
worked in Century Park Hotel, an establishment Employment Specialist in a labor case. The rationale
owned by the Maranaw Hotels. The latter applied in the foregoing cases is to justify the
contracted with Manila Resource Development authority of corporate officers or representatives of
Corporation (MANRED). Subsequently, Oabel the corporation to sign the verification or certificate
was transferred to MANRED, with the latter against forum shopping, being in a position to verify
deporting itself as her employer. After the truthfulness and correctness of the allegations
sometime, Oabel filed before the Labor Arbiter a in the petition. (Mid-Pasig Land
petition for regularization of employment DevelopmentCorporation v. Tablante, G.R. No.
against the Maranaw Hotels. However, Oabel 162924, February 4, 2010).
was dismissed from employment. Oabel
converted her petition for regularization into a Power of directors or trustees to delegate
complaint for illegal dismissal. The NLRC found authority
that Oabel was illegally dismissed. Maranaw
Hotels subsequently appealed before the CA. GR: The board may validly delegate, either
The CA dismissed the petition on account of the expressly or impliedly, some of its powers and
failure of the Maranaw Hotels to append the functions to other officers or agents of the
board resolution authorizing the counsel for corporation appointed by it. (Yu Chuck v. Kong Li Po,
Maranaw Hotels to file the petition before the G.R. No. L-22450, December 3, 1924).
CA. Maranaw Hotels invokes substantial justice
as justification for a reversal of the resolution of XPNS:
the CA. It contends that the filing of a motion for 1. Discretionary powers which, by provisions of
reconsideration with the certificate of non- law or the by-laws or by the vote of the
forum shopping attached constitutes stockholders, are vested exclusively in the
substantial compliance with the requirement. board of directors. (Bliss v. Kaweah Canal, etc.,
Did the petition before the CA comply with the 65 Cal. 502, August 18, 1884);
procedural requirements under the law and the 2. They cannot delegate entire supervision and
rules? control of the corporation to others for this is
not only unnecessary and contrary to usage, but
A: NO. Well-settled is the rule that the certificate of it is inconsistent with Section 23 of the
non-forum shopping is a mandatory requirement. Corporation Code; and
Substantial compliance applies only with respect to 3. Neither can the board delegate special powers
the contents of the certificate but not as to its especially conferred upon it by a resolution of
presence in the pleading wherein it is required. the stockholders or members of the
Furthermore, the lawyer acting for the corporation corporation.
must be specifically authorized to sign pleadings for
the corporation. Specific authorization, the Court BY THE OFFICERS
held, could only come in the form of a board
resolution issued by the Board of Directors that After the election of directors, the latter must
specifically authorizes the counsel to institute the formally organize by electing the corporate officers.
petition and execute the certification, to make his (Sec. 25, CC).
actions binding on his principal, i.e., the corporation.
The SC has not wavered in stressing the need for The corporate officers are tasked to carry out the
strict adherence to procedural requirements. The policies laid down by the Board, the AOI and the by-
rules of procedure exist to ensure the orderly laws.
administration of justice. They are not to be trifled
with lightly. (Maranaw Hotels and Resort Corporate officer’s position
Corporation v. CA, et al., G.R. No. 149660, January 20,
2009). 1. An “office” that is created by the charter of the
corporation; and

2019 GOLDEN NOTES
Mercantile Law
2. The officer is elected by the directors or B. Who can be appointed Corporate Secretary?
stockholders (Easycall Communications Phils., (Bar 2012)
Inc. v. King, G.R. No.145901, December 15, 2005).
A: A. The Corporation Code does not impose any
Limitations on the holding of a corporate nationality or residency requirement in respect of
officer’s position the Treasurer. Any such requirement or any other
reasonable requirement may be adopted by the
Any two or more positions may be held corporation and reflected in its by-laws, or required
concurrently by the same person, except that no one by the law(s) governing the business of the
shall act as president and secretary or as president corporation or a law of general application (e.g., the
and treasurer at the same time. (CC, Sec. 25). AntiDummy Law which applies to all nationalized
businesses). Accordingly, anybody with the
Q: X is a Filipino immigrant residing in qualifications required under the by-laws of the
Sacramento, California. Y is a Filipino residing corporation or under the law(s) governing the
Quezon City. Z is a resident alien residing in business of the corporation, could be elected
Makati City. GGG Corporation is a domestic Treasurer by the Board of Directors. However, the
corporation—40% owned by foreigners and Treasurer could not be President at the same time.
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign NOTE: the treasurer must be a resident of the
corporation registered with the Philippines SEC, Philippines (section 24 of the Revised Corporation
KKK Corporation is a domestic corporation Code)
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y. B. The Secretary is required to be both a resident
and a citizen of the Philippines.
A. Who are qualified to act as Treasurer of the
company?
Positions of corporate officers to be filled up by the Directors
CORP. OFFICER MEMBERSHIP REQUIREMENT CITIZENSHIP RESIDENCY

1. Must be a director at the time he
assumes office Need NOT be a Need NOT be a Philippine
President
2. Must be the stockholder on record Filipino Citizen Resident
of at least 1 share of stock
May or may not be a director, unless Must be a Filipino Must be a Philippine
Secretary required by the by-laws Citizen Resident
Need NOT be a Must be a Philippine
Treasurer May or may not be a director
Filipino Citizen Resident
Such other
officers as may
Qualifications may be provided for in the by-laws
be provided in
the by-laws
Corporate officer vs.Corporate employee
CORPORATE OFFICER CORPORATE EMPLOYEE

Position is provided for in the by-laws or under the Employed by the action of the managing officer of
Corporation Code. the corporation.
RTC acting as a special commercial court has Labor Arbiter has jurisdiction in case of labor
jurisdiction over intra-corporate controversies. disputes.
Power to amend or repeal by-laws or adopt new by-
Power to amend/repeal articles cannot be delegated
laws may be delegated by the 2/3 of the outstanding
by the stockholders/ members to the board of
capital stock or 2/3 of the members in the case of
directors/ trustees
A party in a suit against a corporation cannot interrogatories upon the latter, as said officers
compel the latter’s officers to appear as are also considered as adverse parties
witnesses without first serving written

In a complaint for nullification of mortgage and d. Among the stockholders, partners or associates,
foreclosure with damages against the mortgagee- themselves.
bank, the plaintiff cannot compel the officers of the
bank to appear and testify as plaintiff’s initial Settled jurisprudence, however, qualifies that when
witnesses unless written interrogatories are first the dispute involves a charge of illegal dismissal, the
served upon the bank officers. This is in line with action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
the Rules of Court provision that calling the adverse disputes and claims for damages arising from
party to the witness stand is not allowed unless employer-employee relations as provided in Article
written interrogatories are first served upon the 217 of the Labor Code. Consistent with this
latter. This is because the officers of a corporation jurisprudence, the mere fact that Cosare was a
are considered adverse parties as well in a case stockholder and an officer of Broadcom at the time
against the corporation itself based on the principle the subject controversy developed failed to
that corporations act only through their officers and necessarily make the case an intra-corporate
duly authorized agents (Spouses Afulugencia v. dispute. Applying the case of Matling Industrial and
Metropolitan Bank and Trust Co., G.R. No. 185145, Commercial Corporation v. Coros, to the present
February 5, 2014, in Divina, 2014). case, the LA had the original jurisdiction over the
complaint for illegal dismissal because Cosare,
Q: Arevalo set up Broadcom with Cosare, his although an officer of Broadcom for being its AVP
former employee, as an incorporator. Cosare for Sales, was not a “corporate officer” as the term is
was later promoted to the position of Assistant defined by law(Raul C. Cosare v. Broadcom Asia, Inc.,
Vice-President for Sales and Head of the et al., G.R. No. 201298, February 5, 2014).
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became Q: Respondents filed a motion to dismiss the
Cosare’s immediate superior. Later, Cosare sent complaint filed against them where some of the
a confidential memo to Arevalo to inform him of issues include whether the withdrawals and
the anomalies which were allegedly being disbursements are in accordance with the By-
committed by Abiog against the company. Laws and whether there was a complete, audited
Subsequently, Cosare was totally barred from report and accounting of all the corporate funds.
entering the company premises. Cosare The RTC dismissed the case. Is the RTC correct?
attempted to furnish the company with a memo
by which he addressed and denied the A: No. Based on Section 8, Rule 1 of the Interim
accusations cited in Arevalo’s memo. Soon after, Rules of Procedure for Intra-Corporate
Cosare filed a labor complaint, claiming that he Controversies, in cases involving an intra-corporate
was constructively dismissed from employment dispute, a motion to dismiss is a prohibited
by Broadcom and Arevalo. CA ruled that the case pleading. (ALDERSGATE v. JUNIFEN GR No. 192951
is an intra-corporate controversy and is under Nov 14, 2012)
the RTC’s jurisdiction.
Awards for damages in Intra-Corporate
Is the CA correct? Controversies
A: NO. The Court has determined that contrary to As can be gleaned from the title of A.M. No. 01-2-04-
the ruling of the CA, it is the LA, and not the regular SC, the amendment of Section 4, Rule 1 of the
courts, which has the original jurisdiction over the Interim Rules of Procedure Governing Intra-
subject controversy. An intra-corporate Corporate Controversies was crafted precisely to
controversy, which falls within the jurisdiction of clarify the previous rule that decisions on intra-
regular courts, has been regarded in its broad sense corporate disputes are immediately executory, by
to pertain to disputes that involve any of the specifically providing for an exception. Thus, the
following relationships: prevailing rule now categorically provides that
awards for moral damages, exemplary damages,
a. Between the corporation, partnership or and attorney’s fees in intra-corporate controversies
association and the public; are not immediately executor. (Heirs of Santiago
b. Between the corporation, partnership or Divinagracia, v. Ruiz, G.R. No. 172508, Janaury 12,
association and the state in so far as its 2011).
franchise, permit or license to operate is
concerned; TRUST FUND DOCTRINE
c. Between the corporation, partnership or
association and its stockholders, partners, The subscribed capital stock of the corporation is a
members or officers; and trust fund for the payment of debts of the

2019 GOLDEN NOTES
Mercantile Law
corporation which the creditors have the right to The Code allows distribution of corporate capital
look up to satisfy their credits, and which the only in instances of:
corporation may not dissipate. The creditors may
sue the stockholders directly for the latter’s unpaid 1. Amendment of the AOI to reduce authorized
subscription. (2015 Bar) capital stock;
2. Purchase of redeemable shares by the
Effects of the trust fund doctrine corporation regardless of existence of
unrestricted retained earnings; or
1. Dividends must never impair the subscribed 3. Dissolution and eventual liquidation of the
capital stock and must only be declared out of corporation.
unrestricted retained earnings (URE).
2. Subscription commitments cannot be condoned Proper scope of the Trust Fund doctrine
or remitted
3. GR: The corporation cannot buy its own shares Insolvent
Solvent Corporation
using the subscribed capital as the Corporation
consideration therefore (NTC v. CA, G.R. No. Encompasses only the Encompasses not only
127937. July 28, 1999). capital stock of the the capital stock, but
corporation. It does also other property
XPN: (ReDeC) NOT cover and assets (Divina,
unrestricted retained 2015)
a. Redeemable shares may be acquired even earnings (Villanueva,
without surplus profit for as long as it will 2018)
not result to the insolvency of the
Corporation; The trust fund doctrine covers not only capital
b. In cases that the corporation conveys its stock but also unpaid subscriptions, and other
stocks in payment of a Debt; or corporate property and assets.
c. In a Close corporation, a stockholder may
demand the payment of the fair value of The scope of the doctrine when the corporation is
shares regardless of existence of retained insolvent encompasses not only the capital stock,
earnings for as long as it will not result to but also other property and assets generally
the insolvency of the corporation regarded in equity as a trust fund for the payment of
corporate debts. The creditor is allowed to maintain
4. Rescission of a subscription agreement is not an action upon any unpaid subscriptions and
allowed since it will effectively result in the thereby steps into the shoes of the corporation for
unauthorized distribution of the capital assets the satisfaction of the debt. Subscriptions to the
and property of the corporation (Ong v Tiu, ibid) capital stock of a corporation constitute a fund to
which creditors have the right to look for
NOTE: Rescission of a subscription agreement is not satisfaction of their claims (Halley v. Printwell, Inc.,
one of the instances when distribution of capital G.R. No. 157549, May 30, 2011, in Divina, 2014).
assets and property of the corporation is allowed
(Ibid). Q: A corporation executed a promissory note
binding itself to pay its President/ Director, who
When negotiations ensued in the light of a planned had tendered his resignation, a certain sum in
takeover of a company and the counsel of the buyer payment of the latter’s shares and interests in
advised the stockholder through a letter that he may the company. The corporation defaulted in
take the machineries he brought to the corporation paying the full amount so that the said former
out with him for his own use and sale, the previous President filed suit for collection of the balance
stockholder cannot recover said machineries and before the SEC. Is the arrangement between the
equipment because these properties remained part corporation and its President covered by the
of the capital property of the corporation. Under the trust fund doctrine? (Bar 1992)
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity A: The arrangement between the corporation and
in trust for the payment of corporate creditors its President to the extent that it calls for the
which are preferred over the stockholders in the payment of the latter’s shares is covered by the trust
distribution of corporate assets (Yamamoto v. fund doctrine. The only exceptions from the trust
Nishino Leather Industries, Inc., G.R. No. 150283, fund doctrine are the redemption of redeemable
April 16, 2008). shares and, in the case of close corporation, when
there should be a deadlock and the SEC orders the
Exceptions to the trust fund doctrine

payment of the appraised value of a stockholder’s The board of the following corporations vested with
share. public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-BO)
BOARD OF DIRECTORS
AND TRUSTEES 1. Corporations whose: (Re-Li-Ass)
a. Securities are registered with the
Commission
DOCTRINE OF CENTRALIZED MANAGEMENT b. Corporations listed with an exchange
c. Corporations with:
GR: The Doctrine of Centralized Management states c.1. assets of at least 50 Million Pesos;
that all corporate powers are exercised by the BOD c.2. having 200 or more shareholders;
or BOT. (CC, Sec. 23) c.3. each shareholder holding at least 100
shares of a class of its equity shares
The Board is the body which: (ExBuCo)
2. (B-PIN-PEF): Banks, quasi-banks, preneed,
(1) Exercises all powers provided for under the insurance and trust companies, nonstock savings
Corporation Code; and loan associations, pawnshops, corporations
(2) Conducts all Business of the corporation; and (3) engaged in money service business and other
Controls and holds all the properties od the financial intermediaries; and
corporation (CC, Sec 23 [RCC, Sec 22])
3. Other corporations engaged in business vested
XPN: The doctrine is not applicable to the following with public interest similar to the above, as may be
instances: determined by the Commission, after taking into
account relevant factors which are germane to the
1. In case of delegation to the Executive objective and purpose of requiring the election of
Committee duly authorized in the by-laws; independent director
2. Authorization pursuant to a contracted
manager which may be an individual, a [New provision in RCC]
partnership, or another corporation; and Factors to consider by the Commission in
3. In case of close corporations, the stockholders determining a coporation engaged in business with
may manage the business of the corporation public interest: ExTyPO
instead of a board of directors, if the articles of 1. Extent of minority ownership
incorporation so provide. 2. Type of financial products or securities issued or
offered to investors
Independent director 3. Public interest involved in the nature of business
operations
An independent director is a person who apart from 4. Other analogous factors
shareholdings and fees received from the
corporation, is independent of management and Required number of independent directors for
free from any business or other relationship which the corporations covered by the Revised Code of
could, or could reasonably be perceived to Corporate Governance (RCCG)
materially interfere with the exercise of
independent judgment in carrying out the At least two (2) or such number of independent
responsibilities as a director. (RCC, Sec 22) directors that constitute 20% of the members of the
board, whichever is lesser, but in no case less than
Cases where independent directors are two (2) (RCCG, Art. 3 [A]).
required
Q: May the composition of the board of directors
At least two (2) independent directors are required of the National Power Corporation be validly
in the following companies: reduced to three (3)? (2008 Bar)
1. Any corporation with a class of equity securities A: YES. NPC is a government owned and controlled
listed for trading on an Exchange (Publicly corporation created by a special charter. Its charter
traded companies); allows composition of its board of directors to be
2. Banks; and reduced. As clearly enunciated in Section 16, Article
3. Corporations with secondary franchise. XII, 1987 Constitution: Congress shall not, except by
general law, provide for the formation,
[New provision in RCC:] organization, or regulation of private corporations.

2019 GOLDEN NOTES
Mercantile Law
The prohibition under the Corporation Code only become liable, whether civilly or otherwise, for
applies to private corporations. Since NPC is not the consequences of their acts, which are
governed by the Corporation Code, the standard properly attributed to the corporation alone
number of directors is not required. (Benguet Electric Cooperative, Inc. v. NLRC,GR
89070, May 18, 1992).
BUSINESS JUDGMENT RULE 6. The power to elect corporate officers was a
discretionary power that the law exclusively
Questions of policy or management are left solely to vested in the Board of Directors and could not
the honest decision of officers and directors of a be delegated to subordinate officers or agents
corporation and the courts are without authority to (Matling Industrial and Commercial
substitute their judgment for the judgment of the Corporation, et al. v. Coros, G.R. No. 157802,
board of directors; the board is the business October 13, 2010).
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the Requirement for the Business Judgment Rule to
courts or the SEC. (Montelibano v. Bacolod-Murica apply:
Milling Co., G.R. No. L-15092, May 18, 1962; Phil.
Stock Exchange, Inc. v. Ca, G.R. No. 125469, October 1. Presence of a business decision including
27, 1997). decisions on policy management and
administration;
GR: Contracts intra vires entered into by the board 2. The decision must be intra vires and must comply
of directors are binding upon the corporation with the procedural and substantive requirements
beyond the interference of courts. The courts are of law;
barred from intruding into business judgments of 3. Good faith
corporations, when the same are made in good faith 4. Due care in making the decision;
(Ong v Tiu, G.R. No. 144476. April 8, 2003). 5. The director must not have personal interest or
nor self-dealing or otherwise on breach of the duty
XPNs: Courts can inquire unto contracts which are: of loyalty. (Villanueva, 2018)
1. Unconscionable and oppressive as to amount to Q: PALI sought to offer its shares to the public in
wanton destruction to the rights of the minority order to raise funds for development of
(Ong v Tiu, ibid); or properties and pay its loans with several banks.
2. When there is bad faith or gross negligence by To facilitate the trading of its shares, PALI
the directors (Republic Communications Inc v applied for a listing in the Philippine Stock
CA, G.R. No. 135074, January 29, 1999). Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Consequences of Business Judgment Rule Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
1. Resolutions and transactions entered into by of PALI are owned by Marcos. Consequently, PSE
the Board within the powers of the corporation rejected PALI’s application. The SEC reversed
cannot be reversed by the courts not even on the ruling of the PSE. Is the SEC correct?
the behest of the stockholders.
2. Directors and officers acting within such A: NO. In applying the business judgment rule, the
business judgment cannot be held personally SEC and the courts are barred from intruding into
liable for such acts. business judgments of corporations, when the same
3. If the cause of the losses is merely error in are made in good faith. The said rule precludes the
business judgment, not amounting to bad faith reversal of the decision of the PSE to deny PALI's
or negligence, directors and/or officers are not listing application, absent a showing of bad faith on
liable (Filipinas Port Services v. Go, G.R. No. the part of the PSE.
161886, March 16, 2007).
4. The Board of Directors has the power to create Under the listing rules of the PSE, to which PALI had
positions not provided for in the corporation's previously agreed to comply, the PSE retains the
by-laws since the board is the corporation’s discretion to accept or reject applications for listing
governing body, clearly upholding the power of (PSE v. CA, G.R. No. 125469, October 27, 1997).
its board to exercise its prerogatives in
managing the business affairs of the TENURE, QUALIFICATIONS AND
corporation (Filipinas Port Services v. Go, supra). DISQUALIFICATIONS OF DIRECTORS OR
5. Directors and officers who purport to act for the TRUSTEES
corporation, keep within the lawful scope of
their authority and act in good faith, do not Term of office of BOD/BOT

GR: The regular director shall hold office for 1 year. 1. Majority of the directors/trustees must be
residents of the Philippines (CC, Sec. 23).
[Amendment in RCC, Sec 22: a trustee may be 2. He must not have been convicted by final
elected for a period not exceeding 3 years judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
For a director, the rule remains the same {1 year}]. violation of the Corporation Code, committed
within 5 years prior to the date of his election
XPN: If no election is held, the directors and officers (CC, Sec. 27).
will continue to occupy position even after the lapse 3. He must be of legal age
of 1 year under a hold-over capacity until their 4. Other qualifications as may be prescribed in
successors are elected and qualified. special laws or regulations or in the by-laws of
the corporation.
NOTE: This is applicable to a going concern where
there is no break in the exercise of the duties of the A director cannot be elected without owning any
officers and directors (SEC Opinion, Dec. 15, 1989). stock in the corporation
Term, Tenure, and Holdover Period A person who does not own a stock at the time of his
election or appointment does not disqualify him as
Term – time during which the officer may claim to director if he becomes a shareholder before
hold the office as a matter of right, and fixes the assuming the duties of his office (SEC Opinions,
interval after which the several incumbents shall November 9, 1987 & April 5, 1990).
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and Sec. 30 of the Corporation Code requires directors
does not change simply because the office may have to own the shares of stock in their own right.. To be
become vacant, nor because the incumbent holds eligible to be a director, it is not required that he
office beyond his term when a successor has not owns legal title to the share of stock. It suffices that
been elected. he posseses a beneficial ownership in the books
of the corporation. A trustee is a stockholder of
Tenure – represents the term during which the record. (Lee v. CA, G.R. No. 93695, February 4, 1992).
incumbent actually holds office. The tenure may be Consequently, The omission of the phrase “in his
shorter (or, in case of holdover, longer) than the own right” in Section 23 of the Revised
term for reasons within or beyond the power of the Corporation Code means that in order to be
incumbent. eligible to be elected to the Board and to remain a
member thereof, what is material is lega title
Holdover Period – the time from the lapse of one thereto, beneficial ownership being insufficient.
year from a member’s election to the Board and (RCC Annotated Aquino, Cruz 2019)
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor Both under the old and the new Corporation Codes,
is it a new term; the holdover period, however, there is no dispute as to the most immediate effect
constitutes part of his tenure (Valle Verde Country of a Voting Trust Agreement (VTA) on the status of
Club v. Africa, G.R. No. 151969, September 4, 2009). a stockholder who is a party to its execution - from
legal titleholder or owner of shares subject of the
Duties of Directors/Trustees: (OLD) VTA, he becomes equitable or beneficial owner. Any
director who executes a VTA over all his shares
1) Duty of Obedience – the directors should direct ceases to be a stockholder of record in the books of
the affairs of the corporations only in the corporation and therefore ceases to be a
accordance with the purposes for which it was director (Lee v. CA, G.R. No. 93695, February 4, 1992)
organized.
2) Duty of Diligence – The directors should not Q: Grace Christian High School is an educational
willfully and knowingly vote for or assent to institution at the Grace Village in Quezon City
patently unlawful acts of the corporation or act while Grace Village Association, Inc., is an
in bad faith or with gross negligence in directing organization of lot and/or building owners,
the affairs of the corporation. lessees and residents at Grace Village. From
3) Duty of Loyalty – The directors should not 1975 up to 1990, Grace Christian High School
acquire any personal or pecuniary interest in was given a permanent seat in the board of
conflict with their duty as directors directors of the association. After some time,
the association’s committee on election
Common qualifications of a director and trustee informed James Tan, the principal of the school
that all directors should be elected by members

2019 GOLDEN NOTES
Mercantile Law
of the association. Tan was told that the the decision of the SEC is final and executory unless
proposal to make the Grace Christian High appealed in CA and a TRO is obtained
School representative as a permanent director
of the association, although previously tolerated [Amendment in RCC, Sec 26:]
in the past elections should be reexamined. A person shall be disqualified from being a director,
Grace Christian High School argues that it had trustee or officer of any corporation if, within 5
acquired a vested right to a permanent seat in years prior to election or appointment of such, the
the board of directors. Did Grace Christian High person was: (ConFoFo)
School acquire vested right to a permanent seat
in the board of directors? (a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a
A: NO. The board of directors of corporations must period exceeding 6 years;
be elected from among the stockholders or (2) violation of the Corporation Code;
members. Sec 23 of the CC [Sec 22, RCC] provides (3) Violation of RA 8799 (SRC)
that unless otherwise provided, the corporate
powers of all corporations formed under this Act (b) Found administratively liable for any offense
shall be exercised, all business conducted and all involving fraudulent acts; and
property of such corporations controlled and held
by a board of not less than five nor more than eleven (c) By a foreign court or equivalent foreign
directors to be elected from among the holders of regulatory authority for acts, violations or
stock or, where there is no stock, from the members misconduct similar to those enumerated in
of the corporation paragraphs (a) and (b) above
Since the provision in question is contrary to law, Q: John Gokongwei Jr., as stockholder of San
the fact that for fifteen years it has not been Miguel Corporation, filed with SEC a petition for
questioned or challenged but, on the contrary, declaration of nullity of amended by-laws
appears to have been implemented by the members against the majority of the members of the
of the association cannot forestall a later challenge Board of Directors and San Miguel Corporation.
to its validity. Neither can it attain validity through Gokongwei claimed that prior to the questioned
acquiescence because, if it is contrary to law, it is amendment, he had all the qualifications to be a
beyond the power of the members of the association director of the corporation, being a substantial
to waive its invalidity (Grace Christian High School v. stockholder thereof, Gokongwei had acquired
CA, et al., G.R. No. 108905, October 23, 1997). rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
Additional qualifications provided by the election of directors, and that in amending the
Revised Code of Corporate Governance by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
A director should have the following: of his vested right as aforementioned, hence the
amended by-laws are null and void. Is a
1. College education or equivalent academic provision on the by-laws disqualifying a person
degree; for a position in the board of directors on the
2. Practical understanding of the business of the ground that he is engaged in a business which
corporation; competes with that of the Corporation valid?
3. Membership in good standing in relevant
industry, business or professional A: YES. A corporation is authorized to prescribe the
organizations; and qualifications of its directors. A provision in the by-
4. Previous business experience (RCCG, Art. 3 [D]) laws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
Grounds for disqualification of a board of directors if he is engaged in any business
director/trustee which compete with that of the Corporation is valid;
provided, however, that before such nominee is
1. Conviction by final judgment of an offense disqualified, he should be given due process to show
punishable by imprisonment exceeding 6 that he is covered by the disqualification. A director
years;or stands in fiduciary relation to the corporation and
2. Violation of the Corporation Code committed its stockholders. The disqualification of a
within 5 years prior to his election or competitor from being elected to the board of
appointment (CC, Sec. 27). directors is a reasonable exercise of corporate
NOTE: Disqualification by reason of violation of the authority. Sound principles of corporate
CC does not require conviction for the reason that management counsel against sharing sensitive

information with a director whose fiduciary duty to of age, and daughter of Y. Who are qualified to
loyalty may well require that he discloses this become members of the board of directors of the
information to a competitive rival. When a person corporation? (2012 Bar)
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a A: X, Y, Z and T could be directors (subject to the
majority of the stockholders (Gokongwei v. SEC, et residency requirement mentioned in (a) above and
al., G.R. No. L-45911, April 11, 1979). any nationality requirement under the law
governing the business of the corporation) but not
Foreigners are not disqualified from being GGG Corporation, CCC Corporation, and KKK
elected/ appointed as members of the BOD Corporation as they are not natural persons.
However, the aforementioned corporations could
While foreigners are disqualified from being have their respective representatives nominated
elected/ appointed as corporate officers in wholly and possibly elected as directors by the
or partially nationalized business activities, they are stockholders. Each director must own at least one
allowed representation in the BOD or governing share of the capital stock of the corporation.
body of said entities in proportion to their
shareholding (Anti-Dummy Law, Sec. 2-A; ELECTIONS
1987Constitution, Art. XII, Sec. 11).
Requirements and limitations for the election of
REASON: The BOD/ governing body performs directors or trustees
specific duties as a “body”. Unlike corporate officers,
each member of the BOD/ governing body has no 1. Presence of Stockholders representing a
individual power or authority to perform majority of the outstanding capital stock of the
management functions (De Leon, supra). corporation or majority of the members, either
in person or by proxy.
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To [New ways to vote in RCC, Sec 24]:
complement its furniture manufacturing Through remote communication or in absentia
business, the corporation also engaged in the
logging business. With the additional logging GR: it must be provided in the by-laws
activity, can the Korean national still be a XPN: the right to vote through such modes may
member of the Board of Directors? Explain be exercised in corporations vested with public
(2005 Bar) interest notwithstanding the absence of a
provision in the bylaws of such corporations
A: YES. The Korean national can still be a member
of the Board of Directors as long as sixty percent 2. The election must be by ballot, if requested by
(60%) of the Board of Directors are Filipinos. any voting stockholder or member.
Corporations that are sixty percent (60%) owned by 3. The total number of votes cast by him must not
Filipinos can engage in the business of exploration, exceed the number of shares owned by him as
development and utilization of natural resources shown in the books of the corporation
(1987 Constitution, Art. XII, Sec. 2). The election of multiplied by the whole number of directors to
aliens as members of the Board of Directors be elected.
engaging in partially-nationalized activities is 4. No delinquent stock shall vote or be voted for.
allowed in proportion to their allowable 5. A stockholder cannot be deprived in the articles
participation or share in the capital of such entities of incorporation or in the by-laws of his statutory
(Anti-Dummy Law, Sec. 2-A). Nothing in the facts right to use any of the methods of voting in the
shows that more than forty percent (40%) of the election of directors.
Board of Directors are foreigners. 6. The candidates receiving the highest number of
votes shall be declared elected (CC, Sec. 24 [RCC, Sec
Q: X is a Filipino immigrant residing in 23]).
Sacramento, California. Y is a Filipino residing in
Quezon City. Z is a resident alien residing in Reportorial requirement
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and Within 30 days after the election of directors,
60% owned by Filipinos, with T as authorized trustees and officers of the corporation, the
representative. CCC Corporation is a foreign secretary or any other officer of the corporation,
corporation registered with the Philippines SEC, shall submit to the Commission, the names,
KKK Corporation is a domestic corporation shareholdings, and residence addresses of the
(100%) Filipino owned. S is a Filipino, 16 years directors, trustees and officers elected.

2019 GOLDEN NOTES
Mercantile Law
Permanent representation is not allowed in the elected as a director at the stockholders’ meeting.
BOD Only the candidates receiving the highest number of
The board of directors of corporations must be votes shall be declared elected.
elected from among the stockholders or
members directors every year. Estoppel does not set METHODS OF VOTING
in to legitimize what is wrongful (Grace Christian
High School v. CA, G.R. No. 108905, October 23, 1997). Different methods of voting
Jurisdiction over election contests in stock and 1. Straight voting – every stockholdermay vote
non-stock corporations such number of shares for as many persons as
there are directors to be elected.
As amended by R.A. 8799 (The Securities Regulation 2. Cumulative voting for one candidate – a
Code), the jurisdiction of the SEC under Sec. 5 P.D. stockholder is allowed to concentrate his votes
No. 902‐A (SEC Reorganization Act) is now and give one candidate, as many votes as the
transferred to Courts of General Jurisdiction number of directors to be elected multiplied by
(Regional Trial Court). Thus, RTC now has the number of his shares shall equal.
jurisdiction over election contest. 3. Cumulative voting by distribution – a
stockholder may cumulate his shares by
Q: In case where there are 2 lists of BOD multiplying the number of his shares by the
submitted to SEC, which one is controlling? number of directors to be elected and distribute
the same among as many candidates as he shall
A: It is the list of directors in the latest general see fit.
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA, Cumulative voting in stock v nonstock
G.R. No. 96551, Nov. 4, 1996).
Cumulative voting in case of non-stock corporations
Q: At the annual meeting of ABC Corporation for is allowed only if it is provided in the AOI. The
the election of five directors as provided for in members of non-stock corporations may cast as
its articles of incorporation, A, B, C, D, E, F and G many votes as there are trustees to be elected but
were nominated. A, B, C, D and E received the may cast not more than one vote for one candidate.
highest number of votes and were proclaimed Cumulative voting is mandatory in stock
elected. F received ten votes less than E. corporations to protect the rights of minority
stockholders
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the NON-HOLDING OF ELECTIONS
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed Report
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation Within 30 days from the date of the scheduled of
Code provides that directors “shall hold office election. The report shall specify a new date for the
for 1 year and until their successors are elected election, which shall not be later than 60 days from
and qualified.” On the other hand, F claimed that the scheduled date (Sec 25, RCC)
since he would have been elected as a director
had it not been for E’s nomination and election, Summary order of Commission
then he (F) should now be considered a director If:
as he had acquired all the shares of E. Decide (1) No new date has been designated; or
with reasons. (1984 Bar) (2) If the rescheduled election is likewise not
held;
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the The Commission, may, upon the application of the
transfer of all his shares to F in the books of the stockholder, member, director, or trustee, and after
corporation. Every director must own at least one verification of the unjustified non-holding of the
share of the capital stock of the corporation of which election, summarily order that an election be held.
he is a director, which share shall stand in his name
on the books of the corporation. Any director who The Commission shall have power the power to
ceases to be the owner of at least 1 share of the issue orders as may be appropriate , including:
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s (1) Orders directing the issuance of a notice
claims are without merit since he was not duly stating the time and place of election;

(2) The designated presiding officer; and 1. It must take place either at a regular meeting or
(3) The record date or dates for the special meeting of the stockholders or members
determination fo stockholders or members called for the purpose;
entitled to vote (Sec 25, RCC).
A special meeting for the purpose of removing
QUORUM directors or trustees may be called by:
Quorum required in a stock or non-stock (1) The secretary, on order of the president; or
corporation (2) The secretary, upon written demand of the
stockholders representing or holding at
Unless otherwise provided for in the by-laws, a least a MAJORITY of the capital stock or
quorum shall consist of the stockholders MAJORITY of the members entitled to vote;
representing a majority of the outstanding capital
stock entitled to vote or a majority of the members 2. Previous notice to the stockholders or members
in the case of non-stock corporations (CC, Sec. 52). of the intention to remove a director;and
3. A vote of the stockholders representing 2/3 of
When the stock and transfer book is inaccurate outstanding capital stock or 2/3 of members.
and deficient, it cannot be the sole basis of the
quorum. The AOI may be used as the basis of the Remedy for refusal to call a meeting
quorum.
If there is:
To base the computation of quorum solely on the (1) No secretary; or
obviously deficient, if not inaccurate stock and (2) If the secretary, despite demand, fails or
transfer book, and completely disregarding the refuses to call the special meeting or to give
issued and outstanding shares as indicated in the notice thereof
articles of incorporation would work injustice to the
owners and/or successors in interest of the said The stockholder or member signing the demand
shares. This case is one instance where resort to may call for the meeting by directly addressing the
documents other than the stock and transfer books stockholders or members
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the New Power of SEC under the Revised
quorum as it does not reflect the totality of shares Corporation Code (Sec 27, RCC)
which have been subscribed, more so when the
articles of incorporation show a significantly larger The Commission shall, motu propio or upon verified
amount of shares issued and outstanding as complaint, and after due notice and hearing, order
compared to that listed in the stock and transfer the removal of a director or trustee elected despited
book (Lanuza, et al. v. CA, et al., G.R. No. 131394, the disqualification or whose disqualification arose
March 28, 2005). is discovered subsequent to an election.
REMOVAL NOTE: The removal of a disqualified director shall

be without prejudice to other sanctions that the
Power to remove directors or trustees Commission may impose on the board of directors
or trustees who, with knowledge of the
The power to remove belongs to the stockholders disqualification, failed to remove such director or
exclusively (Sec. 28, CC). trustee.
GR: Removal may be with or without cause Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
XPN: If the director was elected by the minority, of the directors want him removed and his
there must be cause for removal because the shares be sold at auction, so he can no longer
minority may not be deprived of the right to participate even in the stockholder’s meetings.
representation to which they may be entitled under Henry approaches you for advice on whether he
Sec. 24 of the Code (Sec. 28, CC). can be removed as board of director and
stockholder without cause. What is your advice?
NOTE: The right of representation referred to is the Explain “amotion” and the procedure in
right to cumulative voting for one candidate under removing a director. (2016 Bar)
Sec. 24 of the Code.
A: Henry cannot be removed by his fellow directors.
Requisites for removal of directors or trustees The power to remove belongs to the stocjholders.

2019 GOLDEN NOTES
Mercantile Law
He can only be removed by the stockholders owning the remaining directors constituting a quorum is
at least 2/3 of the outstanding capital stock in a merely permissive. Corporations may choose how
meeting called for that purpose. The removal may vacancies in their boards may be filled up, either by
be with or without cause except that in this case, the the remaining directors or trustees constituting a
removal must be with cause because it is intended quorum or by all stockholders or members.
to deprive the minority of the right of
representation. However, if the by-laws prescribe the specific mode
of filling up existing vacancies, the provisions of the
Amotion is the premature ousting of a director or by-laws should be followed (De Leon, supra).
officer from his post in the corporation.
Duration of the term of a replacement director
Q: In 1999, Corporation A passed a board
resolution removing X from his position as A director elected to fill vacancy shall serve the
manager of said corporation. The by‐laws of A unexpired term of the predecessor in office (CC, Sec.
corporation provide that the officers are the 29).
president, vice‐president, treasurer and
secretary. Upon complaint filed with the SEC, it Filling-up a vacancy caused by resignation of a
held that a manager could be removed by mere director in a hold-over position
resolution of the board of directors. On motion
for reconsideration, X alleged that he could only The vacancy caused by resignation of a director in a
be removed by the affirmative vote of the hold-over position can only be filled up by the
stockholders representing 2/3 of the stockholders or members, for the cause of vacancy
outstanding capital stock. Is X's contention is not resignation but by expiration of term because
legally tenable. Why? (2001 Bar) the hold-over period is not a part of the director’s
original term of office, nor is it a new term (De Leon,
A: N0. Stockholders' approval is necessary only for supra).
the removal of the members of the Board. For the
removal of a corporate officer or employee, the vote Emergency Board (Sec 28, RCC)
of the Board of Directors is sufficient for the
purpose. When to call for an Emergency Board
When the vancacy prevents the remaining directors
FILLING OF VACANCIES from constituting a quorum and emergency action
is required to prevent grave, substantial, and
Ways of filling up the vacancies in the board irreparable loss or damage to the corporation
1. Vacancies to be filled up by stockholders or Who who fill the vacancy

members: (ERORI) It may be temporarily filled from among the officers
a. Expiration of term; of the corporation
b. Removal;
c. Grounds Other than removal or expiration Voting requirement
of term, where the remaining directors do He will be elected by a UNANIMOUS vote of the
not constitute a quorum for the purpose of remaining directors or trustees
filling the vacancy;
d. If the vacancy may be filled by the Limitations and Cessation
remaining directors or trustees but the It shall be limited to the emergency action necessary
board Refers the matter to stockholders or and term shall cease within:
members; or (a) Reasonable time from the termination of
e. Increase in the number of directors results the emergency action; or
to vacancy. (b) Upon election of the replacement director
or trustee,
2. Vacancies filled up by members of the board Whichever comes earlier
-If still constituting a quorum, at least a majority
of the members are empowered to fill any Reportorial requirement
vacancy occurring in the board other than by The corporation must notify the Commission within
removal by the stockholders or members or by 3 DAYS from the creation of the emergency board,
expiration of term (CC, Sec. 29. RCC, Sec 28). stating therein the reason for its creation
NOTE: The phrase “may be filled” in Sec. 29 Period of election to fill a vacancy
indicates that the filling of vacancies in the board by

Grounds: not change the nature of the vacancy; the vacancy
(1) Tem expiration- No later than the day of such due to the expiration of Makalintal’s term had been
expiration at a meeting called for the purpose; created long before his resignation (Valle Verde
(2) Result of removal by the stockholders or Country Club, Inc., et al., v. Africa, G.R. No. 151969,
members – on the same day the meeting authorizing September 4, 2009; 2013 Bar).
the removal and this fact must be stated in the
agenda and motice of said meeting The derivative suit was improper. In a derivative
(3) In all other cases -45 days from the time the suit, the corporation, not the individual stockholder,
vacancy arose (Sec 28, RCC) must be the aggrieved party and that the
stockholder is suing on behalf of the corporation.
Q: Dinglasan and Makalintal were elected as What stockholder X is asserting is his individual
new members of the board of directors of Valle right as a stockholder to elect the two directors. The
Verde Country Club, Inc. (VVCC). In the case partake more of an election contest under the
succeeding years however, the requisite rules on intra-corporate controversy (Legaspi
quorum for the holding of the stockholders’ Towers 300, Inc. v. Muer, G.R. No. 170783, June 18,
meeting could not be obtained. Consequently, 2012).
Dinglasan and Makalintal continued to serve in
the VVCC Board in a hold-over capacity. COMPENSATION
Subsequently, Dinglasan resigned from his
position as member of the VVCC Board. In a Compensation of directors/trustees
meeting, the remaining directors, still
constituting a quorum of VVCC’s nine-member GR: Directors, in their capacity as such, are not
board, elected Eric Roxas to fill in the vacancy entitled to receive any compensation except for
created by the resignation of Dinglasan. A year reasonable per diems.
later, Makalintal also resigned as member of the
VVCC Board. He was replaced by Jose Ramirez, NOTE: Directors or trustees shall not participate in
who was elected by the remaining members of the determination of their own per dierms or
the VVCC Board. Victor Africa, a member of compensation (Sec 29, RCC)
VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the XPNs:
SEC and the RTC. May the remaining directors of 1. When their compensation is fixed in the by-
the corporation’s Board, still constituting a laws;
quorum, elect another director to fill in a 2. When granted by the vote of stockholders
vacancy caused by the resignation of a hold-over representing at least a majority of the
director? outstanding capital stock at a regular or special
meeting; or
A: NO. The remaining directors of the corporation’s 3. If they perform services other than as directors
Board, even if still constituting a quorum, cannot of the corporation (i.e. where directors are also
elect another director to fill in a vacancy caused by corporate officers or employees of the
the resignation of a hold-over director. Section 23 of corporation) (Sec. 30, CC).
the CC means that the term of the members of the
board of directors shall be only for one year; their NOTE: Per diems are paid attendance in board
term expires one year after election to the meetings. Other benefits and emoluments of
office. The holdover period – that time from the directors fall within the term “compensation.”
lapse of one year from a member’s election to the
Board and until his successor’s election and BOD is not prohibited from securing an
qualification – is not part of the director’s insurance policy for the life of its members and
original term of office, nor is it a new term; the making the directors the beneficiaries instead of
holdover period, however, constitutes part of the corporation
his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a The Insurance Code does not contain any
holdover capacity, it implies that the office has a prohibition as to such. However, the premium paid
fixed term, which has expired, and the incumbent is thereon is analogous to a continuing bonus and gift
holding the succeeding term. With the expiration of and thus falls within the context of additional
Makalintal’s term of office, a vacancy resulted compensation. A corporation may not be used by its
which, by the terms of Section 29 of the Corporation officers or stockholders as a means of diverting
Code, must be filled by the stockholders of VVCC in profits or proceeds to the payment of premium on
a regular or special meeting called for the insurance policies to the enrichment of its
purpose. His resignation as a hold-over director did

2019 GOLDEN NOTES
Mercantile Law
beneficiaries at the expense of, or to the detriment compensation in favor of the board members of
of, its creditors (SEC Opinion, December 8, 1987). WIT. They maintain that this grant of
compensation is proscribed under Section 30 of
Limitation on the amount of compensation to be the Corporation Code. Is the resolution granting
received by the directors Salas, et al., compensation for services rendered
as officers of WIT valid?
In no case shall the total yearly compensation of
directors exceed 10% of the net income before A: YES. The resolution is valid. There is no argument
income tax of the corporation during the preceding that directors or trustees, as the case may be, are not
year (CC, Sec. 30). entitled to salary or other compensation when they
perform nothing more than the usual and ordinary
Remedy of the stockholders if there was no duties of their office. This rule is founded upon a
proper authorization for the grant of presumption that directors /trustees render service
compensation to the directors gratuitously and that the return upon their shares
adequately furnishes the motives for service,
Compensation to the directors of a corporation without compensation. Under Section 30, there are
without proper authorization in the by-laws or by only two (2) ways by which members of the board
the vote of the stockholders may be recovered in a can be granted compensation apart from reasonable
stockholders’ suit (De Leon, supra). per diems: (1) when there is a provision in the by-
laws fixing their compensation; and (2) when the
Reportorial requirement for corporations stockholders representing a majority of the
vested with public interest outstanding capital stock at a regular or special
Corporations vested with public interest shall stockholders’ meeting agree to give it to them. This
submit to their shareholders and the Commission, proscription, however, against granting
an annual report of the total compensation of each compensation to directors/trustees of a
of their directors or trustees (RCC, Sec 29) corporation is not a sweeping rule. Section 30 states
that the directors shall not receive any
Q: Is the general rule that directors are not compensation, as such directors. The phrase “as
entitled to compensation applicable to such directors” is not without significance for it
corporate officers, who are not directors? delimits the scope of the prohibition to
compensation given to them for services performed
A: NO. Such officers, not being directors and having purely in their capacity as directors or trustees. The
no control over the funds and property of the unambiguous implication is that members of the
corporation, even though they may be stockholders, board may receive compensation, in addition to
do not occupy the relation of trustees to the reasonable per diems, when they render services to
corporation (De Leon, supra, citing Cheeney vs. the corporation in a capacity other than as
Lafayette, BOR Co., 61 III. 570). directors/trustees. In the case at bench, the
resolution granted monthly compensation to Salas,
For Services other than as directors/Trustees: et al., not in their capacity as members of the board,
but rather as officers of the corporation, more
Illustrative case: particularly as Chairman, Vice-Chairman, Treasurer
Q: Ricardo T. Salas, et al., are the majority and and Secretary of Western Institute of Technology
controlling members of the Board of Trustees of (Western Institute of Technology, Inc., v. Salas, et al.,
Western Institute of Technology, Inc. (WIT), a G.R. No. 113032, August 21, 1997).
stock corporation engaged in the operation of an
educational institution. According to Homero FIDUCIARY DUTIES AND LIABILITY RULES
Villasis, et al., the minority stockholders of WIT,
a special board meeting was held whereby the Nature of the obligation of the directors to the
the Board of Trustees passed resolution corporation
granting monthly compensation to Salas, et al.,
as corporate officers. Villasis, et al., filed an The directors’ character is that of a fiduciary insofar
affidavit-complaint against Salas, et al., for as the corporation and the stockholders as a body
falsification of a public document and are concerned. As agents entrusted with the
estafa. Villasis, et al., would like to hold Salas, et management of the corporation for the collective
al., civilly liable despite their acquittal in the benefit of the stockholders, they occupy a fiduciary
criminal cases. They base their claim on the relation, and in this sense the relation is one of trust.
alleged illegal issuance by Salas, et al., of the
resolution ordering the disbursement of The ordinary trust relationship of directors of a
corporate funds representing the retroactive corporation and stockholders springs from the fact

that directors have the control and guidance of In the following instances, the directors/ trustees
corporate affairs and property and hence of the may be held personally liable for damages:
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of 1. When they willfully and knowingly vote for or
the corporate interests and are ultimately the only assent to patently unlawful acts of the
beneficiaries thereof (Gokongwei v. SEC, supra). corporation;
2. When they are guilty of gross negligence or bad
Majority Rule Doctrine in the dealings of faith in directing the affairs of the corporation;
directors with stockholders
NOTE: Bad faith or negligence is a question of
The majority rule states that a director has a fact. Bad faith does not simply mean bad
fiduciary duty with respect to the corporation as an judgment or negligence. It imparts a dishonest
entity, and notto the stockholders as individuals. purpose or some moral obliquity and conscious
Consequently, he is subject to the duty to disclose all doing of wrong. It means breach of a known
material facts only to the corporation and not to the duty through some motive or interest or ill-will;
stockholders (American T. Co. v. California etc. Ins. it partakes of the nature of fraud (Ford Phils.,
Co., 15 Cal.2d 42, 1940). Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).
Special Fact Doctrine 3. When they acquire any personal or pecuniary

interest in conflict with their duty as such
The special fact doctrine is an exception to the directors or trustees (CC, Sec. 31);
majority rule doctrine. It states that where special 4. When they consent to the issuance of watered
circumstances or facts are present which make it stocks or who, having knowledge thereof, does
inequitable for the director to withhold information not forthwith file with the corporate secretary
from the stockholder, the duty to disclose arises, his written objection thereto (CC, Sec. 65);
and concealment is fraud (Ibid). 5. When they are made, by a specific provision of
law, to personally answer for their corporate
Instances where the Special Fact Doctrine has action (CC, Sec. 144; PD 115, Sec.13; Uichico v.
been applied NLRC, G.R. No. 121434, June 2, 1997);
6. When they agree to hold themselves personally
In foreign US jurisprudence, the special fact doctrine and solidarily liable with the corporation
was applied in the following cases: (Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
November 7, 1994); or
1. Where a director actively participates in the 7. When the corporate fiction is used to defeat
negotiations for a transfer of the corporate public convenience, justify wrong, protect
property (Strong v. Repide, 213 U.S. 419, 29 S.Ct. fraud, or defend crime (Carag v. NLRC, GR No.
521, 53 L.Ed. 853). 147590, April 2, 2007)
2. Where a director undertakes to speak or
become active in inducing the sale, he must NOTE: When the officers of the corporation
speak fully, frankly, and honestly, and conceal exceeded their authority, their actions are not
nothing to the disadvantage of the selling binding upon the corporation unless ratified by the
stockholder (Poole v. Camden, 79 W. Va. 310). corporation or is estopped from disclaiming them
3. Where a director personally seeks a (Reyes v. RCPI Credit Employees Union, G.R. No.
stockholder for the purpose of buying his 146535, August 18, 2006).
shares without making disclosure of material
facts within his peculiar knowledge and not Q: BF Corporation, in a collection complaint filed
within reach of the stockholders, the against Shangri-La and its Board of Directors,
transaction will be closely scrutinized and relief alleged that Shangri-La induced BF Corporation
may be granted in appropriate instances to continue with the construction of the
(Strong v. Repide, Ibid). buildings using its own funds and credit despite
Shangri-La’s default. It claims that Shangri-La
Liability of the directors/ trustees or officers of misrepresented that it had funds to pay for its
a corporation for their official acts obligations with BF Corporation. The latter
eventually completed the construction of the
GR: The officers of a corporation are not personally buildings. Shangri-La took possession of the
liable for their official acts. same while still owing BF Corporation an
outstanding balance. Shangri-La’s BoD based
XPNs: If it is shown that they exceeded their their defense on the separate personality given
authority. to juridical persons vis-à-vis their directors,

2019 GOLDEN NOTES
Mercantile Law
officers, stockholders, and agents. Since they did Rubber Corp. v. Ang, G.R. No. 185160, July 24,
not sign the arbitration agreement in any 2013, in Divina, 2014).
capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in Q: Rana and Burgos are the President and
accordance with the arbitration agreement. The General Manager of SKILLEX. The latter entered
Arbitral Tribunal rendered a decision, finding into a service contract with Robinsons Land
that BF Corporation failed to prove the existence Corporation. Halfway through the service
of circumstances that render Shangri-La and the contract, Skillex asked the respondents-
other directors solidarily liable. It ruled that employees Seva, et al. to execute individual
Shangri-La’s Board of Directors is not liable for contracts which stipulated that their respective
the contractual obligations of Shangri-La to BF employments shall end at the last day of the
Corporation. year. Skillex and Robinsons no longer extended
their contract of janitorial services.
Are Shangri-La’s directors liable for the Consequently, the Skillex dismissed Seva, et al.
contractual obligations of Shangri-La to BF as they were project employees whose duration
Corporation? of employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
A: NO. Indeed, as petitioners point out, their a complaint for illegal dismissal with the NLRC.
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an Should Rana and Burgos be held solidarily liable
artificial entity created by fiction of law. This means with the corporation for respondents-
that while it is not a person, naturally, the law gives employees’ monetary claims against the
it a distinct personality and treats it as such. A corporation?
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from A: NO. Seva, et al. failed to show the existence of the
other persons including its stockholders, officers, first requisite. They did not specifically allege in
directors, representatives, and other juridical their complaint that Rana and Burgos willfully and
entities. As a general rule, therefore, a corporation’s knowingly assented to petitioner’s patently
representative who did not personally bind himself unlawful act of forcing the respondents to sign the
or herself to an arbitration agreement cannot be dubious employment contracts in exchange for their
forced to participate in arbitration proceedings salaries. The respondents also failed to prove that
made pursuant to an agreement entered into by the Rana and Burgos had been guilty of gross negligence
corporation. He or she is generally not considered a or bad faith in directing the affairs of the
party to that agreement. corporation.
To hold an officer personally liable for the debts of
Requisites before a Director or Officer of a the corporation, and thus pierce the veil of
Corporation can be held personally liable for corporate fiction, it is necessary to clearly and
corporate obligations: convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed
Before a director or officer of a corporation can be (FVR Skills and Services Exponents, Inc. [SKILLEX], et.
held personally liable for corporate obligations, the Al. v. Seva, et. Al., G.R. No. 200857, October 22, 2014).
following requisites must concur:
Liability of a director for termination of
1. The complainant must allege in the complaint employees
that the director or officer assented to patently
unlawful acts of the corporation, or that the Without any evidence of bad faith or malice,
officer was guilty of gross negligence or bad directors may not be held personally liable. Only
faith; and when the termination is done with malice or in bad
2. The complainant must clearly and convincingly faith on the part of the director may the director be
prove such unlawful acts, negligence or bad held solidarily liable with the corporation
faith (Heirs of Fe Tan Uy vs. International (Equitable Banking Corporation vs. NLRC, GR No.
Exchange Bank, G.R. No. 166282, G.R. No. 02467, June 13, 1997; Rolando DS Torres v. Rural
166283, February 13, 2013). Bank of San Juan, Inc., et al., GR No. 184520, March
13, 2013).
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the Q: Jacob and Fernandez are STI officers, the
SC resolution finding the corporation liable former being the President and CEO and the
does not prove bad faith on the part of the latter as the Senior VP. Ico was hired as Faculty
incorporator of the corporation (Polymer Member by STI College Makati, Inc., a wholly-

owned subsidiary of STI. Ico was subsequently difference between the value received at the
promoted as Dean of STI College-Parañaque issuance of the stoch and the par or issued value of
and, thereafter, as COO of STI-Makati. However, the same.
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum NOTE: The prohibition to issue “watered stock”
cancelling her COO assignment, citing the refers only to the original issue of stocks but not
management’s decision to undertake an to a subsequent transfer of such stocks by the
"organizational restructuring" in line with the corporation, for then it would no longer be an
merger, and further ordering Ico to turn over “issue” but a sale thereof (Rochelle Roofing Co v.
her work to one Victoria Luz, who shall function Burley as cited in De Leon, Corporation Code of the
as STI-Makati’s School Administrator. Based on Philippines Annotated).
a report, it was recommended that an
investigation committee be formed to Liability of the director, trustee or officer who
investigate Ico for grave abuse of authority, attempts to acquire or acquires any interest
falsification, gross dishonesty, maligning and adverse to the corporation in respect of any
causing intrigues, and other charges. The LA matter which has been reposed in him in
found Ico to have been illegally, constructively confidence
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the When a director, trustee, or officer attempts to
ruling of the LA. CA affirmed the ruling of the acquire or acquires, in violation of his duty, any
NLRC. interest adverse to the corporation in respect of any
matter which has been reposed in him in
Is Jacob solidarily liable with STI? confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
A: NO. The Court fails to discern any bad faith or as a trustee for the corporation and must account
negligence on the part of respondent Jacob. The for the profits which otherwise would have accrued
principal character that figures prominently in this to the corporation (CC, Sec. 31).
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is NOTE: Private or secret profits obtained must be
guilty of persecuting petitioner. His superior, Jacob, accounted for, even though the transaction on
may have been, for the most part, clueless of what which they are made is advantageous or is not
Fernandez was doing to petitioner. A corporation, harmful to the corporation, or even though the
as a juridical entity, may act only through its director/ trustee or officer acted without intent to
directors, officers and employees. Obligations injure the corporation.
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal Q: Is the above rule changed by the fact that the
liability but the direct responsibility of the agreement whereby the director/ trustee or
corporation they represent. As a rule, they are only officer is to receive a secret profit is made prior
solidarily liable with the corporation for the illegal to the time he becomes as such director/ trustee
termination of services of employees if they acted or officer?
with malice or bad faith (Girly G. Ico v. STI, Inc., et. Al,
G.R. No. 185100, July 9, 2014) A: NO. Even though the agreement to receive a
secret profit is made prior to the time the recipient
Liability of directors for the issuance of watered becomes a director/ trustee or officer, he is still
stocks liable under the above rule (De Leon, supra).
A director or trustee who: Q: Is the above rule changed by the fact that the
(1) Consents to the issuance of stocks for a secret profits were obtained from ultra vires
consideration less than its par or issued transactions?
value;
(2) Consents to the issuance of stocks for a A: NO. Notwithstanding the fact that the profits
consideration other than cash, valued in were derived from transaction ultra vires, the
excess of its fair value; or director/ trustee or officer is still liable (Ibid).
(3) Having knowledge of the inssuficient NOTE: The members of the board of directors who
consideration, does not file a written approved the payment of the cash dividends despite
objection with corporate secretary. the insolvency of the corporation and the
stockholders who received the payment should
Shall be liable to the corporation or its creditors, make good the losses. (Steinberg vs. Velasco 53 Phil
solidarily with the stockholder concerned for the 953)

2019 GOLDEN NOTES
Mercantile Law
Doctrine of Corporate Opportunity Q: Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation formed
Where a director, by virtue of his office, acquires for to run the Patio Cafe, an al fresco coffee shop in
himself a business opportunity which should belong Makati City. In 2000, Patio Cafe began
to the corporation, thereby obtaining profits to the experiencing financial reverses, consequently,
prejudice of such corporation, thereby obtaining some of the checks it issued to its beverage
profits to the prejudice of such corporation, is guilty distributors and employees bounced.
of disloyalty and should, therefore, account to the
latter for all such profits by refunding the same, In October 2003, Schiera informed Malyn that
notwithstanding that he risked his funds in the she found a location for a second cafe in Taguig
venture (CC, Sec. 34). City. Malyn objected because of the dire
financial condition of the corporation.
A director shall refund to the corporation all the
profits he realizes on a business opportunity which: Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and that its
1. The corporation is financially able to development was undertaken by a new
undertake; corporation known as Fort Patio, Inc., where
2. From its nature, is in line with corporations both Schiera and Jaz are directors. Malyn also
business and is of practical advantage to it; and found that Schiera and Jaz, on behalf of Patio
3. The corporation has an interest or a reasonable Investments, had obtained a loan of P500,000,
expectancy (Ibid). from PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by the
The rule shall be applied notwithstanding the fact assets of Patio Investments and personally
that the director risked his own funds in the venture guaranteed by Schiera and Jaz.
(Ibid).
Malyn then filed a corporate derivative action
NOTE: If such act is ratified by a vote of the before the Regional Trial Court of Makati City
stockholders representing at least 2/3 of the against Schiera and Jaz, alleging that the two
outstanding capital stock, the director is excused directors had breached their fiduciary duties by
from remitting the profit realized (Ibid). misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Non-applicability of the Doctrine of Corporate Did Schiera and Jaz violate the principle of
Opportunity corporate opportunity? Explain. (2005 Bar)
The doctrine is not applicable to the following A: YES, Schiera and Jaz violated the Principle of
instances: Corporate Opportunity, because they used Patio
Investments to obtain a loan, mortgaged its assets
1. When a director engages in a distinct enterprise and used the proceeds of the loan to acquire a coffee
of the same general class of business as that shop through a corporation they formed (CC, Sec.
which his corporation is engaged in, so long as 34).
he acts in good faith;
2. The opportunity is one which is not essential to RESPONSIBILITY FOR CRIMES
the corporation’s business, or employment of
company’s resources, or where the director or Where a law requires a corporation to do a
officer embracing opportunity personally is not particular act, failure of which on the part of the
brought into direct competition with the responsible officer to do so constitutes an offense,
corporation; or the responsible officer is criminally liable therefore.
3. When the property or business opportunity has The reason is that a corporation can act through its
ceased to be a “corporate opportunity” and has officers and agents and where the business itself
transformed into a “personal opportunity”. In involves a violation of law all who participate in it
such a case the corporation is definitely no are liable. While the corporation may be fined for
longer able to avail itself of the opportunity, such criminal offense if the law so provides, only the
which may “arise from financial insolvency”, or responsible corporate officer can be imprisoned
from legal restrictions, or from any other factor (People vs. Tan Boon Kong, GR L-35262, March 15,
which prevents it from acting upon the 1930).
opportunity for its own advantage (SEC Opinion,
March 4, 1982). However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable

because being a corporate officer by itself is not Dealings of directors, trustees or officers with
enough to hold him criminally liable. the corporation
Trust Receipts Law makes the officers of a RCC: Prohibition now covers directors’, trustees’ or
corporation criminally liable officers’:
(1) Spouses
The Trust Receipts Law recognizes the impossibility (2) Relatives within the fourth civil degree of
of imposing the penalty of imprisonment on a consanguinity or affinity (RCC, Sec 31)
corporation. Hence, if the entrustee is a corporation,
the law makes the officers or employees or other A contract of the corporation with one or more of its
persons responsible for the offense liable to suffer directors or trustees or officers is voidable, at the
the penalty of imprisonment (Ong v. the Court of option of the corporation unless all the following
Appeals, G.R. No. 119858, April 29, 2003). conditions are present:
Though the entrustee is a corporation, nevertheless, 1. That the presence of such director or trustee in
the law specifically makes the officers, employees or the board meeting in which the contract was
other persons responsible for the offense, without approved was not necessary to constitute a
prejudice to the civil liabilities of such corporation quorum for such meeting;
and or board of directors, officers, or other officials 2. That the vote of such director or trustee was not
or employees responsible for the offense. The necessary for the approval of the contract;
rationale is that such officers or employees are 3. That the contract is fair and reasonable under
vested with the authority and responsibility to the circumstances;
devise means necessary to ensure compliance with 4. In case of corporations vested with public
the law and, if they fail to do so, are held criminally interest, material contracts are approved by at
accountable; thus, they have a responsible share in least 2/3 of the entire membership of the board,
the violations of the law (Ching v. the Secretary of with at least a majority of the independent
Justice, et al., G.R. No. 164317, February 6, 2006). directors voting to approve the material
contract; and
INSIDE INFORMATION 5. That in the case of an officer, the contract with
the officer has been previously authorized by
Any material non-public information about the the board of directors (CC, Sec. 32, par. 1).
issuer of the securities (corporation) or the security
obtained by being an insider, which includes: NOTE: Sec. 32 (RCC, SEC 31) does not require that
(ID-ReGoL) the corporation suffers injury or damage as a result
of the contract.
1. The Issuer;
2. A Director or officer (or any person performing Contract entered with a director or trustee may
similar functions) of, or a person controlling the be ratified by the vote of stockholders
issuer;
3. A person whose Relationship or former A contract of the corporation with one or more of its
relationship to the issuer gives or gave him directors or trustees or officers may be ratified by
access to material information about the issuer the vote of the stockholders representing at least
or the security that is not generally available to 2/3 of the outstanding capital stock or 2/3 of the
the public; members in a meeting called for the purpose.
4. A Government employee, director, or officer of However, the following should concur:
an exchange, clearing agency and/or self-
regulatory organization who has access to 1. Any of the first 2 conditions set forth in the 1st
material information about an issuer or a paragraph of Sec. 32, CC is absent;
security that is not generally available to the 2. Contract is with a director or trustee;
public; or
5. A person who Learns such information by a NOTE: If the contract is with an officer of the
communication from any forgoing insiders corporation, there must be a prior board
(SRC, Sec. 3.8). resolution authorizing the same.
CONTRACTS 3. Full disclosure of the adverse interest of the

directors or trustees involved is made at the
BY SELF-DEALING DIRECTORS stockholders’ meeting called for the purpose;
WITH THE CORPORATION and

2019 GOLDEN NOTES
Mercantile Law
4. The contract is fair and reasonable under the it formed to manage the foreclosed assets, the
circumstances (CC, Sec. 32, par. 2). unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee
NOTE: Hence, in all such instances, the element that and the assignee have interlocking directors. There
the contract is fair and reasonable cannot be is no bad faith on the part of DBP by its creation of
dispensed with for the transaction is to be valid and Nonoc Mining, Maricalum and Island Cement as the
enforceable. creation of these three corporations was necessary
to manage and operate the assets acquired in the
Q: Suppose that the by-laws of X Corporation, a foreclosure sale lest they deteriorate from non-use
mining firm, provides that "The directors shall and lose their value (DBP v. CA, G.R. No. 126200,
be relieved from all liability for any contract August 16, 2001).
entered into by the corporation with any firm in
which the directors may be interested." Thus, EXECUTIVE COMMITTEE
director A acquired claims which overlapped
with X's claims and were necessary for the An executive committee is a body created by the by-
development and operation of X's mining laws and composed of not less than three (3)
properties. Is the by-law provision valid? Why? members of the board which, subject to the
(2001 Bar) statutory limitations, has all the authority of the
board to the extent provided in the board resolution
A: NO. It is in violation of Sec. 32 of the Corporation or by-laws. The committee may act by a majority
Code (RCC, Sec 31). vote of all of its members (CC, Sec. 35).
Q: What happens if director “A” is able to NOTE: An executive committee can only be created
consummate his mining claims over and above by virtue of a provision in the by-laws and that in
that of the corporation’s claims?(2001 Bar) the absence of such by-law provision, the board of
directors cannot simply create or appoint an
A: “A” should account to the corporation for the executive committee to perform some of its
profits which he realized from the transaction. He functions.
grabbed the business opportunity from the In such a case where there was an unauthorized
corporation (CC, Sec. 34). creation of executive committee by the board, the
principle of de facto officers may be applied insofar
BETWEEN CORPORATIONS WITH as third persons are concerned. However, insofar as
INTERLOCKING DIRECTORS the corporation is concerned, the unauthorized act
of appointment of an executive committee may be
Contracts between corporations with subject to Sec. 144, which provides for penalties in
interlocking directors violation of the Code (SEC Opinion, Sept. 27, 1993).
A contract between two or more corporations Non-members of the board may be appointed as
having interlocking directors shall not be members of the executive committee
invalidated on that ground alone. Provided that:
Non-members of the board may be appointed as
1. Contract is not fraudulent; members of the executive committee provided that
2. Contract is fair and reasonable under the there are at least three (3) members of the board
circumstances; and who are members of the committee (SEC Opinion,
3. If the interest of the interlocking director in one Sept. 16, 1986).
corporation or corporations is merely nominal
(not exceeding 20% of the outstanding capital NOTE: A person not a director can be a member of
stock), he shall be subject to the provisions of the executive committee but only in a
Sec. 32 insofar as the latter corporation or recommendatory or advisory capacity.
corporations are concerned. (CC, Sec. 33)
A foreigner is allowed to be a member of the
NOTE: Stockholdings exceeding 20% of the executive committee
outstanding capital stock shall be considered
substantial for purposes of interlocking A foreigner can be allowed representation in the
directors. executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
When a mortgagee bank foreclosed the mortgage on which functions as the board itself. Thus,
the real and personal property of the debtor and membership therein shall be governed by the same
thereafter assigned the properties to a corporation

law/ rules applicable to the BOD as provided in Sec. corporation in between board meetings. The
35 (SEC Opinion, June 3, 1998). Board of Directors appointed the following
members of the Executive Committee: the
Executive committees provided in the Revised President, Sarah L; the Vice-President, Jane L;
Code of Corporate Governance and a third member from the board, Juan Riles.
On December 1, 2013, the Executive Committee,
1. Audit Committee with Sarah L and Jane L present, met and
2. Nomination Committee decided on the following matters:
3. Compensation and Remuneration Committee
1. Purchase of a delivery van for use in the
Limitations on the powers of the executive corporation’s retail business;
committee 2. Declaration and approval of the 13th month
bonus;
The executive committee cannot act on the 3. Purchase of an office condominium unit at
following: the Fort; and
4. Declaration of P10.00 per share cash
1. Matters needing stockholder approval; dividend.
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws; Are the actions of the Executive Committee
4. Amendment or repeal of any resolution of the valid? (2014 Bar)
Board which by its express terms is not
amendable or repealable; and A: NO. All the actions taken by the Executive
5. Cash dividend declaration (CC, Sec. 35) Committee in the problem are not valid. The
Executive Committee was not properly created and,
Quorum required of the executive committee therefore, its acts are invalid. Sec. 35 of the
The quorum requirement for executive committee Corporation Code requires that at least three
is the same as that of the BOD. members of an Executive Committee be directors of
the corporation. In the problem, only Member Sarah
Creation of special Committees L (who is a director as she is the president) and
The Board of directors may create special Member Juan Riles (who is clearly identified in the
committees of temporary of permanent nature and problem as a director) are directors of Soei
determine the members’ term, composition, Corporation. Member Jane L is not identified as a
powers, and responsibilities (RCC, Sec. 34). director. As the Executive Committee in the problem
was not properly created, it could not act at all as the
Decisions of the executive committee are not minimum quorum would be three. As stated earlier,
subject to appeal to the board the Executive Committee lacks one qualified
member.
Decisions of the executive committee are not
subject to appeal to the board. However, if the If the Executive Committee were properly
resolution of the Executive Committee is invalid, i.e. organized and a quorum was present, all the actions
not one of the powers conferred to it, it may be taken by the Executive Committee in the problem,
ratified by the board (SEC Opinion, July 29, 1995). except the declaration of P10.00 per share cash
dividend, would have been valid. The distribution of
Q: Pursuant to its By-Laws, Soei Corporation’s cash dividends to the shareholders may not be
Board of Directors created an Executive delegated by the Board of Directors to the Executive
Committee to manage the affairs of the Committee pursuant to Sec. 35 of the CC.
MEETING
REGULAR SPECIAL
WHEN: The date fixed in the by-laws; or WHEN: At any time deemed necessary or as may be
provided in the bylaws.
If there is no date in the by-laws – shall be held
monthly.
NOTICE REQUIREMENT:
A. State the date, time and place of the meeting;

B. Be sent to every director or trustee
i. Within the period provided in the by- laws.

2019 GOLDEN NOTES
Mercantile Law
ii. In the absence of provision in the by-laws, at least 1 day prior to the scheduled meeting. (2 days
in RCC)
A director or trustee may waive this requirement, either expressly or impliedly.

VENUE:
A. Venue fixed by the by-laws; or

B. If venue is not provided by the by-laws, anywhere in or outside of the Philippines.
Q: Lopez Realty, Inc. issued a Board Resolution Hence, Juanito, as the administrator of Teresita’s
authorizing Arturo, a member of the Board of estate even though not a director, is entitled to vote
Directors of the corporation, to negotiate with on behalf of Teresita’s estate as the administrator
the Tanjanco spouses for the sale of the ½ thereof (Lopez Realty, Inc. et. al. v. Tanjangco, G.R.
shares of Lopez Realty Corporation. Because of No. 154291, November 12, 2014).
this, Arturo and the spouses executed a Deed of
Sale for the shares for Php3.6M. However, Meeting held in the absence of some of the
Asuncion, another Board of Director of the said directors and without any notice given to them
corporation, submitted a letter requesting the is illegal
Board to defer any transaction with Tanjanco as
she was not apprised and given notice of the said It is illegal, and the action at such meeting although
transaction. Despite this, the execution of the by a majority of the directors, is invalid unless:
Deed of Absolute Sale between Arturo and
spouses Tanjanco proceeded. Asuncion then 1. Subsequently ratified or waived, expressly or
filed a complaint for the Annulment of the Deed impliedly, by the absent directors or
of Sale with a prayer for a writ of preliminary 2. Rights have been acquired by innocent third
injuction in the RTC. Asuncion alleges that she persons, as against whom the corporation must
was neither notified nor apprised of the on- be held estopped to set up the failure to observe
going sale of the shares of LRI. Is Asuncion’s formalities (De Leon, supra).
contention correct?
Directors or trustees cannot attend or vote by
A: NO. The general rule is that a corporation, proxy at board meetings
through its board of directors, should act in the
manner and within the formalities, if any, Directors or trustees cannot attend or vote by proxy
prescribed by its charter or by the general law. at board meetings (CC, Sec. 25).
Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by- The members of the BOD are required to exercise
laws, otherwise, any action taken therein may be their judgment and discretion in running the affairs
questioned by any objecting director or of the corporation and they cannot be substituted by
shareholder. However, the actions taken in such a others (SEC Opinion, May 27, 1970).
meeting by the directors or trustees may be ratified
expressly or impliedly. In the present case, the Requisites for a valid tele/videoconferencing
ratification was expressed through the July 30, 1982
Board Resolution. Asuncion claims that the July 30, R.A. 8792, as implemented by SEC Memo. Circular
1982 Board Resolution did not ratify the Board No. 15 on November 30, 2001, provides that:
Resolution dated August 17, 1981 for lack of the
required number of votes because Juanito is not 1. Directors must express their intent on
entitled to vote while Leo voted "no" to the teleconferencing;
ratification of the sale even if the minutes stated 2. Proper identification of those attending; and
otherwise. The Court takes into account that 3. The corporate secretary must safeguard the
majority of the board of directors except for integrity of the meeting by recording it.
Asuncion, had already approved of the sale to the
spouses Tanjangco prior to this meeting. As a NOTE: There is no violation of the Anti-Wire
consequence, the power to ratify the previous Tapping Act (R.A. 4200) because all the parties to
resolutions and actions of the board of directors in the board meeting are aware that all the
this case lies in the stockholders, not in the board of communications are recorded.
directors. It would be absurd to require the board
of directors to ratify their own acts—acts which the The basic types of teleconferencing are:
same directors already approved of beforehand.

1. Video conferencing; Makati, Metro Manila. The by-laws are silent as
2. Computer conferencing; to the place of meeting of the stockholders and
3. Audio conferencing. directors.
Contents of the notice, which should be sent to a. Who shall preside at the meeting of the
every director in case of a directors?
tele/videoconferencing b. Can Ting, a stockholder, who did not attend
the stockholders’ annual meeting in Manila,
The Corporate Secretary shall send out the notices question the validity of the corporate
of the meeting to all directors in accordance with resolutions passed at such meeting?
the manner of giving notice as stated in the c. Can the same stockholder question the
corporate by-laws. validity of the resolutions adopted by the
BOD at the meeting held in Makati? (1993
The notice shall include the following: Bar)
1. Inquiry on whether the director will attend A:

physically or through tele/videoconferencing; a. Section 54 of the Code provides that it is the
2. Contact number/s of the Secretary and office President who shall preside over the directors’
staff whom the director may call to notify and meeting, unless the by-laws provide otherwise.
state whether he shall be physically present or However, in practice, it is the Chairman who
attend through tele/videoconferencing; presides because the President only reports to
3. Agenda of the meeting; and the Chairman. Only in the absence of a
4. All documents to be discussed in the meeting, Chairman can a President preside over
including attachments, shall be numbered and directors’ meetings.
duly marked by the Secretary in such a way that b. NO. Section 51 provides that the annual
all the directors, physically or electronically stockholders’ meeting shall be held in the city
present, can easily follow, refer to the or municipality where the principal office is
documents and participate in the meeting (SEC located. For this purpose, the law also provides
Memo Circ. No. 15, Series of 2001). that Metro Manila is considered a city or
municipality. Since the principal office or
If the director chooses tele/videoconferencing, he business of MIC is Pasig, Metro Manila, the
shall give notice of at least five (5) days prior to the holding of the annual stockholders’ meeting in
scheduled meeting to the Secretary. The latter shall Manila is proper.
be informed of his contact number/s. In the same c. NO. Ting cannot question the validity of
way, the Secretary shall inform the director corporate resolutions passed in the BOD meeting
concerned of the contact number/s he will call to because Section 53 of the Code does not require
join the meeting. The Secretary shall keep the that the meeting must be held within the city or
records of the details, and on the date of the municipality where the principal office of the
scheduled meeting, confirm and NOTE such details corporation is located. The directors’ meeting
as part of the minutes of the meeting (ibid). In the can be held anywhere in or outside the
absence of an arrangement, it is presumed that the Philippines.
director will physically attend the Board meeting
(Ibid). QUORUM
WHO PRESIDES Quorum in board meetings
The president shall preside at all meetings of the GR: Majority of the number of directors or trustees.
directors or trustees as well as of stockholders or
members unless the by-laws provide otherwise (CC, XPN: If AOI or the by-laws provide for a greater
Sec. 54). number (CC, Sec. 25)
Q: Under the articles of incorporation of Manila NOTE: The quorum is the same even if there is
Industrial Corp., its principal place of business vacancy in the board.
shall be in Pasig, Metro Manila. The principal
corporate offices are at Ortigas Center, Pasig, Rule as to the decision of the quorum
Metro Manila, while factory processing leather
products is in Manila. The corporation holds its GR: Every decision of at least a majority of the
annual stockholders’ meeting at the Manila directors or trustees present at a meeting at which
Hotel in Manila and its BOD meeting at a hotel in there is quorum shall be valid as a corporate act.

2019 GOLDEN NOTES
Mercantile Law
XPNs: 1. The existence of a relationship giving access,
directly or indirectly, to information intended
1. The election of officers which shall require the to be available only for a corporate purpose and
vote of a majority of all the members of the not for the personal benefit of anyone; and
board. 2. The inherent unfairness involved when a party
2. No board approval is necessary where there is takes advantage of such information knowing it
custom, usage and practice in the corporation is unavailable to those with whom he is dealing
not requiring prior board approval or where (SEC v. Interport Resources Corporation, G.R.
subsequent approval is sufficient (Board of No. 135808, October 6, 2008).
Liquidators v. Kalaw, G.R. No. L‐18805, August
14, 1967).
STOCKHOLDERS AND MEMBERS
Three out of five directors of the board of directors
present in a special meeting do not constitute a
quorum to validly transact business when its by- A person becomes a shareholder the moment he:
laws requires at least four members to constitute a
quorum. Under Section 25 of the CC, the articles of 1. Enters into a subscription contract with an
incorporation or by-laws may fix a greater number existing corporation (he is a stockholder upon
than the majority of the number of directors to acceptance of the corporation of his offer to
constitute a quorum. Any number less than the subscribe whether the consideration is fully
number provided in the articles or by-laws cannot paid or not);
constitute a quorum; any act therein would not bind 2. Purchase treasury shares from the corporation;
the corporation; all that the attending directors or
could do is to adjourn (Pena vs. CA, G.R. No. 91478, 3. Acquires shares from existing shareholders by
February 7, 1991, in Divina, 2014). sale or any other contract, or acquires shares by
operation of law like succession (Sundiang Sr. &
RULE ON ABSTENTION Aquino, 2009).
Effect of Abstention RIGHTS OF A STOCKHOLDER AND MEMBER
No inference can be drawn in a vote of abstention. 1. Management Right

When a director or trustee abstains, it cannot be a. To attend and vote in person or by proxy at
said that he intended to acquiesce in the action a stockholders’ meetings (CC, Secs. 50, 58);
taken by those who voted affirmatively. Neither, for b. To elect and remove directors (CC, Secs. 24,
that matter, can such inference be drawn from the 28);
abstention that he was abstaining because he was c. To approve certain corporate acts (CC, Sec.
not then ready to make a decision (Lopez v. Ercita, 58);
G.R. No. L-32991, June 29, 1972). d. To adopt and amend or repeal the by-laws
of adopt new by-laws (CC, Secs. 46, 48);
Instances when a director is required to abstain e. To compel the calling of the meetings (CC,
in voting Sec. 50);
f. To enter into a voting trust agreement (CC,
Whenever a director believes he/she has a conflict Sec. 59); and
of interest, the director should abstain from voting g. To have the corporation voluntarily
on the issue and make sure his/her abstention is dissolved (CC, Secs. 118, 119).
noted in the minutes (Robert's Rules, 10th ed.).
The other reason a director might abstain is that 2. Proprietary rights
he/she believes there was insufficient information a. To transfer stock in the corporate book (CC,
for making a decision. Otherwise, directors should Sec. 63);
cast votes on all issues put before them. Failure to b. To receive dividends when declared (CC,
do so could be deemed a breach of their fiduciary Sec. 43);
duties. c. To the issuance of certificate of stock or
other evidence of stock ownership (CC, Sec.
Example where a director needs to abstain 64);
d. To participate in the distribution of
To avoid “Insider Trading”, Insiders are obligated to corporate assets upon dissolution (CC, Sec.
abstain from trading the shares of his 118, 119); and
corporation. This duty to abstain is based on two e. To pre-emption in the issue of shares (CC,
factors: Sec. 39).

3. Remedial rights It is also used to apply to the holder of the authority
a. To inspect corporate books (CC, Sec. 74); or person authorized by an absent stockholder or
b. To recover stock unlawfully sold for member to vote for him at a stockholders’ or
delinquent payment of subscription (CC, members’ meeting.
Sec. 69);
c. To be furnished with most recent financial It also refers to the instrument which evidences the
statements or reports of the corporation’s authority of the agent (De Leon, supra).
operation (CC, Sec. 74, 75);
d. To bring suits (derivative suit, individual NOTE: A proxy is a special form of agency. A proxy
suit, and representative suit); and holder is an agent and as such a fiduciary (De Leon,
e. To demand payment in the exercise of supra).
appraisal right (CC, Secs. 41, 81).
Since a proxy acts for another, he may act as such
DOCTRINE OF EQUALITY OF SHARES although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
Where the articles of incorporation do not provide because his stock has been declared delinquent may
for any distinction of the shares of stock, all shares vote the stocks of his principal which is not
issued by the corporation are presumed to be equal delinquent.
and enjoy the same rights and privileges and are
also subject to the same liabilities (CC, Sec. 6). Purposes of proxies
PARTICIPATION IN MANAGEMENT The purposes and use of proxies are as follows:
Under the CC, stockholders or members periodically 1. Assures the presence of a quorum in meetings
elect the board of directors or trustees, who are of stockholders of large corporations;
charged with the management of the corporation. 2. Enables those who do not wish to attend a
The board, in turn, periodically elects officers to stockholders’/ members’ meeting to protect
carry out management functions on a day-to-day their interest by exercising their right to vote
basis. As owners, though, the stockholders or through a representative; and
members have residual powers over fundamental 3. One of the devices in securing voting control or
and major corporate changes. management control in the corporation (Ibid.).
While stockholders and members (in some Who may be a proxy

instances) are entitled to receive profits, the
management and direction of the corporation are Any person whom the stockholder or member sees
lodged with their representatives and agents -- the fit to represent him.
board of directors or trustees. In other words, acts
of management pertain to the board; and those of NOTE: By-laws restricting the stockholder’s or
ownership, to the stockholders or members. In the member’s right in this respect are void (De Leon,
latter case, the board cannot act alone, but must supra).
seek approval of the stockholders or members (Tan
v. Sycip, G.R. No. 153468, August 17, 2006). Further, same person may act as proxy for one or
several stockholders or members.
PROXY
Duration of proxy
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members 1. Specific proxy – authority granted to the proxy
(Sec. 58, CC). holder to vote only for a particular meeting on
a specific date.
However the right of members to vote by proxy may 2. Continuing proxy – authority granted a proxy to
be denied under the articles of incorporation or by- appear and vote for and in behalf of a
laws of a non-stock corporation (Sec. 89. CC.) shareholder for a continuing period which
should not be more than 5 years at any one
The term “proxy” designates the formal written time. By-laws may provide for a shorter
authority given by the owner or holder of the stock, duration of a continuing proxy.
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise Extent of authority of a proxy
the voting rights of the former.

2019 GOLDEN NOTES
Mercantile Law
1. General proxy – A general discretionary power 4. Voting by members in non-stock corps (CC, Sec.
to attend and vote at an annual meeting, with all 89, par. 2)
the powers the undersigned would possess if
personally present, to vote for directors and all NOTE: In non-stock corporations the right to
ordinary matters that may properly come vote by proxy, or even the right to vote may be
before a regular meeting. denied to members in the articles of
incorporation or the by-laws as long as the
NOTE: A holder of a general proxy has no denial is not discriminatory.
authority to vote for a fundamental change in
the corporate charter or other unusual 5. In considering other matters:
transactions such as merger or consolidation. a. Pledge or mortgage of shares (CC, par. 2,
Sec. 55);
2. Limited proxy – Restrict the authority to vote to b. In all other matters as may be provided in
specified matters only and may direct the the by-laws (CC, Sec. 47[4]);and
manner in which the vote shall be cast (Ibid.). c. In all meetings of stockholders or members
(CC, Sec. 58).
Requirements of a valid proxy
Power to appoint a proxy is a personal right
1. Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral The right to vote is inseparable from the right of
proxies are NOT valid; ownership of stock. The appointment of proxy is,
2. The proxy shall be filed before the scheduled therefore, purely personal and to be valid, a proxy to
meeting with the corporate secretary; vote stock must have been given by the person who
3. Unless otherwise provided (continuing in is the legal owner of the stock entitled to vote the
nature) in the proxy, it shall be valid only for the same at the time it is be voted (SEC Opinion, Dec. 3,
meeting for which it is intended. The authority 1993, citing 5 Fletcher, Sec. 2053).
may be general or limited; and
4. No proxy shall be valid and effective for a period Unless the stockholder or member who executed a
longer than 5 years at any one time (CC, Sec. 58, proxy gives his consent in writing, a designated
as amended by SRC, Sec. 20). proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
Instances when the right to vote by proxy may proxy in case of non-attendance of the other
be exercised designated proxy (De Leon, supra).
1. Election of the BOD/BOT (CC, Sec. 24) Revocation of proxy
NOTE: When proxies are solicited in relation to A proxy may be revoked in writing, orally or by
the election of corporate directors, the resulting conduct.
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, GR: One who has given a proxy the right to vote may
should be properly seen as an election revoke the same at anytime.
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of XPN: Said proxy is coupled with interest, even if it
Section 5.2 of the SRC in relation to Section 5(c) may appear by its terms to be revocable (De Leon,
of Presidential Decree No. 902-A. From the supra).
language of Section 5(c) of Presidential Decree
No. 902-A, it is indubitable that controversies as Last proxy given revokes all previous proxies (SEC
to the qualification of voting shares, or the Opinion, October 14, 1991).
validity of votes cast in favor of a candidate for
election to the board of directors are properly SEC may pass upon the validity of the issuance
cognizable and adjudicable by the regular and use of proxies
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R. PD 902-A empowers the SEC, among others, “to pass
No. 183905, April 6, 2009) upon the validity of the issuance and use of proxies
and voting trust agreements for absent
2. Voting in case of joint ownership of stock (CC, stockholders or members” (Sec. 6[g]).
Sec. 56)
3. Voting by trustee under VTA (CC, Sec. 59, last Procedural Matters Relating to Proxies
par.)

1. “Proxy Solicitation” involves the securing and 3. To enable the owners of the majority of the
submission of proxies, while “Proxy Validation” stock of the corporation to control the
concerns the validation of such secured and corporation.
submitted proxies; 4. To vest and retain the management of the
2. The SEC’s power to pass upon the validity of corporation in the persons originally promoting
proxies in relation to election controversies has it.
effectively been withdrawn, tied as it is to its 5. To prevent a rival concern from acquiring
abrogated jurisdictional powers and has been control of the corporation.
transferred to the RTC Special Commercial 6. To carry out a proposed sale of the
Courts pursuant to the terms of Sec. 5.2 of the corporation’s assets and to facilitate its
Securities Regulation Code; dissolution.
3. However, although an intra-corporate 7. To enable two holding companies to operate
controversy may animate a disgruntled jointly a corporation controlled by them.
shareholder to complain to the SEC a 8. To effect a plan for reorganization of a
corporations violations of SEC rules and corporation in financial difficulty or in
regulations, but that motive alone should not be bankruptcy proceedings.
sufficient to deprive the SEC of its investigatory 9. To aid a financially embarrassed corporation to
and regulatory powers, especially so since such obtain a loan and protect its creditors (De Leon,
powers are exercisable on a motu proprio basis. supra).
The fact that the jurisdiction of the regular courts Procedural requirements and limitations
under Section 5(c) is confined to the voting on imposed on VTA’s
election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that 1. The agreement must be in writing and
the power of the SEC to regulate proxies remains notarized and specify the terms and conditions
extant and could very well be exercised when thereof.
stockholders vote on matters other than the 2. A certified copy of such agreement shall be filed
election of directors (GSIS v. CA, G.R. No. 183905, with the corporation and with the SEC,
April 16, 2009). otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA
Note: It must be noted however that directors or shall be cancelled.
trustees cannot vote by proxy at board meetings. 4. A new certificate shall be issued in the name of
(Par.3, Sec. 5, CC) the trustee/s stating that they are issued
pursuant to the VTA.
VOTING TRUST 5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said
A voting trust agreement (VTA) is an agreement VTA.
whereby one or more stockholders transfer their 6. The trustee/s shall execute and deliver to the
shares of stocks to a trustee, who thereby acquires transferors voting trust certificates, which shall
for a period of time the voting rights (and/or any be transferable in the same manner and with
other specific rights) over such shares; and in the same effect as certificates of stock.
return, trust certificates are given to the 7. GR: No VTA shall be entered into for a period
stockholder/s, which are transferable like stock exceeding 5 years at any one time (i.e., for every
certificates, subject, to the trust agreement. voting trust)
Note: The voting trust agreement filed with the XPN: In case of a voting trust specifically
requiring a longer period as a condition in a
Principal purpose: acquire control of the loan agreement, the period may exceed 5 years
corporation. but shall automatically expire upon full
payment of the loan.
Other purposes of a VTA
8. No VTA shall be entered into for the purpose of
1. VTA makes possible a unified control of the circumventing the law against monopolies and
affairs of the corporation and a consistent illegal combinations in restraint of trade.
policy by binding stockholders to vote as a unit. 9. The agreement must not be used for purposes
2. To assure continuity of policy and management of fraud (CC, Sec. 59).
especially of a new corporation desirous of
attracting investors. NOTE: Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically

2019 GOLDEN NOTES
Mercantile Law
expire at the end of the agreed period, and the includes the right to receive dividends (Lee v. CA,
voting trust certificates as well as the certificates of G.R. No. 93695, February 4, 1992).
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of Note: The voting trust agreement filed with the
stock shall be reissued in the name of the corporation shall be subject to examination by any
transferors (CC, Sec. 59). stockholder in the same manner as any other
corporate book or record. Both the transferor and
Effect of a voting trust agreement with respect to the trustee may exercise the right of inspection of all
the rights of the trustor and the trustee corporate books and records (Villanueva,
Commercial Law Reviewer, p. 741, 2017.
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement. Trustor has the right to terminate voting trust
agreement when the trustee has committed a
And thus entitled to the right to vote and the right to breach of trust (Everett v. Asia Banking Corp., G.R.
be elected in the board of directors while the No. L-25241, November 3, 1926).
trustor-stockholder has the beneficial title which
Voting trust agreement vs. Proxy
VOTING TRUST PROXY

If validly executed, VTA is intended to be A proxy, unless coupled with interest, is revocable at
irrevocable for a definite and limited period of time. anytime.
Trustee acquires legal title to the shares of the
Proxy has no legal title to the shares of the principal
transferring stockholder
Right to vote as well as other rights may be given
except the right to receive dividends. The trustee Only right to vote is given. The proxy must vote in
may vote in person or by proxy unless the person.
agreement provides otherwise
The agreement must be notarized Proxy need not be notarized
Trustee is not limited to act at any particular Proxy can only act at a specified stockholder’s meeting
meeting (if not continuing)
The stock certificate shall be cancelled and a new
one in the name of the trustee shall be issued stating No cancellation of the certificate shall be made
that they are issued pursuant to a VTA.
A trustee can vote and exercise all the rights of the A proxy can only vote in the absence of the owner of the
stockholder even when the latter is present. stocks
An agreement must not exceed 5 years at any one
A proxy is usually of shorter duration although under
time except when the same is made a condition of a
Sec. 58 it cannot exceed 5 years at any one time
loan.
Governed by the law on trust Governed by the law on agency
A proxy does not have a right of inspection of corporate
A trustee has the right to inspect corporate books.
books.
Pooling agreement e.g. Shareholders A,B,C,D,E, hold 50% of the

outstanding capital stock, entered into a pooling
Pooling or voting agreements are agreements by agreement to vote for F as a member of the board of
which two or more stockholders agree that their director.
shares shall be voted as a unit. They are usually Validity of pooling agreements
concerned with the election of directors to gain
control of the management. The parties remain the Pooling agreements are valid as long as they do not
legal owners of their stocks with the right to vote limit the discretion of the BOD in the management
them (De Leon). of corporate affairs or work any fraud against
stockholders not party to the contract.
NOTE: This does not involve a transfer of stocks but
is merely a private agreement (CC, Sec. 100). Test: the validity and legality of such pooling
agreements depend upon the objects sought to be
attained and the acts which are done under them,

and the other circumstances. There is some of all its assets and properties, including the
authority for holding pooling agreements to be management and operation of the company,
invalid if the consideration for entering into the claiming that under the Voting Trust Agreement,
same gives a private benefit to the stockholder. the bank was constituted as trustee of the
management and operations of the Company. Is
Pooling agreement vs.Voting Trust Agreement the company correct? (1992 Bar)
In Pooling Agreement, the stockholders themselves A: NO. The company’s demand does not tally with
exercise their right to vote. On the other hand, the the concept of a VTA because such agreement
trustees are the ones who exercise the right to vote merely conveys to the trustee the right to vote the
under the Voting Trust Agreement. shares of the grantor. The consequence of the
foreclosure of the mortgaged properties would not
Q: A distressed corporation executed a VTA for a be in consonance with the VTA and its effects
period of three years over 60% of its
outstanding paid up shares in favor of a bank to CASES WHEN STOCKHOLDERS’ ACTION IS
which it was indebted, naming the the Bank as REQUIRED
trustee. The Company mortgaged all its
properties to the Bank.The Bank foreclosed the Under Section 6 of the Corporation Code, each share
mortgaged properties, and as the highest of stock is entitled to vote, unless otherwise
bidder, acquired said properties and assets of provided in the articles of incorporation or declared
the Company. delinquent under Section 67 of the Corporation
Code (Tan v. Sycip, G.R. No. 153468, August 17, 2006).
The three-year period having expired, the
company demanded the turn-over and transfer
Corporate powers exercised jointly by the BOD and stockholders (I.4PA.2G.E2-SMAV)
VOTE REQUIREMENT
CORPORATE ACT
BOARD OF DIRECTORS STOCKHOLDERS
GR: Majority vote of the outstanding capital stock
Amendments, repeal, or
Majority vote of the BOD
adoption of new by-laws
XPN: If delegated by the stockholders to the board
GR: Vote of the majority of the outstanding shares
of stock or members of both the managing and the
managed corporation.
XPN: The vote required for the managed

corporation is not merely majority but 2/3 of the
outstanding capital stock in cases where:
1) A stockholder or stockholders representing

Entering into Majority of the quorum of
the same interest of both the managing and
management contract the BOD
the managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to vote of
the managing corporation; or
2) Majority of the members of the board of
directors of the managing corporation also
constitute a majority of the members of the
board of directors of the managed
corporation.
Issuance of stock Majority of the quorum of Vote representing 2/3 of the outstanding capital
dividends the BOD stock
Amendment to articles of Vote representing 2/3 of the outstanding capital
incorporation stock

2019 GOLDEN NOTES
MERCANTILE LAW
Grant of compensation to
Approval of the Board Majority vote of the outstanding capital stock
directors
Extending or shortening Vote representing 2/3 of the outstanding capital
the corporate term stock
Increase or decrease of Vote representing 2/3 of the outstanding capital
capital stock stock
To incur, create, or
Vote representing 2/3 of the outstanding capital
increase bonded Majority vote of the BOD
stock
indebtedness
Deny Pre-emptive Right Vote representing 2/3 of the outstanding capital
(CC, Sec. 39) stock
Investment of corporate
funds in another
corporation or business or Vote representing 2/3 of the outstanding capital
for any other purpose stock
other than the primary
purpose
The sale or other
disposition of all or Vote representing 2/3 of the outstanding capital
Majority vote of the board
substantially all of the stock
corporate assets
Merger or consolidation Majority vote of the BOD
stock
Voluntary dissolution Majority vote of the BOD
stock
To adopt a plan of
Majority vote of the
distribution of assets of a 2/3 of the members having voting rights
Trustees
Corporate powers exercised solely by the stockholders
CORPORATE ACT APPROVAL OF STOCKHOLDERS

Election of directors or trustees; filling up
of vacancies by the stockholders due to Candidates receiving the highest number of votes from the
the expiration of term, removal from outstanding capital stock or members entitled to vote (plurality,
office or increase in the number of board NOT majority)
seats
Plurality vote of the BOD listed in the AOI, not merely those
To elect officers of the corporation
present constituting a quorum
Majority of the quorum of the BOD if authorized by the AOI or in
Fixing the issued price of no-par value
the absence of such authority, by a majority of the outstanding
shares
capital stock
Declaration of cash and other dividends
Majority of the quorum of the board
other than stock dividends
To adopt by laws Majority of the outstanding capital stock or of the members
To revoke the power delegated to the
BOD to amend or repeal the by-laws or Majority of the outstanding capital stock or of the members
adopt new by laws
To call a special meeting to remove Majority of the outstanding capital stock or of the members
directors or trustees entitled to vote
Vote representing 2/3 of the outstanding capital stock or of
Removal of directors
members entitled to vote
Delegation of the power to amend by-
Vote representing 2/3 of the outstanding capital stock
laws to the board of directors
Ratification of corporate contract with a
director Vote representing 2/3 of the outstanding capital stock

To delegate to the BOD the power to
amend or repeal the by-laws or adopt 2/3 of the outstanding capital stock or of the members
new by laws

2019 GOLDEN NOTES
MERCANTILE LAW
PROPRIETARY RIGHTS A record date is the date fixed in the
resolution declaring dividends, when the
The following are the proprietary rights of the dividend shall be payable to those who are
stockholders: stockholders of record on a specified future
date or as of the date of the meeting
1. Right to Dividends declaring said dividend. (De Leon, supra)
2. Right of Appraisal Holders of shares not fully paid which are
3. Right to Inspect not delinquent shall have all the rights of a
4. Pre-emptive Right stock holder.
5. Right to Vote
6. Right of First Refusal GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at
RIGHT TO DIVIDENDS law to recover his share of the accumulated
profits because such stockholder has no
Right to dividend of a stockholder individual interest in the profits of a
corporation until a dividend has been
It is the right of the stockholder to demand payment declared.
of dividends after the board’s declaration.
Stockholders are entitled to dividends pro rata XPN: An action at law may be maintained
based on the total number of shares that they own where it is alleged that sufficient net profits
and not on the amount paid for the shares (SEC have been earned to obligate the
Opinion, October 10, 1992 and July 16, 1996). corporation to pay, however, there must be
a prior application with the directors for
G.R. Stock corporations are prohibited from the relief sought. If it appears that the
retaining surplus profits in excess of 100% of their directors have wantonly violated their
paid-in capital stock duty, and such application would be
inefficacious, such application need not be
XPN: made.
a) When justified by definite corporate
expansion projects or programs approved No dividends can be declared out of capital, except
by the board of directors; or when liquidating dividends distributed at
b) When the corporation is prohibited under dissolution (Sec. 122, CC).
any loan agreement with any financial
institution or creditor, whether local or Rule in applying dividends in delinquent shares
foreign, from declaring dividends without
its/his consent, and such consent has not Cash dividends due on delinquent
yet been secured; or stock shall first be applied to the
Cash
c) When it can be clearly shown that such unpaid balance on the subscription
retention is necessary under special plus cost and expenses.
circumstances obtaining in the corporation, Stock dividends are withheld from
such as when there is need for special Stock the delinquent stockholder until his
reserve for probable contingencies (Sec. 43, unpaid subscription is fully paid.
CC)
RIGHT OF APPRAISAL
Entitlement to receive dividends
It refers to the right of the stockholder to demand
GR: Those stockholders at the time of declaration payment of the fair value of his shares, after
are entitled to dividends (Sundiang Sundiang Sr. & dissenting from a proposed corporate action
Aquino, 2009, citing SEC Opinion, July 15, 1994). involving a fundamental change in the charter or
articles of incorporation in the cases provided by
NOTE: Dividends declared before the transfer of law (De Leon, 2010).
shares belong to the transferor and those
declared after the transfer, belong to the Requisites: (GWAFU)
transferee (Ibid).
1. Any Ground for appraisal must be present.
XPN: 2. A written demand on the corporation must
1. In case a record date is provided for. be made within 30 days after the date when the
vote was taken

3. The dissenting stockholders attend the NOTE: Failure to make the demand within such
meeting of the stockholders and voted against period shall be deemed a waiver of the appraisal
the proposed action. right.
4. The price of the Fair Market Value of the
shares on the day before the date of voting. 4. The price must be based on the fair value of the
Note: In case of disagreement, the value will shares as of the day prior to the date on which
be determined by appraisal of 3 disinterested the vote was taken. If the proposed corporate
persons (Sec 82. CC) action is implemented or effected, the payment
5. The corporation has sufficient unrestricted shall be made upon surrender of the certificates
retained earnings to pay (Turner vs. Lorenzo of stock representing his shares.
636 scra 137) 5. Such fair value must be determined as provided
in Sec. 82.The fair value shall exclude any
Instances where a stockholder may exercise his appreciation or depreciation in anticipation of
appraisal right such corporate action.
6. Payment of the shares must be made only out of
Any stockholder of a corporation shall have the the unrestricted earnings of the corporation.
right to dissent and demand payment of the fair
value of his shares in the following instances: NOTE: No payment shall be made to any
dissenting stockholder unless the corporation
1. In case any amendment to the articles of has unrestricted retained earnings in its books
incorporation has the effect of changing or to cover the payment. The trust fund
restricting the rights of any stockholder or class doctrine backstops the requirement of
of shares, or of authorizing preferences in any unrestricted retained earnings to fund the
respect superior to those of outstanding shares payment of the shares of stocks of the
of any class, or of extending or shortening the withdrawing stockholders (Philip Turner, et al.,
term of corporate existence; v. Lorenzo Shipping Corp., G.R. No. 157479,
2. In case of sale, lease, exchange, transfer, November 24, 2010).
mortgage, pledge or other disposition of all or
substantially all of the corporate property and 7. Upon such payment, the stockholder must
assets as provided in the Code; transfer his shares to the corporation (CC, Secs.
3. In case of merger or consolidation (CC, Sec. 81); 81, 42).
4. In case the corporation decides to invest its
funds in another corporation or business for Q: Assuming a stockholder disagrees with the
any purpose other than its primary purpose as issuance of new shares and the pricing for the
provided in Sec. 42 of the CC; shares; may the stockholder invoke his
5. Under Sec. 105, any stockholder of a close appraisal rights and demand payment for his
corporation may, for any reason, compel said shareholdings? (1999 Bar)
corporation to purchase his shares at their fair
value, which shall not be less than their par or A: NO, the stockholder may not invoke his appraisal
issued value, when the corporation has right because disagreement with the issuance of
sufficient assets in its books to cover its debts new shares and its pricing do not fall under any of
and liabilities exclusive of capital stock. the instances where the appraisal right is available.
Limitations on the exercise of appraisal right Effects of the exercise of the right of appraisal
1. Any of the instances provided by law for the 1. Once the dissenting stockholder demands
exercise of the right by a dissenting stockholder payment of the fair value of his shares:
must be present. a. All rights accruing to such shares including
voting and dividend rights shall be
2. The dissenting stockholder must have voted suspended; and
against the proposed corporate action. The b. He shall be entitled to receive payment of
right is not available to a stockholder who was the fair value of his shares as agreed upon
either absent at the meeting where the between him and the corporation or as
corporate action was approved, or was present determined by the appraisers chosen by
at such meeting but abstained from casting his him;
vote. c. GR: He is not allowed to withdraw his
3. A written demand on the corporation for demand for payment of his shares
payment of his shares must be made by him
within 30 days after the date the vote was taken.

2019 GOLDEN NOTES
MERCANTILE LAW
XPN: Unless the corporation consents a. Where the price offered by the corporation
thereto. is approximately the same as the fair value
ascertained by the appraisers;
2. If the dissenting stockholder was not paid the b. Where the same action is filed by the
value of his shares within 30 days after the dissenting stockholder and his refusal to
award, his voting and dividend rights shall be accept payment is found by the court to be
immediately restored until payment of his unjustified (De Leon, 2010).
shares (CC , Sec. 83);
Q: In case of disagreement between the
NOTE: Even if his rights as stockholder are corporation and a withdrawing stockholder
suspended after his demand in writing is made, who exercises his appraisal right regarding the
he cannot be considered as an ordinary creditor fair value of his shares, a three-member group
of the corporation (SEC Opinion, Jan. 11, 1982); shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
3. Upon payment of the stockholder’s shares, all stockholder be named to the three member
his rights as stockholders are terminated, not group? (2011 Bar)
merely suspended (CC, Sec. 82); and
A: NO, the wife of the withdrawing shareholder is
4. If before the stockholder is paid, the proposed not a disinterested person.
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be Q: When does the right to payment cease?
permanently restored (CC, Sec. 84).
A: The right of the dissenting stockholder to be paid
Rule if there is a disagreement between the the fair value of his shares shall cease, his status as
withdrawing stockholder and the corporation a stockholder shall thereupon be restored, and all
as to the fair value of the shares dividend distributions which would have accrued
on his shares shall be paid to him if:
If within a period of 60 days from the date the
corporate action was approved by the stockholders, 1. Demand for payment is withdrawn with the
the withdrawing stockholder and the corporation consent of the corporation;
cannot agree on the fair value of the shares, it shall 2. The proposed corporate action is abandoned by
be determined and appraised by three (3) the corporation;
disinterested persons, one of whom shall be named 3. The proposed corporate action is rescinded by
by the stockholder, another by the corporation, and the corporation;
the third by the two thus chosen. 4. The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
The findings of the majority of the appraisers shall 5. The SEC determines that the dissenting
be final, and their award shall be paid by the stockholder is not entitled to the appraisal right
corporation within 30 days after such award is (CC, Sec. 84).
made (CC, Sec. 82).
NOTE: A dissenting stockholder who demands
Cost of appraisal payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
The costs and expenses of appraisal shall be borne consents thereto.
as follows:
RIGHT TO INSPECT
1. By the corporation—
a. Where the price which the corporation The stockholder’s right of inspection of the
offered to pay the dissenting stockholder is corporation’s book and records is based upon his
lower than the fair value as determined by ownership of shares in the corporation and the
the appraisers named by them; necessity for self-protection (Puno v. Puno, G.R. No,
b. Where an action is filed by the dissenting 177066, September 11, 2009)
stockholder to recover such fair value and The mere fact that the shareholdings of a
the refusal of the stockholder to receive stockholder is merely .001 per cent of the issued
payment is found by the court to be shares of stock does not justify the denial of the
justified. request of inspection of the corporate records.
(Terelay v Yulo 765 SCRA 1)
2. By the dissenting stockholder—
Valid purposes for inspection:

1. Ascertainment of financial condition of 1. The right must be exercised during reasonable
corporation or propriety of dividends hours on business days;
2. Value of the shares of stock for sale or 2. The person demanding the right has not
investment. improperly used any information obtained
3. Existence of mismanagement. through any previous examination of the books
4. Obtainment of list of stockholders to solicit and records of the corporation;
proxies or influence voting. 3. The demand is made in good faith or for
5. Obtainment of information in aid of litigation legitimate purpose germane to his interest as a
with the corporation or its officers regarding stockholder (CC, Sec. 74).
corporate transactions.
Good purposes may be:
Books and records required to be kept by the (a) To investigate acts of management;
corporation (b) To investigate financial conditions; fix
value of shares;
The following are the books and records required to (c) Mailing list for proxies; or
be kept by private corporations: (d) Information for litigation (Villanueva)
1. A record of all business transactions, which 4. It should follow the formalities that may be
shall include contract, memoranda, journals, required in the by-laws;
ledgers, etc; 5. The right does not extend to trade secrets; and
2. Minutes of all meetings of stockholders or 6. It is subject to limitations under special laws,
members; e.g. Secrecy of Bank Deposits and FCDA or the
3. Minutes of all meetings of directors or trustees; Foreign Currency Deposits Act.
and
4. Stock and transfer book, in case of stock NOTE: The right extends, in compliance with equity,
corporations (CC, Sec. 74). good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise However, this right does not apply where the
inspect the financial statements of the corporation corporation is not organized under the Philippine
(CC, Sec. 75). law as in such a case, the right of the stockholder is
governed by the inspection requirements in the
Place where the books and records shall be kept jurisdiction in which the corporation was organized
(De Leon, 2010).
GR: All the above books and records must be kept at
the principal office of the corporation. The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
XPN: The stock and transfer book may be kept in the corporation.
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by It would be more in accord with equity, good faith
the corporation (CC, Sec. 75). and fair dealing to construe the statutory right of the
stockholder to inspect the books and records of the
Requirement in order for the minutes of the corporation as extending to books and records of its
board meetings be given probative value wholly-owned subsidiary which are in the
corporation’s possession and control (Gokongwei v.
The minutes of board meetings should be signed by SEC, supra).
the corporate secretary. Without such signature, Rationale behind the right of inspection of a
neither probative value nor credibility could be corporation
accorded such minutes (Union of Supervisors [RB]-
NATU v. Sec. of Labor, G.R. No. L- 39889, November The stockholder's right of inspection of the
12, 1981). corporation's books and records is based upon their
ownership of the assets and property of the
Minutes of meetings without the signature of the corporation. It is, therefore, an incident of
corporate secretary have no probative value, and ownership of the corporate property (Republic v.
therefore cannot be demanded for inspection or Sandiganbayan, G.R. No. 88809, July 10, 1991).
examination (Villanueva).
Persons entitled to inspect corporate books
Requirements for the Exercise of the Right of
Inspection

2019 GOLDEN NOTES
MERCANTILE LAW
The following are entitled to inspect the corporate legal title to the stock (Puno v. Puno Enterprises, Inc.,
books: G.R. No. 177066, September 11, 2009).
1. Any director, trustee, or stockholder or member Q: Who are the persons who may be held liable
of the corporation at reasonable hours on under Section 74?
business day (CC, Sec. 74);
2. Voting trust certificate holder – The term A: The first, second and fourth paragraphs of
“stockholder”, as used in Sec. 74 means not only Section 74 are provisions that enumerates the
a stockholder of record; it includes a voting obligations of a corporation, such as what books or
trust certificate holder who has become merely records required to be kept, where it shall be kept,
an equitable owner of the shares transferred and other obligations of the corporation to its
(CC, Sec. 59 [3]); stockholders or members in relation to such books
3. Stockholder of a sequestered company and records. Hence, by parity of reasoning, such
(Republic vs. Sandiganbayan, supra); and provisions can only be violated by a corporation.
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is It is clear that a criminal action based on the
provided that his interest is clearly established violation of the second or fourth paragraphs of
by evidence. Section 74 can only be maintained against corporate
officers or such other persons that are acting on
Q: The deceased Carlos L. Puno, was an behalf of the corporation. Violations of the second
incorporator of Puno Enterprises, Inc. (Puno, and fourth paragraphs of Section 74 contemplates a
Inc). Joselito Musni Puno, claiming to be an heir situation wherein a corporation, acting thru one of
of Carlos L. Puno, initiated a complaint for its officers or agents, denies the right of any of its
specific performance against Puno, Inc. Joselito stockholders to inspect the records, minutes and the
averred that he is the son of the deceased with stock and transfer book of such corporation (Aderito
the latter’s common-law wife, Amelia Puno. As Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T.
surviving heir, he claimed entitlement to the Quiambao and Eric C. Pilapil, G.R. No. 180416, June 2,
rights and privileges of his late father as 2014).
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its Remedies for enforcement of right to inspect
corporate book, and be given an accounting and
all the profits pertaining to the shares of Puno.. 1. Action for mandamus or damages
2. Civil and criminal liability
May an heir of a stockholder can automatically
exercise the rights (inspection, accounting, Liability of a corporate officer or agent in case he
dividends) pertaining to the deceased? violates the stockholder’s right to inspection
A: NO.The stockholder’s right of inspection of the Any officer or agent of the corporation who shall
corporation’s books and records is based upon his refuse to allow any director, trustees, stockholder or
ownership of shares in the corporation and the member of the corporation to examine and copy
necessity for self-protection. After all, a shareholder excerpts from its records or minutes, shall be liable
has the right to be intelligently informed about to such director, trustee, stockholder or member for
corporate affairs. Such right rests upon the damages, and in addition, shall be liable for by a fine
stockholder’s underlying ownership of the of not less than one thousand (P1,000.00) pesos but
corporation’s assets and property. Similarly, only not more than ten thousand (P10,000.00) pesos or
stockholders of record are entitled to receive by imprisonment for not less than thirty (30) days
dividends declared by the corporation, a right but not more than five (5) years, or both, in the
inherent in the ownership of the shares. Upon the discretion of the court (CC, Sec 75 and Sec 144).
death of a shareholder, the heirs do not
automatically become stockholders of the Requisites for existence of probable cause to file
corporation and acquire the rights and privileges of a criminal case of violation of a stockholder’s
the deceased as shareholder of the corporation. The right to inspect corporate books
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be 1. A director, etc. has made a prior demand in
recorded in the books of the corporation. During writing for a copy or excerpts from the
such interim period, the heirs stand as the equitable corporation’s records or minutes;
owners of the stocks, the executor or administrator 2. Any officer or agent of the concerned
duly appointed by the court being vested with the corporation shall refuse to allow the said

director, etc., to examine and copy said Pre-emptive right must be exercised in accordance
excerpts; with the AOI or the By-Laws. When the AOI and the
3. If such refusal is made pursuant to a resolution By-Laws are silent, the Board may fix a reasonable
or order of the BOD’s the liability for such action time within which the stockholders may exercise
shall be imposed upon the directors or trustees the right.
who voted such refusal; and
4. Where the officer or agent of the corporation Stock Transactions covered includes:
sets up the defense that the person demanding
to examine and copy excerpts from the records a) The re-issuance of treasury shares which would
and minutes has improperly used any cover the increase in the authorized capital
information secured through any prior stock;
examination of the same or was not acting in b) Opening for subscription the unissued portion
good faith or for a legitimate purpose in making of existing capital stock; and
his demand, the contrary must be shown or c) Disposition of treasury shares.
proved (De Leon, supra, citing Ang-Abaya v. Ang,
G.R. No. 178511, December 4, 2008). Pre-emptive right on the re-issuance of treasury
shares
The Corporation Code has granted to all
stockholders the right to inspect the corporate When a corporation reacquires its own shares
books and records, and in so doing has not required which thereby become treasury shares, all
any specific amount of interest for the exercise of shareholders are entitled to pre-emptive right when
the to inspect (Terelay Investment and Development the corporation reissues or sells these treasury
Corp. v. Yulo, G.R. No. 160924, August 05, 2015). shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
Refusal to allow inspection is a criminal offense emptive right does not exist.
We find inaccurate the pronouncement of the RTC Transferability of pre-emptive right

that the act of refusing to allow inspection of the
stock and transfer book is not a punishable offense Pre-emptive right is transferable unless there is an
under the Corporation Code. Such refusal, when express restriction in the AOI.
done in violation of Section 7 4(4) of the
Corporation Code, properly falls within the purview Waiver of pre-emptive right by the stockholder
of Section 144 of the same code and thus may be
penalized as an offense (Yujuico and v. Quiambao, The stockholder may waive his pre-emptive right
supra). either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
Defenses that can be set up: after being notified and given an opportunity to
1. Improper use of the information obtained in the avail of such right.
past;
2. There was bad faith; Denial by the corporation of the pre-emptive
3. Use the information for an illegitimate purpose right
(Villanueva).
The corporation can deny pre-emptive right if the
PRE-EMPTIVE RIGHT articles of incorporation or amendment thereto
denies such right.
It is the preferential right of shareholders to The stockholder must be given a reasonable time
subscribe to all issues or disposition of shares of any within which to exercise their preemptive rights.
class in proportion to their present shareholdings Upon the expiration of said period, any stockholder
(CC, Sec. 39). who has not exercised such right is deemed to have
waived it (Majority Stockholders of Ruby Industrial
Purpose of pre-emptive right Corp. vs. Lim and the Minority Stockholders of Ruby
Industrial Corp., G.R. Nos. 165887 & 165929, June 6,
To enable the shareholder to retain his 2011).
proportionate control in the corporation and to
retain his equity in the surplus RIGHT TO VOTE
Exercise of pre-emptive right The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other

2019 GOLDEN NOTES
MERCANTILE LAW
corporate acts which require stockholders’ capacity by the holders thereof, any one of the joint
approval. owners can vote said shares or appoint a proxy
therefor (CC, Sec. 56).
Nature of the right to vote
Rule in case of pledged or mortgaged shares
One of the rights of a stockholder is the right to
participate in the control and management of the GR: The pledgor or mortgagor shall have the right
corporation that is exercised through his vote. The to attend and vote at meetings of stockholders even
right to vote is a right inherent in and incidental to though their shares are pledged or mortgaged.
the ownership of corporate stock, and such is a
property right (Castillo v. Balinghasay, 440 SCRA XPN: The pledgee or mortgagee has the right to vote
442, 2004). and attend meetings if he is expressly given by the
pledger or mortgagor such right in writing which is
Conditions for the issuance of non-voting shares recorded on the appropriate corporate books (CC,
Sec. 55).
The issuance of non- voting shares is subject to the
following conditions under Section 6 of the CC: RIGHT OF FIRST REFUSAL
1. Only preferred or redeemable shares may be A right that grants to the corporation or another
made non-voting shares; and stockholder the right to buy the shares of stock of
2. There must remain other shares with full voting another stockholder at a fixed price and only valid if
rights. made on reasonable terms and consideration.
Instances when non-voting shares are entitled Provisions in articles of incorporation requiring
to vote (AASI-IMID) stockholders desiring to sell their stocks to offer
them first to the corporation or to the existing
The non-voting shares may still vote in the following stockholders at a given reasonable date before
matters: disposing of them to third persons may be
considered valid and enforceable (SEC Opinion, Feb.
1. Amendment of the articles of incorporation; 23, 1993).
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other Right of first refusal is not a substantive right
disposition of all or substantially all of the under the Corporation Code
corporate property;
4. Incurring, creating or increasing bonded GR: The right of first refusal can only arise by means
indebtedness; of a contractual stipulation, or when it is provided
5. Increase or decrease of capital stock; for in the AOI
6. Merger or consolidation of the corporation with
another corporation or other corporations; XPN: In the case of a close corporation, the right of
7. Investment of corporate funds in another first refusal is required to be found in the AOI.
corporation or business in accordance with the
corporation code; and When only the by-laws provide a right of first
8. Dissolution of the corporation (CC, Sec 6) refusal without the corresponding provision in the
AOI and not printed in the stock certificate, it is null
Treasury shares are not entitled to vote and void. There is no authority to create property
restrictions in by-laws provisions (Hodges v.
Treasury shares shall have no voting right as long as Lezama, G.R. No. L-17327, August 30, 1963).
such shares remain in treasury.
AOI may validly grant a right of first refusal in
Rule in case of joint ownership of stock favor of other stockholders
GR: In case of shares of stock owned jointly by two The SEC, as a matter of policy, allows restrictions on
or more persons, in order to vote the same, the transfer of shares in the AOI if the same is necessary
consent of all the co-owners shall be necessary. and convenient to the attainment of the objective for
which the company was incorporated, unless
XPN: If there is a written proxy, signed by all the co- palpably unreasonable under the circumstances
owners, authorizing one or some of them or any (SEC Opinion, Feb. 20, 1995).
other person to vote such share or shares. Provided,
that when the shares are owned in an “and/or” Pre-emptive right vs. Right of first refusal

REPRESENTATIVE SUIT
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL A representative suit is one filed by the shareholder
Arises only by virtue individually, or on behalf of a class of shareholders
of contractual to which he or she belongs, for injury to his or her
May be exercised even
stipulations but is interest as a shareholder (Cua v. Tan, GR 182008,
when there is no express
also granted under December 4, 2009).
provision of law
the provisions on
close corporation It is proper where the wrong is done to a group of
Pertains to stockholders, as where preferred stockholders’
unsubscribed portion of rights are violated, a class or representative suit will
Exercisable against
the authorized capital be proper for the protection of all stockholders
another stockholder
stock. A right that may belonging to the same group (Ibid).
of the corporation of
be claimed against the
his shares of stock
corporation. It includes NOTE: Right of pre-emption is personal to each
treasury shares. stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that
REMEDIAL RIGHTS he may not maintain a representative action on
behalf of other stockholders who are similarly
Actions that the stockholders or members can situated.
bring
Remedies of representative suit and derivative
1. Derivative suit – one brought by one or more suit are mutually exclusive
stockholders or members in the name and on
behalf of the corporation to redress wrongs The two actions are mutually exclusive: i.e., the right
committed against it or to protect or vindicate of action and recovery belongs to either the
corporate rights, whenever the officials of the shareholders (direct action) or the corporation
corporation refuse to sue or are the ones to be (derivative action) (Ibid.).
sued or hold control of the corporation.
DERIVATIVE SUIT
2. Individual suit – an action brought by a
stockholder against the corporation for direct Neither the Corporation Code nor the Securities
violation of his contractual rights as such Regulation Code expressly grant the stockholder the
individual stockholder, such as the right to vote right to institute a derivative suit. It is impliedly
and be voted for, the right to share in the recognized when the said laws make corporate
declared dividends, the right to inspect directors or officers liable for damages suffered by
corporate books and records, and others. the corporation and its stockholders for violation of
their fiduciary duties (Yu v. Yukayguan, 607 Phil.
3. Representative suit – one brought by a person in 581, 610, 2009).
his own behalf and on behalf of all similarly
situated. Requisites for the existence of a derivative suit
(C-SENA)
INDIVIDUAL SUIT
1. Corporate cause of action: the cause of action
When the injury is suffered directly by an individual must devolve upon the corporation itself; the
shareholder as to affect his proprietary rights, as wrongdoing or harm having been caused to the
when his right to vote is unlawfully withheld or his corporation and not to the particular
right to inspect corporate books arbitrarily denied, stockholder brining the suit (Reyes v. Hon. RTC
an action may be brought by the injured stockholder of Makati Br. 142, G.R. No. 165744, August 11,
in his own name and for his own benefit against the 2008).
corporation (Salonga, 1968). 2. Stockholder: the party bringing the suit must be
a stockholder
NOTE: Authorization from the board of directors is a. At the time the acts or transactions subject
not necessary. Since the wrong is done to him of the action occurred; and
personally and not to the other stockholder or the b. at the time the action was filed
corporation, the cause of action belongs to him
alone. NOTE: if the cause of action is continuing in
nature, the only requisite is that the party is a

2019 GOLDEN NOTES
MERCANTILE LAW
stockholder at the time the action was filed payment of the arrearages will be prejudicial to
(Dean Divina’s Lecture, April 29, 2015). the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
3. Exhaustion of all intra-corporate remedies best solution to the problem. Decide the suit and
available under the AOI, By-Laws, laws or rules explain. (2016 Bar)
governing the corporation or partnership to
obtain the relief he desires. A: The derivative suit will not prosper. While it was
4. Not a Nuisance or Harassment suit. filed by a stockholder on behalf of the corporation,
5. Appraisal right is not available (Rule 8 of the the complainant did not allege the other elements of
Interim Rules of Procedure Governing Intra- derivative suit namely:
Corporate Controversies, cited in Yu, et al., v.
Yukayguan, et al., G.R. No. 177549, June 18, 2009) A) Exhaustion of intra- corporate remedies
available under the articles of
Representative Suit V. Derivative Suit incorporation, by- laws, rules and
regulations governing the corporation to
REPRESENTATIVE DERIVATIVE SUIT obtain relief stockholders desires;
SUIT B) It is not a nuisance suit; and
Initiated by the Initiated by the C) Appraisal right is not available.
stockholder under his stockholder on behalf of
own name or on the corporation Q: Ranier Madrid, a shareholder, wrote the
behalf of other Board of Directors of FHGCCI two demand
stockholders letters because of the delay in construction and
Seeks to recover for the asked them to initiate legal actions against
benefit of the FEGDI and FEDI. The Board of Directors,
corporation and its however, failed and/or refused to act on the
whole body of demand letters.Madrid, in a derivative capacity
Seeks vindication for on behalf of petitioner FHGCCI, filed with the
shareholders when
injury to his or her RTC a Complaint for Specific Performance with
injury is caused to the
interest as a Damages. FEGDI argued that there is no cause of
corporation that may
shareholder action and it is not a proper derivative suit as
not otherwise be
redressed because of Madrid on behalf of FHGCCI failed to exhaust all
failure of the remedies available under the articles of
corporation to act incorporation and by-laws and failed to implead
Deals with individual its Board of Directors as indispensable parties.
stockholders or a Deals with corporate Is there compliance with requirements of
class of stockholder’s rights (Ibid.). derivative suit?
rights
A: NO. Madrid, as a shareholder of FHGCCI, failed to
Q: Royal Links Golf Club obtained a loan from a allege with particularity in the Complaint, and even
bank which is secured by a mortgage on a titled in the Amended Complaint, that he exerted all
lot where holes 1, 2, 3 and 4 are located. The reasonable efforts to exhaust all remedies available
bank informed the Board of Directors (Board) under the articles of incorporation, by-laws, or rules
that if the arrearages are not paid within thirty governing the corporation; that no appraisal rights
(30) days, it will extra-judicially foreclose the are available for the acts or acts complained of; and
mortgage. The Board decided to offer to the that the suit is not a nuisance or a harassment suit.
members 200 proprietary membership shares,
which are treasury shares, at the price of For a derivative suit to prosper, the following must
P175,000.00 per share even when the current be present:
market value is P200,000.00.
a) It is minority stockholder suing for and on behalf
In behalf and for the benefit of the corporation, of the corporation must allege in his complaint that
Peter, a stockholder, filed a derivative suit he is suing on a derivative cause of action on behalf
against the members of the Board for breach of of the corporation and all other stockholders
trust for selling the shares at P25,000.00, lower similarly situated who may wish to join him in the
than its market value, and asked for the suit;
nullification of the sales and the removal of the b) Stockholder should have exerted all reasonable
board members. Peter claims the Club incurred efforts to exhaust all remedies available under the
a loss of PS million. The Board presented the articles of incorporation, by-laws, laws or rules
defense that in its honest belief any delay in the governing the corporation or partnership to obtain

the relief he desires and that such fact is alleged with meeting but he continued to be a registered
particularity in the complaint; and shareholder of PREC.
c) The stockholder is also required to allege,
explicitly or otherwise, the fact that there were no When he was still a director, A discovered that
appraisal rights available for the acts complained of, on Jan 5, 1991, PREC issued free of charge
as well as a categorical statement that the suit is not 10,000 shares to X a lawyer who assisted in a
a nuisance or a harassment suit (Forest Hills Golf and court case involving PREC.
Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
No. 206649, July 20, 2016, Del Castillo, J.). a. Can A now bring an action in the name
of the corporation to question the issuance
Rationale for a derivative suit of the shares to X without receiving any
payment?
Under the CC, where a corporation is an injured b. Can X question the right of A to sue him in
party, its power to sue is lodged with its board of behalf of the corporation on the ground that
directors or trustees. However, an individual A has only one share in his name?
stockholder may be permitted to institute a c. Can the shares issued to X be considered as
derivative suit on behalf of the corporation in order watered stock? (1993 Bar)
to protect or vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are A:
the ones to be sued, or hold control of the a. As a general rule, A cannot bring a derivative
corporation (Hi-Yield Realty v. CA, G.R. No. 168863, suit in the name of the corporation concerning
June 23, 2009). an act that took place before he became a
stockholder. However, if the act complained of
Stockholder is not a real party in interest in a is a continuing one, A may do so.
derivative suit b. NO. In a derivative suit, the action is
instituted/ brought in the name of a
The corporation is the real party-in-interest while corporation and reliefs are prayed for therein
the suing stockholder, on behalf of the corporation, for the corporation, by a minority stockholder.
is only a nominal party (Ibid). The law does not qualify the term
“minority” in terms of the number of shares
Time when a person must be a stockholder for owned by a stockholder bringing the action in
him to be justified in filing a derivative suit behalf of the corporation (SMC v. Khan, G.R. No.
85339, August 11, 1989).
He must be a stockholder at the time the cause of c. NO. Watered shares are those sold by the
action accrued. If the cause of action is general and corporation for less than the par/book value. In
continuing, said person must be a stockholder at the the instant case, it will depend upon the value of
time of filing of the suit and at the time the cause of services rendered in relation to the total par
action accrued. value of the shares.
The implicit argument — that a stockholder, to be Allegation of tort can co-exist with a derivative
considered as qualified to bring a derivative suit, suit in the same petition
must hold a substantial or significant block of stock
— finds no support whatever in the law. The bona Personal injury suffered by a stockholder cannot
fide ownership by a stockholder of stock in his own disqualify him from filing a derivative suit on behalf
right suffices to invest him with standing to bring a of the corporation. It merely gives rise to an
derivative action for the benefit of the corporation. additional cause of action for damages against the
The number of his shares is immaterial since he is erring directors (Goachan v. Young, G.R. No. 131889,
not suing in his own behalf, or for the protection or March 12, 2001).
vindication of his own particular right, or the
redress of a wrong committed against him, Jurisdiction over a derivative suit
individually, but in behalf and for the benefit of the
corporation (San Miguel Corporation v. Khan, G.R. A derivative suit is an intra-corporate controversy
No. 85339, August 11, 1989). hence under the jurisdiction of the RTC acting as a
special commercial court.
Q: A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10, 1991, Q: AA, a minority stockholder, filed a suit against
when he was given one share by another BB, CC, DD, and EE, the holders of majority
stockholder to qualify him as a director. A was shares of MOP Corporation, for alleged
not re-elected director in the July 1, 1992 annual misappropriation of corporate funds. The

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complaint averred, inter alia, that MOP Oscar claimed that the suit is not a bona
Corporation is the corporation in whose behalf fide derivative suit because the requisites
and for whose benefit the derivative suit is therefor have not been complied with. Is the
brought. In their capacity as members of the complaint filed by Rodrigo a derivative suit?
Board of Directors, the majority stockholders
adopted a resolution authorizing MOP A: NO. First, Rodrigo is not a shareholder with
Corporation to withdraw the suit. Pursuant to respect to the shareholdings originally belonging to
said resolution, the corporate counsel filed a Anastacia; he only stands as a transferee-heir whose
Motion to Dismiss in the name of the MOP rights to the share are inchoate and unrecorded.
Corporation. Should the motion be granted or Second, in order that a stockholder may show a right
denied? Reason briefly. to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has
A: The motion to dismiss should be denied. The exhausted his remedies within the corporation by
requisites for a valid derivative suit exist in this making a sufficient demand upon the directors or
case. First, AA was exempt from exhausting his other officers for appropriate relief with the
remedies within the corporation and did not have a expressed intent to sue if relief is denied. Lastly, the
demand on the Board of Directors for the latter to Court finds no injury, actual or threatened, alleged
sue. Here, such a demand would be futile, since the to have been done to the corporation due to Oscar’s
directors who comprise the majority (namely BB, acts. If indeed he illegally and fraudulently
CC, DD and EE are the ones guilty of the wrong transferred Anastacia’s shares in his own name,
complained of. Second, AA appears to be a then the damage is not to the corporation but to his
stockholder at the time of the alleged co-heirs; the wrongful transfer did not affect the
misappropriation of corporate funds. Third, the suit capital stock or the assets of Zenith (Oscar C. Reyes
is brought on behalf and for the benefit of MOP v. RTCof Makati, Branch 142, et al., G.R. No. 165744,
Corporation. In this connection, it was held in August 11, 2008).
Commart (Phils.) Inc. v. SEC, (G.R. No. 85318, June 3,
1991) that to grant to the corporation concerned the Q: Pursuant to the by-laws of Legaspi Towers
right of withdrawing or dismissing the suit, at the 300, Inc. (Legaspi), petitioners Lilia Marquinez
instance of the majority stockholders and directors Palanca,et al., the incumbent Board of Directors,
who themselves are the persons alleged to have fixed the annual meeting of the members of the
committed the breach of trust against the interests condominium corporation and the election of
of the corporation would be to emasculate the right the new Board of Directors. Out of a total
of the minority stockholders to seek redress for the number of 5,723 members who were entitled to
corporation. Filing such action as a derivative suit vote, 1,358 were supposed to vote through their
even by a lone stockholder is one of the protections respective proxies and their votes were critical
extended by law to minority stockholders against in determining the existence of a quorum. The
abuses of the majority. Committee on Elections of Legaspi, however,
found most of the proxy votes, at its face value,
Q: Oscar and Rodrigo C. Reyes are two of the four irregular, thus, questionable; and for lack of
children of the spouses Pedro and Anastacia time to authenticate the same, Palanca, et al.,
Reyes. Pedro, Anastacia, Oscar, and Rodrigo adjourned the meeting for lack of quorum.
each owned shares of stock of Zenith Insurance Despite Palanca et al.'s insistence that no
Corporation (Zenith), a domestic corporation quorum was obtained during the annual
established by their family. Pedro and Anastacia meeting, Muer, et al.,pushed through with the
died. Pedro’s estate was judicially partitioned scheduled election and were elected as the new
among his heirs, however, no similar settlement Board of Directors and officers of Legaspi.
and partition appear to have been made with Subsequently, they submitted a General
Anastacia’s estate, which included her Information Sheet to the Securities and
shareholdings in Zenith. Zenith and Rodrigo Exchange Commission (SEC) with the new set of
filed a complaint with the SEC against Oscar. The officers. Palanca, et al., filed a complaint for the
complaint stated that it is a derivative suit declaration of nullity of elections against Muer,
initiated and filed by the complainant Rodrigo to et al., in a form of a derivative suit. Is the
obtain an accounting of the funds and assets of derivative suit proper?
Zenith which are now or formerly in the control,
custody, and/or possession of Oscar and to A: NO. The derivative suit is not proper. The
determine the shares of stock of deceased complaint for nullification of the election is a direct
spouses Pedro and Anastacia Reyes that were action by Palanca, et al., who were the members of
arbitrarily and fraudulently appropriated by the Board of Directors of the corporation before the
Oscar. Oscar denied the charge. Furthermore, election, against Muer, et al., who are the newly-

elected Board of Directors. The cause of action 3. Liability to the creditors of the corporation for
devolves on Palanca, et al., not the condominium unpaid subscription (CC, Sec. 60);
corporation, which did not have the right to vote. 4. Liability for watered stock (CC, Sec. 65);
Hence, the same is improper for derivative suit 5. Liability for dividends unlawfully paid (CC, Sec.
(Legaspi Towers 300, Inc., et al., v. Amelia P. Muer, et 43); and
al., G.R. No. 170783, June 18, 2012). 6. Liability for failure to create corporation (CC,
Sec. 10) (Sundiang Sr. & Aquino, 2014)
OBLIGATIONS OF A STOCKHOLDER
While a stockholder has no personal liability for the
The following are the obligations of the stockholder: debts of the corporation beyond the amount of his
capital investment, he is personally liable for the
1. Liability to the corporation for unpaid above obligations. In addition, he may become
subscription (CC, Sec. 67-70); personally liable for damages or otherwise for any
2. Liability to the corporation for interest on wrongful disposition of corporate assets, breaches
unpaid subscription if so required by the by of fiduciary duties, fraud, gross negligence,
laws (CC, Sec. 66); unauthorized acts, violations of law, or improper us
of the corporate form.
STOCKHOLDERS’ MEETINGS
DATE AND PLACE REQUIRED WRITTEN NOTICE
Regular meeting
The notice of meetings shall be in writing, and the
time and place thereof stated therein.
1. Annually on date fixed in the by-laws; or
2. If there is no date in the by-laws – any date in April NOTE: Under the Revised Corporation Code, the
as determined by the board. written notice of regular meetings may be sent
through electronic mail or such other manner as the
NOTE: Under the Revised Corporation Code, if the by- commission shall allow under its guidelines. (Sec.
laws does not fix the date of the meeting, it shall be on 49).
any date after April 15 of every year as may be
determined by the board (Sec. 49). The notice shall be sent to the stockholder:
1. Within the period provided in the by-laws
Venue: In the city or municipality where the principal 2. In the absence of provision in the by-laws – at least
office is located, and if practicable in the principal 2 weeks prior to the meeting.
office of the corporation: Provided, that Metro Manila
shall be considered a city or municipality. Notice may be waived, expressly or impliedly, by any
stockholder or member.
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro NOTE: Under the Revised Corporation Code, the
Davao, and other Metropolitan areas shall be written notice of regular meetings shall be sent to all
considered a city or municipality (Sec. 50). stockholders or members of record at least twenty-
one (21) days prior to the meeting unless otherwise
provided in the bylaws, law, or regulation (Sec. 49).
Special meeting
1. Any time deemed necessary; or
2. As provided in the by-laws The notice of meetings shall be in writing, and the
time and place thereof stated therein.
Venue: In the city or municipality where the principal
office is located, and if practicable in the principal The notice shall be sent to the stockholder:
office of the corporation: Provided, that Metro Manila 1. Within the period provided in the by-laws
shall be considered a city or municipality. 2. If no provision in the by-laws – at least 1 week
prior to the meeting
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro Notice may be waived, expressly or impliedly, by any
Davao, and other Metropolitan areas shall be stockholder or member.
considered a city or municipality (Sec. 50).
Requirements for a valid meeting whether

stockholders/members or the board 1. It must be held in the proper place.

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MERCANTILE LAW
2. It must be held at the stated date and at the before the Sandiganbayan (Trans Middle
appointed time or at a reasonable time East [Phils.] v. Sandiganbayan, GR 172556,
thereafter. June 9, 2006).
3. It must be called by the proper person:
a. The person or persons designated in the Under the two-tiered test, the government,
by-laws have authority to call stockholders’ through PCGG, may vote sequestered shares if
or members’ meeting; there is a prima facie evidence that the shares
b. In the absence of such provision in the by- are ill-gotten wealth and there is imminent
laws it may be called by a director or danger of dissipation of assets while the case is
trustee or by an officer entrusted with the pending. However, the two-tiered test
management of the corporation; contemplates a situation where the registered
c. A stockholder or member may make the stockholders were in control and had been
call on order of the SEC whenever for any dissipating company assets and the PCGG
cause there is no person authorized to call wanted to vote the sequestered shares to save
a meeting. the company. It does not apply when the PCGG
had voted the shares and is in control of the
4. The special meeting for the removal of directors sequestered corporation (Africa v.
or trustees may be called by the secretary or by Sandiganbayan, G.R. Nos. 172222, 174493 &
stockholder or member: 184636, November 11, 2013, in Divina, 2014).
a. There must be a previous notice;
b. There must be a quorum. XPN to the XPN: The two-tiered test does not
apply in cases involving funds of public
Rules on meeting or voting which are applicable character (public character exception). In such
to certain kinds of shares cases, the government is granted the authority
to vote said shares, namely:
1. Delinquent shares- shall not be entitled to vote.
2. Treasury shares - have no voting rights while a. Where the government shares are taken
they remain in the treasury (CC, Sec. 57). over by private persons or entities who
3. Fractional shares- shall not be entitled to vote. or which registered them in their own
4. Escrow shares - shall not be entitled to vote names; and
before the fulfillment of the condition imposed b. Where the capitalization of shares that
thereon. were acquired with public funds
5. Unpaid shares - if not delinquent, are entitled to somehow landed in private hands
all the rights of a stockholder including the right (Republic vs. Sandiganbayan, G.R. No.
to vote. 107789, April 30, 2003).
6. Sequestered shares
7. Pledgor, mortgagor, or administrator shares (CC,
GR: The registered owner of the shares of a Sec. 55) – pledger or mortgagor has the right to
corporation, even if they are sequestered by the attend and vote at meetings unless pledge or
government through the PCGG, exercises the mortgagee is expressly given such right in
right and the privilege of voting on them. writing, as recorded on the books.
The PCGG as a mere conservator cannot, as a
rule, exercise acts of dominion by voting these Executor, administrators, receivers, and other
shares. legal representatives may attend and vote in
behalf of the stockholder or members without
XPN: Two-tiered test: The registered owner of need of any written proxy. In Gochan v. Young,
sequestered shares may only be deprived of G.R. No. 131889, Mar. 12, 2001, it was held that
these voting rights, and the PCGG authorized to heirs are not prohibited from representing the
exercise the same, only if it is able to establish deceased with regard to shares of stock
that: registered in the name of the latter, especially
when no administrator has been appointed.
a. There is prima facie evidence showing
that the said shares are ill-gotten and 8. Shares jointly owned (CC, Sec. 56) – consent of all
thus belong to the State; and the co-owners is necessary, unless there is a
b. There is an imminent danger of written proxy signed by all the co-owners. If
dissipation, thus necessitating the shares are owned in an “and/or” capacity by the
continued sequestration of the shares holders thereof, any one of the joint owners can
and authority to vote thereupon by the vote or appoint a proxy thereof.
PCGG while the main issue is pending

WHO CALLS THE MEETING meeting (People v. Dumlao, GR 168918, March 2,
2009).
The “call” for a meeting is exercised by the person
who has the power to call the meeting. To have probative value and credibility, the minutes
must be signed by the corporate secretary,
The following persons may exercise the power to notwithstanding that the one taking the minutes
“call” for a meeting: was a mere clerk (Union of Supervisors [RB]-NATU v.
Sec. of Labor, supra).
1. The person or persons designated in the by-
laws to have the authority to call stockholders’/
members’ meeting; CAPITAL STRUCTURE
2. In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with
the management of the corporation unless SUBSCRIPTION AGREEMENTS
otherwise provided by law;
3. A stockholder/ member may make the call on It is a contract for the acquisition of unissued stock
order of the SEC whenever for any cause, there in an existing corporation or a corporation still to be
is no person authorized to call a meeting (CC, formed. It is considered as such notwithstanding the
Sec. 50) or the officers authorized fail or refuse fact that the parties refer to it as purchase or some
to call a meeting; and other contract (CC,Sec. 60).
NOTE: SEC may compel the officers of any Nature of a subscription contract
corporation registered by it to call meetings of A subscription contract is indivisible. Consequently,
stockholders/members thereof under its where stocks were subscribed and part of the
supervision (PD No. 902-A, Sec. 6 [f]) subscription contract price was not paid, the whole
4. Corporate Secretary or a stockholder/member subscription shall be considered delinquent and not
for a special meeting intended for the removal only the shares which correspond to the amount not
of directors or trustees (CC, Sec. 28). paid.
QUORUM NOTE: This is called the Doctrine of Individuality

(Indivisibility) of Subscription. A subscription is
GR: Shall consist of the stockholders representing one entire and indivisible whole contract. It cannot
majority of the outstanding capital stock or a be divided into portions (CC, Sec. 64).
majority of the actual and living members with
voting rights, in the case of non-stock corporation Subscription and purchase of stock
(Tan v. Sycip, G.R. No. 153468, Aug. 17, 2006).
The CC, under sec. 60 in defining subscription,
XPNs: abolished the distinction between subscription and
1. A different quorum may be provided for in the purchase of shares from an existing corporation by
by-laws; and making all such acquisitions a subscription
2. The corporation code provides for certain notwithstanding that the parties denominate it as a
resolutions that must be approved by at least purchase or sale or some other contract.
2/3 of the outstanding capital stock, in which
case, majority of the outstanding capital stock is Subscription vs. Purchase
insufficient to constitute a quorum, presence of
the stockholders representing 2/3 of the SUBSCRIPTION PURCHASE
outstanding capital stock is necessary for such May be made before May be made only after
purpose. or after incorporation incorporation
Buyer does not become
MINUTES OF THE MEETINGS
a stockholder until the
Subscriber becomes a
fulfillment of the terms
The minutes are a brief statement not only of what stockholder even if he
of the sale and
transpired at a meeting, usually of stockholders/ has not fully paid the
registration thereof in
members or directors/ trustees, but also at meeting subscription
the books of the
of an executive committee.
corporation
The minutes are usually kept in a book especially
Cannot be released The corporation may
designed for that purpose, but they may also be kept
from his subscription rescind or cancel the
in the form of memoranda or in any other manner
unless all contract for non-
in which they can be identified as minutes of a

2019 GOLDEN NOTES
MERCANTILE LAW
stockholders agree fulfillment of the Kinds of subscription
thereto and no contract by the buyer
creditor is thereby 1. Pre-incorporation subscription – entered into
prejudiced before incorporation (CC, Sec. 61); and
Corporate creditors 2. Post-incorporation subscription – entered into
may proceed against Creditors may not after incorporation (Sundiang Sr. & Aquino,
the subscriber for his proceed against the 2009).
unpaid subscription buyer for the unpaid
in case the assets of price as there is no Rules governing pre-incorporation contracts
the corporation are privity of contract
not sufficient to pay between them GR: A pre-incorporation subscription agreement is
their claims irrevocable for a period of six (6) months from the
In purchase amounting date of subscription.
Not covered by the to more than 500 pesos,
Statute of Frauds the Statute of Frauds XPNs:
shall apply 1. If all of the other subscribers consent to the
Subscription price are revocation,
Purchase price does not 2. If the incorporation of said corporation fails to
considered assets of
become assets of the materialize within said period or within a
the corporation,
corporation unless fully longer period as may be stipulated in the
hence, creditors may
paid contract of subscription.
go after them
Stock option vs. Warrant
XPN to XPN: No pre-incorporation subscription
STOCK OPTION WARRANT may be revoked after the submission of the AOI to
A type of security the Securities and Exchange Commission (CC, Sec.
which entitles the 61).
holder the right to
subscribe to a pre- Payment of a subscription contract cannot be
determined number of condoned by a corporation
unissued capital stock
of a corporation A corporation has no power to release an original
(subscription warrant), subscriber to its capital stock from the obligation of
or to purchase a pre- paying for his shares, without a valuable
A privilege granted to a determined number of consideration for such release. This is in violation of
party to subscribe to a issued or existing the trust fund doctrine (PNB v Bitulok Sawmill Inc,
certain portion of the shares in the future G.R. Nos. L-24177-85, June 29, 1968).
unissued capital stock (covered warrant).
of a corporation within NOTE: A warrant is Stockholder is entitled to the rights pertaining
a certain period and detachable if it may be to shares of stock subscribed although not fully
under the terms and sold, transferred or paid
conditions of the grant assigned to any person
exercisable by the by the warrant holder As long as the shares are not considered delinquent,
grantee at anytime separate from and stockholders are entitled to all rights granted to it
within the period independent of the whether or not the subscribed capital stocks are
granted. corresponding fully paid.
beneficiary securities,
or shares of stock or Q: FLADC, which was owned by the Tius,
other securities of the encountered dire financial difficulties. It was
issuer which form the heavily indebted to PNB for P190 million. Thus,
basis of the the construction of the Masagana Citimall was
entitlement in a threatened with stoppage and incompletion. To
warrant. It is non- prevent foreclosure of the mortgage on the two
detachableif it may not lots where the mall was being built, the Tius
be sold etc. invited the Ongs to invest in FLADC. Under the
(SEC Rules, in De Leon, 2010) Pre-Subscription Agreement they entered into,
the Ongs and the Tius agreed to maintain equal
Subscription is an offer to acquire a specified shareholdings in FLADC. Accordingly, the Ongs
number of unissued shares of an existing paid P100 million in cash for their subscription
corporation or one still to be formed. to 1,000,000 shares of stock while the Tius

committed to contribute to FLADC a four-storey requirements are complied with (Ong, et al. v. Tiu, et
building and two parcels of land respectively to al., G.R. Nos. 144476 & 144629, Apri 8, 2003).
cover their additional 549,800 stock
subscription therein. The business harmony CONSIDERATION FOR SHARES OF STOCK
between the Ongs and the Tius in FLADC,
however, was short-lived because the Tius, Valid considerations in a subscription
rescinded the Pre-Subscription Agreement. The agreement
Tius accused the Ongs of violation of the terms
of their agreement. Because of this, the Tius filed 1. Actual cash paid to the corporation;.
a case at SEC, seeking confirmation of their 2. Property, tangible or intangible (i.e. patents or
rescission of the Pre-Subscription Agreement. copyrights), provided:
The SEC granted the same. Could the Tius legally a. The property is actually received by the
rescind the Pre-Subscription Agreement? corporation
b. The property is necessary or convenient for
A: NO. When a subscriber assigned properties and its use and lawful purposes
infused capital to the corporation upon invitation of c. It must be subject to a fair valuation equal
a majority stockholder and in exchange for shares of to the par or issued value of the stock
stocks under a pre-subscription agreement, the issued
agreement cannot be rescinded since the subject d. The valuation thereof shall initially be
matter of the contract was the unissued shares of determined by the incorporators; and
the Corporation allocated to the subscriber. Since e. The valuation is subject to the approval by
these were unissued shares, the Pre-Subscription the SEC.
Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the 3. Labor or services actually rendered to the
Corporation Code: “Any contract for the acquisition corporation.
of unissued stock in an existing corporation or a 4. Prior corporate obligations or indebtedness.
corporation still to be formed shall be deemed a 5. Amounts transferred from unrestricted
subscription within the meaning of this Title, retained earnings to stated capital (in case of
notwithstanding the fact the parties refer to it as a declaration of stock dividends).
purchase or some other contract.” A subscription 6. Outstanding shares in exchange for stocks in
contract necessarily involves the corporation as one the event of reclassification or conversion. (CC,
of the contracting parties since the subject matter of Sec. 6)
the transaction is property owned by the
corporation - its shares of stock. Thus, the NOTE: Promissory notes or future services are not
subscription contract was one between the valid considerations.
subscriber and the corporation and not between the
stockholders. In view of nos. 1 and 2 of sec 62, payment of shares
of stock must be actually received by the
The trust fund doctrine provides that subscriptions corporation. Hence, receivables cannot be treated as
to the capital stock of a corporation constitute a cash actually received. They may, however, be
fund to which the creditors have a right to look for considered as property payment subject to
the satisfaction of the claims. This doctrine is the verification by SEC and the condition that it be held
underlying principle in the procedure for the in escrow until actual payment of the amount.
distribution of corporate capital only in three
instances: NOTE: Under the Revised Corporation Code, shares
of stock in another corporation and/or other
1. Amendment of the articles of incorporation to generally accepted form of consideration are valid
reduce the authorized capital stock; considerations (Sec. 61, par. (g) and (h))
2. Purchase of redeemable shares by the
corporation regardless of the existence of Amount of consideration
unrestricted retained earnings; and
3. Dissolution and eventual liquidation of the Shares of stock shall not be issued for a
corporation. consideration less than the par or issued price
thereof, except treasury shares so long as the price
Furthermore, the doctrine is articulated in Section is reasonable.
41 of the Corporation Code on the power of the
corporation to acquire its own shares and in Section Persons required to pay in full their
122 on the prohibition against the distribution of subscription upon incorporation
corporate assets and property unless the stringent

2019 GOLDEN NOTES
MERCANTILE LAW
1. Non‐resident foreign subscribers upon capital stock must rest in the hands of Filipino
incorporation must pay in full their nationals in accordance with the constitutional
subscriptions unless their unpaid subscriptions mandate. Otherwise, the corporation is “considered
are guaranteed by a surety bond or by an as non-Philippine nationals. Full beneficial
assumption by a resident stockholder through ownership of the stocks, coupled with appropriate
an affidavit of liability. voting rights, is essential”.
2. In case of no‐par value shares, they are deemed
fully paid and non‐assessable (CC, Sec. 6). NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to
NOTE: The issued price of no-par value shares may voting control of the corporation but also to the
be fixed in the AOI or by the BOD pursuant to beneficial ownership of the corporation, it is
authority conferred upon it by the AOI or the by- therefore imperative that such requirement apply
laws, or in the absence thereof, by the stockholders uniformly and across the board to all classes of
representing at least a majority of the outstanding shares, regardless of nomenclature and category,
capital stock at a meeting duly called for the purpose comprising the capital of a corporation.
(CC, Sec. 62).
Under the Corporation Code, capital stock consists
SHARES OF STOCK of all classes of shares issued to stockholders, that
is, common shares as well as preferred shares,
Stock or share of stock is one of the units in which which may have different rights, privileges or
the capital stock is divided. It represents the interest restrictions as stated in the articles of
or right which the owner has — incorporation. The Corporation Code allows denial
of the right to vote to preferred and redeemable
1. In the management of the corporation in which shares, but disallows denial of the right to vote in
he takes part through his right to vote (if voting specific corporate matters. Thus, common shares
rights are permitted for that class of stock by have the right to vote in the election of directors,
the AOI); while preferred shares may be denied such right.
2. In a portion of the corporate earnings, if and Nonetheless, preferred shares, even if denied the
when segregated in the form of dividends; and right to vote in the election of directors, are entitled
3. Upon its dissolution land winding up, in the to vote on certain corporate matters.
property and assets of the corporation
remaining after the payment of corporate debts Since a specific class of shares may have rights and
and liabilities to creditors (De Leon, 2010, citing privileges or restrictions different from the rest of
11 Fletcher, 1971). the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section
Q: In order to comply with the 60% capital 11, Article XII of the Constitution must apply not
requirement for ownership by Filipinos of only to shares with voting rights but also to shares
certain corporations, what does the term capital without voting rights (This is because when only
refer to? preferred shares without voting rights are issued,
the requirement of full beneficial ownership will be
A. The term “capital” refers to shares with voting used as the standard). Preferred shares, denied the
rights, and with full beneficial ownership, which right to vote in the election of directors are anyway
must be owned and held by citizens of the still entitled to vote on the eight specific corporate
Philippines. matters under Sec, 6. Thus, if a corporation, engaged
in a partially nationalized industry, issues a mixture
Rationale: The right to vote in the election of of common and preferred non-voting shares, at
directors, coupled with full beneficial ownership of least 60 percent of the common shares and at least
stocks, translates to effective control of a 60 percent of the preferred non-voting shares must
corporation. be owned by Filipinos. Of course, if a corporation
issues only a single class of shares, at least 60
Legal title without beneficial title of stocks is not percent of such shares must necessarily be owned
sufficient to meet the ownership requirement by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply
Mere legal title is insufficient to meet the 60% separately to each class of shares, whether common,
Filipino-owned “capital” required in the preferred non-voting, preferred voting or any other
Constitution. Full beneficial ownership of 60% of class of shares. This uniform application of the 60-
the outstanding capital stock, coupled with 60% of 40 ownership requirement in favor of Filipino
the voting rights, is required. The legal and citizens clearly breathes life to the constitutional
beneficial ownership of 60% of the outstanding command that the ownership and operation of

public utilities shall be reserved exclusively to A stock corporation is expressly granted the power
corporations at least 60 percent of whose capital is to issue or sell stocks. The power to issue shares of
Filipino-owned. stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
Applying uniformly the 60-40 ownership to consider it because additional issuances of shares
requirement in favor of Filipino citizens to each of stock do not need approval of the stockholders.
class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees The only requirement is the board resolution
effective Filipino control of public utilities, as approving the additional issuance of shares. The
mandated by the Constitution. Moreover, such corporation shall also file the necessary application
uniform application to each class of shares insures with the SEC to exempt these from the registration
that the “controlling interest” in public utilities requirements under the Revised Securities Act
always lies in the hands of Filipino citizens. This (now the Securities Regulation Code) (Majority
addresses and extinguishes Pangilinan’s worry that Stockholders of Ruby Industrial Corp. v. Lim and the
foreigners, owning most of the non-voting shares, Minority Stockholders of Ruby Industrial Corp.,
will exercise greater control over fundamental supra).
corporate matters requiring two-thirds or majority
vote of all shareholders (Heirs of Gamboa v. Teves, WATERED STOCK
G.R. No. 176579, October 9, 2012).
A watered stock is a stock issued in exchange for
NATURE OF SHARES OF STOCK cash, property, share, stock dividends, or services
lesser than its par value or issued value (CC, Sec. 65).
The ownership of share of stock confers no
immediate legal right or title to any of the property Watered Stocks include stocks:
of the corporation. Each share merely represents a
distinct undivided share or interest in the common 1. Issued without consideration (bonus share);
property of the corporation. 2. Issued for a consideration other than cash, the
fair valuation of which is less than its par or
The interest over the share is purely inchoate, or a issued value;
mere expectancy of a right in the management of the 3. Issued as stock dividend when there are no
corporation and to share in the profits thereof and sufficient retained earnings to justify it; and
in the properties and assets thereof on dissolution, 4. Issued as fully paid when the corporation has
after payment of the corporate debts and received a lesser sum of money than its par or
obligations. Further, the stockholder’s interest in issued value (discount share).
the corporate property is merely equitable or
beneficial in nature; hence he cannot be said to be a NOTE: Watered stocks can either be par or no par
co-owner of the corporate property (De Leon, 2006). value shares.
Shares of stocks are personal property Reason behind the prohibition on the issuance
of watered stocks
Shares of stock are personal property. They are
incorporeal in nature. Except treasury stock which It is to protect persons who may acquire stock and
belongs to the Corporation (NCC, Art. 417 and 2095). the creditors of the corporation particularly those
who may become such on the faith of its outstanding
Share of stock does not constitute an capital stock being fully paid. The prohibition
indebtedness of the corporation to the secures equality among subscribers and prevents
shareholder discriminations against those who have paid in full
the par or issued value of their shares (De Leon,
They are in the nature of choses in action but are not supra).
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder Not all exchanges of stocks worth less than their
and are therefore, not credits as to make the value are considered watered stock
stockholder a creditor of the corporation (De Leon,
2010). The watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such
The board of directors may issue additional stocks by the corporation, for then it would no
shares of stock without approval of the longer be an “issue” but a sale thereof (De
stockholders. Leon,2010, citing Rochelle Roofing Co. vs. Burley, 115
NE 478).

2019 GOLDEN NOTES
MERCANTILE LAW
Treasury shares are not subject to the a. Objection must be directed to the issuance
prohibition on the issuance of watered stocks of the watered stocks;
b. In writing;
Treasury shares are not original issuances. They are c. File the same with the corporate secretary;
shares of stocks which have been issued and fully and
paid for, but subsequently reacquired by the issuing d. Such objection must be done before the sale
corporation by purchase, redemption, donation, or of stocks (CC, Sec. 65).
through some other lawful means (CC, Sec. 9). Since
they do not lose their status as issued shares, they Trust fund doctrine for liability for watered
cannot be treated as new issues when disposed of or stock
reissued.
The subscribed capital stock of the corporation is a
Limitation on the re-disposal of treasury shares trust fund for the payment of debts of the
corporation which the creditors have the right to
Treasury shares may again be disposed of for a look up to satisfy their credits, and which the
reasonable price fixed by the BOD. Since they are corporation may not dissipate. The creditors may
not subject to the prohibition on the issuance of sue the stockholders directly for the latter’s unpaid
watered stock, they may be sold for less than their subscription.
par or issued value as long as the price for re-
disposal is reasonable. There is a violation of the trust fund doctrine
when stocks of the corporation are issued less
The issuance of watered stock cannot be ratified than the par value
by the stockholders
GR: The trust fund doctrine is violated where stocks
It is not merely ultra vires, but is illegal per se as it is are issued by the corporation for a consideration
a violation of Sec. 62, CC. which is less than its par value.
Liability of directors for watered stocks XPN: Trust fund doctrine is not violated in case
treasury shares are reacquired and subsequently
Any director or officer of a corporation shall be re-issued for a lesser consideration by the
solidarily liable with stockholder concerned to the corporation. The only limitation for the reissuance
corporation and its creditors for difference between of treasury shares is that their price must be
the fair value received at the time of the issuance of reasonable.
the stock and the par or issued value of the same, if:
SITUS OF SHARES OF STOCK
1. He consents to the issuance of stocks for
consideration less than its par or issued value; GR: The situs of shares of stock is the country where
2. He consents to the issuance of stocks for a the corporation is domiciled (Wells Fargo Bank v.
consideration in any form other than cash, CIR, G.R. No. L-46720, June 28, 1940).
valued in excess of its fair value; or
3. Who, having knowledge thereof, does not The residence of the corporation is the place
forthwith express his objection in writing and where the principal office of the corporation is
file the same with the corporate secretary. (CC, located as stated in its AOI even though the
Sec. 65) corporation has closed its office therein and
relocated to another place (Hyatt Elevators and
NOTE: The solidary liability of the directors Escalators Corp. v. Goldstar Elevator Phils., Inc.,
emanates from the fiduciary character of the supra.).
position of director or corporate officer.
XPN: In property taxation –the situs of intangible
Defenses that can be invoked in order that a property, such as shares of stocks, is at the domicile
director or an officer can escape liability for the or residence of the owner.
issuance of watered stocks
XPN to the XPN:
1. The director or officer did not consent and did 1. When a nonresident alien has shares of stock in
not have knowledge in the issuance of the a domestic corporation, then the situs will be in
watered stock. the Philippines; and
2. The director or officer objected to its issuance, 2. For purposes of the estate tax, the gross estate
provided: of a resident decedent, whether citizen or alien,
or a citizen decedent, whether resident or

nonresident, includes his intangible personal Limitations on no par value shares (5DP - B2tip -
property wherever situated (De Leon, 2010). AP)
CLASSES OF SHARES OF STOCK 1. Shares which have no par value, cannot have an
issued price of less than P5.00.
Kinds or classifications of shares 2. The entire consideration for its issuance
constitutes capital so that no part of it should be
1. Par value shares Distributed as dividends.
2. No par value shares 3. They cannot be issued as Preferred stocks.
3. Common shares 4. They cannot be issued by Banks, Building and
4. Preferred shares loan association, Trust companies, Insurance
5. Redeemable shares companies, and Public utilities.
6. Treasury shares 5. The Articles of incorporation must state the fact
7. Founder’s share that it issued no par value shares as well as the
8. Voting shares number of said shares
9. Non-voting shares 6. Once issued, they are deemed fully Paid and
10. Convertible shares non-assessable (CC, Sec. 6).
11. Watered stock
12. Fractional share 3. Common shares
13. Shares in escrow
14. Over-issued stock These are ordinarily and usually issued stocks
15. Street certificate without extraordinary rights and privileges, and
16. Promotion share entitle the shareholder to a pro rata division of
profits. It represents the residual ownership
Who may classify shares interest in the corporation. The holders of this kind
of share have complete voting rights and they
1. Incorporators – the classes and number of cannot be deprived of the said rights except as
shares which a corporation shall issue are first provided by law.
determined by the incorporators as stated in
the articles of incorporation filed with the SEC. 4. Preferred shares
2. Board of directors and stockholders – after the
corporation comes into existence, classification These entitle the shareholder to some priority on
of shares may be altered by the board of distribution of dividends and assets over those
directors and the stockholders by amending the holders of common shares. Preferred shares may be
articles of incorporation pursuant to Sec. 16. issued only with a stated par value (CC, Sec. 6).
1. Par value shares Kinds of preferred shares
Shares with a value fixed in the articles of 1. Preferred shares as to assets –gives the holder
incorporation and the certificates of stock. The par preference in the distribution of the assets of
value fixes the minimum issue price of the shares the corporation in case of liquidation.
(CC, Sec. 62). 2. Participating preferred shares – Entitled to
participate with the common shares in excess
Rule on the issuance of shares less than its par distribution
value 3. Non-participating preferred shares – Not
entitled to participate with the common shares
GR: A corporation cannot issue shares at less than in excess distribution.
its par value. 4. Preferred shares as to dividends–entitled to
receive dividends on said share to the extent
XPN: The prohibition applies only to original agreed upon before any dividends at all are paid
issuance of shares and not to the subsequent sale of to the holders of common stock.
treasury shares and sale of shares made by 5. Cumulative preferred shares – If a dividend is
stockholders. omitted in any year, it must be made up in a
later year before any dividend may be paid on
2. No par value shares the common shares in the later year.
6. Non-cumulative preferred shares – There is no
These are shares having no stated value in AOI. need to make up for undeclared dividends
Holders of preferred shares are not creditors

2019 GOLDEN NOTES
MERCANTILE LAW
Holders of preferred shares cannot compel the condition, one of the stockholders holding the
corporation to give them dividends. The preference preferred shares filed an action against the
only applies once dividends are declared. corporation to redeem his shares and pay the
dividends due. Will the suit prosper?
Preferred cumulative participating share of
stock A: NO. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
This is a kind of share which gives the holder earnings, this is subject to the condition that the
preference in the payment of dividends ahead of corporation has, after such redemption, assets in its
common stockholders and to be paid the dividends books to cover debts and liabilities inclusive of
due for prior years and to participate further with capital stock. Redemption, therefore, may not be
common stockholders in dividend declaration. made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
5. Redeemable shares corporation to meet its debts as they mature.
These are shares of stocks issued by a corporation Furthermore, the declaration of dividends is
which said corporation can purchase or take up dependent upon the availability of surplus profit or
from their holders upon expiry of the period stated unrestricted retained earnings, as the case may be.
in certificates of stock representing said shares (CC, Shareholders, both common and preferred, are
Sec. 8). considered risk takers who invest capital in the
business and who can look only to what is left after
NOTE: Under the Revised Corporation Code for corporate debts and liabilities are fully paid
Redeemable shares, their redemption shall now be (Republic Planters Bank v. Judge Agana, G.R. No.
subject to the rules and regulations that may be 51765. March 3, 1997).
issued by SEC, in addition to what may be stipulated
in the AOI and Certificate of Stock. 6. Treasury shares
Kinds of redeemable shares Shares that have been earlier issued as fully paid
and have thereafter been acquired by the
1. Compulsory - the corporation is required to corporation by purchase, donation, and redemption
redeem the shares. or through some lawful means (CC, Sec. 9).
2. Optional - the corporation is not mandated to
redeem the shares. NOTE: Treasury shares are not retired shares. They
do not revert to the unissued shares of the
Limitations on redeemable shares (ATVI) corporation but are regarded as property acquired
by the corporation which may be reissued or resold
1. Issuance of redeemable shares must be at a price to be fixed by the Board of Directors (SEC
expressly provided in the Articles of Rules Governing Redeemable and Treasury Shares,
incorporation; CCP No. 1-1982).
2. The Terms and conditions affecting said shares
must be stated both in the articles of Other means in which a corporation may
incorporation and in the certificates of stock acquire its own shares
3. Redeemable shares may be deprived of Voting
rights in the articles of incorporation, unless 1. To collect or compromise unpaid indebtedness
otherwise provided in the Code (CC, Sec. 6 [6]) to the corporation;
4. Redemption cannot be made if it will cause 2. To eliminate fractional shares;
Insolvency of the corporation. 3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
Reissuance of redeemed shares 4. Redemption
5. Close corporation.
Redeemable shares, once redeemed are retired
unless reissuance is expressly allowed in the AOI. Limitations on treasury shares
Q: Planters Bank issued preferred redeemable 1. They may be re-issued or sold again as long as
shares with a feature that entitles them to be it is for a reasonable price fixed by the BOD.
preferred in the payment of dividends. 2. Cannot participate in dividends.
Subsequently, the bank experienced liquidity 3. It has no voting right.
problems. The Central Bank ruled that the bank 4. It cannot be represented during stockholder’s
has a reserve deficiency. Despite of the meetings.

5. The amount of URE equivalent to the cost of of the
treasury shares being held shall be restricted Corporation.
from being declared and issued as dividends. Applicability
Must comply Is an exception
of the trust
NOTE: When treasury shares are sold below its par with the trust to the trust
fund
or issued value, there can be no watering of stock fund doctrine fund doctrine
doctrine
because such watering of stock contemplates an
original issuance of shares. 7. Founders' shares
Treasury shares distributed by way of dividends Shares classified as such in the articles of
incorporation and which may be given special
They can be distributed only as property dividends. preference in voting rights and dividend payments.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or NOTE: Where the exclusive right to vote and be
surplus profits. The distribution of cash or stock voted for in the election of directors is granted, such
dividends out of treasury shares would be right must be for a limited period not exceeding 5
converting the corporation into both a debtor and years subject to approval of the SEC, the period to
creditor for the same amount at the same time, or commence from the date of said approval (CC, Sec.
requiring it to take money or stock from one of its 7).
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property NOTE: Under the Revised Corporation Code,
divided to be issued out of the retained earnings Founder’s shares given the exclusive right to vote
previously used to support their acquisition and be voted for are not allowed to exercise that
provided that the amount of the said retained right in violation of the Anti-Dummy Law and the
earnings has not been subsequently impaired by Foreign Investment Act.
losses (SEC Opinion, July 17, 1984).
8. Voting shares
Note: Since a treasury share is a fully paid share re-
acquired by the corporation, it is not outstanding Shares with a right to vote. If the stock is originally
and may be re-issued and resold. It cannot receive issued as voting stock, it may not thereafter be
dividends before the resale, because the deprived of the right to vote without the consent of
corporation cannot grant dividends to itself. the holder.
(CIR vs Manning 66 SCRA 14.)
9. Non-voting shares
Treasury shares vs. Redeemable shares
Shares without right to vote. The law only
BASIS TREASURY REDEEMABLE authorizes the denial of voting rights in the case of
SHARES SHARES redeemable shares and preferred shares, provided
Shares so that there shall always be a class or series of shares
acquired by which have complete voting rights (CC, Sec. 6).
the Issued by the
corporation corporation Instances when holders of non-voting shares are
through when allowed to vote
Description
purchase, expressly so
donation, provided in These redeemable and preferred shares, when such
redemption or the AoI. voting rights are denied, shall nevertheless be
any other entitled to vote on the following fundamental
lawful means. matters:
Redeemable
shares may be 1. Amendment of articles of incorporation;
Can only be
acquired even 2. Adoption and amendment of by-laws;
acquired in
without 3. Sale, lease, exchange, mortgage, pledge or other
the presence
Manner of unrestricted disposition of all or substantially all of the
of
acquisition retained corporate property;
Unrestricted
earnings for as 4. Incurring, creating or increasing bonded
retained
long as it will indebtedness;
earnings
not result to 5. Increase or decrease of capital stock;
the insolvency 6. Merger or consolidation of the corporation with
another corporation or other corporations;

2019 GOLDEN NOTES
MERCANTILE LAW
7. Investment of corporate funds in another the company, or for services rendered in launching
corporation or business in accordance with this or promoting the welfare of the company.
Code; and
8. Dissolution of the corporation (CC, Sec. 6). 16. Watered stock
10. Convertible shares Shares issued below its par value or issued value.
Shares which are changeable by the stockholder NOTE: Watered stocks pertain only to original
from one class to another (such as from preferred to issuance of shares.
common) at a certain price and within a certain
period. A corporation can designate other classes of
stocks
GR: Stockholder may demand conversion at his
pleasure. There can be other classifications as long as they are
indicated in the AOI, stock certificate and not
XPN: Otherwise when restricted by the articles of contrary to law.
incorporation.
PAYMENT OF BALANCE OF SUBSCRIPTION
NOTE: In the absence of express provision in the
AOI as to their convertibility feature, preferred Time when the balance of the subscription
shares cannot be converted into common. The should be paid:
terms of the preferred share contract cannot be
changed without the consent of the stockholders. 1. On the date specified in the subscription
contract, without need of demand or call;
The conversion of no par value shares to par value 2. If no date of payment has been specified, on the
is allowed by SEC provided there would be no date specified on the call made by the BOD (CC,
change in the stockholder’s percentage interest in Sec. 67);
the total assets of the corporation. 3. If no date of payment has been specified on the
call made, within 30 days from the date of call;
11. Fractional share and
4. When insolvency supervenes upon a
A fractional share is a share of equity that is less corporation and the court assumes jurisdiction
than one full share. to wind it up, all unpaid subscriptions become
payable on demand, and are at once
12. Shares in escrow recoverable, without necessity of any prior call.
Subject to an agreement by virtue of which the share Accrual of interest on unpaid balance
is deposited by the grantor or his agent with a third
person to be kept by the depositary until the Unpaid balance will accrue interest if so required by
performance of certain condition or the happening the by‐laws and at the rate of interest fixed in the
of a certain event contained in the agreement. by‐laws. If no rate of interest is fixed in the by‐laws,
such rate shall be deemed to be the legal rate (CC,
13. Over-issued stock Sec. 66).
It is a stock issued in excess of the authorized capital The above interest is different from the interest
stock. Stocks which are issued in this manner are contemplated by Sec. 67, the unpaid balance
null and void. involved in which, will only accrue interest, by way
of penalty, on the date specified in the contract of
14. Street certificate subscription or on the date stated in the call made
by the board.
It is a stock certificate endorsed by the registered
holder in blank and the transferee can command its NOTE: Interest contemplated in Sec. 66 pertains to
transfer to his name from issuing corporation. moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67
15. Promotional share speaks of compensatory interest which is the
interest on account of delay
This is a share issued to promoters or those in some
way interested in the company, for incorporating Moratory vs. Compensatory interest

Compensatory SEC opined on July 21, 1976 that the following are
Moratory Interest
interest the requisites for a valid call:
(CC, Sec. 66)
(CC, Sec. 67)
Interest which accrues Interest on unpaid 1. It must be made in the manner prescribed by
by way of penalty, on subscription by reason law;
the date specified in of amortization/ 2. It must be made by the BOD; and
the contract of installments. It can be 3. It must operate uniformly upon all the
subscription or on the collected only if shareholders.
date stated in the call stipulated and for the
made by the board. The rate specified in the The call of the board of directors is not always
stockholder liable for contract and fixed by necessary to collect payment for unpaid
interest at the legal the by-laws. If the rate subscription
rate on such balance, is silent the legal rate
unless a different rate shall be followed. The necessity for calls depends upon the provisions
of interest is provided of the contract of subscription. When no time is
in the by-laws, fixed for payment, the subscription is payable only
computed from such upon call by the BOD which may be made at any
date until full payment. time the board may decide (De Leon, supra).
Effect of failure to pay the subscription on the However, a call is not necessary where:
date it is due 1. The subscription contract specifies the date of
payment; or
It shall render the entire balance due and payable 2. The corporation becomes insolvent (Sundiang
and shall make the shareholder liable for Sr. & Aquino, 2009)
compensatory interest at the legal rate on such 3. The subscriber becomes insolvent (De Leon,
balance, unless a different rate of interest is supra)
provided in the by‐laws.
NOTICE REQUIREMENT
Remedies of corporations to enforce payment of
stocks The notice of the call must be served on the
stockholders concerned in the manner prescribed
1. Extra-judicial sale at public auction (CC, Sec. 67) in the call, which may either be by registered mail
2. Judicial action (CC, Sec. 70) and/or personal delivery and publication.
CALL BY BOARD OF DIRECTORS Notice of call is necessary to bind the stockholders

(Ibid., citing Baltazar v. Lingayen Gulf Electric Power,
Call for the payment by the board of directors G.R. No. L-16236, June 30, 1965).
for unpaid subscription
SALE OF DELINQUENT SHARES
A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and If within 30 days from expiry of the date of payment
payable and the same or such percentage thereof or from the date stated in the call made by the board,
shall be collected, together with all accrued interest, and no payment is made, all stocks covered by said
on a specified date and that if no payment is made subscription shall thereupon become delinquent
within 30 days from said date, all stocks covered by and shall be subject to delinquency sale unless the
said subscription shall thereupon become BOD orders otherwise (CC, Sec. 67).
delinquent and shall be subject to public auction
sale. Effects of stock delinquency
Unpaid claim 1. Upon the stockholder

a. Accelerates the entire amount of the unpaid
It refers to any unpaid subscription, and not to any subscription
indebtedness which a subscriber or stockholder b. Subjects the shares to interest expenses
may owe the corporation arising from any other and costs
transaction (Sundiang Sr. & Aquino, 2009, citing c. Disenfranchises the shares from any right
China Bank v. CA, G.R. No. 117604, March 26, 1997). that inheres to a stockholder, except the
right to dividends (CC, Sec. 71) .
Requisites for a valid call

2019 GOLDEN NOTES
MERCANTILE LAW
NOTE: Dividends shall be applied to any b. NO. No certificate of stock shall be issued to a
amount due on said shares, or, in the case subscriber until the full amount of subscription
of stock dividends, to be withheld by the together with interest and expenses (in case of
corporation until full payment of the delinquent shares), if any is due, has been paid.
delinquent shares (CC, Sec. 43). (Sec 64) Clearly, since Ace Cruz did not pay the
full subscription yet, the certificate of stock
2. Upon the director owning delinquent shares shall not be issued to him.
a. If the delinquent stockholder is a director,
the director shall continue to be a director Call by resolution of the Board of Directors
but he cannot run for re-election (Sundiang
Sr. & Aquino, 2009). Stocks become delinquent when the unpaid
b. A delinquent stockholder seeking to be subscription and accrued interests thereon are not
elected as director may not be a candidate paid within 30 days from their due date as specified
for, not be duly elected to, the board. in the subscription contract or in the call by the
board of directors.
Status of the stockholder from delinquency date
before auction sale The delinquency is automatic after said 30 day
period and does not need a declaration by the board
GR: All the rights of the stockholder are suspended. making the stock delinquent.
XPN: Right to dividends. Notice of sale

With respect to dividends, Section 43 states that
cash dividends should be applied against unpaid The notice of sale and copy of the board resolution
subscription while stock dividends should be ordering the sale shall be:
withheld until full payment of the subscription.
1. Sent to every delinquent stockholder either
Q: Ace Cruz subscribed to 100,000 shares of personally or by registered mail or;
stock of JP Development Corporation, which has 2. Published once a week for 2 consecutive weeks
a par value of P 1 per share. He paid P25,000.00 in a newspaper of general circulation in the
and promised to pay the balance before province or city where the principal office of the
December 31, 2008. JP Development corporation is located (CC, Sec. 68).
Corporation declared cash dividends on October
15, 2008 payable on December 1, 2008. Procedure for the sale of delinquent stocks
a. For how many shares is Ace Cruz entitled to 1. Resolution – the board shall issue resolution
be paid cash dividends? Explain. ordering the sale of delinquent stock.
b. On December 1, 2008, can Ace Cruz compel 2. Notice – notice of said sale, with a copy of the
JP Development Corporation to issue to him resolution, shall be sent to every delinquent
the stock certificate corresponding to the stockholder either personally or by registered
P25,000 paid by him? (2008 Bar) mail.
3. Publication – the notice shall furthermore be
A: published once a week for two consecutive
a. Ace is entitled to the whole amount of his shares weeks in a newspaper of general circulation in
which is 100,000. A contract of subscription is the province or city where the principal office of
an indivisible contract. If only partial payment the corporation is located
for the subscription was made, it cannot be the 4. Sale – the delinquent stock shall be sold at the
basis for the amount of cash dividend in favor of public auction to be held not less than 30 days
the stockholder. Cash dividends due on nor more than 60 days from the date stocks
delinquent stocks shall first be applied to the become delinquent.
unpaid balance on the subscription plus cost 5. Transfer – the stock so purchased shall be
and expenses. (Sec. 43) Stocks become transferred to such purchaser in the books of
delinquent 30 days from the due date specified the corporation and a certificate for such stock
in the contract of subscription or in the date shall be issued in his favor.
stated in the call made by the board. (Sec 67) In 6. Credit remainder – the remaining shares, if any,
this case, the cash dividend is not yet shall be credited in favor of the delinquent
delinquent. Ace Cruz, therefore can claim the stockholder who shall likewise be entitled to
entire cash dividend payable on December 1, the issuance of a certificate of stock covering
2008. the same (CC, Sec. 68; Aquino, 2014).

Discontinuance or cancellation of delinquency Prescription period of the action to question a
sale delinquency sale
Delinquency sale may be discontinued or cancelled For stock corporations, the action prescribes 6
if the delinquent stockholder pays the unpaid months from such sale. However, in case of non-
balance plus interest, costs and expenses on or stock corporations, the applicable period is 4 years
before the date specified for the sale or when the under the Civil Code.
BOD orders otherwise (CC, Sec. 68).
CERTIFICATE OF STOCK
Winning bidder in a delinquency sale
A certificate of stock is a written instrument signed
1. The person participating in the delinquency by the proper officer of a corporation stating or
sale who offers to pay the full amount of the acknowledging that the person named therein is the
balance of the subscription together with the owner of a designated number of shares of its stock.
accrued interest, costs of advertisement and It indicates the name of the holder, the number, kind
expenses of sale, for the smallest number of and class of shares represented, and the date of
shares;. issuance.
2. If there is no bidder as mentioned above, the
corporation, subject to the provisions of Sec. 68 It is not stock in the corporation but is merely
of CC, may bid for the same, and the total evidence of the holder’s interest and status in the
amount due shall be credited as paid in full in corporation.
the books of the corporation. The purchase by
the corporation must be made out of net NOTE: Under the Revised Corporation Code, the SEC
earnings in view of the trust fund doctrine. may require corporations whose securities are
Thereafter, the reacquired shares shall be traded in trading markets and which can reasonably
considered as treasury shares (CC, Sec. 41; De demonstrate their ability to do so, to issue their
Leon, 2010). securities or shares of stock in uncertified or in
scripless form in accordance with the rules imposed
NOTE: The board is not bound to accept the highest by SEC.
bid unless the contrary appears. The bidder is the
one making the offer to purchase, which the Shares of stock vs. Certificates of stock
corporation is free to accept or reject (Ibid.)
CERTIFICATE OF
SHARE OF STOCK
Q: What happens to the remaining shares, if any, STOCK
were not sold? Evidence of the holder’s
ownership of the stock
A: The remaining shares, if any, shall be credited in Unit of interest in a
and of his right as a
favor of the delinquent stockholder who shall corporation
shareholder and of his
likewise be entitled to the issuance of a certificate of extent specified therein.
stock covering such shares (CC, Sec. 68). It is an incorporeal or It is concrete and
intangible property tangible
Rule on questioning the sale of delinquent share It may be recognized
in public auction by the corporation It may be issued only if
even if the the subscription is fully
GR: The sale at public auction of delinquent share is subscription is not paid.
absolute and not subject to redemption. fully paid.
XPN: An action may be filed to question the sale, the NATURE OF THE CERTIFICATE
requisites for which are:
1. There should be allegation and proof of A certificate of stock is a prima facie evidence of
irregularity or defect in the notice of sale or ownership and evidence can be presented to
in the sale itself. determine the real owner of the shares (Bitong vs.
2. The party filing the action must first pay the CA, supra).
party holding the stock the sum for which
the stock was sold with legal interest from It is not essential to the existence of a share of stock
the date of sale. or the creation of the relation of the shareholder
3. The action is filed within 6 months from the with the corporation (Tan v. SEC, G.R. No. 95696,
date of sale (CC, Sec. 69). March 3, 1992).

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MERCANTILE LAW
A certificate of stock has a value separate and Q: A is the registered owner of Stock Certificate
distinct from the value of the shares represented. No. 000011. He entrusted the possession of said
certificate to his best friend B who borrowed the
UNCERTIFICATED SHARES said endorsed certificate to support B's
application for passport (or for a purpose other
An uncertificated share is a subscription duly than transfer). But B sold the certificate to X, a
recorded in the corporate books but has no bona fide purchaser who relied on the endorsed
corresponding certificate of stock yet issued. certificates and believed him to be the owner
thereof. Can A claim the shares of stocks from X?
Stockholder may alienate his shares even if Explain. (2001 Bar)
there is no certificate of stock issued by the
corporation A: NO. Since the shares were already transferred to
"B", "A" cannot claim the shares of stock from "X".
The absence of a certificate of stock does not The certificate of stock covering said shares have
preclude the stock holder from alienating or been duly endorsed by "A" and entrusted by him to
transferring his shares of stock. "B". By his said acts, "A" is now estopped from
claiming said shares from "X", a bona fide purchaser
Transfers of fully paid subscription but the who relied on the endorsement by “A” of the
corporations has not yet issued a certificate of certificate of stock.
stock
Requirements for valid transfer of stocks
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the The following are the requirements for valid
transfer may be effected by the subscriber or transfer of stocks:
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and 1. If represented by a certificate, the following
submitting said contract or deed to the corporate must be strictly complied with:
secretary for recording. a. Indorsement by the owner and his agent
b. Delivery of the certificate
Transfers of subscription not fully paid c. To be valid to third parties and to the
corporation, the transfer must be recorded
In case of subscription not fully paid, the in the books of the corporation (Rural Bank
corporation may record such transfer, provided that of Lipa v. CA, G.R. No. 124535, Sepember 28,
the transfer is approved by the board of directors 2001).
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the 2. If NOT represented by a certificate (such as
subscription. when the certificate has not yet been issued or
where for some reason is not in the possession
NEGOTIABILITY of the stockholder):
a. By means of deed of assignment; and
Stock certificate is not negotiable b. Such is duly recorded in the books of the
corporation. (Sundiang Sr. & Aquino, 2009)
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be Effect of the non-payment of Documentary
transferred by delivery, it is well-settled that the Stamp Tax
instrument is NON-NEGOTIABLE, because the
holder thereof takes it without prejudice to such No sale, exchange, transfer or similar transaction
rights or defenses as the registered owner or intended to convey ownership of, or title to any
creditor may have under the law, except insofar as share of stock shall be registered in the books of the
such rights or defenses are subject to the limitations corporation unless the receipts of payment of the
imposed by the principles governing estoppels tax herein imposed is filed with and recorded by the
(Republic v. Sandiganbayan,G.R. Nos. 107789 & stock transfer agent or secretary of the corporation
147214, April 30, 2003). (Revenue Regulations No. 6-2008, Sec. 11).
Certificates of stock may be issued only to Stockholder may bring suit to compel the
registered owners of stock. The issuance of “bearer” corporate secretary to register valid transfer of
stock certificates is not allowed under the law (SEC stocks
Opinion No. 05-02, Jan. 31, 2005).

It is the corporate secretary’s ministerial duty and NOTE: If the contract of subscription is still not fully
obligation to register transfers of stocks provided paid, the consent of the corporation must be
all the requirements for a valid transfer had been obtained first since there would be a change of
complied with. debtor. Hence, the consent of the creditor
(corporation) is necessary.
Remedies where corporation refuses to transfer
certificate of stocks Kind of transfer that requires registration in the
books of the corporation
1. Petition for mandamus
Only absolute transfers are required to be
In case of wrongful refusal of the corporate registered in the books of the corporation. Hence,
secretary to record the transfer, specific registration in the stock and transfer book is not
performance and mandamus are the common necessary if the conveyance is by way of chattel
remedies. Remedy of mandamus is available if mortgage. However, registration must be had with
the following requisites are present: the Register of Deeds (Chua Guan v. Samahan,
a. Due application therefor has been made; supra.).
b. Said application has been denied;
c. There are no unpaid claims against the Validity of a transfer that is not recorded
stock by the corporation;
d. An ordinary action for damages against If the transfer is not recorded, it is valid but only
the corporation would be inadequate; insofar as the parties to the transfer are concerned.
and To bind the corporation, the deed affecting the
e. An action in the nature of a suit in equity transfer must be duly recorded in the corporate
to secure a decree ordering the transfer books (CC, Sec. 63).
would also be inadequate [Hager v.
Bryan, 19 Phil. 138 (1912)]. Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
NOTE: However, by the weight of authority, it is Nicolas Jomouad, ex-officio sheriff. Said action
held that mandamus will not lie in ordinary stemmed from an earlier case for collection of
cases to compel a corporation or its officers to sum of money, filed by the spouses Atinon
transfer stock on its books and issue new against Jaime Dico. In that case the trial court
certificates to the transferee. rendered judgment ordering Dico to pay the
spouses Atinon. After said judgment became
2. Suit for specific performance of an express or final and executory, the sheriff proceeded with
implied contract its execution. In the course thereof, the
3. May sue for damages where specific Proprietary Ownership Certificate (POC) in the
performance cannot be granted Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
NOTE: There must be a special power of attorney auction. Claiming ownership over the subject
executed by the registered owner of the share certificate, Garcia filed the action for injunction
authorizing transferor to demand transfer in the to enjoin the spouses Antinon from proceeding
stock and transfer book (Ponce v. Alsons Cement, G.R. with the auction.Garcia contends that the
No. 139802, December 10, 2002). subject stock of certificate, albeit in the name of
Dico, cannot be levied upon the execution to
The law does not prescribe a period within which satisfy his judgment debt because even prior to
the registration of the transfer of shares should be the institution of the case for collection of sum of
effected. Hence, the action to enforce the right does money against him, the spouses Atinon had
not accrue until there has been a demand and a knowledge that Dico already conveyed back the
refusal concerning the transfer. ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
Valid refusal by the corporation to register the covering the subject certificate in favor of
transfer of shares Garcia.
The corporation may refuse to register the transfer Is a bona fide transfer of the shares of a
of shares if it has an existing unpaid claim over the corporation, not registered or noted in the
shares to be transferred. The “unpaid claim” refers books of the corporation, valid as against a
to the unpaid subscription on the shares transferred subsequent lawful attachment of said shares,
and not to any other indebtedness that the regardless of whether the attaching creditor had
transferor may have to the corporation (CC, Sec. 63). actual notice of said transfer or not?

2019 GOLDEN NOTES
MERCANTILE LAW
A: NO. A transfer of shares not registered in the In this case, Vertex fully paid the purchase price by
books of the corporation is not valid as against February 11, 1999 but the stock certificate was only
subsequent attachment of the shares. All transfers delivered on January 23, 2002 after Vertex filed an
of shares not so entered in the books of the action for rescission against FEGDI.
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the Under these facts, considered in relation to the
corporation and to subsequent purchasers in good governing law, FEGDI clearly failed to deliver the
faith, and, indeed, as to all persons interested, stock certificates, representing the shares of stock
except the parties to such transfers. Hence, the purchased by Vertex, within a reasonable time from
transfer of the subject certificate made by Dico to the point the shares should have been delivered.
Garcia was not valid as to the spouses Atinon, the This was a substantial breach of their contract that
judgment creditors, as the same still stood in the entitles Vertex the right to rescind the sale under
name of Dico, the judgment debtor, at the time of the Article 1191 of the Civil Code. It is not entirely
levy on execution (Nemesio Garcia v. Nicolas correct to say that a sale had already been
Jomouad, et al., G.R. No. 133969, January 26, 2000). consummated as Vertex already enjoyed the rights
a shareholder can exercise. The enjoyment of these
Q: Fil-Estate Golf and Development, Inc. (FEGDI) rights cannot suffice where the law, by its express
is a stock corporation whose primary business terms, requires a specific form to transfer
is the development of golf courses. Fil-Estate ownership.
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development. Mutual restitution is required in cases involving
FEGDIwas the developer of the Forest Hills Golf rescission under Article 1191 of the Civil Code; such
and Country Club (Forest Hills) and, in restitution is necessary to bring back the parties to
consideration for its financing support and their original situation prior to the inception of the
construction efforts, was issued several shares contract. Accordingly, the amount paid to FEGDI by
of stock of Forest Hills. reason of the sale should be returned to Vertex (Fil-
Estate Golf and Development, Inc. and Fil-Estate
FEGDI sold on installment, to RS Asuncion Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
Construction Corporation (RSACC) one common 202079, June 10, 2013).
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to Q: May Forest Hills appeal the CA decision which
Vertex Sales and Trading, Inc. (Vertex). RSACC ordered the recisision of the sale?
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex A: NO. It was not a party to the sale even though the
as a shareholder. For this reason, Vertex subject of the sale was its share of stock. The
enjoyed membership privileges in Forest Hills. corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
Despite Vertex’s full payment, the share donation, or any other mode of conveyance) need
remained in the name of FEGDI.As the demands not be a party to the transaction, as may be inferred
to issue certificate in its name went unheeded, from the terms of Section 63 of the Corporation
Vertex filed a Complaint for Rescission with Code. However, to bind the corporation as well as
Damages and Attachment against FEGDI, FELI third parties, it is necessary that the transfer is
and Forest Hills. It averred that the petitioners recorded in the books of the corporation. In the
defaulted in their obligation as sellers when present case, the parties to the sale of the share
they failed and refused to issue the stock were FEGDI as the seller and Vertex as the buyer
certificate covering the subject share despite (after it succeeded RSACC). As party to the sale,
repeated demands. FEGDI is the one who may appeal the ruling
Is the delay in the issuance of the stock rescinding the sale.
certificate a substantial breach of the sale which
entitles Vertex entitled to the rescission The remedy of appeal is available to a party who
thereof? has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
A: YES. Section 63 of the Corporation Code provides, judgment. A party, in turn, is deemed aggrieved or
among others, that shares of stock may be prejudiced when his interest, recognized by law in
transferred by delivery of the certificate or the subject matter of the lawsuit, is injuriously
certificates indorsed by the owner or his attorney- affected by the judgment, order or decree." The
in-fact or other person legally authorized to make rescission of the sale does not in any way prejudice
the transfer. Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously

affected (Forest Hills Golf & Country Club v. Vertex fully paid, the basis of which is the doctrine of
Sales and Trading, Inc., G.R. No. 202205, March 6, indivisibility of subscription.
2013). 6. The original certificate must be surrendered
where the person requesting the issuance of a
Validity of stock transfer certificate is a transferee from the stockholder
(CC, Sec. 64).
1. As between the parties, the requisite for a valid
transfer is merely the delivery of the certificate Full payment
indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the Rule: Sec 64 prohibits the issuance of certificate of
transfer. stock to a subscriber who has not paid “the full
2. As against third persons and the corporation, the amount of his subscription together with interest
transfer of shares must be entered and noted and expenses (in case of delinquent shares), if any is
upon the books of the corporation so as to show due.
the names of the parties to the transaction, the
date of the transfer, the number of the NOTE: The provision enunciates the doctrine that a
certificate, and the number of shares subscription is one, entire and indivisible contract,
transferred. and therefore, it cannot be divided into portions so
that the stockholder shall not be entitled to the
Effects of an unregistered transfer of shares certificate of stock until he has paid the full amount
of his subscription together with interest and
1. It is valid and binding as between the transferor expenses, if any is due.
and the transferee.
2. It is invalid or ineffective, as to the corporation, Payment pro-rata
as against corporate creditors, as to the
attaching or executing creditors of the In the case of Baltazar v. Lingayen Gulf Electric Co.,
transferor, subsequent purchasers in good faith 14 SCRA 522 (1965), the Court ruled that, unless
without notice of the transfer, and as to all prohibited by the by-laws, certificates of stock may
persons interested except the parties to such be issued for less than the number of shares
transfers. subscribed provided the par value of each of the
stocks represented by said certificate has been fully
ISSUANCE paid.
Issuance of certificate of stock NOTE: This provides a contrary view that a

subscription is one, entire and indivisible contract.
It may only be issued until the full amount of the
stockholder’s subscription together with the In other words, in the absence of provisions in the
interest and expenses (in case of delinquent shares) by-laws to the contrary, a corporation may apply
if due has been paid (CC, Sec. 64). payments made by subscribers on account of their
subscriptions, either as: (a) full payment for the
Requisites for the issuance of the certificate of corresponding number of shares, the par value of
stock which is covered by such payment, or (b) as
payment pro rata to each and all the entire number
1. The certificate must be signed by the president of shares subscribed for. This rule applies to all
or vice-president, countersigned by the kinds and classes of stock corporations. The two
corporate secretary or assistant secretary alternatives cannot be availed of at the same time
(Bitong v. CA, G.R. No. 123553, July 13, 1998). (SEC Opinion, Feb. 7, 1968).
NOTE: Unless it complies with the foregoing, it LOST OR DESTROYED CERTIFICATES

is not deemed issued.
Procedure for the issuance of a new stock
2. The certificate must be sealed with the seal of certificate in lieu of those which have been lost,
the corporation. stolen or destroyed
3. The certificate shall be issued in accordance
with the by-laws. 1. The registered owner of a certificate of stock in
4. The certificate must be delivered. a corporation or his legal representative shall
5. The par value as to par value shares, or full file with the corporation an affidavit in
subscription as to no par value shares must be triplicate setting forth:

2019 GOLDEN NOTES
MERCANTILE LAW
a. If possible, the circumstances as to how the If there are oppositions on the issuance of new
certificate was lost, stolen or destroyed; certificates, the corporation may file an interpleader
b. The number of shares represented by such proceeding to compel the parties to litigate among
certificate; themselves.
c. The serial number of the certificate and the
name of the corporation which issued the Liability of the corporation for the issuance of
same. new certificates of stock in case of lost or
destroyed certificate
He shall also submit such other information and
evidence which he may deem necessary. GR: No action may be brought against any
corporation which shall have issued certificate of
2. After verifying the affidavit and other stock in lieu of those lost, stolen or destroyed
information and evidence with the books of the pursuant to the procedure above-described (safe
corporation, the latter shall publish a notice in a harbor provision).
newspaper of general circulation published in
the place where the corporation has its XPN: Where there is fraud, bad faith, or negligence
principal office, once a week for three (3) on the part of the corporation and its officers. (ibid)
consecutive weeks at the expense of the
registered owner of the Certificate of Stock. Q: A stockholder claimed that his stock
certificate was lost. After going through with the
Contents of notice: procedure for the issuance of lost certificate,
a. Name of the corporation; and no contest was presented within 1 year from
b. Name of the registered owner; the last publication, the corporation issued a
c. Serial number of the certificate of stock; new certificate of stock in lieu of the supposed
and lost certificate. The stockholder immediately
d. Number of share represented by the sold his shares and endorsed the replacement
certificate of stock. certificate to a buyer. It turned out that the
original certificate was not lost, but sold and
3. After the expiration of one (1) year from the endorsed to another person.
date of the last publication, if no contest has
been presented to said corporation regarding a. May the corporation be made liable by the
said certificate of stock, the corporation shall aggrieved party?
cancel in its books the certificate of stock which b. Who will have a better right over the shares,
has been lost, stolen or destroyed and issue in the endorsee of the original certificate or the
lieu thereof new certificate of stock. endorsee of the replacement certificate?
After the expiration of the 1 year period to A:

contest, such right shall be barred unless the a. NO. The corporation cannot be made liable.
registered owner files a bond or other security Except in cases of fraud, bad faith, or negligence
in lieu thereof as may be required, effective for on the part of the corporation and its officers,
a period of 1 year, for such amount and in such no action may be brought against any
form and with such sureties as may be corporation which has issued certificates of
satisfactory to the BOD, in which case, a new stock in lieu of those lost, stolen, or destroyed
certificate may be issued even before the pursuant to the procedure prescribed by law.
expiration of the 1 year period provided herein. b. The endorsee of the replacement certificate has
a better right to the shares. After expiration of 1
4. Provided that if a contest has been presented to year from the date of the last publication, and
said corporation or if an action is pending in no contest has been presented to said
court regarding the ownership of said corporation regarding said certificate, the right
certificate of stock which has been lost, stolen to make such contest has been barred and said
or destroyed, the issuance of the new certificate corporation already cancelled in its books the
of stock in lieu thereof shall be suspended until certificate which have been lost, stolen, or
the final decision by the court regarding the destroyed and issued in lieu thereof new
ownership of said certificate of stock which has certificate.
been lost, stolen or destroyed (CC, Sec. 73).
Q: Juan was a stockholder of X Co. He owned a
Oppositions on the issuance of new certificates total of 500 shares evidenced by Cert of Stock No
1001. He sold the shares to Pedro. After getting
paid, Juan indorsed and delivered said

Certificate of Stock No 1001 to Pedro. The compel performance. The stockholder cannot take
following day, Juan went to the offices of the the law on to his hands; otherwise such entry shall
corporation and claimed that his Certificate of be void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5,
Stock No 1001 was lost and that, despite diligent 1997).
efforts, the certificate could not be located. The
formalities prescribed by law for the Probative value of the stock and transfer book
replacement of the lost certificate were
complied with. Eventually X Co issued in The stock and transfer book is the best evidence of
substitution of the lost certificate, Cert of Stock the transactions that must be entered or stated
No 2002. Juan forthwith transferred for valuable therein. However, the entries are considered prima
consideration the new certificate to Jose who facie evidence only and may be subject to proof to
knew nothing of the previous sale to Pedro. In the contrary (Bitong vs. CA, supra).
time, the corporation was confronted with the
conflicting claims of Jose and Pedro. The BOD of DISPOSITION AND ENCUMBRANCE OF SHARES
X Co invited you to enlighten them on these
questions; viz: SALE OF SHARES
a. If a suit were to be initiated in order to Registration by the corporation of the transfer

resolve the controversy between Pedro and of shares in case of alienation
Jose, should the matter be submitted to the
SEC or to the regular courts? As between the parties to the contract of sale,
b. Between Jose and Pedro, whom should the registration of the transfer of shares is not required.
corporation so recognize as the rightful However, until the shares are fully paid, such
stockholder? How would you respond to the transfer cannot be recorded in the books of the
above queries? (1997 Bar) corporation. Consequently, the transferee will not
be considered as a stockholder.
A:
a. The jurisdiction of the matter belongs to the Reasons for the recording of the alienation of
regular courts. Under section 5.2 of the SRC as shares
amended, the jurisdiction for intra-corporate
controversies was transferred from the SEC to 1. To enable the corporation to know at all times
the regular courts. their actual stock holders;
b. The corporation should recognize both Pedro 2. To afford the corporation the opportunity to
and Jose as rightful stockholders if there is no object or refuse its consent to the transfer in
over-issuance of shares resulting from the two case it has any claim against the stock; and
transactions without prejudice to the right of 3. To avoid fictitious and fraudulent transfer.
the corporation to claim against Juan for the
value of the shares sold to Jose. ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
STOCK AND TRANSFER BOOK
Requisites for a restriction to be valid
CONTENTS
1. Restrictions are provided in the articles of
1. All stocks in the name of the stockholders incorporation;
alphabetically arranged 2. It must be printed at the back of the certificate
2. Amount paid and unpaid on all stocks and the of stock; and
date of payment of any installment 3. Must not be more onerous than the right of first
3. Alienation, sale or transfer of stocks refusal
4. Other entries as the by-laws may prescribe
(Sundiang Sr. & Aquino, 2009) Corporation can provide regulations to the
sale/transfer of the shares of stockholders
WHO MAY MAKE VALID ENTRIES
Corporation can provide regulations to the
Entries in stock and transfer books sale/transfer of the shares of stockholders but the
authority granted to a corporation to regulate the
The obligation and duty to make proper entries in transfer of its stock does not empower it to restrict
stock and transfer books falls on the corporate the right of a stockholder to transfer his shares, but
secretary. If the corporate secretary refuses to merely authorizes the adoption of regulations as to
comply, the stockholder may rightfully bring suit to the formalities and procedure to be followed in

2019 GOLDEN NOTES
MERCANTILE LAW
effecting transfer (Thomson v. CA, G.R. No. 116631, subscription. Can Nava compel the corporation
October 28, 1998). to register the sale?
A stockholder can transfer his shares without A: NO. The corporation has a claim on the said
being fully paid shares for the unpaid balance of Po's subscription. A
stock subscription is a subsisting liability from the
The incomplete payment of the subscription does time the subscription is made. The subscriber is as
not preclude the subscriber from alienating his much bound to pay his subscription as he would be
shares of stock. However, the transfer shall be valid to pay any other debt (Ibid).
only between the parties. The corporation has the
right to refuse from recording the sale in its books. Sale of full paid shares
A transferee of the partially paid shares cannot Sale of fully paid shares is allowed even without the
compel the corporation to record the transfer of consent of the corporation as long as the requisites
shares in its books, even though he has no for the valid transfer of shares are complied.
knowledge that they are not fully paid
Q: Four months before his death, PX assigned
Shares of stock against which the corporation holds 100 shares of stock registered in his name in
any unpaid claim shall not be transferable in the favor of his wife and his children. They then
books of the corporation. Hence, a transferee of the brought the deed of assignment to the proper
partially paid shares cannot compel the corporation corporate officers for registration with the
to record the transfer of shares in its books, even request for the transfer in the corporation's
though he has no knowledge that they are not fully stock and transfer books of the assigned shares,
paid (CC, Sec. 63). the cancellation of the stock certificates in PX's
name, and the issuance of new stock certificates
Stockholder cannot sell a portion of the shares in the names of his wife and his children as the
not fully paid new owners. The officers of the Corporation
denied the request on the ground that another
A stockholder who has not paid the full amount of heir is contesting the validity of the deed of
his subscription cannot transfer a portion of his assignment. May the Corporation be compelled
subscription in view of the indivisible nature of the by mandamus to register the shares of stock in
subscription contract (Villanueva, 2009). the names of the assignees? (2004 Bar)
Liability of the transferee for the balance of the A: YES. The corporation may be compelled by
purchase price in case the stockholder on record mandamus to register the shares of stock in the
fails to pay the same name of the assignee. The only legal limitation
imposed by Section 63 of the Corporation Code is
In case the stockholder on record fails to pay the pay when the Corporation holds any unpaid claim
the balance of the purchase price, he is still liable for against the shares intended to be transferred. The
the balance of the purchase price. Unless the alleged claim of another heir of PX is not sufficient
transfer of the shares is recorded, the stockholder is to deny the issuance of new certificates of stock to
still the owners of the shares as far as the his wife and children. It would be otherwise if the
corporation is concerned. transferee's title to the shares has no prima facie
validity or is uncertain.
REASON: The subscriber is as much bound to pay
his subscription as he would be to pay any other Recording of a deed of assignment with the SEC
debt (Nava v. Peers Marketing Corp., G.R. No. L-28120 without the transfer of shares does not bind the
November 25, 1976). corporation and third persons
Q: Po subscribed to 80 shares of Peers The recording of a deed of assignment does not give
Marketing Corporation at one hundred pesos a rise to any legal benefit to the corporation or any
share with a total value of 8,000 pesos. Po person (Sec Memo Circular No. 17, Series of 2004).
initially paid 2,000 pesos (25% of the amount of
subscription). Without paying the full REQUISITES OF A VALID TRANSFER
subscription price, Po sold to Nava 20 of his 80
shares. Nava requested the officers of the If represented by a certificate, the following must be
corporation to register the sale in the books of strictly complied with:
the corporation. The request was denied
because Po has not paid fully the amount of his 1. Indorsement by the owner and his agent;

2. Delivery of the certificate; It is the extinguishment of the franchise of a
3. To be valid to third parties and to the corporation and the termination of its corporate
corporation, the transfer must be recorded existence (Sundiang Sr. & Aquino, 2009).
in the books of the corporation (Rural Bank
of Lipa v. CA, G.R. No. 124535, Sepember 28, De jure and de facto dissolution
2001); and
4. No shares of stock against which the De jure dissolution –dissolution in law adjudged
corporation holds any unpaid claim shall be and determined by judicial sentence or brought
transferrable (CC, Sec. 63). about by an act of or with the consent of the
sovereign power or which results from the
NOTE: Unpaid claim refers to claim arising from expiration of the charter period of corporate life.
unpaid sunscription, and not to any indebtedness
which a stockholder or subscriber may owe to the De facto dissolution- takes place in substance and
corporation arising from any other transaction in fact when the corporation by reason of
(China Banking Corp. v. CA and Valley Golf and insolvency, cessation of business, or otherwise
Country Club, G.R. No. 117604, March 26, 1997). suspends all its operations and goes into liquidation
still retaining its primary franchise to be a
If NOT represented by a certificate (such as when corporation.
the certificate has not yet been issued or where for
some reason is not in the possession of the Two legal steps in corporate dissolution
stockholder):
1. The termination of the corporate existence at
1. By means of deed of assignment; and least as far as the right to go on doing ordinary
2. Such is duly recorded in the books of the business is concerned;
corporation (Sundiang Sr. & Aquino, 2009) 2. The winding up of its affairs, the payment of its
debts, and the distribution of its assets among
INVOLUNTARY DEALINGS WITH SHARES the shareholders or members and other
persons interested. After winding up, the
It refers to such writ, order or process issued by a existence of the corporation is terminated for
court of record affecting shares of stocks which by all purposes.
law should be registered to be effective, and also to
such instruments which are not the willful acts of Effects of the dissolution of a corporation
the registered owner and which may have been
executed even without his knowledge or against his 1. Corporation ceases as a body corporate to
consent. continue the business for which it was
established (CC, Sec. 122).
Examples of involuntary dealings of a share 2. The assets of the corporation will then be
1. Attachment liquidated and legal title to the remaining
2. Sale on execution of judgment or sales for taxes corporate properties are transferred to the
3. Adverse claims stockholders who become co-owners thereof
4. Foreclosure of mortgage of stocks 3. The Corporation continues as a body corporate
for 3 years only for the purpose of winding up
Involuntary dealings must be registered or liquidation.
4. A dissolved corporation cannot be revived.
It is the act of registration which creates a However, those interested may reincorporate
constructive notice to the whole world of such by refilling a new AOI and by-laws (Rebollido vs.
instrument or court writ or process and is the CA, G.R. No. 81123, February 28, 1989).
operative act that conveys ownership (Aquino,
2007). Q: Vitaliano Aguirre, II, one of the original
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel et. al
DISSOLUTION upon learning that they have filed, as corporate
AND LIQUIDATION officers of FQB+7, a GIS which showed a different
set of Directors and Subscribers from that of the
AoI. In response, Nathaniel, et al. filed a petition
Dissolution for certiorari with the CA for the annulment of
the proceedings in the RTC claiming that the SEC
had already revoked FQB+7’s certificate of

2019 GOLDEN NOTES
MERCANTILE LAW
registration almost a year before Aguirre filed A: NO. In the instant case, there is no dispute that
his complaint with the RTC. ADC's corporate registration was revoked on May
26, 2003. Based on Section 122 of the Corporation
The CA dismissed the complaintbecause the Code, it had three years, or until May 26, 2006, to
corporation has lost its juridical personality. As prosecute or defend any suit by or against it. The
such the trial court does not have jurisdiction to subject complaint, however, was filed only on
entertain an intra-corporate dispute when the October 19, 2006, more than three years after such
corporation is already dissolved. revocation.
Is the case an intra-corporate dispute and is thus In the present case, ADC filed its complaint not only
under the jurisdiction of the RTC? after its corporate existence was terminated but
also beyond the three-year period allowed by
A: YES. The Court finds and so holds that the case is Section 122 of the Corporation Code. Thus, it is clear
essentially an intra-corporate dispute. It obviously that at the time of the filing of the subject complaint
arose from the intra-corporate relations between ADC lacks the capacity to sue as a corporation. To
the parties, and the questions involved pertain to allow ADC to initiate the subject complaint and
their rights and obligations under the Corporation pursue it until final judgment, on the ground that
Code and matters relating to the regulation of the such complaint was filed for the sole purpose of
corporation. The Court further holds that the nature liquidating its assets, would be to circumvent the
of the case as an intra-corporate dispute was not provisions of Section 122 of the Corporation Code
affected by the subsequent dissolution of the (Alabang Development Corp. v. Alabang Hills Village
corporation. Section 145 preserves a corporate Association and Rafael Tinio, G.R. No. 187456, June 2,
actor’s cause of action and remedy against another 2014).
corporate actor. In so doing, Section 145 also
preserves the nature of the controversy between Procedure for dissolution of a corporation sole
the parties as an intra-corporate dispute.
In case of a corporation sole, by submitting to the
The dissolution of the corporation simply prohibits SEC for approval, a verified declaration of
it from continuing its business. However, despite dissolution which will set forth the following:
such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution 1. The name of the corporation;
does not automatically convert the parties into total 2. The reason for dissolution and winding up;
strangers or change their intra-corporate 3. The authorization for the dissolution of the
relationships. Neither does it change or terminate corporation by the particular religious
existing causes of action, which arose because of the denomination, sect or church; and
corporate ties between the parties. Thus, a cause of 4. The names and addresses of the persons who
action involving an intra-corporate controversy are to supervise the winding up of the affairs of
remains and must be filed as an intra-corporate the corporation.
dispute despite the subsequent dissolution of the
corporation (Aguirre v. FQB+7 Inc., GR No. 170770, Upon approval of such declaration of dissolution by
January 9 2013, Del Castillo, J.). the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
Q: Alabang Development Corporation (ADC), except for the purpose of winding up its affairs (CC,
developer of Alabang Hills Village, filed with the Sec. 115).
RTC a complaint for injunction against Alabang
Hills Village Association, Inc. (AHVAI) and its Dissolution by merger or consolidation
president, Rafael Tino, alleging that AHVAI
started the construction of a multi-purpose hall Upon issuance of SEC of a Certificate of Merger or
and a swimming pool on one of the parcels of Consolidation, the corporate existence of the
land still owned by ADC, without the latter’s absorbed corporation and the constituent
consent and approval. corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
AHVAI claimed that ADC had no legal capacity to thereafter be conducted (CC, Sec. 80).
sue since its existence as a registered corporate
entity was revoked by the SEC on May 26, 2003. MODES OF DISSOLUTION
Does the ADC has the capacity to file the
complaint? The following are the modes of dissolution of the
corporation:

1. Voluntary A:
a. By the vote of the BOD/ BOT and the a. NO. AAA Corporation is an artificial being
stockholders/ members where no created by law and has a legal personality of its
creditors are affected (CC, Sec. 118); own. A corporation does not owe its existence
b. By the judgment of the SEC after hearing of upon the presence of assets and properties. It
petition for voluntary dissolution, where can only be dissolved in cases provided for by
creditors are affected (CC, Sec. 119); law. As such, AAA Corporation will subsist
c. By amending the AOI to shorten the regardless of the sale of all of its assets and
corporate term (CC, Sec. 120); liabilities to another corporation.
d. In case of a corporation sole, by submitting b. A corporation may be dissolved voluntarily, by
to the SEC a verified declaration of the shortening of the corporate term and through
dissolution for approval (CC, Sec. 115); and involuntary dissolution. In voluntary
e. Merger or consolidation dissolution, the action for dissolution must be
approved by majority of the directors or
2. Involuntary trustees and 2/3 of the stockholders
a. By expiration of corporate term provided representing the outstanding capital stock or
for in the AOI (CC, Sec. 11) members, publication requirement and filed
b. By legislative enactment with SEC which will issue certificate of
c. By failure to formally organize and dissolution. If there are creditors affected, there
commence the transaction of its business must be a hearing to hear the objections and
within 2 years from the date of claims of the creditors. In case of shortening of
incorporation (CC, Sec. 22) corporate term, through amendment of the AOI.
d. By order of the SEC on grounds under In involuntary dissolution, through filing of a
existing laws (CC, Sec. 121) verified complaint with the SEC based on any
e. Judicial decree on Quo Warranto ground provided by law or rules.
Proceeding (CC, Sec. 20)
VOLUNTARY
NOTE: Methods effecting dissolution as prescribed
by statute are exclusive, and a corporation cannot Procedure of dissolution of a corporation where
be dissolved except in the manner prescribed by law no creditors are affected (Meet-NAC-PA)
(De Leon, 2010).
1. A MEETing must be held on the call of directors
The requirements for dissolution mandated by the or trustees
CC should be strictly complied with (Vesaga vs. CA, 2. Notice of the meeting
G.R. No. 142924, December 5, 2001). a. Given to each stockholder or member
either by registered mail or by personal
NOTE: Piercing the veil of corporate fiction is not delivery at least thirty (30) days prior to
one of the causes by which a corporation may be the said meeting.
dissolved. b. Published for three (3) consecutive weeks
in a newspaper published in the place
Q: AAA Corporation is a bank. The operations of where the principal office of said
AAA Corporation as a bank were not doing well. corporation is located and if no newspaper
So, to avert any bank run, AAA Corporation, with is published in such place, then in a
the approval of the Monetary Board, sold all its newspaper of general circulation in the
assets and liabilities to BBB Banking Philippines.
Corporation which includes all deposit
accounts. In effect then, BBB Corporation will 3. Resolution to dissolve must be Approved by
service all deposits of all depositors of AAA majority vote of the board of directors or
Corporation. trustees and adopted by the affirmative vote of
stockholders representing at least 2/3 of the
a. Will the sale of all assets and liabilities of outstanding capital stock or 2/3 of members.
AAA Corporation to BBB Banking 4. Copy of the resolution is then certified by the
Corporation automatically dissolve or majority of Board of directors or trustees and
terminate the corporate existence of AAA countersigned by the secretary of the
Corporation? Explain your answer. Corporation.
b. What are the legal requirements in order 5. Petition for dissolution together with the
that a corporation may be dissolved? (2012 signed and countersigned copy of the resolution
Bar) is then filed with the SEC.

2019 GOLDEN NOTES
MERCANTILE LAW
6. Approval of SEC of the petition and issuance of objections, SEC shall proceed to hear the
certificate of dissolution. (CC, Sec. 118) petition and try any issue made by the
Objections file.
NOTE: Under the RCC, it is now required that 6. If no objection is sufficient and the material
majority vote of the board, and majority vote of the allegations of the petition are true, it shall
stockholders, member to approve the dissolution. render Judgment dissolving the corporation
The New Code now likewise provides that a verified and directing such disposition of its assets as
request for dissolution to be filed with the SEC justice requires, and may appoint a receiver to
providing details of dissolution and submit certial collect such assets and pay the debts of the
documents showing compliance with the corporation.
requirements. The request shall be approved by the
the SEC within 15 days from receipt, and dissolution NOTE: Under the RCC, only majority of the board are
shall take effect only upon issuance of a certificate qualified to sign. And the new code includes
of dissolution. Banks, preneed, insurance and trust additional matters to be included in the petition.
companies, and other similar financial Specifically, it should state the reason for the
intermediaries require favorable recommendation dissolution the form, manner and time of the
of the appropriate government agency prior to the metting when votes were cast. The corporation
filing. must submit to the SEC, a copy of the resolution
authorizing dissolution certified by the majority of
Procedure of dissolution of a corporation where the board and countersigned by the secretary, and
creditors are affected (APSIVECSO – CPUPOOJ) list of all creditors. To do away with confusion, the
new code states that dissolution takes effects upon
1. Approval of the stockholders representing at issuance of a certificate of dissolution by the SEC
least 2/3 of the outstanding capital stock or by
at least two-thirds (2/3) of the members at a Creditor’s consent is not necessary for
meeting of its stockholders or members called dissolution
for that purpose.
2. Filing of Petition for dissolution with SEC, Consent of creditors is not necessary to approve
petition must be: (SiVeCS) dissolution for the reason that liquidation
a. SIgned by a majority of its board of proceedings will be conducted to protect their
directors or trustees or other officers interest.
having the management of its affairs;
b. VErified by its president or secretary or one Procedure for dissolving the corporation by
of its directors or trustees; shortening of the corporate term (ASAF)
c. Set forth all Claims and demands against it;
d. State that its dissolution was approved by 1. Amending the Articles of Incorporation
the required votes of Stockholders or pursuant to Sec. 16:
members. a. Approved by majority vote of the board of
directors or trustees
3. SEC shall issue an Order reciting the purpose of b. Ratified at a meeting by the stockholders
the petition and fix a date when objections representing at least 2/3 of the outstanding
thereto may be filed by any person. Said date capital stock or by at least two-thirds (2/3)
must not be less than thirty (30) days nor more of the members in case of non-stock
than sixty (60) days after the entry of the order. corporations.
4. Copy of the order shall be:
a. PUblished at least once a week for three (3) 2. Copy of the amended AOI shall be submitted
consecutive weeks in a newspaper of with the SEC.
general circulation published in the 3. Approval of SEC of the amended AOI.
municipality or city where the principal 4. As an additional requirement, the SEC requires
office of the corporation is situated, or if to submit the final audited Financial statement
there be no such newspaper, then in a not older than 60 days before the application
newspaper of general circulation in the for shortening the corporate term (CC, Sec. 120
Philippines, and in relation to Sec. 16)
b. POsted for three (3) consecutive weeks in
three (3) public places in such municipality NOTE: Under the RCC the dissolution now takes
or city. effect from the expiration of the shortened terms
stated in the approved articles, without any further
5. After expiration of the time to file objections proceedings, And to prevent confusion, the new
and upon prior 5-day notice to hear the code now specifically provides that in case of

expiration of corporate term dissolution INVOLUNTARY
automatically takes effect in the day following the
last day of the corporate term as stated in the Expiration of corporate term
aritcles without need for issuance by the SEC of a
certificate of dissolution. The corporation shall exist within the period stated
in the AOI not exceeding 50 years unless sooner
Q: The Securities and Exchange Commission legally dissolved (CC, Secs. 19, 22, 117-122, 144, 145)
approved the amendment of the articles of or unless its registration is revoked upon any of the
incorporation of GHQ Corporation shortening grounds provided by law (CC, Sec. 6, PD 902-A & Sec.
its corporate life to only 25 years in accordance 22). In the absence of any express stipulation, it shall
with Sec. 120 of the Corporation Code. As exist for a period not exceeding fifty (50) years from
shortened, the corporation continued its the date of incorporation. After the term had
business operations until May 30, 1997, the last expired without extension, the corporation is
day of its corporate existence. Prior to said date, dissolved.
there were a number of pending civil actions, of
varying nature but mostly money claims filed by NOTE: UNDER THE RCC, A corporation shall have
creditors, none of which was expected to be perpetual existence unless its articles of
completed or resolved within five years from incorporation provides otherwise or unless the
May 30, 1997. If the creditors had sought your corporation, upon a vote of its stockholders
professional help at that time about whether or representing a majority of its outstanding capital
not their cases could be pursued beyond May 30, stock, notifies the Commission that it elects to retain
1997, what would have been your advice? (2000 its specific corporate term pursuant to its articles of
Bar) incorporation (Sec. 10 of R.A. 11232) or unless its
registration is revoked upon any of the grounds
A: The cases can be pursued even beyond May 30, provided by law.
1997, the last day of the corporate existence of GHQ
Corporation. The corporation is not actually Q: XYZ Corporation entered into a contract of
dissolved upon the expiration of its corporate term. lease with ABC, Inc., over a piece of real estate
There is still the period for liquidation or winding for a term of 20 years, renewable for another 20
up. years, provided that XYZ's corporate term is
extended in accordance with law. Four years
Q: X Corporation shortened its corporate life by after the term of XYZ Corporation expired, but
amending its articles of incorporation. It has no still within the period allowed by the lease
debts but owns a prime property located in contract for the extension of the lease period,
Quezon City. How would the said property be XYZ Corp. notified ABC, Inc., that it is exercising
liquidated among the five stockholders of said the option to extend the lease. ABC, Inc., objected
corporation? Discuss two methods of to the proposed extension, arguing that since
liquidation. (2001 Bar) the corporate life of XYZ Corp. had expired, it
could no longer opt to renew the lease. XYZ Corp.
A: The prime property of X Corporation can be countered that withstanding the lapse of its
liquidated among the five stockholders after the corporate term it still has the right to renew the
property has been conveyed by the corporation to lease because no quo warranto proceedings for
the five stockholders, by dividing or partitioning it involuntary dissolution of XYZ Corp. has been
among themselves in any two of the following ways: instituted by the Office of the Solicitor General.
Is the contention of XYZ Corp. meritorious?
1. By physical division or partition based on the Explain briefly. (2004 Bar)
proportion of the values of their stockholdings;
or A: NO. XYZ Corporation’s contention is not
2. By selling the property to a third person and meritorious XYZ Corp. was dissolved ipso facto upon
dividing the proceeds among the five the expiration of its original term. It ceased to be a
stockholders in proportion to their body corporate for the purpose of continuing the
stockholdings; or business for which it was organized, except only for
3. After the determination of the value of the purposes connected with its winding up or
property, by assigning or transferring the liquidation. Extending the lease is not an act to wind
property to one stockholder with the obligation up or litigate XYZ’s affairs. It is contrary to the idea
on the part of said stockholder to pay the other of winding up the affairs of the corporation (PNB v.
four stockholders the amount/s in proportion CFI of Rizal, G.R. No. 63201, May 27, 1992).
to the value of the stockholding of each.

2019 GOLDEN NOTES
MERCANTILE LAW
NOTE: (UNDER THE REVISED CORPO) Provided If a corporation does not formally organize and
that the original corporate term was retained by the commence the transaction of its business or the
corporation despite the fact the law now provides construction of its works within two (2) years from
for a perpetual existence, the doctrine still stands. the date of its incorporation, its corporate powers
cease and the corporation shall be deemed
Remedy in case the stockholders want to still dissolved (CC, Sec 22).
continue the business of the corporation after
its term expired NOTE: UNDER THE REVISED CORPO If a
corporation does not formally organize and
The remedy of the stockholders is reincorporation. commence its business within five (5) years from
Amending the articles of the incorporation to the date of its incorporation, its certificate of
extend the corporate term is not an available incorporation shall be deemed revoked as of the day
remedy as the corporation has ceased to exist. following the end of the five (5)-year period. (Sec.
21 R.A. No. 11232)
There is nothing to prevent the stockholders from
conveying their shareholdings toward the creation Effect of continuous inoperation for a period of
of a new corporation to continue the business of the ar least five (5) years
old. Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate If a corporation has commenced the transaction of
anew. its business but subsequently becomes
continuously inoperative for a period of at least five
It is not unlawful for the old board of directors to (5) years, the same shall be a ground for the
negotiate and transfer the assets of the dissolved suspension or revocation of its corporate franchise
corporation to the new corporation intended to be or certificate of incorporation (CC, Sec. 22).
created as long as the stockholders have given their
consent (Chung Ka Bio v IAC, G.R. No. 71837, July 26, NOTE: The provision shall not apply if the failure to
1988). organize, commence the transaction of its business
or the construction of its works, or to continuously
NOTE: UNDER THE RCC A corporation whose term operate is due to causes beyond the control of the
has expired may apply for a revival of its corporate corporation as may be determined by the Securities
existence, together with all the rights and privileges and Exchange Commission.
under its certificate of incorporation and subject to
all of its duties, debts and liabilities existing prior to NOTE: UNDER THE RCC However, if a corporation
its revival. Upon approval by the Commission, the has commenced its business but subsequently
corporation shall be deemed revived and a becomes inoperative for a period of at least five (5)
certificate of revival of corporate existence shall be consecutive years, the Commission may, after due
issued, giving it perpetual existence, unless its notice and hearing, place the corporation under
application for revival provides otherwise. delinquent status.
Non-use of corporate charter or continuous Legislative dissolution

inoperation of a corporation
A corporation created by special law can be
To “formally organize” as used in reference to dissolved by an enactment of special law or
corporations means: expiration of its charter.
1. Election of officers, providing for the Limitations:

subscription;
2. Payment of the capital stock; 1. Under the constitution, the amendment,
3. Adoption of by-laws; and alteration or repeal of the corporate franchise
4. Such other similar steps as are necessary to of a public utility shall be made only “when the
endow the legal entity with the capacity to common good so requires.”
transact the legitimate business for which it 2. Section 145.
was created (Benguet Consolidated Mining Co. v 3. It cannot impair the obligations of existing
Pineda, G.R. No. L-7231, March 28, 1956). contracts between the corporation and third
persons, or take away vested rights of its
Effect of failure of a corporation to formally creditors. However, if effected because the
organize common good so requires, there is no
impairment.

Dissolution by the SEC on grounds underexisting Process by which all the assets of the corporation
laws are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors and
A corporation may be dissolved by the Securities the remaining balance if any is to be distributed to
and Exchange Commission upon filing of a verified the stockholders (Sundiang Sr. & Aquino, 2014).
complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and Method of liquidation
regulations (CC, Sec. 121).
1. By the corporation itself or its board of
The following are some of the grounds, which may directors or trustees (CC , Sec. 122 [1])
result to the issuance of a dissolution order by the 2. By conveyance to a trustee within a three-year
SEC after conduct of appropriate proceedings: period (CC, Sec. 122[2]; Board of Liquidators v.
Kalaw, G.R. No. L-18805, Aug. 14, 1967)
1. Violations of the Corporation committed by the 3. By a management committee or rehabilitation
corporation. Such violations are generally receiver appointed by SEC (CC, Sec. 119)
penalized by Sec. 144 as the Code did not 4. By liquidation after three years
specifically penalize the same.
2. Deadlocks in a close corporation (CC, Sec. 104) Approval of the SEC is not required in order to
3. Mismanagement of a close corporation (CC, Sec. liquidate and distribute the assets of a dissolved
105) corporation
4. On any of the following grounds, wherein the
SEC retains its power to suspend or revoke, The liquidation and distribution of the assets of a
after proper notice and hearing, the franchise or dissolved corporation is a matter of internal
certificate of registration of the corporations, concern of the corporation and falls within the
partnerships or associations: (FMI-DBR) power of the directors and stockholders or duly
appointed liquidation trustee (SEC Opinion, July 23,
a. Fraud or misrepresentation in 1996).
procuring its Certificate of
Registration; Q: Lucia prayed before the RTC-Iriga to annul
b. Serious Misrepresentation as to what the extrajudicial partition and deed of mortgage
the corporation can do or is doing to executed by her childrenover the estate of her
the great prejudice of or damage to the deceased husband, having been executed
general public; without her knowledge and consent. She also
c. continuous Inoperation for a period of prayed for damages.
at least 5 years (Sec. 22, CC);
d. Refusal to comply or Defiance with any After the case was set for pre-trial, RBCI filed a
lawful order, rules or regulations of motion to withdraw after being informed that
SEC restraining commission of acts the PDIC would handle the case as RBCI had
which would amount to a grave already been closed and placed under the
violation of its franchise; receivership of the former. Consequently, the
e. Failure to file By-laws within the lawyers of PDIC took over the case of RBCI.
required period. However, SEC must
give the corporation the opportunity to May Lucia’s petition proceed independently of
explain such failure; the liquidation proceedings of RBCI?
f. Failure within the prescribed period to
submit required Reports in A: NO. After the Monetary Board has declared that a
appropriate forms as determined by bank is insolvent and has ordered it to cease
the SEC (e.g. General Information operations, the Board becomes the trustee of its
Sheet, Financial Statements) (De Leon, assets for the equal benefit of all the creditors,
2010). including depositors. The assets of the insolvent
banking institution are held in trust for the equal
NOTE: All actions filed with the SEC must be benefit of all creditors, and after its insolvency, one
prosecuted and defended in the name of the real cannot obtain an advantage or a preference over
party-in-interest (SEC Rules of Procedure, Rule III, another by an attachment, execution or otherwise.
Sec. 2).
Thus, to allow Lucia’s case to proceed
METHODS OF LIQUIDATION independently of the liquidation case, a possibility
of favorable judgment and execution thereof against
Liquidation the assets of RBCI would not only prejudice the

2019 GOLDEN NOTES
MERCANTILE LAW
other creditors and depositors but would defeat the the right to appeal (Paramount Insurance Corp. v.
very purpose for which a liquidation court was A.C. Ordonez Corp., G.R. No. 175109, August 6, 2008).
constituted as well. It would be more in keeping
with law and equity if Lucia’s case is consolidated Liquidation is not necessary in case a
with the liquidation case in order to expeditiously corporation is dissolved by merger and
determine whether she is entitled to recover the consolidation
property subject of mortgage from RBCI and, if so,
how much she is entitled to receive from the In case of merger or consolidation, the surviving or
remaining assets of the bank (Barrameda v. Rural the consolidated corporation shall thereupon and
Bank of Canaman, Inc., G.R. No. 176260, November, thereafter possess all the rights, privileges,
24 2010, in Divina 2014). immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
Period of Liquidation all receivables due on whatever account, including
subscriptions to shares and other choses in action,
The period of liquidation is three (3) years. and all and every other interest of, or belonging to,
or due to each constituent corporation, shall be
Corporation in the process of liquidation does deemed transferred to and vested in such surviving
not have legal authority to engage in any new or consolidated corporation without further act or
business deed (CC, Sec 80).
A corporation in the process of liquidation has no Distribution of the corporation’s assets prior to
legal authority to engage in any new business, even dissolution
if the same is in accordance with the primary
purpose stated in its article of incorporation. GR: A corporation cannot distribute its assets prior
to dissolution. This will violate the trust fund
Suits brought against the corporation within the doctrine (CC,Sec. 122).
3-year period but remained pending beyond
said period XPNs:
1. Decrease of Capital Stock (CC,Sec. 38)
Pending actions against the corporation are not 2. Redemption of Redeemable Shares (CC, Sec. 8)
extinguished. They may still be prosecuted against 4. Reacquisition of shares which are considered as
the corporation even beyond said period. treasury shares (CC, Sec. 9)
5. Acquisition of own shares (CC, Sec. 41)
The creditors of the corporation who were not paid 6. Declaration of dividends (CC, Sec. 43)
within the 3-year period may follow the property of 7. Purchase of shares of any stockholder in case of
the corporation that may have passed to its deadlocks in a close corporation (CC, Sec. 10)
stockholders unless barred by prescription or 8. Withdrawal of a stockholder in a close
laches or disposition of said property in favor of a corporation (CC, Sec 105)
purchaser in good faith. 9. Upon lawful dissolution and after payment of all
debts and liabilities (CC, Sec. 122)
Suits not brought against the corporation within
the 3-year period Order of distribution of assets in case of
liquidation (CreSt-PreComE)
Suits not brought against the corporation within the
3-year period may still be prosecuted against the 1. Payment of claims of CREditors who are not
corporation, since there is nothing in Sec. 122, par. stockholders (based on preference or
1 which bars action for the recovery of the debts of concurrence of credits).
the corporation against the liquidator thereof after 2. Payment of claims of STockholders who are
the lapse of the winding up period of 3 years creditors of the corporation, as to the amount of
(Republic of the Philippines vs. Marsman Dev. Co., G.R. their claim as creditors.
No. L-175109, April 27, 1972). 3. Residual Balance shall be distributed
proportionately:
Right of the corporation to appeal a judgment is a. Holders of PREferred stock, if any; then
not extinguished by the expiration of the 3-year to the
period b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found,
Corporations whose certificate of registration was their claims or shares shall be Escheated in
revoked by the SEC may still maintain actions in favor of the city or municipality where the asset
court for the protection of its rights which includes is located.

BY THE CORPORATION ITSELF dissolution is more for the protection of its creditors
and stockholders. The appointment of said counsel
Every corporation whose charter expires by its own can be considered a substantial compliance [Gelano
limitation or is annulled by forfeiture or otherwise, v. CA, 103 SCRA 90 (1981)].
or whose corporate existence for other purposes is
terminated in any other manner: Period of existence of the trusteeship
1. Shall nevertheless be continued as a body Where no time limit has been fixed with respect to
corporate for 3 years after the time when it the existence of the trusteeship, the trustee has
would have been so dissolved; authority to close the affairs of the corporation even
2. For the purpose of after the expiration of the statutory 3-year period
a. Prosecuting and defending suits by or and claims not barred by the statute of limitations
against it; can be presented and allowed until the liquidation
b. Enabling it to settle and close its affairs; is terminated (National Abaca & Other Fibers Corp.
c. To dispose of and convey its property; v. Pore, G.R. No. L-16779, August 16, 1979).
and
d. to distribute its assets Suits brought by the corporation within the 3-
3. But NOT for the purpose of continuing the year period but remained pending beyond said
business for which it was established (CC, Sec. period
122 [1]).
A corporation that has a pending action and which
NOTE: Sec 122 authorizes the dissolved cannot be terminated within the 3 year period after
corporation’s board of directors to conduct its its dissolution is authorized under Sec. 122 of the CC
liquidation within 3 years from its dissolution. to convey all its property to a trustee to enable it to
Jurisprudence has even recognized the board’s prosecute and defend suits by or against the
authority to act as trustee for persons in interest corporation beyond the 3-year period. The trustee
beyond the said 3 year period [Aguirre v. FQB+7 Inc., may commence a suit which can proceed to final
688 SCRA 242 (2013)]. judgment even beyond the 3-year period. The
director may be permitted to continue as trustees to
BY CONVEYANCE TO A TRUSTEE complete the liquidation (Clemente v. CA, G.R. No.
WITHIN A 3-YEAR PERIOD 82407, March 27, 1995).
At anytime during the 3-year period for liquidation, Suits brought by the corporation beyond the 3-
said corporation is authorized and empowered to year period are not barred
convey all of its property to trustees for the benefit
of its stockholders, members, creditors and other The trustee of a dissolved corporation may
persons in interest. commence a suit which can proceed to final
judgment even beyond the 3-year period. The
From and after any such conveyance by the expiration of 3 years after the dissolution of a
corporation of its property in trust for the benefit of corporation does not affect its right to enforce a
its stockholders, members, creditors and others in favorable judgment, because under Sec. 145 of the
interest, all interest which the corporation had in CC, no right or remedy in favor or against any
the property terminates, the legal interest vests in corporation shall be removed or impaired either by
the trustees, and the beneficial interest in the subsequent dissolution of said corporation or by
stockholders, members, creditors or other persons any subsequent amendment or repeal of the CC or
in interest (par. [2], Sec. 122, CC). any part thereof (Knecht v. United Cigarette Corp.,
G.R. No. 139370, July 4, 2002).
Meaning of trustee
Q: The corporation, once dissolved, thereafter
The word “trustee” as used in the law must be continues to be a body corporate for three years
understood in its general concept. It has been held for purposes of prosecuting and defending suits
that a counsel who prosecuted and defended the by and against it and of enabling it to settle and
interest of a corporation and who in fact appeared close its affairs, culminating in the final
in behalf of the corporation before and after its disposition and distribution of its remaining
dissolution by amendment of its articles of assets. If the 3 year extended life expires
incorporation may be considered a trustee of the without a trustee or receiver being designated
corporation at least with respect to the matter in by the corporation within that period and by
litigation only. The purpose in the transfer of the that time (expiry of the 3 year extended term),
assets of the corporation to a trustee upon its the corporate liquidation is not yet over, how, if

2019 GOLDEN NOTES
MERCANTILE LAW
at all, can a final settlement of the corporate preserve its properties for the use and benefit of its
affairs be made? (1997 Bar) creditors and others who may have similar interests
in the property as where there is already a final and
A: The liquidation can continue with the winding up. executory judgment against the corporation, which
The members of the BOD can continue with the is in a precarious financial condition [Central
winding of the corporate affairs until final Sawmills, Inc. v Alto Surety and Ins. Co., 27 SCRA 247
liquidation. They can act as trustees or receivers for (1969)].
this purpose.
Where corporate directors are guilty of breach of
Where no receiver or trustee has been designated trust, minority stockholders may ask for
after dissolution: receivership [Chase v. CFI, 18 SCRA 602 (1966)].
1. The board of directors or trustees itself may be The corporation, through its president cannot
permitted to so continue as “trustees” by legal condone penalties and charges after it had been
implication. placed under receivership
2. In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets, The appointment of a receiver operates to suspend
stockholders or creditors, may make a proper the authority of a corporation and of its directors
representations with SEC for working out a final and officers over its property and effects, such
settlement of the corporate concerns [Clemente authority being reposed in the receiver (Yam v. CA,
v CA, 242 SCRA 717 (1995)]. G.R. No. 104726, February 11, 1999).
3. The only surviving stockholder or director (SEC
Opinion No. 10-96, Jan 29 2010) Q: ASB Realty, being the owner of the property
4. The counsel who prosecuted and defended the by virtue of a Deed of Assignment, entered a
interest of the corporation (Reburiano v CA, G.R. Contract of Lease with Leonardo Umale. Upon
No. 102965, January 21, 1999). expiration of the contract, Umale continued
occupying the premises. ASB Realty served
BY MANAGEMENT COMMITTEE OR Umale a Notice of Termination of Lease and
REHABILITATION RECEIVER Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
Liquidation by a receiver his arrears. ASB Realty filed an unlawful
detainer case. Umale admitted occupying the
In the case of a dissolution order where creditors property but challenged the personality of ASB
are affected, the SEC may appoint a receiver to take Realty to sue and recover the property. He
charge of the liquidation of the corporation (CC, Sec. claimed that ASB Realty being placed under
119). receivership, it is the rehabilitation receiver
that has the power to take possession, control,
NOTE: Thus, the appointment of receiver is and custody of the assets under the Interim
addressed to the sound discretion of the court or the Rules of Procedure on Corporate Rehabilitation.
SEC. Can ASB Realty, a corporation under
rehabilitation, sue in its own name and recover
Appointment of receiver for a going corporation property unlawfully withheld?
The appointment of a receiver for a going A: YES. Being placed under corporate rehabilitation
corporation is a last resort remedy, and should not and having a receiver appointed to carry out the
be employed when another remedy is rehabilitation plan do not ipso facto deprive a
available. Relief by receivership is an extraordinary corporation and its corporate officers of the power
remedy and is never exercised if there is an to recover its unlawfully detained property.
adequate remedy at law or if the harm can be Rehabilitation is for effecting a feasible and viable
prevented by an injunction or a restraining rehabilitation by preserving a floundering business
order. Bad judgment by directors, or even as a going concern. This concept of preserving the
unauthorized use and misapplication of the corporation’s business as a going concern while it is
company’s funds, will not justify the appointment of undergoing rehabilitation is called debtor-in-
a receiver for the corporation if appropriate relief possession or debtor-in-place wherein the debtor
can otherwise be had (Rev. Ao-As v. CA, G.R. No. corporation remains in control of its business and
128464, June 20, 2006). properties, subject only to the monitoring of the
appointed rehabilitation receiver. The receiver
Even without dissolution, the court has authority to does not take over the control and management of
appoint a receiver for a corporation to protect and the debtor corporation being tasked only to monitor

the successful implementation of the rehabilitation initial hearing before it can give due course to or
plan (Umale v. ASB Realty Corporation, G.R. No. dismiss a petition. Nevertheless, while the Interim
181126, June 15, 2011, Del Castillo, J.). Rules does not require the holding of a hearing
before the issuance of a stay order, neither does it
Corporate Rehabilitation prohibit the holding of one. Thus, the trial court has
ample discretion to call a hearing when it is not
It refers to the restoration of the debtor to a confident that the allegations in the petition are
condition of successful operation and solvency, if it sufficient in form and substance, for so long as this
is shown that its continuance of operation is hearing is held within the five (5)-day period from
economically feasible and its creditors can recover the filing of the petition — the period within which
by way of the present value of payments projected a stay order may issue as provided in the Interim
in the plan, more if the debtor continues as a going Rules (Pryce Corp. v. China Banking Corp., G.R. No.
concern than if it is immediately liquidated [Sec. 172302, February 18, 2014, in Divina, 2014).
4(gg), FRIA].
FRIA is prospective in application
Nature of Rehabilitation proceedings
Sec. 146 of the FRIA, which makes it applicable to
Rehabilitation proceedings are summary and non- “all further proceedings in insolvency, suspension of
adversarial in nature, and do not contemplate payments and rehabilitation cases x x x except to the
adjudication of claims that must be threshed out in extent that in the opinion of the court their
ordinary court proceedings. application would not be feasible or would work
injustice,” still presupposes a prospective
The jurisdiction of the rehabilitation court is over application. The wording of the law clearly shows
claims against the debtor that is under that it is applicable to all further proceedings. In no
rehabilitation, not over claims by the debtor against way could it be made retrospectively applicable to
its own debtors or against third parties. The the Stay Order issued by the rehabilitation court in
corporation under rehabilitation must file a 2002. At the time of the issuance of the Stay Order,
separate action against its debtors/insurers to the rules in force were the 2000 Interim Rules of
recover whatever claim it may have against them Procedure on Corporate Rehabilitation. Under those
(Steel Corp. v. Mapfre Insular Insurance Corp., G.R. rules, one of the effects of a Stay Order is the stay of
No. 201199, October 16, 2013, in Divina, 2014). the "enforcement of all claims, whether for money
or otherwise and whether such enforcement is by
Stay order and appointment of rehabilitation court action or otherwise, against the debtor, its
receiver guarantors and sureties not solidarily liable with
the debtor. Nowhere in the Interim Rules is the
Under Section 6(c) of PD 902-A, receivers may be rehabilitation court authorized to suspend
appointed whenever: foreclosure proceedings against properties of third-
party mortgagors (Situs Development Corp., et al. v.
1) Necessary in order to preserve the rights of Asiatrust Bank, et al., G.R. No. 180036, January 16,
the parties-litigants; and/or 2013).
2) Protect the interest of the investing public
and creditors. NOTE: FRIA took effect on July 18, 2010.
The stay order and appointment of a Execution of rehabilitation plan

rehabilitation receiver is an "extraordinary,
preliminary, ex parte remedy." The effectivity The Interim Rules on Corporate Rehabilitation
period of a stay order is only "from the date of its provides for means of execution of the
issuance until dismissal of the petition or rehabilitation plan, which may include, among
termination of the rehabilitation proceedings." It is others, the conversion of the debts or any portion
not a final disposition of the case. It is an thereof to equity, restructuring of the debts, dacion
interlocutory order defined as one that "does not en pago, or sale of assets or of the controlling
finally dispose of the case, and does not end the interest. The restructuring of the debts of PALI is
Court’s task of adjudicating the parties’ contentions part and parcel of its rehabilitation (Puerto Azul
and determining their rights and liabilities as Land, Inc. v. Pacific Wide Realty Development Corp.,
regards each other, but obviously indicates that G.R. No. 184000, September 17, 2014).
other things remain to be done by the Court."
Q: Spouses Rodil are the owners and sole
The Interim Rules does not require a hearing before proprietors of St. Michael Diagnostic and Skin
the issuance of a stay order. What it requires is an Care Laboratory Services and Hospital. With a

2019 GOLDEN NOTES
MERCANTILE LAW
vision to upgrade the hospital, Sps. Rodil upstart corporations under the prevailing economic
purchased two (2) parcels of land adjoining climate, it must nonetheless remain forthright in
their existing property and incorporated limiting the remedy of rehabilitation only to
SMMCI, with which entity they planned to meritorious cases.
eventually consolidate St. Michael Hospital’s 2. NO. SMMCI’s Rehabilitation Plan which is an
operations. To finance the construction, they indispensable requisite in corporate rehabilitation
obtained a loan from BPI secured by their proceedings failed to comply with the fundamental
personal assets. Due to mismanagement in the requisites outlined in Section 18, Rule 3 of the Rules,
construction, loan was not paid and debt particularly, that of a material financial
became due. Nevertheless, using hospital- commitment to support the rehabilitation and an
generated revenues, Sps. Rodil were still able to accompanying liquidation analysis. In this case,
purchase new equipment and machinery for St. aside from the harped on merger of St. Michael
Michael Hospital. Later on, BPI Family Hospital with SMMCI, the only proposed source of
demanded immediate payment of the entire revenue the Rehabilitation Plan suggests is the
loan obligation and, soon after, filed a petition capital which would come from SMMCI’s potential
for extrajudicial foreclosure of the real investors, which negotiations are merely pending.
properties covered by the mortgage. On the Further, SMMCI likewise failed to include any
other hand, SMMCI filed a Petition for Corporate liquidation analysis in its Rehabilitation Plan thus,
Rehabilitation. It was averred that St. Michael prevents the Court from ascertaining if the
Hospital was operating profitably. Further, petitioning debtor’s creditors can recover by way of
there are several persons who approached Sps. the present value of payments projected in the plan,
Rodil signifying their interest to invest in the more if the debtor continues as a going concern than
corporation. Moreover there are group of if it is immediately liquidated. Accordingly, it is
medical doctors are willing to infuse capital to insufficient to decree SMMCI’s rehabilitation. It is
the corporation for SMMCI to conclude pending well to emphasize that the remedy of rehabilitation
negotiations for investments. This was should be denied to corporations that do not qualify
supported by a feasibility study conducted by a under the Rules. (BPI FAMILY SAVINGS BANK, INC. V
CPA in that upon merging St. Michael and SMMCI, ST. MICHAEL MEDICAL CENTER, INC.G.R. No.
the company will attain operational feasibility 205469, March 25, 2015)
and profitability
Rules of Court applies in cases of appeals and
1. Will the petition for rehabilitation be reviews
granted
2. Whether the CA correctly affirmed SMMCI’s Under Rule 3, Section 5 of the Rules of Procedure on
Rehabilitation Plan as approved by the RTC. Corporate Rehabilitation, the review of any order or
A: decision of the rehabilitation court or on appeal
1. No. Restoration is the central idea behind the therefrom shall be in accordance with the Rules of
remedy of corporate rehabilitation. In common Court, unless otherwise provided (Robinson's Bank
parlance, to “restore” means “to bring back to or put Corp v. Gaerlan, et al., G.R. No. 195289, September 24,
back into a former or original state.” Rehabilitation 2014).
assumes that the corporation has been operational
but for some reasons like economic crisis or Cram-down clause
mismanagement had become distressed or
insolvent, i.e., that it is generally unable to pay its Section 23.Approval of the Rehabilitation Plan.– The
debts as they fall due in the ordinary course of court may approve a rehabilitation plan over the
business or has liability that are greater than its opposition of creditors, holding a majority of the
assets. In this case, it cannot be said that the total liabilities of the debtor if, in its judgment, the
petitioning corporation, SMMCI, had been in a rehabilitation of the debtor is feasible and the
position of successful operation and solvency at the opposition of the creditors is manifestly
time the Rehabilitation Petition was filed on August unreasonable (Sec. 23, Rule 4, Interim Rules of
11, 2010. While it had indeed “commenced Procedure on Corporate Rehabilitation).
business” through the preparatory act of opening a
credit line with BPI Family to finance the This provision, which is currently incorporated in
construction of a new hospital building for its future the FRIA, is necessary to curb the majority creditors’
operations, SMMCI itself admits that it has not natural tendency to dictate their own terms and
formally operated nor earned any income since its conditions to the rehabilitation, absent due regard
incorporation. This simply means that there exists to the greater long-term benefit of all stakeholders.
no viable business concern to be restored. While the Otherwise stated, it forces the creditors to accept
Court recognizes the financial predicaments of the terms and conditions of the rehabilitation plan,

preferring long-term viability over immediate but Notwithstanding the rejection of the Rehabilitation
incomplete recovery (BPI v. Sarabia Manor Hotel, Plan by the creditors, the court may confirm the
G.R. no. 175844, July 29, 2013). Rehabilitation Plan if all of the following
circumstances are present:
Q: APECfiled a Petition for Corporate
Rehabilitation. Marcelo, the rehabilitation 1. The Rehabilitation Plan complies with the
receiver, submitted an Alternative requirements specified in this Act;
Rehabilitation Plan (ARP) which provides for 2. The rehabilitation receiver recommends the
the implementation of “swap” of open-ended confirmation of the Rehabilitation Plan;
education plans to a fixed-value pre-need plan 3. The shareholders, owners or partners of the
as well as tuition support depending on the juridical debtor lose at least their controlling
prevailing market rate of the NAPOCOR Bonds interest as a result of the Rehabilitation Plan;
and Peso-Dollar exchange rates. The plan was and
approved. In the meantime, the value of the 4. The Rehabilitation Plan would likely provide
Philippine Peso strengthened and appreciated. the objecting class of creditors with
Because of this, Marcelo filed a Modified compensation which has a net present value
Rehabilitation Plan (MRP) which includes the greater than that which they would have
suspension of the tuition support and received if the debtor were under liquidation
converting Philippine Peso Liabilities to U.S. (Sec. 64, FRIA).
Dollar liabilities by assigning to each planholder
a share of the remaining asset. The A corporation’s material financial commitment
Rehabilitation Court approved the MRP despite is significant for purposes of rehabilitation
opposition, in view of the “cram down” power of
the Rehabilitation Court. Marilyn Victorio- A material financial commitment becomes
Aquino, a planholder, questioned this approval significant in gauging the resolve, determination,
before the Court of Appeals for the MRP forced earnestness and good faith of the distressed
the creditors to reduce their claims against corporation in financing the proposed
APEC and it reduces the original amount which rehabilitation plan. This commitment may include
she was to receive under the ARP. The CA the voluntary undertakings of the stockholders or
dismissed the petition. Was the Court correct in the would-be investors of the debtor-corporation
approving the MRP? indicating their readiness, willingness and ability to
contribute funds or property to guarantee the
A: YES. The “cram-down” power of the continued successful operation of the debtor
Rehabilitation Court has long been established and corporation during the period of rehabilitation
even codified under Section 23, Rule 4 of the Interim (Philippine Bank of Communications v. Basic
Rules. Such prerogative was carried over in the Polyprinters and Packaging Corp., G.R. No. 187581,
Rehabilitation Rules, which maintains that the court October 20, 2014).
may approve a rehabilitation plan over the
objection of the creditors if, in its judgment, the Claims against the corporation are suspended
rehabilitation of the debtors is feasible and the during rehabilitation
opposition of the creditors is manifestly
unreasonable. The required number of creditors The suspension of all actions and/or claims against
opposing such plan under the Interim Rules (i.e., a corporation under rehabilitation does not only
those holding the majority of the total liabilities of cover cases which are pending in court. The
the debtor) was, in fact, removed. Petitioner’s automatic suspension of an action for claims
outright censure of the concept of the cram-down embraces all phases of the suit, that is, the entire
power of the rehabilitation court cannot be proceedings of an action or suit and not just the
countenanced. To adhere to the reasoning of payment of the claims.
petitioner would be a step backward — a futile
attempt to address an outdated set of challenges. It The actions that were suspended cover all claims
is undeniable that there is a need to move to a against a distressed corporation whether for
regime of modern restructuring, cram-down and damages founded on a breach of contract of
court supervision in the matter of corporation carriage, labor cases, collection suits or any other
rehabilitation in order to address the greater claims of a pecuniary nature. A claim arising from
interest of the public (Victorio-Aquino v. Pacific illegal dismissal is a claim covered by the
Plans Inc., G.R. No. 193108, December 10, 2014). suspension order issued by the SEC, as it is one for
pecuniary consideration.
Confirmation of Rehabilitation Plan by the court

2019 GOLDEN NOTES
MERCANTILE LAW
Furthermore, jurisprudence is settled that the The prevailing rule now categorically provides that
suspension of proceedings referred to in the law awards for moral damages, exemplary damages,
uniformly applies to “all actions for claims” filed and attorney’s fees in intra-corporate controversies
against a corporation xxx under management or are not immediately executor (Heirs of Santiago
receivership, without distinction, except only those Divinagracia v. Ruiz, G.R. No. 172023, July 7, 2010, in
expenses incurred in the ordinary course of Divina, 2014).
business (Molina v. Pacific Plans, Inc., G.R.
No. 165476, August 15, 2011, in Divina, 2014). Qualifications under the Rules must be strictly
complied with
The stay order is effective on all creditors of the
corporation without distinction, whether secured It is well to emphasize that the remedy of
or unsecured (Veterans Philippine Scout Security rehabilitation should be denied to corporations that
Agency, Inc. v. First Dominion Prime Holdings, Inc., do not qualify under the Rules. Neither should it be
G.R. No. 190907, August 23, 2012, in Divina, 2014). allowed to corporations whose sole purpose is to
delay the enforcement of any of the rights of the
Claims which are not suspended during creditors, which is rendered obvious by: (a) the
rehabilitation absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets, and
a. Criminal actions goals; and (c) speculative capital infusion or
complete lack thereof for the execution of the
The suspension of claims in corporate rehabilitation business plan. Unfortunately, these negative
does not extend to criminal actions against the indicators have all surfaced to the fore, much to
distressed corporations or its directors and officers. SMMCI’s chagrin. In one case, not only has SMMCI
It would be absurd for one who has engaged in failed to show that it has formally began its
criminal conduct to escape punishment simply operations which would warrant restoration, but
because the corporation of which he is director or also it has failed to show compliance with the key
officer filed a petition for rehabilitation. The requirements under the Rules, the purpose of which
prosecution of the officers of the corporation has no are vital in determining the propriety of
bearing on the pending rehabilitation of the rehabilitation. Thus, for all the reasons hereinabove
corporation (Panlilio v. RTC, Branch 51, City of explained, the Court is constrained to rule in favor
Manila, GR No. 173846, February 2, 2011, in Divina, of BPI Family and hereby dismiss SMMCI’s
2014). Rehabilitation Petition (BPI Family Savings Bank,
Inc. v. St. Michael Medical Center, Inc., G.R. No.
b. Return of the subject of writ of replevin 205469, March 25, 2015).
The return of the car subject of the writ of replevin Right of the creditor-mortgagee to foreclose
is correct notwithstanding the pendency of the corporate property
rehabilitation proceedings. This is the necessary
consequence of the dismissal of the replevin case for The court has already settled and upheld the right of
failure to prosecute without prejudice. Upon the the secured creditor to foreclose the mortgages in
dismissal of the replevin case, the writ of seizure, its favor during the liquidation of a debtor
which is merely ancillary in nature, became functus corporation.
officio and should have been lifted. There was no
adjudication on the merits, which means that there The creditor-mortgagee has the right to foreclose
was no determination of the issue who has the the mortgage over a specific real property whether
better right to possess the subject car. Returning or not the debtor-mortgagor is under insolvency or
the seized vehicle is not an enforcement of a claim liquidation proceedings. The right to foreclose such
against the distressed corporation which must be mortgage is merely suspended upon the
suspended by virtue of the stay order issued by the appointment of a management committee or
rehabilitation court. The issue in a replevin case is rehabilitation receiver or upon the issuance of a stay
who has a better right of possession. So long as the order by the trial court. However, the creditor-
respondent is not interposing a monetary claim, mortgagee may exercise his right to foreclose the
respondent’s prayer for the return of the car subject mortgage upon the termination of the rehabilitation
of the replevin suit is not in any way violative of the proceedings or upon the lifting of the stay order
Rules on Corporate Rehabilitation (Advent Capital (Yngson, Jr. [in his capacity as Liquidator of Arcam &
and Medical Corp. v. Young, G.R. No. 183018, August Company, Inc.] v. Philippine National Bank, G.R. No.
3, 2011, in Divina, 2014). 171132, August 15, 2012, in Divina, 2014).

The Stay Order cannot suspend foreclosure On September 8, 2005, PA filed a Petition for
proceedings already commenced over properties Corporate Rehabilitation before the RTC of
belonging to third party mortgagors. The Stay Order Makati City. On October 17, 2005, ten (10) plan
can only cover those claims directed against holders filed an Opposition and Motion to
petitioner corporations or their properties, against Exclude Planholders from Stay Order on the
petitioners’ guarantors, or against petitioners’ ground that planholders are not creditors as
sureties who are not solidarily liable with them. they (planholders) have a trust relationship
with PA. Are the planholders correct? (2014
Likewise, the enforcement of the mortgage lien Bar)
cannot be considered as a claim against a guarantor A: NO. Under the 2000 Interim Rules of Corporate
or a surety not solidarily liable with the debtor Rehabilitation, claim shall include all claims or
corporations. While the third party mortgagors also demands of whatever nature or character against a
executed Continuing Guaranty and Comprehensive debtor or its property, whether for money or
Surety undertakings in favor of the bank, the latter otherwise. Creditor shall mean any holder of a
did not proceed against them as individual claim. Hence, the claim of the policyholders for
guarantors or sureties. Rather, by initiating payment of tuition fees from (PA Assurance) CAP is
extrajudicial foreclosure proceedings, the bank was included in the definition of “claims” under the
directly proceeding against the property mortgaged Interim Rules.
to them by the spouses as security (Situs What is to be determined at this point is whether or
Development Corporation, et al. v. Asiatrust Bank, et not claims arising from the pre-need contracts
al., G.R. No. 180036, July 25, 2012). between the policyholders and (PA Assurance) CAP
can be stayed under Section 6, Rule 4 of the Interim
Considering that Metrobank acquired ownership Rules or Section 6(c) of P.D. No. 902-A.
over the mortgaged properties upon the expiration It does not provide that a claim arising from a pre-
of the redemption period on 6 February 2002, TCEI need contract is an exception to the power of the
is also out on a limb in invoking the Stay Order trial court to stay enforcement of all claims upon the
issued by the Rehabilitation Court on 8 October finding that the petition for rehabilitation is
2002 and the approval of its rehabilitation plan. An sufficient in form and substance.
essential function of corporate rehabilitation is, The foregoing provision echoes the provision in
admittedly, the Stay Order which is a mechanism of Section 6(c) of the governing law, P.D. No. 602-A, as
suspension of all actions and claims against the amended by P.D. No. 1758, which mandates that
distressed corporation upon the due appointment upon appointment of a management committee,
of a management committee or rehabilitation rehabilitation receiver, board or body, x x x all
receiver. The Stay Order issued by the actions for claims against corporations,
Rehabilitation Court cannot, however, apply to the partnerships or associations under management or
mortgage obligations owing to Metrobank which receivership pending before any court, tribunal,
had already been enforced even before TCEI’s filing board or body shall be suspended accordingly.
of its petition for corporate rehabilitation on 1 The Interim Rules of Procedure on Corporate
October 2002. In Equitable PCI Bank, Inc v. DNG Rehabilitation of 2000 has been amended by the
Realty and Development Corporation, the Court Rules of Procedure on Corporate Rehabilitation of
upheld the validity of the writ of 2009, which took effect on January 16, 2009. Under
possessionprocured by the creditor despite the the 2009 Rules of Procedure, the power of the RTC
subsequent issuance of a stay order inthe to issue a Stay Order when it finds the petition for
rehabilitation proceedings instituted by the debtor rehabilitation to be sufficient in form and substance
(Town and Country Enterprises Inc v. Quisumbing, is contained in Section 7, Rule 3, [17] which likewise
G.R. No. 173610, October 1, 2012, in Divina, 2014). does not exempt claims arising from pre-need
contracts from the Stay Order (Abrera, et al., v. Hon.
Q: PA Assurance (PA) was incorporated in 1980 Barza and College Assurance Plan, G.R. No. 171681,
to engage in the sale of pre-need educational September 11, 2009).
plans. It sold open-ended educational plans
which guaranteed the payment of tuition and Q: DNG Realty And Development Corporation
other fees to planholders irrespective of the cost (DNG) obtained a loan from petitioner Equitable
at the time of availment. It also engaged in the PCI Bank (EPCIB) secured by a real estate
sale of fixed value plans which guaranteed the mortgage over DNG’s property. When DNG
payment of a pre-determined amount to defaulted payment, EPCIB foreclosed the
planholders. In 1982, PA was among the mortgage and bought the property at public
country’s top corporations. However, it auction. The sheriff issued a certificate of sale in
subsequently suffered financial difficulties. favor of EPCIB.

2019 GOLDEN NOTES
MERCANTILE LAW
Months later, DNG filed a petition for considered a trustee of the corporation at least
rehabilitation with the SEC, and SEC issued a with respect to the matter in litigation only (De
stay order. Afterwards, the Registry of Deeds Leon, supra, pgs. 768-769, citing: Sec. 145, CC;
issued a title in favor of EPCIB, prompting DNG Clemente vs. CA, supra; SEC Opinion No. 10-96,
to seek the annulment of the foreclosure January 29, 2010, Reburiano vs. CA, G.R. No.
proceedings. To gain possession of the property, 102965, January 21, 1999).
PCIB filed an Ex-Parte Petition for Issuance of
Writ of Possession before the RTC, which later
directed the issuance of a writ of possession. OTHER CORPORATIONS
Did the foreclosure sale and writ of possession

in favor of EPCIB affect the Stay Order? (2014 CLOSE CORPORATION
Bar)
A close corporation is one which AOI provides that:
A: NO. Since the foreclosure of respondent DNG's
mortgage and the issuance of the certificate of sale 1. All of the corporation’s issued stock of all
in petitioner EPCIB's favor were done prior to the classes, exclusive of treasury shares, shall be
appointment of a Rehabilitation Receiver and the held of record by not more than a specified
Stay Order, all the actions taken with respect to the number of persons, not exceeding 20;
foreclosed mortgage property which were 2. All of the issued stock of all classes shall be
subsequent to the issuance of the Stay Order were subject to one or more specified restrictions on
not affected by the Stay Order. After the redemption transfer permitted by the provisions on close
period expired without DNG redeeming the corporations; and
foreclosed property, EPCIB becomes the absolute 3. The corporation shall not list in any stock
owner of the property and it was within its right to exchange or make any public offering of any of
ask for the consolidation of title and the issuance of its stock of any class.
new title in its name as a consequence of ownership; 4. Notwithstanding the foregoing, a corporation
thus, it is entitled to the possession and enjoyment shall be deemed NOT a close corporation when
of the property (Equitable PCI Bank, Inc. v. DNG at least 2/3 of its voting stock or voting rights is
Realty and Development Corp., G.R. No. 168672, owned or controlled by another corporation
August 8, 2010). which is not a close corporation within the
meaning of this Code.
LIQUIDATION AFTER 3 YEARS
Note: Stockholders of close corporations are
If the 3-year extended life has expired without a personally liable for corporate torts unless the
receiver or trustee having been expressly corporation has obtained adequate liability
designated by the corporation within that period: insurance (sec. 100 (5) CC)
1. The BOD/BOT itself may be permitted to so NON-STOCK CORPORATION

continue as ‘trustees” by legal implication to
complete the liquidation; DEFINITION
2. Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets, It is one where no part of its income is distributable
including not only the stockholders but likewise as dividends to its members, trustees or officers.
the creditors of the corporation, acting for and Any profit which it may obtain as an incident to its
in its behalf, may make proper representations operations shall whenever necessary or proper, be
with the SEC which has primary and sufficiently used in furtherance of the purpose or purposes for
broad jurisdiction in matters of this nature, for which it was organized (CC, Sec. 87).
working out a final settlement of the corporate
concerns; Foundation
3. The only surviving stockholder or director of a
corporation whose term of existence has A foundation is a non-stock, non-profit corporations
expired may act as trustee-in-liquidation after with funds established to maintain or aid charitable,
the 3-year period to liquidate has expired religious, educational, athletic, cultural, literary,
without the appointment of a trustee-in- scientific, social welfare or similar activities
liquidation; or primarily through extending grants or endowments.
4. The counsel who prosecuted and defended the A foundation, as distinguished from an ordinary
interest of the corporation and who, in fact, non-stock corporation requires a minimum capital
appeared in behalf of the corporation, may be

of 1 million Pesos (SEC Memo. Circular No. 1 Series of the election of the Board of Trustees every two
2004). years.
In 2003, the Board voted to remove Barayuga as
Characteristics of a non-stock corporation president. This prompted Barayuga to file a
petition for injunction with damages against
1. It does not have capital stock divided into AUP, contending among others, that the Board
shares. relieved him of the presidency without valid
2. No part of its income during its existence is grounds despite his five-year term. The RTC
distributable as dividends to its members, ruled in favor of Barayuga. The CA, on the other
trustees, or officers. hand, ruled in favor of AUP.
3. As a general rule, it is not empowered to engage
in business with the object of making income or Can an officer-elect of a non-stock educational
profits directly or indirectly. However, it is not corporation occupying a hold-over capacity be
prohibited to make income or profits as an removed without cause upon the appointment
incident to its operation (CC, Sec. 87). of his or her successor?
4. There is non-transferability of membership (CC,
Sec. 90). A: YES. Although setting the term of the members of
5. The right to vote of members may be limited, the Board of Trustees at five years, Sec. 108, par 2
broadened, or even denied in the AOI or the by- contains a proviso expressly subjecting the duration
laws (CC, Sec. 89). to what is otherwise providedin the AOI or by-laws
6. Non-stock corporations may, through their of the educational corporation. That contrary
articles of incorporation or their by-laws provision controls on the term of office.
designate their governing boards by any name
other than as BOT (CC, Sec. 138). In light of the amended By-Laws of AUP the
7. By-laws may provide that the members may members of the Board of Trustees were to serve a
hold their meetings at any place even outside term of office of only two years; and the officers,
the place where the principal office of the who included the President, were to be elected from
corporation is located, provided that such place among the members of the Board of Trustees during
is within the Philippines (CC, Sec. 93). their organizational meeting, which was held during
A non-stock corporation is not allowed to the election of the Board of Trustees every two
distribute any of its assets or any incidental years. Naturally, the officers, including the
income or profit made by the corporation President, were to exercise the powers vested by
during its existence. Section 2 of the amended By-Laws for a term of only
8. Non-availability of conversion into stock two years, not five years.
corporation (SEC Opinion, February 24, 1989).
Ineluctably, Barayuga, having assumed as President
Q: Adventist University of the Philippines (AUP) of AUP on January 23, 2001, could serve for only two
is a non-stock, non-profit educational years, or until January 22, 2003. By the time of his
institution. Petonillo Barayuga was appointed removal for cause as President on January 27, 2003,
by the AUP’s Board of Trustees as its President he was already occupying the office in a hold-over
in 2001. AUP subsequently amended its By-Laws capacity, and could be removed at any time, without
to state that members of the Board of Trustees cause, upon the election or appointment of his
were to serve a term of office of only two years; successor. His insistence on holding on to the office
and the officers, who included the President, was untenable, therefore, and with more reason
were to be elected from among the members of when one considers that his removal was due to the
the Board of Trustees during their loss of confidence on the part of the Board of
organizational meeting, which was held during Trustees (Barayuga v. Adventist University of the
Philippines, G.R. No. 168008, August 17, 2011).
Stock Corporation vs. Non-stock Corporation
STOCK- CORPORATION NON-STOCK CORPORATION

No capital stock.
Existence of Has capital stock divided into shares (CC,
Capital Stock Sec. 3) Non-stock corporations has capital is in the
form of contributions or donations.
Purpose Organized for profit. Not organized for profit.

2019 GOLDEN NOTES
MERCANTILE LAW
Profits are not distributed to members. Any
Profits are distributed to the
Distribution of profit earned by the non-stock corporation is
stockholders through dividends (CC, Sec.
Profit used for the furtherance of the purpose or
3)
purposes for which it is organized. (CC, Sec. 87)
Not less than 5 but not more than 15.
Number of Not less than 5 and may be more than 15 except
Directors or Except corporation sole and banks (in Non-stock educational institutions (maximum
Trustees case of merger or consolidation) which of 15 trustees).
can have a maximum of 21 directors
Term of one year until their successors
Term of Office Subject to the provision in AOI and By-laws, 3
are elected and qualified, subject to the
of Directors years on a staggered basis.
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not Members may directly elect officers. (CC,Sec.
Officers by the stockholders 92)
Stockholders meeting shall be held in city
May be held at any place outside the principal
or municipality where the principal
Place of place of business of the corporation provided it
office of the corporation is located or at
meeting shall be within the Philippines. (CC, Sec. 93)
the principal office of the corporation.
(CC,Sec. 51)
Stockholders can resort to cumulative
voting.
No cumulative voting unless allowed by AOI.
Only preferred and redeemable shares
Right to vote may be limited, broadened or
can be denied the right to vote except
Right to vote denied by the AOI and by-laws. (CC, Sec. 89)
those matters in Sec. 6.
Regional or district voting of trustees is
Voting of directors may be made only
allowed.
through general voting. Regional or
district voting of directors is not allowed.
Transferability Shares may be transferred by the Membership is personal in character and is not
of Shares/ stockholder with or without the consent transferable unless allowed by the AOI or by-
Membership of the corporation. laws. (CC, Sec. 90)
Membership shall be terminated in the manner
Right to expel Stockholders may be expelled only for
and for the causes provided in the articles of
members grounds provided by law.
incorporation or the by-laws. (CC, Sec. 91)
Assets of stock corporation shall be
Assets of non-stock corporation shall be
distributed in the following order:
distributed as follows:
1. Payment of claims of creditors
1.Payment of claims of creditors who are
2. Assets held on condition of return or
Distribution of not stockholders (based on preference of
subject to limitation of use shall be
Assets in case credit)
returned, transferred or conveyed.
of dissolution 2.Payment of claims of stockholders as
3. Distribution to member based on
creditors
distributive rights stated in AOI or by-law.
3.Residual balance is distributed
4. In case of default, distribution pursuant to
proportionately to preferred shares, if
Plan of Distribution of Assets.
any, then to common stock.
Conversion 2. A non-stock corporation can be converted into

a stock corporation only if the members
1. A non-stock corporation cannot be converted dissolve it first and then organize a stock
into a stock corporation through mere corporation. However, there is a resulting new
amendment of its AOI. This would violate corporation (Sundiang Sr. & Aquino, 2014 citing
Section 87 which prohibits distribution of SEC Opinion, May 13, 1992).
income as dividends to members. Giving the 3. A stock corporation may be converted into a
members shares is tantamount to distribution non-stock corporation by mere amendment
of its assets or income (Sundiang Sr. & Aquino, provided all the requirements are complied
2014 citing SEC Opinion, March 1995). with. Its rights and liabilities will remain
(Sundiang Sr. & Aquino, 2014).

Termination of Membership 8. Scientific,
9. Social,
The power to admit members pertains to the Board 10. Civic service, or
in the absence of any contrary provisions on the AOI 11. Similar purposes, like trade, industry,
and by-laws. Consistently, it is also the Board who agriculture and like chambers, or any
has the power to terminate membership. combination thereof. (CC, Sec. 88) (RCC, Sec. 87)
1. Standards - A non-stock corporation is NOTE: A non-stock corporation organized to

authorized to terminate the membership in promote educational objectives may not be an
accordance with the standards fixed in the AIO educational corporation as contemplated in Secs.
or the by-laws (CC, Sec. 91). 106 to 108, CC.
2. When property rights are involved - Membership
may involve property rights. Example: The formation of a non-stock corporation for
Membership in a golf club where the purchase political purpose is not allowed
of the share is a sine qua non (Valley Golf &
Country Club Inc. v. Caram, G.R. No. 158805, April Political purpose is not included on the purposes for
16, 2009). which a non-stock corporation may be established.
3. Lien – Non-payment of dues may be a ground SEC may reject the AOI if the purpose of the
for termination or suspension of membership. corporation is to engage in election campaign or
The AOI or the by-laws of a non-stock partisan political activity (SEC Opinion, April 10,
corporation may provide that unpaid dues shall 1985).
constitute a lien on the member’s share.
However, Section 68 of the Corporation Code TREATMENT OF PROFITS
does not apply if the membership shares are
sold under the provisions that provide for the Non-stock corporationmay earn profit
constitution of lien (Calatagan Golf & Country
Club Inc. V. Caram, G.R. No. 165443, April 16, Mere intangible or pecuniary benefit to the
2009); members does not change the nature of the
4. Notice - For the termination of membership to corporation. The fact that a non‐stock corporation
be valid, there should be reasonable notice to earns a profit does not make it a profit‐making
the member concerned and he must be given a corporation where such profit or income is used for
fair opportunity to be heard in his defense; purposes set forth in its articles of incorporation
5. Effect of death of a member - Membership in and and is not distributed to its incorporators, members
all rights arising from a non-stock corporation or officers.
are personal and non-transferable, unless the
AOI or the by-laws of the corporation provide DISTRIBUTION OF ASSETS UPON DISSOLUTION
otherwise. Deceased members who are
dropped from the membership roster in the Order of distribution of assets on dissolution of
manner and for the cause provided for in the non-stock corporations
by-laws are not to be counted in determining
the requisite vote in corporate matters or the 1. All liabilities of the corporation shall be paid or
requisite quorum for the annual member’s adequate provision thereof shall be made;
meeting (Tan v. Sycip, G.R. No. 153468, August 2. Assets held upon a condition requiring return,
17, 2006). transfer or conveyance upon, and which
condition occurs by reason of the dissolution,
PURPOSES shall be returned, transferred or conveyed;
3. Assets received and held by the corporation
Purposes for which a non-stock corporation subject to limitations permitting their use only
may be organized for charitable, religious, benevolent,
educational or similar purposes shall be
Non-stock corporations may be formed or transferred or conveyed to one or more
organized for: (CREP-CFLSS-CS) corporations, societies or organizations
1. Charitable, engaged in activities in the Philippines
2. Religious, substantially similar to those of the dissolving
3. Educational, corporation.
4. Professional, 4. All other assets shall be distributed to the
5. Cultural, members as provided by the articles of
6. Fraternal, incorporation or the by-laws.
7. Literary,

2019 GOLDEN NOTES
MERCANTILE LAW
5. In the absence of provision in the AOI or by- 2. Principle of reciprocity - It allows Filipino
laws, distribution may be made in accordance citizens to do business in the foreign state or
to a plan of distribution adopted by the board of country. This is merely prescribed as a
trustees by majority vote and by at least 2/3 of requirement to secure a license and not an
the members (CC, Sec. 94). essential element of being a foreign corporation
(De Leon, 2010).
The assets of a non-stock corporation undergoing
the process of dissolution for reasons other than Jurisdiction over a foreign corporation
those set forth in Section 139 of this Code shall
be applied and distributed to such enumeration. IF THE FOREIGN IF THE FOREIGN
(Revised Corporation Code, Sec. 93) CORPORATION IS CORPORATION IS
THE PLAINTIFF THE DEFENDANT
A non-stock corporation cannot offset unused 1.GR: Voluntary
contributions of members against the balance of appearance of the
receivables from the same members corporation by
interposing a
The unused contributions of members cannot be defense
offset against the balance of receivables because 1. Voluntary
this would amount to distribution of the capital of appearance before the
XPN: A special
the corporation. Members of non-stock corporation local courts by the
appearance to file a
are not entitled to distribution of capital. They are filing of an action by a
motion to dismiss
only entitled to distribution of capital upon licensed corporation
based on lack of
dissolution when it is provided for in the articles of jurisdiction
incorporation or by-laws (SEC Opinion, November 2. If the foreign
27, 1985). corporation is a co-
2. Service of summons
plaintiff with a
to a foreign
FOREIGN CORPORATIONS domestic corporation
corporation which has
and latter filed a suit
transacted business in
A foreign corporation is done, formed, organized or here in the Philippines.
the Philippines
existing under any laws other than those of the whether licensed or
Philippines and whose laws allow Filipino citizens registered
and corporations to do business in its own country 3. Service of summons
or State (CC, Sec. 123). to its resident agent in
an isolated transaction.
Features that make a foreign corporation within
the coverage of the law BASES OF AUTHORITY OVER FOREIGN
CORPORATION
1. Place of incorporation - The corporation must
be formed, organized, or existing under foreign The following are the two bases of authority
law. (jurisdiction) over foreign corporations:
Due to the enactment of RA 7042, the control 1. A corporation may give actual consent to
test is now used in the determination of judicial jurisdiction manifested normally by
nationality of the corporation in case of compliance with the State’s foreign corporation
nationalized or partly nationalized activities. qualification requirements (licensing
However, this does not preclude the use of requirements and other requisites to lawfully
other tests in determining the nationality of the transact business in the Philippines); and
corporation. In fact, as per SEC Opinion on Nov. 2. A corporation, even though not qualified (not
28, 2009, the SEC opined that the grandfather licensed), by engaging in sufficient activity
rule can be useful when a corporation’s (doing business) within the State, established
economic activity is strictly limited by law to judicial jurisdiction over the foreign
Filipino citizens, such as certain types of retail corporation (Foreign Corporations: The
trading and mass media. Further, according to Interrelation of Jurisdiction and Qualification,
the commission, the control test, which is more Indiana Law Journal, Article 4, Vol. 33, Issue 3,
liberal, is applied for corporations intending to retrieved on April 29, 2013).
engage in commerce where 60%-40% equity
ratio is allowed by law. Consent

Through compliance with the Philippines’ legal 2. Contract Test - Whether the contracts entered
requirements to lawfully engage in business within into by the foreign corporation, or by an agent
the country’s territory, the foreign corporation acting under the control and direction of the
gives its actual consent to be subjected to the foreign corporation, are consummated in the
jurisdiction of the Philippines (Ibid). Philippines.
By securing a license, which is a legal requirement NOTE: Actual transaction of business within the
to lawfully engage in business in the Philippines, the Philippine territory is an essential requisite for the
foreign entity would be giving assurance that it will Philippines to acquire jurisdiction over a foreign
abide by the decisions of our courts, even if adverse corporation and thus require the foreign
to it (Eriks PTE, Ltd. v. CA, GR 118843, February 6, corporation to secure a Philippine business license
1997). (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing
Industries, Inc., G.R. No. 147905, May 28, 2007).
Foreign corporations shall not be permitted to
transact or do business in the Philippines until they Q: What is the legal test for determining if an
have secured a license for that purpose from the unlicensed foreign corporation is doing
SEC and certificate of authority from the business in the Philippines? (2002 Bar)
appropriate government agency (CC, Sec. 123).
XPN: Isolated Transactions – where a foreign A: The test is whether or not the unlicensed foreign
corporation had no intention to engange corporation has performed an act or acts that imply
continuously in the transaction is not doing in the a continuity of commercial dealings or
Philippines and need not get a license. arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of
Doctrine of “Doing Business” in the Philippines some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of
Q: When is a foreign corporation deemed to be the purpose and object of the business corporation.
“doing business in the Philippines?” (1998, 2016
Bar) Q: Steelcase is a foreign corporation existing
under the laws of Michigan, USA, and engaged in
A: Under the Foreign Investment Act (R.A. No. the manufacture of office furniture with dealers
7402),a foreign corporation is “deemed doing worldwide. DISI is a corporation existing under
business in the Philippines” if it is continuing the Philippine Laws and engaged in the furniture
body or substance of the business or enterprise for business, including the distribution of furniture.
which it was organized. It is the intention of an Steelcase and DISI orally entered into a
entity to continue the body of its business in the dealership agreement whereby Steelcase
country. The grant and extension of 90-day credit granted DISI the right to market, sell, distribute,
terms of a foreign corporation to a domestic install, and service its products to end-user
corporation for every purchase shows an intention customers within the Philippines. The business
to continue transacting with the latter. relationship continued smoothly until it was
terminated after the agreement was breached
Jurisdictional tests of “doing or transacting with neither party admitting any fault. Steelcase
business” in the Philippines for foreign filed a complaint for sum of money against DISI
corporations alleging, among others, that DISI had an unpaid
account of US$600,000.00.
1. Twin Characterization Test
a. Continuity Test –implies a continuity of DISI alleged that the complaint failed to state a
commercial dealings and arrangements, cause of action and to contain the required
and contemplates to some extent the allegations on Steelcase’s capacity to sue in
performance of acts or works or the the Philippines despite the fact that Steelcase
exercise of some functions normally was doing business in the Philippines without
incident to and in progressive prosecution the required license to do so. Consequently, it
of, the purpose and object of its posited that the complaint should be dismissed
organization. because of Steelcase’s lack of legal capacity to
b. Subsequent Test – a foreign corporation is sue in Philippine courts. Is Steelcase doing
doing business in the country if it is business in the Philippines without the required
continuing the body or substance of the license?
enterprise of business for which it was
organized (Sundiang Sr. & Aquino, 2009). A: NO. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing

2019 GOLDEN NOTES
MERCANTILE LAW
business” unless it is under the full control of the b. Under Section 32 of BP 68, the law provides that
foreign corporation. If the distributor is an where any of the first two conditions set forth
independent entity which buys and distributes in the preceding paragraph is absent, in the case
products, other than those of the foreign of a contract with a director or trustee, such
corporation, for its own name and its own account, contract may be ratified by the vote of the
the latter cannot be considered to be doing business stockholders representing at least 2/3 of the
in the Philippines. It should be kept in mind that the outstanding capital stock or of at least 2/3 of
determination of whether a foreign corporation is the members in a meeting called for the
doing business in the Philippines must be judged in purpose. Provided, that full disclosure of the
light of the attendant circumstances. adverse interest of the directors or trustees
involved is made at such meeting. Provided,
It is undisputed that DISI was founded in 1979 and however, that the contract is fair and
is independently owned and managed by the reasonable under the circumstances.
spouses Leandro and Josephine Bantug. In addition
to Steelcase products, DISI also distributed products NOTE: See Section 33 on interlocking directors.
of other companies including carpet tiles,
relocatable walls and theater settings. The NECESSITY OF A LICENSE TO DO BUSINESS
dealership agreement between Steelcase and DISI
had been described by the owner himself a buy and The purpose of the law in requiring that a foreign
sell arrangement. This clearly belies DISI’s assertion corporation doing business in the Philippines be
that it was a mere conduit through which Steelcase licensed to do so is to subject such corporation to
conducted its business in the country. From the the jurisdiction of the courts. The object is not to
preceding facts, the only reasonable conclusion that prevent foreign corporation from performing single
can be reached is that DISI was an independent acts but to prevent it from acquiring a domicile for
contractor, distributing various products of the purpose of business without taking steps
Steelcase and of other companies, acting in its own necessary to render it amenable to suits in local
name and for its own account (Steelcase, Inc., v. courts (Marshall-Wells Co. vs. Elser & Co, G. R. No.
Design InternationalSelections, Inc., G.R. No. 171995, 22015, September 1, 1924).
April 18, 2012).
Further, the following are considered objectives of
Q: Chito Santos is a director of both Platinum the statutory provisions prescribing regulation of
Corporation and Kwik Silver Corporation. He foreign corporations:
owns 1% of the outstanding capital stock of
Platinum and 40% of Kwik. Platinum plans to 1. To place the foreign corporations under the
enter into a contract with Kwik that will make jurisdiction of the court;
both companies earn very substantial profits. 2. To place them in the same footing as domestic
The contract is presented at the respective corporation; and
board meetings of Platinum and Kwik. 3. To protect the public in dealing with the said
corporation.
a. In order that the contract will not be
voidable, what conditions will have to be A corporation engaged in exporting goods to the
complied with? Explain. Philippines is not required to obtain a license
b. If these conditions are not met, how may this
contract be ratified? Explain (1995 Bar) If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
A: products to the Philippines, the Philippines has no
a. Under Section 32 of BP 68, the law provides jurisdiction to require such foreign corporation to
that: 1) the presence of such director or trustee secure a Philippine business license. Actual
in the board meeting in which the contract ws transaction of business within the Philippine
approved was not necessary to constitute a territory is an essential requisite for the Philippines
quorum for such meeting; 2) the vote of such to acquire jurisdiction over a foreign corporation
director or trustee was not necessary for the and thus require the foreign corporation to secure a
approval of the contract; 3) the contract is fair Philippine business license (B. Van Zuiden Bros., Ltd.
and reasonable under the circumstances; and v. GTVL Manufacturing Industries, Inc., G.R. No.
4) in case of an officer, the contract has been 147905, May 28, 2007).
previously authorized by the board of directors.
In the case at bar, Chito must make sure that the Q: Cargill is a corporation organized and existing
following conditions be met for in order that the under the laws of the State of Delaware, United
contract will not be voidable. States of America. Cargill and Northern

Mindanao Corporation (NMC) executed a
contract whereby NMC agreed to sell to Cargill
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended
contract required NMC to put up a performance
bond which represents the value of 10,500
metric tons of molasses. The performance bond
was intended to guarantee NMC’s performance
to deliver the molasses during the
prescribedshipment periods according to the
terms of the amended contract. In compliance
with the terms of the third amendment of the
contract, respondent Intra Strata Assurance
Corporation (Intra Strata) issued a performance
bond to

2019 GOLDEN NOTES
MERCANTILE LAW
guarantee NMC’s delivery of the 10,500 tons of under Sec. 123, CC, which defines a
molasses, and a surety bond. NMC was only able foreign corporation.
todeliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, Cargill sent b. The applicant is an existing corporation
demand letters to NMC claiming payment under in good standing.
the performance and surety bonds. When NMC c. If such certificate is in a foreign language,
refused to pay, Cargill filed a complaint for sum a translation thereof in English under
of money against NMC and Intra Strata. Does oath of the translator shall be attached
Cargill, an unlicensed foreign corporation, has thereto.
legal capacity to sue before Philippine courts?
4. Statement under oath by the President or other
A: YES, it has the capacity to sue. In this case, Cargill person authorized by the Corporation showing
and NMC amended their contract three times to give to the satisfaction of the SEC and other
a chance to NMC to deliver to Cargill the molasses, governmental agency in the proper cases that
considering that NMC already received the the:
minimum price of the contract. There is no showing a. applicant is solvent and in sound financial
that the transactions between Cargill and NMC condition
signify the intent of Cargill to establish a continuous b. the assets and liabilities of the corporation
business or extend its operations in the Philippines. as of the date not exceeding one (1) year
An exporter in one country may export its products immediately prior to the filing of the
to many foreign importing countries without application.
performing in the importing countries specific
commercial acts that would constitute doing 5. An agreement or stipulation stating the
business in the importing countries. The mere act of designated resident agent who will receive
exporting from one’s own country, without doing summons and other legal processes for the
any specific commercial act within the territory of corporation together with a Special Power of
the importing country, cannot be deemed as doing Attorney;
business in the importing country. The importing 6. An agreement that if it ceases to transact
country does not require jurisdiction over the business or if there is no more resident agent,
foreign exporter who has not yet performed any summons shall then be served through SEC; and
specific commercial act within the territory of the 7. Deposit securities for the benefit of present and
importing country. Without jurisdiction over the future creditors, within 60 days after the
foreign exporter, the importing country cannot issuance of license.
compel the foreign exporter to secure a license to do NOTE: Foreign banking, financial and insurance
business in the importing country (Cargill, Inc., v. corporations shall, in addition to the above
Intra Strata Assurance Corp., G.R. No. 168266, March requirements, comply with the provisions of
15, 2010). existing laws applicable to them.
Requisites for issuance of a license The AOI and by-laws of a licensed and registered
foreign corporation is valid despite the fact that
The foreign corporation must submit to SEC the said AOI and by-laws are not approved by SEC
following:
Since the SEC will grant a license only when the
1. Copy of its articles of incorporation and by- foreign corporation has complied with all the
laws, certified in accordance with law and their requirements of law, it follows that when it decides
translation to an official language of the to issue such license, it is satisfied that the
Philippines, if necessary; applicant's by-laws, among the other documents,
2. The application, which shall be under oath.; meet the legal requirements. This, in effect, is an
3. Attached to the application for license shall be a approval of the foreign corporation’s by-laws
duly executed certificate under oath by the (Citibank v. Chua, G.R. no. 102300, March 17, 1993).
authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that: Resident Agent
a. The laws of the country or state of the
applicant allow Filipino citizens and 1. An individual, who must be of good moral
corporations to do business therein. character and of sound financial standing,
residing in the Philippines; or
NOTE: This oath of reciprocity is one of 2. A domestic corporation lawfully transacting
the requirements to secure a license business in the Philippines (CC, Sec. 127).

Securities Regulation Code
A resident agent may be either an individual SEC requires the submission of:
residing in the Philippines or a domestic
corporation lawfully transacting business in the 1. A duly authenticated copy of board resolution
Philippines: Provided, That an individual resident or a certification from the authorized officer of
agent must be of good moral character and of sound the company formally revoking his
financial standing: Provided, further, That in case appointment as a resident agent of the
of a domestic corporation who will act as a corporation; and
resident agent, it must likewise be of sound 2. Accompanied by a duly authenticated written
financial standing and must show proof that it is power of attorney designating the substitute or
in good standing as certified by the Commission. the new resident agent.
(RCC, Sec. 144)
NOTE: The appointment of a resident agent of a
Purpose of appointing a resident agent foreign corporation is revocable at any time at the
instance of the corporation (SEC Opinion, Sept. 4,
The appointment of a resident agent is required for 1990).
the purpose of accepting and receiving, on behalf of
the foreign corporation: Duty of the resident agent in case it changes its
address
1. Notice affecting the corporation pending the
establishment of its local office and It shall be his or its duty to immediately notify in
2. Summons and other legal processes in all writing the SEC of the new address (CC, Sec. 128).
proceedings for or against the corporation.
Instances when service of summons or other
Effect of service of summons and notices to the legal processes made upon the SEC instead of a
resident agent resident agent
Service upon any agent of a foreign corporation, 1. If a foreign corporation, previously granted a
whether or not engaged in business in the license, ceases to transact business in the
Philippines, constitutes personal service upon the Philippines.
corporation (CC, Sec. 128; Facilities Management 2. A foreign corporation without any resident
Corp. v. Dela Rosa, G.R. No. L-38649, March 26, 1979). agent in the Philippines on whom any summons
or other legal processes may be served (CC, Sec.
As a condition to the issuance of the license for a 128).
foreign corporation to transact business in the
Philippines, such corporation shall file with the Effect of service made upon the SEC
Commission a written power of attorney
designating a person who must be a resident of Such service made upon the SEC shall have the same
the Philippines, on whom summons and other force and effect as if made upon the duly authorized
legal processes may be served in all actions or officers of the corporation at its home office (CC, Sec.
other legal proceedings against such 128).
corporation, and consenting that service upon such
resident agent shall be admitted and held as valid as Whenever such service shall be made upon the SEC,
if served upon the duly authorized officers of the it must, within 10 days thereafter, transmit by mail
foreign corporation at its home office. (RCC, Sec. a copy of such summons or other legal process to the
145) corporation at its home or principal office. The
sending of such copy by the Commission shall be a
Resident agent cannot sign the certificate of necessary part of and shall complete such service.
non-forum shopping
PERSONALITY TO SUE
While a resident agent may be aware of the actions
filed against the principal, he may not be aware of GR: Only foreign corporations that have been issued
the actions initiated by the principal, therefore he a license to operate a business in the Philippines
cannot sign the certificate of non-forum shopping have the personality to sue (CC, Sec.133).
that is a requirement for filing of an initiatory
pleading in court (Expert Travel & Tours Inc. v. CA, No foreign corporation transacting business in the
G.R. No. 152392, May 26, 2005). Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
Replacement of a resident agent in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such

2019 GOLDEN NOTES
MERCANTILE LAW
corporation may be sued or proceeded against Philippines (Columbia Pictures v. CA, G.R. No.
before Philippine courts or administrative tribunals 110318, August 28, 1996).
on any valid cause of action recognized under
Philippine laws. (RCC, Sec. 150) A foreign corporation, although not licensed to do
business in the Philippines, may seek recognition
XPN: Under the rule on estoppel, a party is estopped and enforcement of the foreign arbitral award in
to challenge the personality of a foreign corporation accordance with the provisions of the Alternative
to sue, even if it has no license, after having Dispute Resolution Act of 2004. A foreign
acknowledged the same by entering to a contract corporation‘s capacity to sue in the Philippines is
with it. not material insofar as the recognition and
enforcement of a foreign arbitral award is
One who has dealt with a corporation of foreign concerned (Tuna Processing Inc., v. Philippine
origin as a corporate entity is estopped to deny its Kingford Inc., G.R. No. 185582, February 29, 2012).
corporate existence.
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely A foreign corporation, which was granted a
incapacitated from filing a suit in local courts license to transact business in the Philippines, is
suable before local courts or administrative
Only when that foreign corporation is “transacting” agencies
or “doing business” in the country will a license be
necessary before it can institute suits. It may, It is suable since any foreign corporation lawfully
however, bring suits on isolated business doing business in the Philippines shall be bound by
transactions, which is not prohibited under all laws, rules and regulations applicable to
Philippine law. Thus, a foreign insurance company domestic corporations of the same class, save and
may sue in Philippine courts upon the marine except:
insurance policies issued by it abroad to cover 1. Such only as provided for the creation,
international-bound cargoes shipped by a formation, organization or dissolution of the
Philippine carrier, even if it has no license to do corporations or
business in this country. It is the act of engaging in Those which fix the relations, liabilities,
business without the prescribed license which bars responsibilities, or duties of stockholders, members
a foreign corporation from access to our courts or officers of corporations to each other or to the
(Aboitiz Shipping Corp. vs. Insurance Co. of NA, G.R. corporation (CC, Sec. 129). (RCC, Sec. 146)
No. 168402, August 6, 2008, in Divina, 2010).
NOTE: Matters relating to the organization or
The obtainment of a license prescribed by the internal affairs of the corporation are governed by
Corporation Code is not a condition precedent to the the laws of the home or incorporating State unless
maintenance of any kind of action in Philippine they offend any public policy of the Philippines.
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact A foreign corporation doing business in the
business in the Philippines, as this phrase is Philippines without license may be sued in the
understood under the Corporation Code, unless it country
shall have the license required by law, and until it While an unlicensed foreign corporation doing
complies with the law in transacting business here, business in the country cannot maintain any action,
it shall not be permitted to maintain any suit in local said corporation can be sued in the country, under
courts. As thus interpreted, any foreign corporation the doctrine of quasi-estoppel by acceptance of
not doing business in the Philippines may maintain benefits. It shall not be allowed to invoke its lack of
an action in our courts upon any cause of action, license to impugn the jurisdiction of the courts
provided that the subject matter and the defendant (Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
are within the jurisdiction of the court. It is not the September 28, 1990; SEC Opinion, Jan. 10, 1995).
absence of the prescribed license but "doing
business" in the Philippines without such license INSTANCES WHERE AN UNLICENSED FOREIGN
which debars the foreign corporation from access to CORPORATION BE ALLOWED TO SUE
our courts. In other words, although a foreign
corporation is without license to transact business 1. Isolated transactions.
in the Philippines, it does not follow that it has no 2. A license subsequently granted enables the
capacity to bring an action. Such license is not foreign corporation to sue on contracts
necessary if it is not engaged in business in the executed before the grant of the license.

3. In an action for infringement of patent or other In its complaint, Surecomp alleged that it is a
intellectual property rights, provided that the foreign corporation not doing business in
country of the foreign corporation is a party to the Philippines and is suing on an isolated
the Paris Convention. transaction. Pursuant to the agreement, it
4. If the foreign corporation is co-plaintiff with a installed the System in ABC’s computers for a
domestic corporation and the domestic consideration of US$298,000.00 as license fee.
corporation is the one who instituted the suit in Global filed a motion to dismiss on the ground
the Philippines; -or that Surecomp had no capacity to sue because it
5. By reason of the doctrine of estoppel. was doing business in the Philippines without a
license. Is Global estopped from questioning
Isolated transaction Surecomp’s capacity to sue?
The Court has not construed the term “isolated A: YES, Global is estopped. As a rule, unlicensed
transaction” to literally mean “one” or a mere single foreign non-resident corporations doing business in
act. The phrase “isolated transaction” has a definite the Philippines cannot file suits in the Philippines.
and fixed meaning, i.e., a transaction or series of This is mandated under Section 133 of the
transaction set apart from the common business of Corporation Code. A corporation has a legal status
a foreign enterprise in the sense that there is no only within the state or territory in which it was
intention to engage in progressive pursuit of the organized. For this reason, a corporation organized
purpose and object of the business organization in another country has no personality to file suits in
(Lorenzo Shipping Corp., v. Chubb and Sons, G.R. No. the Philippines. In order to subject a foreign
147724, June 8, 2004). corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license
Q: May a foreign corporation not engaged in from the Securities and Exchange Commission and
business in the Philippines and a national of a appoint an agent for service of process. Without
country which is a party to any convention, such license, it cannot institute a suit in
treaty, or agreement relating to intellectual the Philippines.
property rights or the repression of unfair
competition, to which the Philippines is also a The exception to this rule is the doctrine of estoppel.
party or extend reciprocal rights sue in Global is estopped from challenging Surecomp’s
trademark or service mark enforcement action? capacity to sue. A foreign corporation doing
business in the Philippines without license may sue
A: YES. The foreign corporation mentioned above in Philippine courts a Filipino citizen or a Philippine
may sue in trademark or service mark enforcement entity that had contracted with and benefited from
action. This is in accordance with Section 160, in it. A party is estopped from challenging the
relation to Section 3 of R.A. No. 8393, The personality of a corporation after having
Intellectual Property Code (Sehwani Inc. v. In-n-Out acknowledged the same by entering into a contract
Burger, G.R. No. 171053, Oct. 15, 2007). with it. The principle is applied to prevent a person
contracting with a foreign corporation from later
Q: Surecomp, a foreign corporation duly taking advantage of its non-compliance with the
organized and existing under the laws of the statutes, chiefly in cases where such person has
Netherlands, entered into a software license received the benefits of the contract (Global
agreement with ABC, a domestic corporation, Business Holdings, Inc., v. Surecomp Software, B.V.,
for the use of its IMEX Software System (System) G.R. No. 173463, October 13, 2010).
in the bank’s computer system for a period of
twenty (20) years. ABC merged with Global GROUNDS FOR REVOCATION OF LICENSE
Business Holdings, Inc. (Global), with Global as
the surviving corporation. Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
When Global took over the operations of ABC, it transact business in the Philippines may be revoked
found the System unworkable for its operations, or suspended by the SEC upon any of the following
and informed Surecomp of its decision to grounds:
discontinue with the agreement and to stop
further payments thereon. Consequently, for 1. Failure to file its annual report or pay any fees
failure of Global to pay its obligations under the as required by the Code;
agreement despite demands, Surecomp filed a 2. Failure to appoint and maintain a resident
complaint for breach of contract with damages agent in the Philippines;
before the RTC. 3. Failure, after change of its resident agent or of
his address, to submit to the Securities and

2019 GOLDEN NOTES
MERCANTILE LAW
Exchange Commission a statement of such Withdrawal by foreign corporation licensed to
change; transact business in the Philippines from said
4. Failure to submit to the SEC an authenticated license
copy of any amendment to its articles of
incorporation or by-laws or of any articles of A foreign corporation licensed to transact business
merger or consolidation within the time in the Philippines may be allowed to withdraw from
prescribed by the Corporation Code; the Philippines by filing a petition for withdrawal of
5. A misrepresentation of any material matter in license. However, no certificate of withdrawal shall
any application, report, affidavit or other be issued by the SEC unless all the following
document submitted by such corporation requirements are met:
pursuant to this Title;
6. Failure to pay any and all taxes, imposts, 1. All claims which have accrued in the Philippines
assessments or penalties, if any, lawfully due to have been paid, compromised or settled;
the Philippine Government or any of its 2. All taxes, imposts, assessments, and penalties, if
agencies or political subdivisions; any, lawfully due to the Philippine Government
7. Transacting business in the Philippines outside or any of its agencies or political subdivisions
of the purpose or purposes for which such have been paid; and
corporation is authorized under its license; 3. The petition for withdrawal of license has been
8. Transacting business in the Philippines as agent published once a week for three (3) consecutive
of or acting for and in behalf of any foreign weeks in a newspaper of general circulation in
corporation or entity not duly licensed to do the Philippines (CC, Sec. 136). (Now Sec. 153
business in the Philippines; or under the RCC)
9. Any other ground as would render it unfit to
transact business in the Philippines (CC, Sec
134). (Now Sec. 151 of the RCC) MERGERS
AND CONSOLIDATIONS
A certificate of revocation shall be issued by the SEC.
A copy thereof shall be furnished to the appropriate
government agency in the proper cases. The SEC DEFINITION AND CONCEPT
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation Common forms of corporate combinations
accompanied by a copy of the certificate of
revocation (CC, Sec. 135). 1. Sale of assets – One corporation sells all or
substantially all of its assets to another. Such
Effects of revocation of license of a foreign sale, usually, though not necessarily made in the
corporation course of the dissolution of the vendor
corporation.
The following are the effects of such revocation: 2. Lease of assets – A corporation, without being
dissolved, leases its property to another
1. The revocation cannot affect the validity of corporation for which the lessor merely
contracts entered into by it before the receives rental paid by the lessee. This is similar
revocation nor its right to maintain an action to to the sale of assets, except that under a lease,
enforce them(Billmeyer Lumber Co. vs. nothing passes, except the right to use the
Merchants’ Coal Co., 69 SE 1073); property leased.
2. The revocation shall not affect the validity of 3. Sale of stock – The purpose of a holding
contracts entered into by a foreign corporation corporation is to acquire a sufficient amount of
after revocation. The only effect of the the stock of another corporation for the
revocation is that the foreign corporation purpose of acquiring control. The acquiring
cannot seek redress from the courts to enforce corporation is called the parent/ holding
such contracts. It simply removes its legal company. The corporation whose stocks were
standing to sue (SEC Opinion No. 10-07, Feb. 5, acquired is the subsidiary.
2010); and 4. Merger – One where a corporation absorbs
3. Innocent parties can enforce such contracts another corporation and remains in existence
whether the same are considered valid or not. while others are dissolved.
However, the foreign corporation can no longer 5. Consolidation - One where a new corporation is
transact business in the Philippines, and it created and consolidating corporations are
cannot maintain any suit or action in any court extinguished.
or administrative agency (CC, Sec. 133).
Merger

The seller in good faith Notwithstanding the
Two or more corporations unite, one corporation is authorized to stock sale, the
which retains its corporate existence absorbing or dismiss the affected corporation continues
merging in itself the other which disappears as a employees, but is liable to be the employer of
separate corporation. It is the absorption of one for the payment of its people and
corporation by another which survives (De Leon, separation pay under continues to be liable
2010). the law. The buyer in for the payment of
good faith, on the other their just claims.
Merger vs. De Facto Merger hand, is not obliged to Furthermore, the
absorb the employees corporation or its new
De Facto Merger affected by the sale, majority shareholders
Merger
(2016 Bar) nor is it liable for the are not entitled to
Merger is a re- payment of their lawfully dismiss
organization of two claims. The most that it corporate employees
or more corporations may do, for reasons of absent a just or
that results in their public policy and social authorized cause. (SME
consolidating into a justice, is to give Bank, Inc., et al., v.
single corporation, preference to the Gaspar, et al., G.R. Nos.
which is one of the qualified separated 184517 & 186641,
constituent personnel of the selling October 8, 2013)
corporations, one firm.
Can be pursued by one
disappearing or
corporation acquiring all
dissolving and the Q: One of the stipulations in the sale of SME Bank
or substantially all of the
other surviving. To to Abelardo Samson was that Agustin and De
properties of another
put it another way, Guzman, the majority stockholders and
corporation in exchange
merger is the corporate directors of SME, shall
of shares of stock of the
absorption of one or terminate/retire its employees. At the behest of
acquiring corporation.
more corporations by Samson’s wife, SME’s general manager urged its
The acquiring
another existing employees, respondents Gaspar, et al., to tender
corporation would end
corporation, which their resignations on the promise that they will
up with the business
retains its identity be rehired. The majority shares of SME were
enterprise of the target
and takes over the then sold to the Sps. Samson, and SME did not
corporation; whereas,
rights, privileges, rehire De Guzman, et al.
the target corporation
franchises,
would end up with
properties, claims, Gaspar, et al. filed a complaint for illegal
basically its only
liabilities and dismissal against SME, Samson, Agustin and De
remaining assets being
obligations of the Guzman. The LA ruled that the labor buyer of an
the shares of stock of the
absorbed enterprise is not bound to absorb its employees,
acquiring corporation.
corporation(s). The unless there is an express stipulation to the
absorbing contrary. The NLRC found that there was only a
corporation mere transfer of shares – and therefore, a mere
continues its change of management – from Agustin and De
existence while the Guzman to the Samson Group. As the change of
life or lives of the management was not a valid ground to
other corporation(s) terminate respondent bank employees, the
is or are terminated. NLRC ruled that they had indeed been illegally
dismissed.
(Bank of Commerce v. Radio Philippines Network, Was there a transfer of business such that
Inc., et al., G.R. No. 195615, April 21, 2014) Samson, being an innocent transferee, has no
obligation to retain the employment of Gaspar,
Asset sale vs. Stock sale et al. ?
ASSET SALE STOCK SALE A: NO. There was no transfer of the business
The individual or establishment to speak of, but merely a change in
The corporate entity corporate the new majority shareholders of the corporation.
sells all or substantially shareholders sell a
all of its assets to controlling block of There are two types of corporate acquisitions: asset
another entity. stock to new or sales and stock sales. In contrast with asset sales,
existing shareholders. in which the assets of the selling corporation are

2019 GOLDEN NOTES
MERCANTILE LAW
transferred to another entity, the transaction in judicial actions which were covered by a BSP-
stock sales takes place at the shareholder level. mandated escrow fund of P50 million. Shortly
Because the corporation possesses a personality after, the Supreme Court, in TRB v. RPN, ordered
separate and distinct from that of its shareholders, TRB to pay respondents Radio Philippines
a shift in the composition of its shareholders will not Network, Intercontinental Broadcasting
affect its existence and continuity. Thus, Corporation, and Banahaw Broadcasting
notwithstanding the stock sale, the corporation Corporation (RPN, et al.) actual damages with
continues to be the employer of its people and legal interest. RPN, et al. filed a motion for
continues to be liable for the payment of their just execution against TRB before the RTC. But
claims. Furthermore, the corporation or its new rather than pursue a levy in execution of the
majority shareholders are not entitled to lawfully corresponding amounts on escrow, RPN, et al.
dismiss corporate employees absent a just or filed a Supplemental Motion for Execution
authorized cause. where they described TRB as “now BOC” based
on the assumption that TRB had been merged
In the case at bar, the Letter Agreements show that into BOC.
their main object is the acquisition by the Samson
Group of 86.365% of the shares of stock of SME BOC opposed RPN, et al.’s motion and denied
Bank. Hence, this case involves a stock sale, that there was a merger between itself and TRB.
whereby the transferee acquires the controlling The RTC granted the writ of execution to cover
shares of stock of the corporation. Thus, following all assets of TRB, including those subject of the P
the rule in stock sales, respondent employees may & A agreement. The RTC held that the P &A
not be dismissed except for just or authorized agreement was a mere tool to effectuate merger.
causes under the Labor Code.
BOC appealed to the CA, which affirmed with
The transfer only involved a change in the equity modification the RTC decision, by declaring that
composition of the corporation. To reiterate, the no merger existed between BOC and TRB and
employees are not transferred to a new employer, deleting the phrase that the P & A agreement
but remain with the original corporate employer, was a farce or a mere tool to effectuate a merger
notwithstanding an equity shift in its majority or consolidation between TRB and BOC. The CA
shareholders. This being so, the employment status limited the execution to TRB’s properties found
of the employees should not have been affected by in BOC’s possession.
the stock sale. A change in the equity composition of
the corporate shareholders should not result in the The RTC issued an alias writ of execution against
automatic termination of the employment of the BOC, and BOC sought reconsideration of the
corporation’s employees. Neither should it give the same considering that the CA declared that no
new majority shareholders the right to legally merger existed between BOC and TRB. The RTC
dismiss the corporation’s employees, absent a just denied BOC’s motion.
or authorized cause.
a. Was there a merger between BOC and TRB?
It is thus erroneous on the part of the corporation to b. Should BOC be considered as RPN, et al.’s
consider the employees as terminated from their judgment debtor?
employment when the sole reason for so doing is a
change of management by reason of the stock sale. A:
The conformity of the employees to the a. NO.What happened is that TRB sold and BOC
corporation’s act of considering them as terminated purchased identified recorded assets of TRB in
and their subsequent acceptance of separation pay consideration of BOC’s assumption of identified
does not remove the taint of illegal dismissal. recorded liabilities of TRB including booked
Acceptance of separation pay does not bar the contingent accounts. There is no law that
employees from subsequently contesting the prohibits this kind of transaction especially
legality of their dismissal, nor does it estop them when it is done openly and with appropriate
from challenging the legality of their separation government approval. In a strict sense, no
from the service (SME Bank, Inc., et al., v. Gaspar, et merger or consolidation took place as the
al., G.R. Nos. 184517 & 186641, October 8, 2013). records do not show any plan or articles of
merger or consolidation.
Q: Petitioner Bank of Commerce (BOC) and
Traders Royal Bank (TRB) executed a Purchase In his book, Philippine Corporate Law, Dean
and Assumption agreement, where the former Cesar Villanueva explained that under the
acquired the latter’s specified assets and Corporation Code, “a de facto merger can be
liabilities, excluding liabilities arising from pursued by one corporation acquiring all or

substantially all of the properties of another Since there had been no merger, BOC cannot be
corporation in exchange of shares of stock of considered as TRB’s successor-in-interest and
the acquiring corporation. The acquiring against which the Court’s Decision in TRB v. RPN
corporation would end up with the business may be enforced. BOC did not hold the former
enterprise of the target corporation; whereas, TRBs assets in trust for it as to subject them to
the target corporation would end up with garnishment for the satisfaction of the latter’s
basically its only remaining assets being the liabilities to RPN, et al. BOC bought and
shares of stock of the acquiring corporation.” acquired those assets and thus, became their
(Emphasis supplied) absolute owner.
No de facto merger took place in the present The enforcement, therefore, of the decision in
case simply because the TRB owners did not get the main case should not include the assets and
an equivalent value in BOC shares of stock in properties that BOC acquired from TRB. These
exchange for the bank’s assets and liabilities. have ceased to be assets and properties of TRB
BOC and TRB agreed with BSP’s approval to under the terms of the BSP-approved P & A
exclude from the sale the TRB’s contingent Agreement between them. They are not TRB
judicial liabilities, including those owing to assets and properties in the possession of BOC
RPN, et al. (Bank of Commerce v. Radio Philippines
Network, Inc., et al., G.R. No. 195615, April 21,
The Bureau of Internal Revenue (BIR) treated 2014).
the transaction between the two banks purely
as a sale of specified assets and liabilities when Consolidation
it rendered its opinion on the tax consequences
of the transaction given that there is a Two or more corporations unite, giving rise to a new
difference in tax treatment between a sale and corporate body and dissolving the constituent
a merger or consolidation. corporations which cease to exist as separate
corporations (De Leon, 2010).
b. NO. First, BOC agreed to assume those liabilities
of TRB that are specified in their P & A Merger vs.Consolidation
Agreement. That agreement specifically
excluded TRB’s contingent liabilities that the BASIS CONSOLIDATIO
MERGER
latter might have arising from pending N
litigations in court, including the claims of RPN, One where a
et al. corporation
absorbs One where a new
Second, as already pointed out above, the sale another corporation is
did not amount to merger or de facto merger of corporation created and
Bancommerce and TRB since the elements Definition and remains consolidating
required of both were not present. in existence corporations are
while others extinguished. (CC,
Third, the evidence in this case fails to show that are Sec. 76)
BOC was a mere continuation of TRB. TRB dissolved.
retained its separate and distinct identity after (CC, Sec. 76)
the purchase. Although it subsequently changed Consequent All of the
its name to Traders Royal Holding’s, Inc. such dissolution constituent
change did not result in its dissolution. All consolidated
of a corporation
corporations are
corporation s involved
Fourth, to protect contingent claims, the BSP dissolved without
or are
directed BOC and TRB to put up P50 million in exception
corporation dissolved
escrow with another bank. It was the BSP, not s except one
BOC that fixed the amount of the escrow. Consequent
Consequently, it cannot be said that the latter No new A new
creation of a
bank acted in bad faith with respect to the corporation corporation
new
excluded liabilities. They did not enter into the is created emerges
corporation
P & A Agreement to enable TRB to escape from Acquisition The All assets,
its liability to creditors with pending court of Assets, surviving liabilities, and
cases. Liabilities, corporation capital stock of all
Capital acquires all consolidated
Stock the assets, corporations are

2019 GOLDEN NOTES
MERCANTILE LAW
liabilities, transferred to the transferor corporation. Given that the transferee
and capital new corporation corporation acquired not only the assets but also
stock of all the business of the transferor corporation, then the
constituent liabilities of the latter are inevitably assigned to the
corporation former. Section 40 refers to the sale, lease, exchange
s or disposition of all or substantially all of the
corporation's assets, including its goodwill. The sale
A partnership cannot merge or to consolidate under this provision does not contemplate an
with a corporation ordinary sale of all corporate assets; the transfer
must be of such degree that the transferor
Only corporations can merge or consolidate into a corporation is rendered incapable of continuing its
single corporation. Hence, a partnership may NOT business or its corporate purpose.
be allowed to merge with a corporation but the
partnership may transfer all its assets and liabilities The purpose of the business-enterprise transfer is
to the corporation which will issue its shares of to protect the creditors of the business by allowing
stock to be distributed to the partners in proportion them a remedy against the new owner of the assets
to their respective interest in the partnership, and business enterprise. Otherwise, creditors
provided the partnership shall be dissolved in would be left “holding the bag,” because they may
accordance with the Civil Code (De Leon, 2010, citing not be able to recover from the transferor who has
SEC Opinion, Jan 3, 1984). “disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
Q: Where one corporation sells or otherwise good faith and for value. Based on the foregoing, as
transfers all of its assets to another corporation, the exception of the Nell doctrine relates to the
is the latter liable for the debts and liabilities of protection of the creditors of the transferor
the transferor? corporation, and does not depend on any deceit
committed by the transferee corporation, then
A: GR: NO. fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
XPNs: corporation may inherit the liabilities of the
1. Where the purchaser expressly or impliedly transferor despite the lack of fraud due to the
agrees to assume such debts; continuity of the latter’s business (Y-I Leisure
2. Where the transaction amounts to a Philippines, Inc. v. Yu, G.R. No. 207161, September 18,
consolidation or merger of the corporations; 2015).
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and Q: E Co. sold its assets to M Inc. after complying
4. Where the transaction is entered into with the requirements of the Bulk Sales Law.
fraudulently to escape liability for such debts Subsequently, one of the creditors of E Co. tried
(Edward J. Nell Co. vs. Pacific Farms, Inc., G.R. No. to collect the amount due it, but found out that E
L-20850, November 29, 1965). Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
NOTE: The Nell Doctrine states the general rule of E Co. Will the suit prosper? (1996 Bar)
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the A: NO. The suit will not prosper. The sale by E Co. of
liabilities of the transferor. If any of the above-cited its assets to M Inc. did not result in the transfer of
exceptions are present, then the transferee liabilities of the latter to, nor in the assumption
corporation shall assume the liabilities of the therefore by, the former. The facts given do not
transferor. (2017 Bar) indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
Business- Enterprise Transfer agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
The transferee corporation’s interest goes beyond sale of the shares of stock of the corporation
the assets of the transferor’s assets and its desires belonging to its stockholders. There is therefore no
to acquire the latter’s business enterprise, including merger or consolidation that took place. E Co.
its goodwill. continues to exist and remains liable to the creditor.
Section 40 suitably reflects the business-enterprise Constituent Corporation vs. Consolidated

transfer under the exception of the Nell Doctrine Corporation
because the purchasing or transferee corporation
necessarily continued the business of the selling or

Constituent Consolidated Any amendment may be made, provided such
Corporation Corporation amendment is approved by majority vote of the
One of the parties to a A completely new respective BOD / BOT of all the constituent
merger or corporation formed corporations and ratified by the affirmative vote of
consolidation when two or more stockholders representing at least 2/3 of the
corporations outstanding capital stock or 2/3 of the members of
combined each of the constituent corporations (CC, Sec. 77).
PLAN OF MERGER OR CONSOLIDATION NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
Plan of merger or consolidation consolidation.
Appraisal right is available to a dissenting
The plan of merger or consolidation is a plan stockholder to a plan of merger or consolidation
created by the representatives of the constituent
corporations, providing for the details of such Any dissenting stockholder in stock corporations
merger. may exercise his appraisal right in accordance with
this Code: Provided, that if after the approval by the
Contents of a plan of merger or consolidation stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
The BOD/ BOT of each corporation party to the extinguished (CC, Sec. 77).
merger or consolidation must set forth the following
in their plan of merger or consolidation: ARTICLES OF MERGER OR CONSOLIDATION
1. The names of the corporations proposing to After approval of the plan of merger or
merge or consolidate, hereinafter referred to as consolidation, an article of merger or consolidation
the constituent corporations; is executed by each of the constituent corporations
2. The terms of the merger or consolidation and to be signed by the president or vice-president of
the mode of carrying the same into effect; the each corporation and signed by their secretary
3. A statement of the changes, if any, in the AOI of or assistant secretary setting forth:
the surviving corporation in case of a merger;
and, with respect to the consolidated 1. The plan of the merger or the plan of
corporation in case of consolidation, all the consolidation;
statements required to be set forth in the AOI 2. As to stock corporations, the number of shares
for corporations organized under the CC; and outstanding, or in the case of non-stock
4. Such other provisions with respect to the corporations, the number of members; and
proposed merger or consolidation as are 3. As to each corporation, the number of shares or
deemed necessary or desirable (CC, Sec. 76). members voting for and against such plan,
respectively (CC, Sec. 78).
Approvals required for an effective plan of
merger or consolidation After the approval by the stockholders or members
as required by the preceding section, articles of
The plan of merger or consolidation must be merger or articles of consolidation shall be executed
approved by: by each of the constituent corporations, to be signed
by the president or vice president and certified by
1. Majority vote of each of the BOD/ BOT of the the secretary or assistant secretary of each
constituent corporation; and corporation setting forth:
2. Submitted for approval by the stockholders or
members of each of such corporations at (a) The plan of the merger or the plan of
separate corporate meetings duly called for the consolidation;
purpose. The affirmative vote of the (b) As to stock corporations, the number of shares
stockholders representing at least 2/3 of the outstanding, or in the case of nonstock corporations,
outstanding capital stock of each the number of members;
corporation in the case of stock corporations (c) As to each corporation, the number of shares or
or at least 2/3 of the members in the case of members voting for or against such plan,
non-stock corporations, shall be necessary for respectively;
the approval of such plan (CC, Sec. 77). (d) The carrying amounts and fair values of the
assets and liabilities of the respective
Amendment of a plan of merger or consolidation companies as of the agreed cut-off date;

2019 GOLDEN NOTES
MERCANTILE LAW
(e) The method to be used in the merger or the Certificate of Incorporation, as the case may
consolidation of accounts of the companies; be.
(f) The provisional or pro-forma values, as 10. If, upon investigation, the SEC has reason/s to
merged or consolidated, using the accounting believe that the proposed merger or
method; and consolidation is contrary to or inconsistent with
(g) Such other information as may be prescribed the Corporation Code or other existing laws, it
by the Commission. (RCC, Sec. 77) shall set a hearing to give the corporations the
opportunity to be heard and written notice of
PROCEDURE said hearing shall be given to each constituent
corporation at least two weeks prior to the said
1. The Board of each corporation shall draw up a hearing (CC, Secs. 76-79).
plan of merger or consolidation.
2. The plan of merger or consolidation shall be EFFECTIVITY
approved by majority vote of each board of the
concerned corporations at separate meetings. The merger or consolidation shall become effective
3. The plan of merger or consolidation shall be upon issuance by the SEC of the certificate of merger
submitted for approval by the stockholders or and consolidation.
members of each such corporation at separate
corporate meetings duly called for the purpose. In the case of merger or consolidation of banks or
Notice should be given to all stockholders or banking institutions, building and loan associations,
members at least two (2) weeks prior to date of trust companies, insurance companies, public
meeting, either personally or by registered utilities, educational institutions and other special
mail. corporations governed by special laws, the
4. Affirmative vote of 2/3 of the outstanding favorable recommendation of the appropriate
capital stock in case of stock corporations, or government agency shall first be obtained (CC, Sec.
2/3 of the members of a non-stock corporation 79).
shall be required.
5. Dissenting stockholders may exercise the right The articles of merger or of consolidation, signed
of appraisal. But if the Board abandons the plan and certified as required by this Code, shall be
to merge or consolidate, such right is submitted to the Commission for its approval:
extinguished. Provided, That in the case of merger or
6. The plan may still be amended before the same consolidation of banks or banking institutions,
is filed with the SEC; however, any amendment loan associations, trust companies, insurance
to the plan must be approved by the same votes companies, public utilities, educational
of the board members of trustees and institutions, and other special corporations
stockholders or members required for the governed by special laws, the favorable
original plan. recommendation of the appropriate government
7. After such approval, Articles of Merger or agency shall first be obtained. If the Commission is
Articles of Consolidation shall be executed by satisfied that the merger or consolidation of the
each of the constituent corporations, signed by corporations concerned is consistent with the
president or VP and certified by secretary or provisions of this Code and existing laws, it shall
assistant secretary, setting forth: issue a certificate approving the articles and plan of
a. Plan of merger or consolidation; merger or of consolidation, at which time the
b. In stock corporation, the number of shares merger or consolidation shall be effective. If, upon
outstanding; in non-stock, the number of investigation, the Commission has reason to believe
members; and that the proposed merger or consolidation is
c. As to each corporation, number of shares or contrary to or inconsistent with the provisions of
members voting for and against such plan, this Code or existing laws, it shall set a hearing to
respectively. give the corporations concerned the opportunity to
8. Four copies of the Articles of Merger or be heard. Written notice of the date, time, and place
Consolidation shall be submitted to the SEC for of hearing shall be given to each constituent
approval. Special corporations like banks, corporation at least two (2) weeks before said
insurance companies, building and loan hearing. The Commission shall thereafter, proceed
associations, etc., need the prior approval of the as provided in this Code. (RCC, Sec. 78)
respective government agency concerned.
9. If SEC is satisfied that the merger or Q: FISLAI and DSLAI entered into a merger, with
consolidation is not inconsistent with the DSLAI as the surviving corporation. The articles
provisions of the Corporation Code and existing of merger were not registered with the SEC due
laws, it shall issue the Certificate of Merger or to incomplete documentation. DSLAI changed its


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The Corporation Code

The creation of a corporation is by operation of

UNIVERSITY OF SANTO TOMAS 162

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DE FACTO CORPORATION Q: University Publishing Company (UPC),

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Nationality of a corporation sole A corporation sole may alienate properties by:

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Tests in determining the nationality of 2. Corporations organized abroad and registered

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INCORPORATION a. English – the underwriter sells what the

Steps in the creation of a corporation Number and the qualifications of incorporators

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Note: No required minimum number of

Corporator vs. Incorporator

BASIS INCORPORATOR CORPORATOR

XPN: Corporation sole – only 1 XPN: Close corporations – not more

Incorporator vs. Subscriber (2012 Bar)

BASIS INCORPORATORS SUBSCRIBER

XPN: Corporation sole – only 1 XPN: Close corporations – not more

UNIVERSITY OF SANTO TOMAS

GR: Filipino citizenship is not a requirement.

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1. Names of incorporators; 1. Failure to organize and commence business

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Articles of incorporation vs. By-laws

BASIS AOI BY-LAWS

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A: YES. NPC has the power to undertake stevedoring

A: NO. The assailed resolution covers a subject Exercise of corporate powers

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