XI.

STOCKS AND STOCKHOLDERS SUBSCRIPTION CONTRACTS

1. Pre-incorporation Subscription

A subscription of shares in a corporation still to be formed shall be irrevocable for a

period of at least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or the corporation fails to incorporate within the
same period or within a longer period stipulated in the contract of subscription. No
pre-incorporation subscription may be revoked after the articles of incorporation are
submitted to the Commission.

1.1 Binding Effect

Despite the non-existence of the corporation, the subscription contract before

incorporation is valid and binding. Section 60 of the RCCP provides that it is valid,
binding and irrevocable for a period of six months. In addition, even if the six-month
period has already expired, the pre-incorporation subscription contract is also
irrevocable after the filing of the Articles of Incorporation with the SEC.

2. Consideration of stock and transfer of shares

Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
(c) Labor performed for or services actually rendered to the corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the event of reclassification or
conversion;
(g) Shares of stock in another corporation; and/ or
(h) Other considerations. generally accepted form of

The consideration for the issuance of stock is not limited to only one of the items
enumerated because the law states that the consideration may be any or a combination
of any two or more of the considerations enumerated. However, Section 61 imposes the
following conditions:

(1) Stocks shall not be issued for a consideration less than the par or issued price
thereof;
(2) Shares of stock shall not be issued in exchange for promissory notes or future
services; and (3) Where the consideration is property, whether tangible or intangible,
such as patents or copyrights, the valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to approval by the SEC. a. In this connect

3. Certificate of Stock and transfer of shares

The capital stock of corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with
the bylaws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates endorsed by the owner, his attorney-in-fact, or
any other person legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer.is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates, and the number of shares transferred. The
Commission may require corporations whose securities are traded in trading markets
and which can reasonably demonstrate their capability to do so to issue their securities
or shares of stocks in uncertificated or scripless form in accordance with the rules of the
Commission. No shares of stock against which tt,e corporation holds any unpaid claim
shall be transferable in the books of the corporation.

4. Issuance of stock certificates

No certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid.

5. Rights of unpaid shares

SEC. 71. Rights of Unpaid Shares, Nondelinquent. - Holders of subscribed shares not
fully paid which are not delinquent shall have all the rights of a stockholder.

NOTES 1. Accrual of Rights of Shareholders. A pre-incorporation subscriber

becomes a shareholder from the moment the Certificate of Incorporation is issued. He
has been a shareholder from the inception of the corporation. Unless certain terms and
conditions are required, a post-incorporation subscriber becomes a s}Jareholder from
the perfection of the subscription contract. He is a shareholder the moment he holds the
shares by virtue of a subscription contract

6. Trust Fund Doctrine

First enunciated by the Supreme Court in the 1923 case of Philippine Trust Co. vs.
Rivera, provides that subscriptions to the capital stock of a corporation constitute a fund
to which the creditors have a right to look for the satisfaction of their claims.

This doctrine is the underlying principle in the procedure for the distribution of capital
assets which allows the distribution of corporate capital only in three instances:

● (1) amendment of the Articles of Incorporation to reduce the authorized capital

stock;
● (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings; and
● (3) dissolution and eventual liquidation of the corporation.

Furthermore, the doctrine is articulated in Section 41 [now Section 40 under the

Revised Corporation Code] on the power of a corporation to acquire its own shares and
in Section 122 [now Section 139 under the Revised Corporation Code] on the
prohibition against the distribution of corporate assets and property, unless the stringent
requirements therefor are complied with.

7. Liability of directors for watered stocks

A director or officer of a corporation who: (a) consents to the issuance of stocks for a
consideration less than its par or issued value; (b) consents to the issuance of stocks for
a consideration other than cash, valued in excess of its fair value; or (c) having
knowledge of the insufficient consideration, does not file a written objection with the
corporate secretary, shall be liable to the corporation or its creditors, solidarily with the
stockholder concerned for the difference between the value received at the time of
issuance of the stock and the par or issued value of the same.

NOTES 1. Watered stocks.

Watered stocks are stocks that are issued for a consideration less than the par or
issued price thereof. 176 Strictly speaking watered stocks should be distinguished from
bonus stocks. Bonus stocks are stocks that are issued without any valuable
consideration. However, bonus stocks are also covered by the prohibition under the first
sentence of Section 61 of the RCCP (previously Section 62 of the Corporation Code).

XII. CORPORATE BOOKS AND RECORDS

1. Books to be kept; stock transfer agent

Every corporation shall keep and carefully preserve at its principal office all information
relating to the corporation including, but not limited to:
(a) The articles of incorporation and bylaws of the corporation and all their
amendments;
(b) The current ownership structure and voting rights of the corporation, including lists
of stockholders or members, group structures, intra-group relations, ownership data,
and beneficial ownership;
(c) The names and addresses of all the members of the board of directors or trustees
and the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions Qf the board of directors or trustees and of the
stockholders or members;
(f) Copies of the latest reportorial requirements submitted to the Commission; and
(g) The minutes of all meetings of stockholders or members, or of the board of directors
or trustees. Such minutes shall set forth in detail, among others: the time and place of
the meeting held, how it was authorized, the notice given, the agenda therefore,
whether the meeting was regular or special, its object if special, those present and
absent, and every act done or ordered done at the meeting.

A stock transfer agent or one engaged principally in the business of registering

transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
Philippines upon securing a license from the Commission and the payment of a fee to
be fixed by the Commission,which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfers of its own stocks, in
which case all the rules and regulations imposed on stock transfer agents, except the
payment of a license fee herein provided, shall be applicable: Provided, further, That the
Commission may require stock corporations which transfer and/or trade stocks in
secondary markets to have an independent transfer ·agent.

2. Right to Financial statements

The stockholder or member is also entitled to the financial statements of the

corporation. Under Section 74, the same must be furnished within 10 days from receipt
of a written request. a. The financial statements shall be audited by an independent
certified public accountant. If the total assets or total liabilities of the corporation are
less than P600,000.00, or another amount as the Department of Finance may
determine to be appropriate, the financial statements shall be certified under oath by the
corporation's treasurer/chief financial officer and the president

XIII, MERGER AND CONSOLIDATION

1. Plan or Merger of Consolidation

(Merger is one where a corporation absorbs another corporation, where the former
corporation remains in existence while the latter is dissolved. Consolidation is one
where a new corporation is created, and the consolidating corporations are
extinguished.)

SEC. 75. Plan of Merger or Consolidation. - Two (2) or more corporations may merge
into a single corporation which shall be one of the constituent corporations or may
consolidate into a new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the following:
(a) The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
(b) The terms of the merger or consolidation and the mode of carrying the same into
effect;
(c) A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, in case of consolidation, all the statements required
to be set forth in the articles of incorporation for corporations organized under this
Code;and
(d) Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.

2. Stockholders' or Members approval

Stockholders' or Members' Approval. Upon approval by a majority vote of each of the

board of directors or trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the stockholders or members
of each of such corporations at separate corporate meetings duly called for the purpose.
Notice of such meetings shall be given to all stockholders or members of the respective
corporations in the same manner as giving notice of regular or special meetings under
Section 49 of this Code. The notice shall state the purpose of the meeting and include a
copy or a summary of the plan of merger or consolidation.

3. Articles of Merger or Consolidation

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

4. Effectivity of Merger or Consolidation

When the Commission is satisfied that the merger or consolidation of the corporations
concerned is consistent with the provisions of this Code and existing laws, it shall issue
a certificate approving the articles and plan of merger or of consolidation, at which time
the merger or consolidation shall be effective. If, upon investigation, the Commission
has reason to believe that the proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing laws, it shall set a hearing to
give the corporations concerned the opportunity to be heard. Written notice of the date,
time, and place of hearing shall be given to each constituent corporation at least two (2)
weeks before said hearing. The Commission shall thereafter proceed as provided in
this Code.

5. Effects of Merger or Consolidation

The merger or consolidation shall have the following effects:

(a) The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;
(b) The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation;
(c) The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities,, and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;
(d) The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of each constituent corporation; and all real or personal
property, all receivables due on whatever account, including subscriptions to shares and
other choses in action, and every other interest of, belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
(e) The surviving or consolidated corporation shall be responsible for all the liabilities
and obligations of each constituent corporation as though such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any
pending claim, action

XIV. APPRAISAL RIGHT

1. Instances of Appraisal Right

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

2. How Right is exercised

The dissenting stockholder who votes against a proposed corporate action may
exercise the right of appraisal by making a written demand on the corporation for the
payment of the fair value of shares held within thirty (30) days from the date on which
the vote was taken: Provided, That failure to make the demand within such period shall
be deemed a waiver of the appraisal right. If the proposed corporate action is
implemented, the corporation shall pay the stockholder, upon surrender of the certificate
or certificates of stock representing the stockholder's shares, the fair value thereof as of
the day before the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action. If, within sixty (60) days from the approval of the
corporate action by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two (2) thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall be paid by the corporation
within thirty (30) days after such award is made: Provided, That no payment shall be
made to any dissenting stockholder unless the corporation has unrestricted retained
earning in its books to cover such payment: Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith transfer
the shares to the corporation.

XV. NON-STOCK CORPORATIONS

1. Definition
a nonstock corporation is one where no part of its income is distributable as dividends
to its members, trustees, or officers: Provided, That any profit which a nonstock
corporation may obtain incidental to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title. The provisions governing stock
corporations, when pertinent, shall be applicable to nonstock corporations, except as
may be covered by specific provisions of this Title.
2. Purpose

Nonstock corporations may be formed or organized for charitable, religious,

educational, professional, cultural, fraternal, literary, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing particular classes of
nonstock corporations.

XVI. CLOSE CORPORATIONS

A close corporation, within the meaning of this Code, is one whose articles of
incorporation provides that: (a) all the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20).

1. Close Corporation v. Ordinary Corporation

Close Corporation Ordinary Corporation

There is a limitation on the number of There is no limit as to the number of

stockholders to a maximum of 20. shareholders.

There must be a restriction on the transfer A restriction on the transfer of shares.

of shares. need not be provided for.

Specific qualifications to be eligible as . Qualifications of stockholders not

stockholder are usually provided for. normally prescribed.

Public offering of shares is prohibited Public offering of shares is not prohibited.

prohibited.

May be managed directly by the Managed by the Board of Directors and

stockholders, as the Articles of not by the stockholders.
Incorporation. may provide

There are rules on dead- lock. There are no rules on deadlock; . the
powers given to the SEC in case of
deadlock in close corporations are not
available (example: there is no power to
appoint provisional directors).

A shareholder may withdraw and may ask Generally, a shareholder cannot withdraw
the corporation to purchase his share/s. and compel the corporation to purchase
 his shares; the exceptions are provided
for under Section 40 of the RCCP.

The main difference between a close corporation and other corporations is the identity
of stock ownership and active management, that is, all or most of the stockholders of a
close corporation are active in the corporate business as directors, officers or other key
men in management.

2. What cannot be close corporation

The following corporations cannot be close corporations:
(a) A corporation wherein at least 2/3 of its voting stock or voting rights is owned by
another corporation that is not a close corporation;
(b) Mining or oil companies;
(c) Stock exchanges;
(d) Banks;
(e) Insurance companies;
(f) Public utilities;
(g) Educational institutions; and
(h) Corporations declared to be vested with public interest.

3. Closed corporation v. Closely held corporation

A close corporation is different from a "closed corporation" and a "closely held

corporation." The term "closed'"emphasizes a determination on the part of the
participants in the enterprise to keep outsiders from acquiring any interest in the
business and may indicate that they have taken steps to accomplish that objective by
shareholders' agreement or provisions in the
Articles of Incorporation or By-Laws."
In a "closed corporation,"the shares are transferable but by agreement, the provisions
of the
Articles of Incorporation or By-Laws, the components thereof opted to close its doors on
other persons and effectively bar such other persons from becoming shareholders.
a. "Closely held' focuses more on the number of shareholders in the corporation at that
particular time, indicating that they are few in numbers. Thus, a "closely held
corporation" has been defined

XVII. SPECIAL CORPORATIONS

SEC. 105. Incorporation. - Educational corporations shall be governed by special laws
and by the general provisions of this Code. SEC. 106.
Board of Trustees. - Trustees of educational institutions organized as nonstock
corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the
number of trustees shall be in multiples of five (5)

XVIII. RELIGIOUS CORPORATIONS

Religious corporations may be incorporated by one (1) or more persons. Such
corporations may be classified into corporations sole and religious societies

Corporation Sole. - For the purpose of administering and managing, as trustee, the
affairs, property, and temporalities of any religious denomination, sect or church, a
corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi,
or other presiding elder of such religious denomination, sect or church.

A corporation sole is a special form of corporation usually associated with the clergy.
Conceived and introduced in the common law by sheer necessity, this legal creation,
which was referred to as "that unhappy freak of English law", was designed to facilitate
the exercise of the functions of ownership carried on by the clerics for and on behalf of
the church that was regarded as the property owner.

Religious Societies. - Unless forbidden by competent authority, the Constitution,

pertinent rules, regulations, or discipline of the religious denomination, sect or church of
which it is a part, any religious society, religious order, diocese, or synod, or district
organization of any religious denomination

XIX. DISSOLUTION

Voluntary Dissolution Where No Creditors are Affected. - If dissolution of a corporation

does not prejudice the rights of any creditor having a claim against it, the dissolution
may be affected by majority vote of the board of directors or trustees, and by a
resolution adopted by the affirmative vote of the stockholders owning at least majority of
the outstanding capital stock or majority of the members of a meeting to be held upon
the call of the directors or trustees.
A verified request for dissolution shall be filed with the Commission stating:
(a) the reason for the dissolution;
(b) the form, manner, and time when the notices were given;
(c) names of the stockholders and directors or members and trustees who approved
the dissolution;
(d) the date, place, and time of the meeting in which the vote was made; and
(e) details of publication.
Voluntary Dissolution Where Creditors are Affected; Procedure and Contents of
Petition. - Where the dissolution of a corporation may prejudice the rights of any
creditor, a verified petition for dissolution shall be filed with the Commission.

XX. CASES

1. Heirs of Wilson P. Gamboa v. Finance Secretary Margarito B. Teves, et al., GR No.

176579, October 9, 2002 January 12, 2011

2. Carandang v. Disierto, GR No. 148076 & 153161, 3. Gokongwei, Jr. v. SEC, GR No.
L-45911, April 11, 1979

4. Legaspi Towers Inc. v. Amelia P. Muer, GR No. 170783, June 18, 2012

B. REVISED CORPORATION CODE

C. LAW ON PARTNERSHIP

1. Formation

2. Kinds

3. Obligations of Partner

4. Partners to Third Person

5. Dissolution

6. Liabilities of a limited partner

D. BOUNCING CHECKS LAW (Batas Pambansa Bilang 22)

1. Checks without insufficient funds

2. Evidence of knowledge of insufficient funds

3. Duty of Drawee
4. Credit construed

E. ART. 315 OF THE REVISED PENAL CODE

Title: Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al.

Facts:
Wilson P. Gamboa, a shareholder of the Philippine Long Distance Telephone Company
(PLDT), filed a petition challenging the sale of shares of the Philippine
Telecommunications Investment Corporation (PTIC) by the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific). The case traces its roots to 1967 when PTIC was incorporated
and subsequently held 26% of PLDT’s equity. Various changes in PTIC’s ownership
structure ultimately led to its sequestration by the Presidential Commission on Good
Government (PCGG) in 1986. In 1999, First Pacific gained control of PTIC by acquiring
54% of its outstanding capital stock.

In November 2006, the Philippine Government, through the Privatization Council,

announced its intent to sell its 111,415 PTIC shares, amounting to 46.125% of PTIC’s
outstanding capital stock. Parallax Venture Fund XXVII won the bid for the shares,
which was then matched by First Pacific after being granted the right of first refusal by
the Privatization Council. Consequently, MPAH acquired the shares, resulting in First
Pacific’s increase in common shares in PLDT from 30.7% to 37%, thereby raising the
issue of potential violation of the Philippine Constitution’s restriction on foreign
ownership in public utilities.

Gamboa alleged that the increase in First Pacific’s common shareholdings in PLDT
violated Section 11, Article XII of the 1987 Philippine Constitution, which limits foreign
ownership of the capital of a public utility to not more than 40 percent. Gamboa’s
assertion was based on the contention that First Pacific, with a combined interest with
Japanese NTT DoCoMo, would collectively own 51.56 percent of PLDT’s common
equity.

Gamboa raised several issues: (1) the violation of the constitutional limit on foreign
ownership following the sale of PTIC shares to First Pacific, (2) grave abuse of
discretion by public respondents in allowing the sale, and (3) the sale of common
shares to foreigners exceeding 40 percent of the entire subscribed common capital
stock contravening the constitutional limit on foreign ownership in a public utility.
Procedurally, the sale of PTIC shares was completed on February 28, 2007, and
Gamboa timely filed the petition on the same day. The complexity of the issues led
various government agencies, as well as officers of relevant corporations including First
Pacific and PLDT, to adopt different stances. The Philippine government contended that
existing interpretation practices included both common and preferred shares in
assessing compliance with the 40% constitutional limitation.

Issues:
1. Whether the term “capital” in Section 11, Article XII of the 1987 Philippine Constitution
refers only to common shares or includes the total outstanding capital stock of PLDT, a
public utility.
2. If the term “capital” refers only to common shares, whether the sale of PTIC shares to
First Pacific resulting in foreign ownership of common shares exceeding 40% violates
the constitutional limitation on foreign ownership of public utilities.

Court’s Decision:
The Philippine Supreme Court partly granted the petition and ruled that the term
“capital” in Section 11, Article XII of the 1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, or to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares). The Court
directed the Chairperson of the Securities and Exchange Commission (SEC) to apply
this definition of the term “capital” when determining the extent of allowable foreign
ownership in PLDT. The Court also held that if there was a violation of Section 11,
Article XII of the Constitution, appropriate sanctions under the law should be imposed.

Doctrine:
The term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares
of stock that can vote in the election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares).

Class Notes:
– Public utilities in the Philippines must comply with the minimum nationality
requirement set by the Constitution: at least 60% Filipino ownership, which refers to
shares with voting rights.
– The term “capital” for the purpose of nationality requirement in relation to public
utilities pertains to common shares, which are the voting stocks in a corporation.
– The SEC is the agency responsible for enforcing compliance with the nationality
requirement for public utilities prescribed by the Constitution.
Historical Background:
This case reflects the application of nationalistic provisions in the Philippine Constitution
aimed at maintaining Filipino control over public utilities. These restrictions date back to
the 1935 Constitution and have been reiterated in subsequent constitutions, reflecting a
consistent policy of reserving certain areas of the economy to Filipinos. This policy
underscores the protectionist stance that aims to preserve certain economic activities,
such as public utilities, for national development and public interest.

Case Digest (G.R. No. 148076 & 153161)

Facts:

● Antonio M. Carandang challenged the jurisdiction of the Ombudsman and the

Sandiganbayan.
● Carandang argued that he was not a public official because he served as the general
manager and chief operating officer of Radio Philippines Network, Inc. (RPN), which
was not a government-owned or -controlled corporation.
● Carandang claimed that this resulted in the dismissal of administrative and criminal
charges against him.
● Carandang sought the reversal of the decision and resolution of the Court of Appeals
(CA) affirming the decision of the Ombudsman dismissing him from the service for grave
misconduct.
● Carandang also challenged the resolutions of the Sandiganbayan (Fifth Division) that
sustained its jurisdiction over the criminal complaint charging him with violation of
Section 3 (g) of the Anti-Graft and Corrupt Practices Act.
● In March 1986, the government ordered the sequestration of RPN's properties, assets,
and business.
● On November 3, 1990, the Presidential Commission on Good Government (PCGG)
entered into a compromise agreement with RPN.
● Carandang assumed office as general manager and chief operating officer of RPN on July
28, 1998.
● On April 19, 1999, Carandang and other RPN officials were charged with grave
misconduct before the Ombudsman.
● The charge alleged that Carandang, in his capacity as the general manager of RPN, had
entered into a contract with AF Broadcasting Incorporated despite his being an
incorporator, director, and stockholder of that corporation.
● Carandang sought the dismissal of the administrative charge on the ground that the
Ombudsman had no jurisdiction over him because RPN was not a government-owned or
-controlled corporation.
 ● The Ombudsman found Carandang guilty of grave misconduct and ordered his dismissal
from the service.
● Carandang appealed the decision, but the Court of Appeals affirmed the decision of the
Ombudsman.
● Carandang also faced a criminal complaint for violation of Section 3 (g) of the Anti-Graft
and Corrupt Practices Act.
● He moved to quash the information, arguing that the Sandiganbayan had no jurisdiction
over him because RPN was not a government-owned or -controlled corporation.
● The Sandiganbayan denied Carandang's motion to quash, and he appealed the decision.

Issue:

● Whether RPN was a government-owned or -controlled corporation, which would

determine the jurisdiction of the Ombudsman and the Sandiganbayan over Carandang.

Ruling:

● The court ruled in favor of Carandang.

● RPN was neither a government-owned nor a controlled corporation because the
government's total share in RPN's capital stock was only 32.4%.
● The court also considered the opinions of the PCGG and the Office of the President,
which recognized RPN's status as a private corporation.
● Based on these findings, the court granted Carandang's petitions and reversed the
decisions of the Court of Appeals and the Sandiganbayan.
● The administrative charge for grave misconduct against Carandang was dismissed, and
the criminal case against him was also dismissed.

Ratio:

● The court determined the jurisdiction of the Ombudsman and the Sandiganbayan over
Carandang based on whether RPN was a government-owned or -controlled corporation.
● The court found that RPN was not a government-owned or -controlled corporation
because the government's total share in RPN's capital stock was only 32.4%.
● The court also considered the opinions of the PCGG and the Office of the President,
which recognized RPN's status as a private corporation.
● Therefore, the court granted Carandang's petitions and dismissed the administrative and
criminal charges against him.
G.R. No. L-45911. April 11, 1979

Title: John Gokongwei, Jr. vs. Securities and Exchange Commission, et al.

Facts: The case revolves around the petitioner, John Gokongwei, Jr., a significant
stockholder of respondent San Miguel Corporation (SMC). Gokongwei filed two cases
before the Securities and Exchange Commission (SEC). The first case, SEC Case No.
1375, challenged the amended by-laws of SMC which effectively disqualified him from
being elected as a director due to his interests in competing businesses. The second,
SEC Case No. 1423, accused SMC of investing corporate funds in other
corporations/businesses without the requisite stockholders’ approval, an alleged
violation of Section 17-1/2 of the Corporation Law. In SEC Case No. 1375, Gokongwei
contended that the Board of Directors of SMC had no authority to amend the by-laws to
include disqualification provisions because the powers delegated to the Board in 1961
had already been exercised and thus exhausted. Furthermore, Gokongwei argued that
the disqualification provisions were intended to suppress minority stockholders and
were unreasonable, oppressive, and amounted to an ultra vires act. In SEC Case No.
1423, Gokongwei alleged that SMC, without stockholders’ approval, invested in other
businesses outside its primary purpose, violating Section 17-1/2 of the Corporation Law,
and sought that such action be declared illegal. The SEC failed to act with deliberate
dispatch on Gokongwei’s petitions. Due to the impending annual stockholders’ meeting
of SMC and the potential for irreversible actions therein, Gokongwei sought recourse
before the Supreme Court through a petition for certiorari, mandamus, and injunction,
with a prayer for the issuance of a writ of preliminary injunction. The Supreme Court
issued a temporary restraining order, restraining SMC from disqualifying Gokongwei
from running for directorship and from ratifying the by-laws amendment and the foreign
investments in question.
Issues:

1. Whether the amended by-laws of SMC disqualifying a competitor from nomination or

election to the Board of Directors are valid and reasonable.

2. Whether the SEC gravely abused its discretion in denying Gokongwei’s request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary
of SMC. G.R. No. L-45911. April 11, 1979 2

3. Whether the SEC committed grave abuse of discretion in allowing the ratification of
the foreign investment of corporate funds in violation of Section 17-1/2 of the
Corporation Law.

Court’s Decision:

1. The Court, though not unanimous, effectively upheld the validity of the amended
by-laws disqualifying competitors from board nomination or election. The majority found
the by-laws to be a reasonable exercise of corporate authority as a measure of
self-protection.

2. The Court granted Gokongwei’s petition to examine the books and records of San
Miguel International, Inc., affirming his statutory right as a stockholder.

3. On the matter of ratifying the foreign investment, the Court found the issue moot, as
the investment in question pertained to SMC’s primary purpose and had been ratified by
stockholders.

Doctrine:

1. Corporate by-laws may provide reasonable qualifications for directors; however, they
must not be contrary to law or used to perpetuate a board or suppress minority rights.
2. A stockholder’s right to inspect the books and records of the corporation extends to
wholly owned subsidiaries where the parent corporation has control over the
subsidiary’s records.

3. A corporation may invest its funds in a business in line with its main purpose without
the approval of stockholders, provided such investment does not violate the Corporation
Law.

Class Notes:

– The Philippine Corporation Law provides that directors act as fiduciaries to the
corporation and the stockholders, and must serve with utmost good faith and loyalty.

– A director may not use his position to further personal interests to the detriment of the
corporation and its stockholders.

– The Anti-Trust Laws, inclusive of the Philippine Constitution, prohibit monopolies and
combinations in restraint of trade or unfair competition.

– There is an inherent statutory right for a stockholder to inspect the books of the
corporation, which must be exercised in good faith and for a lawful purpose.

Historical Background:

The case provides an instance where the internal governance mechanisms of a

corporation were leveraged to address potential conflicts of interest arising from
competition. It illustrates the balance sought by corporate governance between the
rights of minority G.R. No. L-45911. April 11, 1979 3 shareholders and the protection of
corporate interests. The decision also underscores the evolving jurisprudence on
corporate law and stockholder rights in the Philippines during the period of economic
expansion and diversification of business interests.
Legaspi Towers vs. Muer G.R. No. 170783

FACTS:

Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners, incumbent Board of
Directors, set the annual meeting of the members of the condominium corporation and
the election of the new Board of Directors.

However, petitioners adjourned the meeting for lack of quorum.

The group of respondents challenged the adjournment of the meeting and pushed
through with the scheduled election and were elected as the new Board of Directors and
officers.

Petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for
the issuance of TRO and Writ of Preliminary Injunction and Damages against
respondents. The RTC issued a 72 hour TRO, enjoining defendants from taking over
management, or to maintain a status quo, in order to prevent further irreparable
damages and prejudice to the corporation.

Plaintiffs’ motion to admit amended complaint and motion to amend complaint to include
Legaspi Towers 300, Inc. as party-plaintiff were denied.

Petitioners filed a Motion for Reconsideration of the Orders, which the court denied.
Petitioners filed a petition for certiorari with the CA.

The CA dismissed the petition for lack of merit.

Petitioners’ MR was denied by the CA.

ISSUE:
Whether or not a derivative suit proper in this case.

RULING:
Suits by stockholders or members of a corporation based on wrongful or fraudulent acts
of directors or other persons may be classified into individual suits, class suits, and
derivative suits.

Where a stockholder or member is denied the right of inspection, his suit would be
individual because the wrong is done to him personally and not to the other
stockholders or the corporation.

Where the wrong is done to a group of stockholders, as where preferred stockholders’

rights are violated, a class or representative suit will be proper for the protection of all
stockholders belonging to the same group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action belongs to the corporation and not
to the individual stockholder or member.

However, in cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has no
redress because the former are vested by law with the right to decide whether or not the
corporation should sue, and they will never be willing to sue themselves. The
corporation would thus be helpless to seek remedy. Because of the frequent occurrence
of such a situation, the common law gradually recognized the right of a stockholder to
sue on behalf of a corporation in what eventually became known as a “derivative suit.” It
has been proven to be an effective remedy of the minority against the abuses of
management. Thus, an individual stockholder is permitted to institute a derivative suit
on behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the ones to
be sued or hold the control of the corporation. In such actions, the suing stockholder is
regarded as the nominal party, with the corporation as the party-in- interest.

Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs
prayed for do not pertain to the corporation, then it is an improper derivative suit.
The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

The stockholder’s right to file a derivative suit is not based on any express provision of
The Corporation Code, but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties, which is not the issue in this case.