Aquila Legis Fraternity: Corporation Law Reviewer

AQUILA LEGIS FRATERNITY
Corporaton Law Revewer

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Darren L. Sapsp 98B & Ronad Patrck Rubn 06C
CHAPTER 2: DEFINITION AND ATTRIBUTES
A corporaton s an artca beng created by operaton of aw, havng the rght of
successon and the powers, attrbutes and propertes expressy authorzed by aw or
ncdent to ts exstence.
Attrbutes:
1. Artca beng;
2. Created by operaton of aw;
3. Rght of successon; and
4. Powers, attrbutes and propertes expressy authorzed by aw or ncdent to ts
exstence.
A corporaton may cam for mora damages under Art. 2219 (7) of the Cv Code n
cases of be, sander or any form of defamaton. (Fpnas Broadcastng Network vs.
Ago Medca and Educatona Center)
Advantages of corporate form of busness:
1. Capacty to act as a snge unt;
2. Lmted sharehoders abty;
3. Contnuty n exstence;
4. Feasbty of greater undertakng;
5. Transferabty of shares;
6. Centrazed management; and
7. Standardzed method of organzaton, management and nance
Dsadvantage of corporate form of busness:
1. To have vad and bndng corporate act, forma proceedngs, such as
board meetngs are requred.
2. The busness transactons of a corporaton s mted to the State of ts
ncorporaton and may not act as such corporaton n other |ursdcton uness t
has obtaned a cense or authorty from the foregn state.
3. The sharehoders mted abty tends to mt the credt avaabe to
the corporaton as a separate ega entty.
4. By the very nature of shares of stock whch are persona propertes,
transferabe at w by the owners thereof, transfers of share may resut to
untng ncompatbe and conctng nterests.
5. The mnorty sharehoders have practcay no say n the conduct of
corporate ahars.
6. In arge scae enterprses, stockhoders votng rghts may become
merey cttous and theoretca because of dsnterest n management, wde-
scae ownershp and naccessbe pace of meetng.
7. Doube taxaton may be mposed on corporate ncome.
8. Corporatons are sub|ect to governmenta reguatons supervson and
contro ncudng submsson of reportora requrements not otherwse mposed
n other busness form.
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Dstnctons between a corporaton and a partnershp
CORPORATION PARTNERSHIP
1. Created by aw or operaton of aw 1. Created by mere agreement of the
partes
2. Generay there must be at east 5
ncorporators
2. May be formed by 2 or more natura
persons
3. Can exercse ony such powers and
functons expressy granted to t by
aw and those necessary or ncdent
to ts exstence
3. Can do anythng by agreement of
the partes provded ony that t s
not contrary to aw, moras, good
customs, pubc pocy and pubc
order
4. Uness vady deegated expressy
or mpedy, must transact ts
busness through the board of
drectors
4. In absence of agreement to the
contrary, any one of the partners
may vady bnd the partnershp
5. Has the rght of successon whch
presupposes that t contnues to
exst despte the death, wthdrawa,
ncapacty or cv nterdcton of the
stockhoders or members
5. Based on mutua trust and
condence such that the death,
ncapacty, nsovency, cv
nterdcton or mere wthdrawa of
one partner woud resut n t
dssouton
6. Any stockhoder can ordnary
transfer, se or assgn hs shares of
stock wthout the consent of the
other stockhoders
6. A partner cannot transfer hs rghts
or nterest n the partnershp so as
to make the transferee a partner
wthout the consent of the other
partners
7. The abty of the stockhoders or
members n s mted to the extend
of ther subscrpton or ther
promsed contrbuton
7. A partners are abe pro rata wth
a ther property and after a the
partnershp property has been
exhausted, for a partnershp
abty
8. Term of exstence s mted ony to
50 years uness extended
8. May exst for an ndente perod
9. Consent of the State s necessary
for ts dssouton
9. Partners may dssove at w
CHAPTER 3: CLASSIFICATION OF CORPORATIONS
Casses of corporatons:
1. Stock
2. Non-stock
Requstes to be cassed as a stock corporaton:
1. That they have a capta stock dvded nto shares; and
2. That they are authorzed to dstrbute dvdends or aotments as
surpus prots to ts stockhoders on the bass of the shares hed by them
Non-stock corporatons - no part of ther ncome s dstrbutabe as dvdends to ts
members, trustees or omcers sub|ect to the provsons on dssouton. (Sec. 87)
The pan and ordnary meanng of a busness s restrcted to actvtes or ahars where
prot s the purpose or vehood s the motve, and the term busness when used
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wthout quacaton, shoud be construed n ts pan and ordnary meanng, restrcted
to actvtes for prot or vehood. (CIR vs. Cub Fpno, Inc.)
The test n determnng whether a government owned or controed corporaton s
sub|ect to the Cv Servce Law s the manner of ts creaton, such that government
corporatons created by speca charter are sub|ect to ts provsons whe those
ncorporated under the Genera Corporaton Law are not wthn ts coverage. (PNOC-
EDC vs. NLRC)
Other casses of corporatons:
1. Pubc and Prvate.
a. Pubc corporatons - those created, formed or organzed for potca or
governmenta purposes wth potca powers to be exercsed for
purposes connected wth the pubc good n the admnstraton of cv
government.
b. Prvate corporatons - those formed for some prvate purpose, benet,
am or end.
2. Eccesastca (regous socetes or corporaton soe) and Lay
(eeemosynary or cv).
a. Eccesastca or regous corporatons - those composed excusvey of
eccesastcs organzed for sprtua purposes or for admnsterng
propertes hed for regous ones. They are further cassed as
regous socetes or corporaton soe.
b. Lay corporatons - those estabshed for the purposes other than
regon. They are further cassed as eeemosynary or cv.
Eeemosynary corporatons are created for chartabe and benevoent
purposes. Cv corporatons are organzed not for the purpose of pubc
charty but for the benet, pecunary or otherwse, of ts members.
3. Aggregate and Soe.
a. Aggregate corporatons - those composed of a number of ndvduas
vested wth corporate powers.
b. Corporatons soe - those that consst of one person or ndvdua ony
and who are made as bodes corporate and potc n order to gve
them some ega capacty and advantage whch, as natura persons,
they cannot have.
4. Cose and Open.
a. Cose corporatons - those whose shares of stock are hed by mted
number of persons.
b. Open corporatons - those formed to openy accept outsders as
stockhoders or nvestors.
5. Domestc and Foregn.
a. Domestc corporatons - those that are organzed or created under or
by vrtue of the Phppne aws. Note: ssues of ntra-corporate nature
are governed by Phppne aw.
b. Foregn corporatons - those formed, organzed or exstng under any
aws other than those of the Phppnes and whose aws aow Fpno
ctzens and corporatons to do busness n ts own country or state.
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6. Parent or Hodng Companes and Subsdares and Amates.
a. Hodng corporatons - corporatons that conne ther actvtes to
ownng stock n, and supervsng management of other companes.
b. Subsdary corporatons - those whch another corporaton owns at
east a ma|orty of the shares, and thus have contro.
c. Amates - those corporatons whch are sub|ect to common contro and
operated as part of a system.
7. Ouas-pubc.
a. Ouas-pubc corporatons - prvate corporatons whch have accepted
from the State the grant of a franchse or contract nvovng the
performance of pubc dutes (pubc servce corporatons).
8. Ouas corporatons.
a. Ouas corporatons - pubc bodes or muncpa socetes such as
townshps, countes, schoo dstrcts, road or hghway dstrcts whch,
though not vested wth the genera powers of corporatons, are
organzed by statutes or mmemora usage, as persons or aggregate
corporatons wth precse dutes whch may be enforced, and prveges
whch may be mantaned, by suts of aw.
9. De |ure corporatons.
a. De |ure corporatons - |urdca enttes created or organzed n strct or
substanta compance wth the statutory requrements of
ncorporaton and whose rght to exst as such cannot be successfuy
attacked even by the State n a quo warranto proceedng.
10. De facto corporatons.
a. De facto corporatons - those whch exst by vrtue of an rreguarty or
defect n the organzaton or consttuton or from some other omsson
to compy wth the condtons precedent by whch corporatons de |ure
are created, but there was coorabe compance wth the requrements
of the aw under whch they mght be awfuy ncorporated for the
purposes and powers assumed, and user of the rghts camed to be
conferred by aw.
11. Corporatons by estoppe.
a. Corporatons by estoppe - those whch are so defectvey formed as
not to be ether de |ure or de facto corporatons but whch are
consdered as corporatons n reaton ony to those who cannot deny
ther corporate exstence due to ther agreement, admsson or
conduct.
The mere fact that the government happens to be a ma|orty stockhoder does not
make t a pubc corporaton. (Natona Coa vs. CIR)
CHAPTER 4: FORMATION AND ORGANIZATION
Stages n the fe of a corporaton:
1. Creaton
2. Reorganzaton or quas-reorganzaton
3. Dssouton and wndng up
Steps n creaton:
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1. Promotona stage
2. Process of ncorporaton
3. Organzaton and commencement of busness
PROMOTIONAL STAGE
A promoter actng for a proposed corporaton has 3 optons:
1. He may make a contnung oher on behaf of the corporaton, whch, f
accepted after ncorporaton, w become a contract. In ths case, the promoter
does not assume any persona abty, whether or not the corporaton w
accept the oher.
2. The promoter may make a contract at the tme bndng hmsef, wth
the understandng that f the corporaton, once formed, accepts or adopts the
contract, he w be reeved of responsbty.
3. The promoter may bnd hmsef personay and assume the
responsbty of ookng to the proposed corporaton, when formed, for
rembursement.
PROCESS OF INCORPORATION
Process of ncorporaton:
1. Draftng the artces of ncorporaton
2. Preparaton and submsson of addtona and supportng documents
3. Fng wth the SEC
4. Subsequent ssuance of certcate of ncorporaton
Contents of the artces of ncorporaton
1. Name
2. Purpose
3. Prncpa omce
4. Term
5. Incorporators
6. Number of drectors/trustees
7. Names, natonates and resdences of drectors/trustees
8. If a stock corporaton, amount of authorzed capta stock, number of
shares, par vaue, orgna subscrbers
9. If a non-stock corporaton, amount of capta, contrbutors
10. Such other matters not nconsstent wth aw and whch the
ncorporator may deem necessary and convenent
11. Treasurers certcate
CORPORATE NAME
A corporaton cannot use a name whch s:
1. dentca or deceptvey or confusngy smar to that of any exstng
corporaton or to any other name protected by aw; or
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2. patenty deceptve, confusng or contrary to aw.
The aw gves a corporaton no express or mped authorty to assume another name
that s unapproprated; st ess that of another corporaton, whch s expressy set
apart from t and protected by aw. (Red Lne Transportaton Co. vs. Rura Transt Co.)
A word or phrase orgnay ncapabe of excusve appropraton wth reference to an
artce on the market, because geographcay or otherwse descrptve, mght
nevertheess have been used so ong and so excusvey by one producer wth
reference to hs artce that, n that trade and to that branch of the purchasng pubc,
the word or phrase has come to mean that the artce was hs product. (Doctrne of
secondary meanng, Lyceum of the Phppnes, Inc. vs.CA)
A corporaton's rght to use ts corporate and trade name s a property rght, a rght n
rem, whch t may assert and protect aganst the word n the same manner as t may
protect ts tangbe property, rea or persona, aganst trespass or converson. It s
regarded, to a certan extent, as a property rght and one whch cannot be mpared or
defeated by subsequent appropraton by another corporaton n the same ed.
(Phps Export B.V. vs. CA)
To come wthn the scope of the prohbton of Sec. 18, two requstes must be proven,
namey:
1. That the companant corporaton acqured a pror rght over the use of such
corporate name; and
2. The proposed name s ether: (a) dentca or (b) deceptvey or confusngy
smar to that of any exstng corporaton or to any other name aready
protected by aw; or (c) patenty deceptve, confusng or contrary to exstng
aw. (Phps Export B.V. vs. CA)
In determnng the exstence of confusng smarty n corporate names, the test s
whether the smarty s such as to msead a person usng ordnary care and
dscrmnaton. Proof of actua confuson need not be shown. It sumces that confuson
s probaby or key to occur. (Phps Export B.V. vs. CA)
A corporaton has an excusve rght to the use of ts name, whch may be protected by
n|uncton upon a prncpe smar to that upon whch persons are protected n the use
of trademarks and tradenames. (Phps Export B.V. vs. CA)
A mere change n the name of a corporaton, ether by the egsature or by the
corporators or stockhoders under egsatve authorty, does not, generay speakng,
ahect the dentty of the corporaton, nor n any way ahect the rghts, prveges or
obgatons prevousy acqured or ncurred by t.
PURPOSE CLAUSE
A corporaton has ony such powers as are expressy granted to t by aw and by ts
artces of ncorporaton ncudng those whch are ncdenta to such conferred powers,
those reasonaby necessary to accompsh ts purpose and those whch may be
ncdenta to ts exstence.
Reasons for requrng a statement of purposes or ob|ects:
1. In order that the stockhoder who contempates on an nvestment n a
busness enterprse sha know wthn what nes of busness hs money s to be
put at rsk.
2. So that the board of drectors and management may know wthn what
nes of busness they are authorzed to act.
3. So that anyone who deas wth the company may ascertan whether a
contract or transacton nto whch he contempates enterng s one wthn the
genera authorty of the management.
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If the corporate purpose or ob|ectve ncudes any purpose under the supervson of
another government agency, pror cearance and/or approva of the concerned
government agences or nstrumentates w be requred.
Genera mtatons on the purpose cause:
1. The purpose must be awfu.
2. The purpose must be specc or stated concsey athough n broad or genera
terms.
3. If there s more than one purpose, the prmary as we as the secondary ones
must be speced.
4. The purpose must be capabe of beng awfuy combned.
THE PRINCIPAL OFFICE
The resdence of the corporaton s the pace of ts prncpa omce as may be ndcated
n ts artces of ncorporaton and may, therefore, be sued ony at that pace. (CRS vs.
Anton)
TERM OF EXISTENCE
Sec. 11. Corporate term. - A corporaton sha exst for a perod not exceedng fty (50)
years from the date of ncorporaton uness sooner dssoved or uness sad perod s
extended. The corporate term as orgnay stated n the artces of ncorporaton may
be extended for perods not exceedng fty (50) years n any snge nstance by an
amendment of the artces of ncorporaton, n accordance wth ths Code; Provded,
That no extenson can be made earer than ve (5) years pror to the orgna or
subsequent expry date(s) uness there are |ustabe reasons for an earer extenson
as may be determned by the Securtes and Exchange Commsson.
INCORPORATORS
Sec. 10. Number and quacatons of ncorporators. - Any number of natura persons
not ess than ve (5) but not more than fteen (15), a of ega age and a ma|orty of
whom are resdents of the Phppnes, may form a prvate corporaton for any awfu
purpose or purposes. Each of the ncorporators of a stock corporaton must own or be a
subscrber to at east one (1) share of the capta stock of the corporaton.
Genera rue: Ony natura persons can be ncorporators.
Excepton: Cooperatves and corporatons prmary organzed to hod equtes n rura
banks.
Mnors are not quaed to become ncorporators.
THE DIRECTORS/TRUSTEES
Genera rue: There must be at east 5 but not more than 15 drectors or trustees n a
prvate corporaton.
Exceptons:
1. Educatona corporatons regstered as a non-stock corporaton whose number
of trustees, though not ess than 5 and not more than 15 shoud be dvsbe by
5;
2. In cose corporatons where a the stockhoders are consdered as members of
the board of drectors thereby ehectvey aowng 20 members n the board;
and
3. Corporaton soe.
The by-aws may provde for addtona quacatons and dsquacatons. However, t
may not do away wth the mnmum dsquacatons ad down by the Code.
Ouacatons:
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1. Drectors must own at east one (1) share of the capta stock of the
corporaton. Trustees must be members.
2. A ma|orty of the drectors or trustees must be resdents of the Phppnes.
Dsquacatons:
1. Convcton by na |udgment of an ohense punshabe by mprsonment for a
perod exceedng sx (6) years, or a voaton of ths Code commtted wthn ve
(5) years pror to the date of eecton or appontment.
2. Other dsquacatons under appcabe speca aws.
A by-aws may vady provde that no person may be eected as drector uness he
owns a speced number of shares requred for the drectorate quacaton.
It may kewse dsquafy a stockhoder from beng eected nto omce f he has a
substanta nterest n a compettor corporaton to avod any possbe adverse ehects of
conctng nterest of a drector.
In order to be egbe as a drector, what s matera s the ega tte to, not beneca
ownershp, of the stock as appearng on the books of the corporaton. (Lee vs. CA)
If no eecton s conducted or no quaed canddate s eected, the ncumbent drector
sha contnue to act as such n a hod over capacty unt the eecton s hed and a
quaed canddate s so eected. (Detectve and Protectve Bureau vs. Corbe)
CAPITALIZATION
Authorzed capta - the maxmum amount xed n the artces to be subscrbed and
pad-n or secured to be pad by the subscrbers.
Subscrbed capta stock - the tota number of shares and ts tota vaue for whch there
are contracts for ther acquston or subscrpton.
Pad-up capta stock - the actua amount or vaue whch has been actuay contrbuted
or pad to the corporaton n consderaton of the subscrptons made thereon.
Stocks sha not be ssued for a consderaton ess than the par or ssued prce thereof.
Consderaton for the ssuance of stock may be any or a combnaton of any two or
more of the h:
1. Actua cash pad to the corporaton;
2. Property, tangbe or ntangbe, actuay receved by the corporaton
and necessary or convenent for ts use and awfu purposes at a far vauaton
equa to the par or ssued vaue of the stock ssued;
3. Labor performed or servces actuay rendered to the corporaton;
4. Prevousy ncurred ndebtedness by the corporaton;
5. Amounts transferred from unrestrcted retaned earnngs to stated
capta; and
6. Outstandng shares n exchange for stocks n the event of
recasscaton or converson.
Stocks sha not be ssued n exchange of promssory notes or future servces.
Shares of stock and their classifcation
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Shares of stock desgnate the nterest or rght whch the stockhoder has n the
management of the corporaton, and n the surpus prots and, n case of dstrbuton,
n a assets remanng after the payment of ts debts.
Stock certcate s a document or nstrument evdencng the nterest of a stockhoder
n the corporaton.
The shares of stock of stock corporatons may be dvded nto casses or seres of
shares, or both, any of whch casses or seres of shares may have such rghts,
prveges or restrctons as may be stated n the artces of ncorporaton.
Purpose of casscaton:
1. To specfy and dene the rghts and prveges of the stockhoders.
2. For reguaton and contro of the ssuance of sae of corporate
securtes for the protecton of purchasers and stockhoders.
3. As a management contro devce.
4. To compy wth statutory requrements.
5. To better nsure return on nvestment.
6. For exbty n prce.
Except as otherwse provded n the artces of ncorporaton and stated n the
certcate of stock, each share sha be equa n a respects to every other share.
Common and preferred shares
Common stock - a stock whch enttes ts owner to an equa pro-rata dvson of prots,
f there be any, but wthout any preference or advantage n that respect over any other
stockhoder or cass of stockhoders.
Preferred stock - a stock that gves the hoder a preference over the hoder of common
stocks wth respect to the payment of dvdends and/or wth respect to dstrbuton of
capta upon qudaton.
Lmtatons on preferred stock:
1. Must be ssued wth a stated par vaue; and
2. The preferences must be stated n the artces of ncorporaton and n
the certcate of stock, otherwse, each share sha be, n a respect, equa to
every other share.
The guarantee to preference as to dvdends does not create a reaton of debtor and
credtor between the corporaton and the hoders of such stock. The board has the
dscreton to determne whether or not to decare dvdends.
Preferred shares are presumed to be non-partcpatng.
Partcpatng preferred shares - the hoders thereof are st gven the rght to
partcpate wth the common stockhoders n dvdends beyond ther stated preference.
Cumuatve preferred share - those that entte the owner thereof to payment not ony
of current dvdends but aso back dvdends not prevousy pad whether or not, durng
the past years, dvdends were decared or pad.
In absence of express stpuaton, preferred shares are presumed to be non-cumuatve.
Non-cumuatve preferred shares - those whch grant the hoders of such shares ony to
the payment of current dvdends but not back dvdends, when and f dvdends are
pad, to the extent agreed upon before any other stockhoders are pad the same.
Types of non-cumuatve preferred shares:
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1. Dscretonary dvdend type - gves the hoder of such shares the rght
to have dvdends pad thereon n a partcuar year dependng on the |udgment
or dscreton of the board of drectors.
2. Mandatory f earned type - mpose a postve duty on drectors to
decare dvdends every year when prots are earned.
3. Earned cumuatve or dvdend credt - gves the hoder thereof the
rght to arrears n dvdends f there were prots earned durng the prevous
years but dvdends were not decared.
Uness the rght to vote s ceary wthhed, a preferred stockhoder has the rght to
vote.
Preference upon qudaton must be ceary ndcated otherwse they sha be paced on
equa footng wth other shares.
Par and no par value shares
Par vaue shares - those whose vaue are xed n the artces of ncorporaton.
Par vaue shares cannot be ssued nor sod by the corporaton at ess than par.
No par vaue shares - those whose ssued prce are not stated n the certcate of stock
but whch may be xed n the artces of ncorporaton, or by the board of drectors
when so authorzed by the sad artces or by the by-aws, or n the absence thereof, by
the stockhoders themseves.
Lmtatons of no par vaue shares:
1. Such shares, once ssued, are deemed fuy pad and thus, non
assessabe;
2. The consderaton for ts ssuance shoud not be ess than P5.00;
3. The entre consderaton for ts ssuance consttutes capta, hence, not
avaabe for dvdend decaraton;
4. They cannot be ssued as preferred stock; and
5. They cannot be ssued by banks, trust companes, nsurance
companes, pubc uttes and budng and oan assocatons.
Advantages to the ssuance of no par vaue shares:
1. Fexbty n prce;
2. Evason of the danger of abty upon watered stock; and
3. Dsappearance of persona abty on the part of the hoder thereof for unpad
subscrpton.
Voting and non-voting shares
Votng shares - gves the hoder thereof the rght to vote and partcpate n the
management of the corporaton through the exercse of such rght, ether at the
eecton of the board of drectors, or n any manner requrng the stockhoders
approva.
Non-votng shares - do not grant the hoder thereof the rght to vote except under the
penutmate paragraph of Sec. 6.
Ony preferred and redeemabe shares may be dened the rght to vote.
There must aways be a cass or seres of shares whch have compete votng rghts.
Non-votng shares sha nevertheess be entted to vote on the foowng matters:
1. Amendment of the artces of ncorporaton;
2. Adopton and amendment of by-aws;
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3. Sae, ease, exchange, mortgage, pedge or other dsposton of a or
substantay a of the corporate property;
4. Incurrng, creatng or ncreasng bonded ndebtedness;
5. Increase or decrease of capta stock;
6. Merger or consodaton of the corporaton wth another corporaton or other
corporatons;
7. Investment of corporate funds n another corporaton or busness n
accordance wth ths Code; and
8. Dssouton of the corporaton.
Except as provded n the penutmate paragraph of Sec. 6, the vote necessary to
approve a partcuar corporate act as provded n ths Code sha be deemed to refer
ony to stocks wth votng rghts.
Founders shares
Sec. 7. Founders shares. - Founders' shares cassed as such n the artces of
ncorporaton may be gven certan rghts and prveges not en|oyed by the owners of
other stocks, provded that where the excusve rght to vote and be voted for n the
eecton of drectors s granted, t must be for a mted perod not to exceed ve (5)
years sub|ect to the approva of the Securtes and Exchange Commsson. The ve-
year perod sha commence from the date of the aforesad approva by the Securtes
and Exchange Commsson.
Redeemable shares
Redeemabe shares may be ssued by the corporaton when expressy so provded n
the artces of ncorporaton.
They may be purchased or taken up by the corporaton upon the expraton of a xed
perod, regardess of the exstence of unrestrcted retaned earnngs n the books of the
corporaton, and upon such other terms and condtons as may be stated n the artces
of ncorporaton, whch terms and condtons must aso be stated n the certcate of
stock representng sad shares.
Treasur shares
Treasury shares are shares of stock whch have been ssued and fuy pad for, but
subsequenty reacqured by the ssung corporaton by purchase, redempton, donaton
or through some other awfu means. Such shares may agan be dsposed of for a
reasonabe prce xed by the board of drectors.
Treasury shares may agan be ssued for a prce ess than par.
Treasury shares have no votng and dvdend rghts. Such rghts are ony granted to
outstandng shares of stock. (CIR vs. Mannng)
CAPITAL REQUIREMENT
Sec. 12. Mnmum capta stock requred of stock corporatons. - Stock corporatons
ncorporated under ths Code sha not be requred to have any mnmum authorzed
capta stock except as otherwse speccay provded for by speca aw, and sub|ect
to the provsons of the foowng secton.
Sec. 13. Amount of capta stock to be subscrbed and pad for the purposes of
ncorporaton. - At east twenty-ve percent (25%) of the authorzed capta stock as
stated n the artces of ncorporaton must be subscrbed at the tme of ncorporaton,
and at east twenty-ve (25%) per cent of the tota subscrpton must be pad upon
subscrpton, the baance to be payabe on a date or dates xed n the contract of
subscrpton wthout need of ca, or n the absence of a xed date or dates, upon ca
for payment by the board of drectors: Provded, however, That n no case sha the
pad-up capta be ess than ve Thousand (P5,000.00) pesos.
Page 12 of 97
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
Genera rue: Corporatons may or may not provde for restrctons and preferences
regardng the transfer, sae or assgnment of shares n the artces of ncorporaton. It s
dscretonary.
Excepton: Cose corporatons are requred to sub|ect ther shares to speced
restrctons as requred n Sec. 96.
Genera rue: Restrctons or preferences must be contaned n the artces of
ncorporaton and n a stock certcates to be ssued by the corporaton.
Excepton: In cose corporatons, such restrctons and preferences must aso be
emboded n the by-aws.
NO TRANSFER CLAUSE
No transfer of stock or nterest whch w reduce the ownershp of Fpno ctzens to
ess than the requred percentage of the capta stock as provded by exstng aws
sha be aowed or permtted to be recorded n the books of the corporaton and ths
restrcton sha be ndcated n a of the stock certcates to be ssued by the
corporaton.
GROUNDS FOR DISAPPROVAL
Ony substanta and not strct compance s requred.
Grounds for dsapprova:
1. The artces of ncorporaton or any amendment thereto s not substantay n
accordance wth the form prescrbed;
2. The purpose or purposes of the corporaton are patenty unconsttutona,
ega, mmora, or contrary to government rues and reguatons;
3. The Treasurers Amdavt concernng the amount of capta stock subscrbed
and/or pad s fase;
4. The percentage of ownershp of the capta stock to be owned by ctzens of the
Phppnes has not been comped wth as requred by exstng aws or the
Consttuton,
5. The artces of ncorporaton of corporatons sub|ect to government supervson
are not accompaned by a favorabe recommendaton from the approprate
government agency.
The grounds are not excusve.
COMMENCEMENT OF CORPORATE EXISTENCE
It s ony from the tme of the ssuance of the certcate of ncorporaton that a
corporaton acqures |urdca personaty and ega exstence.
Pror to ncorporaton, a corporaton has no |urdca personaty to enter nto contracts.
(Cagayan Fshng Deveopment vs. Sandko)
DE FACTO CORPORATION
De facto corporaton - one that s so defectvey created as not to be a de |ure
corporaton but nevertheess exsts, for a practca purposes, as a corporate body, by
vrtue of ts bona de attempt to ncorporate under exstng statutory authorty,
couped wth the exercse of corporate powers.
Requstes:
1. There s a vad aw under whch the corporaton coud have been created as a
de |ure corporaton;
Page 13 of 97
2. An attempt, n good fath, to form a corporaton accordng to the requrements
of aw (coorabe compance);
3. A user of corporate powers; and
4. Good fath n camng to be and dong busness as a corporaton.
Rues on coatera and drect attack aganst corporate exstence:
1. The corporate exstence of a de |ure corporaton cannot be drecty attacked
ether drecty or coateray, even by the State.
2. The corporate exstence of a de facto corporaton can be drecty attacked on a
quo warranto proceedng.
3. The corporate exstence of a de facto corporaton s not sub|ect to coatera
attack by any party.
A muncpa corporaton created by an unconsttutona aw cannot be cannot exst as a
de facto corporaton uness there s some other vad aw gvng corporate vtaty to
the organzaton. An unconsttutona aw confers no rghts. (Muncpaty of Maabang
vs. Bento)
Wthout havng obtaned a certcate of ncorporaton, a corporaton - even ts
stockhoders - may not cam n good fath to be a corporaton. (Ha vs. Pcco)
CORPORATION BY ESTOPPEL
Sec. 21. Corporaton by estoppe. - A persons who assume to act as corporaton
knowng t be wthout authorty to do so sha be abe as genera partners for a debts,
abtes and damages ncurred or arsng as a resut thereof; Provded, however, That
when any such ostensbe corporaton s sued on any transacton entered by t as a
corporaton or on any tort commtted by t as such, t sha not be aowed to use as a
defense ts ack of corporate personaty.
The doctrne of corporaton by estoppe may appy to the aeged corporaton or to a
thrd party transactng wth the former.
The prncpe of estoppe cannot be nvoked n favor of a person who s a member of
the assocaton and therefore must be presumed to know that t s not a corporaton.
(Lozano vs. De Los Santos)
The prncpe of estoppe appes when persons assume to form a corporaton and
exercse corporate functons and enter nto busness reatons wth thrd persons.
Where there s no thrd person nvoved and the conct arses ony among those
assumng to form a corporaton, who therefore know that t has not been regstered,
there s no corporaton by estoppe. (Lozano vs. De Los Santos)
One who has nduced another to act upon hs wfu msrepresentaton that a
corporaton was duy organzed and exstng under the aw, cannot, thereafter set up
aganst hs vctm the prncpe of corporaton by estoppe. Such persons becomes
abe for the contracts entered nto by such ostensbe corporaton. (Abert vs.
Unversty Pubshng Co., Inc.)
A person who has contracted or deat wth an assocaton n such a way as to recognze
ts exstence as a corporate body s estopped from denyng the same n an acton
arsng out of such transacton or deang, yet ths doctrne may not be hed to be
appcabe where fraud takes part n the sad transacton. (Savaterra vs. Gartos)
Persons who have contnuousy and for a ong perod msrepresented themseves as a
corporaton as estopped from denyng such personaty to defeat cams aganst t.
(Chang Ka Shek Schoo vs. CA)
In the absence of fraud, a person who has contracted or deat wth an assocaton n
such a way as to recognze and n ehect admt ts ega exstence as a corporate body
Page 14 of 97
s thereby estopped to deny ts corporate exstence n an acton eadng out of or
nvovng such contract or deang, uness the exstence s attacked for causes whch
have arsen snce makng the contract or other deang reed on as an estoppe. (Asa
Bankng Corp. vs. Standard Products Co., Inc.)
The doctrne of estoppe appes to a thrd party ony when he tres to escape abty
on a contract from whch he has beneted. It does not appy when the thrd party s the
one camng from the contract. (Internatona Express Trave & Tours Servces, Inc. vs.
CA)
The doctrne of estoppe appes to foregn as we as domestc corporatons. Foregn
corporatons dong busness n the Phppnes may sue n Phppne courts athough
not authorzed to do busness here aganst the Phppne ctzen who had contracted
wth and been beneted by sad corporaton. (Georg Grot|ahn GMBH & Co. vs. Isnan)
If a corporaton by estoppe exsts and enters nto a contract or transacts busness wth
a thrd party, the atter has three remedes:
1. He may e a sut aganst the ostensbe corporaton to recover from the
corporate propertes;
2. He may e the case drecty aganst the assocates personay who hed out
the assocaton a corporaton; and
3. Aganst both the ostensbe corporaton and persons formng t, |onty and
severay.
As regards the abty of the assocates of the aeged corporaton, ony those who
actvey partcpated n hodng out the assocaton as a corporaton shoud be hed
personay abe.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
Sec. 22. Ehects on non-use of corporate charter and contnuous noperaton of a
corporaton. - If a corporaton does not formay organze and commence the
transacton of ts busness or the constructon of ts works wthn two (2) years from the
date of ts ncorporaton, ts corporate powers cease and the corporaton sha be
deemed dssoved. However, f a corporaton has commenced the transacton of ts
busness but subsequenty becomes contnuousy noperatve for a perod of at east
ve (5) years, the same sha be a ground for the suspenson or revocaton of ts
corporate franchse or certcate of ncorporaton.
Ths provson sha not appy f the faure to organze, commence the transacton
of ts busnesses or the constructon of ts works, or to contnuousy operate s due to
causes beyond the contro of the corporaton as may be determned by the Securtes
and Exchange Commsson.
Organzaton - the eecton of omcers, provdng for the subscrpton and payment of
capta stock, the adopton of by-aws, and such other steps as are necessary to endow
the ega entty wth the capacty to transact the egtmate busness for whch t was
created.
Faure of the corporaton to organze wthn the prescrbed perod woud resut n ts
automatc dssouton, uness ts faure to do so s due to causes beyond ts contro.
Substanta compance s sumcent.
Subsequent noperaton s merey a ground for suspenson or revocaton of corporate
franchse. Dssouton s not automatc.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
CORPORATE CHARTER
Corporate charter - an nstrument or authorty from the soveregn power, bestowng
rghts and power.
Page 15 of 97
The corporate charter s a three-fod contract:
1. Between the corporaton and the state nsofar as t concerns ts prmary
franchse to be and act as a corporaton;
2. Between the corporaton and the stockhoders or members nsofar as t
governs ther respectve rghts and obgatons; and
3. Between and among the stockhoders or members themseves as far as ther
reatonshp wth one another s concerned.
The charter of corporatons created under the Corporaton Code conssts of the artces
of ncorporaton and the Corporaton Code ncusve of the by-aws adopted thereunder
and a pertnent provsons of any statute governng them.
The charter of corporatons created by speca aws conssts of the speca aw creatng
the same and any and a aws, rues and reguatons ahectng or appcabe to them.
Franchse - the rght or prvege tsef to be and act as a corporaton or to do a certan
act.
Knds of franchses:
1. Prmary franchse - the rght or prvege of beng a corporaton whch the state
confers upon the appcant for ths facuty.
2. Secondary franchse - the powers and prveges vested n, and to be exercsed
by the corporate body as such.
CORPORATE ENTITY THEORY
The corporaton s possessed wth a personaty separate and dstnct from the
ndvdua stockhoders or members.
A corporaton s a dstnct ega entty to be consdered as separate and apart from the
ndvdua stockhoders or members who compose t, and s not ahected by the
persona rghts, obgatons and transactons of ts stockhoders or members.
Conversey, a corporaton has no nterest n the ndvdua property of ts stockhoders
uness transferred to the corporaton, even n case of a one-man corporaton. (Suo ng
Bayan, Inc. vs. Gregora Araneta, Inc.)
A bona de corporaton shoud aone be abe for ts corporate acts as duy authorzed
by ts drectors and omcers. (Caram vs. CA)
The presdent and manager of a corporaton who entered nto and sgned a contract n
hs omca capacty, cannot be made abe thereunder n hs ndvdua capacty n the
absence of stpuaton to that ehect due to the personaty of the corporaton beng
separate and dstnct from the person composng t. (Rustan Pup and Paper Ms, Inc.
vs. IAC)
A corporaton has a personaty dstnct and separate from ts ndvdua stockhoders or
members. The mere fact that one s presdent of a corporaton does not render the
property he owns and possesses the property of the corporaton, snce the presdent,
as an ndvdua, and the corporaton are separate enttes. (Cruz vs. Dasay)
Mere ownershp by a snge stockhoder or by another corporaton of a or neary a of
the capta stock of a corporaton s not, of tsef, sumcent ground for dsregardng the
separate corporate personaty. (Paay Inc. vs. Cave)
In a rght of acton aganst the corporaton, the omcers may not be hed personay
abe as ong as they act wthn the scope of ther authorty. (Sorano vs. CA)
PIERCING THE VEIL OF CORPORATE FICTION
Page 16 of 97
Percng the ve of the corporate cton s resorted to ony n cases where the
corporaton s used or beng used to defeat pubc convenence, |ustfy wrong, protect
fraud, defend crme, confuse egtmate ssues, or to crcumvent the aw or perpetuate
decepton, or an ater-ego, ad|unct or busness condut for the soe benet of a
stockhoder or a group of stockhoders or another corporaton.
Test n determnng the appcabty of the doctrne of percng the ve of corporaton
cton:
1. Contro, not mere ma|orty or compete stock contro, but compete domnaton,
not ony of nances but of pocy and busness practce n respect to the
transacton attacked so that the corporate entty as to ths transacton had at
the tme no separate mnd, w or exstence of ts own;
2. Such contro must have been used by the defendant to commt fraud or wrong,
to perpetuate the voaton of a statutory or other postve ega duty, or
dshonest and un|ust act n contraventon of panth's ega rghts; and
3. The aforesad contro and breach of duty must proxmatey cause the n|ury or
un|ust oss companed of. (Instrumentaty Rue, Concept Buders, Inc. vs.
NLRC)
WHEN PIERCING THE CORPORATE FICTION IS NOT USTIFIED
Corporate cton cannot be dsregarded n the absence of ntent to defraud n
corporate transactons. (Remo, |R vs. IAC)
For the separate |urdca personaty of a corporaton to be dsregarder, the
wrongdong must be ceary and convncngy estabshed. (De Rosaro vs. NLRC)
Mere corporate ownershp of a the stocks of another corporaton w not |ustfy ther
beng treated as snge entty. (PNB vs. Rtratto)
There beng not the east ndcaton that the second corporaton s a dummy or serves
as a cent of the rst corporaton, the cton of separate and dstnct corporate enttes
cannot be dsregarder and brushed asde. (Yu vs. NLRC)
AMENDMENT OF THE CORPORATE CHARTER
Steps to be foowed for an ehectve amendment of the artces of ncorporaton:
1. Resouton by at east a ma|orty of the board of drectors or trustees.
2. Vote or wrtten assent of the stockhoders representng at east 2/3 of the
outstandng capta stock or 2/3 of the members n case of non-stock
corporaton.
3. Submsson and ng of the amendments wth the SEC as foows:
a. The orgna and amender artces together sha contan a the
provsons requred by aw to be set out n the artces of ncorporaton.
Such artces, as amended, sha be ndcated by underscorng the
change or changes made.
b. A copy thereof, duy certed under oath by the corporate secretary
and a ma|orty of the drectors or trustees statng the fact that such
amendments have been duy approved by the requred vote of the
stockhoders or members.
c. Favorabe recommendaton of the approprate government agency
concerned n the case where the corporaton s under ts supervson.
Tme when the amendments sha take ehect:
1. Upon approva of the SEC; or
Page 17 of 97
2. From the date of ng wth the SEC f not acted upon wth 6 months from the
date of ng for a cause not attrbutabe to the corporaton. (Note: not
appcabe to speca amendments)
Speca amendments:
1. Extenson or shortenng of corporate term (Sec. 37)
2. Increase or decrease of capta stock (Sec. 38)
3. Incurrng, creatng or ncreasng bonded ndebtedness (Sec. 38)
PROVISIONS SUBECT TO AMENDMENT
Matters whch are fat accomp are not sub|ect to change.
A change n the name of the corporaton does not ahect the dentty of the corporaton,
nor n any way ahect the rghts, prveges, or obgatons prevousy acqured or
ncurred by t. (Phppne Frst Insurance Co. vs. Hartgan)
AMENDMENT OF THE CORPORATE TERM
Procedure to amend the corporate term:
1. Approva by a ma|orty vote of the board or drectors or trustees.
2. Wrtten notce of the proposed acton and the tme and pace of
meetng sha be served to each stockhoder or member ether by ma or by
persona servce.
3. Ratcaton by the stockhoders representng at east 2/3 of the
corporatons.
4. In case of extenson of corporate term, the extenson shoud be for
perods not exceedng 50 years n any snge nstance, and provded that no
extenson can be made earer than 5 years pror to the orgna or subsequent
expry date(s) uness there are |ustabe reasons for an earer extenson as
may be determned by the SEC.
5. In cases of extenson of corporate term, a dssentng stockhoder may
exercse hs apprasa rghts.
Extenson may be made ony before the term provded n the corporate charter
expres. (Ahambra Cgar & Cgarette Mfg. Co., Inc. vs. SEC)
CHAPTER !: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
POWERS OF THE BOARD
Sec. 23. The board of drectors and trustees. - Uness otherwse provded n the Code,
the corporate powers of a corporatons formed under ths Code sha be exercsed, a
busness conducted and a property of such corporatons controed and hed by the
board of drectors or trustees.
The authorty of the board of drectors does not extend to the fundamenta changes n
the corporate charter.
The board may deegate the exercse of corporate powers.
A corporaton s bound by the acts of ts corporate omcers f they act wthn the scope
of the 5 casscatons of powers of corporate agents:
1. Those expressy conferred or those granted by the artces of
ncorporaton, the corporate by-aws or by the omca act of the board of
drectors.
2. Those that are ncdenta or those acts as are naturay and ordnary
done whch are reasonabe and necessary to carry out the corporate purpose
or purposes.
Page 18 of 97
3. Those that are nherent or acts that go wth the omce.
4. Those that are apparent or those acts whch athough not actuay
granted, the prncpa knowngy aows or permts t to be done.
5. Powers arsng out of customs, usage or emergency.
Where a corporaton seeks to evade abty on a contract on the ground of ack of
authorty on the part of the person who assumed to act for t, such defense shoud be
specay peaded. Faure to make an ssue as to such authorty emnates any
questons regardng t. (Ramrez vs. Orentast Co.)
The fact that the power to make corporate contracts s thus vested n the board of
drectors does not sgnfy that a forma vote of the board must aways be taken before
contractua abty can be xed upon a corporaton; for the board can create abty,
ke an ndvdua, by other means than by a forma expresson of ts w. (Ramrez vs.
Orentast Co.)
The power to make corporate contracts resdes prmary n the company's board of
drectors; but the board may ratfy an unauthorzed contract made by an omcer of the
corporaton. Ratcaton n ths case s hed to have occurred when the board, wth
knowedge that the contract had been made, adopted a resouton recognzng the
exstence of the contract and drectng that steps be taken to enabe the corporaton to
utze ts benets. (Ramrez vs. Orentast Co.)
Where a corporate contract has been ehected wth the approva of the board of
drectors, a resouton adopted at a meetng of stockhoders refusng to recognze the
contract or repudatng t s wthout ehect. (Ramrez vs. Orentast Co.)
Contracts between a corporaton and thrd persons must be made by or under the
authorty of ts board of drectors and not of ts stockhoders. (Barreto vs. La Prevsora)
QUALIFICATIONS AND DISQUALIFICATIONS
Ouacatons:
1. Drectors must own at east one (1) share of the capta stock of the
corporaton. Trustees must be members.
2. A ma|orty of the drectors or trustees must be resdents of the Phppnes.
Dsquacatons:
1. Convcton by na |udgment of an ohense punshabe by mprsonment for a
perod exceedng sx (6) years, or a voaton of ths Code commtted wthn ve
(5) years pror to the date of eecton or appontment.
2. Other dsquacatons under appcabe speca aws.
In order to be egbe as a drector, what s matera s the ega tte to, not beneca
ownershp, of the stock as appearng on the books of the corporaton. (Lee vs. CA)
If no eecton s conducted or no quaed canddate s eected, the ncumbent drector
sha contnue to act as such n a hod-over capacty unt the eecton s hed and a
quaed canddate s so eected. (Detectve and Protectve Bureau vs. Corbe)
ELECTION AND VOTING
In stock corporatons, the ma|orty of the outstandng capta stock, n person or by
representatve authorzed to act by wrtten proxy, must be present at the eecton of
drectors.
Page 19 of 97
In non-stock corporatons, a ma|orty of the members entted to vote, n person or by
proxy, f aowed n ts artces of ncorporaton or by-aws, must be present n the
eecton.
The eecton may be ad|ourned f, for any reason, no eecton s hed, or f the requred
quorum s not obtaned. However, t may not be ad|ourned ndentey.
The eecton must be by baot f requested by any votng stockhoder or member.
Canddates recevng the hghest number of votes sha be decared eected.
In stock corporatons, cumuatve votng s a matter of rght.
In non-stock corporatons, cumuatve votng s not avaabe uness provded for n the
artces of ncorporaton or by-aws. I.e., a member may cast as many votes as there
are trustees to be eected but may not cast more than one vote for one canddate.
In stock corporatons, the stockhoder may:
1. Vote such number of shares for as many persons as there are drectors to be
eected;
2. Cumuate sad shares and gve one canddate as many votes as the number of
drectors to be eected mutped by the number of hs shares sha equa;
3. Dstrbute them on the same prncpe among as many canddates as he sha
see t.
No denquent stock sha be voted.
Omcers to be eected
1. Presdent, who sha be a drector
2. Treasurer, who may or may not be a drector
3. Secretary, who sha be a resdent and ctzen of the Phppnes
4. Such other omcers as may be provded for n the by-aws.
Any two (2) or more postons may be hed concurrenty by the same person, except
that no one sha act as presdent and secretary or as presdent and treasurer at the
same tme.
The drectors or omcers sha hod omce for one (1) year unt ther successors are
eected and quaed.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
Genera rue: the quorum requrement for a vad board meetng s the ma|orty of the
number of the drectors or trustees as xed n the artces of ncorporaton.
Excepton: The artces of ncorporaton or the by-aws may provde for a greater
ma|orty.
Genera rue: To have a vad corporate act, the decson of at east a ma|orty of the
drectors or trustees present at a meetng at whch there s a quorum s requred.
Excepton: The eecton of corporate omcers requres the vote of a ma|orty of a the
members.
Genera rue: Indvdua drectors cannot bnd the corporaton by ther ndvdua acts.
Exceptons:
1. By deegaton of authorty;
2. Where expressy conferred; or
3. Where the omcer or agent s cothed wth actua or apparent authorty.
Page 20 of 97
Athough an omcer or agent acts wthout, or n excess of, hs actua authorty f he acts
wthn the scope of an apparent authorty wth whch the corporaton has cothed hm
by hodng hm out or permttng hm to appear as havng such authorty, the
corporaton s bound thereby n favor of a person who deas wth hm n good fath n
reance on such apparent authorty, as where an omcer s aowed to exercse a
partcuar authorty wth respect to the busness, or a partcuar branch of t,
contnuousy and pubcy, for a consderabe tme. Aso, f a prvate corporaton
ntentonay or neggenty cothes ts omcers or agents wth apparent power to
perform acts for t, the corporaton w be estopped to deny that such apparent
authorty s rea, as to nnocent thrd persons deang n good fath wth such omcers or
agents. Ths apparent authorty may resut from (1) the genera manner by whch the
corporaton hods out an omcer or agent as havng power to act or, n other words, the
apparent authorty wth whch t cothes hm to act n genera, or (2) the acquescence
n hs acts of a partcuar nature, wth actua or constructve knowedge thereof,
whether wthn or wthout the scope of hs ordnary powers. (Yao Ka Sn Tradng vs. CA)
Any acton of the board wthout a meetng and wthout the requred votng and quorum
requrement w not bnd the corporaton uness subsequenty rated, expressy or
mpedy. (Lopez vs. Fontecha)
Where a genera busness manager of a corporaton s cothed wth apparent authorty
to borrow money and the amount borrowed does not exceed the ordnary requrements
of the busness, the authorty s mped and that the corporaton s bound. (Pua Casm
& Co. vs. Neumark and Co.)
An nvad contract may be vadated by the ratcaton ony of the board of drectors;
the presdent has no authorty to ratfy such contract. (Yu Chuck vs. Kong L Po)
Sence couped wth acceptance of benets consttutes a bndng ratcaton.
(Francsco vs. GSIS)
A corporate omcer entrusted wth the genera management and contro of ts busness,
has mped authorty to make any contract or do any other act whch s necessary or
approprate to the conduct of the ordnary busness of the corporaton. As such omcer,
he may, wthout any speca authorty from the Board of Drectors, perform a acts of
an ordnary nature, whch by usage or necessty are ncdent to hs omce, and may
bnd the corporaton by contracts n matters arsng n the usua course of busness.
Where smar acts have been approved by the drectors as a matter of genera
practce, custom, and pocy, the genera manager may bnd the company wthout
forma authorzaton of the board of drectors. (Board of qudators vs. Kaaw)
Lack of repudaton, acquescence and acceptance of benets are equvaent to an
mped ratcaton by the Board of Drectors and bnds the corporaton even wthout
forma resouton passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)
Express ratcaton: through forma board acton.
Imped ratcaton:
1. Sence or acquescence;
2. Acceptance and/or retenton of benets; or
3. By recognton or adopton.
REMOVAL AND FILLING UP OF VACANCIES
Requrements and procedure:
Page 21 of 97
1. The remova shoud take pace at a genera or speca meetng duy
caed for that purpose;
2. The remova must be a vote of the stockhoders representng at east
2/3 of the outstandng capta stock or 2/3 of the members n case of non-stock
corporatons;
3. Pror notce of the proposed remova must be made statng the tme
and pace of meetng ether by pubcaton or by wrtten notce.
The speca meetng must be caed by the secretary, on order of the presdent or on
the wrtten demand of the stockhoders representng a ma|orty of the outstandng
capta stock, or a ma|orty of the members entted to vote. Shoud the secretary fa or
refuse to ca the speca meetng upon such demand or fa or refuse to gve notce, or
f there s no secretary, the ca for the meetng may be addressed drecty to the
stockhoders or members by any stockhoder or member sgnng the demand.
Genera rue: Drectors or trustees may be removed wth or wthout |ust cause.
Excepton: Remova wthout |ust cause may not be used to deprve mnorty
stockhoders or members of the rght of representaton to whch they may be entted
under Sec. 24.
PD 902-A grants the court the power and authorty to remove or oust a drector and t
can do so, even motu propo by the appontment of a management commttee.
In case of a deadock n a cose corporaton, the SEC s authorzed to ssue an order
canceng, aterng, or en|onng any resouton or other act of the corporaton or ts
board of drectors or drectng or prohbtng any act of the corporaton or the board of
drectors thereby ehectvey takng away the rghts of the drectors to act as managers
of the corporaton.
Vacances to be ed by the stockhoders or members n a reguar or speca meetng:
1. Vacancy due to remova;
2. Vacancy due to expraton of term;
3. Vacancy due to an ncrease n the number of board of drectors; and
4. Vacancy due to other causes when the remanng drectors or trustees
do not consttute a quorum.
Vacancy due to remova may be ed by an eecton at the same meetng wthout
further notce.
Any change n the consttuton of the board of drectors or trustees must be reported to
the SEC.
The tenure of the drector ng up the vacancy sha ony be for the unexpred term of
hs predecessor n omce.
If the successor s not quaed, the predecessor sha hod omce n a hod-over
capacty unt such successor s duy eected and quaed. (Detectve and Protectve
Bureau vs. Corbe)
COMPENSATION OF DIRECTORS
Genera rue: Drectors sha not receve any compensaton, as such drectors, except
for reasonabe per dems.
Exceptons:
1. When there s a provson n the by-aws xng ther compensaton;
2. When the stockhoders, by a ma|orty vote the outstandng capta
stock grant the same; and
3. If the drector renders extra-ordnary or unusua servce.
Page 22 of 97
In no case sha the tota yeary compensaton of drectors, as such drectors, exceed
10% of the net ncome before ncome tax of the corporaton durng the precedng year.
If there s wastage of corporate assets, the courts may be |usted to ook nto the
reasonabeness and farness of the compensaton despte the fact that the grant
thereof s authorzed pursuant to the by-aws and by the vote of the ma|orty of the
hoders of the outstandng capta stock of the corporaton.
The board may not grant compensaton upon tsef wthout authorzaton of the by-aws
or n contraventon of the by-aws. (Centra Cooperatve Exchange vs. Tbe, |r.)
Members of the board of drectors may receve compensaton, n addton to
reasonabe per dems, when they render servces to the corporaton n a capacty other
than as drectors or trustees. (Western Insttute of Technoogy, Inc. vs. Saas)
The fact that the amount pad as compensaton to drectors under a by-aw provson
has ncreased beyond what woud probaby be necessary to secure adequate servce
from them s a matter that cannot be corrected by the court. The remedy s n the
hands of the stockhoders who have the power at any awfu meetng to change the
rue. (Govt. vs. E Hogar Fpno)
LIABILITY OF CORPORATE OFFICERS
The genera rue s that uness the aw speccay provdes, a corporate omcer or
agent s not cvy or crmnay abe for acts done by hm as such omcer or agent.
Persona abty of a corporate drector, trustee or omcer aong wth the corporaton
may vady attach, as a rue, ony when:
1. He assents (a) to a patenty unawfu act of the corporaton, or (b) for
bad fath, gross neggence n drectng ts ahars, or (c) for conct of nterest,
resutng n damages to the corporaton, ts stockhoders or other persons;
2. He consents to the ssuance of watered stocks or who, havng
knowedge thereof, does not forthwth e wth the corporate secretary hs
wrtten ob|ecton thereto;
3. He agrees to hod hmsef personay and sodary abe wth the
corporaton; or
4. He s made, by specc provson of aw, to personay answer for hs
corporate acton. (Tramat Mercante, Inc. vs. CA)
Where a check s drawn by a corporaton, company or entty, the person or persons
who actuay sgned the check n behaf of such drawer sha be abe under ths Act.
(Sec. 1, BP 22)
In abor cases, corporate drectors and omcers are sodary abe wth the corporaton
for the termnaton of empoyment of corporate empoyees done wth mace or n bad
fath. (Uchco vs. NLRC)
THREE"FOLD DUTY OF DIRECTORS
Three-fod duty of drectors:
1. Obedence
2. Dgence
3. Loyaty
Sodary abty for a damages suhered by the corporaton, ts stockhoders or
members or other persons sha be mposed upon drectors or trustees:
1. Who wfuy and knowngy vote for or assent to patenty unawfu acts
of the corporaton;
2. Who are guty of gross neggence or bad fath n drectng the ahars
of the corporaton; or
Page 23 of 97
3. Who acqure any persona property or pecunary nterest n conct
wth ther duty as such drectors or trustees.
Busness |udgment rue - drectors are not abe for osses due to mprudence or
honest error of |udgment. Ouestons of pocy and management are eft soey to the
honest decson of the board of drectors and the courts are wthout authorty to
substtute ts |udgment as aganst the former.
Resoutons passed n good fath by the board of drectors are vad and bndng, and
whether or not t w cause osses or decrease n prots are not sub|ect to the revew of
the court. (Montebano vs. Bacood Murca Mng, Co., Inc.)
Genera rue: A drector s not abe for msconduct of co-drectors or other omcers.
Exceptons:
1. He connves or partcpates n t; or
2. He s neggent n not dscoverng or actng to prevent t.
The duty of oyaty s voated n the foowng nstances:
1. When a drector or trustee acqures any persona or pecunary nterest
n conct wth hs duty as such drector or trustee;
2. When he attempts to acqure or acqures, n voaton of hs duty, any
nterest adverse to the corporaton n respect to any matter whch has been
reposed n hm n condence, as to whch equty mposes a dsabty upon hm
to dea n hs own behaf; and
3. When he, by vrtue of hs omce, acqures for hmsef a busness
opportunty whch shoud beong to the corporaton, thereby obtanng prot to
the pre|udce of such corporaton.
Corporate opportunty doctrne - It paces a drector of a corporaton n the poston of
a ducary and prohbts hm from sezng a busness opportunty and/or deveopng t
at the expense and wth the factes of the corporaton. He cannot approprate to
hmsef a busness opportunty whch n farness shoud beong to the corporaton.
Dstncton between Secs. 31 & 34:
1. Sec. 31, where a drector s abe to account for prots f he attempts
to acqure or acqures any nterest adverse to the corporaton n respect to any
matter reposed n hm n condence as to whch equty mposes a dsabty
upon hm to dea n hs own behaf s not sub|ect to ratcaton by the
stockhoders.
2. Sec. 34, where the drector acqures for hmsef a busness opportunty
whch shoud beong to the corporaton, he s bound to account for such prots
uness hs act s rated by the stockhoders ownng or representng at east 2/3
of the outstandng capta stock.
Drectors are abe for fraud commtted by conceament of nformaton as to the state
and probabe resut of the negotatons for the sae of corporate assets whch may
ahect the prce of the corporatons stock. (Strong vs. Repde)
SELF"DEALING DIRECTORS
A contract of the corporaton wth one or more of ts drectors or trustees or omcers s
vodabe, at the opton of such corporaton, uness a of the foowng condtons are
present:
1. That the presence of such drector or trustee n the board meetng n whch the
contract was approved was not necessary to consttute a quorum for such
meetng;
2. That the vote of such drector or trustee was not necessary for the approva of
the contract;
Page 24 of 97
3. That the contract s far and reasonabe under the crcumstances; and
4. That n case of an omcer, the contract has been prevousy authorzed by the
board of drectors.
Where any of the rst two condtons set forth n the precedng paragraph s absent, n
the case of a contract wth a drector or trustee, such contract may be rated,
provded:
1. The contract s rated by the vote of the stockhoders representng at east
two-thrds (2/3) of the outstandng capta stock or of at east two-thrds (2/3) of
the members
2. Such ratcaton s made at a meetng caed for that purpose;
3. Fu dscosure of the adverse nterest of the drectors or trustees nvoved s
made; and
4. The contract s far and reasonabe under the crcumstances.
In the absence of express deegaton, a contract entered nto by the presdent, on
behaf of the corporaton, may bnd the corporaton f the board shoud ratfy the same
expressy or mpedy. Furthermore, the presdent as such may bnd the corporaton by
a contract n the ordnary course of busness, provded the same s reasonabe under
the crcumstances. These rues ony appy where the presdent or other omcer,
purportedy actng for the corporaton, s deang wth a thrd person, .e., person
outsde the corporaton. It does not appy to sef-deang drectors or omcers. (Prme
Whte Cement Corp. vs. IAC)
A drector or omcer may n good fath and for an adequate consderaton purchase
from a ma|orty of the drectors or stockhoders the property even of an nsovent
corporaton. (Mead vs. Mc Cuough)
INTERLOC#ING DIRECTORS
Sec. 33. Contracts between corporatons wth nterockng drectors. - Except n cases
of fraud, and provded the contract s far and reasonabe under the crcumstances, a
contract between two or more corporatons havng nterockng drectors sha not be
nvadated on that ground aone: Provded, That f the nterest of the nterockng
drector n one corporaton s substanta and hs nterest n the other corporaton or
corporatons s merey nomna, he sha be sub|ect to the provsons of the precedng
secton nsofar as the atter corporaton or corporatons are concerned.
Stockhodngs exceedng twenty (20%) percent of the outstandng capta stock
sha be consdered substanta for purposes of nterockng drectors.
A drector who owns a substanta nterest n one corporaton deang wth another
where he has a nomna nterest s a regarded as a sef-deang drector n so far as the
atter corporaton s concerned.
DERIVATIVE SUIT
Suts that stockhoders may brng aganst errng drectors or omcers:
1. Indvdua or persona sut - one brought by the sharehoders for drect
n|ury to hs rghts, such as dena of hs rght to nspect corporate books and
records or pre-emptve rght;
2. Representatve of cass sut - ; and
3. Dervatve sut - an acton based on n|ury to the corporaton - to
enforce a corporate rght - wheren the corporaton s |oned as a necessary
party, and recovery s n favor of the corporaton.
A stockhoder n a corporaton who was not such at the tme of the transactons
companed of, or whose shares had not devoved upon hm snce by operaton of aw,
can not mantan a dervatve sut uness such transactons contnue and are n|urous
Page 25 of 97
to the stockhoder, or ahect hm speccay n some other way. (Pascua vs. Orozco, et
a.)
When the board s under the compete contro of the prncpa defendants n the case,
demand upon such board to nsttute acton and prosecute the same s not requred.
The aw does not requre tgants to do useess acts. (Everett vs. Asa Bankng
Corporaton)
The corporaton shoud be made a party, n order to make the courts |udgment bndng
upon t, and thus bar future retgaton of the ssue. On what sde the corporaton
appears s not mportant. (Repubc Bank vs. Cuaderno)
The mnorty sharehoder who s sung for and n behaf of the corporaton must aege
n hs compant before the proper forum that he s sung on a dervatve cause of
acton on behaf of the corporaton and a other sharehoders smary stuated who
wsh to |on. Ths s necessary to vest |ursdcton upon the trbuna n ne wth the rue
that t s the aegatons n the compant that vest |ursdcton upon the court or quas-
|udca body concerned over the sub|ect matter and nature of the acton. (Western
Insttute of Technoogy, Inc. vs. Saas)
The bona de ownershp by a stockhoder of stock n hs own rght sumces to nvest
hm wth standng to brng a dervatve acton for the benet of the corporaton. The
number of hs shares s mmatera snce he s not sung n hs own behaf, or for the
protecton or vndcaton of hs own partcuar rght, or the redress of a wrong
commtted aganst hm, ndvduay, but n behaf and for the benet of the
corporaton. (SMC vs. Khan)
Where corporate drectors are guty of breach of trust - not mere error of |udgment or
abuse of dscreton - and ntra-corporate remedy s fute or useess, a stockhoder may
nsttute a sut n behaf of hmsef and other stockhoders and for the benet of the
corporaton, to brng about a redress of the wrong ncted drecty upon the
corporaton and ndrecty upon the stockhoders. (Reyes vs. Tan, et a.)
The stockhoders n a dervate sut cannot aege or vndcate ther own ndvdua
nterests or pre|udce. (Gamboa vs. Vctorano, et a.)
In a dervatve sut, the n|ury companed of s prmary to the corporaton, so that the
sut for the damages camed shoud be by the corporaton rather than by the
stockhoders. The stockhoders may not drecty cam those damages for themseves
for that woud resut n the appropraton by, and the dstrbuton among them of part
of the corporate assets before the dssouton of the corporaton and the qudaton of
ts debts and abtes. (Evangesta vs. Santos)
Rues, requrements and procedure so that a dervatve sut may proceed or prosper:
1. The party brngng the acton shoud be a stockhoder as of the tme the act or
transacton companed of took pace, or whose shares have evoved upon hm
snce by operaton of aw. Ths rue, however, does not appy f such act or
transacton contnues and s n|urous to the stockhoder or ahects hm
speccay n some other way. The number of shares s mmatera.
2. He has tred to exhaust ntra-corporate remedes, .e. he has made a demand
on the board of drectors for the approprate reef but the atter had faed or
refused to heed hs pea. Demand, however, s not requred f the company s
under the compete contro of the drectors who are the very ones to be sued
(or where t becomes obvous that a demand upon them woud have been
fute and useess) snce the aw does not requre a tgant to perform useess
acts.
3. The stockhoder brngng the sut must aege n hs compant that he s sung
on a dervatve cause of acton on behaf of the corporaton and a other
stockhoders smary stuated, otherwse, the case s dsmssbe.
4. The corporaton shoud be made a party, ether as party-panth or defendant,
n order to make the courts |udgment bndng upon t.
Page 26 of 97
5. Any benet or damages recovered sha pertan to the corporaton.
EXECUTIVE COMMITTEE
An executve commttee may be created when authorzed by the by-aws.
Genera rue: The executve commttee may act, by ma|orty vote of a ts members,
on such specc matters wthn the competence of the board, as may be deegated to t
n the by-aws or on a ma|orty vote of the board.
Exceptons:
1. Approva of any acton for whch sharehoders' approva s aso requred;
2. The ng of vacances n the board;
3. The amendment or repea of by-aws or the adopton of new by-aws;
4. The amendment or repea of any resouton of the board whch by ts express
terms s not so amendabe or repeaabe; and
5. A dstrbuton of cash dvdends to the sharehoders.
CHAPTER $: CORPORATE POWERS AND AUTHORITY
Casscaton of corporate authorty:
1. Those expressy granted or authorzed by aw ncusve of the corporate
charter or artces of ncorporaton
2. Those mpedy granted as are essenta or reasonaby necessary to
the carryng out of the express powers
3. Those that are ncdenta to ts exstence.
Powers expressy granted
1. Power to sue and be sued (Sec. 36)
2. Power of successon (Sec. 36)
3. Power to adopt and use a corporate sea (Sec. 36)
4. Power to amend ts artces of ncorporaton (Sec. 36)
5. Power to adopt, amend or repea by-aws (Sec. 36)
6. Power to ssue or se stocks/ to admt members (Sec. 36)
7. Power to acqure or aenate rea or persona property (Sec. 36)
8. Power to enter nto merger or consodaton (Sec. 36)
9. Power to make reasonabe donatons (Sec. 36)
10. Power to estabsh penson, retrement, and other pans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37)
12. Power to ncrease or decrease capta stock (Sec. 38)
13. Power to ncur, create or ncrease bonded ndebtedness (Sec. 38)
14. Power to deny pre-emptve rght (Sec. 39)
15. Power to se or dspose corporate assets (Sec. 40)
16. Power to acqure own shares (Sec. 41)
17. Power to nvest corporate funds n another corporaton or busness or for any
other purpose (Sec. 42)
18. Power to decare dvdends (Sec. 43)
Page 27 of 97
19. Power to enter nto management contract (Sec. 44)
POWER TO SUE AND BE SUED
The resdence of the corporaton s the pace of ts prncpa omce as may be ndcated
n ts artces of ncorporaton and may, therefore, be sued ony at that pace. (CRS vs.
Anton)
Servce of summons upon a corporaton must be made upon:
1. Presdent,
2. Managng partner,
3. Genera manager,
4. Corporate secretary,
5. treasurer, or
6. In-house counse
Strct compance wth the mode of servce s necessary to confer |ursdcton of the
court over a corporaton. The omcer upon whom servce s made must be one who s
named n the statute; otherwse the servce s nsumcent. (Deta Motor Saes Corp. vs.
Mangosng)
Under the new rues, servce of summons upon an agent of the corporaton s no onger
authorzed. (E.B. Varosa & Partner Co., LTD. vs. Bento)
POWER OF SUCCESSION
Rght of successon - a corporaton perssts to exst despte the death, ncapacty, cv
nterdcton or wthdrawa of the stockhoders or members thereof.
POWER TO ADOPT AND USE COMMON SEAL
Statutes empowerng corporatons to make and own a sea are not mandatory but
merey permssve.
POWER TO AMEND ARTICLES OF INCORPORATION
Genera rue: Amendment of the artces of ncorporaton s a matter of rght (Note:
procedure dhers for speca amendments)
Excepton: Corporatons created by speca aw
POWER TO ADOPT BY"LAWS
A corporaton, once formed s requred to adopt ts by-aws, not contrary to aw, moras
or pubc pocy, wthn one month from recept of omca notce of the ssuance of
certcate of ncorporaton or regstraton.
POWER TO ISSUE/SELL STOC#S OR ADMIT MEMBERS
The power of a corporaton to ssue or se stock s an nherent rght except where t
ses or ssues stocks of other corporatons (Securtes Reguaton Code).
POWER TO ACQUIRE/ALIENATE PROPERTY
Rea or persona propertes must be acqured, hed or conveyed as the transacton of
the awfu busness of the corporaton may reasonaby and necessary requre.
Furthermore, t sha be sub|ect to the mtatons mposed by aw and the Consttuton.
A corporaton cannot undertake acquston of property whch woud have no purpose
and woud have no necessary connecton wth ts egtmate busness. (Luneta Motors
Co. vs. A.D. Santos, Inc.)
Page 28 of 97
A corporaton whose busness may propery conducted n a popuous center may
acqure an approprate ot and construct thereon an edce wth factes n excess of
ts own mmedate requrements. (Govt. vs. E Hogar)
A corporaton may regster aenabe pubc ands f t has been hed by t, personay or
through ts predecessor-n-nterest, openy, contnuousy and pubcy wthn the
prescrbed statutory perod of 30 years under the Pubc Land Law, as amended, snce
t s converted nto prvate property by mere apse of competon of sad perod. (Dr. of
Lands vs. CA)
POWER TO MA#E REASONABLE DONATIONS
Lmtatons mposed upon corporate donatons:
1. The donaton must be reasonabe;
2. It must be for pubc wefare, or for hospta, chartabe, scentc,
cutura or smar purpose; and
3. It sha not be n ad of any potca party or canddate, or for purpose
of partsan potca actvty.
POWER TO ESTABLISH PENSION% RETIREMENT AND OTHER PLANS
Whe as a rue an utra vres act s one commtted outsde the ob|ect for whch a
corporaton s created as dened by aw of ts organzaton and therefore beyond the
powers conferred upon t by aw, there are however certan corporate acts that may be
performed outsde of the scope of the powers expressy conferred f they are necessary
to promote the nterest or wefare of the corporaton. (Repubc vs. Aco|e Mnng Co.,
Inc.)
POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY
OUT ITS PURPOSES &IMPLIED POWERS'
Casscaton of mped powers:
1. Acts n the usua course of busness
2. Acts to protect debts owng to the corporaton
3. Embarkng on a dherent busness
4. Acts n part or whoy to protect or ad empoyees
5. Acts to ncrease busness
A corporaton has authorty to do what w egtmatey tend to ehectuate the express
purposes and ob|ects; that t may ordnary do a thngs that are convenent, sutabe
or necessary to enabe t to fuy perform the undertakng desgnated n ts charter, and
for whch t s organzed.
There must be a ogca and necessary reaton of the act to the corporate purpose.
(NPC vs. Vera)
If the act s one whch s awfu n tsef and not otherwse prohbted, and s done for
the purpose of servng corporate ends, and reasonaby contrbutes to the promoton of
those ends n a substanta and not n a remote and fancfu sense, t may be fary
consdered wthn the corporatons charter powers. (NPC vs. Vera)
Exampes:
1. Operaton and mantenance of an eectrc pant for a cement factory.
(Teresa Eectrc Power Co., Inc. vs. PSC)
2. NPCs undertakng of stevedorng servces for ts power pant. (NPC vs.
Vera)
3. Internatona Schoos mposton of a deveopment fee for expanson
and mantenance. (Powers vs. Marsha)
Page 29 of 97
POWER TO EXTEND/SHORTEN CORPORATE TERM
1. Approva by the ma|orty vote of the board of drectors or trustees;
2. Ratcaton by the stockhoders representng at east 2/3 of the outstandng
capta stock or 2/3 of the members n case of non-stock corporatons;
3. The ratcaton must be at a meetng duy caed for that purpose;
4. Pror wrtten notce of the proposa to extend or shorten the corporate term
must be made statng the tme and pace of meetng addressed to each
stockhoder or member at hs pace of resdence, ether by ma or persona
servce;
5. In case of extenson, the same cannot be made eaer than ve (5) years pror
to the orgna or subsequent expry date uness there are |ustabe reasons
for an earer extenson;
6. In case of extenson, the same must be made durng the fetme of the
corporaton;
7. Any dssentng stockhoder may exercse hs apprasa rght;
8. Submsson of the amended artces wth the SEC; and
9. Approva thereof by the SEC.
POWER TO INCREASE/DECREASE CAPITAL( INCUR% CREATE OR INCREASE BONDED
INDEBTEDNESS
1. Approva by the ma|orty vote of the board of drectors or trustees;
4. Pror wrtten notce of the proposed acton must be made statng the tme and
pace of meetng addressed to each stockhoder or member at hs pace of
resdence, ether by ma or persona servce;
5. A certcate n dupcate must be sgned by a ma|orty of the drectors of the
corporaton, countersgned by the charman and the secretary of the
stockhoders meetng, settng forth the matters contaned n subsecton 1 to 7
of Sec. 38;
6. In case of ncrease n capta stock, 25% of such ncreased capta must be
subscrbed and that at east 25% of the amount subscrbed must be pad ether
n cash or property;
7. In case of decrease n capta stock, the same must not pre|udce the rght of
the credtors;
8. Fng of the certcate of ncrease and amended artces wth the SEC; and
9. Approva thereof by the SEC.
3 ways of ncreasng the capta stock:
1. Increasng the par vaue of the exstng number of shared wthout
ncreasng the number of shares;
2. Increasng the number of exstng shares wthout ncreasng the par
vaue thereof; and
3. Increasng the number of exstng shares and at the same tme
ncreasng the par vaue of the shares.
Page 30 of 97
Exstence of unssued or unsubscrbed share out of the orgna capta stock w not
prohbt the ncrease of capta stock.
Reasons for decreasng capta stock:
1. To reduce or wpe out exstng dect where no credtors woud thereby
be ahected;
2. When capta s more than what s necessary to procreate the busness
or reducton of capta surpus; or
3. To wrte down the vaue of ts xed assets to reect the present actua
vaue n case where there s a decne n the vaue of the xed assets of the
corporaton.
A corporaton has no power to reease an orgna subscrber to ts capta stock from
the obgaton of payng for hs shares, wthout a vauabe consderaton for such
reease; and as aganst credtors a reducton of the capta stock can take pace ony n
the manner and under the condtons prescrbed by aw. Moreover, strct compance
wth the statutory reguatons s necessary. (Phppne Trust Company vs. Rvera)
A reducton of capta stock may not be used as a subterfuge, a decepton as t were, to
camouage the fact that a corporaton has been makng prots to obvate a |ust
sharng to abor. (Madrga & Co. vs. Zamora)
A corporaton whch has the power to borrow or rase money, to contract for abor or
servces, or otherwse contract a debt has the mped power to ssue bonds n payment
or as a securty provded t voates no prohbton or restrcton n ts charter or any
other statutes.
Corporate bonds must be regstered and approved by the SEC before they are ssued.
POWER TO DENY PRE"EMPTIVE RIGHTS
Pre-emptve rght - s a rght granted by aw to a exstng stockhoders of a stock
corporaton to subscrbe to a ssues or dsposton of shares of any cass, n proporton
to ther respectve stockhodngs, sub|ect ony to the mtatons mposed under Sec.
39.
The bass for the grant of ths rght s the preservaton, unmpared and unduted, of
the od stockhoders reatve and proportonate votng strength and contro, that s, the
exstng rato of ther propretary nterest and votng power n the corporaton.
A stockhoders of a stock corporaton sha en|oy pre-emptve rght to subscrbe to a
ssues or dsposton of shares of any cass, n proporton to ther respectve
sharehodngs, uness such rght s dened by the artces of ncorporaton or an
amendment thereto.
Exceptons:
1. Shares to be ssued n compance wth aws requrng stock oherngs
or mnmum stock ownershp by the pubc; or
2. Shares to be ssued n good fath wth the approva of the stockhoders
representng two-thrds (2/3) of the outstandng capta stock, n exchange for
property needed for corporate purposes or n payment of a prevousy
contracted debt.
The exceptons do not appy to stockhoders of a cose corporaton.
The rght may be ost by waver, expressy or mpedy by nabty or faure to exercse
t after havng been noted.
The pre-emptve rght covers a ssues or dsposton of share of any cass. It ncudes
new share ssued pursuant to an ncrease n capta stock, unssued shares whch form
part of the orgna capta stock and treasury shares.
POWER TO SELL/DISPOSE ASSETS
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There s a sae or other dsposton of substantay a the corporate property and
assets f the corporaton woud thereby be rendered ncapabe of contnung the
busness or accompshng the purpose for whch t was ncorporated.
Condtons for the vad exercse of ths rght:
1. Resouton by the ma|orty vote of the board of drectors or trustees;
2. Authorzaton from the stockhoders representng at east 2/3 of the
corporatons;
4. Pror wrtten notce of the proposed acton must be made statng the tme and
pace of meetng addressed to each stockhoder or member at hs pace of
resdence, ether by ma or persona servce;
5. The sae of the assets sha be sub|ect to the provsons of exstng aws on
ega combnatons and monopoes; and
6. Any dssentng stockhoder sha have the opton to exercse hs apprasa rght.
7. (Note: In non-stock corporatons where there are no members wth votng
rghts, the vote of at east a ma|orty of the trustees n omce w be sumcent
authorzaton for the corporaton to enter nto such transacton.)
Excepton to appcaton of the procedure and requrements:
1. The sae, ease, exchange, mortgage, pedge or other dspose of property and
assets s necessary n the usua and reguar course of busness of the
corporaton; or
2. The sae or other dsposton of property and assets s approprated for the
conduct of the corporatons remanng busness.
The sae or other dsposton of a or substantay a of the corporate property or
assets must be voted for by the egtmate board and concurred n by the bona de
stockhoders or members. (IDP vs. CA)
Genera rue: Where a corporaton ses or otherwse transfers a of ts assets to
another corporaton, the atter s not abe for the debts and abtes of the transferor.
Exceptons:
1. Where the purchaser expressy or mpedy agrees to assume such debts;
2. Where the transacton amounts to a consodaton or merger of the
corporatons;
3. Where the purchasng corporaton s merey a contnuaton of the seng
corporaton; and
4. Where the transacton s entered nto frauduenty n order to escape abty
for such debts.
POWER TO ACQUIRE OWN SHARES
A stock corporaton sha have the power to purchase or acqure ts own shares for a
egtmate corporate purpose or purposes, ncudng but not mted to the foowng
cases:
Page 32 of 97
1. To emnate fractona shares arsng out of stock dvdends;
2. To coect or compromse an ndebtedness to the corporaton, arsng out of
unpad subscrpton, n a denquency sae, and to purchase denquent shares
sod durng sad sae;
3. To pay dssentng or wthdrawng stockhoders entted to payment for ther
shares; and
4. To redeem redeemabe shares.
Genera rue: the corporaton must have unrestrcted retaned earnngs.
Exceptons:
1. Redempton of redeemabe shares; and
2. Stockhoders rght to compe a cose corporaton to purchase hs shares when
the corporaton has sumcent assets to cover ts debts and abtes.
The acquston of shares must be made n good fath, free from fraud, actua or
constructve, and that the corporaton s not nsovent or n the process of dssouton
and that the rghts of credtors and other stockhoders are n no way n|urousy
ahected.
POWER TO INVEST FUNDS
The rght refers to nvestment n the form of money, stock, bonds and other qud
assets and does not ncude rea propertes or other xed assets.
1. Resouton by the ma|orty vote of the board of drectors or trustees;
4. Pror wrtten notce of the proposed nvestment and the tme and pace of
meetng sha be made, addressed to each stockhoder or member at hs pace
of resdence, ether by ma or persona servce; and
5. Any dssentng stockhoder sha have the opton to exercse hs apprasa rght.
The approva of the stockhoders or members s not requred where the nvestment s
reasonaby necessary to accompsh ts prmary purpose.
An unauthorzed nvestment whch s not ega or vod ab nto or not contrary to aw,
moras, pubc order or pubc pocy, s merey vodabe and may become bndng and
enforceabe when rated by the stockhoders. (Gokongwe, |r. vs. SEC)
POWER TO DECLARE DIVIDENDS
Dvdends - are corporate prots set asde, decared and ordered by the Board of
Drectors to be pad to the stockhoders.
Dvdends can ony be decared out of unrestrcted retaned earnngs.
Unrestrcted retaned earnngs - undstrbuted earnngs of a corporaton whch have
not been aocated for any managera, contractua or ega purpose and whch are free
for dstrbuton to the stockhoders as dvdends.
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Types of dvdends:
1. Cash dvdend - those that are payabe n awfu money.
2. Property dvdend - those that take form of bonds, notes, evdences
of ndebtedness or stock n other corporatons.
3. Stock dvdends - refer to the corporatons shares of stock.
Rues on dvdends due on denquent stock:
1. Cash dvdend - rst apped to the unpad baance on subscrpton
costs and expenses.
2. Stock dvdend - wthhed unt subscrpton s fuy pad.
Genera rue: Stock corporatons are prohbted from retanng surpus prots n excess
of 100% of ther pad-n capta stock.
Exceptons:
1. When |usted by dente corporate expanson pro|ects or programs approved
by the board of drectors; or
2. When the corporaton s prohbted under any oan agreement wth any
nanca nsttuton or credtor, whether oca or foregn, from decarng
dvdends wthout ts/hs consent, and such consent has not yet been secured;
or
3. When t can be ceary shown that such retenton s necessary under speca
crcumstances obtanng n the corporaton, such as when there s need for
speca reserve for probabe contngences.
Genera rue: The board of drectors exercse excusve authorty n decarng dvdends.
Excepton: In decarng stock dvdends, the approva of the stockhoders representng
at east 2/3 of the outstandng capta stock s requred.
The |udgment of the board of drectors n the matter of decarng dvdends s
concusve except when they act n bad fath, or for a dshonest purpose or act
frauduenty, oppressvey, unreasonaby or un|usty or abuse of dscreton can be
shown so as to mpar the rghts of the companng stockhoders to ther |ust
proporton of corporate prots.
The essenta test of bad fath s to determne f the pocy of the drectors s dctated
by ther persona nterest rather than the corporate wefare.
The rght of the stockhoders to be pad dvdends vest as soon as they have been
awfuy and nay decared by the Board of Drectors.
No revocaton of dvdend may be had uness t has not been omcay communcated
to the stockhoders or s n the form of stock dvdends whch s revocabe at any tme
pror to dstrbuton.
Stock dvdends cannot be ssued to a person who s not a stockhoder. (Neson & Co.,
Inc. vs. Lepanto Consodated Mnng Co.)
Drectors are not abe for decaraton of dvdend contrary to aw, uness attended wth
bad fath, gross neggence or wfu and knowng assent. (Lada)
POWER TO ENTER INTO MANAGEMENT CONTRACTS
1. Resouton by the board of drectors or trustees;
2. Approva by the stockhoders representng a ma|orty of the outstandng capta
stock or ma|orty of the members n case of non-stock corporatons;
3. The approva must be at a meetng duy caed for that purpose;
Page 34 of 97
4. The contract sha not be for a perod onger than 5 years for any one term,
except those whch reate to exporaton, deveopment or utzaton of natura
resources whch may be entered nto for such perods as may be provded by
pertnent aws and reguatons.
When approva of the stockhoders of the managed corporaton ownng at east 2/3 of
the outstandng capta stock or 2/3 of the members n case of non-stock corporatons
are requred:
1. Where a stockhoder or stockhoders representng the same nterest of both the
managng and the managed corporatons own or contro more than 1/3 of the
tota outstandng capta stock entted to vote of the managng corporaton;
2. Where a ma|orty of the members of the board of drectors of the managng
corporaton aso consttute a ma|orty of the members of the board of drectors
of the managed corporaton; or
3. Where the contract woud consttute the management or operaton of a or
substantay a of the busness of another corporaton, whether such contracts
are caed servce contracts, operatng agreements or otherwse.
ULTRA"VIRES ACTS
Utra-vres acts - are those that can not be executed or performed by a corporaton
because they are not wthn ts express, nherent or mped powers as dened by ts
charter or artces of ncorporaton.
Consequences of utra-vres acts:
1. On the corporaton tsef - the proper forum may suspend or revoke, after
proper notce and hearng, the franchse or certcate of regstraton of the
corporaton for serous msrepresentaton as to what the corporaton can do or
s dong to the great damage or pre|udce of the genera pubc.
2. On the rghts of the stockhoders - a stockhoder may ether an ndvdua or
dervatve sut to en|on a threatened utra-vres act or contract.
3. On the mmedate partes - (a) f the contract s fuy executed on both sdes,
the contract s ehectve; (b) f the contract s executory on both sdes, nether
party can mantan an acton for ts non-performance; and (c) f the contract s
executory on one sde ony, and has been fuy performed on the other, the
party who has receved the benets s estopped to set up that the contract s
utra-vres.
Acts whch are ceary beneca to the company or necessary to promote the nterest
or wefare of the corporaton, ts empoyees and ther fames, or n the egtmate
furtherance of ts busness are wthn corporate powers. (Repubc vs. Aco|e Mnng)
Mere utra-vres acts whch are not ega per se may become bndng and enforceabe
ether by ratcaton, estoppe or on equtabe grounds uness the pubc or thrd
partes are thereby pre|udced. (Prvano vs. De a Rama Steamshp)
Corporatons authorzed to acqure the bonds have the mped power to guarantee
them n order to pace them upon the market under better, more advantageous
condtons, and thereby secure the prot derved from ther sae. When a contract s
not on ts face necessary beyond the scope of the power of the corporaton by whch
t was made, t w, n the absence of proof to the contrary, be presumed to be vad.
Corporatons are presumed to contract wthn ther powers. The doctrne of utra vres,
when nvoked for or aganst a corporaton, shoud not be aowed to preva where t
woud defeat the ends of |ustce or work a ega wrong. (Caros vs. Mdoro Sugar Co.)
Actons whch are beyond the powers of the corporaton as emboded n ts artces of
ncorporaton and have absoutey no reaton to the avowed purpose of the
corporaton are utra-vres. (|apanese War Notes Camants Assoc., Inc. vs. SEC)
Page 35 of 97
Corporate omcers have no power to execute for mere accommodaton a negotabe
nstrument of the corporaton for ther ndvdua debts or transactons arsng from or
n reaton to matters n whch the corporaton has no egtmate concern. Snce such
accommodaton paper cannot thus be enforced aganst the corporaton, especay
snce t s not nvoved n any aspect of the corporate busness or operatons, the
sgnatores thereof sha be personay abe therefor, as we as for the consequences
arsng from ther acts n connecton therewth. (Crsoogo-|ose vs. CA)
CHAPTER ): BY"LAWS
By-aws - are rues and ordnances made by a corporaton for ts own government; to
reguate the conduct and dene the dutes of the stockhoders or members towards
the corporaton and among themseves. They are rues and reguatons or prvate aws
enacted by the corporaton to reguate, govern and contro ts own actons, ahars and
concerns and ts stockhoders or member and drectors and omcers wth reaton
thereto and among themseves n ther reaton to t.
Requrements and procedure for adopton of by-aws:
1. The by aws must not be nconsstent wth the Code;
2. If adopted pror to ncorporaton:
a. Approved and sgned by a the ncorporators;
b. Submtted together wth the artces of ncorporaton to the SEC;
3. If adopted subsequent to ncorporaton:
a. Adopted wthn one (1) month after recept of omca notce of the
ssuance of ts certcate of ncorporaton by the SEC;
b. Amrmatve vote of the stockhoders representng at east a ma|orty of
the outstandng capta stock, or of at east a ma|orty of the members
n case of non-stock corporatons,
c. Sgned by the stockhoders or members votng for them
d. Kept n the prncpa omce of the corporaton, sub|ect to the nspecton
of the stockhoders or members durng omce hours.
e. A copy thereof, duy certed to by a ma|orty of the drectors or
trustees countersgned by the secretary of the corporaton, must be
ed wth the SEC whch sha be attached to the orgna artces of
ncorporaton.
4. Certcaton of the approprate government agency concerned to the ehect
that such by-aws or amendments are n accordance wth aw.
5. Issuance by the Securtes and Exchange Commsson of a certcaton that the
by-aws are not nconsstent wth ths Code.
Contents of by-aws:
1. The tme, pace and manner of cang and conductng reguar or speca
meetngs of the drectors or trustees;
2. The tme and manner of cang and conductng reguar or speca meetngs of
the stockhoders or members;
3. The requred quorum n meetngs of stockhoders or members and the manner
of votng theren;
4. The form for proxes of stockhoders and members and the manner of votng
them;
5. The quacatons, dutes and compensaton of drectors or trustees, omcers
and empoyees;
Page 36 of 97
6. The tme for hodng the annua eecton of drectors of trustees and the mode
or manner of gvng notce thereof;
7. The manner of eecton or appontment and the term of omce of a omcers
other than drectors or trustees;
8. The penates for voaton of the by-aws;
9. In the case of stock corporatons, the manner of ssung stock certcates; and
10. Such other matters as may be necessary for the proper or convenent
transacton of ts corporate busness and ahars.
By-aws are subordnate to the artces of ncorporaton, the Corporaton Code and
other statutes whch form part of the corporate charter.
By-aws become ehectve ony upon the approva of the SEC
Tme of ng:
1. Pror to ncorporaton - must be sgned by a the ncorporators, must
be ed together wth the artces of ncorporaton
2. After ncorporaton - approva of at east a ma|orty of the outstandng
capta stock
Faure to e by-aws may resut to suspenson or revocaton of corporate franchse
after proper notce and hearng
Faure to e by-aws does not resut n automatc dssouton. (LGVHA vs. CA)
By-aws are nterna rues an cannot bnd, ehect or pre|udce thrd persons wthout
knowedge. (Fesher vs. Botca Noasco)
Two modes of amendng or repeang by aws or adoptng a new one:
1. By a ma|orty vote of the drectors or trustees and the ma|orty vote of
the outstandng capta stock or members, at a reguar or speca meetng
caed for that purpose; or
2. By the board of drectors aone when deegated by 2/3 of the
outstandng capta stock or members
Deegated power to amend, repea or adopt by-aws may be revoked
Incorporaton of an nvad by-aw provson s not a msdemeanor. It does not |ustfy
the dssouton of the corporaton. (Govt. vs. E Hogar)
The by-aws may dsquafy a stockhoder from beng eected nto omce f he has a
substanta nterest n a compettor corporaton to avod any possbe adverse ehects of
conctng nterest of a drector. (Gokongwe, |r. vs. SEC)
Eements of a vad by aws:
1. It must not be contrary to aw, pubc pocy or moras.
2. It must not be nconsstent wth the artces of ncorporate.
3. It must be genera and unform n ts ehect or appcabe to a ake or
those smary stuated.
4. It must not mpar obgatons and contracts or vested rghts.
5. It must be reasonabe.
CHAPTER *: MEETINGS
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Meetngs - appes to every duy convened assemby ether stockhoders, members,
drectors or trustees, manages, etc. for any ega purpose, or the transacton of
busness of a common nterest.
Casses of meetngs:
1. Genera
2. Speca
STOC#HOLDER+S MEETINGS
Requrements to have a vad stockhoders meetng:
1. It must be hed on the date xed n the by-aws or n accordance wth
aw.
2. Pror notce must be gven.
3. It must be hed at the proper pace.
4. It must be caed by the proper party.
5. Ouorum and votng requrements must be met
!t must be held on the date f"ed in the b-la#s or in accordance #ith la#$
Reguar meetngs sha be hed annuay on a date xed n the by-aws, or f not so
xed, on any date n Apr of every year as determned by the board of drectors or
trustees.
Speca meetngs of stockhoders or members sha be hed at any tme deemed
necessary or as provded n the by-aws.
Prior notice must be given$
Reguar - 2 weeks pror notce
Speca - 1 week pror notce
The by-aws may provde for a dherent perod (shorter or onger)
Faure to gve notce of a meetng woud render the resouton made thereunder
vodabe at the opton of the stockhoder or member who was not noted. (Board of
Drectors vs. Tan)
Notce may be waved, expressy or mpedy.
Notce must state the agenda otherwse t may become vodabe.
Notce of meetngs sha be n wrtng, and the tme and pace thereof stated theren.
!t must be held at the proper place$
Genera Rue: Stockhoders' or members' meetngs, whether reguar or speca, sha be
hed n the cty or muncpaty where the prncpa omce of the corporaton s ocated,
and f practcabe n the prncpa omce of the corporaton.
Exceptons to the rue:
1. A non-stock corporaton, n ts by aws, may provde for any pace
wthn the Phppnes.
2. Metro Mana s consdered a cty or muncpaty.
!t must be called b the proper part$
Persons who may ca the meetng:
1. The person or persons authorzed under the by-aws;
2. Absent of any provson n the by-aws, the presdent;
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3. Under Sec. 28 (remova of drector), by the secretary on order of the presdent
or on wrtten demand of the stockhoder representng or hodng at east a
ma|orty of the outstandng capta stock or ma|orty of the members entted
to vote n a non-stock corporaton, or the stockhoder or member makng the
demand f there s no secretary or he refuses to do so; and
4. On order of the proper forum under Sec. 50.
A stockhoder may ony petton the SEC to ssue an order drectng the pettoner to
ca a meetng when there s no person authorzed to ca a meetng. Otherwse, the
remedy s to e a petton for mandamus.
%uorum and voting re&uirements must be met
A quorum sha consst of the stockhoders representng a ma|orty of the outstandng
capta stock.
The by-aws or the Code tsef may provde for a greater quorum.
The bass of determnng the presence of a quorum:
1. Stock corporaton - tota subscrpton rrespectve of the amount pad
by them.
2. Non-stock corporaton - tota number of regstered votng members.
A quorum once present s not broken by the subsequent wthdrawa of a part or
fracton of the stockhoders.
If the votng requrement s met, any resouton passed n the meetng, even f
mpropery hed or caed w be vad f a the stockhoders or members are present or
duy represented.
DIRECTORS+/TRUSTEES+ MEETING
Reguar meetngs - hed monthy, uness the by-aws provde otherwse
Speca meetngs - hed at any tme upon the ca of the presdent or as provded n the
by-aws
Meetngs may be hed anywhere n or outsde of the Phppnes, uness the by-aws
provde otherwse.
Notce must be sent at east one (1) day pror to the schedued meetng, uness
otherwse provded by the by-aws.
Notce may be waved, expressy or mpedy.
If the notce requrement s not comped wth the meetng s ega and w not bnd
the corporaton except when subsequenty rated. (Lopez vs. Fontecha)
In a cose corporaton, the act of any one drector may bnd the corporaton wthout a
meetng.
Presence at a meetng waves want of notce.
Physca presence at the meetng s not requred; teeconferencng and
vdeoconferencng s aowed. (RA 8792)
The presdent sha presde at the meetng, uness the by-aws provde otherwse.
A drector or trustee cannot attend or vote by proxy at any board meetng.
STOC#HOLDERS+ RIGHT TO VOTE AND MANNER OF VOTING
Genera rue: The rght to vote s an nherent rght and the stockhoder may vote any
way he peases.
Exceptons:
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1. Non-votng shares are not entted to vote except n those nstances
provded for n the penutmate paragraph of Sec. 6
2. Treasury shares
3. Denquent shares
4. Unregstered transferee of stock
Genera rue: Stockhoders or members may vote personay or through a
representatve by way of proxy, votng trust agreement or by the executor,
admnstrator, recever of other ega representatve.
Excepton: In non-stock corporatons, the rght to vote may be mted, broadened or
dened n the artces of ncorporaton or n the by-aws.
The rght to vote s vested wth the ega owner of the shares.
In case of pedged or mortgaged shares, the pedgor or mortgagor s entted to vote n
absence of a wrtten agreement (recorded n the corporate books) to the contrary.
(Sec. 55)
Executors, admnstrators, recevers, and other ega representatves duy apponted by
the court may attend and vote n behaf of the stockhoders or members wthout need
of any wrtten proxy. (Sec. 50)
An executor or admnstrator of a stockhoder may not be eected uness he owns at
east 1 share.
Genera Rue: In case of shares |onty owned, the consent of a the co-owners sha be
necessary.
Exceptons:
1. Wrtten proxy sgned by a the co-owners
2. The shares are owned n an "and/or" capacty
PROXY
Proxy - the authorty gven by the stockhoder or member to another to vote for hm at
a stockhoders or members meetng. It aso refers to the nstrument or paper whch s
evdence of the authorty of the agent or the hoder thereof to vote for and n behaf of
the stockhoder or member.
Two types of proxes:
1. Genera - gves a genera dscretonary power of attorney to vote for drectors
and a ordnary matters that may propery come before a meetng. It s not an
authorty, however, to vote for fundamenta changes n the corporate charter
or for other unusua transactons, uness speced.
2. Lmted - restrcts the authorty to vote on speced matters ony and may
drect the manner n whch the vote w be cast.
Proxy votng may not be dened except n a non-stock corporaton.
Requrements:
1. In wrtng
2. Sgned by the stockhoder or member
3. Fed before the schedued meetng wth the corporate secretary
By-aws may reasonaby reguate the form and executon of proxes.
Uness otherwse provded n the proxy, t sha be vad ony for the meetng for whch
t s ntended.
Page 40 of 97
No proxy sha be vad and ehectve for a perod onger than ve (5) years at any one
tme.
A proxy s revocabe uness couped wth an nterest.
Revocaton may be expresses:
1. To the proxy hoder
2. To the eecton commttee
3. By a subsequent proxy to another
4. By sae of the shares
VOTING TRUST
A votng trust s one created by an agreement between a group of stockhoders of a
corporaton and a trustee, or a group of dentca agreements between ndvdua
stockhoders and a common trustee, whereby t s provded that for a term of years, or
for a perod contngent upon a certan event, or unt the agreement s termnated,
contro over the stock owned by such stockhoders, sha be odged n the trustee,
ether wth or wthout reservaton to the owners or persons desgnated by them the
power to drect how such contro sha be used. It s a devce of bndng stockhoders to
vote as a unt and thus assurng a desrabe stabty and contnuty n management n
stuatons where t s needed.
Requrements:
1. It shoud confer upon the trustee or trustees the rght to vote and other rghts
pertanng to the shares;
2. It shoud be for a perod not exceedng ve (5) years at any tme uness the
votng trust s speccay requred as a condton n a oan agreement, n
whch case, the votng trust may be for a perod exceedng ve (5) years but
sha automatcay expre upon fu payment of the oan;
3. It must be n wrtng and notarzed, and sha specfy the terms and condtons
thereof;
4. A certed copy thereof must be ed wth the corporaton and wth the
Securtes and Exchange Commsson, otherwse, sad agreement s nehectve
and unenforceabe;
5. The certcate or certcates of stock covered by the votng trust agreement
sha be canceed and new ones sha be ssued n the name of the trustee or
trustees statng that they are ssued pursuant to sad agreement. In the books
of the corporaton, t sha be noted that the transfer n the name of the trustee
or trustees s made pursuant to sad votng trust agreement;
6. The trustee or trustees sha execute and dever to the transferors votng trust
certcates, whch sha be transferabe n the same manner and wth the same
ehect as certcates of stock.
7. It shoud not be entered nto for the purpose of crcumventng the aw aganst
monopoes and ega combnatons n restrant of trade or used for purposes
of fraud.
Votng trust dstngushed from proxy
VOTING TRUST PROXY
The beneca owner of the shares
ceases to be a stockhoder of record of
the corporaton
Lega tte remans wth the beneca
owner
The trustee votes as owner of the
shares
The proxy hoder votes merey as an
agent
The beneca owner of the shares s The owner of the shares may be
Page 41 of 97
dsquaed to be a drector eected as a drector snce ega tte
remans wth hm
The purpose s to acqure votng
contro of the corporaton
Generay used to secure votng and
quorum requrements or merey for the
purpose of representng an absent
stockhoder
Irrevocabe Revocabe uness couped wth an
nterest
The trustee can act and vote at any
meetng durng the duraton of the
votng trust agreement
A proxy hoder can generay act as
such ony at a partcuar meetng
The trustee may vote n person or by
proxy
A proxy hoder must vote n person
The duraton may exceed 5 years The duraton may not exceed 5 years
Must be notarzed and ed wth the
SEC
Need not be notarzed nor ed wth
the SEC
A corporaton s not a party to a votng trust agreement therefore t s not a rea party
nterest n a sut to enforce the same. (NIDC vs. Aquno)
A votng trust transfers ony votng and other rghts pertanng to the shares sub|ect of
the agreement or contro over the stock. It does not ncude the assets, operaton and
management of the corporaton. (NIDC vs. Aquno)
CHAPTER ,-: STOC#S AND STOC#HOLDERS
3 ways n whch a person may become a stockhoder:
1. By a contract of subscrpton wth the corporaton;
2. By the purchase of treasury shares from the corporaton; and
3. By purchase or acquston of shares from exstng stockhoders (ncudes
purchase from the stock exchange).
SUBSCRIPTION CONTRACT
Subscrpton - the mutua agreement of the subscrbers to take and pay for the stocks
of a corporaton.
Subscrpton contract - any contract for the acquston of unssued stock n an exstng
corporaton or a corporaton st to be formed, not wthstandng the fact that the
partes refer to t as a purchase or some other contract.
A subscrpton contract s not requred to be wrtten; an ora contract for subscrpton s
vad and enforceabe. The statutes of fraud do not appy to a subscrpton contract
because such subscrpton does not fa under the statutory denton of a sae.
Condtona subscrpton - one made upon a condton precedent, does not make the
subscrber a stockhoder, or render hm to pay the amount of hs subscrpton, unt the
performance or fument of the condton.
Subscrpton upon speca terms - an absoute subscrpton, makng the subscrber a
stockhoder, and renderng hm abe as such, as soon as the subscrpton s accepted,
the speca term beng an ndependent stpuaton.
In case of doubt, a subscrpton sha be consdered one upon speca terms n order to
protect the credtors and other subscrbers.
Genera rue: Condtona subscrptons are vad.
Exceptons:
1. The charter or enabng act prohbts the same; or
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2. The condtons are such as to render ther performance beyond the powers of
the corporaton or n voaton of aw or contrary to pubc pocy.
An appcaton for subscrpton whch s at varance wth the terms evdenced n a
genera form of subscrpton must be accepted by the corporaton to create a bndng
contract. (Trana vs. Ouezon Coege, Inc.)
A condton facutatve as to the debtor renders the whoe obgaton vod. (Trana vs.
Ouezon Coege, Inc.)
PRE"INCORPORATION SUBSCRIPTIONS
Types of subscrptons as to tme of executon:
1. Pre-ncorporaton subscrptons - subscrptons for shares of stock of a
corporaton st to be formed; and
2. Post-ncorporaton subscrptons - those made or executed after the formaton
or organzaton of the corporaton.
Genera rue: A subscrpton for shares of stock of a corporaton st to be formed s
rrevocabe.
Exceptons:
1. Lapse of a perod of 6 months from the date of subscrpton;
2. A the subscrbers consent to the revocaton; or
3. The ncorporaton of sad corporaton fas to materaze wthn 6
months or wthn a onger perod as may be stpuated n the contract of
subscrpton.
Excepton to the exceptons: No pre-ncorporaton subscrpton may be revoked after
the submsson of the artces on ncorporaton to the SEC.
Pre-ncorporaton subscrptons are mandatory n vew of Secs. 13 and 14 whch
mandates that a corporaton may be regstered as such ony f at east 25% of ts
authorzed capta stock has been subscrbed and that at east 25% of the tota
subscrpton has been pad.
Stocks sha not be ssued for a consderaton ess than the par or ssued prce thereof.
Consderaton for the ssuance of stock may be any or a combnaton of any two or
more of the h:
1. Actua cash pad to the corporaton;
2. Property, tangbe or ntangbe, actuay receved by the corporaton and
necessary or convenent for ts use and awfu purposes at a far vauaton
equa to the par or ssued vaue of the stock ssued;
3. Labor performed or servces actuay rendered to the corporaton;
4. Prevousy ncurred ndebtedness by the corporaton;
5. Amounts transferred from unrestrcted retaned earnngs to stated capta; and
6. Outstandng shares n exchange for stocks n the event of recasscaton or
converson.
Stocks sha not be ssued n exchange of promssory notes or future servces. Ther
reazaton s uncertan.
Issue - the makng of a share contract or contract of subscrpton; transacton by whch
a person becomes the owner of shares and by whch new share contracts are created.
The ssuance of shares s not dependent on the devery of a certcate of stock.
Page 43 of 97
Par or ssue prce - ndcates the amount whch the orgna subscrbers are supposed
to contrbute to the corporate capta as the bass of the prvege of prot sharng wth
mted abty.
Vauaton of propertes gven as a consderaton for ssuance of stock:
1. Tangbe propertes (partcuary rea propertes):
a. Apprasa report of an ndependent appraser;
b. Zona vauaton as certed by the BIR; or
c. Market vaue ndcated n the Rea Estate Tax Decaraton.
2. Intangbe propertes (such as patents or copyrghts):
a. Inta determnaton by the ncorporators or the board of drectors
sub|ect to the approva of the SEC; or
b. Apprasa report of an ndependent appraser.
Labor performed or servces actuay rendered to the corporaton must be capabe of
vauaton and n fact fary vaued.
Two theores n the vauaton of property or servces:
1. True vaue rue - the motves or ntent of those makng the vauaton are
dsregarded and the soe and decsve factor or queston s whether or not the
property or servces are n fact worth the vaue paced on them.
2. Good fath rue - the vaue of the property or servces s a matter about whch
there can be an honest dherence of opnon. Therefore, f the partes have
acted n good fath wthout fraud or ntentona over-vauaton, the transacton
cannot be overturned even f the ater becomes evdent that the property or
servces were n fact worth much ess than the vaue xed on them ntay.
The set-oh or satsfacton of a debt due from the corporaton s a awfu and vad
consderaton for the ssuance of stock.
Amounts transferred from unrestrcted retaned earnngs to stated capta - refers to
the decaraton and dstrbuton of stock dvdends where corporate earnngs are
captazed.
Outstandng shares exchanged for stocks n the event of recasscaton or converson
- refers to stocks surrendered to the corporaton n exchange for a new or dherent
type of shares. (Ex. converson of founders shares to common shares.)
The prohbton aganst the ssuance of shares by corporatons except for actua cash or
property at ts far vauaton secures absoute equaty among stockhoders wth
respect to ther abty upon stock subscrptons. A stpuaton s a stock subscrpton
whch obgates the subscrber to pay nothng for the shares except as dvdends may
accrue upon the stock s a dscrmnaton n favor of the partcuar subscrber, and
hence, ega. (Natona Exchange Co., Inc. vs. Dexter)
A corporaton has no power to receve a subscrpton upon such terms as w operate
as a fraud upon the other subscrbers as stockhoders by sub|ectng the partcuar
subscrbers to ghter burden, or by gvng hs greater rghts and prveges, or as fraud
upon credtors of the corporaton by wthdrawng or decreasng capta. Therefore, an
agreement between a corporaton and a partcuar subscrber, by whch the
subscrpton s not to be payabe, or s to be payabe n part ony, s ega and vod.
(Natona Exchange Co., Inc. vs. Dexter)
CERTIFICATES OF STOC# AND THEIR TRANSFER
Certcate of stock - the pece of paper or document whch evdences the ownershp of
shares and a convenent nstrument for the transfer of the tte.
Page 44 of 97
Requstes for the ssuance of a certcate of stock:
1. It must be sgned by the presdent or vce-presdent and countersgned by the
secretary or assstant secretary;
2. It must be seaed wth the corporate sea; and
3. The fu amount of subscrpton together wth nterest and expenses (n case of
denquent shares) f any s due, has been pad.
Genera rue: Hoders of subscrbed shares not fuy pad are entted to a the rghts of
a stockhoder.
Exceptons:
1. The shares have been decared denquent; or
2. The stockhoder exercses hs apprasa rght.
The ssuance of a stock certcate s not a condton sne quanon to consder a
subscrber as a stockhoder.
Two modes of transferrng shares of stock:
1. When the corporaton has aready ssued stock certcates - ony by devery of
the certcate or certcates of stock ndorsed by the owner or hs attorney-n-
fact or other person egay authorzed to make the transfer.
2. When the corporaton has not yet ssued certcates of stock - by a duy
notarzed deed.
No transfer sha be vad, except as between the partes, unt the transfer s recorded
n the books of the corporaton.
Unt regstraton s accompshed, the transfer of stock, though vad between the
partes, cannot be ehectve as aganst the corporaton. The corporaton ooks ony
though ts books for the purpose of determnng who ts stockhoders are.
Non-regstraton of a transfer of stock w not, however, ahect the vadty thereof at
east n so far as the contractng partes are concerned.
Reasons for the necessty of the regstraton of transfers of stock:
1. To enabe the corporaton to know who ts stockhoders are;
2. To enabe the transferee to exercse hs rghts as a stockhoder;
3. To ahord the corporaton an opportunty to ob|ect or refuse regstraton of the
transfer n cases aowed by aw (as when t has unpad cams on the shares
transferred);
4. To avod cttous and frauduent transfers; and
5. To protect credtors who have the rght to ook upon stockhoders, n case of
non-payment or watered shares, for the satsfacton of ther cams.
The duty of the corporate secretary to record a vad transfer of shares of stock s
mnstera. Thus, he may be compeed by mandamus.
Genera rue: A certcate of stock s not a negotabe nstrument. A bona-de
purchaser of a certcate of stock w acqure no better tte to the shares than hs
transferor had and w be sub|ect to a rghts, remedes and defenses whch the true
and awfu owner may have.
Page 45 of 97
Excepton: When the genera prncpes of estoppe appy. Thus, f the ega owner
thereof, by hs act or neggence, s estopped from camng ownershp, (as when he
cothes another wth apparent tte or authorty to dspose of the same) a purchaser n
good fath and wthout notce w acqure a better tte as aganst the owner so
estopped.
Shares of stock are persona propertes and the owners thereof have the unbrded
rght to transfer the same to anyone they pease sub|ect ony to reasonabe charter
provsons.
The duty of the corporate secretary to regster a vad transfer of shares s mnstera.
Therefore, mandamus w e to compe regstraton n case the corporaton or the
corporate secretary refuses regstraton. (Rura Bank of Sanas vs. CA) However, the
transferee has no such rght when hs tte to sad shares has no prma face vadty of
s uncertan. (Tay vs. CA)
The rght to transfer shares of stock may not be unreasonaby restrcted or prohbted.
Every owner of corporate shares has the same uncontroabe rght to aenate them
and s under no obgaton from seng them at hs sacrce and for the wefare and
benet of the corporaton and other stockhoders. (Padgett vs. Bobcock & Tempeton;
Fescher vs. Botca Noasco)
However, the rght to transfer may be "reguated" to gve the corporaton protecton
aganst coorabe or frauduent transfer or to enabe t to know who ts stockhoders
are. Aso, as a matter of pocy, the SEC aows the grant of "preferenta rghts" to
exstng stockhoders and/or the corporaton, gvng them the rst opton to purchase
the shares of a seng stockhoder wthn a reasonabe perod not exceedng 30 days
provded that the same s contaned n the artces of ncorporaton and n a of the
stock certcates to be ssued by the corporaton. Ths s consdered "reasonabe" snce
t merey suspends the rght to transfer wthn the perod speced.
A corporaton may cassfy ts shares and grant such "rghts, prveges or restrctons"
provded that such are made n the artces of ncorporaton and sub|ect to reasonabe
terms, condtons or perod. (Go Soc & Sons vs. IAC)
Other restrctons on the rght to transfer shares:
1. It s not vad, except as between the partes, unt recorded n the books of the
corporaton;
2. Share of stock aganst whch the corporaton hods any unpad cam sha not
be transferabe n the books of the corporaton; unpad cams, refer to cams
arsng from unpad subscrpton and not to any ndebtedness whch a
stockhoder may owe the corporaton such as monthy dues;
3. Restrctons requred to be ndcated n the artces of ncorporaton, by-aws
and stock certcates of a cose corporaton;
4. Restrctons mposed by speca aw, such as the Pubc Servce Act requrng
the approva of the government agency concerned f t w vest unto the
transferee 40% of the capta of the pubc servce company;
5. Sae to aens n voaton of maxmum ownershp of shares under the
Natonazaton Laws; and
6. Those covered by reasonabe agreement of the partes.
Transfer - refers to absoute and uncondtona conveyance of the tte and ownershp
of a share of stock to warrant regstraton n the books of the corporaton n order to
bnd the atter and other thrd persons. (Monserrat vs. Ceron)
Ony the transfer or absoute conveyance of the ownershp of the tte to a share need
be entered and noted upon the books of the corporaton n order that such transfer
may be vad, therefore, nasmuch as a chatte mortgage of the aforesad tte s not a
compete and absoute aenaton of the domnon and ownershp thereof, ts entry and
Page 46 of 97
notaton upon the books of the corporaton s not a necessary requste to ts vadty.
(Monserrat vs. Ceron)
Chatte mortgages over shares of stock shoud be regstered both at the owners
domce and n the provnce where the corporaton has ts prncpa omce or pace of
busness n order to bnd thrd persons. The ownershp of shares n a corporaton s
property dstnct from the certcates whch are merey the evdence of such
ownershp. The property n the shares are deemed to be stuated n the provnce n
whch the corporaton has ts prncpa omce or pace of busness. (Chua Guan vs.
Samahang Magsasaka, Inc.)
A transfers of shares shoud be entered n the books of the corporaton. Transfers not
so entered are nvad as to attachng or executon credtors of the assgnors as we as
to the corporaton and to subsequent purchasers n good fath, and ndeed, as to a
persons nterested, except the partes to such transfer. (Uson vs. Dosomto)
A cause contaned n the by-aws of a corporaton whch provdes that the owner of a
share of stock cannot se t to another person except to the defendant corporaton s
utra-vres, voatve of the property rghts of sharehoders, and n restrant of trade.
(Fescher vs. Botca Noasco Co.)
Shares of stock beng regarded as property, the owner of such shares may, as a
genera rue, dspose of them as they see t, uness the corporaton has been
dssoved, or uness the rght to do so s propery restrcted, or the owners prvege of
dsposng of hs shares has been hampered by hs own acton. (Padgett vs. Babcock &
Tempeton)
Any restrcton on a stockhoders rght to dspose of hs shares must be construed
strcty; and any attempt to restran a transfer of shares s regarded as beng n
restrant of trade, n the absence of a vad en upon ts shares, and except to the
extent that vad restrctve reguatons and agreements exst and are appcabe.
Sub|ect ony to such restrctons, a stockhoder cannot be controed n or restraned
from exercsng hs rght to transfer by the corporaton or ts omcers or by other
stockhoders, even though the sae s to a compettor or the company, or to an
nsovent person, or even though a controng nterest s sod to one purchaser.
Therefore, restrctons consstng n the word "non-transferabe" s ega. (Padgett vs.
Babcock & Tempeton)
The suspenson of the power to se shares of stock whch has a beneca purpose,
resuts n the protecton of the corporaton as we as of the ndvdua partes to the
contract, and s reasonabe as to the ength of tme of suspenson s vad. (Lambert vs.
Fox)
An ndorsee of an undevered certcate of stock has no power to ehectvey transfer
the shares to other persons or hs nomnees. For an ehectve transfer of shares of stock
the mode and manner of transfer prescrbed by aw must be foowed. (Embassy Farms,
Inc. vs. CA)
Indorsement of the certcate of stock s a mandatory requrement of aw for an
ehectve transfer of a certcate of stock. (Razon vs. IAC)
The rght of a transferee/assgnee to have stocks transferred to hs name s an nherent
rght owng from hs ownershp of the stocks. The corporatons obgaton to regster
s mnstera. (Rura Bank of Sanas vs. CA)
The pedge of shares of stock does not vest ownershp of such shares to the pedgee.
The pedgor remans the owner durng the pendency of the pedge and pror to
forecosure and sae. Therefore, the pedgee has no rght to demand the regstraton of
the pedged shares n hs name. In order that a wrt of mandamus may ssue, t s
essenta that the person pettonng for the same has a cear ega rght to the thng
demanded and that s t the mperatve duty of the respondent to perform the act
requred. (Tay vs. CA)
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Wthout a stock certcate, whch s the evdence of ownershp of corporate stock, the
assgnment of corporate shares s ehectve ony between the partes to the
transacton. (Nava vs. Peers Marketng)
For a vad transfer of stocks, there must be strct compance wth the mode of transfer
prescrbed by aw.
1. There must be devery of the stock certcate;
2. The certcate must be endorsed by the owner or hs attorney-n-fact or other
persons egay authorzed to make the transfer; and
3. To be vad aganst thrd partes, the transfer must be recorded n the books of
the corporaton.
An assgnment, wthout endorsement and devery, whe vad as among the
partes, does not necessary make the transfer ehectve. The assgnees cannot en|oy
the status of a stockhoder, cannot vote nor be voted for, and w not be entted to
dvdends, nsofar as the assgned shares are concerned. (Rura Bank of Lpa Cty, Inc.
vs. CA)
Devery s not essenta where t appears that the person sought to be hed as
stockhoders are omcers of the corporaton, and have custody of the stock books. (Tan
vs. SEC)
After a vad transfer of share, the rght to have such regstered commences to exst.
However, t woud not foow that sad rght shoud be exercsed mmedatey or wthn
a dente perod. (Won vs. Wack Wack Gof & Country Cub, Inc.)
Certcates of stock are not negotabe nstruments. Consequenty, a transferee under
a forged assgnment acqures no tte whch can be asserted aganst the true owner,
uness hs own neggence has been such as to create an estoppe aganst hm. If the
owner of the certcate has endorsed t n bank, and t s stoen from hm, no tte s
acqured by an nnocent purchaser for vaue. (De Los Santos vs. Repubc)
FORGED AND UNAUTHORIZED TRANSFERS
Forged and unauthorzed transfer - what s forged or unauthorzed s the transfer of the
certcate from the true and awfu owner to another person.
Unauthorzed ssuance of certcate of stock - the act of the corporaton n ssung a
certcate, ether frauduenty or by mstake.
Genera rue: In forged or unauthorzed transfer of stock the purchaser acqures no tte
as aganst the awfu owner and w have no rght or remedy aganst the corporaton
(non-negotabty of stock certcates).
Excepton: If after such forged or unauthorzed transfer, the corporaton ssues a new
certcate and such certcate passes nto the hands of subsequent bona de
purchaser, the atter may rghtfuy acqure tte thereto snce the corporaton w be
estopped to deny the vadty thereof. The subsequent purchaser n good fath took the
shares by vrtue of the genuness of the certcates ssued by the corporaton or of the
representaton made by the corporaton that the same s vad and subsstng and that
the person named theren s a stockhoder of the corporaton. He may therefore,
compe the corporaton to recognze hm as a stockhoder or cam rembursement and
damages aganst the atter.
ISSUANCE OF STOC# CERTIFICATES
Subscrptons to shares of stock are ndvsbe. Thus, no certcate of stock sha be
ssued to a subscrber unt the fu amount of hs subscrpton together wth nterest
and expenses (n case of denquent shares), f any s due, has been pad.
Once a subscrber has pad hs subscrpton n fu, he becomes entted to be ssued a
stock certcate.
Page 48 of 97
The duty of the corporate omcers to ssue stock certcates to those entted s a
mnstera duty enforceabe by mandamus.
A stockhoder whose subscrpton s not fuy pad may not be ssued a stock certcate
for that porton aready pad. (Fua Cun vs. Summers and Chna Bankng Corporaton)
WATERED STOC#
Watered stock - one whch s ssued by the corporaton as fuy pad-up shares when n
fact the whoe amount of the vaue thereof has not been pad.
Drectors or omcers sha be sodary abe wth the stockhoder concerned to the
corporaton and ts credtors for the dherence between the far vaue receved at the
tme of ssuance of the stock and the par or ssued vaue of the same for the foowng
acts:
1. Consentng to the ssuance of watered stocks; or
2. Havng knowedge thereof, fang to forthwth express hs ob|ecton n wrtng
and e the same wth the corporate secretary.
A credtors, whether pror or subsequent to the ssuance of watered stock may
enforce payment of such water.
Ways n whch watered stocks may be ssued:
1. For a monetary consderaton ess than ts par or ssued vaue;
2. For a consderaton n property, tangbe or ntangbe, vaued n excess of ts
far market vaue;
3. Gratutousy or under an agreement that nothng sha be pad at a; or
4. In the guse of stock dvdends when there are no surpus prots of the
corporaton.
Ev ehects of stock waterng:
1. The corporaton s deprved of ts capta thereby hurtng ts busness
prospects, nanca capabty and responsbty;
2. Stockhoders who pad ther subscrptons n fu, or promsed to pay the same,
are n|ured and pre|udced by the reducton of ther proportonate nterest n
the corporaton; and
3. Present and future credtors are deprved of corporate assets for the protecton
of ther nterest.
Two theores advanced as the bass for the abty on water stocks:
1. Trust fund doctrne - treatng the capta of the corporaton, ncusve of the
unpad porton of subscrptons to sad capta, as a "trust fund" whch the
credtors have a rght to ook up to for the satsfacton of ther cams.
2. Fraud or msrepresentaton theory - abty s based on the fase
representaton made by the corporaton and the stockhoder concerned to the
credtors that the true par vaue or ssued prce of the shared has been pad or
promsed to be pad fu.
Ehects of ssuance of watered stock:
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1. As to the corporaton - when a corporaton s guty of utra-vres acts whch
consttute an n|ury to or fraud upon the pubc, or whch w tend to n|ure or
defraud the pubc, the State may nsttute a quo-warranto proceedng to forfet
ts charter for the msuse or abuse of ts franchse.
2. As between the corporaton and the subscrber - the subscrpton s vod; the
subscrber s abe to pay the fu par or ssued vaue thereof, to render t vad
and ehectve.
3. As to the consentng stockhoders - they are estopped from rasng any
ob|ecton thereto.
4. As to dssentng stockhoder - n vew of the duton of ther proportonate
nterest n the corporaton, they may compe the payment of the "water" n the
stock sodary aganst the responsbe and consentng drectors and omcers
ncusve of the hoder of the watered stock.
5. As to credtors - they may enforce payment of the dherence n the prce, or
the water n the stock, sodary aganst the responsbe drectors/omcers and
the stockhoders concerned.
6. As aganst transferees of the watered stock - hs rght s the same as that of hs
transferor. If however, a certcate of stock has been ssued and duy ndorsed
to a bona de purchaser, wthout knowedge, actua or constructve, the atter
cannot be hed abe, at east as aganst the corporaton, snce he took the
shares on reance of the msrepresentaton made by the corporaton that the
stock certcate s vad and subsstng. Ths s because a corporaton s
prohbted from ssung certcates of stock unt the fu vaue of the
subscrptons have been pad and coud not, therefore, deny the vadty of the
stock certcate t ssued as aganst a purchaser n good fath.
Subscrbers for stock sha pay to the corporaton nterest on a unpad subscrptons
from the date of subscrpton, f so requred by, and at the rate of nterest xed n the
by-aws. If no rate of nterest s xed n the by-aws, such rate sha be deemed to be
the ega rate.
ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
When unpad subscrpton or any percentage thereof, together wth nterest f requred,
sha be pad:
1. On the date or dates xed n the contract of subscrpton; or
2. On the date or dates that may be speced by the board of drectors pursuant
to a "ca" decarng any or a unpad porton thereof to be so payabe.
Two possbe remedes avaabe to the corporaton to enforce payment of unpad
subscrpton:
1. By board acton (denquency sae);
2. By a coecton case n court.
Faure or refusa of the corporaton, through ts board of drectors to enforce or coect
payment of unpad subscrpton w not prevent the credtors or the recever of the
corporaton to nsttute a court acton to coect the unpad porton thereof (trust fund
doctrne).
Procedure for the enforcement of payment through board acton:
1. The board of drectors, by a forma resouton, decares the whoe or any
percentage of unpad subscrptons to be due and payabe on a specc date.
However, f the contract of subscrpton provdes the date or dates when
payment s due, no "ca" decaraton of the board s necessary;
2. The stockhoders concerned are gven notce of the board resouton by the
corporaton ether personay or by regstered ma. Pubcaton of the notce of
Page 50 of 97
ca s not requred uness the by-aws provde otherwse. Notce s not kewse
necessary f the contract of the subscrpton stpuates a specc date when
any unpad porton s due and payabe;
3. Payment sha be made n the date speced n the ca or on the date provded
for n the contract of subscrpton;
4. Faure to pay on the date requred n the ca or as speced n the contract of
subscrpton w render the entre baance due and payabe and makng the
stockhoder abe for the nterest;
5. If wthn 30 days from the date stated n the ca or as may be provded n the
contract of subscrpton no payment s made, a the stock covered by the
subscrpton sha become denquent and sha be sub|ect to a denquency
sae;
6. The board, by resouton, orders the sae of the denquent stock statng the
amount due and the date, tme and pace of the sae;
7. The sae sha be made not ess than 30 days nor more than 60 days from the
date the stocks became denquent;
8. Notce of the sae, wth the copy of the board resouton shoud be sent to
every denquent stockhoder ether personay or by regstered ma;
9. Pubcaton of the notce of sae must be made once a week for two
consecutve weeks n the newspaper of genera crcuaton n the provnce or
cty where the prncpa omcer s ocated;
10. Sae at pubc aucton f no payment s made by the denquent stockhoder n
favor of the bdder who ohered to pay the fu amount of the baance n the
subscrpton, ncusve of nterest, cost of advertsement and expenses for the
smaest number of shares;
11. Regstraton or transfer of the shares of stock n the name of the bdder and
correspondng ssuance of the stock certcate coverng the shares successfuy
bdded;
12. If there be any remanng shares, the same sha be credted n favor of the
denquent stockhoder who sha be entted to the ssuance of a certcate of
stock coverng such shares;
13. If there s no bdder at the pubc aucton who ohers to pay the tota amount
due pus nterest, cost and expenses, the corporaton may, sub|ect to the
provsons of the Code, bd for the same and the tota amount due sha be
credted or pad n fu n the corporate books; and
14. The shares so purchased by the corporaton sha be vested n the atter as
treasury shares.
Hghest bdder - s such bdder who sha oher to pay the fu amount of the baance on
the subscrpton together wth accrued nterest, cost of advertsement and expenses of
sae, for the smaest number of shares or fracton of a share.
Grounds to queston the denquency sae:
1. Irreguarty or defect n the notce of sae; or
2. Irreguarty or defect n the sae tsef.
Two condtons before an acton to recover denquent stocks rreguary sod may be
aowed:
1. The party seekng to mantan such acton rst pays or tenders to the party
hodng the stock the sum for whch the same was sod, wth nterest from the
date of the sae at the ega rate; and
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2. The acton sha be commenced by the ng of a compant wthn sx months
from the date of the sae.
A "ca" s a condton precedent before the rght of acton to nsttute a recovery sut
accrues. A demand s requred before a debtor may ncur a deay n the performance of
hs obgaton.
Instances when a "ca" s not necessary:
1. The contract of subscrpton provdes for a date or dates when payment s due;
or
2. The corporaton has become nsovent.
A subscrpton for shares of stock does not requre an express promse to pay the
amount subscrbed, as the aw mpes a promse to pay on the part of the subscrber.
The subscrber s as much bound to pay the amount of the share subscrbed by hm as
he woud be to pay any other debt, and the rght of the company to demand payment
s no ess ncontestabe. (Veasco vs. Pozat)
Notwthstandng the fact that the by-aws of the corporaton provdes for a method for
the coecton of the unpad porton of stock subscrptons, the corporaton may st
make use of the methods provded by the Code. (De Sva vs. Abotz & Co.)
Genera rue: A vad and bndng subscrpton for stock of a corporaton cannot be
canceed so as to reease the subscrber from abty thereon.
Excepton: Consent of a the stockhoders s gven.
Exceptons to the excepton:
1. Bona de compromse;
2. Set-oh of a debt due from the corporaton; or
3. Reease supported by consderaton. (Lngayen Guf vs. Batazar)
The NLRC has no |ursdcton to determne ntra-corporate dsputes between the
stockhoder and the corporaton as n the matter of unpad subscrptons. (Apocada vs.
NLRC)
Unpad subscrptons are not due and payabe unt a ca s made by the corporaton
for payment. (Apocada vs. NLRC)
Subscrpton to the capta of a corporaton consttutes a fund to whch the credtors
have a rght to ook for satsfacton of ther cams and that the assgnee n nsovency
can mantan an acton upon any unpad stock subscrpton n order to reaze assets for
the payment of ts debt. (Lumanan vs. Cura)
The Presdent of the Phppnes s devod of the prerogatve of suspendng the
operaton of any stature or any of ts tems. Thus the Presdent cannot condone the
payment of stock subscrptons n the event that the counterpart fund to be nvested
by the government woud not be avaabe. (PNB vs. Btuok Sawm, Inc.)
A stockhoder s personay abe for the nanca obgatons of a corporaton to the
extent of hs unpad subscrpton. (Edward Keer & Co., Ltd. vs. Cob Group Marketng,
Inc.)
The subscrpton to capta stock of the corporaton, uness otherwse stpuated, s not
payabe at the moment of the subscrptons but on a subsequent date whch may be
xed by the corporaton. (Garca vs. Suarez)
Shares of stock become denquent when no payment s made on the baance of a or
any porton of the subscrpton on the date or dates xed n the contract of
subscrpton wthout need of ca, or on the date speced by the board of drectors
pursuant to a ca made by t.
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Genera rue: No denquent stock sha not be entted to:
1. Be voted for or to vote;
2. Representaton at any stockhoder's meetng; or
3. Any of the rghts of a stockhoder.
Excepton: Denquent stocks are entted to the rght to dvdends (any cash dvdends
due on denquent stockhoders sha rst be apped to the unpad baance on hs
subscrpton pus cost and expenses, whe stock dvdends sha be wthhed unt hs
unpad subscrpton s pad n fu).
Genera rue: Hoders of subscrbed shares not fuy pad whch are not denquent sha
have a the rghts of a stockhoder.
Excepton: Shares of stock not fuy pad are not entted to be ssued a certcate of
stock.
Requrements and procedure for ssuance of new certcates of stock n eu of those
ost, stoen or destroyed:
1. The regstered owner of a certcate of stock n a corporaton or hs ega
representatve sha e wth the corporaton an amdavt n trpcate settng
forth:
a. The crcumstances as to how the certcate was ost, stoen or
destroyed;
b. The number of shares represented by such certcate;
c. The sera number of the certcate; and
d. The name of the corporaton whch ssued the same.
2. He sha aso submt such other nformaton and evdence whch he may deem
necessary.
3. Pubcaton of a notce n a newspaper of genera crcuaton pubshed n the
pace where the corporaton has ts prncpa omce, once a week for 3
consecutve weeks at the expense of the regstered owner of such certcate of
stock.
4. If no contest has been presented wthn 1 year from the date of the ast
pubcaton, the rght to make such contest sha be barred and sad
corporaton sha cance n ts books the certcate of stock whch has been
ost, stoen or destroyed and ssue n eu thereof new certcate of stock.
However, the regstered owner may e a bond or other securty, ehectve for a
perod of 1 year, for such amount and n such form and wth such suretes as
may be satsfactory to the board of drectors, n whch case a new certcate
may be ssued even before the expraton of the one 1 year perod.
5. If a contest has been presented to sad corporaton or f an acton s pendng n
court regardng the ownershp of sad certcate of stock, the ssuance of the
new certcate of stock sha be suspended unt the na decson by the court
regardng the ownershp of sad certcate of stock.
Except n case of fraud, bad fath, or neggence on the part of the corporaton
and ts omcers, no acton may be brought aganst any corporaton whch sha
have ssued certcate of stock n eu of those ost, stoen or destroyed
pursuant to the procedure above-descrbed.
RIGHTS AND LIABILITIES OF STOC#HOLDERS
Certan basc rghts for the protecton of stockhoders:
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1. Partcpaton n the management of the corporate ahars by exercsng
ther rght to vote and be voted upon ether personay or by proxy;
2. To enter nto a votng trust agreement;
3. To receve dvdends and to compe ther decaraton f warranted;
4. To transfer shares of stock sub|ect ony to reasonabe restrctons
ncusve of the rght of the transferee to compe the regstraton of the transfer
n the books of the corporaton;
5. To be ssued a certcate of stock for fuy pad-up shares;
6. To exercse pre-emptve rghts;
7. To exercse ther apprasa rght;
8. To nsttute and e a dervatve sut;
9. To recover shares of stock unawfuy sod for denquency;
10. To nspect the books of the corporaton;
11. To be furnshed the most recent nanca statements of the
corporaton;
12. To be ssued a new stock certcate n eu of the ost or destroyed one;
13. To have the corporaton dssoved;
14. To partcpate n the dstrbuton of the assets of the corporaton upon
dssouton;
15. In the case of a cose corporaton, to petton the SEC to arbtrate a
deadock; and
16. In the case of a cose corporaton, to wthdraw therefrom, for any
reason, and to compe the purchase of hs shares.
Certan obgatons and abtes of stockhoders:
1. To pay the corporaton the baance of hs unpad subscrptons;
2. To pay nterest on hs unpad subscrpton f requred by the by-aws or
by the contract of subscrpton;
3. To answer to credtors for the unpad porton of ther subscrpton;
4. To answer the "water" n ther stocks;
5. To be abe, as genera partners, for a debts, abtes and damages
of ostensbe corporatons; and
6. In case of a cose corporaton, to be personay abe for corporate torts
when they actvey partcpate n the management of the corporaton.
CHAPTER ,,: CORPORATE BOO#S AND RECORDS
Records to be kept and mantaned by the corporaton:
1. Records of a busness transactons - whch ncude, among others,
|ournas, edgers, contracts, vouchers and recepts, nanca statements and
other books of accounts, ncome tax returns, and votng trust agreement whch
must be kept and carefuy preserved at ts prncpa omce.
2. Mnutes of a meetngs of stockhoders or members and of the
drectors or trustees - settng forth n deta the tme and pace of hodng the
meetng, how authorzed, the notce gven, whether the meetng was reguar or
speca, f speca ts ob|ect, those present and absent, and every act done or
ordered done thereat whch must kewse be kept at the prncpa omce of the
corporaton.
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3. Stock and transfer book - showng the names of the stockhoders, the
amount pad or unpad on a stock for whch subscrpton has been made, a
statement of every aenaton, sae or transfer of stock made, the date thereof,
and by and to whom made whch must be kept ether n the prncpa omce of
the corporaton or n the omce of ts stock transfer agent.
These corporate books and records, ncusve of a busness transactons and mnutes
of meetngs, are sub|ect to nspecton by any drector, trustee, stockhoder or member
of the corporaton at reasonabe hours on busness days and a copy of excerpts of sad
records may be demanded.
Genera rue: Any omcer or agent of the corporaton who refuses to aow the
nspecton of corporate books and records, or any drector or trustee who through a
resouton by the board votes for such refusa sha be abe for damages and sha be
guty of an ohense whch sha be punshabe under Sec. 144.
Excepton. It sha be a defense that the person demandng nspecton
1. Has mpropery used any nformaton secured through any pror examnaton of
the records or mnutes of such corporaton or of any other corporaton; or
2. Was not actng n good fath or for a egtmate purpose n makng hs demand.
Wthn ten (10) days from recept of a wrtten request of any stockhoder or member,
the corporaton sha furnsh to hm ts most recent nanca statement, whch sha
ncude a baance sheet as of the end of the ast taxabe year and a prot or oss
statement for sad taxabe year, showng n reasonabe deta ts assets and abtes
and the resut of ts operatons.
At the reguar meetng of stockhoders or members, the board of drectors or trustees
sha present to such stockhoders or members a nanca report of the operatons of
the corporaton for the precedng year, whch sha ncude nanca statements, duy
sgned and certed by an ndependent certed pubc accountant. However, f the
pad-up capta of the corporaton s ess than P50,000.00, the nanca statements
may be certed under oath by the treasurer or any responsbe omcer of the
corporaton.
The bass of the rght of the stockhoder to nspect the books and records of the
corporaton for a proper purpose s to protect hs nterest as a stockhoder.
Genera rue: The rght of stockhoders to examne corporate books extends to a whoy
owned subsdary whch s competey under the contro and management of the parent
company where he s such a stockhoder. (Gokongwe vs. SEC)
Excepton: The subsdary and the parent are egay beng operated as separate and
dstnct enttes.
The rght to nspect corporate books, athough persona, may be exercsed through an
agent or representatve snce t may be unavang n many nstances. (W.G. Phpotts
vs. Phppne Manufacturng Co.)
The corporaton, or ts responsbe drectors and omcers cannot unduy restrct the
rght of nspecton and may not arbtrary set a few days of the year wthn whch the
stockhoder may make the nspecton. (Pardo vs. Hercues Lumber, Co.)
Drectors of a corporaton have the unquaed rght to nspect the books and records
of the corporaton at a reasonabe hours. However, there s no absoute rght to
secure certed copes of the mnutes of the corporaton unt these mnutes have been
wrtten up and approved by the drectors. (Vegaruth vs. Isabea Sugar Co., Inc.)
It s a requred condton for the nspecton of corporate books that the one requestng
t must not have been guty of usng mpropery any nformaton secured through a
Page 55 of 97
pror examnaton and that the person askng for such examnaton must be actng n
good fath and for a egtmate purpose n makng hs demand. (Gonzaes vs. PNB)
Remedes of a stockhoder who s dened nspecton of corporate books:
1. Mandamus;
2. Damages ether aganst the corporate or the responsbe omcer; or
3. Crmna compant based on Sec. 144 of the Code.
CHAPTER ,2: MERGER AND CONSOLIDATION
Merger - a unon ehected by absorbng one or more exstng corporatons by another
whch survves and contnues the combned busness; the untng of two or more
corporatons by the transfer of property to one of them whch contnues n exstence,
the other or others beng dssoved and merged theren.
Consodaton - the untng or amagamaton of two or more exstng corporatons to
form a new corporaton and the termnaton of exstence of the od ones.
Requrements and procedure for merger or consodaton:
1. The board of drectors or trustees of each consttuent corporaton sha
approve a pan of merger or consodaton settng forth the foowng:
a. The names of the consttuent corporatons;
b. The terms of the merger or consodaton and the mode of carryng the
same nto ehect;
c. A statement of changes, f any, n the artces of ncorporaton; and
d. Other provsons deemed necessary and desrabe.
2. Approva of the pan by the stockhoders representng 2/3 of the
outstandng capta stock or 2/3 of the members n a non-stock corporatons of
each consttuent corporaton at separate corporate meetngs caed for the
purpose;
3. Pror notce of such meetng, wth a copy or summary of the pan of
merger or consodaton sha be gven to a stockhoders or members at east
2 weeks pror to the schedued meetng, ether personay or by regstered ma
statng the purpose thereof;
4. Executon of the artces of merger or consodaton by each consttuent
corporaton to be sgned by the presdent or vce-presdent and certed by the
corporate secretary or assstant secretary settng forth the foowng:
a. The pan of the merger or consodaton;
b. As to stock corporatons, the number of shares outstandng, or n the
case of non-stock corporatons, the number of members; and
c. As to each corporaton, the number of shares or members votng for
and aganst such pan, respectvey.
5. Submsson of the artces of merger or consodaton n quadrupcate
to the SEC sub|ect to the requrement of that f t nvoves corporatons under
the drect supervson of any other government agency or governed by speca
aws the favorabe recommendaton of the government agency concerned sha
rst be secured; and
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6. Issuance of the certcate of merger or consodaton by the SEC at
whch tme the merger or consodaton sha be ehectve. If the pan, however,
s beeved to be contrary to aw, the SEC sha set a hearng to gve the
corporatons concerned an opportunty to be heard upon proper notce and
thereafter, the SEC sha proceed as provded n the Code.
Any amendment to the pan of merger or consodaton must be approved by ma|orty
vote of the respectve boards of drectors or trustees of a the consttuent corporatons
and rated by the amrmatve vote of stockhoders representng at east 2/3 of the
outstandng capta stock or of 2/3 of the members of each of the consttuent
corporatons.
Mergers and consodatons may not be entered nto for the purpose of crcumventng
the aw aganst monopoes and ega combnatons n restrant of trade or for
purposes of fraud.
Ehects of merger or consodaton:
1. There w ony be a snge corporaton. In case of merger, the survvng
corporaton, or n case of consodaton, the consodated corporaton;
2. Termnaton of the corporate exstence of the consttuent corporatons, except
that of the survvng or the consodated corporaton;
3. The survvng or the consodated corporaton w possess a the rghts,
prveges, mmuntes and powers and sha be sub|ect to a the dutes and
abtes of a corporaton organzed under the Code;
4. The survvng or the consodated corporaton sha possess a the rghts,
prveges, mmuntes and franchses of the consttuent corporatons; and a
property and a recevabes due on whatever account, ncudng subscrptons
to shares and other choses n acton, and a and every other nterest of, or
beongng to, or due to each consttuent corporaton, sha be deemed
transferred to and vested n such survvng or consodated corporaton wthout
further act or deed; and
5. The survvng or consodated corporaton sha be responsbe and abe for a
the abtes and obgatons of each of the consttuent corporatons; and any
pendng cam, acton or proceedng brought by or aganst any of such
consttuent corporatons may be prosecuted by or aganst the survvng or
consodated corporaton. The rghts of credtors or ens upon the property of
any of such consttuent corporatons sha not be mpared by such merger or
consodaton.
Merger or consodaton does not become ehectve upon the mere agreement of the
consttuent corporatons. It sha be ehectve ony upon the ssuance of a certcate of
merger. (Assocated Bank vs. CA)
CHAPTER ,3: APPRAISAL RIGHT
Apprasa rght - the method of payng a sharehoder for the takng of hs property; the
statutory means whereby a stockhoder can avod the converson of hs property nto
another property not of hs own choosng. The purpose of the rght s to protect the
property rghts of dssentng stockhoders from actons by the ma|orty sharehoders
whch aters the nature and character of ther nvestment. It s a rght granted to
dssentng stockhoders on certan corporate or busness decsons to demand payment
of the far market vaue of ther shares.
Instances when a stockhoder may have the rght to dssent and demand payment of
the far vaue of hs shares:
1. In case any amendment to the artces of ncorporaton has the ehect of:
a. Changng or restrctng the rghts of any stockhoder or cass of shares;
Page 57 of 97
b. Authorzng preferences n any respect superor to those of outstandng
shares of any cass; or
c. Extendng or shortenng the term of corporate exstence.
2. In case of sae, ease, exchange, transfer, mortgage, pedge or other
dsposton of a or substantay a of the corporate property and assets as
provded n the Code; and
3. In case of merger or consodaton.
Other nstances provded for n the Code:
1. Investment of corporate funds n another corporaton or busness
or for any other purpose;
2. In a cose corporaton, a stockhoder has the rght to compe the
corporaton for any reason to purchase hs shares at ther far vaue whch sha
not be ess than the par or ssued vaue when the corporaton has sumcent
assets to cover t debts and abtes, excusve of capta stock.
Requrements and procedure for the exercse of the apprasa rght:
1. The stockhoder must have voted aganst the proposed corporate acton n any
of the nstances aowed by aw for the exercse of the apprasa rght;
2. A wrtten demand for payment must be made by the dssentng stockhoder
wthn 30 days after the date on whch the vote was taken. Faure to make the
demand wthn the sad perod sha be deemed a waver of the apprasa rght;
3. Surrender of the certcate of stock by the dssentng stockhoder for notaton
n the corporate books and payment by the corporaton of the far market vaue
of sad shares as of the day pror to the date on whch the vote was taken,
excudng any apprecaton or deprecaton n antcpaton of such corporate
acton. If the stockhoder and the corporaton cannot agree on the far market
vaue thereof, the same sha be determned by apprasers;
4. The corporaton must have unrestrcted retaned earnngs n t books to cover
the payment of the far vaue of the shares of the dssentng stockhoder;
5. Upon payment of the shares by the corporaton, the dssentng stockhoder
sha transfer hs shares to the corporaton.
Ehects of demand for payment of the far vaue of a stockhoders shares:
1. From the tme of demand for payment - a rghts accrung to such shares,
ncudng votng and dvdend rghts, are suspended, except the rght to receve
payment.
2. After ether the rght ceases or the purchase of the sad shares by the
corporaton - a rghts accrung to such shares are restored and a dvdend
dstrbutons whch woud have accrued on the shares sha be pad to the
hoder thereof.
If the dssentng stockhoder s not pad the vaue of hs shares wthn 30 days after the
award, hs votng and dvdend rghts sha mmedatey be restored.
No demand for payment may be wthdrawn uness the corporaton consents thereto.
Instances when the rght to payment ceases:
1. The stockhoder wthdraws hs demand for payment wth the consent of the
corporaton;
2. The proposed corporate acton s abandoned or rescnded by the corporaton;
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3. The proposed corporate acton s dsapproved by the SEC where such approva
s necessary;
4. The SEC determnes that such stockhoder s not entted to the apprasa rght;
5. The stockhoder fas wthn 10 days after demandng payment for hs shares to
submt the certcates of stock representng hs shares to the corporaton for
notaton and the corporaton, at its option, termnates the rght.
6. The shares represented by the certcates bearng such notaton are
transferred and the certcates subsequenty canceed.
Genera rue: The costs and expenses of apprasa sha be borne by the corporaton.
Excepton: The far vaue ascertaned by the apprasers s approxmatey the same as
the prce whch the corporaton ohered to pay the stockhoder.
Genera rue: In an acton to recover the far vaue of stocks, a costs and expenses
sha be assessed aganst the corporaton.
Excepton: The refusa of the stockhoder to receve payment s un|usted.
A dssentng stockhoder s requred wthn 10 days after demandng payment for hs
shares to submt the stock certcates representng hs shares to the corporaton for
notaton. Hs faure to do so sha, at the option of the corporation, termnate hs
rghts.
The dssentng stockhoder s not prohbted from seng, transferrng or assgnng hs
shares. If such be the case, once the certcates are subsequenty canceed, the rghts
of the transferor as a dssentng stockhoder sha cease and the transferee sha have
a the rghts of a reguar stockhoder; and a dvdend dstrbutons whch woud have
accrued on such shares sha be pad to the transferee.
A drector who exercses hs apprasa rght reman to be a drector unt hs shares are
no onger regstered n hs name.
A stockhoder whose subscrpton s not fuy pad s st entted to exercse hs
apprasa rght.
CHAPTER ,4: NON"STOC# CORPORATIONS
Non-stock corporaton - one where no part of ts ncome s dstrbutabe as dvdends to
ts members, trustees, or omcers, sub|ect to the provsons of the Code on dssouton.
Even f a corporaton has capta stock dvded nto shares t s consdered as non-stock
so ong as t does not dstrbute dvdends to ts members and omcers. (CIR vs. Cub
Fpno de Cebu)
Any prot whch a non-stock corporaton may obtan as an ncdent to ts operatons
sha, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for whch the corporaton was organzed.
The fact that a non-prot corporaton earns a prot, gan or ncome for the corporaton
or members does not make t a prot-makng corporaton where such prot or ncome
s used for the purpose set forth n the artces of ncorporaton and s not dstrbutabe
to ts ncorporators, members or omcers, snce mere ntangbe or pecunary benets of
the members does not change the nature of the corporaton.
The determnaton of whether or not a non-stock corporaton can engage n prot-
makng busness or actvty depends argey on the purpose or purposes ndcated n
the artces of ncorporaton. If the busness actvty s authorzed n the sad artces,
necessary, ncdenta or essenta thereto, the same may be undertaken by the
corporaton, otherwse, not, as t woud be an utra-vres act.
Purposes: Chartabe, regous, educatona, professona, cutura, fraterna, terary,
scentc, soca, cvc servce, or smar purposes, ke trade, ndustry, agrcutura and
ke chambers, or any combnaton thereof (non-excusve).
Page 59 of 97
The provsons governng stock corporaton, when pertnent, sha be appcabe to non-
stock corporatons.
MEMBERSHIP AND VOTING RIGHTS
Genera rue: Each member, regardess of cass, sha be entted to one vote (no
cumuatve votng).
Excepton: The rght to vote s mted, broadened or dened n the artces of
ncorporaton or the by-aws.
Genera rue: A member may vote by proxy.
Excepton: Proxy votng s dened n the artces of ncorporaton or the by-aws.
Votng by ma or other smar means by members of non-stock corporatons may be
authorzed by the by-aws of non-stock corporatons wth the approva of, and under
such condtons whch may be prescrbed by the SEC.
Genera rue: Membershp n a non-stock corporaton and a rghts arsng therefrom
are persona and non-transferabe.
Excepton: The artces of ncorporaton or the by-aws provde otherwse.
Membershp n non-stock corporatons may be acqured by compyng wth the
provsons of ts rues prescrbed n the by-aws. In absence of restrctons, a non-stock
corporaton may act arbtrary and excude any persons t may see t, and the courts
have no power to nterfere. It s free to x quacatons for membershp and to provde
for termnaton of membershp.
Genera rue: The board of drectors of a non-stock corporaton sha have the authorty
to admt members.
Excepton: The by-aws provde otherwse.
Membershp sha be termnated n the manner and for the causes provded n the
artces of ncorporaton or the by-aws.
Genera rue: Termnaton of membershp sha have the ehect of extngushng a
rghts of a member n the corporaton or n ts property.
In termnatng membershp, strct compance wth the manner and procedure ad
down n the by-aws must be observed, otherwse t may render the expuson
nehectve and nvad. (Carmoan vs, PED)
In absence of any provson n the artces of ncorporaton or by-aws reatve to the
manner and causes of termnaton, the power s nonetheess nherent n the foowng
stuatons:
1. When an ohense s commtted whch, athough t has no mmedate reaton to
a members duty as such, t s so nfamous as to render hm unt for socety of
honest men, and whch s ndctabe at common aw;
2. When the ohense s a voaton of hs duty as a member of the corporaton; and
3. When the ohense s of a mxed nature, beng both aganst hs duty as a
member of the corporaton, and aso ndctabe at common aw.
As to whether or not a member shoud be expeed or mantaned s the estabshed
rght of the corporaton to determne and the courts are wthout authorty to strp a
member of hs membershp wthout cause.
Courts cannot strp a member of a non-stock corporaton of hs membershp theren
wthout cause. Otherwse, that woud be an unwarranted and undue nterference wth
the we estabshed rght of a corporaton to determne ts membershp. (Chnese
YMCA vs. Chng)
Page 60 of 97
TRUSTEES AND OFFICERS
Non-stock or speca corporatons may desgnate ther governng boards by any name
through ther artces of ncorporaton or ther by-aws.
Genera rue: The number of trustees n a non-stock corporaton may exceed 15.
Genera rue: The term of omce of the board of trustees may be staggered. They sha
cassfy themseves n order that 1/3 of ther number sha expre every year and
subsequent eectons of trustees comprsng 1/3 sha be hed annuay.
Ouacatons of trustees:
1. He s a member of the corporaton;
2. Ma|orty thereof must be resdents of the Phppnes; and
3. Other quacatons as may be provded for n the by-aws.
Genera rue: omcers of a non-stock corporaton may be drecty eected by the
members.
Trustees eected to vacances occurrng before the expraton of a partcuar term
hod omce ony for the unexpred perod.
Genera rue: The courts w not nterfere on matters nvovng the nterna ahars of an
unncorporated assocaton such as eectons, the manner by whch t was conducted
and the resuts thereof. (Lons Cub Internatona vs. CA)
Exceptons:
1. There s fraud, oppresson or bad fath;
2. The acton companed of s caprcous, arbtrary or un|usty dscrmnatory;
3. Property and cv rghts are nvaded;
4. The proceedngs are voatve of the aws of socety, or the aw of the and, as
by deprvng a person of due process of aw;
5. There s ack of |ursdcton on the part of the trbuna conductng the
proceedngs;
6. The organzaton exceeds ts powers;
7. The proceedngs are ega; or
8. An ncorporated assocaton or ts members ava of the remedy of nsttutng
an ntra-corporate dspute case.
Genera rue: Reguar or speca meetngs of members of a non-stock corporaton sha
be hed n the cty or muncpaty where the prncpa omce s ocated, and f
practcabe n the prncpa omce of the corporaton.
Exceptons:
1. The by-aws of the corporaton provde otherwse; and
2. Metro Mana s consdered a cty or muncpaty.
Requrements for meetngs hed outsde the ocaton of the prncpa omce as provded
for by the by-aws:
1. Proper notce s sent to a members ndcatng the date, tme and pace of the
meetng; and
Page 61 of 97
2. The pace of meetng must be wthn the Phppnes.
Genera rue: A proceedngs and busness transactons at a meetng mpropery hed
or caed are nvad.
Excepton: A of the members are present or duy represented at the meetng.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Rues of dstrbuton:
1. A abtes and obgatons of the corporaton sha be pad, satsed and
dscharged, or adequate provson sha be made therefore;
2. Assets hed by the corporaton upon a condton requrng return, transfer or
conveyance, and whch condton occurs by reason of the dssouton, sha be
returned, transferred or conveyed n accordance wth such requrements;
3. Assets receved and hed by the corporaton sub|ect to mtatons permttng
ther use ony for chartabe, regous, benevoent, educatona or smar
purposes, but not hed upon a condton requrng return, transfer or
conveyance by reason of the dssouton, sha be transferred or conveyed to
one or more corporatons, socetes or organzatons engaged n actvtes n
the Phppnes substantay smar to those of the dssovng corporaton
accordng to a pan of dstrbuton;
4. Assets other than those mentoned n the precedng paragraphs, f any, sha
be dstrbuted n accordance wth the provsons of the artces of ncorporaton
or the by-aws, to the extent that the artces of ncorporaton or the by-aws,
determne the dstrbutve rghts of members, or any cass or casses of
members, or provde for dstrbuton; and
5. In any other case, assets may be dstrbuted to such persons, socetes,
organzatons or corporatons, whether or not organzed for prot, as may be
speced n a pan of dstrbuton.
Procedure and requrements for a pan of dstrbuton of assets:
1. Ma|orty vote of the board of trustees adoptng a pan of dstrbuton;
2. Approva of such pan by at east 2/3 of the members havng votng rghts
present or represented by proxy at a reguar or speca meetng for that
purpose; and
3. Pror wrtten notce settng forth the proposed pan of dstrbuton or a
summary thereof and the date, tme and pace of such meetng sha be gven
to each member entted to vote, wthn the tme and n the manner provded
n the Code for the gvng of notce of meetngs to members.
CHAPTER ,5: CLOSE CORPORATIONS
Cose corporaton - one whose artces of ncorporaton provde that:
1. A the corporaton's ssued stock of a casses, excusve of treasury shares,
sha be hed of record by not more than a speced number of persons, not
exceedng 20;
2. A the ssued stock of a casses sha be sub|ect to one or more speced
restrctons on transfer permtted by Tte XV of the Code; and
3. The corporaton sha not st n any stock exchange or make any pubc oherng
of any of ts stock of any cass.
Absent any of the three requstes, a corporaton cannot be consdered a cose
corporaton and woud thus be governed by the genera provsons on ordnary
corporatons.
Page 62 of 97
A corporaton does not become a cose corporaton |ust because a husband and wfe
owns 99.86% of the capta stock. (San |uan Structura Stee vs. CA)
A corporaton sha not be deemed a cose corporaton when at east 2/3 of ts voting
stock or voting rghts s owned or controed by another corporaton whch s not a
cose corporaton.
Genera rue: Any corporaton may be ncorporated as a cose corporaton.
Exceptons:
1. Mnng or o companes;
2. Stock exchanges;
3. Banks;
4. Insurance companes;
5. Pubc uttes;
6. Educatona nsttutons; and
7. Corporatons decared to be vested wth pubc nterest.
Sec. 140 authorzes the NEDA to recommend to the egsature the settng of maxmum
mts to famy or group ownershp of stock n corporaton vested wth pubc nterest,
and the determnaton of whether or not t shoud be vested wth pubc nterest s
wthn ts doman.
The provsons of Tte XV of the Code sha prmary govern cose corporatons.
However, the provsons of other Ttes of the Code appy suppetory.
A cose corporaton may partake the nature of a partnershp n that the stockhoders
thereof take an actve roe n the management of the corporate ahars ether as
drectors, omcers or even perhaps as partners n management whch s akn to the
partnershp form of busness.
The artces of ncorporaton of a cose corporaton may provde:
1. For a casscaton of shares or rghts and the quacatons for ownng or
hodng the same and restrctons on ther transfers as may be stated theren;
2. For a casscaton of drectors nto one or more casses, each of whom may be
voted for and eected soey by a partcuar cass of stock;
3. For a greater quorum or votng requrements n meetngs of stockhoders or
drectors;
4. That the busness of the corporaton sha be managed by the stockhoders of
the corporaton rather than by a board of drectors. So ong as ths provson
contnues n ehect:
a. No meetng of stockhoders need be caed to eect drectors;
b. Uness the context ceary requres otherwse, the stockhoders of the
corporaton sha be deemed to be drectors; and
c. The stockhoders of the corporaton sha be sub|ect to a abtes of
drectors.
5. That a omcers or empoyees or that speced omcers or empoyees sha be
eected or apponted by the stockhoders, nstead of by the board of drectors.
In order to bnd purchasers n good fath, restrctons on the rght to transfer shares
must appear n:
1. The artces of ncorporaton;
2. The by-aws; and
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3. The certcate of stock.
Restrctons on the rght to transfer shares sha not be more onerous than grantng the
exstng stockhoders or the corporaton the opton to purchase the shares of the
transferrng stockhoder wthn reasonabe terms, condtons or perod. If upon the
expraton of sad perod, the exstng stockhoders or the corporaton fas to exercse
the opton to purchase, the transferrng stockhoder may se hs shares to any thrd
person.
Ehects of ssuance or transfer of stock n breach of quafyng condtons:
CONDITIONS EFFECTS
1. The stock s ssued or transferred to
a person not entted under the
artces of ncorporaton; and
2. The stock certcate conspcuousy
shows the quacatons of the
persons entted.
The transferee s concusvey
presumed to have notce of hs
negbty to be a stockhoder.
1. The artces of ncorporaton states
the number of persons, not
exceedng 20, who are entted to
be hoders of record of ts stock
states such number; and
3. The ssuance or transfer of stock
causes the stock to be hed by
more than such number of persons.
presumed to have notce of ths fact.
shows a restrcton on transfer of
stock;
2. The transfer voates the restrcton.
presumed to have notce of ths fact.
Genera rue: A cose corporaton may refuse to regster the transfer of stock n the
name of the transferee who has or s concusvey presumed to have notce that:
1. He s not egbe to be a hoder of stock of the corporaton;
2. Transfer of stock to hm causes the stock of the corporaton to be hed by more
than the number of persons permtted by ts artces of ncorporaton to hod
stock of the corporaton; or
3. The transfer of stock s n voaton of a restrcton on transfer of stock.
Exceptons:
1. The transfer of stock has been consented to by a the stockhoders; or
2. The cose corporaton has amended ts artces of ncorporaton.
Optons granted to the transferee:
1. Rescnd the transfer; or
2. Recover under any appcabe warranty, express or mped.
The term "transfer" s not mted to a transfer for vaue.
Agreements by and among stockhoders executed before the formaton and
organzaton of a cose corporaton, sgned by a stockhoders, sha survve the
ncorporaton of such corporaton and sha contnue to be vad and bndng between
and among such stockhoders, f such be ther ntent, to the extent that such
Page 64 of 97
agreements are not nconsstent wth the artces of ncorporaton, rrespectve of
where the provsons of such agreements are contaned, except those requred by ths
Tte to be emboded n sad artces of ncorporaton.
An agreement between two or more stockhoders, f n wrtng and sgned by the
partes thereto, may provde that n exercsng any votng rghts, the shares hed by
them sha be voted as theren provded, or as they may agree, or as determned n
accordance wth a procedure agreed upon by them.
No provson n any wrtten agreement sgned by the stockhoders, reatng to any
phase of the corporate ahars, sha be nvadated as between the partes on the
ground that ts ehect s to make them partners among themseves.
A wrtten agreement among some or a of the stockhoders n a cose corporaton sha
not be nvadated on the ground that t so reates to the conduct of the busness and
ahars of the corporaton as to restrct or nterfere wth the dscreton or powers of the
board of drectors: Provded, That such agreement sha mpose on the stockhoders
who are partes thereto the abtes for managera acts mposed by ths Code on
drectors.
To the extent that the stockhoders are actvey engaged n the management or
operaton of the busness and ahars of a cose corporaton, the stockhoders sha be
hed to strct ducary dutes to each other and among themseves. Sad stockhoders
sha be personay abe for corporate torts uness the corporaton has obtaned
reasonaby adequate abty nsurance.
Sec. 101. When board meetng s unnecessary or mpropery hed. - Uness the by-aws
provde otherwse, any acton by the drectors of a cose corporaton wthout a meetng
sha nevertheess be deemed vad f:
Genera rue: Any acton by the drectors of a cose corporaton wthout a meetng s
nvad.
Exceptons:
1. Wrtten consent s sgned by a the drectors;
2. A the stockhoders have actua or mped knowedge of the acton and make
no prompt ob|ecton thereto n wrtng;
3. The drectors are accustomed to take nforma acton wth the express or
mped acquescence of a the stockhoders; or
4. A the drectors have express or mped knowedge of the acton n queston
and none of them makes prompt ob|ecton thereto n wrtng.
(If a drector's meetng s hed wthout proper ca or notce, an acton taken
theren wthn the corporate powers s deemed rated by a drector who faed
to attend, uness he prompty es hs wrtten ob|ecton wth the secretary of
the corporaton after havng knowedge thereof.)
Excepton to the exceptons: The by-aws provde otherwse.
Genera rue: The pre-emptve rght of stockhoders n cose corporatons sha extend
to a stock to be ssued, ncudng ressuance of treasury shares, whether for money,
property or persona servces, or n payment of corporate debts.
Excepton: The artces of ncorporaton provde otherwse.
Any amendment to the artces of ncorporaton whch seeks to:
1. Deete or remove any provson requred by Tte XV of the Code to be
contaned n the artces of ncorporaton, or
2. Reduce a quorum or votng requrement stated n sad artces of ncorporaton,
Page 65 of 97
must be approved by the amrmatve vote of at east 2/3 of the outstandng capta
stock, whether wth or wthout votng rghts, or of such greater proporton of shares as
may be speccay provded n the artces of ncorporaton for amendng, deetng or
removng any of the aforesad provsons, at a meetng duy caed for the purpose.
Deadock - the drectors or stockhoders are so dvded respectng the management of
the corporaton's busness and ahars that the votes requred for any corporate acton
cannot be obtaned, wth the consequence that the busness and ahars of the
corporaton can no onger be conducted to the advantage of the stockhoders
generay.
In case of a deadock and upon wrtten petton by any stockhoder, the SEC has the
power to arbtrate the dspute and the authorty to:
1. Cance or ater any provson contaned n the artces of ncorporaton, by-aws,
or any stockhoder's agreement;
2. Cance, ater or en|on any resouton or act of the corporaton or ts board of
drectors, stockhoders, or omcers;
3. Drect or prohbt any act of the corporaton or ts board of drectors,
stockhoders, omcers, or other persons party to the acton;
4. Requre the purchase at ther far vaue of shares of any stockhoder, ether by
the corporaton regardess of the avaabty of unrestrcted retaned earnngs
n ts books, or by the other stockhoders;
5. Appont a provsona drector;
6. Dssove the corporaton; or
7. Grant such other reef as the crcumstances may warrant.
Provsona drector:
1. A provsona drector sha be an mparta person who s nether a stockhoder
nor a credtor of the corporaton or of any subsdary or amate of the
corporaton, and whose further quacatons, f any, may be determned by the
SEC.
2. A provsona drector s not a recever of the corporaton and does not have the
tte and powers of a custodan or recever.
3. A provsona drector sha have a the rghts and powers of a duy eected
drector of the corporaton, ncudng the rght to notce of and to vote at
meetngs of drectors, unt such tme as he sha be removed by order of the
SEC or by a the stockhoders.
4. Hs compensaton sha be determned by agreement between hm and the
corporaton sub|ect to approva of the SEC, whch may x hs compensaton n
the absence of agreement or n the event of dsagreement between the
provsona drector and the corporaton.
Any stockhoder of a cose corporaton may, for any reason, compe the sad
corporaton to purchase hs shares at ther far vaue, whch sha not be ess than ther
par or ssued vaue, when the corporaton has sumcent assets n ts books to cover ts
debts and abtes excusve of capta stock.
Page 66 of 97
Any stockhoder of a cose corporaton may, by wrtten petton to the SEC, compe the
dssouton of such corporaton whenever:
1. Any of acts of the drectors, omcers or those n contro of the corporaton s
ega, or frauduent, or dshonest, or oppressve or unfary pre|udca to the
corporaton or any stockhoder; or
2. Corporate assets are beng msapped or wasted.
Cose corporatons dstngushed ordnary stock corporatons
CLOSE CORPORATION ORDINARY STOC# CORPORATION
1. The number of stockhoders cannot
exceed 20.
1. No mtaton as to number of
sharehoders.
2. The number of drectors can
ehectvey be more than 15.
2. Maxmum number of drectors s 15
3. Shares of stock are sub|ect to
speced restrctons.
3. Generay no restrcton on transfer
of shares.
4. Shares of stock are prohbted from
beng sted n the stock exchange
or ohered for sae to the pubc.
4. No prohbton.
5. Stockhoders may take an actve
part n corporate management by
vestng management to them
rather than the a board of drectors.
5. Management s odged n the board
of drectors.
6. Those actve n management are
personay abe for corporate torts
uness the corporaton has obtaned
an adequate abty nsurance.
6. Drectors are abe for torts ony f
they have acted neggenty or
frauduenty.
7. Drectors can vady act even
wthout a meetng.
7. Drectors must, as a rue, act as a
body at a duy consttuted meetng.
8. Agreements between stockhoders
regardng the operatons of the
busness can vady be made.
8. Not vad and bndng snce
stockhoders agreement cannot
mt the dscreton of the Board to
manage corporate ahars.
9. To the extent that drectors may be
cassed nto one or more casses
and to be voted soey by a
partcuar cass of stock, cumuatve
votng may, n ehect, be restrcted.
9. Ordnary, no such casscaton
and no restrctons on cumuatve
votng.
10.The artces of ncorporaton may
provde that a omcers sha be
eected or apponted by the
stockhoders.
10.Omcers are eected by the Board of
Drectors.
11.It may provde for greater quorum
and votng requrements n
meetngs of stockhoders and
11.Athough the artces of
ncorporaton or by-aws may
provde for greater quorum and
Page 67 of 97
drectors. votng requrements n drectors
meetngs under Sec. 25, those for
stockhoders meetngs cannot
generay be atered.
12.Restrctons on transfer of shares
shoud be ndcated n the artces
of ncorporaton, by-aws and stock
certcates.
12.Vad and bndng f ndcated n the
artces of ncorporaton and stock
certcates.
13.Pre-emptve rghts of stockhoders
s broader as t ncudes a ssues
wthout excepton.
13.Pre-emptve rghts may be dened
as provded for n Sec. 39.
14.A stockhoder may wthdraw and
compe the corporaton to purchase
hs shares for any reason wth the
mtaton ony that the corporaton
has sumcent assets to cover ts
abtes excusve of capta stock.
14.Uness he ses hs shares, a
stockhoder cannot get back hs
nvestment nor compe the
corporaton to buy hs shares
except n the exercse of hs
apprasa rght.
15.The proper forum may nterfere n
the management of a cose
corporaton n case of deadocks
under Sec. 104, even f the
drectors/stockhoders are actng n
good fath.
15.Courts cannot nterfere n the
busness |udgment of the
drectors/stockhoders.
16.Any stockhoder may petton the
Sec for corporate dssouton on
grounds among others, provded for
n Sec. 105.,
16.Dssouton may be had ony on the
grounds provded by the provsons
of the Code on dssouton and PD
902-A, as amended.
In a cose corporaton, a corporate acton taken at a board meetng wthout proper ca
or notce s deemed rated by the absent drector uness the atter prompty es hs
wrtten ob|ecton wth the secretary of the corporaton after havng knowedge of the
meetng. (Manue Duay Enterprses vs. CA)
Stockhoders who actvey engage n the management or operaton of the busness and
ahars of a cose corporaton sha be personay abe for corporate torts uness the
corporaton has obtaned reasonaby adequate abty nsurance. Essentay a tort
conssts n the voaton of a rght gven or the omsson of a duty mposed by aw.
Artce 283 of the Labor Code mandates the empoyer to grant separaton pay to
empoyees n case of cosure or cessaton of operatons of estabshment or
undertakng not due to serous busness osses or nanca reverses. CFTI faed to
compy wth ths aw-mposed duty or obgaton. Consequenty, ts stockhoder who
was actvey engaged n the management or operaton of the busness shoud be hed
personay abe. (Naguat vs. NLRC)
CHAPTER ,!: SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS
Educatona corporatons - those whch provde factes for teachng or nstructon.
Educatona corporatons are governed prmary by speca aws and secondary by the
Code.
Educatona nsttutons are requred to ncorporate wthn 90 days after ther
recognton as such. However, faure to compy w not mmune the educatona
nsttuton from sut as a corporaton.
A favorabe recommendaton of the Secretary of Educaton, Cuture and Sports s
requred before the SEC accepts or approves the artces of ncorporaton or by-aws of
any educatona nsttuton.
Trustees of non-stock educatona corporatons sha not be ess than 5 nor more than
fteen 15, n mutpes of 5.
Page 68 of 97
Uness otherwse provded n the artces of ncorporaton on the by-aws, the board of
trustees of ncorporated schoos, coeges, or other nsttutons of earnng sha, as
soon as organzed, so cassfy themseves that the term of omce of 1/5 of ther number
sha expre every year. Trustees thereafter eected to vacances, occurrng before
the expraton of a partcuar term, sha hod omce ony for the unexpred perod.
Trustees eected thereafter to vacances caused by expraton of term sha hod
omce for 5 years. A ma|orty of the trustees sha consttute a quorum for the
transacton of busness. The powers and authorty of trustees sha be dened n the
by-aws.
For nsttutons organzed as stock corporatons, the number and term of drectors sha
be governed by the provsons on stock corporatons.
Genera rue: Educatona nsttutons sha be owned soey by ctzens of the
Phppnes or corporatons or assocatons at east 60% of the capta of whch s owned
by such ctzens. The contro and admnstraton of educatona nsttutons sha be
vested n ctzens of the Phppnes.
Excepton: Educatona nsttutons estabshed by regous groups and msson boards.
Genera rue: No educatona nsttuton sha be estabshed excusvey for aens and
no group of aens sha comprse more than 1/3 of the enroment n any schoo.
Excepton: The rue sha not appy to schoos estabshed for foregn dpomatc
personne and ther dependents and, uness otherwse provded by aw, for other
foregn temporary resdents.
RELIGIOUS CORPORATIONS
Regous corporaton - one composed entrey of sprtua persons whch s created for
the furtherance of regon or perpetuatng the rghts of the church or for the
admnstraton of church or regous work or property.
Casses of regous corporatons:
1. Corporatons soe; and
2. Regous socetes.
Regous corporatons are governed by the approprate chapter of the Code and the
genera provsons on non-stock corporatons.
Corporation Sole
Corporaton soe - conssts of one person ony and hs successor n some partcuar
staton, who are ncorporated by aw n order to gve them some ega capactes and
advantages, partcuary that of perpetuty, whch n ther natura persons they coud
not have had.
Purpose - Admnstraton and management, as trustee, of the ahars, propertes and
temporates of any regous denomnaton, sect or church.
Who - Chef archbshop, bshop, prest, mnster, rabb or other presdng eder of such
regous denomnaton, sect or church.
Requrements and procedure of ncorporaton:
1. The chef archbshop, bshop, prest, mnster, rabb or other presdng eder of
such regous denomnaton, sect or church must e the artces of
ncorporaton wth the SEC whch must contan the foowng:
a. That he s the chef archbshop, bshop, prest, mnster, rabb or
presdng eder of hs regous denomnaton, sect or church and that
he desres to become a corporaton soe;
b. That the rues, reguatons and dscpne of hs regous denomnaton,
sect or church are not nconsstent wth hs becomng a corporaton
soe and do not forbd t;
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c. That as such chef archbshop, bshop, prest, mnster, rabb or
presdng eder, he s charged wth the admnstraton of the
temporates and the management of the ahars, estate and propertes
of hs regous denomnaton, sect or church wthn hs terrtora
|ursdcton, descrbng such terrtora |ursdcton;
d. The manner n whch any vacancy occurrng n the omce of chef
archbshop, bshop, prest, mnster, rabb of presdng eder s requred
to be ed, accordng to the rues, reguatons or dscpne of the
regous denomnaton, sect or church to whch he beongs; and
e. The pace where the prncpa omce of the corporaton soe s to be
estabshed and ocated, whch pace must be wthn the Phppnes.
2. The artces of ncorporaton may ncude any other provson not contrary to
aw for the reguaton of the ahars of the corporaton.
3. The artces of ncorporaton must be:
Vered by amdavt or amrmaton of the chef archbshop, bshop, prest,
mnster, rabb or presdng eder, as the case may be;
Accompaned by a copy of the commsson, certcate of eecton or etter
of appontment of such chef archbshop, bshop, prest, mnster, rabb
or presdng eder; and
Duy certed to be correct by any notary pubc.
4. From and after the ng of the aforementoned documents wth the SEC, such
chef archbshop, bshop, prest, mnster, rabb or presdng eder sha become
a corporaton soe.
A temporates, estate and propertes of the regous denomnaton, sect or church
admnstered or managed by the corporaton soe sha be hed n trust for the use,
purpose, behaf and soe benet of the regous denomnaton, sect or church,
ncudng hosptas, schoos, coeges, orphan asyums, parsonages and cemeteres
thereof.
A provson reatve to ts term of exstence s not requred snce a corporaton soe s
supposed to exst n perpetuty.
Genera rue: A corporaton acqures |urdca personaty ony upon the ssuance of a
certcate of ncorporaton by the SEC.
Excepton: A corporaton soe becomes endowed wth corporate personaty after ng
of the vered artces of ncorporaton together wth other requred documents.
A corporaton soe may purchase and hod rea estate and persona property for ts
church, chartabe, benevoent or educatona purposes, and may receve bequests or
gfts for such purposes.
Genera rue: A court order s requred before a corporaton soe may se or mortgage
rea property hed by t. Before such an order s granted, a vered petton must be
made by the chef archbshop, bshop, prest, mnster, rabb or presdng eder actng
as corporaton soe and t must be shown that notce of the appcaton has been gven
as drected by the court and that t s to the nterest of the corporaton that the petton
be granted. However, such appcaton may be opposed by any member of the
regous denomnaton, sect or church represented by the corporaton soe.
Excepton: Court nterventon s not necessary when the rues, reguatons and
dscpne of the regous denomnaton, sect or church, regous socety or order
concerned represented by such corporaton soe reguate the method of acqurng,
hodng, seng and mortgagng rea estate and persona property.
Regstraton of rea property n the name of the corporaton soe does not vest
ownershp unto the head thereof.
Page 70 of 97
The consttutona requrement that 60% of the capta of a corporaton must be owned
by Fpno ctzens before t may regster and n ts own name does not appy to a
corporaton soe. A corporaton soe has no natonaty and the framers of the
consttuton dd not have n mnd the corporaton soe when t provded for such
requrement. (Roman Cathoc Apostoc Adm. of Davao, Inc. vs. LRC)
Whether or not a corporaton soe, or any prvate corporaton for that matter, can
acqure aenabe and of the pubc doman depends upon the character of the and at
the tme of the nsttuton of the regstraton proceedng. If t st forms part of the
pubc doman, no. If t s prvate, yes. (Repubc vs. INC)
Under the Pubc Land Act, aenabe pubc and may be sub|ect to regstraton by a
possessor f he, personay or through hs predecessor-n-nterest, had openy,
contnuousy, excusvey and notorousy possessed the same for 30 years. The aw
creates the ega cton whereby the and, upon competon of the requste perod pso
|ure and wthout the need of |udca or other sancton, ceases to be pubc and and
becomes prvate property. (Drector of Lands vs. CA)
In case of vacancy n the omce of the "head" of the corporaton, the person authorzed
by the rues, reguatons or dscpne of the denomnaton sha exercse a the powers
and authorty of the corporaton soe durng such vacancy and unt such vacancy has
been ed-up.
The successors n omce sha become the corporaton soe and sha be permtted to
transact busness as such ony upon the ng wth the SEC of a copy of ther
commsson, certcate of eecton, or etters of appontment, duy certed by a notary
pubc.
Requrements for the vountary dssouton of corporatons soe:
1. Fng wth the SEC of a vered decaraton of dssouton whch must set forth
the foowng:
a. The name of the corporaton;
b. The reason for dssouton and wndng up;
c. The authorzaton for the dssouton of the corporaton by the
partcuar regous denomnaton, sect or church; and
d. The names and addresses of the persons who are to supervse the
wndng up of the ahars of the corporaton.
2. Approva of the SEC.
Religious Societies
Regous socety - a body of person assocated together for the purpose of mantanng
regous worshp.
Purpose - the admnstraton of ts temporates or for the management of ts ahars,
propertes and estate
Who - any regous socety or regous order, or any docese, synod, or dstrct
organzaton of any regous denomnaton, sect or church.
Requrements and procedure for ncorporaton:
1. Fng of the artces of ncorporaton wth the SEC;
2. The artces of ncorporaton must set forth the foowng:
a. That the regous socety or regous order, or docese, synod, or
dstrct organzaton s a regous organzaton of a regous
denomnaton, sect or church;
b. That at east 2/3 of ts membershp have gven ther wrtten consent or
have voted to ncorporate, at a duy convened meetng of the body;
Page 71 of 97
c. That the ncorporaton of the regous socety or regous order, or
docese, synod, or dstrct organzaton desrng to ncorporate s not
forbdden by competent authorty or by the consttuton, rues,
reguatons or dscpne of the regous denomnaton, sect, or church
of whch t forms a part;
d. That the regous socety or regous order, or docese, synod, or
dstrct organzaton desres to ncorporate for the admnstraton of ts
ahars, propertes and estate;
e. The pace where the prncpa omce of the corporaton s to be
estabshed and ocated, whch pace must be wthn the Phppnes;
and
f. The names, natonates, and resdences of the trustees eected by the
regous socety or regous order, or the docese, synod, or dstrct
organzaton to serve for the rst year or such other perod as may be
prescrbed by the aws of the regous socety or regous order, or of
the docese, synod, or dstrct organzaton, the board of trustees to be
not ess than 5 nor more than 15.
3. The artces of ncorporaton must be vered by the amdavt of the presdng
eder, secretary, or cerk or other member of such regous socety or regous
order, or docese, synod, or dstrct organzaton of the regous denomnaton,
sect or church.
4. Issuance of the SEC of the certcate of ncorporaton.
The artces of ncorporaton of a regous socety need not ndcate a term snce t s
supposed to exst n perpetuty.
CHAPTER ,$: DISSOLUTION
Dssouton - the extngushment of the corporate franchse and the termnaton of
corporate exstence.
Genera rue: When a corporaton s dssoved, t ceases to be a |urdca entty and can
no onger pursue the busness for whch t s ncorporated.
Excepton: The corporaton w contnue as a body corporate for another perod of 3
years from the tme t s dssoved for the purpose of wndng up ts ahars and the
qudaton of ts assets.
Three modes of dssouton:
1. By expraton of the corporate term;
2. By vountary surrender of ts prmary franchse (vountary dssouton); or
3. By the revocaton of ts corporate franchse (nvountary dssouton).
EXPIRATION OF CORPORATE TERM
Genera rue: A corporaton regstered under the Corporaton Code s requred to
ndcate ts term of exstence n the artces of ncorporaton.
Exceptons:
1. Corporatons soe; and
2. Regous socetes.
A corporaton ceases to exst and s automatcay dssoved upon the expraton of the
term ndcated n ts artces of ncorporaton wthout the need of forma proceedng.
There s no need to for the nsttuton of a proceedng for quo warranto to determne
the tme and date of the dssouton of a corporaton because the perod of corporate
exstence s provded n the artces of ncorporaton. (PNB vs. CFI)
SURRENDER OF FRANCHISE &VOLUNTARY DISSOLUTION'
Page 72 of 97
Three modes of vountary dssouton:
1. Vountary dssouton where no credtors are ahected;
2. Vountary dssouton where credtors are ahected; and
3. Shortenng of corporate term.
Voluntar dissolution #here no creditors are a'ected
Forma and procedura requrements for vountary dssouton where no credtors are
ahected:
1. Ma|orty vote of the board of drectors or trustees;
2. Sendng of notce to each stockhoder or member ether by regstered ma or
persona devery at east 30 days pror to the meetng (schedued by the board
for the purpose of submttng the board acton to dssove the corporaton for
approva of the stockhoders or members);
3. Pubcaton of the notce of tme, pace and sub|ect of the meetng for 3
consecutve weeks n a newspaper pubshed n the pace where the prncpa
omce of sad corporaton s ocated or n a newspaper of genera crcuaton n
the Phppnes;
4. Resouton adopted by the amrmatve vote of the stockhoders ownng at east
2/3 of the outstandng capta stock or 2/3 of the members at the meetng duy
caed for the purpose;
5. A copy of the resouton authorzng the dssouton must be certed by a
ma|orty of the board of drectors or trustees and countersgned by the
corporate secretary; and
6. Issuance of a certcate of dssouton by the SEC.
The requrements and formates provded by aw for the dssouton of corporatons
are mandatory such that faure to compy therewth w have no ehect on the ega
exstence of the corporaton. A corporaton beng a creaton of aw may ony termnate
ts exstence n the manner prescrbed by aw.
A mere resouton by the stockhoders or the board of drectors of a corporaton to
dssove the same does not ahect the dssouton of a corporaton. (Daguhoy
Enterprses vs. Ponce)
Voluntar dissolution #here creditors are a'ected
Forma and procedura requrements for vountary dssouton where credtors are
ahected:
1. Amrmatve vote of the stockhoder representng at east 2/3 of the outstandng
capta stock or at east 2/3 of the members at a meetng duy caed for that
purpose;
2. Petton for the dssouton sha be ed wth the SEC sgned by the ma|orty of
ts board of drectors or trustees or other omcers havng the management of ts
ahars, vered by the presdent or secretary or one of ts drectors or trustees,
settng forth a cams and demands aganst t;
3. Issuance of an order by the SEC rectng the purpose of the petton and xng
the date on or before whch ob|ectons thereto may be ed by any person,
whch date sha not be ess than 30 days nor more than 60 days after entry of
the order;
4. Before such date, a copy of the order must be pubshed once a week for 3
consecutve weeks n a newspaper of genera crcuaton pubshed n the cty
or muncpaty where the prncpa omce s stuated or n a newspaper of
genera crcuaton n the Phppnes;
Page 73 of 97
5. Postng of the same order for 3 consecutve weeks n 3 pubc paces n such
cty or muncpaty;
6. Upon 5 days notce, gven after the date on whch the rght to e ob|ects has
expred, the SEC sha hear the petton and try any ssue made by the
ob|ectons ed; and
7. |udgment dssovng the corporaton and drectng dsposton of ts assets as
|ustce requres and the appontment of a recever (f necessary n the courts
dscreton) to coect such assets and pay the debts of the corporaton.
The appontment of a recever s ony permssve and not mandatory. The aw s
ntended to et the stockhoders have contro of the assets of the corporaton upon
dssouton and wndng up of ts ahars.
(issolution b shortening the corporate term
Procedure to shorten the corporate term:
1. Approva by a ma|orty vote of the board or drectors or trustees.
2. Wrtten notce of the proposed acton and the tme and pace of meetng sha
be served to each stockhoder or member ether by ma or by persona
servce.
capta stock or 2/3 of the members n case of non-stock corporatons.
4. Submsson of the amended artces of ncorporaton to the SEC.
5. Approva of the SEC.
In case of a corporaton soe, an authorzaton for the dssouton by the partcuar
regous denomnaton, sect or church s necessary.
A vote must cast at a duy consttuted meetng. Wrtten assent s nsumcent.
It s ony upon the approva of the SEC that the corporaton s deemed dssoved.
INVOLUNTARY DISSOLUTION
Requrements for nvountary dssouton by the SEC:
1. Fng of a vered compant; and
2. Proper notce and hearng on the grounds provded by aws, rues and
reguatons.
Notwthstandng the fact that RA 8799 transferred the |ursdcton of the SEC under
Sec. 5 of PD 902-A to the Speca Commerca Courts, the same aw granted the SEC
concurrent |ursdcton over revocaton proceedngs. Sec. 5 (m) of RA 8799 provdes
that the SEC sha have the power to suspend or revoke, after proper notce and
hearng, the franchse or certcate of regstraton of corporatons, partnershps or
assocatons, upon any ground provded by aw.
Grounds for nvountary dssouton under Sec. 6, PD 902-A:
1. Fraud n procurng the certcate of regstraton;
2. Serous msrepresentaton as to what the corporaton can do or s dong to the
great pre|udce of or damage to the genera pubc;
3. Refusa to compy or deance of any awfu order of the Commsson restranng
commsson of acts whch woud amount to a grave voaton of ts franchse;
4. Contnuous noperaton for a perod of at east 5 years;
5. Faure to e by-aws wthn the requred perod; and
6. Faure to e requred reports n approprate forms as determned by the
Commsson wthn the prescrbed perod.
Page 74 of 97
Other grounds provded for the n Corporaton Code:
1. Voaton of any provson of the Code (Sec. 144);
2. In case of deadock n a cose corporaton (Sec. 105);
3. In a cose corporaton, any acts of drectors, omcers or those n contro of the
corporaton whch s ega or frauduent or dshonest or oppressve or unfary
pre|udca to the corporaton or any stockhoder or whenever corporate assets
are beng msapped or wasted (Sec. 105).
Other grounds can be found n speca aws, e.g. the Securtes Reguaton Code and
the Genera Bankng Act.
Courts proceed wth extreme cauton n the proceedng whch have for ther ob|ect the
forfeture of corporate franchses, and a forfeture w not be aowed, except under
express mtaton, or for a pan abuse of power by whch the corporaton fas to fu
the desgn and purpose of ts organzaton. But when such abuses and voatons
consttute or threaten a substanta n|ury to the pubc or such as to amount to a
voaton of the fundamenta condtons of the contract (charter) by whch the franchse
were granted and thus defeat the purpose of the grant, then dssouton w be
granted. (Government vs. Phppne Sugar Estates Co.)
The court has a dscreton wth respect to the ncton of capta punshment upon
corporatons and there are certan msdemeanors and msusers of franchses whch
shoud not be recognzed as requrng ther dssouton. (Government vs. E Hogar)
That the corporaton s guty of wfu and repeated voaton of the aw and that ts
contnuance ncts substanta n|ury to the pubc warrants ts dssouton. (Repubc
vs. Securty Credt)
Reef by dssouton w be awarded ony where no other adequate remedy s
avaabe, and s not avaabe where the rghts of the stockhoders can be, or are,
protected n some other way. The severa acts of msuse and msappcaton of the
funds and/or assets of the corporaton were commtted more partcuary by the
corporatons presdent, for the commsson of whch they may be hed personay
abe. (Repubc vs. Bsaya Land Transportaton Co., Inc.)
Under the present state of aw, any stockhoder or member of a corporaton can
nsttute a dssouton proceedng aganst hs own corporaton before the proper forum.
The Speca Commerca Courts, sha hear and decde cases nvovng ntra-corporate
dspute or partnershp reatons between and among stockhoders, members or
assocates; between any or a of them and the corporaton, partnershp or assocaton
of whch they are stockhoders, members or assocates, respectvey; and between
such corporaton, partnershp or assocaton and the State nsofar as t concerns ther
ndvdua franchse or rght to exst as such entty. (PD 902-A)
The SEC has concurrent |ursdcton to suspend, revoke, after proper notce and
hearng, the franchse or certcate of regstraton of corporatons, partnershp or
assocatons upon any of the grounds provded by aw. (Sec. 5(m) RA 8799)
The exstence of a de |ure corporaton may be determned n a prvate sut for ts
dssouton between stockhoders, wthout nterventon of the State. (Ha vs. Pcco)
In a cose corporaton, a petton for the dssouton of the corporaton may be
nsttuted by any sharehoder on the ground of mere dshonesty.
EFFECTS OF DISSOLUTION
No rght or remedy n favor of or aganst any corporaton, ts stockhoders, members,
drectors, trustees, or omcers, nor any abty ncurred by any such corporaton,
stockhoders, members, drectors, trustees, or omcers, sha be removed or mpared
by the subsequent dssouton of sad corporaton.
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Dssouton termnates a corporatons prmary franchse and generay prevents t from
further exercsng other or secondary franchses whch have been conferred to t.
Dssouton termnates the corporatons power to enter nto contracts or to contnue
the busness as a gong concern. (Ha vs. Pcco)
Genera rue: In a ease to a corporaton, the rghts and obgatons thereunder are not
extngushed by the corporatons dssouton snce eases ahect property rghts and
survves the death of partes. The stockhoders succeed to the rghts and abtes of
the dssoved corporaton n an unexpred easehod state whch may be enforced by or
aganst the recever or qudatng trustee.
Excepton: The ease, by ts terms, termnates when the corporaton ceases to exst.
Contracts for persona servces are deemed termnated by the dssouton of the
corporaton. There s an mped condton that the contract sha termnate n such
event. (Geano vs. CA)
A dssoved corporaton has no |urdca personaty; t ceases to exst as a corporaton
and cannot appy for a new certcate or a secondary franchse. (Buenaor vs.
Camarnes Sur Industry Corp.)
The 3-year perod aowed by the aw s ony for the purpose of qudaton or wndng
up of corporate ahars. No act can be done for the purpose of contnung the busness
for whch t was estabshed. Nether can t enforce a contract executed pror to ts
dssouton. (Cebu Port Labor Unon vs. State Marne Co.)
The termnaton of the fe of a |urdca entty does not, by tsef, mpy the dmnuton
or extncton of rghts demandabe aganst such |urdca entty. Debts due to or aganst
the corporaton w not be extngushed. Otherwse, t w amount to an mparment of
contracts or a dena of due process. (Gonzaes vs. Sugar Reguatory Admnstraton)
LIQUIDATION AND WINDING UP
Lqudaton and wndng up - the coecton of a corporate assets, the payments of a
ts debts and settement of ts obgatons and the utmate dstrbuton of the corporate
assets, f any of t remans, to a stockhoders n accordance wth ther proportonate
stockhodngs n the corporaton or n accordance wth ther respectve contracts of
subscrpton (e.g. preferred stocks).
A dssoved corporaton contnues as a body corporate for a perod of 3 years from the
tme of dssouton for the purpose of prosecutng and defendng suts by or aganst t
and enabng t to sette and cose ts ahars, to dspose of and convey ts property and
to dstrbute ts assets, but not for the purpose of contnung the busness for whch t
was estabshed.
At any tme durng sad three (3) years, the corporaton s authorzed and empowered
to convey a of ts property to trustees for the benet of stockhoders, members,
credtors, and other persons n nterest. From and after any such conveyance by the
corporaton of ts property n trust for the benet of ts stockhoders, members,
credtors and others n nterest, a nterest whch the corporaton had n the property
termnates, the ega nterest vests n the trustees, and the beneca nterest n the
stockhoders, members, credtors or other persons n nterest.
Upon the wndng up of the corporate ahars, any asset dstrbutabe to any credtor or
stockhoder or member who s unknown or cannot be found sha be escheated to the
cty or muncpaty where such assets are ocated.
Genera rue: No corporaton sha dstrbute any of ts assets or property except upon
awfu dssouton and after payment of a ts debts and abtes.
Exceptons:
1. By decrease of capta stock; or
2. As otherwse aowed the Code.
Page 76 of 97
Three methods of qudaton:
1. By the corporaton tsef though the Board of Drectors.
2. By a Trustee apponted by the corporaton.
3. By appontment of a recever.
Mere appontment of a recever wthout anythng more does not mpy the dssouton
of a corporaton.
Pendng actons by or aganst a corporaton are abated upon expraton of the perod
aowed by aw for the qudaton of ts ahars; but trustees to whom the corporate
assets have been conveyed may sue or be sued as such n a matters connected wth
the qudaton. The ehect of conveyance s to make the trustees the ega owners of
the property conveyed, sub|ect to the beneca nterest theren of credtors and
stockhoders. (Natona Abaca Other Fbers Co. vs. Pore)
If the corporaton carres out the qudaton of ts assets through ts own omcers and
contnues and defends the actons brought by or aganst t, ts exstence sha
termnate at the end of three years from the tme of dssouton; but f a recever or
assgnee s apponted, as has been done n the present case, wth or wthout a transfer
of ts propertes wthn three years, the ega nterest passes to the assgnee, the
beneca nterest remanng n the members, stockhoders, credtors and other
nterested persons; and sad assgnee may brng an acton, prosecute that whch has
aready been commenced for the benet of the corporaton, or defend the atter
aganst any other acton aready nsttuted or whch may be nsttuted even outsde of
the perod of three years xed for the omces of the corporaton. (Sumera vs. Vaenca)
(Board of Lqudators vs. Kaaw)
The counse who prosecuted and defended the nterest of the corporaton and who
appeared n behaf of the corporaton may be consdered a trustee of the corporaton
at east wth respect to the matter n tgaton ony. The word "trustee" must be
understood n ts genera concept. (Geano vs. CA)
A cam estabshed aganst the corporaton may be prosecuted aganst the qudator
of such corporaton even after the three years from ts dssouton. (Repubc vs.
Marsman Deveopment Company)
Upon dssouton of the corporaton ts assets are hed for the benet of ts stockhoder
after payment of ts debts and w be so dstrbuted to the sad stockhoder n
accordance wth ther proportonate nterest n the corporaton or ther contracts of
subscrpton.
Hoders of preferred shares may be granted certan rghts or prveges upon
dssouton.
Genera rue: The board of drectors of a dssoved corporaton s not permtted to
undertake any actvty outsde of the usua qudaton of the corporaton.
Excepton: The stockhoders of a dssoved corporaton may convey ther respectve
sharehodngs toward the creaton of a new corporaton to contnue the busness of the
od. Wndng up s the soe actvty of a dssoved corporaton that does not ntend to
ncorporate a new. (Chung Ka Bo vs. IAC)
If the three year perod of qudaton has eapsed and no ehort to nay sette or cose
the corporate ahars was undertaken, those havng pecunary nterest n the corporate
assets, ncudng not ony the stockhoders but kewse the credtors, actng for and ts
behaf, may make proper representatons wth the SEC for workng out a na
settement of the corporate concern. (Cemente vs. CA)
Note: The above decson s an aberrant rung. Once the three year perod for
qudaton and wndng up has eapsed wthout any trustee or recever beng
apponted, the assets of the corporaton w be escheated n favor of the Government
thus barrng the cams of stockhoders and credtors.
Page 77 of 97
CHAPTER ,): FOREIGN CORPORATIONS
Foregn corporaton - one formed, organzed or exstng under any aws other than
those of the Phppnes (and whose aws aow Fpno ctzens and corporatons to do
busness n ts own country or state).
The phrase "whose aws aow Fpno ctzens and corporatons to do busness n ts
own country or state" s a mere condton precedent to the grand of a cense of a
foregn corporaton to do busness n the Phppnes.
Genera rue: The "ncorporaton test" s apped n determnng whether a corporaton
s domestc or foregn. If t s ncorporated n another state, t s a foregn corporaton,
whe f t s regstered under Phppne aws, t s deemed a Fpno or domestc
corporaton rrespectve of the natonaty of ts stockhoders.
Excepton: In tmes of war, the "contro test" woud appy n determnng the corporate
natonaty, .e., the ctzenshp of the controng stockhoders determnes the
natonaty of the corporaton.
Genera rue: A corporaton can have no ega exstence outsde the boundares of the
soveregn by whch t s created.
Excepton: By vrtue of state comty, a corporaton created by aws of one state s
usuay aowed to transact busness n other states and to sue n the courts of the
forum, sub|ect to restrctons and certan requrements mposed theren.
Requstes for a foregn corporaton to transact busness n the Phppnes:
1. A cense or permt to do so; and
2. A certcate of authorty from the approprate government agency.
Procedure for appcaton of a cense:
1. Submsson to the SEC of ts artces of ncorporaton and by-aws, certed n
accordance wth aw, and ther transaton to an omca anguage of the
Phppnes, f necessary.
2. The appcaton sha be under oath and, uness aready stated n ts artces of
ncorporaton, sha speccay set forth the foowng:
a. The date and term of ncorporaton;
b. The prncpa omce of the corporaton n the country or state of
ncorporaton;
c. The resdent agent;
d. The pace n the Phppnes where the corporaton ntends to operate;
e. The purpose or purposes of the corporaton;
f. The drectors and omcers of the corporaton;
g. Its authorzed capta stock;
h. Its outstandng capta stock;
. The amount actuay pad n; and
|. Such addtona nformaton as may be necessary or approprate n
order to enabe the SEC to determne whether such corporaton s
entted to a cense to transact busness n the Phppnes, and to
determne and assess the fees payabe.
3. Attached to the appcaton for cense sha be a duy executed certcate
under oath by the authorzed omca or omcas of the |ursdcton of ts
ncorporaton, attestng to the fact that the aws of the country or state of the
appcant aow Fpno ctzens and corporatons to do busness theren, and
that the appcant s an exstng corporaton n good standng. If such certcate
Page 78 of 97
s n a foregn anguage, a transaton thereof n Engsh under oath of the
transator sha be attached thereto.
4. The appcaton for a cense to transact busness n the Phppnes sha
kewse be accompaned by a statement under oath of the presdent or any
other person authorzed by the corporaton, showng to the satsfacton of the
Securtes and Exchange Commsson and other governmenta agency n the
proper cases that the appcant s sovent and n sound nanca condton, and
settng forth the assets and abtes of the corporaton as of the date not
exceedng one (1) year mmedatey pror to the ng of the appcaton.
5. Foregn bankng, nanca and nsurance corporatons sha, n addton to the
above requrements, compy wth the provsons of exstng aws appcabe to
them. In the case of a other foregn corporatons, no appcaton for cense to
transact busness n the Phppnes sha be accepted by the Securtes and
Exchange Commsson wthout prevous authorty from the approprate
government agency, whenever requred by aw.
Foregn corporatons aready ssued a cense to transact busness n the Phppnes
pror to the ehectvty of the Code contnue to have such authorty under the terms and
condtons of ts cense, sub|ect to the provsons of the Code and other speca aws.
Upon compance wth the provsons of Sec. 125, other speca aws and the rues and
reguatons mpementng them, the SEC sha thereafter ssue the cense.
Upon ssuance of the cense, such foregn corporaton may commence to transact
busness n the Phppnes and contnue to do so for as ong as t retans ts authorty to
act as a corporaton under the aws of the country or state of ts ncorporaton, uness
such cense s sooner surrendered, revoked, suspended or annued n accordance wth
ths Code or other speca aws.
Wthn 60 days after the ssuance of the cense, a foregn corporaton, except those
engaged n foregn bankng or nsurance, sha depost wth the SEC, for the benet of
credtors, securtes consstng of bonds or other evdence of ndebtedness of the
Phppne government or ts potca subdvsons or nstrumentates, or of
government owned or controed corporatons and enttes, shares of stock n
"regstered enterprses," shares of stock n domestc nsurance companes and banks,
or any combnaton thereof, wth an actua market vaue of P100,000.00. Addtona
securtes may be requred by the SEC f the actua market vaue of the securtes on
depost has decreased by at east 10%.
The ob|ectve of the aw requrng the cense s not to prevent the foregn corporaton
from performng soated or snge acts, but to prevent t from acqurng a domce for
the purpose of pursung ts busness wthout takng steps to render t amendabe to
sut n the oca courts. (Marsha-Wes Co. vs. H. W. Eser & Co.)
MODES OF ENTRY OF FOREIGN CORPORATIONS
Modes of entry of foregn corporatons:
1. Branch omce;
2. Representatve or ason omce;
3. Loca subsdary;
4. Regona or area headquarters;
5. Regona operatng headquarters;
6. Regona warehouse; or
7. |ont venture.
RESIDENT AGENT
The appontment of a resdent agent s a condton precedent to the ssuance of a
cense to transact busness n the Phppnes by a foregn corporaton.
Page 79 of 97
The foowng may be apponted as a resdent agent:
1. An ndvdua resdng n the Phppnes, of good mora character and of sound
nanca standng; or
2. A domestc corporaton awfuy transactng busness n the Phppnes
(ncudes partnershps such as aw rms and accountng rms).
The necessty of the appontment of a resdent agent s ony for the purpose of
recevng summons and other ega processes n any ega acton or proceedng aganst
the foregn corporaton.
Modes of servce of summons upon a foregn corporaton:
1. Servce upon the resdent agent - servce upon the resdent agent s
mandatory f the foregn corporaton s cense to do busness n the
Phppnes;
2. Servce upon the SEC - f the censed foregn corporaton has ceased to
transact busness n the Phppnes or has no resdent agent n the Phppnes;
or
3. Servce upon any of ts omcers or agents wthn the Phppnes.
DOING BUSINESS WITHOUT A LICENSE
Genera rue: No foregn corporaton transactng busness n the Phppnes wthout a
cense, or ts successors or assgns, sha be permtted to mantan or ntervene n any
acton, sut or proceedng n any court or admnstratve agency of the Phppnes
Excepton: Such corporaton may be sued or proceeded aganst before Phppne
courts or admnstratve trbunas on any vad cause of acton recognzed under
Phppne aws.
A foregn corporaton cannot transact busness n the Phppnes wthout the requste
cense. If t does so, the responsbe omcers may be sub|ected to the pena provsons
of Sec. 144.
Genera rues regardng whether or not a foregn corporaton may sue or be sued n the
Phppnes:
1. As to whether or not t can sue.
a. A foregn corporaton transactng or dong busness n the Phppnes
wth a cense can sue before Phppne Courts.
b. Sub|ect to certan exceptons, a foregn corporaton dong busness n
the country wthout a cense can not sue n Phppne Courts.
c. If t s not transactng busness n the Phppnes, even wthout a
cense, t can sue before the Phppne Courts.
2. As to whether t can be sued or not.
a. A foregn corporaton transactng busness n the Phppnes wth the
requste cense can be sued n the Phppnes.
b. A foregn corporaton transactng busness n the Phppnes wthout a
cense can be sued n Phppne courts.
c. If t s dong busness n the Phppnes, t cannot be sued n Phppne
courts for ack of |ursdcton.
Page 80 of 97
It s not the ack of requred cense but dong busness wthout a cense whch bars a
foregn corporaton from access to our courts. (Unversa Shppng vs. IAC)
Genera rue: A foregn corporaton must have the requste cense to sue before the
Phppne courts.
Exceptons:
1. The act or transacton nvoved s an "soated transacton;"
2. The foregn corporaton s not seekng to enforce any ega or contractua rghts
arsng from, or growng out of any busness whch t has transacted n the
Phppnes;
3. The purpose of the sut s to protect ts trademark, tradename, corporate
name, reputaton or goodw;
4. The sut s based on a voaton of the Revsed Pena Code;
5. The foregn corporaton s merey defendng a sut ed aganst t;
6. The party s estopped to chaenge the personaty of the corporaton by
enterng nto a contract wth t.
Excepton to an excepton: Where a snge act or transacton however, s not merey
ncdenta or casua but ndcates the foregn corporatons ntenton to do other
busness n the Phppnes, sad snge act or transacton consttutes dong or
engagng n or transactng busness n the Phppnes.
The true test regardng "dong" or "engagng n" or "transactng" busness s whether
the foregn corporaton s contnung the body or substance of the busness or
enterprse for whch t was organzed or whether t has substantay retred from t and
turned t over to another. The term mpes a contnuty of commerca deangs and
arrangements, and contempates, to that extent, the performance of acts or works or
the exercse of some of the functons normay ncdent to, and n progressve
prosecuton of, the purpose and ob|ect of ts organzaton. (Menthoatum Co., Inc. vs.
Mangaman)
The ob|ect of the statute was to sub|ect the foregn corporaton dong busness n the
Phppnes to the |ursdcton of ts courts. The ob|ect of the statute was not to prevent
the foregn corporaton from performng snge acts, but to prevent s from acqurng
domce for the purpose of busness wthout takng the steps necessary to render t
amenabe to sut n the oca courts. The aw smpy means that no foregn corporaton
sha be permtted "to transact busness n the Phppne Isands" uness t sha have
the cense requred by aw, and unt t compes wth the aw, sha not be permtted to
mantan any sut n the oca courts. (Marsha-Wes Co. vs. Henry W. Eser & Co.)
A foregn corporaton not engaged n busness n the Phppnes may not be dened the
rght to e an acton n Phppne courts for soated transactons. (Buakhdas vs.
Navarro)
If A foregn corporaton not engaged n busness n the Phppnes has the rght to sue
on an soated transacton, more so may t sue based on a mstake. (Swedsh East Asa
Co., Ltd. vs. Mana Port Servce)
There was ony one agreement between pettoners and the respondent. The three
seemngy dherent transactons were entered nto by the partes ony n an ehort to
fu the basc agreement and n no way ndcate an ntent on the part of the
respondent to engage n a contnuty of transactons wth pettoners whch w
categorze t as a foregn corporaton dong busness n the Phppnes. The
respondent, beng a foregn corporaton not dong busness n the Phppnes, does not
need to obtan a cense to do busness n order to have the capacty to sue. (Atnam
Consodated, Inc. vs. CA)
Under the rues of the BOI, the phrase dong busness has been exemped wth
ustratons, among them beng as foows:
Page 81 of 97
1. Soctng orders, purchase (saes) or servce contracts. Concrete and specc
soctatons by a foregn rm, not actng ndependenty of the foregn rm
amountng to negotaton or xng of the terms and condtons of saes or
servce contract, regardess of whether the contracts are actuay reduced to
wrtng, sha consttute dong busness even n the enterprse has no omce or
xed pace of busness n the Phppnes.
2. Appontng a representatve or dstrbutor who s domced n the Phppnes
uness sad representatve or dstrbutor has an ndependent status, .e., t
transacts busness n ts name and for ts own account, and not n the name or
for the account of the prcpa.
3. Openng omces, whether caed ason omces, agences or branches, uness
provded otherwse.
4. Any other act or acts that mpy a contnuty of commerca deangs or
arrangements, and contempate to that extent the performance of acts or
works, or the exercse of some of the functons normay ncdent to, or n the
progressve prosecuton of, commerca gan or of the purpose and ob|ectve of
the busness organzaton. (Factes Management Corp. vs. De La Rosa)
A snge act may brng the corporaton wthn the purvew of the statute where t s an
act of the ordnary busness of the corporaton. In such a case, the snge act of
transacton s not merey ncdenta or casua, but s of such character as dstncty to
ndcate a purpose on the part of the operatons for the conduct of a part of the
corporatons ordnary busness. (Far East Int Import vs. Nanka)
ITECs arrangement wth ts varous busness contacts n the country ndcate ts
purpose to brng about the stuaton among ts customers and the genera pubc that
they are deang drecty wth ITEC and that ITEC s actvey engage n busness n the
country. In determnng whether a corporaton does busness n the Phppnes or not,
asde from ther actvtes wthn the forum, reference may be made to the contractua
agreements entered nto by t wth other enttes n the country. (Communcaton
Materas and Desgn, Inc. vs. CA)
A foregn corporaton dong busness n the Phppnes may sue n Phppne courts
athough no authorzed to do busness here aganst a Phppne ctzen or entty who
had contracted wth and beneted by sad corporaton. To put t another way, a party s
estopped to chaenge the personaty of a corporaton after havng acknowedged the
same by enterng nto a contract wth t. An the doctrne of estoppe to deny corporate
exstence appes to a foregn as we as to domestc corporatons. One who has deat
wth a corporaton of foregn orgn as a corporate entty s estopped to deny ts
corporate exstence and capacty. The prncpe w be apped to prevent a person
contractng wth a foregn corporaton from ater takng advantage of ts
noncompance wth the statutes chey n cases where such person has receved the
benets of the contract. (Communcaton Materas and Desgn, Inc. vs. CA)
The rght of a corporaton to use ts corporate and trade name s a property rght, a
rght n rem, whch t may assert and protect aganst a the word, n any of the courts
of the word - even n |ursdctons where t does not transact busness - |ust the same
as t may protect ts tangbe property, rea or persona, aganst trespass, or
converson. Snce t s the trade and not the make that s to be protected, a trademark
acknowedges no terrtora boundares or muncpates or states or natons, but
extends to every market where the traders goods have become known and dented
by the use of the mark. (Western Equpment and Suppy Co. vs. Reyes)
A foregn corporaton whch has never done busness n the Phppne Isands and
whch s uncensed and unregstered to do busness here, but s wdey and favoraby
known n the Isands through the use theren of ts products bearng ts corporate and
trade name has a ega rght to mantan an acton n the Isands. Parenthetcay the
Trademark Law aows a foregn corporaton or |urstc person to brng an acton n
Phppne courts for nfrngement of a mark or trade-name, for unfar competton, or
Page 82 of 97
fase desgnaton of orgn and fase descrpton, whether or not t has been censed to
do busness n the Phppnes. (Genera Garments Corporaton vs. Drector of Patents)
Artce 8 of the Pars Conventon to whch the Phppnes became a party provdes that
a trade name sha be protected n a the countres of the Unon wthout the obgaton
of ng or regstraton, whether or not t forms part of the trademark. (Puma vs. IAC)
A foregn corporaton not dong busness not dong busness n the Phppnes needs no
cense to sue before Phppne courts for nfrngement of trademark and unfar
competton. (Le Chemse Lacoste vs. Fernandez)
In a sut nvovng the voaton of the Revsed Pena Code the companant foregn
corporatons capacty to sue s not sgncant. (Le Chemse Lacoste vs. Fernandez)
CAPACITY TO SUE
Genera rue: A foregn corporaton must amrmatvey pead ts capacty to sue n order
that t may proceed and ehectvey nsttute a case n Phppne courts.
Exceptons:
1. The acton nvoves a compant for voaton of the Revsed Pena Code.
2. The foregn corporaton s not sung or mantanng a sut but s merey
defendng tsef from one ed aganst t.
The quafyng crcumstance of whether or not a foregn corporaton has engaged n
busness n the Phppnes s an essenta part of the eement of a foregn corporatons
capacty to sue and must be amrmatvey peaded. (Atantc Mutua Insurance Co. vs.
Cebu Stevedorng Co., Inc.)
If the dsmssa of the case, based on faure of the foregn corporaton to aver ts
capacty to sue, woud not, however, bar the nsttuton of the same acton, dsmssa
shoud not be aowed, especay so f t woud be an de, crcutous ceremony
consderng the absence of any mertorous substanta defense of the defense of the
defendant. Technca rues shoud not be accorded undue mportance to frustrate and
defeat a pany vad cam. (Oympa Busness Machnes Co. vs. Razon, Inc.)
Snce pettoner s not mantanng any sut but s merey defendng one aganst tsef
(t dd not e any compant but ony a coroary defensve petton to prohbt the ower
court from further proceedng wth a sut that t had no |ursdcton to entertan), ts
faure to aver ts ega capacty to nsttute the present petton s not fata. (Tme, Inc.
vs. Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS
Genera rue: Any foregn corporaton awfuy dong busness n the Phppnes sha be
bound by a aws, rues and reguatons appcabe to domestc corporatons of the
same cass.
Exceptons:
1. Laws whch provde for the creaton, formaton, organzaton or
dssouton of corporatons; or
2. Laws whch x the reatons, abtes, responsbtes, or dutes of
stockhoders, members or omcers of a corporaton to each other or to the
corporaton.
Intra-corporate or nterna matters not ahectng credtors or the pubc n genera are
governed not by Phppne aws but the aw under whch the foregn corporaton was
formed or organzed.
Speca aws may provde or grant certan restrctons, mtatons, prveges or
ncentves to a foregn corporaton not otherwse appcabe or granted to domestc
corporatons (e.g. mport dutes and tax ncentves under the Omnbus Investments
Code).
Page 83 of 97
A foregn corporaton authorzed to transact busness n the Phppnes whch amends
ts artces of ncorporaton or by-aws must e a copy of such amended artces of
ncorporaton or by-aws wth the SEC or the approprate government agency wthn 60
days from the ehectvty of such amendment.
Instances when a foregn corporaton authorzed to transact busness n the Phppnes
must obtan an amended cense:
1. The foregn corporaton changes ts corporate name; or
2. The foregn corporaton desres to pursue other or addtona purposes
n the Phppnes.
Requrements n a merger or consodaton of a foregn corporaton censed n the
Phppnes:
Wth a domestc corporaton:
Such must be permtted under Phppnes aws and by the aw of ts
ncorporaton; and
The requrements on merger or consodaton provded by the Code must
be foowed.
Wth a foregn corporaton:
Such must be permtted by the aw of ts ncorporaton;
A duy authentcated artces of merger or consodaton must be ed wth
the SEC or the approprate government agency wthn 60 days from the
ehectvty of the merger or consodaton; and
If the absorbed corporaton s the foregn corporaton dong busness n the
Phppnes, a petton for wthdrawa of ts cense must aso be ed.
Requrements and procedure for the wthdrawa of foregn corporatons:
1. Fng of a petton for wthdrawa of cense;
2. A cams whch have accrued n the Phppnes have been pad, compromsed
or setted;
3. A taxes, mposts, assessments and penates, f any, awfuy due to the
Phppne Government or any of ts agences or potca subdvsons have
been pad;
4. Pubcaton of the petton for wthdrawa once a week for 3 consecutve weeks
n a newspaper of genera crcuaton n the Phppnes; and
5. Issuance of the certcate of wthdrawa by the SEC.
Grounds for the revocaton or suspenson of cense:
1. Faure to e ts annua report or pay any fees as requred by the Code;
2. Faure to appont and mantan a resdent agent n the Phppnes;
3. Faure, after change of ts resdent agent or of hs address, to submt to the
SEC a statement of such change;
4. Faure to submt to the SEC an authentcated copy of any amendment to ts
artces of ncorporaton or by-aws or of any artces of merger or consodaton
wthn the tme prescrbed by the Code;
5. Msrepresentaton of any matera matter n any appcaton, report, amdavt or
other document submtted;
6. Faure to pay any and a taxes, mposts, assessments or penates, f any,
awfuy due to the Phppne Government or any of ts agences or potca
subdvsons;
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7. Transactng busness n the Phppnes outsde of the purpose or purposes for
whch such corporaton s authorzed under ts cense;
8. Transactng busness n the Phppnes as agent of or actng for and n behaf of
any foregn corporaton or entty not duy censed to do busness n the
Phppnes; or
9. Any other ground as woud render t unt to transact busness n the
Phppnes.
Other grounds for revocaton of cense under speca aws:
1. Genera Bankng Act - mmnent danger of nsovency;
2. Insurance Code - unsound condton, faure to compy wth the
provsons of aw or reguaton obgatory upon t, a condton or method of
busness hazardous to the pubc or ts pocy hoders, mparment of ts
securty depost, or decency n the margn of sovency.
3. Omnbus Investments Code - wfu voaton of the provsons of
exstng aws and mpementng gudenes or voaton of the terms and
condtons of ts cense.
In case the revocaton s warranted the SEC sha:
1. Issue a certcate of revocaton;
2. Furnsh a copy thereof to the approprate government agency; and
3. Ma a notce of such revocaton accompaned by a copy of the certcate of
revocaton to the corporaton at ts regstered omce n the Phppnes.
CHAPTER ,): MISCELLANEOUS PROVISIONS
Outstandng capta stock - the tota shares of stock ssued under bndng subscrpton
agreements to subscrbers or stockhoders, whether or not fuy or partay pad,
except treasury shares.
Non-stock or speca corporatons may, through ther artces of ncorporaton or ther
by-aws, desgnate ther governng boards by any name other than as board of
trustees.
The NEDA sha, from tme to tme, make a determnaton of whether the corporate
vehce has been used by any corporaton or by busness or ndustry to frustrate the
provsons thereof or of appcabe aws, and sha submt to Congress, whenever
deemed necessary, a report of ts ndngs, ncudng recommendatons for ther
preventon or correcton.
Maxmum mts may be set by Congress for stockhodngs n corporatons decared by
t to be vested wth a pubc nterest pursuant to the provsons of ths secton,
beongng to ndvduas or groups of ndvduas reated to each other by consangunty
or amnty or by cose busness nterests, or whenever t s necessary to acheve
natona ob|ectves, prevent ega monopoes or combnatons n restrant or trade, or
to mpement natona economc poces decared n aws, rues and reguatons
desgned to promote the genera wefare and foster economc deveopment.
In recommendng to Congress corporatons, busness or ndustres to be decared
vested wth a pubc nterest and n formuatng proposas for mtatons on stock
ownershp, the NEDA sha consder the type and nature of the ndustry, the sze of the
enterprse, the economes of scae, the geographc ocaton, the extent of Fpno
ownershp, the abor ntensty of the actvty, the export potenta, as we as other
factors whch are germane to the reazaton and promoton of busness and ndustry.
Every corporaton, domestc or foregn, awfuy dong busness n the Phppnes sha
submt to the SEC an annua report of ts operatons, together wth a nanca
statement of ts assets and abtes, certed by any ndependent certed pubc
Page 85 of 97
accountant n approprate cases, coverng the precedng sca year and such other
requrements as the SEC may requre. Such report sha be submtted wthn such
perod as may be prescrbed by the SEC.
A nterrogatores propounded by the SEC and the answers thereto, as we as the
resuts of any examnaton made by the Commsson or by any other omca authorzed
by aw to make an examnaton of the operatons, books and records of any
corporaton, sha be kept strcty condenta, except nsofar as the aw may requre
the same to be made pubc or where such nterrogatores, answers or resuts are
necessary to be presented as evdence before any court.
The SEC sha have the power and authorty to mpement the provsons of ths Code,
and to promugate rues and reguatons reasonaby necessary to enabe t to perform
ts dutes hereunder, partcuary n the preventon of fraud and abuses on the part of
the controng stockhoders, members, drectors, trustees or omcers.
Voatons of any of the provsons of ths Code or ts amendments not otherwse
speccay penazed theren sha be punshed by a ne of not ess than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
mprsonment for not ess than thrty (30) days but not more than ve (5) years, or
both, n the dscreton of the court. If the voaton s commtted by a corporaton, the
same may, after notce and hearng, be dssoved n approprate proceedngs before
the Securtes and Exchange Commsson: Provded, That such dssouton sha not
precude the nsttuton of approprate acton aganst the drector, trustee or omcer of
the corporaton responsbe for sad voaton: Provded, further, That nothng n ths
secton sha be construed to repea the other causes for dssouton of a corporaton
provded n ths Code.
No rght or remedy n favor of or aganst any corporaton, ts stockhoders, members,
drectors, trustees, or omcers, nor any abty ncurred by any such corporaton,
stockhoders, members, drectors, trustees, or omcers, sha be removed or mpared
ether by the subsequent dssouton of sad corporaton or by any subsequent
amendment or repea of ths Code or of any part thereof.
A corporatons awfuy exstng and dong busness n the Phppnes on the date of
the ehectvty of ths Code and heretofore authorzed, censed or regstered by the
Securtes and Exchange Commsson, sha be deemed to have been authorzed,
censed or regstered under the provsons of ths Code, sub|ect to the terms and
condtons of ts cense, and sha be governed by the provsons hereof: Provded, That
f any such corporaton s ahected by the new requrements of ths Code, sad
corporaton sha, uness otherwse heren provded, be gven a perod of not more than
two (2) years from the ehectvty of ths Code wthn whch to compy wth the same.
PD *-2"A% AS AMENDED
The SECs quas-|udca functons under Sec. 5 of PD 902-A, as amended were
transferred to the Speca Commerca Courts by RA 8799.
Genera rue: The Speca Commerca Courts sha have excusvey and orgnay
|ursdcton over cases fang under Sec. 5 of PD 902-A.
Excepton: The SEC sha retan |ursdcton over cases nvovng suspenson of
payments and corporate rehabtaton ed on or before |une 30, 2000.
Dstrbuton of Speca Commerca Courts:
1. Two n Makat Cty;
2. Two n Ouezon Cty;
3. One n each n other ctes n Metro Mana; and
4. One per regon.
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION &S./0 5 123'
Page 86 of 97
Genera rue: The Speca Commerca Courts sha have orgna and excusve
|ursdcton to hear and decde cases nvovng devces or schemes empoyed by or any
acts of the board of drectors, busness assocates, ts omcers or partners, amountng
to fraud and msrepresentaton whch may be detrmenta to the nterest of the pubc
and/or of the stockhoder, partners, members of assocatons or organzatons
regstered wth the SEC.
Excepton: The compant s based on the voaton of the Revsed Pena Code (Ex.
Syndcated Estafa)
Even f the acton s for recovery of sums of money pad or gven to the corporaton
through devces and schemes amountng to fraud or msrepresentaton detrmenta to
the nvestng pubc, the same must be ed, heard and tred by the Speca
Commerca Courts.
Exampes of acts amount to fraud or msrepresentaton wthn the orgna and
excusve |ursdcton of the Speca Commerca Courts:
1. Fraud commtted by a corporaton n fang to pay ndvdua money market
pacements. (Orosa, |r. vs. CA)
2. Corporatons act of dupng persons nto nvestng money when such
corporatons authorty to ssue commerca papers has aready expred.
(Mangaad vs. Premer Corporaton)
3. Corporate omcers act of dvertng corporate funds and assets for hs persona
use. (Ae|e vs. CA)
4. Pyramdng schemes.
The aegaton of fraud must be stated wth partcuarty to pace the case wth the
|ursdcton of the Speca Commerca Courts.
INTRA"CORPORATE CONTROVERSIES &S./0 5 143'
Intra-corporate controverses ncude those of corporatons, partnershps and
assocatons.
Eements of ntra-corporate controverses:
1. An ntra-corporate reatonshp:
a. Between and among the stockhoders, members, assocates of a
corporaton, partnershp or assocaton;
b. Between them and the corporaton, partnershp or assocaton; or
c. Between the corporaton, partnershp or assocaton and the State.
2. The controversy must arse out of sad reatonshp.
The dspute among the partes must be ntrnscay connected wth the reguaton of
the corporaton. If the nature of the controversy nvoves matters that are purey cv n
character necessary the case does not nvove an ntra-corporate controversy. (Speed
Dstrbutng Corp. vs. CA)
The fact that shares of stock were ssued to be used as part payment for ease rentas
does not convert t nto a ntra-corporate controversy. (DMRC Enterprses vs. Este de
So Mountan Reserve, Inc.)
Recovery of the contro and management of a corporaton n the guse of a compant
for rescsson of a memorandum of agreement whch vested such contro and
management s an ntra-corporate controversy. (DPB vs. Iustre, |r.)
If a of the requrements for a vad transfer have been comped the dspute s ntra-
corporate and s wthn the |ursdcton of the Speca Commerca Court. (Abe|o vs. de
a Cruz; Rura Bank of Sanas, Inc. vs. CA)
Page 87 of 97
If the pettoner does not have a "prma face" tte to the share sought to be recorded
n hs name the dspute s not ntra-corporate and the ordnary or reguar court can
assume |ursdcton over the case. (Rvera vs. Forendo; Tay vs. CA)
A dspute regardng the automatc rescsson cause of a Memorandum of Agreement
regardng the sae of shares of a group of stockhoders to another group of
stockhoders s ntra-corporate. (Saavedra vs. SEC)
Where the conct nvoves the enforcement of rghts and obgatons under the
Corporaton Code or the nter and ntra-corporate ahars of the corporaton, |ursdcton
woud fa wth the Speca Commerca Courts. But f t requres a mere determnaton
of the contractua rghts of the partes under an ordnary agreement, the
ordnary/reguar courts can acqure |ursdcton thereto.
The factor whch decdes whether the acton s wthn the |ursdcton of the Speca
Commerca Courts s that the controversy arose out of an ntra-corporate reaton
between and among the partes. (SEC vs. CA)
The ng of the cv/ntra-corporate case before the SEC does not precude the
smutaneous and concomtant ng of a crmna acton before the reguar courts; such
that, a frauduent act may gve rse to abty for voaton of the rues and reguatons
of the SEC cognzabe by the SEC tsef, as we as crmna abty for voaton of the
Revsed Pena Code cognzabe by the reguar courts, both charges to be ed and
proceeded ndependenty, and may be smutaneousy, wth the other. (Faba vs. CA)
CONTROVERSIES IN THE APPOINTMENT% ELECTION AND REMOVAL OF DIRECTORS
AND OFFICERS &S./0 5 1/3'
The Speca Commerca Courts have orgna and excusve |ursdcton to hear and
decde cases nvovng controverses n the eecton or appontment of drectors,
trustees, omcers or managers of corporatons, partnershps or assocatons.
Genera rue: A corporate omcers eecton, appontment or termnaton by the board of
drectors s aways a corporate act, and the fact that the omcer asks for backwages
does not ater the pcture. The orgna and excusve |ursdcton rests wth the Speca
Commerca Courts.
Excepton: The man cause of acton s for the recovery of unpad wages and
separaton pay. (Mdand Constructon Co., Inc. vs. Mova)
The man aspect to be consdered s whether the corporate omcer asserts hs rghts as
such omcer or questons hs remova or ouster. If so, the case woud fa wthn the
ambt of the |ursdcton of the Speca Commerca Courts and not the NLRC.
RECEIVERSHIP AND SUSPENSION &S./0 5 153 265 !1/% 53'
Pettons for suspenson of payments of corporatons, partnershps or assocatons, and
appontment of recevershp, management commttee, board or body are odged wthn
the |ursdcton of the Speca Commerca Courts.
A corporaton, partnershp or assocaton, whether or not nsovent, can e a petton
for suspenson of payments provded t s paced under a rehabtaton recever or
management commttee or rehabtaton recever.
Three types of suspenson of payments:
1. Smpe suspenson of payments - mere deferment of payment of debts
and t refers to a petton whch s ed by a corporaton whch possesses
sumcent assets to cover ts abtes but foresees the possbty of meetng
them when they respectvey fa due owng to temporary qudty probems.
2. Suspenson of payments wth the appontment of a recever wth or
wthout a rehabtaton pan. The rehabtaton pan s a pan under whch the
corporaton w reschedue the payment of ts debts and abtes. Ether the
pettoner corporaton w propose the pan or ask for the appontment of a
recever who w study and make the pan.
Page 88 of 97
3. Suspenson of payments where the corporaton has no sumcent assets
to cover ts debts and abtes wth or wthout the appontment of a
management commttee wth or wthout a rehabtaton pan.
EFFECTS OF SUSPENSION OF PAYMENTS
The proper court may ssue an order suspendng payments of cams due from a
dstress corporaton.
Upon the appontment of a management commttee, rehabtaton recever, board or
body a actons for cams aganst the corporaton, partnershp or assocaton under
management or recevershp pendng before any court, trbuna, board or body sha be
suspended accordngy.
The reason for suspenson of payments for cams aganst a dstressed corporaton s to
enabe the management commttee to ehectvey exercse ts powers free from |udca
or extra|udca nterference that mght unduy hnder or prevent the rescue of the
debtor company. (PAL vs. Sps. Sadc and Kurangkng)
The suspenson of a actons for cams against a corporation embraces a phases of
the sut, be t before the tra court or any trbuna or before ths Court. No other acton
may be taken, ncudng the rendton of |udgment durng the state of suspenson. It
must be stressed that what are automatcay stayed or suspended are the proceedngs
of a sut and not |ust the payment of cams durng the executon stage after the case
had become na and executory. Once the process of rehabtaton, however, s
competed, ths Court w proceed to compete the proceedngs on the suspended
actons. Furthermore, the actons that are suspended cover a cams aganst the
corporaton whether for damages founded on a breach of contract of carrage, abor
cases, coecton suts or any other cams of a pecunary nature. No excepton n favor
of abor cams s mentoned n the aw. (PAL vs. Zamora)
Cams - refers to debts or demands of pecunary nature; the asserton of rght to have
money pad.
Suspended proceedngs ncude extra |udca forecosures. You cannot even
consodate. A proceedngs at whatever stage are suspended.
Even f the suspenson order s ssued after a credtors acton n court has aready
become na but pendng executon, the executon of the decson s kewse
suspended. (Fnvest vs. E|ercto)
Note the words "aganst the corporaton."
If a corporaton secures a oan, and one of ts key omcers uses hs prvate propertes to
guarantee the oan, corporaton es for suspenson, the bank want to forecose on the
prop, may the bank forecose? Yes. It s not an acton for ac cam aganst the
corporaton. Unon bank case.
Propertes of an ndvdua stockhoder, drector or omcer, as surety of corporate
abtes, are not, and w not be covered by the suspenson of payments order ssued
by the court pursuant to PD 902-A.
Same wth regard to crmna proceedngs, persona to corporate omcer concerned.
Despte the appontment of a recever for a corporaton under PD 902-A, an acton
aganst a corporaton seekng the nucaton of corporate documents cannot be
suspended by reason thereof, snce the cv acton does not present a monetary cam
aganst the corporaton. (Fnasa Investment and Fnance Corporaton vs. CA)
The SEC does not have |ursdcton to entertan pettons for suspenson of payments
ed by partes other than corporatons, partnershps or assocatons. (Unon Bank vs.
CA)
Equaty s Equty - durng suspenson the assets are hed n trust for the equa benet
of a credtors to precude one from obtanng an advantage or preference over
another by the expedency of an attachment, executon or otherwse. The credtors
Page 89 of 97
shoud stand on equa footng. Not anyone of them shoud be gven any preference by
payng one of them ahead of the others. (Aemars Sba and Son, Inc. vs. Ebenas)
The ssue of whether or not preferred credtors of dstressed corporatons stand on
equa footng wth a other credtors gans reevance and materaty ony upon the
appontment of a management commttee, rehabtaton recever, board or body.
Suspenson of cams aganst the corporaton under rehabtaton s counted or gured
up ony upon the appontment of a management commttee or a rehabtaton
recever. (RCBC vs. IAC)
VERY IMPORTANT777
1. A cams aganst corporatons, partnershps or assocatons that are pendng
before any court, trbuna or board, wthout dstncton as to whether or not a
credtor s secured or unsecured, sha be suspended ehectve upon the
appontment of a management commttee, rehabtaton recever, board or
body n accordance wth the provsons of PD 902-A.
2. Secured credtors retan ther preference over unsecured credtors, but
enforcement of such preferences s equay suspended upon the appontment
of a management commttee, rehabtaton recever, board or body. In the
event that the assets of the corporaton, partnershp or assocaton are nay
qudated, however, secured or preferred credts under the appcabe
provsons of the Cv Code w dentey have preference over unsecured
ones.
If the rehabtaton of the corporaton s not feasbe, the court muto propo or the
management commttee may petton the ftng and the preferences w be there
agan.
APPOINTMENT OF MANAGEMENT COMMITTEE% BOARD OR BODY &S./0 ! 153'
Speca Commerca Courts may create or appont a management commttee, board or
body upon petton or muto propo to undertake the management of corporatons,
partnershps or assocaton not supervsed or reguated by other government agences
n approprate cases where there s mmnent danger of dsspaton, oss or wastage or
destructon of assets or other propertes or parayzaton of busness operatons of such
corporaton or enttes whch may be pre|udca to the nterest of mnorty
stockhoders, partes-tgant or the genera pubc.
It may aso create or appont a management commttee, board or body to undertake
the management of corporatons, partnershps or other assocatons supervsed or
reguated by other government agences such as banks and nsurance companes,
upon the request of the government agency concerned.
Requstes before a management commttee, board or body may be apponted or
created:
1. Dsspaton, oss, wastage or destructon of assets or other propertes; and
2. Parayzaton of ts busness operatons whch may be pre|udca to the nterest
of the mnorty stockhoders, partes-tgants or the genera pubc. (Sy Chm
vs. Sy Sy Ho & Sons, Inc.)
Danger - a genera term, ncudng per, |eopardy, hazard and rsk; refers to exposure
or abty to n|ury.
Immnent - somethng whch s threatenng to happen at once, somethng cose at
hand, somethng to happen upon the nstant, cose athough not yet happenng, and on
the verge of happenng.
In the absence of a strong showng of an mmnent danger of dsspaton, oss, wastage
or destructon of assets or other propertes of a corporaton and parayss of ts
busness operatons, the mere apprehenson of future msconduct based upon pror
msmanagement w not authorze the appontment of a management
commttee/recever. (Sy Chm vs. Sy Sy Ho & Sons, Inc.)
Page 90 of 97
Mere dsagreement among stockhoder as to the farness of the corporaton woud not
n tsef sumce as a ground for the appontment of a management commttee.
However, where the dssenton among the stockhoders s such that the corporaton
cannot successfuy carry on ts corporate functons, the appontment of a
management commttee becomes mperatve. (|acnto vs. Frst Womens Credt
Corporaton)
A management commttee sha have the power to take custody of and contro a
assets and propertes owned and possessed by the entty under management. It sha
take the pace of the management and board of drectors of the entty under
management, assume ther rghts and responsbtes, and preserve the enttys assets
and propertes n ts possesson.
The rehabtaton recever sha not take over the management and contro of the
debtor but sha cosey oversee and montor the operatons of the debtor durng the
pendency of the proceedngs. He sha be prmary tasked to study the best way to
rehabtate the debtor and to ensure that the vaue of the debtors property s
reasonaby mantaned pendng the determnaton of whether or not the debtor shoud
be rehabtated, as we as mpement the rehabtaton pan after ts approva.
Venue of actons n ntra-corporate controverses - Speca Commerca Court whch has
|ursdcton over the prncpa omce of the corporaton, partnershp or assocaton.
Nature of proceedngs s n rem. |ursdcton acqured upon pubcaton of the
proceedng.
Credtors have the personaty (at east 25% of the tota outstandng abttes) may
e, ex. Bayante.
Ther compensaton s sub|ect to agreement of the partes.
Actuatons of the board, body, commttee sub|ect to..
Servce of peadngs . Sec. 6 rue 1. may be by fax or ema. When authorzed by the
court.
Servce of summons. Sec. 5 rue 2. made upon any of the statutory or corporate
omcers or ther respectve secretares. vs. Eb Varosa case. (Rue of Court)
SECURITIES REGULATION CODE &SRC'
Fu dscosure rue - as ong as there s fu and compete dscosure reatve to the
ssue of securtes the nvestng pubc shoud determne for themseves whether or not
to nvest.
Doctrne of prmary |ursdcton - courts w not determne a controversy nvovng a
queston wthn the |ursdcton of the admnstratve trbuna, where the queston
demands the exercse of sound admnstratve dscreton requrng the specazed
knowedge and expertse of sad admnstratve trbuna to determne technca and
ntrcate matters of fact.
A crmna charge for voaton of the SRC s a specazed dspute. Hence, t must rst
be referred to an admnstratve agency of speca competence, .e., the SEC. The SRC
s a speca aw. Its enforcement s partcuary vested n the SEC. Hence, a compants
for any voaton of the Code and ts mpementng rues and reguatons shoud be ed
wth the SEC. Where the compant s crmna n nature, the SEC sha ndorse the
compant to the DO| for premnary nvestgaton and prosecuton as provded n
Secton 53.1. (Bavera vs. Pagnawan)
Securities
Securtes - are shares, partcpaton or nterests n a corporaton or n a commerca
enterprse or prot-makng venture and evdenced by a certcate, contract,
nstrument, whether wrtten or eectronc n character. It ncudes:
Page 91 of 97
1. Shares of stock, bonds, debentures, notes, evdences of ndebtedness, asset-
backed securtes;
2. Investment contracts, certcates of nterest or partcpaton n a prot sharng
agreement, certcates of depost for a future subscrpton;
3. Fractona undvded nterests n o, gas or other mnera rghts;
4. Dervatves ke opton and warrants;
5. Certcates of assgnments, certcates of partcpaton, trust certcates,
votng trust certcates or smar nstruments;
6. Propretary or non propretary membershp certcates ncorporatons; and
7. Other nstruments as may n the future be determned by the Commsson.
The denton of securtes s extra-ordnary broad. It s a catch a phrase meant to
ncude a nove devces whch are of the same nature. Investment contracts and gof
cub shares are ncuded n the denton of securtes.
Genera rue: Securtes cannot be sod or ohered for sae or dstrbuton to more than
19 persons wthout a Regstraton Statement duy ed and approved by the SEC. Once
the securtes are sod or ohered to more than 19 persons, t becomes a pubc oherng
requrng pror regstraton wth the SEC. Voaton thereof renders the person
admnstratvey, cvy and crmnay abe.
Excepton: The securtes nvoved are covered by Sec. 9 (exempt securtes) and Sec.
10 (exempt transactons).
Persons engagng n the busness of buyng or seng securtes n the Phppnes as a
broker or deaer, or actng as a saesman for such enttes must be regstered and
authorzed as such by the SEC.
Investment contract - a contract or scheme whereby a person nvests hs money n a
common venture premsed on a reasonabe expectaton of prots to be derved from
the entrepreneura or managera ehorts of others.
Issuance of certcates of partcpaton n a mut-eve marketng scheme, soey on the
management of others wthout goods or servces s an nvestment contract and thus a
securty. (|ustee vs. SEC)
Pyramdng schemes partakes of a nature of an nvestng contract whch cannot be sod
to more than 19 persons wthout pror approva of the SEC.
When an nvestor s reatvey unnformed and turns over hs money to others,
essentay dependng upon ther representatons and ther honesty and sk n
managng t, the transacton generay s consdered as an nvestment contract. The
touchstone s the presence of an nvestment n a common venture premsed on a
reasonabe expectaton of prots to be derved from the entrepreneura or managera
ehorts of others. (Peope vs. Petraba)
)"empt Securities
Exempt Securtes (Sec. 9):
1. Any securty ssued or guaranteed by the Government of the Phppnes, or by
any potca subdvson or agency thereof, or by any person controed or
supervsed by, and actng as an nstrumentaty of sad Government.
2. Any securty ssued or guaranteed by the government of any country wth
whch the Phppnes mantans dpomatc reatons, or by any state, provnce
or potca subdvson thereof on the bass of recprocty: Provded, That the
Commsson may requre compance wth the form and content of dscosures
the Commsson may prescrbe.
3. Certcates ssued by a recever or by a trustee n bankruptcy duy approved
by the proper ad|udcatory body.
Page 92 of 97
4. Any securty or ts dervatves the sae or transfer of whch, by aw, s under the
supervson and reguaton of the Omce of the Insurance Commsson, HLURB,
or BIR.
5. Any securty ssued by a bank except ts own shares of stock.
)"empt Transactions
Exempt Transactons (Sec. 10):
1. Any |udca sae, or sae by an executor, admnstrator, guardan or recever or
trustee n nsovency or bankruptcy.
2. By or for the account of a pedge hoder, or mortgagee or any other smar en
hoder seng or oherng for sae or devery n the ordnary course of busness
and not for the purpose of avodng the provsons the SRC, to qudate a bona
de debt, a securty pedged n good fath as securty for such debt.
3. An soated transacton n whch any securty s sod, ohered for sae,
subscrpton or devery by the owner thereof, or by hs representatve for the
owners account, such sae or oher for sae, subscrpton or devery not beng
made n the course of repeated and successve transactons of a ke character
by such owner, or on hs account by such representatve and such owner or
representatve not beng the underwrter of such securty.
4. The dstrbuton by a corporaton, actvey engaged n the busness authorzed
by ts artces of ncorporaton, of securtes to ts stockhoders or other securty
hoders as a stock dvdend or other dstrbuton out of surpus.
5. The sae of capta stock of a corporaton to ts own stockhoders excusvey,
where no commsson or other remuneraton s pad or gven drecty or
ndrecty n connecton wth the sae of such capta stock.
6. The ssuance of bonds or notes secured by mortgage upon rea estate or
tangbe persona property, where the entre mortgage together wth a the
bonds or notes secured thereby are sod to a snge purchaser at a snge sae.
7. The ssue and devery of any securty n exchange for any other securty of the
same ssuer pursuant to a rght of converson enttng the hoder of the
securty surrendered n exchange to make such converson: Provded, That the
securty so surrendered has been regstered under the SRC or was, when sod,
exempt from the provsons of the SRC, and that the securty ssued and
devered n exchange, f sod at the converson prce, woud at the tme of such
converson fa wthn the cass of securtes entted to regstraton under the
SRC. Upon such converson the par vaue of the securty surrendered n such
exchange sha be deemed the prce at whch the securtes ssued and
devered n such exchange are sod.
8. Brokers transactons, executed upon customers orders, on any regstered
Exchange or other tradng market.
9. Subscrptons for shares of the capta stock of a corporaton pror to the
ncorporaton thereof or n pursuance of an ncrease n ts authorzed capta
stock under the Corporaton Code, when no expense s ncurred, or no
commsson, compensaton or remuneraton s pad or gven n connecton wth
the sae or dsposton of such securtes, and ony when the purpose for
soctng, gvng or takng of such subscrptons s to compy wth the
requrements of such aw as to the percentage of the capta stock of a
corporaton whch shoud be subscrbed before t can be regstered and duy
ncorporated, or ts authorzed capta ncreased.
10. The exchange of securtes by the ssuer wth ts exstng securty hoders
excusvey, where no commsson or other remuneraton s pad or gven
drecty or ndrecty for soctng such exchange.
Page 93 of 97
11. The sae of securtes by an ssuer to fewer than 20 persons n the Phppnes
durng any tweve-month perod.
12. The sae of securtes to any number of the foowng quaed buyers:
a. Bank;
b. Regstered nvestment house;
c. Insurance company;
d. Penson fund or retrement pan mantaned by the Government of the
Phppnes or any potca subdvson thereof or managed by a bank or
other persons authorzed by the Bangko Sentra to engage n trust
functons;
e. Investment company; or
f. Such other person as the Commsson may by rue determne as
quaed buyers, on the bass of such factors as nanca
sophstcaton, net worth, knowedge, and experence n nanca and
busness matters, or amount of assets under management.
Tender *'er
Tender Ohers - a pubcy announced ntenton by the purchaser to acqure a certan
bock of equtes of a company through open market purchases or prvate negotatons.
A tender oher s requred of any person or group of persons actng n concert who
ntend to acqure:
1. At east 15% of any cass of any equty securty of a sted corporaton or of any
cass of any equty securty of a corporaton wth assets of at east P50M and
havng 200 or more stockhoders wth at east 100 shares each; or
2. At east 30% of such equty over a perod of 12 months.
Pro"ies
Proxes must be ssued and proxy soctaton must be made n accordance wth rues
and reguatons to be ssued by the Commsson.
Requstes for proxes:
1. In wrtng;
2. Sgned by the stockhoder or hs duy authorzed representatve; and
3. Fed before the schedued meetng wth the corporate secretary.
Genera rue: A proxy sha be vad ony for the meetng for whch t s ntended.
Excepton: It s otherwse provded n the proxy.
No proxy sha be vad and ehectve for a perod onger than 5 years at one tme.
No broker or deaer sha gve any proxy, consent or authorzaton, n respect of any
securty carred for the account of a customer, to a person other than the customer,
wthout the express wrtten authorzaton of such customer.
A broker or deaer who hods or acqures the proxy for at east 10% or such percentage
as the Commsson may prescrbe of the outstandng share of the ssuer, sha submt a
report dentfyng the beneca owner wthn 10 days after such acquston, for ts own
account or customer, to the ssuer of the securty, to the Exchange where the securty
s traded and to the Commsson.
!ndependent (irector
Any corporaton wth a cass of equty securtes sted for tradng on an Exchange or
wth assets n excess of P50M and havng 200 or more hoders, at east of 200 of whch
Page 94 of 97
are hodng at east 100 shares of a cass of ts equty securtes or whch has sod a
cass of equty securtes to the pubc pursuant to an ehectve regstraton statement
sha have at east 2 ndependent drectors or such ndependent drectors sha
consttute at east 20% of the members of such board, whchever s the esser.
Independent drector - a person other than an omcer or empoyee of the corporaton,
ts parent or subsdares, or any other ndvdua havng a reatonshp wth the
corporaton, whch woud nterfere wth the exercse of ndependent |udgment n
carryng out the responsbtes of a drector.
The SEC may exempt corporatons from the requred ndependent drectors as t dd n
the rehabtaton of Vctoras Mng Co. Inc..
!nsider Trading
Insder:
1. The ssuer;
2. A drector or omcer (or person performng smar functons) of, or a person
controng the ssuer;
3. A person whose reatonshp or former reatonshp to the ssuer gves or gave
hm access to matera nformaton about the ssuer or the securty that s not
generay avaabe to the pubc;
4. A government empoyee, or drector, or omcer of an exchange, cearng agency
and/or sef-reguatory organzaton who has access to matera nformaton
about an ssuer or a securty that s not generay avaabe to the pubc; or
5. A person who earns such nformaton by a communcaton from any of the
foregong nsders.
Genera rue: An nsder may not se or buy a securty of the ssuer whe n possesson
of matera nformaton wth respect to the ssuer or the securty that s not generay
avaabe to the pubc.
Exceptons:
1. The nsder proves that the nformaton was not ganed from such reatonshp;
or
2. The nsder dscosed the nformaton to a party reasonaby beeved by the
nsder to possess the nformaton.
Matera non-pubc nformaton - has not been generay dscosed to the pubc and:
1. woud key ahect the market prce of the securty after beng dssemnated to
the pubc and the apse of a reasonabe tme for the market to absorb the
nformaton; or
2. woud be consdered by a reasonabe person mportant under the
crcumstances n determnng hs course of acton whether to buy, se or hod a
securty.
An nsder may not communcate matera non-pubc nformaton to any person who
w key buy or se a securty of the ssuer whe n possesson of such nformaton.
Tradng by persons who have matera non-pubc nformaton about a tender oher s
prohbted.
Registration of +rokers, (ealers, Salesmen and -ssociated Persons
Persons engagng n the busness of buyng or seng securtes n the Phppnes as a
broker or deaer, or actng as a saesman for such enttes must be regstered and
authorzed as such by the SEC.
Broker - a person engaged n the busness of buyng and seng securtes for the
account of others.
Page 95 of 97
Deaer - any person who buys and ses securtes for hs/her own account n the
ordnary course of busness.
Saesman - a natura person, empoyed as such or as an agent, by a deaer, ssuer or
broker to buy and se securtes.
A stockbrokerage rm can have no other busness than that.
Purchase of shares shoud be coursed through a broker. However a prvate transacton
can be made.
Fraudulent Transactions and *ther .arket .anipulations
Frauduent and manpuatve devces:
1. Wash sae - any transacton n a securty whch nvoves no change n the
beneca ownershp thereof.
2. Matched order - an order or orders for the purchase or sae of securty wth the
knowedge that a smutaneous order or orders of substantay the same sze,
tme and prce for the sae or purchase of such securty has, or w be entered
by or for the same or dherent partes.
3. Markng the cose - pace of purchase or sae order, at or near the cose of the
tradng perod.
4. Pantng the tape - the actvty s made durng norma tradng hours. It nvoves
buyng actvty among nomnee accounts at ncreasngy hgher or ower prces
or causng cttous reports to appear on the "tcker tape."
5. Squeezng the oat - the part or porton of the ssue/securty whch s
outstandng but ntentonay hed by deaers or other persons wth a vew of
reseng them ater for prot.
6. Hype and dump - the act empoyed by a person or group of persons of
purchasng the outstandng capta stock of a dormant pubc she company for
a nomna amount and merge t wth ther prvatey hed company. They woud
then gan contro of the ma|orty of the stocks of the merged entty. The shares
of the She Company are often reverse-spt four to one or more to reduce the
number of shares. Stock certcates are often re-ssued n the name of the
merged entty to reatves and assocates who act as nomnees of the person
or group of persons empoyng the devce. They woud then ook for a broker-
deaer who woud be wng to make a market reatve to the stocks of the
newy merged company; then hre a promoter who woud "hype" the vrtues of
the company, ts products and stocks. The broker-deaer then generates
voume and advance bd prce. When the market reaches a hgh prce, they
woud "dump" ther sharehodngs and ba out.
7. Boer room operatons - nvoves an ntensve seng campagn through
numerous saesmen by teephone or through drect ma oherngs for securtes
of ether a certan type or from a specc ssuer. Investors are nduced to
purchase through hard-se technques based on unfounded predctons and
mang of mseadng market etters.
8. Crcuatng or dssemnaton nformaton that the prce of any securty sted n
the Exchange w or s ke to rse or fa (ega)
9. Makng fase or mseadng statements wth respect to any matera fact, whch
he knew or had reasonabe ground to beeve was so fase or mseadng for the
purpose of nducng the purchase or sae of any securty (ega).
10. Peggng or xng or stabzng the prce of securty ehected ether aone or
wth others through any seres of transactons for the purchase or sae thereof
(ega)
11. Short sae - sae of securtes whch the vendor does not own (ega uness
done n accordance wth the rues and reguatons of the SEC) (T3 rue).
Page 96 of 97
12. Insder tradng - the act of an nsder of buyng or seng securtes of the
ssuer whe n possesson of matera nformaton wth respect thereto that s
not generay avaabe to the pubc (ega uness exempted).
Wash sae and matched order s ega when used as a means to create a fase or
mseadng appearance of actve tradng n the securty concerned.
Markng the cose, pantng the tape, squeezng the oat, hype and dump, and boer
room operatons are ega when they are ehected to:
1. Rase the prce or nduce the purchase of a securty or of a controng,
controed or commony controed company by others;
2. Depress ther prce to nduce the sae of a securty, whether of the same or of a
dherent cass, of the same ssuer or of a controng, controed company, or
common controed company of others; and
3. Creates actve tradng to nduce such purchase or sae through sad devces or
schemes.
Other frauduent transactons:
1. Empoyng any devce, scheme, or artce to defraud;
2. Obtanng money or property by means of any untrue statement of a matera
fact of any omsson to state a matera fact necessary n order to make the
statements made, n the ght of the crcumstances under whch they were
made, not mseadng; or
3. Engagng n any act, transacton, practce or course of busness whch operates
or woud operate as a fraud or decet upon any person.
Fraud - akn to bad fath whch mpes a conscous and ntentona desgn to do a
wrongfu act for a dshonest purpose or mora obquty.
Settlement *'er
At any tme, durng an nvestgaton or proceedng under ths Code, partes beng
nvestgated and/or charged may propose n wrtng an oher of settement wth the
Commsson.
Upon recept of such oher of settement, the Commsson may consder the oher based
on tmng, the nature of the nvestgaton or proceedng, and the pubc nterest.
The Commsson may ony agree to a settement oher based on ts ndngs that such
settement s n the pubc nterest. Any agreement to sette sha have no ega ehect
unt pubcy dscosed. Such decson may be made wthout a determnaton of gut on
the part of the person makng the oher.
/imitation of -ctions
SEC. 62. Lmtaton of Actons. - 62.1. No acton sha be mantaned to enforce any
abty created under Secton 56 or 57 of ths Code uness brought wthn two (2) years
after the dscovery of the untrue statement or the omsson, or, f the acton s to
enforce a abty created under Subsecton 57.1(a), uness brought wthn two (2)
years after the voaton upon whch t s based. In no event sha any such acton be
brought to enforce a abty created under Secton 56 or Subsecton 57.1 (a) more
than ve (5) years after the securty was bona de ohered to the pubc, or under
Subsecton 57.1 (b) more than ve (5) years after the sae.
62.2. No acton sha be mantaned to enforce any abty created under any other
provson of ths Code uness brought wthn two (2) years after the dscovery of the
facts consttutng the cause of acton and wthn ve (5) years after such cause of
acton accrued.
Fase regstraton statement - abe cvy - sec. 56
Ceng as to amount of damages - trpe of the amount nvoved
Page 97 of 97
mtaton of actons - not ater than 5 years after the cause of acton accrues

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