Corpo Ladia Book Notes.pdf

August 1, 2017 | Author: Rj Fonacier | Category: Corporations, Partnership, Legal Personality, Joint Venture, Business
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THE CORPORATION CODE OF THE PHILIPPINES CHAPTER 1: INTRODUCTION

law is necessary for its creation such that the mere agreement of the persons composing it or intending to organize it does not warrant the grant of its independent existence as a juridical entity;

KINDS OF BUSINESS ORGANIZATION 1.

SOLE PROPRIETORSHIP – one conducted for profit by a lone or single individual who owns all assets, personally owes and answers all the liabilities or suffers all the losses and enjoys all the profits to the exclusion of others.

ADVANTAGES Eliminates the bureaucratic process common in corporations where the board of directors must sit as a body to have a valid transaction. The proprietor makes his own decisions and can act without delay. Proprietor owns all the profits without having to share the same

DISADVANTAGES Unlimited personal liability of the proprietor

Capital is limited by the proprietor’s personal resources

2.

PARTNERSHIP – a contract where two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (Art. 1767, Civil Code).

3.

JOINT VENTURE – a one-time grouping of two or more persons, natural or juridical, in a specified undertaking.

PARTNERSHIP Has a personality separate and distinct from the partners Has for its object a general business of particular kind, although there may be partnership for a single transaction Corporations, generally are not allowed to enter into partnerships*

JOINT VENTURE Does not acquire a separate and distinct personality from the venturers Object is an undertaking of a particular or single transaction Corporations ventures

may

enter

joint

*A corporation is generally not allowed to enter into partnerships because (1) the identity of the corporation is lost or merged with that of another; and (2) the discretion of the officials is placed in other hands other than those permitted by the law in its creation. EXCEPTION to the rule is when the following conditions are met: a. The articles of incorporation expressly authorized the corporation to enter into contracts of partnership; b. The agreement or articles of partnership must provide that all the partners will manage the partnership; and c. The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership 4.

CORPORATION – an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec. 1, Corporation Code [CC]) CHAPTER 2: DEFINITION AND ATTRIBUTES

A.

2.

ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.

3.

RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more of its stockholder does not result in its dissolution;

4.

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only such powers and can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything as they please.

LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21, 1994]) – Private respondent Carloto, incumbent President-Manager of private respondent Rural Bank of Labason, alleged that he was instructerd to go to Manila to follow up on the Bank’s plan of payment of rediscounting obligations with Central Bank’s main office, where he purchased a round trip ticket and phone his sister to send him P1,000 for his pocket money which LBC failed to deliver and eventually Carloto was not able to submit the rediscounting documents and the Bank was made to pay the Central Bank P32,000 s penalty interest and alleged that he suffered embarrassment and humiliation. Respondent Rural Bank was later on joined as one of the plaintiff and prayed for the reimbursement of P32,000. Carloto and the Bank was awarded moral and exemplary damages of P10,000 and P5,000, respectively. ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be awarded moral damages? HELD: No. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, oral shock, social humiliation and social injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows and grieves of life – all of which cannot be suffered by respondent bank as an artificial person. BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel, slander and other forms of defamation, a corporation is entitled to moral damages. C.

ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1.

CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may unite in a single enterprise without using their names, without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, and to hold or convey property, in the corporate name; LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since stockholders are not personally liable for the debts of the corporation; CONTINUITY OF EXISTENCE – rights and obligations of a corporation are not affected by the death, incapacity or replacement of the individual members; FEASIBILITY OF GREATER UNDERTAKING – it enables the individuals to cooperate in order to furnish the large amounts of capital necessary to finance large scale enterprises; TRANSFERABILITY OF SHARES – unless reasonably restricted, shares of stocks, being personal properties, can be transferred by the owner without the consent of the other stockholders; CENTRALIZED MANAGEMENT – the vesting of powers of management and appointing officers and agents in board of directors gives to a corporation the benefit of a centralized administration which is a practical business necessity in any large organization; and STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT AND FINANCE – which are provided under a well-drawn general

2. 3. 4.

DEFINITION

Sec. 2. Corporation Defined – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. B.

ATTRIBUTES (CARP)

1.

CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance with the requirements imposed by

1

5. 6.

7.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

corporation law. The corporation statutes enter into the charter contract and these are constantly being interpreted by courts. An established system of management and protection of shareholders and creditors’ rights has thus been and are being evolved. D. 1. 2. 3. 4. 5. 6. 7. 8.

E.

DISADVANTAGES To have a valid and binding corporate act, formal proceedings, such as board meetings are required; The business transactions of a corporation is limited to the State of its incorporation and may not act as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign state; The shareholders’ limited liability tends to limit the credit available to the corporation as a separate legal entity; Transferability of shares may result to uniting incompatible and conflicting interests; The minority shareholders have practically no say in the conduct of corporate affairs; In large scale enterprises, stockholders’ voting rights may become merely fictitious and theoretical because of disinterest in management, wide-scale ownership and inaccessible place of meeting; “Double taxation” may be imposed on corporate income; and Corporations are subject to governmental regulations, supervision and control including submission of reportorial requirements not otherwise imposed in other business form. CORPORATION VS. PARTNERSHIP

CORPORATION Created by operation of law (Sec. 2&4, Corp Code) There must be at least 5 incorporations (Sec. 10), except corporation sole which is incorporated by one single individual (Sec. 110) Can exercise only such powers and functions expressly granted to it by law and those that are necessary or incidental to its existence (Sec. 2, 45) Unless validly delegated expressly or impliedly, a corporation must transact its business through the board of directors (Sec. 23) Right of succession, it continues to exist despite the death, withdrawal, incapacity or civil interdiction of the stockholders or members. (Sec. 3) Transferability of shares – without the consent of the other stockholders. (Sec. 63) Limited liability – only to the extent of their subscription or their promised contribution.

The term of corporate existence is limited only to fifty years and unless extended by amendment, it shall be considered non-existent except for the purpose of liquidation. Cannot be dissolved by mere agreement of the stockholders. The consent of the State is necessary for it to cease as a body corporate.

PARTNERSHIP Created by mere agreement of the parties (Art. 1767, Civil Code) Maybe formed by two or more natural persons (Art. 1767)

Can do anything by agreement of the parties provided only that it is not contrary to law, morals, good customs or public order. (Art. 1306) In the absence of an agreement to the contrary, any one of the parties in the partnership form of business may validly bind the partnership (Art. 1308, par. 1) Based on mutual rust and the death, incapacity, insolvency, civil interdiction or mere withdrawal of one of the parties would result in its dissolution (Art. 1830, par. 6 & 7) A partner cannot transfer his rights or interests in the partnership so as to make the transferee a partner without the consent of the other partners (Art. 1830, par. 6 & 7) All partners, including industrial ones (except a limited partner) are liable pro rata with all their property and after all the partnership property has been exhausted, for all partnership liability (Art. 1813) May exist for an indefinite period subject only to the causes of dissolution provided for by the law of its creation (Art. 1824) Partners may dissolve their partnership at will or at any time they deem it fit (Art. 1830, par. 1(b) and par. 2)

F.

GOVERNMENT POWERS IN RELATION TO CORPORATIONS

The Corporation Code places all corporations registered under its provision to be under the control and supervision of the Securities and Exchange Commission (Sec. 19 and 144). Its powers and functions are clearly spelled out in PD 902-A, as amended by RA No. 8799, otherwise known as the Securities Regulation Code. CHAPTER 3: CLASSIFICATION OF CORPORATION A.

CLASSES OF CORPORATIONS UNDER THE CORPORATION CODE

Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS: 1. They have a capital stock dividend into shares; and 2. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each of them. SIGNIFICANT DISTINCTION: Although a non-stock corporation exists for purposes other than for profit, it does not follow that they cannot make profits as an incident to their operations. But a significant distinction is that profits obtained by a non-stock corporation cannot be distributed as dividends but are used merely for the furtherance of their purpose or purposes. COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC. DE CEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club operates a clubhouse, a bowling alley, a golf course and a bar restaurant where it sells wines, liquors, soft-drinks, meals and short orders to its members and their guests. The bar and restaurant was a necessary incident to the operation of the Club and its golf course is operated mainly with funds derived from membership fees and dues. Whatever profits it had were used to defray its overhead expenses and to improve its golf course. In 1951, as a result of capital surplus arising from the revaluation of its real properties, the Club declared stock dividends. In 1952, the BIR assessed percentage taxes on the gross receipt of the Club’s bar and restaurant pursuant to Sec. 182 of the Tax Code: “unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of P10 for each calendar year or a fraction thereof” and under Sec. 191: “keepers of restaurant, refreshment parlors and other eating places shall pay a tax of 3% of their gross receipts” ISSUE: WON the Club is liable for the assessment? HELD: No. It has been held that the liability for fixed and percentage taxes does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a bar keeper and restauranteur. Business, in the ordinary sense, is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning; restricted to activities for profit or livelihood. The fact that the Club derived profits from the operation of its bar and restaurant does not necessarily convert it into a profit making enterprise. The bar and restaurant are necessary adjunct of the Club to foster its purpose and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a club makes profit does not make it a profit-making club. ISSUE2: Is the Club a stock corporation? HELD: No. The fact that the capital of the Club is divided into shares does

2

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose as stated in its articles and by-laws. Moreover, for a stock corporation to exists, two requisites must be complied with: (1) a capital stock divided into shares; and (2) an authority to distribute to the holders of such shares, dividends or allotments of surplus profits on the basis of the shares held. In the case at bar, nowhere it its AOI or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot therefore, be considered as stock corporation, within the contemplation of the Corporation Code. B.

CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER

Sec. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Among these corporations created by special law are the Philippine National Oil Company, the National Development Company, the Philippine Export and Foreign Loan Guarantee Corporation and the GSIS. All these are government owned or controlled, operating under a special law or charter such that registration with the SEC is not required for them to acquire legal and juridical personality. They owe their own existence as such not by virtue of their compliance with the requirements of registration under the Corporation Code but by virtue of the law specially creating them. They are primarily governed by the special law creating them. But unless otherwise provided by such law, they are not immune from suits, it is thus settled that when the government engages in a particular business through the instrumentality of a corporation, it divests itself pro hoc vice of its sovereign character so as to subject itself to the rules governing private corporations (PNB vs. Pabolar 82 SCRA 595) Officers and employees of GOCCs created by special laws are governed by the law of their creation, usually the Civil Service Law. Their subsidiaries, organized under the provisions of the Corporation Code are governed by the LAbor Code. The test in determining whether they are governed by the Civil Service Law is the manner of their creation. PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo Mercado, an employee of herein petitioner was dismissed on the ground of dishonesty and violation of company rules and regulations. He filed an illegal dismissal complaint before herein respondent NLRC who ruled on his favour, despite the motion to dismiss of petitioner that the Civil Service Commission has jurisdiction over the case. ISSUE: WON NLRC has jurisdiction over the case? HELD: Yes. Employees of GOCCs, whether created by special law or formed as subsidiaries under the Corporation Law are governed by the Civil Service Law and not the Labor Code, under the 1973 Constitution has been supplanted by the present Constitution. Thus, under the present state of the law, the test in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its coverage. PNOC has its special charter, but its subsidiary, PNOC-EDC, having been incorporated under the General Corporation Law was held to be a GOCC whose employees are subject to the provisions of the Labor Code. C.

OTHER CLASSES OF CORPORATIONS

1.

PUBLIC AND PRIVATE CORPORATIONS

3

PUBLIC CORPORATION: those formed or organized for the government of a portion of the State or any of its political subdivisions and which have for their purpose the general good and welfare. It is to be observed, however, that the mere fact that the undertaking in which a corporation is engaged in is one which the State itself might enter into as part of its public work does not make it a public one. Nor is the fact that the State has granted property or special privileges to a corporation render it public. Likewise, the fact that some or all of the stocks in the corporation are held by the government does not make it a public corporation. The TRUE TEST to determine the nature of a corporation is found in the relation of the body to the State. Strictly speaking, a public corporation is one that is created, formed or organized for political or governmental purposes with political powers to be exercised for purposes connected with the public good in the administration of the civil government. The GOCCs are regarded as private corporations misconceptions.

despite common

NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL REVENUE (146 Phil. 583) – Herein plaintiff brought an action for the purpose of recovering a sum of money allegedly paid by it under protest to the herein defendant, a specific tax on some tons of coal. It claimed exemption from taxes under Sec. 1469 of the Administrative Code which provides that “on all coal and coke shall be collected per metric ton, fifty centavos”. Of the 30,000 shares issued by the corporation, the Philippine government is the owner of 29,809 or substantially all of the shares of the company. ISSUE: WON the plaintiff corporation is a public corporation? HELD: No. The plaintiff is a private corporation. The mere fact that the government happens to be a majority stockholder does not make it a public corporation. As a private corporation, it has no greater rights, powers and privileges than any other corporation which might be organized for the same purpose under the Corporation Law, and certainly, it was not the intention of the Legislature to give it a preference or right or privilege over other legitimate private corporation in the mining of coal. PRIVATE CORPORATIONS: those formed for some private purpose, benefit, aim or end. They are created for the immediate benefit and advantage of the individuals or members composing it and their franchise may be considered as privileges conferred by the State to be exercised and enjoyed by them in the form of the corporation. 2.

ECCLESIASTICAL AND LAY CORPORATIONS

ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed exclusively of ecclesiastics organized for spiritual purposes or for administering properties held for religious ones. They are organized to secure public worship or perpetuating the right of a particular religion. LAY CORPORATIONS: are those organized for purposes other than religion. They may further be classified as: a. ELEEMOSYNARY: created for charitable and benevolent purposes such as those organized for the purpose of maintaining hospitals and houses for the sick, aged or poor. b. CIVIL: organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members. 3.

AGGREGATE AND SOLE CORPORATIONS

AGGREGATE CORPORATIONS: are those composed of a number of individuals vested with corporate powers. CORPORATION SOLE: those consist of one person or individual only and who are made as bodies corporate and politic in order to give them some legal capacity and advantage which, as natural persons, they cannot have. Under the Code, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder or religious

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

denominations, sects or churches. 4.

CLOSE AND OPEN CORPORATION

CLOSE CORPORATIONS: are those whose shares of stock are held by a limited number of persons like the family or other closely-knit group. There are no public investors and the shareholders are active in the conduct of the corporate affairs; recognized under Sec. 96 of the Corporation Code. OPEN CORPORATIONS: are those formed to openly accept outsiders as stockholders or investors. They are authorized and empowered to list in the stock exchange and to offer their shares to the public such that stock ownership can widely be dispersed. 5.

DOMESTIC AND FOREIGN CORPORATIONS

DOMESTIC CORPORATIONS: are those organized or created under or by virtue of the Philippine laws, either by legislative act or under the provisions of the General Corporation Law. FOREIGN CORPORATIONS: are those formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123, Corporation Code). The second part of the definition is, however, somehow misplaced since any corporation for that matter, which is not registered under Philippine laws is a foreign corporation. Such second part was inserted only for the purpose of qualifying a foreign corporation to secure a license and to do business in the Philippines.

the State in a quo warranto proceeding. They are, in effect, incorporated by strict adherence to the provisions of the law of their creation. DE FACTO CORPORATIONS: are those which exist by the virtue of an irregularity or defect in the organization or constitution or from some omission to comply with the conditions precedent by which corporations de jure are created, but there was colorabe compliance with the requirements of the law under which they might be lawfully incorporated for the purposes and powers assumed, and user of the rights claimed to be conferred by law. Its existence can only be attacked by a direct action of quo warranto proceedings. CORPORATION BY ESTOPPEL: those which are so defectively formed as not to be either de jure or de facto corporations but which are considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement, admission or conduct. CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS 1.

PROMOTIONAL STAGE

This is undertaken by the organizers or promoters who bring together persons interested in the business venture. They enter into contract either in their own names or in the name of the proposed corporation.

LIABILITY OF PROMOTERS:

PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND AFFILIATES

GENERAL RULE: a promoter, although he may assume to act for and on behalf of a projected corporation and not for himself, will be held personally liable on contracts made by him for the benefit of a corporation he intends to organize. The personal liability continues even after the formation of the corporation unless there is novation or other agreement to release him from liability. As such, the promoter may do either of the following options:

PARENT OR HOLDING COMPANY: a corporation who controls another corporation, or several other corporations known as its subsidiaries. Holding companies have been defined as corporations that confine their activities to owning stock in, and supervising management of other companies. A holding company usually owns a controlling interest (more than 50% of the voting stock) in the companies whose stocks it holds. As may be differentiated from investment companies which are active in the sale or purchase of shares of stock or securities, parent or holding companies have a passive portfolio and hold the securities merely for purposes of control and management.

a. He may make a continuing offer on behalf of the corporation, which, if accepted after incorporation, will become a contract. In this case, the promoter does not assume any personal liability, whether or not the corporation will accept the offer; b. He may make a contract at the time binding himself, with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relieved of responsibility; or c. He may bind himself personally and assume responsibility of looking to the proposed corporation, when formed, for reimbursement.

SUBSIDIARY CORPORATIONS: those which another corporation owns at least a majority of the shares, and thus have control.

2.

6.

A subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence any claim or suit against the latter does not bind the former or vice versa. AFFILIATES: are those corporations which are subject to common control and operated as part of a system. They are sometimes called “sister companies” since the stockholdings of a corporation is not substantial enough to control the former. Example: 15% of ABCD Company is held by A Corp, 18% by B Corp, and another 15% by C Corp. – A, B and C are affiliates. 7.

QUASI-PUBLIC CORPORATIONS

These are private corporations which have accepted from the state the grant of a franchise or contract involving the performance of public duties. The term is sometimes applied to corporations which are not strictly public in the sense of being organized for governmental purposes, but whose operations contribute to the convenience or welfare of the general public, such as telegraph and telephone companies, water and electric companies. More appropriately, they are known as public service corporations. 8.

DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL

DE JURE CORPORATIONS: are juridical entities created or organized in strict or substantial compliance with statutory requirements of incorporation and whose rights to exist as such cannot be successfully attacked even by

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PROCESS OF INCORPORATION

Includes the drafting of the Articles of Incorporation, preparation and submission of additional and supporting documents, filing with the SEC, and the subsequent issuance of the Certificate of Incorporation.

CONTENTS OF THE ARTICLES OF INCORPORATION Sec. 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Sec. 15. Forms of Articles of Incorporation . - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: a.

contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. The SEC, in implementing the above provision on corporate name, thus requires that a “Verification Slip” from the Records Division of the Commission be submitted showing that the proposed name is legally permissible. If the corporate name is available for use, the SEC will allow the incorporators to “reserve” it for a nominal fee for a specific period until the AOI is filed with the SEC. SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides: In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following revised guidelines in the approval of corporate and partnership names are hereby adopted for the information and guidelines of all concerned: 1.

2.

3.

PREFATORY PARAGRAPH

xxx “KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines” xxx It must specify the nature of the corporation being organized in order to prevent difficulties of administration and supervision. Thus, the corporation should indicate whether it is a stock or a non-stock corporation, a close corporation, corporation sole or a religious corporation.

4. 5. 6.

b.

CORPORATE NAME

xxx AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be ".............................................., INC. or CORPORATION"; xxx The name of the corporation is essential to its existence since it is through it that it can act and perform all legal acts. Each corporation should therefore, have a name by which it is to sue and be sued and do all legal acts. A corporation, once formed, cannot use any other name, unless it has been amended in accordance with law as this would result in confusion and may open the door to fraud and evasion as well as difficulties of administration and supervision. Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar or confusingly similar to any other name already registered and protected by law since the SEC would refuse registration if such be the case. Sec. 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or

5

7. 8. 9. 10.

11. 12. 13.

The corporation name shall contain the word "Corporation" or its abbreviation "Corp." or "Incorporated", or "Inc.". The partnership name shall contain the word "Company" or "Co.". For limited partnership, the word "Limited" or "Ltd." shall be included. In case of professional partnership, the word "Company" need not be used. Terms descriptive of a business in the name shall be indicative of the primary purpose. If there are two (2) descriptive terms, the first shall refer to the primary purpose and the second shall refer to one of the secondary purposes. The name shall not be identical, misleading or confusingly similar to one already registered by another corporation or partnership with the Commission or a sole proprietorship registered with the Department of Trade and Industry. If the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered. (The Book of Sir Ladia, 2007 Edition, provides that there must be two other words different and distinct from the name of the company already registered or protected by law). Business or tradename of any firm which is different from its corporate or partnership name shall be indicated in the articles of incorporation or partnership of said firm. Tradename or trademark duly registered with the Intellectual Property Office cannot be used as part of a corporate or partnership name without the consent of the owner of such tradename of trademark. If the name or surname of a person is used as part of a corporate or partnership name, the consent of said person or his heirs must be submitted except of that person is a stockholder, member, partner of a declared national hero. If such person cannot be identified or non-existent, an explanation for the use of such name shall be required. The meaning of initials in the name shall be disclosed in writing by the registrant. Name containing a term descriptive of a business different from the business of a registered company whose name also bears similar term(s) used by the former may be allowed. The name should not be patently deceptive, confusing or contrary to existing laws. The name which contains a word identical to a word in a registered name shall not be allowed if such word is coined or already appropriated by a registered firm, regardless of the number of the different words in the proposed name, unless there is consent from the registered firm of this firm is one of the stockholders of partners of the entity to be registered. The name of an internationally known foreign corporation or one similar to it may not be used by a domestic corporation without the consent of the former. The term "Philippines" when used as part of the name of a subsidiary corporation of a foreign corporation shall be in parenthesis: i.e. "(Philippines)" or "(Phil.)". The following words shall not be used as part of a corporate or partnership names: a. As provided by special laws:

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

1.

"Finance", "Financing" or "Finance and Investment" by corporations or partnerships not engaged in the financing business (R.A. 5980, as amended) 2. "Engineer", "Engineering" or "Architects" as part of the corporate name (R. A. 546 and R.A. 1582) 3. "Bank", "Banking", "Banker", Building and Loan Association", Trust Corporation", "Trust Company" or words of similar import by corporations or associations not engaged in banking business. (R.A. 337, as amended) 4. "United Nations" in full or abbreviated form can not be part of a corporate or partnership name (R.A. 226) 5. "Bonded" for corporations or partnerships with unlicensed warehouse (R.A. 245) b. As a matter of policy: 1. "Investment(s)" by corporations or partnership not organized as investment house company or holding company. 2. "National" by all stock corporations and partnership. 3. "Asean", "Calabarzon" and "Philippines 2000". 14. The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years after the approval of the dissolution of the corporation by the Commission, unless allowed by the last stockholders representing at least majority of the outstanding capital stock of the dissolved firm. 15. Registrant corporations or partnership shall submit a letter undertaking to change their corporate or partnership name in case another person or firm has acquired a prior right to the use of the said firm name or the same is deceptively or confusingly similar to one already registered unless this undertaking is already included as one of the provisions of the articles of incorporation or partnership of the registrant.1 RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil. 549; Sept. 6, 1934) – A certificate of public convenience was issued in the name of Rural Transit Co. by the Public Service Commission despite opposition of herein petitioner-appellant Red Line Transportation Co.. It appears that “Red Line Transit Co.” is being used as a trade name of Bahrach Motors Co. ISSUE: Who is the real party in interest, Rural Transit Co. which appears in the face of the application? Or Bahrach Motors, Inc. using the name of the former as a trade name? HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any court in this jurisdiction to authorize one corporation to assume the name of another corporation as a trade name. Both Rural Transit and Bahrach are Philippine corporations and the very law of their creation and continued existence requires each to adopt and certify a distinctive name. The incorporators constitute a body politic and corporate under the name state in the certificate (Sec. 11, Act. No. 1459). A corporation has the power of succession in its corporate name (Sec. 13). The name of a corporation is therefore essential to its existence. It cannot change its name except in the manner provided by law. By that name alone it is authorized to transact business. The law gives a corporation on express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart from it and protected by law. If any corporation should assume at pleasure as a unregistered trade name, the name of another corporation, this practice would result in confusion of administration and supervision. The policy of the law as expressed in our corporation statute and the Code of Commerce is clearly against such a practice. UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC. (78 SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) was organized. In 1954, Universal Hosiery Mills Corporation (UHMC) was also organized. Both are actually distinct corporations but they engage in the same business (fabrics). In 1963, UHMC petitioned to change its name to

1 http://www.disini.ph/res_sec__mc142000.html

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Universal Mills Corporation (UMC). The Securities and Exchange Commission (SEC) granted the petition. Subsequently, a warehouse owned by UMC was gutted by fire. News about the fire spread and investors of UTMI thought that it was UTMI’s warehouse that was destroyed. UTMI had to make clarifications that it was UMC’s warehouse that got burned. Eventually, UTMI petitioned that UMC should be enjoined from using its name because of the confusion it brought. The SEC granted UTMI’s petition. UMC however assailed the order of the SEC as it averred that their tradename is not deceptive; that UTMI’s tradename is qualified by the word “Textile”, hence, there can be no confusion, ISSUE: WON the SEC is correct? HELD: Yes. There is definitely confusion as it was evident from the facts where the investors of UTMI mistakenly believed that it was UTMI’s warehouse that was destroyed. Although the corporate names are not really identical, they are indisputably so similar that it can cause, as it already did, confusion. The SEC did not act in abuse of its discretion when it order UMC to drop its name because there was a factual evidence presented as to the confusion. Further, when UMC filed its petition for change of corporate name, it made an undertaking that it shall change its name in the event that there is another person, firm or entity who has obtained a prior right to the use of such name or one similar to it. That promise is still binding upon the corporation and its responsible officers LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 SCRA 610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtained from the SEC a favourable decision on the exclusive use of “Lyceum” against Lyceum of Baguio, Inc.. such decision assailed by the latter before the SC which was denied for lack of merit. Armed with the Resolution of the Supreme Court, the Lyceum of the Philippines then wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of "Lyceum." Unheaded, Lyceum of the Philippines instituted before the SEC an action to enforce what Lyceum of the Philippines claims as its proprietary right to the word "Lyceum." The SEC rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case. On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines, Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,, which are also educational institutions, to the SEC En Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with Lyceum of the Philippines as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of Lyceum of the Philippines and those of the other Lyceums were physically quite remote from each other. On appeal, the CA affirmed the deicison of the CA en banc, and denied reconsideration. ISSUE: WON private respondents can be directed to delete the word “lyceum” from their corporate names? HELD: No. The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Herein, the Court does not consider that the corporate names of the academic institutions are "identical with, or deceptively or confusingly similar" to that of Lyceum of the Philippines Inc.. True enough, the corporate names of the other schools (defendant institutions) entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, the "Lyceum of Aparri" cannot be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines. Further, etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of Lyceum of the Philippines is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other. ISSUE2: WON the word “Lyceum” has acquired a secondary meaning although originally generic? HELD: No. The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. . . . No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. The number alone of the private respondents in the present case suggests strongly that the Lyceum of the Philippines' use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" 17 years before Lyceum of the Philippines registered its own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than Lyceum of the Philippines. Hence, Lyceum of the Philippines is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA 457; Feb. 21, 1992) – Petitioner is the registered owner of the trademark PHILIPS and PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. Philips Electric Lamp Inc. and Philips Industrial Development Inc., also petitioners, are the authorized users of such trademark. Petitioner filed a case with SEC praying for a writ of injunction to prohibit herein respondent Standard Philips Corporation from using the word “PHILIPS” in its corporate name, which was denied. On appeal, the CA affirmed the SEC.

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ISSUE: WON Standard Philips should be directed to delete the word PHILIPS from its corporate name? HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51 Phil. 115 (1927), the Court declared that a corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549). A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36). A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308). The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be any clearer. To come within its scope, two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical; or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. In this regard, there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later. Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922. The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves. While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Respondent’s argue that there were no evidence presented that there was actual confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

The statement of the objects or purpose or powers in the charter results practically in defining the scope of authority of the corporate enterprise or undertaking. This statement both congers and also limits the actual authority of the corporate representatives.

Moreover, Given Private Respondent's underlined primary purpose in its AOI, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

The reasons for requiring a statement of the purposes or objects: 1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risks; 2. So that the board of directors and management my now within what lines of business they are authorized to act; and 3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management.

In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate name of respondent STANDARD PHILIPS CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

other purpose not peculiar to them: 1. Educational, religious, and other non-stock corporations cannot include any other purpose which would change or contradict its nature or to engage in any enterprise to make profits for is members; 2. Insurance companies cannot engage in commercial banking at the same time, and vice-versa; and 3. Stock brokers can have no other line of business not peculiar to them.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the proposed name must contain two other words different from the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have two words different from that of Private Respondent's name. What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships and other business organizations. The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their corporate names is no defense and does not warrant the use by Private Respondent of such word which constitutes an essential feature of Petitioners' corporate name previously adopted and registered and-having acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records). c.

PURPOSE CLAUSE

xxx SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); xxx

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SECONDARY PURPOSE: Although the Corporation Code does not restrict

nor limit the number of purpose or purposes which a corporation may have, Sec. 14 thereof, requires that if it has more than one purpose, the primary purpose as well as the secondary ones must be indicated therein.

PROHIBITION: The following are prohibited by special laws for having any

RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:

1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC is duty bound to determine the legality of the corporate purpose/s before it issues the certificate of registration; 2. A corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy, either directly or indirectly. These are reserved exclusively for professional partnerships; 3. The retail trade, where the corporate capital is less than $2.5M, or its peso equivalent are reserved exclusively for Filipinos, or for corporations or partnerships wholly owned by such citizen. 4. As a general rule, corporations with foreign equity are not allowed to engage in restaurant business but corporations with such foreign equity can purse such undertaking if it is incidental or in connection with hotel or innkeeping business. 5. Management consultants, advisers and/or specialists, must submit the personal information sheet of the incorporators and directors in order that the SEC may be able to find out or determine whether or not the applicant corporation is qualified to act as such. 6. As a matter of policy, financing companies are required by the SEC to submit certain additional documents together with their applications for registration to verify compliance with RA 8556. 7. For bonded warehousing companies, an undertaking to comply with the General Bonded Warehousing Act must be submitted along with the AOI. 8. In case the applicant proposes to engage in the business of hospital and/or clinic, the purpose clause must contain the following proviso: “Provided that purely medical or surgical services in connection therewith shall be performed by duly qualified physician and surgeon who may or may not be freely and individually contracted by the parties.” 9. In the case of Customs Brokerage business, the applicant must submit the license of at least two customs broker connected with the applicant corporation; 10. Transfer Agents, Broker and Clearing Houses must submit the certificate of admission to the profession of the CPA of any officer of the corporation; 11. Carriage of mails cannot be a purpose of a corporation unless a special franchise has been granted to it. 12. If the corporate purpose or objective includes any purpose under the supervision of another government agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will be required pursuant to the last paragraph of Sec. 17 of the Code.

GENERAL LIMITATIONS:

1. The purpose or purposes must be lawful;

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

2. The purpose must be specific or stated concisely although in broad or general terms; 3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and 4. The purposes must be capable of being lawfully combined. d.

PRINCIPAL OFFICE

xxx THIRD: That the principal office of the corporation is located in the City/Municipality of............................................, Province of................................................., Philippines xxx It must be located within the Philippines. The AOI must not only specify the province, but also the City or Municipality where it is located. In this regard, it is to be observed that the principal office may be in one place but the business operations are actually conducted in other areas. The law does not, of course, require a statement of the place of corporate operations and, therefore, may be dispensed with. The principal office serves as the residence of the corporation, and is thus important in: (1) venue of actions; (2) registration of chattel mortgage of shares; (3) validity of meetings of stockholders or members in so far as venue thereof is concerned. CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18, 1967) – The New Cagayan Grocery filed a complaint against CRS for some irregularities in the transmission of a message which changed the context and purport causing damages. The complaint was filed in the City Court of Cagayan de Oro.

f.

INCORPORATORS

xxx FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME ..................... ..................... ..................... ..................... .....................

NATIONALITY RESIDENCE ............................. ............................ ............................. ............................ ............................. ............................ ............................. ............................ ............................. ............................ xxx

Sec. 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members.

CORPORATORS apply to all who compose the corporation at any given time and need not be among those who executed the AOI at the start of its formation or organization.

INCORPORATORS are those mentioned in the AOI as originally forming

ISSUE: WON the action will prosper?

the corporation and who are signatories in the AOI.

HELD: No. The action was based on tort and not upon a written contract and as such, under the Rules of Court, it should be filed in the municipality where the defendant or any of the defendants resides or may be served with summons.

An incorporator may be considered as a corporator as long as he continues to be a stockholder or a member, but not all corporators are incorporators.

Settled is the principle in corporation law that the residence of a corporation is the place where the principal office is established. Since it is not disputed that CRS has its principal office in Manila, it follows that the suit against it may properly be filed in the City of Manila. The fact that CRS maintains branch office in some parts of the country does not mean that it can be sued in any of these places. To allow such would create confusion and work untold inconveniences to the corporation. e.

TERM OF EXISTENCE

xxx FOURTH: That the term for which said corporation is to exist is............... years from and after the date of issuance of the certificate of incorporation; xxx

Sec. 11. Corporate term. - A corporation shall exist for a period not

exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission The corporate term is necessary in determining at what point in time the corporation will cease to exist or have lost its juridical personality. Once it ceases to exist, its legal personality also expires and could not thereafter, act in its own name for the purpose of prosecuting it business.

EXTENSION: can be made not earlier than 5 years prior to the expiry date unless there are justifiable reasons.

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Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

QUALIFICATIONS OF INCORPORATORS:

1. Must be natural persons. It implies that a corporation or a partnership cannot become incorporators. EXCEPTION: (1) cooperatives; (2) corporations primarily organized to hold equities in rural banks and may rightfully become incorporators thereof. It must be noted likewise that the law does not preclude firms and other entities from becoming stockholders or subscribers to the shares of a stock corporation. Thus, while they cannot qualify as incorporators, they can become corporators or stockholders. 2. Of Legal Age. Minors cannot be incorporators. They may, however, become stockholders provided they are legally represented by parents, guardians or administrators. 3. Must own at least 1 share. 4. Majority must be residents of the Philippines. The law does not provide for citizenship requirements. EXCEPT: in certain areas of activity or industry wherein ownership of shares of stock are reserved wholly or partially to Filipino citizens. Hence, all incorporators may be foreigners provided majority of them are residents. Note that the requirement is residence and not citizenship. g.

DIRECTORS/TRUSTEES

xxx SIXTH: That the number of directors or trustees of the corporation shall be............; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: NAME ..................... ..................... .....................

NATIONALITY ............................. ............................. .............................

RESIDENCE ............................ ............................ ............................

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

..................... .....................

............................. ............................ ............................. ............................ xxx

DIRECTORS is the governing board in stock corporations. TRUSTEES refer to non-stock corporations.

There must be at least 5 but not more than 15 directors in a private corporation. EXCEPTIONS: 1. Educational corporations registered as non-stock corporations whose number of trustees, though not less than 5 and not more than 15 should be divisible by 5. 2. In close corporations where all stockholders are considered as members of the board of directors (Sec. 97) thereby effectively allowing 20 members in the board. The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors or trustees. However, it may not do away with the minimum disqualifications laid down by the Code. The minimum qualifications of directors and trustees in a domestic corporation are provided under the 2nd par. Of Sec. 23: Sec. 23. The board of directors or trustees xxx Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

QUALIFICATIONS OF DIRECTORS/TRUSTEES:

1. Must own at least 1 share in their own names or a member (in the case of trustees); 2. Majority must be resident of the Philippines. Even aliens may be elected as directors, provided that the majority of such directors are residents of the Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like the management of educational institutions and those governed by the Retail Trade Law. Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

DISQUALIFICATIONS:

1. Imprisonment for a period exceeding 6 years; 2. Violation of the Corporation Code within 5 years prior to the date of election or appointment; 3. Such other disqualifications that may be provided in the by-laws. JOHN GOKONGWEI, JR., Petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents

(GR No. L-52129; April 21, 1980)

FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration of nullity of the by-laws etc. against the majority members of the BOD and San Miguel. The amended by-laws provided for the disqualification of competitors from nomination and election in the Board of irectors of SMC. This was denied by the SEC. ISSUE: Is the disqualification valid? HELD: Yes. The Court held that a corporation has authority prescribed, by

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law, the qualifications of directors. It has the inherent power to adopt bylaws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. A corporation, under the Corporation law, may prescribe in its by-laws the qualifications, duties and compensation of directors, officers, and employees. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and he impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of incorporation and lawfully enacted by-laws and not forbidden by law. Any corporation may amend its by-laws by the owners of the majority of the subscribed stock. It cannot thus be said that petitioners has the vested right, as a stock holder, to be elected director, in the face of the fact that the law at the time such stockholder's right was acquired contained the prescription that the corporate charter and the by-laws shall be subject to amendment, alteration and modification. A Director stands in a fiduciary relation to the corporation and its shareholders, which is characterized as a trust relationship. An amendment to the corporate by-laws which renders a stockholder ineligible to be director, if he be also director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. This is based upon the principle that where the director is employed in the service of a rival company, he cannot serve both, but must betray one or the other. The amendment in this case serves to advance the benefit of the corporation and is good. Corporate officers are also not permitted to use their position of trust and confidence to further their private needs, and the act done in furtherance of private needs is deemed to be for the benefit of the corporation. This is called the doctrine of corporate opportunity. h.

CAPITALIZATION

xxx SEVENTH: That the authorized capital stock of the corporation is................................................ (P......................) PESOS in lawful money of the Philippines, divided into.............. shares with the par value of.................................. (P.......................) Pesos per share. (In case all the share are without par value): That the capital stock of the corporation is.......................... shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of....................... shares of which...................... shares are of the par value of............................. (P.....................) PESOS each, and of which............................... shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No of Shares Amount Subscribed ........................ .............. ................ ........................... ........................ .............. ................ ........................... ........................ .............. ................ ........................... ........................ .............. ................ ........................... ........................ .............. ................ ........................... NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber .............................. .............................. .............................. .............................. ..............................

Amount Subscribed .............................. .............................. .............................. .............................. ..............................

Total Paid-Up .................... .................... .................... .................... ....................

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.)

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xxx The Corporation Code requires the AOI to state the authorized capital stock, the number of shares and/or kind of shares into which the authorized capital is divided, the par value of each share, if there by any, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each. At least 25% of the subscribed capital must be paid and in no case may the paid-up capital be less than P5,000.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-in or secured to be paid by the subscribers. It may also refer to the maximum number of shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total

value for which there are contracts for their acquisition or subscription. It is in effect, the stockholder’s equity account showing that part of the authorized capital stock which has been paid or promised to be paid, or that portion of the authorized capital stock which has been subscribed by the subscribers or stockholders.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value

which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon. It may be in the form of cash, property or in the form of services actually rendered to the corporation as provided under Sec. 62 of the Corporation Code: Sec. 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. 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; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

SHARES OF STOCKS AND THEIR CLASSIFICATIONS SHARES OF STOCK designate the units into which the proprietary interest

in a corporation is divided. They represent the proportionate integers or units, the sum of which constitutes the capital stock of the corporation. It is likewise the interest or right which the owner, called the stockholders or shareholder, has in the management of the corporation, and in the surplus profits and in case of distribution, in all of its assets remaining after the payment of its debts.

CERTIFICATE OF STOCK is a document or instrument evidencing the interest of a stockholder in the corporation.

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Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

PURPOSE OF CLASSIFICATION:

1. To specify and define the rights and privileges of the stockholders; 2. For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. 3. As a management control device. 4. To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership. 5. To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets in case of liquidation; and 6. For flexibility in price, particularly, no par shares may be issued or sold

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

from time to time at different prices depending on the net worth of the company since they do not purport to represent an actual or fixed value.

shareholders have the right to vote in matters enumerated in the penultimate paragraph of Sec. 6.

COMMON STOCKS are the most commonly issued shares of stock of a

c. Preference Upon Liquidation

corporation. Although no clear cut definition can be found, it has been described as one which entitles it owner to an equal or pro-rata division of profits, if there are any, but without any preference or advantage in that respect over any other stockholder or class of stockholders. A common share usually carries with it the right to vote, and frequently, the exclusively right to do so. However, where the AOI is silent, all issued and outstanding shares shall be considered to have the right to vote and be voted for.

PREFERRED STOCKS is a stock that gives the holder preference over the

holder of common stocks with respect to the payment of dividends and/or with respect to distribution of capital upon liquidation. LIMITATIONS imposed by the Code in the issuance of preferred stocks: (1) They can be issued only with a stated par value; and (2) The preference must be stated in the AOI and in the certificate of stock otherwise each share shall be, in all respect, equal to every other share. a. PREFERENCE AS TO DIVIDENDS They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty is not absolute so as to create a relation of debtor and creditor between the corporation and the holders of such stock. The amount of preference is stated in the contract of subscription and is usually a fixed percentage or by specified amount indicated therein.

Participating and Non-Participating Preferred Shares If the preferred shares is participating, they are entitled to participate in dividends with the common shareholders beyond their stated preference. Non-participating preferred shares on the other hand are entitled to its fixed priority or preference only.

Cumulative and Non-cumulative Preference Shares Cumulative preferred shares are those that entitle the owner thereof to

payment not only of current dividends but also back dividends not previously paid whether or not, during the pas years, dividends were declared or paid. In light of the provision of the Code stating that all shares are equal in all respects unless otherwise stated in the AOI, a preferred share to be considered cumulative, the same must be provided for and specified in the certificate.

Non-cumulative preferred shares are those which grant the holders of such

shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. This type may be divided into three groups: 1. Discretionary dividend type – depends on the judgment or discretion of the board of directors. Unless there is grave abuse of discretion as to result in oppression, fraud or unfair discrimination, the dividend right of stockholders of a particular year cannot be made up in subsequent years; 2. Mandatory if earned – impose a positive duty on directors to declare dividends every year when profits are earned. In effect, directors cannot withhold dividends if there are profits. 3. Earned cumulative or dividend credit type – gives the holder the right to arrears in dividends if there were profits earned during the previous years. In effect, their right to receive dividends is merely postponed on a later date. The moment dividends are declared, back dividends earned in previous years but not declared as such must first be paid to this type of preferred shareholders before the common shareholders receive theirs. DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are entitled to dividends whether or not there are profits. Earned cumulative or dividend credit type is entitled only to arrears if there are profits in those years.

b. Voting Right of Preferred Shares

Preferred shares, along with redeemable shares, are usually denied voting rights as they are allowed to be denied of such as provided in Sec. 6, but this right must clearly be withheld. However, even if deprived, preferred

12

Such preference must also be stated in the contract, accordingly giving tem the preference to the distribution of corporate assets upon liquidation or termination of corporate existence. If the preferred shares are cumulative, they have the right to any arrears in arrears in priority to any distribution of assets to the common stockholders.

PAR AND NON-PAR VALUE SHARES Par Value Shares are those whose values are fixed in the AOI. Its par value is

the minimum subscription or original issue price of the shares and indicates the amount which the original subscribers are supposed to contribute to the capital, which, however, may not reflect the true value of the shares because the same may fluctuate depending on the liability and networth of the enterprise.

Watered Stocks are those issued at less than par value where the

stockholders will remain liable for the difference between what he paid and the actual par value thereof (Sec. 65).

No Par Value Shares are those whose issued price are not stated in the

certificate of stock but may be fixed in the AOI, or by the BOD when so authorized the articles or the by-laws, or in the absence thereof, the stockholders themselves. They do not purport to represent ay stated proportionate interest in the capital measured by value, but only an aliquot part of the whole number of shares of the corporation issuing it. The Code allows the issuance of no par value shares, subject to the following limitations provided in Sec. 6: 1. Such shares once issued, are deemed fully paid and thus, non-assessable; 2. The consideration for its issuance should not be less than P5; 3. The entire consideration constitutes capital, hence, not available for dividend declaration; 4. They cannot be issued as preferred stock; and 5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loans associations.

Advantages of no-par value shares:

1. Flexibility in price – no par shares may be issued from time to time at different prices with the exception only that it shall not be issued at less than P5; 2. The issuance thereof practically results to the evasion of the danger of liability upon watered stock in case of overvaluation of the consideration paid for it; 3. There is a disappearance of personal liability on the part of the holder for unpaid subscription since they are already deemed fully paid and nonassessable.

VOTING AND NON-VOTING SHARES Voting shares as the name suggests, gives the holder thereof the right to

vote and participate in the management of the corporation, through the election of the BOD, or in any matter requiring stockholders’ approval. However, voting shares may practically be denied the right to vote where there exist founders’ shares.

Non-voting shares do not grant the holder thereof, a voice in the election of directors and some other matter requiring stockholders’ vote.

Only preferred and redeemable shares may be denied the right to vote. But, even if denied such right, they may still vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock;

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation

FOUNDERS’ SHARES are shares issued to the founders of the corporation which are granted certain right and privileges such as the exclusive right to vote and be voted for in the election of directors.

Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of other stockholders to elect or be elected as members of the BOD resulting to the lack of proper representation thereat.

REDEEMABLE SHARES are those subject to redemption as may be

provided in the subscription contract, which are usually attached to preferred shares and other debt securities like bonds. Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares These types of shares grants the corporation the right to repurchase the shares at its option or at the option of the holder based on the face or issued value plus specified premium, such redemption may be optional or mandatory at a fixed or future date. Such repurchase may also be made regardless if there are unrestricted retained earnings. (see Power to Acquire Own Shares)

TREASURY SHARES Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. Treasury shares, as provided in Sec. 9, are reacquired but not retired. They may be issued for a price, even less than par, and the purchaser will not be liable to the creditors of the corporation for the difference of the purchase price and its par value. They may also be declared as dividends since they are properties of the corporation. Such shares do not have the right to share in dividends nor the right to vote. COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14; Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized capital stock of Manta Trading and Supply Co., the rest are owned by herein respondents. Upon Reese’ death, his shares was held in trust by the law firm Ross, Carrascoso and Janda for the private respondent, who were to continue management of the corporation. These shares considered by the respondents as treasury shares, prior to full payment, were declared as stock dividends. Such declaration was assessed by the BIR as distribution of assets subject to income tax. ISSUE: WON the subject shares are treasury shares?

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HELD: No. Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means and do not have the status of outstanding shares. They may be re-issued or sold again and while held by the company participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in meeting of the corporation as voting stock for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represent a paid for interest in the property of the corporation. These features of a treasury stock are lacking in the questioned shares. In this case, and under the terms of the trust agreement, the shares of stock of Reese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporate meetings. They were not, therefore, treasury shares. The 24,700 shares were outstanding shares of Reese’s estate until they were fully paid. Such being the case, their declaration as treasury stock dividend was a complete nullity.

CAPITAL REQUIREMENTS Sec. 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paidup capital be less than five Thousand (P5,000.00) pesos From the above provisions, it can be said that there is no minimum capital requirement in order that a corporation may be duly incorporated except in special cases and provided that at least P5,000 should be paid-in, which effectively would make the P5,000 the minimum capital requirement. The 25% minimum paid-in capital can be paid by any shareholder, meaning that it is not particularly required that each subscriber pay 25% of their subscription. There are instances where the SEC, by virtue of an existing law, rules and regulations or policies, requires the payment of more than the amount provided in the Code, such as Financing Companies where the required minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000 (other cities), and P2,000,000 (municipalities). i.

RESTRICTIONS AND PREFERENCES

Corporations are not required to provide for certain restrictions and preferences regarding the transfer, sale or assignment of shares in the AOI except in close corporations which would subject their shares to specific restrictions as required in Sec. 96 of the Code. They are not, however, restrained or prohibited from doing so If the corporation desires to grant such options, restrictions and/or preferences, the same must be indicated in the AOI AND in all of the stock certificates. Failure to provide the same in the AOI would not bind the purchasers in good faith despite the fact that the said restriction and/or preference is indicated in the by-laws of the corporation. In a close corporation, however, such restrictions and preferences must not only appear in the articles of incorporation and in the stock certificates BUT ALSO be embodied in the by-laws of that close corporation otherwise it may not bind purchasers in good faith.

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j.

THE TREASURER

xxx TENTH: That...................................... has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the bylaws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. xxx k.

NO TRANSFER CLAUSE

19.......; by........................................... with Res. Cert. No..................... issued at................ on....................., 19......... NOTARY PUBLIC My commission expires on.........................., 19....... Doc. No...............; Page No...............; Book No..............; Series of 19.....

xxx ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following):

GROUNDS FOR DISAPPROVAL

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." xxx

Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval:

This indicates the treasurer who has been elected as such until his successor has been elected and qualified and who is authorized to receive for and in the name of the corporation all subscriptions, contributions or donations paid or given by the subscribers or members.

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

l.

THE EXECUTION CLAUSE

xxx IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this..............day of....................., 19.......... in the City/Municipality of......................................., Province of................................................, Republic of the Philippines. (Names and signatures of the incorporators) xxx The signatures are important as the AOI serves as a contract between the signatories thereof, by and among themselves, with the corporation, and the latter with the State. m. TREASURER’S AFFIDAVIT

xxx

TREASURER'S AFFIDAVIT REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I,..................................., being duly sworn, depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ....................................... (Signature of Treasurer) n.

xxx

NOTARIAL ACKNOWLEDGMENT xxx SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of................................. Province of........................................., this............ day of........................,

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xxx

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. After filing of the AOI, the SEC will examine and process them to determine compliance with the requirements enumerated in Sec. 14 and if the form prescribed under Sec. 15 is complied with. Only substantial and not strict compliance is required. The above grounds are not exclusive. There may be other reasons for rejection or disapproval such as the corporate name is not legally permissible or that the minimum capital requirement is not sufficient. 3.

COMMENCEMENT OF CORPORATE EXISTENCE

Corporate existence is reckoned from the time of the issuance of its CERTIFICATE OF INCORPORATION or registration. It is only from this time that it acquires juridical personality and legal existence, EXCEPT: a. Corporations by Estoppel; b. Those created by special laws; c. Those organized as Cooperatives covered by Bureau of Cooperatives and Home Owners’ Associations covered by Home Insurance Guaranty Corporation. d. Corporation Sole – which is reckoned from the filing of verified articles. (Sec. 112) Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233; Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of Sale where he sold four parcels of land in favor of herein petitioner Cagayan Fishing Development Co., said to be under the process of incorporation. Plaintiff company filed its AOI with the Bureau of Commerce and Industry on Oct. 22, 1930. A year later, before the issuance of the certificate of incorporation, the BD of the company adopted a resolution to sell the four parcels of land to Teodoro Sandiko for P42,000. ISSUE: WON the subsequent sale to Sandiko is valid? HELD: No. A duly organized corporation has the power to purchase and hold real property as the purpose for which such corporation was formed may permit and for this purpose may enter into such contract as may be necessary. But before a corporation may be said to be lawfully organized many thing have to be done. Among which, the law requires the filing of the AOI. It cannot be denied that the plaintiff was not incorporated when it entered into the contract of sale. It was not even a de facto corporation at that time. Not being in legal existence then, it did not possess juridical personality to enter into the contract. Corporations are creatures of the law, and can only come into existence in the manner prescribed by the law. That a corporation should have a full and complete organization and existence as an entity before it can enter into a contract or transact any business, would seem to be self-evident. A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter, there is no corporation, nr does it possess franchise or faculties for it to exercise, until it acquires complete existence. If the company could not and did not acquire the four parcels of and here involved, it follows that it did not have the resultant right to dispose the same to the defendant. D.

DEFECTIVELY FORMED CORPORATIONS

A corporation de jure is one created in strict or substantial compliance to the governing corporation statutes and whose right to exist and act as such could not be attacked in a either collaterally or through a direct proceeding for that purpose even by the State. 1.

DE FACTO CORPORATIONS

A de facto corporation is one that is so defectively created as not to be a de jure corporation but nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona fide attempt to incorporate under existing statutory authority, coupled with the exercise of corporate powers.

ATTACK: From the above provision, the only purpose of determining

whether it is a de facto or de jure corporation is the applicability of the rules on collateral and direct attack. Such that a de jure is impregnable to either, while a de facto corporation’s existence can only be questioned in a direct proceeding by the State through a quo warranto. A de facto corporation’s corporate existence however cannot be attacked collaterally. THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO BALINDONG, petitioners, vs. PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR LAO. Respondents GR No. L-28113; March 28, 1969) FACTS: The Municipality of Balabagan was created from the barrios and sitios of the Municipality of Malabang by virtue of EO No 386 issued by President Garcia by virtue of Sec. 68 of the Revised Administrative Code. Following the decision of the Court in Pelaez vs. Auditor General, which declared Sec. 68 unconstitutional and that the President had no power to create a municipality, herein petitioners sought to nullify EO 386 and to restrain the respondents, who are officers of Balabagan, to vacate said their office and desist from performing their functions. Respondents argue that it is at least a de facto corporation and the ruling in Pelaez is not applicable to it, having been organized under color of a statute before it was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged corporate functions for the past five years. That as a de facto corporation, its existence cannot be collaterally attacked. ISSUE: WON the Municipality of Balabagan is a de facto corporation? HELD: No. In cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decision could be fairly made to rest on the consideration that there was some other valid law giving validity to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at the time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as independently of the Administrative Code provision in question, there is no other valid statute to give color of authority for its creation. An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed. HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with private respondents signed and acknowledged the AOI of Far East Lumber and Commercial Co., Inc., after the execution of which the corporation proceeded to do business by adopting its by-laws and election of its officers. Subsequently, pending action on the AOI, the respondents filed with the CFI alleging the corporation to be an unregistered partnership and praying for its dissolution, which was granted.

REQUISITES:

Herein petitioner claims that the corporation is a de facto corporation, that its dissolution may be ordered only in a quo warranto proceedings instituted by the State.

b.

ISSUE: WON it is a de facto corporation?

a.

c. d.

There is a valid statute under which the corporation could have been created as a de jure corporation (or according to some, an apparently valid statute); An attempt, in good faith, to form a corporation according to the requirements of law which goes far enough to amount to a “colourable compliance” with the law; A user of corporate powers, the transaction of business in some way as if it were a corporation; Good faith in claiming to be and doing business as a corporation.

Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding

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HELD: No. First, not having obtained a certificate of incorporation, the company, even its stockholders, may not probably claim “in good faith” to be a corporation. Such claim is compatible with the existence of errors and irregularities, but not with a total or substantial disregard of the law. UNnless there has been an evident attempt to comply with the law the claim to be a corporation “under this Act” (Sec. 19) could not be made in good faith. Second, this is not a suit where the corporation is a party. This is a litigation between a stockholder of the alleged corporation, for the purpose of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the State. 2.

CORPORATION BY ESTOPPEL

A corporation may exist on the ground of estoppel by virtue of the agreement, admission or conduct of the parties such that they will not be permitted to deny the fact of the existence of the corporation. It is neither a de jure nor de facto because of serious defects in its incorporation or organization, unlike the de facto doctrine, it does not involve a theory that the irregular corporation has acquired a corporate status generally. It applies to the consequences of some particular transactions or acts done in the corporate name by associates assuming to be a corporation. Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. From the above provision, it is clear that the doctrine of estoppel may apply to the alleged corporation or to a third party transacting with the former.

As to the Corporation – the members who purported to be a corporate body

cannot deny their purported existence as a corporation in an action against them on the contract, where the third persons were induced to deal with the supposed corporation. They cannot avoid liability on the ground of lack of personality to be sued.

As to third persons – they are estopped from denying the existence of the

alleged corporation in a suit to enforce a contract. However, the association of persons must have purported or acted, and were treated by the third persons, as corporations. The doctrine also applies when the third person tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner Reynaldo Lozano and respondent Antontio Anda agreed to consolidate their respective Jeepney Associations, to which they are presidents. They conducted an election for one set of officers of the consolidated association, where petitioner was the winner. Respondent, however, refused to abide by the agreement which prompted petitioner to institute an action for damages in the trial court which was denied for being intra-corporate, and was held to be within the jurisdiction of the SEC. ISSUE: WON there is corporation by estoppel placing the case within SEC jurisdiction? HELD: None. The unified association was still a proposal and had not been approved by the SEC, neither had its officers and members submitted their AOI. Their respective associations are distinct and separate entities, petitioner and private respondent does not have an intra-corporate relation much less do they have an intra-corporate dispute. The SEC has no jurisdiction over the complaint. The doctrine of corporation by estoppel advance by privte respondent cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. Corporation by estoppel is founded on principle of equity and is designated to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no

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corporation by estoppel. ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan. 30, 1965) – Jose Aruego, president of defendant University Publishing Co, Inc. entered into a contract with plaintiff for the publishing of the latter’s revised commentaries on the Revised Penal Code, which the defendant failed to pay the second instalment due. The CFI of Manila rendered judgment in favor of plaintiff, such judgment reduced by the Supreme Court to P15,000. The CFI issued a writ of execution against Aruego, as the real defendant, stating the discovery that there is no such entity as University Publishing Co., Inc. ISSUE: WON the writ of execution may be effected upon Aruego? HELD: Yes. On account of non-registration, University cannot be considered a corporation, not even a corporation de facto. It has therefore, no personality separate from Aruego it cannot be sued independently. The doctrine of corporation by estoppel is inapplicable. Aruego represented a non-existent entity and induced not only the plaintiff but even the court of belief of such representation. He signed the contract as “President” of University and obviously misled plaintiff in to believing that University is a “corporation duly organized and existing under the laws of the Philippines”. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot, thereafter, set up against his victim the principle of corporation by estoppel. SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) – Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a corporation. For failure to comply with the obligations under the lease, petitioner filed a complaint in the CFI where the company was declared in default and decision was rendered in favor of petitioner. Defendant Refuerzo filed a motion claiming that he should not be made personally liable in the decision which was granted by the Court. Hence, this petition. ISSUE: WON Refuerzon can be made personally liable? HELD: Yes. While as a general rule, a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine may not be held applicable where fraud takes part in the said transaction. In the instant case, on plaintiff’s charge that she was unaware of the fact that the company had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract led to the inescapable conclusion that plaintiff Salvatierra was really made to believe that such corporation was duly organized in accordance with law. The rule on the separate personality of a corporation is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious – since an organization which before the law is non-existent has no personality and would be incompetent to act on its behalf; thus, those who act or purport to act as its representatives or agent do so without authority and at their own risk. And, as is it elementary principle of law that a person who acts as an agent without authority or without principal is himself regarded as the principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agents. In acting on behalf of a corporation which he knew to be unregistered, the president of the unregistered corporation Refuerzo, assumed the risk of reaping the con the consequential damages of resultant right, if any, arising out of such transaction. CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989) – Private respondent Faustina Oh has been teaching in the herein petitioner

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

School since 1932 for a continuous period of 33 years until that day that she was told that she had no assignment for the next semester. She filed a suit before the CFI against the school and later on amended her complaint to include certain officials. The CFI of Sorsogon dismissed the complaint. On appeal, the CA reversed the decision and held herein petitioner school liable but absolved the other defendants. ISSUE: WON the School can be held liable? HELD: Yes. Even though the school failed to incorporate as mandated by law, it cannot now invoke such non-compliance with the law to immunize it from the private respondent’s complaint. There should also be no question that having contracted with the private respondent every year for 32 years and thus represented itself possessed of juridical personality to defeat her claim against it. According to Art. 1431 of the Civil Code: “through estoppel an admission or representation is rendered conclusive upon the person making it and it cannot be denied as against the person relying on it”. As the school itself may be sued in its own name, there is no need to apply Rule 3, Sec. 15 ,under which the persons joined in an association without any juridical personality may be sued with such an association. Besides, it has been shown that the individual members of the board of trustees are not liable, having been appointed only after the private respondent’s dismissal. ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This action was brought to recover the balance due of a promissory note executed by herein appellant. The court rendered judgment in favor of the plaintiff. At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error. ISSUE: WON parties herein are corporations with juridical personality? HELD: Yes. There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.) The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated. INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA (343 SCRA 674; Oct. 19, 2000) – Petitioner International Express Travel & Tours Services, Inc. entered into an agreement with the Philippine Football Federation through its president Henry Kahn, herein private respondent, where the former supplied tickets for the trips of the athletes to the Southeast Asian Games and other various trips. The Federation failed to pay a balance of P265,894.33 which led petitioner to file a civil case in the RTC of Manila which decided in its favor and holding Henry Kahn personally liable. On appeal, the CA reversed the decision of the RTC absolving Kahn from personal liability holding that the Federation had a separate and distinct personality. ISSUE: WON Henry Kahn can be made personally liable? HELD: Yes. While we agree with the appellate court that associations may be accorded corporate status, such does not automatically take place by the

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mere passage of RA 3135 otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation and PD 604. It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. Nowhere can it be found in RA 3135 and PD 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided for the manner by which these entities may acquire juridical personality. The recognition of Philippine Amateur Athletic Federation required under RA 3135 and the Department of Youth and Sports Development under 604, extended to the PFF was not substantiated by Kahn. Accordingly, the PFF is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. This being said, it follows that private respondent Kahn should be held liable for the unpaid obligations of the unincorporated PFF. It is a settled principle in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agents. We cannot subscribe to the position taken by the appellate court that even assuming that the PFF was defectively incorporated, the petitioner cannot deny the corporate existence of the PFF because it had contracted and dealt with the PFF in such a manner as to recognize and in effect admits its existence. The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract. GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug. 10, 1994) – Petitioner is a German company who was granted a license to establish a regional or area headquarters in the Philippines. Private respondent Romana Lanchinebre was a sales representative of petitioner who made advances totalling P35,000 which were left unpaid. Petitioner filed a complaint for the collection of a sum of money which was dismissed by the judge holding, among others, that the license of petitioner does not include the license to do business in the Philippines. ISSUE: WON petitioner has capacity to sue? HELD: Yes. Private respondent is estopped from assailing the personality of petitioner. “The rule is that the party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to foreign as well as domestic corporation; one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage f its non-compliance with the statutes chiefly in case where such person has received the benefits of the contract” (Merill Lynch Futures, Inc. vs. CA). In the case of Merill Lynch Futures, the SC held that a foreign corporation doing business in the Philippines may sue in Philippine courts although not authorized to do business here against the Philippine citizen who had contracted with and been benefited by said corporation. Citing and applying the doctrine laid down in Asia Banking Corp. vs. Standard Products Co., Inc.

IN SUMMARY: it appears that if a corporation by estoppel exist and enters

into a contract and transact business with a third party, the latter has three possible remedies: 1. He may file a suit against the ostensible corporation to recover from the corporate properties; 2. He may file the case directly against the associates personally liable who held out the association as a corporation; and 3. Against both the ostensible corporation and persons forming it, jointly and severally. The last two remedies may not, however, be availed of if the third party by his conduct is estopped from denying the existence of

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the association as a corporation and as such, recovery should be limited only against the corporate assets.

INDIVIDUAL LIABILITY of associates should not be overlooked. If the doctrine of corporation by estoppel cannot be applied in their favor because the third party dealing with it has not, in any manner, deemed to have chosen to deal with it as a corporation or in short not, estopped to deny corporate existence, the associates can be held liable either as partners or principals.

WHO SHOULD BEAR THE LOSS: The better view is that those who actively

participated in holding out the association as a corporation should be held personally liable by virtue of the express provision of Sec. 21 which provides that “all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising” therefrom. 4.

ORGANIZATION AND COMMENCEMENT OF BUSINESS

a.

CORPORATE ORGANIZATION

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation.- If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. Once the certificate of incorporation has been issued, the corporation MUST formally organize and commence its business.

NON-USE OF CORPORATE CHARTER: Apparent from the above provision is that the failure of the corporation to organize within 2 years would result in it automatic dissolution, unless, of course, its failure to do so is due to causes beyond its control.

FORMAL ORGANIZATION: refers to the process of structuring the

corporation to enable it to effectively pursue the purpose for which it was organized. It includes: a. Organizational meeting of the stockholders to elect the BOD; b. Adoption of by-laws, if not simultaneously filed with the AOI, and its subsequent filing with the SEC which must be within 1 month from the issuance of the certificate of incorporation; c. Organizational meeting of the BOD to elect the corporate officers, adoption of corporate seal, accepting pre-incorporation subscriptions, establishing the principal office and such other steps necessary to transact the legitimate business for which the corporation was formed. Strict compliance is not required. Substantial compliance therewith is sufficient. Thus, it has been held in the case of Perez vs. Balmaceda that a corporation is deemed to have formally organized if it had a governing board which direct its affairs, as well as a treasurer and a clerk, and that through these instrumentalities, it actually functioned and engaged in the business for which it was organized. It cannot be held to have forfeited its charter simply because it has not been shown that is also had a president and a secretary. b.

COMMENCEMENT OF BUSINESS/TRANSACTION

This means that the corporation has actually functioned and engaged in business for which it was organized which must be done within two years from the issuance of the certificate of incorporation lest it is deemed dissolved. This may take the form of entering into contracts which tend to pursue its business undertaking or other acts related thereto.

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If a corporation has commenced its business but subsequently becomes inoperative continuously for a period of at least 5 years, the same shall be merely a ground for suspension or revocation of its corporate franchise or certificate of registration. CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS A.

CORPORATE CHARTER

CORPORATE CHARTER signifies an instrument or authority from the sovereign power, bestowing rights or power, and is often used convertibly with the term “act of incorporation”, where the corporation was formed under a special act of the legislature, and with the “articles of incorporation”, when the corporation was formed under a general law.

THREE-FOLD CONTRACT: 1. 2. 3.

Between the corporation and the state insofar as it concerns its primary franchise to be and act as a corporation’ Between the corporation and the stockholders or members insofar as it governs their respective rights and obligations; Between and among the stockholders or members themselves as far as their relationship with one another is concerned.

FRANCHISE: appropriately applies to the right or privilege itself to be and

act as a corporation or to do a certain act while charter applies to the instrument by which the state vests such right or privilege. Franchise may either be: (1) Primary – nothing more than the right or privilege of being a corporation; or (2) Secondary – the powers and privileges vested in, and to be exercised by the corporate body as such. Example: Employment Agencies, primary franchise is the certificate of incorporation from the SEC, the secondary franchise is the license issued by the POEA. B.

CORPORATE ENTITY THEORY

As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter. The properties it possesses belongs to it exclusively as a separate juridical entity such that the personal creditors of its stockholders or members cannot attach corporate properties to satisfy their claims. On the other hand, the corporation is not likewise liable for the debts, obligations or liabilities of its stockholders. Neither may it properties be made answerable to satisfy the claim of creditors against its stockholders or member even if the stockholder concerned is its president. SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA, INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiffappellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the recovery of 28,000 square meters of land for and in behalf of it members, who were themselves and their predecessors-in-interest pioneered in the clearing of the land and cultivated the same since the Spanish Regime and have been in continuous possession of the same. The action was dismissed on the ground that there is no cause of action. On appeal, the CA certified the case to the SC for the legal issues involved. ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of property of it individual members? HELD: No. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. The property of a corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of it stockholders unless transferred to the corporation, “even in the case of a one-man corporation”. Absent any showing of interest, therefore, a corporation, like plaintiff-

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

appellant herein, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. It is fundamental that there cannot be a cause of action without an antecedent primary legal right conferred by law upon a person. Evidently, there can be no wrong without a corresponding right, and no breach of duty by one person without a corresponding right belonging to some other person. FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO V. ARELLANO (151 SCRA 372; June 30, 1987) – Herein petitioners were ordered jointly and severally to pay the plaintiff P50,000 for the preparation of the project study and his technical services that led to the organization of the defendant corporation. The petitioners questioned the order stating that they are mere subsequent investors in the corporation that was later created, that they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with co-defendants who were the ones who requested the said services from the private respondent. ISSUE: WON petitioners can be held personally liable for such expenses? HELD: No. Petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Baretto, respondent, as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioner, as principal stockholder thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its directors and officers. The most that can be said is that they benefited from the services, but that surely is no justification t hold them personally liable therefor. Otherwise, all other stockholders of the corporation, including those who came in later, and regardless of the amount of their stockholdings would be equally and personally liable also with the petitioners for the claims of the private respondents. Petitioners are not liable under the challenged decision. RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct. 19, 1992) – Petitioner Rustan entered into a conract of sale with respondent Lluch which was later on stopped by Rustan through a letter. Lluch sent a letter to clarify whether the letter sent by Rustan was for the stoppage of delivery or termination of the contract of sale. Unanswered, respondent Lluch resumed devliveries and later on filed a complaint for contractual breach which was dimissed. On appeal, the CA modified the decision of the trial court directing petitioner including Tantoco, president and general manager, and Vergara, resident manager, to pay private respondents. ISSUE: WON individual petitioners may be held liable? HELD: No. The president and manager of a corporation, who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of a corporation being separate and distinct from the person composing it. And because of this precept, Vergara’s supposed non-participation in the contract of sale although he signed the letter terminating it is completely immaterial. CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office, corrupt practices and serious irregularities when the respondent sheriff attached and/or levied the money belonging to complainant Cruz when he was not himself the judgment debtor in the final judgment of NLRC sought to be enforced but rather the company known as Qualitrans Limousine Service, Inc., a duly registered corporation.

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ISSUE: WON the charge against the respondent should be upheld for attaching personal property of the corporate president? HELD: Yes. The respondent’s action in enforcing judgment against complaint who is not the judgment debtor in the case calls for disciplinary action. Considering the ministerial duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a decision ordered or decreed in the dispositive part should be the subject of execution. No more, no less. That the title of the case specifically names complaint as one of the respondent is of no moment as execution must conform to that directed in the dispositive portion and not in the title of the case. The tenor of the NLRC judgment and the implementing writ are clear enough. It directed Qualitrans to reinstate the discharged employee and pay the full backwages. Respondent, however, chose to “pierce the veil of corporate entity” usurping a power belonging to the court and assumed improvidently that since the complainant is the owner/president, they are one and the same. It is well-settled doctrine, both in law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities. PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) – Petitioner Palay, Inc. through its president Albert Onstott, executed in favor of respondent Naario Dumpit a Contract to Sell a parcel of land which provided for automatic rescission upon default in payment of any monthly amortization without need of notice and forfeiture of all instalments paid. Respondent failed to pay some instalments and later offered to update all his overdue account but was informed that the contract has already been rescinded. Respondent filed with the NHA a complaint questioning the validity of the rescission which decided in its favor holding Palay, Inc. and Alberto Onstott, in his capacity as president, jointly and severally liable. ISSUE: WON the corporate president is liable to refund the amount state in the NHA ruling? HELD: No. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. We find no badges of fraud on petitioners’ part. They had literally relied, albeit mistakenly, on its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to another person. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he “appears to be the controlling stockholder”. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not, of itself, sufficient ground for disregarding the separate corporate personality. PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G. MACADANGDANG, petitioners, vs. HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO CU, respondents

(GR No. L-49834; June 22, 1989)

FACTS: Petitioners were held solidarily liable by the appellate court in their personally capacity to the private respondent for non-payment of tobacco under an agreement between them embodied in a receipt which states as follows:

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

GREETINGS: WE, the President, Manager, Treasurer and Director Representative of Bacarra (I.N.) Facoma, Inc., do hereby execute this document: That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale (sic) the said Virginia tobacco consists of different grades or class from E to A (sic) the said tobaccos are to be shipped to the redrying plants through the Bacarra Facoma under Guia number 236. Conditions of the deal between Mr. Cu and the Association. Upon payment of the said tobacco by the Philippine Virginia Tobacco Administration then Mr. Cu, will collect the corresponding payments as graded by the redrying plant as further stipulated that the check representing the payment shall only be cashed in the presence of Mr. Cu, or his authorized representative. (Sic) This instrument is executed for the protection, guidance and information of the parties concerned. Done this 10th day of August 1964 at Bacarra, Ilocos Norte. (Sgd.) Paulino Soriano PAULINO SORIANO President (Sgd.) Nenita C. Esperanza NENITA C. ESPERANZA Sec. Treasurer by: (Sgd.) Erlinda V. Acosta BIENVENIDO E. ACOSTA Director, Official Representative (Sgd.) A. Macadangdang A.G. MACADANGDANG Manager ISSUE: WON petitioners are liable? HELD: No. We cannot accept the conclusion that the official designations of petitioners were written on the document merely as meaningless and hollow decorations or as mere descripto personae without any relevance to the liability of the corporation these officers obviously represented. Indeed, taking in conjunction with the other obtaining circumstances, the receipt discloses the capacity by which the petitioners entered into the “deal” with private respondent. The subject receipt itself states tht the conditions contained therein were between the private respondent and the “Association”. The lower court held that the “Association” referred only to the signatories. We disagree. It is quite plain and we are convinced that the “Association is none other than the Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative marketing association. Not only that , we cannot find any cogent reason why the petitioners used the word “Association” when they could have more easily and conveniently placed “the undersigned” or words to the same effect in its stead. In light of the foregoing, it is clear that the liability of the petitioners under the document subject of the instant case is not personal but corporate, and therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a corporation, has a personality distinct and separate from that of the petitioners who are only its officers. It is the general rule that the protective mantle of a corporation’s separate and distinct personality could only be pierced and liability attached directly to its officers and/or member-stockholders, when the same is used for fraudulent, unfair or illegal purpose. C.

PIERCING THE VEIL OF CORPORATE FICTION

The notion of corporate legal entity is not, at all ties respected. This is because the applicability of the corporate entity theory is confined to

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legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to work injustice. While no hard and fast rule exists as to when the corporate fiction may pierced or disregarded, it is a fundamental principle in Corporation law that a corporation is an entity separate and distinct from its stockholders or member and from other corporations to which it may be connected. But when the notion of legal entity is used to defeat public convenience, Justify wrong, Protect fraud, Defend crime, the law will regard the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the one being merely regarded as part or instrumentality of the other. The same is true where a corporation is a mere dummy and serves no business purpose and is intended only as a blind, or an alter-ego or business conduit for the sole benefit of the stockholders. In cases where the doctrine of piercing the veil of corporate fiction, liability will attach directly to the officers and stockholders, at least, in so far as that particular act is concerned. PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug. 31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran over the child of herein petitioner Mario Palacio, and was found guilty of the criminal case filed against him. Isabelo Calingasan, the employer, was held subsidiarily liable and not the defendant corporation. Plaintiffs now contend that the defendant corporation should be made subsidiarily liable for damages in the criminal case because the sale to it of the jeep in question, after the conviction of Carillo was merely an attempt on the part of Calingasan, its president and general manager, to evade his subsidiary civil liability. ISSUE: WON the corporation can be held liable for the subsidiary civil liability of Isabelo Calingasan? HELD: Yes. It is evident that Calingasan’s main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction of his driver. This conclusion is borned out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end of subversive of justice. Furthermore, the failure of the defendant corporation to prove that it has other property other than the jeep strengthens the conviction that its formation was for the purpose above indicated. MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376; Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation sought to enjoin the defendant Collector of Internal Revenue from selling at a public auction properties which were said to be registered in the name of said corporation. Said properties were seized and distrained by defendant to collect war profits taxes against Maria Castro who the former claims to be the sole owner of the said corporation. Maria Castro owns P250,000 of the P1,025,000 capital of the corporation, of the rest of the incorporators were her half-brothers, half-sister and a brother-in-law. ISSUE: WON Maria Castro is the sole owner of the Corporation? HELD: Yes. Circumstantial pieces of evidence presented were: (1) Endorsement in blank of the certificates of stock issued in the name of the incorporators and the possession thereof by Maria Castro; (2) The other incorporators did not have incomes in such amount, during the time of the organization of the corporation or immediately thereto, as to enable them to pay in full their supposed subscriptions; and (3) It should have been the supposed subscribers who should have come to court to assert that they actually paid for their subscriptions and are not mere dummies. The circumstantial evidence is not only convincing, it is conclusive. In addition to the above, the fact that the stockholders or directors never appeared to hae ever met to discuss the business of the corporation and the fact that Maria Castro advanced big sums of money to the corporation without any previous arrangements or account, and the fact that the books of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

accounts were kept as if they belonged to Maria Castro alone – these facts are of patent and potent significance.

NORTON and HARRISON COMPANY, respondent.

In our opinion, the facts and circumstances duly set forth, all of which have been proved to our satisfaction, prove conclusively and beyond reasonable doubt that Maria Castro is the sole and exclusive owner of all the shares of stock of the corporation and that the other partners are her dummies.

FACTS: Herein respondent entered into an agreement with Jackbilt where the former was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt and accordingly every order of a customer of Norton was transmitted to Jackbilt which delivered the merchandise directly to the customer. Payment of the goods, however, is made to Norton, which in turn pays Jackbilt the amount charged the customer less a certain amount, as its compensation or profit.

YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein petitioner Yutivo purchased its cars and trucks from General Motors Overseas Corporation (GM), the latter paying the sales tax once on original sales, Yutivo no longer paid sales tax on its sales to the public. Later no, GM withdrew from the Philippines and appointed Yutivo as importer. Yutivo in turn exclusively sold to Southern Motors, Inc. (SM), a corporation where the incorporators are sons fo the founders of Yutivo. Under this arrangement, Yutivo paid the sales tax on original sale, while SM did not subject to sales tax its sales to the public. The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes which the CTA affirmed. ISSUE: WON Yutivo is liable for the deficiency taxes? HELD: No. It is elementary rule and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons, or in case of two corporations merge them into one. Another rule is that, when the corporation is a mere alter-ego or business conduit of a person, it may disregarded. The sales tax liability of Yutivo did not arise until it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade. We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young and Yu family. The founders of the corporation are closely related to each other either by blood or affinity and most of its stockholders are members of the Yu (Yutivo or Young) family. According to the AOI, the amount of P62,500 was actually advanced by Yutivo. The additional subscriptions to SM were paid by Yutivo. The shareholders in SM are mere nominal stockholders holding the share for and in behalf of Yutivo, so even conceding that the original subscribers were bona fide stockholders, Yutivo was at all tie in control of the stock of SM and that the latter was a mere subsidiary of the former. SM is under the management control of Yutivo by virtue of the management contract entered into between the two parties. In fact, the controlling majority of the BOD of Yutivo is also the controlling majority of the Board of SM. At the same time, the principal officers of both corporations are identical. In addition, both corporations have a common comptroller. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations would be directed towards common ends. Likewise, cash or funds of SM, including those of its branches which are directly remitted to Yutivo, and subject to withdrawal only by Yutivo, SM’s being under Yutivo’s control, the former’s operations and existence became dependent upon the latter.

(GR No. L-17618; 11 SCRA 714; Aug 31, 1964)

During the existence of the agreement, Norton acquired by purchase all the outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal Revenue, assess respondent Norton for deficiency taxes making the basis of sales tax the sales of Norton to the public, which is the higher price compare to the sale of Jackbilt to Norton. The CTA decided in favor of Norton. ISSE: WON the two corporations may be merged into a single corporation? HELD: Yes. It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding distinct personalities. However, in the case at bar, we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. (a) Norton owned all the outstanding stocks of Jackbilt; (b) Norton constituted Jackbilt’s directors; (c) Norton financed the operations of Jackbilt; (d) Norton treats Jackbilt’s employees as its own; (e) Compensation given to board members of Jackbilt indicate that Jackbilt is merely a department of Norton; (f) The offices of Norton and Jackbilt are located in the same compound; (g) Payments were effected by Norton of accounts for Jackbilt and vice versa; (h) Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa. The circumstances presented by the facts of the case, yields to the conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of Norton and that the fiction of corporate entities, separate and distinct from each other should be disregarded. LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) – Tan Tong, one of herein petitioners, is engaged in the buying and selling of guagua under the trade name La Campana Guagua Packing. Later on, Tong and his family organized a family corporation known as La Campana Coffee Factory Co, Inc. with its principal office located at the same place as that of La Campana Guagua Packing. Tan Tong’s employees later on formed a union (herein respondent) through which they demanded (from both companies) higher salaries and more privileges. As the demand was not granted and an attempt at a settlement through mediation had given no result, the Department of Labor certified the dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion to dismiss which was denied. Hence, this present petition for certiorari. ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may be disregarded?

SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate entity to arrive at the true tax liability of Yutivo.

HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory, Inc. are operating under on single management, that is, as one business though with two trade names. True, the coffee factory is a corporation and, by legal fiction, an entity existing separate and apart from the person composing it, that Tan Tong and his family. But it is settled that this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice cannot be invoked as to further and end subversive of that purpose.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

In the present case, Tan Tong appears to be the owner of the guagua factory. And the factory, though an incorporated business, is in reality owned

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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

exclusively by Tan Tong and his family. As found by the CIR, one payroll, except after July 17, the day the case was certified to the CIR, when the person who was discharging the office of cashier for both branches of the business began preparing separate payrolls for the two. And above all, it should not be overlooked that, as also found by the industrial court, the laborers of the guagua factory and the coffee factory were interchangeable. In view of all these, the attempt to make the two factories appear as two separate businesses, when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) – In a complaint for unfair labor practice, the Court of Industrial Relations rendered a decision in favor of Honorata Cruz, ordering Emilio and Rodolfo Cano, officials of herein petitioner corporation, to reinstate Cruz. An order of execution was issued directed against the properties of herein petitioner. Hence, this petition. ISSUE: WON execution may be had on the properties of the corporation? HELD: Yes. We should not lose sight of the fact that Emilio Cano Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. Here is an instance where the corporation and its members are considered as one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. And so it has been held that while a corporation is a legal entity existing separate and apart from the person composing it, that concept cannot be extended to a point beyond it reason and policy, and when invoked in support of an end subversive of this policy it should be disregarded by the courts. Emilio and Rodlfo Cano were indicted in the case, not in their personal capacity, but as president and manager of the corporation. Having been sued officialy, their connection with the case must be deemed to be impressed with the representation of the corporation. In fact, the court’s order is for them to reinstate Honorata Cruz to her former position in the corporation and incidentally pay her the wages she had been deprived of during her separation. Verily, the order against them is in effect against the corporation. No benefit can be attained if this case were to be remanded to the court a quo merely in response to a technical substitution of parties. TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354; May 13, 1981) – The late Pacifico Gatus was an employee of Utilities Management Corporation (UMACOR), a sister company of herein Petitioner TESCO. He was later on detailed with Petitioner Company and returned back to UMACOR. But he contracted illness and later on died of “liver cirrhosis with malignant degeneration”. His wife, respondent Leonila Gatus filed a Notice and Claim for Compensation with the Workmen’s Compensation Commission (WCC) alleging Pacifico to be an employee of TESCO. An employer’s report was submitted to WCC where UMACOR was indicated as the employer of the deceased and stated that it would not contravert the claim and admitted that Pacifico contracted illness “in regular occupation”. The sheriff levied on and attached the property of TESCO and scheduled the sale of the same at public auction. Thus, the present petition for certiorari with preliminary injunction. ISSUE: WON the award may be rendered against TESCO? HELD: Yes. We note that it is only in this Petition that petitioner denied, for the first time, the employer-employee relationship. In fact, in the letters it submitted to the Acting Referee and to the Commission, petitioner represented and defended itself as the employer of the deceased. Petitioner even admitted that TESCO and UMACOR are sister companies operating under one single management and housed in the same building. Although respect for the corporate personality as such, is the general rule, there are exceptions. In appropriate cases, the veil of corporate fiction may be pierced as when the same is made as a shield to confuse the legitimate issues.

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While indeed, jurisdiction cannot be conferred by acts or omission of the parties. TESCO’s denial at this stage that it is the employer of the deceased is obviously an afterthought, a devise to defeat the law and evade its obligations. This denial also constitutes a change of theory on appeal which is not allowed in this jurisdiction. CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE (July 31, 1975; 65 SCRA 613) – A decision rendered against herein petitioner was rendered on a complaint filed by herein private respondents Allied Workers’ Association, Demetrio Garlitos and 10 respondent workers who petitioner dismissed from Clarapols Steel and Nail Plant. ISSUE: WON the veil of corporate fiction should be pierced? HELD: Yes. It very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skilfully timed to avoid financial liability that already attached to its predecessor, Clarapols Steel and Nail Plant. (1) Both predecessor and successor were owned and controlled by the petitioner Eduardo Clarapols; and (2) there was no break in the succession and continuity in the same business. This avoiding-the-liability scheme is very patent, considering that (3) 90% of the subscribed shares of stock of the second corporation was owned by Clarapols himself, and (4) all assets of the dissolved Clarapols Steel and Nail Plant were turned over to the emerging Clarapols Steel Corporation. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should be pierced as it was deliberately and maliciously designed to evade its financial obligations to its employees. NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE (143 SCRA 124; July 22, 1986) – NAFLU requested for conciliation before the Bureau of Labor Relations for certain money claims and refusal of the company to conclude collective agreement and run-away shop undertaken by management. In the course of the negotiation, management unilaterally declared a temporary shutdown. But it was discovered that the actual partial shutdown begun a month before and that the machines of Lawman were transferred to a different location and the name of the company was changed to Libra Garments, upon discovery of this, the name was further changed to DOLPHIN garments. For failure of the company to resume operations in January 1983 (as promised) a complaint for unfair labor practice was filed. ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN) garments should be pierced? HELD: Yes. It is very obvious from the above findings that the second corporation seeks the protective shield of a corporate fiction to achieve illegal purpose. As enunciated in Clarapols vs. CIR, its view in the present case should, therefore be pierced as it was deliberately and maliciously designed to evade its financial obligations to it employees. It is an established principle that when the veil of corporate fictions is made as a shield to perpetrate a fraud or to confuse legitimate issues (here, the relation of employeremployee), the same should be pierced. After finding that Lawman Industrial Corporation had transferred business operations to Libra Garments, which later changed to Dolphin Garments, the public respondent cannot deny reinstatement to the petitioners simply because Lawman has ceased its operation. As Libra Garments is but an alter-ego of the old employer, Lawman Industrial, the former must bear the consequences of the latter’s unfair act by reinstating petitioners to their former positions without loss of seniority rights. AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May 29, 1987) – A decision was rendered by the CIR and affirmed by this Court against AC Ransom for unfair labor practice. Writ of execution were issued successively against Ransom to no avail. The Union filed an ex-parte motion for a Writ of Execution and Garnishment against the officers/agents of AC Ransom personally and on their estates, as the case may be, which the Labor Arbiter granted. On appeal, the NLRC reversed the Labor Arbiter relieving the

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

officers of personal liability. ISSUE: WON the officers may be liable? HELD: Yes. The NLRC, on appeal, could not have modified the CIR decision as affirmed by this Court, by relieving AC Ransom’s officers and agent of liability which were held to be jointly and severally liable to the 22 employees for unfair labor practice. This finding does not ignore the legal fiction that a corporation has a personality separate and distinct from its stockholders and members for, as this Court had held “where the incorporators belong to a single family, the corporation and its members can be considered as one in order to avoid it being used as an instrument to commit injustice,” or to further an end subversive of justice. In the case of Clarapols vs. CIR involving almost similar facts as in this case, it was also held that the shield of corporate fiction should be pierced when it is deliberately and maliciously designed to evade financial obligations to employees. Aggravating AC Ransom’s clear evasion of payment of its financial obligations is the organization of a “run-away” corporation, ROSARIO Industrial Corporation, in 1969 at the time the unfair labor practice case was proceeding before the CIR by the same person who were the officers and stockholders of AC Ransom, engaged in the same line of business, producing the same line of product, occupying the same compound, using the same machineries, buildings, factories, bodega and sales and accounts departments used by AC Ransom, and which is still in existence. Both corporations were closed corporations owned and managed by members of the same family. Its organization proved to be a convenient instrument to avoid payment of backwages and the reinstatement of 22 workers. This is another instance where the fiction of separate and distinct corporate entities should be disregarded. CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29, 1996) – Private respondents were employees of petitioner Concept Builders, Inc, who were served termination letters stating that the project for which they were hired was already completed and that their contracts have already expired. Finding that the project was not actually completed yet, and that petitioner employed a subcontractor whose employees performed the duties of private respondents, the latter filed a complaint for illegal dismissal with the Labor Arbiter who held that the dismissal was illegal. A writ of execution was issued but was partially satisfied only. The sheriff sought levy upon the properties in the head office of Concept Builders, inc. but was not allowed to do so on the ground that it was occupied by Hydro Pipes Philippines, Inc. and not concept builders. Unable to remove the personal properties he found thereat, the Sheriff asked for a “break-open” order which was denied by the Labor Arbiter after a third party claim was filed by Hydro, which was reversed by the NLRC on appeal. ISSUE: WON the break-open order should be issued? HELD: Yes. The conditions under which the juridical entity may be disregarded vary according to the particular facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly there are some probative factors of identity that will justify the application of the doctrine of piercing the veil of corporate veil, to wit: 1. Stock ownership by one or common ownership of both corporations; 2. Identity of directors and officers; 3. The manner of keeping corporate books and records; 4. Methods of conducting the business. The SEC en banc explained the “instrumentality rule” which the courts have applied in disregarding separate juridical personality of corporations as follows: “Where on corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies, and practices that the controlled corporation has, so to speak, no separate mind,

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will or existence of its own and is a business conduit of its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made” The test in determining the applicability of piercing the veil of corporate fictions is as follows: 1. Control, not mere majority or complete stock control, but complete domination, not only in finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff’s legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust los complained of. The absence of one of the elements prevents piercing the corporate veil. In applying the “instrumentality” or “alter-ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Thus, the question of whether a corporation is mere alter-ego, a mere sheet of paper corporation, a sham or a subterfuge is purely one of fact. In this case, while petitioner claimed that it ceased on operations on April 29, 1986, it filed an information sheet with the SEC on May 15, 1987 stating that its office address is at 355 Maysan Road, Valenzuela Metro Manila. On the other hand, third-party claimant Hydro, on the same day, filed an information sheet with the same address, both information sheets filed by the same Virgilio O. Casino. Both companies have the same president, the same BOD, the same corporate officers and substantially the same subscribers. Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to their former position. Hydro is obviously a business conduit of petitioner corporation and its emergence was skilfully orchestrated to avoid the financial liability attached to petitioner orporaiton. MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) – Petitioners, original incorporators of Park Rite Co., Inc. was ordered to pay the unsatisfied balance of a judgment rendered in favor of lot owners whose property they used in the operations of their parking business without the owners’ consent. ISSUE: WON the incorporators may be held liable for obligations of the corporation? HELD: Yes. The Court has already answered the question in the affirmative wherever the circumstances have shown that the corporate entity is being used as an alter-ego or business conduit for the sole benefit of the stockholders, or else to defeat public convenience, justify wrong, protect fraud, or defend crime. The evidence shows that Cirilio Paredes and Ursula Tolentino (present stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez (previous stockholders) completely dominated and controlled the corporation and that the functions of the corporation were solely for their benefit, as shown that the other shareholders were merely qualifying shares. This is strengthened by the fact that the office of Cirilio Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor, and in the same room. This is further shown by the fact that the funds of the corporation were kept by Cirilio Paredes in his own name. The corporation itself had no visible assets, as correctly found by the trial court, except perhaps the toll house, the wire fence around the lot and the signs thereon It was for this reason that the judgment against it could not be fully satisfied. While the mere ownership of all or nearly all of the capital stock of a corporation does not necessarily mean that it is a mere business conduit of the stockholder, that conclusion is amply unjustified where it is shown, as in this case before us, that the operations of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

the corporation were so merged with the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but merely to apply the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created the separate personality.

properties of Tiaong Milling are actually properties of FL Cease and sould be divided equally among his children”, the trial court did aptly apply the familiar exception to the general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding the corporation and the individual members one and the same. In shredding the fictitious corporate veil, the trial judge narrated the undisputed factual premise:

TAN BOON BEE & CO., INC., petitioner, vs. THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, respondents

“While the records show that originally, the incorporators were aliens, friends or third-parties in relation of one to another, in the course of its existence, it developed into a close family corporation. The BOD and stockholders belong to one family the head of which FL Cease always retained the majority and hence, the control and management of its affairs. In fact, during the reconstruction of its records before the SEC, only 9 nominal shares out of 300 appear in the name of his 3 eldest children then and another person close to them (Ternate). It is likewise noteworthy to observe that as his children increase or perhaps become of age, he continued distributing his shares among them adding Florence, Teresa and Marion until at the time of his death, only 190 were left to his name. Definitely, only the members of his family benefited from the corporation.

(GR No. L-41337; 163 SCRA 205; June 30, 1988)

FACTS: For failure of private respondent Graphic Publishing Inc. to pay paper products purchased from petitioner (doing business under the name and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of Manila. A writ of Execution was issued levying a printing machine which private respondent Philippine American Drug Company claimed as its own. PADCO filed a third party claim and asked the court to nullify the auction sale already conducted, which herein respondent judge granted. ISSUE: WON the respondent judge should be upheld? HELD: No. It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from that of the persons composing it as well as from any other legal entity to which it may be related. As a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. However, this separate and distinct personality is merely a fiction created by law for convenience and to promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors. Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity. Likewise, this is true when the corporation is merely an adjunct, business conduit or alter-ego of another corporation. In such case, the fiction of separate and distinct corporate entities should be disregarded.

The accounts of the corporation and therefore its operation, as well as that of the family appears to be indistinguishable and apparently joined together. As admitted by the defendants, the corporation “never” had any account with any banking institution or if any account was carried in a bank on its behalf, it was in the name of FL Cease. In brief, the operation of the Corporation is merged with those of the majority stockholders, the latter using the former as his instrumentality and for the exclusive benefit of all his family. From the foregoing indication, therefore, there is truth in plaintiffs’ allegation that the corporation is only a business conduit of his father and an extension of his personality, they are once and the same thing. Thus, the assets of the corporation are also the estate of FL Cease, the father of the parties herein who are al legitimate children of full blood” Were we to sustain petitioners, the legal fiction of separate corporate personality shall have been used to delay and ultimately deprive and defraud the respondents of their successional right to the estate of their deceased father. D.

WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED 1.

In the instant case, petitioner’s evidence established that PADCO never engaged in the printing business; that the BOD and the officers of PADCO and Graphic are the same; and that PADCO holds 50% share of stock of Graphic. The printing machine in question was in the premises of Graphic, long before PADCO even acquired its alleged title from Capitol Publishing. Considering the above, respondent judge should have pierced PADCO’s veil of corporate identity. CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the common predecessor-in-interest of the parties. He and other American citizens organized the Tiaong Milling and Plantation Company and in the course of its corporate existence all other incorporators were bought out by Cease and his children. The corporation’s charter expired but there were no records as to its liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3 of the 5 children) and Bonifacia Terante re-incorporated under FL Cease Plantation Company, to the objection of Benjamin and Florence who wanted actual division of Forrest Cease’s shares. The latter two filed a civil case asking to declare the corporation identical to FL Cease and that its properties be divided among Fl Cease’s children as his intestate heirs which was granted by the trial court. ISSUE: WON the assets of the corporation are also the properties of Forrest L. Cease? HELD: Yes. In sustaining respondent’s theory of “merger of Forrest Cease and the Tiaong Milling as one personality”, or that “the company is only the business conduit and alter-ego of the deceased FL Cease and the registered

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WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

2. 3.

Absent any of the following circumstances, the courts will not be justified in disregarding the corporate entity; a. The corporation is used or being used to defeat public convenience; b. Justify wrong; c. Protect fraud; d. Defend crime; e. Confuse legitimate issues; f. Circumvent the law; g. Perpetuate deception; or h. An alter-ego, adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another corporation. The wrong doing must be clearly and convincingly established. It cannot be justified by speculation and can never be presumed. The petitioner must seek to impose a claim against the stockholders or officers directly liable, otherwise piercing the veil of corporate fiction would not be available nor justified.

CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405; April 18, 1989) – Petitioner Feliciano Coprada, as president of Akron, purchased 13 trucks from private respondent (EB Marcha Transport Co., Inc.) for and in consideration of P525,000 as evidenced by a deed of absolute sale.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In a side agreement, the parties agreed on a down payment of P50,000 and the balance to be paid within 60 days. They further agreed that until the balance is paid, the down payment shall accrue as rentals for the 13 trucks; and in case of failure to pay the balance shall constitute a chattel mortgage lien; and the parties may allow 30 day extension; and private respondent may ask for the revocation of the contract and re-conveyance of the said trucks. The obligation is further secured by a promissory note executed by Coprada, where it is stated that the balance shall be paid from the proceeds of a loan from DBP which was never applied for. A complaint was later on filed by private respondent for the recovery of the P525, 000 or the return of the 13 trucks against Akron and its officers and directors including herein petitioner which was granted by the CFI of Rizal. Petitioner denied any participation the transaction and alleging that Akron has distinct corporate personality. He was, however, declared in default for failure to attend pretrial. ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable? HELD: No. The facts of the case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that he is a member of the board at the time the resolution to purchase the trucks were adopted, it does not appear that said resolution was intended to defraud anyone. It was Coprada who negotiated with respondent and the one who signed the promissory note. The word “We” in the said promissory note must refer to the corporation and COprada and not of its stockholders and directors. Petitioner did not sign such note so he cannot be personally bound thereby. Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was forthcoming loan from the DBP when in fact there as none, it is Coprada who should account for the same and not the petitioner.

therefore have been in anticipation of PR’s money claims and the consequent adverse judgment against PHILSA. 3. Substantial identity of the incorporators of the two corporations – does not necessarily imply fraud. *Distinguished from other cases* LA CAMPANA – the two companies were substantially owned by the same person. They had one office, one management, and a single payroll for both businesses. The laborers were also interchangeable. CLARAPOLS – Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. Moreover, all the assets of the old was transferred to the new corporation. AC RANSOM – The distinguishing mark of fraud were clearly apparent in AC Ransom, when such corporation ceased operation after the decision of the CIR and new one replacing it which was owned by the same family, engaging in the same business and operating in the same compound. In the present case, not only has there been failure to establish fraud, but it has also not been shown that petitioner is the corporation officer responsible for PR’s predicament. It must be emphasized that the claims were actually directed against the employer, PHILSA became liable only because of its undertaking to be jointly and severally bound with the foreign employer, as required by POEA rules. INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA 697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile Mills, Inc. executed a CBA effective from April 1, 1987 to March 31, 1990. On November 3, 1987, Indophil ACRYLIC MANUFACTURING CORP was formed and registered with the SEC and in 1988 became operation and hired workers according to its own criteria and standards.

DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a complaint for money claims which was ultimately decided by the NLRC against PHILSA Construction and Trading Co. (recruiter) and Arieb Enterprises (employer), a writ of execution was issed by the POEA which was returned unsatisfied as PHILSA was no longer operating and was financially incapable of satisfying the judgment.

In 1989, the workers of ACRYLIC unionized and a CBA was executed. In 1990, petitioner union claimed that the plant facilities build and set up by ACRYLIC should be considered an extension or expansion of the facilities of TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining unit. Public respondent voluntary arbitrator Calica declared that the CBA of petitioner DOES NOT extend to employees of ACRYLIC.

At the motion of private respondent, an alias writ was issued against the properties of Mr. Francisco del Rosario and if insufficient, against the cash and/or surety bond of the Bonding Company concerned.

ISSUE: WON the veil of corporate entity should be pierced?

Petitioner appealed to the NLRC which was denied together with his MR. ISSUE: WON the writ of execution must be upheld? HELD: No. Under the law, a corporation is bestowed juridical personality, separate and distinct from its stockholders. But when the juridical personality of the corporation is used to defeat public convenience, Justify wrong, protect fraud or defend crime, the corporation shall be considered as a mere association of persons, and its responsible officers and/or stockholders shall be held individually liable. For the same reasons, a corporation shall be liable for he obligation of a stockholder or a corporation and its successor-in-interest shall be considered as one and the liability of the former shall attach to the latter. But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this regard, we find the NLRC decision wanting. 1. PHILSA allowed its license to expire so as to evade payment of private respondent’s claim – not supported by facts. The license expired in 1985, it was delisted in 1986, there was no judgment yet in favour of PR. An intent to evade payment of his claims cannot therefore be implied from the expiration of PHILSA’s license and its delisting. 2. Organization of PHILSA International Placemen and Services Corp. and its registration with POEA implies fraud – it was organized and registered in 1981, several years before private respondent filed his complaint with the POEA in 1985. The creation of the second corporation could not

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HELD: No. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of a corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. In the case at bar, petitioner alleges that the creation of the ACRYLIC is a devise to evade the application of the CBA between petitioner and TEXTILE MILL. While we do not discount the possibility of the similarities of the businesses of the two corporations, neither are we inclined to apply the doctrine invoked by petitioner. 1. The fact that the business of Indophil Textile Mills and Indphil Acrylic Manufacturing are related; 2. That some of the employees of PR are the same persons manning and providing for auxilliary services to the units of ACRILYC, and that; 3. The physical plants, offices and facilities are situated in the same compound. It is our considered opinion that these facts are not sufficient to justify piercing the corporate veil of ACRILYC. UMALI VS. CA – “the legal corporate entity is disregarded only if its sought to hold the officers and stockholders directly liable for a corporate debt or obligation”. In the instant case, petitioner does not seek to impose a claim against the members of ACRILYC.

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PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001) - PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of PNB, organized and doing business in HK, extended a letter of credit in favor of respondent RITRATTO in the amount of US$300K , later increased to 1.14M, to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by a real estate mortgage constituted in 4 parcels of land in Makati City. As of April 1998, the outstanding obligation of respondents stood at US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its attorney-in-fact PNB, notified respondents of the foreclosure of all the real estate mortgages and that the properties would be sold at a public auction. Respondents filed a complaint for injunction for which a TRO was issued and later on a writ of preliminary injunction, which petitioner assailed with the CA through petition for certiorari. The CA dismissed the petition. ISSUE: WON the corporate entity of IFL may be disregarded? HELD: No. Respondents, therefore do not have any cause of action against it. The trial court erred in disregarding the corporate entity by saying that IFL is a wholly owned subsidiary of PNB and that it is a mere alter-ego or business conduit of the latter. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence of the parent and subsidiary on the ground that the latter was formed merely for the purpose of evading the payment of higher taxes. In the case at bar, respondents failed to show any cogent reason why the separate entities of PNB and IFL should be disregarded. While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation some factors have been identified that will justify the application of the treatment of the doctrine of piercing the corporate veil: 1. As a general rule, the stock ownership alone by one corporation ofhte stock of anoher does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is by an instrumentality or adjunct of the dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC); 2. The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purpose. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is used as a shield to confuse legitimate issues or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; 3. The test in determining the doctrine of piercing the veil of corporation fiction: a. Control, not mere majority of complete control, but complete domination, not only of finances, but of policy and business practices in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; b. Such control must have been used by the defendant to commit fraud, or wrong to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention to plaintiff’s legal rights; and

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c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents “piercing the corporate veil”. In applying the “instrumentality” or “alter-ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to the operation. (Concept Builders, Inc vs. NLRC) Aside from the fact that IFL is a wholly owned subsidiary, there is no showing of the indicative factors that the it is a mere instrumentality of PNB. Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil based on the alter-ego or instrumentality doctrine finds application in the case at bar. The injunction suit was directed against PNB, as agent of IFL and not as parent. A suit against an agent, cannot, without compelling reasons be considered a suit against the principal, for he is not the real party in interest provided under the Rules of Court. YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22 employees of TDI, including PRs, received a memorandum from TDI, terminating their services for reasons of retrenchment, because First Pacific Metro Corporation is buying TDI’s assets, which purchase did not push through. On June 1, 1988, after employees had ceased as such, Twin Ace Holdings, Inc. took over the business and assumed the name Tanduay Distillers (Tanduay). Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners filed an opposition against the motion for execution (which was directed towards them and TDI) contending that Tanduay is a separate entity distinct from TDI, and respondents James Yu and Wilson Young, which was dismissed by the NLRC. ISSUE1: WON the order of execution is void? HELD: Yes. The decision dated May 24, 1989, was already final and executory and cannot be amended or corrected except for clerical errors or mistakes. An examination of the said decision does not in any manner obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only TDI was held liable upto the time of change of ownership. The order of execution in effect amended the decision. It is beyond the power and competence of Labor Arbiter Cueto to amend a final decision. The writ of execution must not go beyond the scope of judgment. ISSUE2: WON NLRC committed grave abuse of discretion in holding petitioner Yu and Young liable? HELD: It cannot be said that TDI and Tanduay are one and the same, as seems to be the impression of respondents when they impleaded petitioners as party-respondents in their complaint.

Such a stance is not supported by the facts. The name of the company

for whom the petitioners are working is Twin Ace Holdings Corporation. As stated by the SolGen, Twin Ace is part of the Allied Banking Group although it conducts the rum business under the name of Tanduay Distillers. The use of a similar sounding or almost identical name is an obvious device to capitalize on the goodwill which Tanduay Rhum has built over the years. Twin Ace or Tanduay Distillers and TDI are distinct and separate corporations. There is nothing to suggest that the owners of TDI, have any common relationship as to identify it with Allied Banking Group which runs Tanduay Distillery.

The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent interested buyer. PRs have not presented any proof as to communality of ownership and management to support

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

their contention that the two companies are one firm or closely related.

The complaint was filed against TDI. Only later when the manufacture

and sale of Tanduay products was taken over by Twin Ace or Tanduay Distillers were James Yu and Wilson Young impleaded. The corporation itself was never made a party to the case.

The buyer (Twin Ace) did not buy TDI as a corporation, only most of its assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace

did not take over the corporate personality of TDI although they manufacture the same product at the same plant with the same equipment and machinery. Obviously, the trade name “Tanduay” went with the sale because the new firm does business as Tanduay Distillers and its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate corporation. In point of fact, TDI is now herein a party respondent represented by its own counsel. The fiction of separate and distinct corporate entites cannot, in the instant case, be disregarded and brushed aside, there being not the lease indication that the second corporation was a dummy or servces as a client of the first corporate entity. AMENDMENT OF THE CORPORATE CHARTER Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: xxx 4. To amend its articles of incorporation in accordance with the provisions of this Code; Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation The steps to be followed for an effective amendment of the articles of incorporation would thus be: 1. Resolution by at least a majority of the board of directors or trustees; 2. Vote OR WRITTEN ASSENT of the stockholders representing at least 2/3 of the outstanding capital stocks or members in case of a non-stock corporation. (Note: non-voting shares are considered in determining the voting and quorum requirement in case of amendments of the articles of incorporation as provided in Sec. 6); 3. Submission and filing of the amendments with the SEC as follows: a. The original and amended articles together shall contain all the provision required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made;

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b.

c.

A copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that such amendments have been approved by the required vote of the stockholders or members; Favorable recommendation of the appropriate government agency concerned in the case where the corporation is under its supervision such as banking and insurance companies, etc.

When to take effect? (1) Upon approval by the SEC; or (2) From the date of

filing if not acted upon within 6 months for a cause not attributed to the corporation (does not apply to increasing or decreasing the capital stock or shortening the corporate term, which shall require the approval of the SEC [Sec. 38 and 120]) SPECIAL AMENDMENTS Sec. 37.Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance

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by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. SEC. 37&38 vs. SEC. 16: 1. In the former a meeting of the stockholders would be REQUIRED, unlike in Sec. 16, where the “written assent” would suffice. 2. Former requires the approval of the SEC. NOTE: When the amendment of the corporate charter involves shortening the life of the corporation with the effect of dissolution, Sec. 120 would apply, requiring approval by the SEC. GROUNDS FOR DISAPPROVAL OF AMENDMENT Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved.- The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli): 1. Names of the incorporations and the incorporating directors or trustees; 2. Name of the treasurer originally or first elected by the subscribers or members to act as such; 3. Number of shares and the amount originally subscribed and paid out of the original authorized capital stock of the corporation; and

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4.

Date and place of execution of the articles of incorporation and the signatories and acknowledgment thereof.

CHANGE IN CORPORATE NAME Change in corporate name is included in the general power to amend and maybe effected with compliance to Sec. 16. Any change in the corporate identity or name does not affect the rights and obligations of the corporation. A mere change in the name of the corporation does not affect the identity of a corporation nor in any manner affect the rights, privileges and obligations previously acquired or incurred by it. PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant vs. MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendantsappellees (GR No. L-26370; 74 SCRA 252; July 31, 1970) FACTS: Plaintiff changed its name from “The Yek Tong Lin Fire and Marine Insurance Co., Ltd” (Yek Tong). The complaint alleges that under its old name, PFIC signed as co-maker together with Hartigan, a promissory note for P5,000 in favor of China Banking Corporation (Chinabank). Plaintiff agreed to act as such upon application of the defendant, who together with Antonio Chua and Chang Ka Fu, signed an indemnity agreement in favor of the plaintiff. Defendants admitted the execution of the indemnity agreement but argued that it was made in favor of Yek Tong and not PFIC. They claim that there was no privity of contract between plaintiff and defendants and consequently, the plaintiff has no cause of action against them considering that the plaintiff does not allege that PFIC and Yek Tong are one and the same or that the plaintiff has acquired the rights of the latter. CFI of Manila dismissed the complaint. ISSUE: WON the trial court correctly dismissed the case? HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459) explicitly permits the articles of incorporation to be amended. The law does not only authorize corporations to amend their charter; it also lays down the procedure for such amendment; and, what is more relevant to the present discussion, it contains provisos restricting the power to amend when it comes to the term of their existence and the increase or decrease of the capital stock. There is no prohibition therein against the change of name. The inference is clear that such a change is allowed, for if the legislature had intended to enjoin corporations from changing names, it would have expressly stated so in this section or in any other provision of the law. No doubt, the name of the corporation is peculiarly important as necessary to the very existence of a corporation. The general rule as to corporation is that each corporation shall have a name by which it is to sue and be sued and do all legal acts. The name of the corporation in this respect designates the corporation in the same manner as the name of an individual designates the person. Since an individual has the right to change his name under certain conditions, there is no

compelling reason why a corporation may not enjoy the same right.

The sentimental considerations which individuals attach to their names are not present in corporations and partnerships. Of course, as in the case of an individual, such change may not be made exclusively by the corporation’s own act. It has to follow the procedure prescribed by law for the purpose, and this is what is important and indispensably prescribed – strict adherence to such procedure. RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as contrary to public policy is the USE by one corporation of the name of another corporation as its trade name. We are certain no one will disagree that such an act can only result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. Surely, the Red Line case was not one of change of name.

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The change of name of a corporation DOES NOT result in its dissolution.

There is unanimity in authorities: “An authorized change in the name of a corporation has no more effect upon its identity as a corporation than change of name of natural person has upon his identity. It does not affect the rights of the corporation or lessen or add to its obligations. After a corporation has effected a change in its name it should sue and be sued in its new name” (13 Am. Jur. 276-277)

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

A mere change in the name of a corporation, either by the legislature or by the corporators or stockholders under legislative authority, does not, generally speaking, affect the identity of the corporation, nor in any way affect the rights, privileges, or obligations previously acquired or incurred by it. Indeed, it has been said that a change of name by a corporation has no more effect upon the identity of the corporation than a change of name by a natural person has upon the identity of such person. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original one, but remains and continues to be the original corporation. It is the same corporation with a different name, and its character is in no respect changed. ... (6 Fletcher, Cyclopedia of the Law of Private Corporations, 224-225, citing cases). REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no effect on the identity of the corporation, or on its property rights or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred.

The law gives a certain length of time for the filing of records in this court, and provides that the time may be extended by the court, but under this provision it has uniformly been held that when the time was expired, there is nothing to extend, and that the appeal must be dismissed... So, when the articles of a corporation have expired, it is too late to adopt an amendment extending the life of a corporation; for, the corporation having expired, this is in effect to create a new corporation ..."

AMENDMENT OF THE CORPORATION TERM For purposes of amending the corporate term, the following procedure is to be observed (Sec. 37): 1. Approval by a majority vote of the board of directors or trustees; 2. Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or by personal service; 3. Ratification by the stockholders or members representing at least 2/3; 4. In case of extension of corporate term, it should be for periods not exceeding 50 years in any single instance, and provided that no extension can be made earlier than 5 years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the SEC. 5. In cases of extension of corporate term, a dissenting stockholder may exercise appraisal rights under the conditions prescribes by Sec. 81 and 82 of the Code.

OTHER MATTERS SUBJECT TO AMENDMENT: 1. Purpose clause – by changing, altering or including other purpose or purposes; 2. Principal Office; 3. Number of Directors; 4. Shares of stock and their classification; 5. Restrictions as well as preference;

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner, vs. SECURITIES & EXCHANGE COMMISSION, respondent

(G.R. No. L-23606 July 29, 1968)

FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years which expired on Jan. 15, 1962. On July 15, 1963, during the period within which it is to liquidate, the board of directors resolved to amend its articles of incorporation extending its corporate life for another 50 years which was approved by the stockholders but denied by the SEC. ISSUE: WON the extension of corporate term should be allowed? HELD: No. The privilege of extension is purely statutory. All the statutory conditions precedent must be complied with in order that the extension may be effectuated. And, generally, these conditions must be complied with, and the steps necessary to effectuate an extension must be taken, during the life of the corporation, and before the expiration of the term of existence as originally fixed by its charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as the

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CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS A.

POWERS OF THE BOARD

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority in matter of management of the regular and ordinary business affairs of the corporation. However, this authority does not extend to the fundamental changes in the corporate charter such as amendments or substantial changes thereof, which belong to the stockholders as a whole. The equitable principle therefore is that the stockholders may have all the profits but shall turn over the management of the enterprise to the Board of Directors. CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS

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Unless the law so provides, corporate powers may be delegated to individual directors or other officers or agents. Whether or not the acts of the individual director, officer or agent would bind the corporation depend on the nature of the agency created or the poers conferred upon such person by the statute, the corporate charter, the by-laws, the corporate action of the board or stockholders, or whether it is necessary or incidental to one’s office. The general rule is that a corporation is bound by the acts of its corporate officers who act within the scope of the 5 classification of powers of corporate agents, which are: 1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by the official act of the board of directors; 2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and necessary to carry out the corporate purpose or purposes; 3. Those that are inherent or acts that go with the office; 4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows or permits it to be done; and 5. Powers arising out of customs, usage or emergency. J. F. RAMIREZ, plaintiff-appellee, vs. THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendantsappellants

(G.R. No. 11897 September 24, 1918)

FACTS: The Board of Directors were apprised of the fact the plaintiff JF Ramirez, who is based in Paris and represented by his son Jose Ramirez, had control of agencies for two different marks of films, “Éclair Films” and “Milano Films”. Negotiations began between Jose Ramirez and the board of directors of Orientalist Co. where Ramon Fernandez, one of the members of the board and TOC’s treasurer was chiefly active. Near the end of July 1913, Jose Ramirez offered to supply from Paris the aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an informal conference with the BOD except one, and with approval of those whom he had communicated, accepted the offer through letters signed by Fernandez in his capacity as treasurer. Upon arrival of the said films, it turned out that TOC was without funds, so the first drafts, taken in the name of TOC were received and paid by its president, Hernandez, through his own funds and such films were treated by him as his own property; and in fact, they never came into the possession of TOC and were rented by Hernandez to TOC as they are exhibited in the Oriental Theater. Other films arrived together with their drafts, taken in the name of TOC through its president, which were not paid and gave rise to the present action. TOC was declared the principal debtor and Ramon Fernandez, the guarantor. ISSUE: WON the corporation could be held liable for the contract? HELD: Yes. The public is not supposed nor required to know the transactions

which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. In dealing with corporations, the public at large is bound to rely to a large extent upon outward appearances. If a man is acting for a corporation with the external indicia of authority, any person not having notice of want of authority may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may ever have been granted.

The failure of the defendant corporation to make an issue in its answer with regard to the authority of Ramon Fernandez to bind it, and particularly to

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deny specifically under oath the genuineness and due execution of the contracts sued upon have the effect of eliminating the question of his authority from the case. It is declared under Sec. 28 (now 23) that corporate powers shall be exercised, and all corporate business conducted by the board of directors, and this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the board of directors. It is true that it is also true in the by-laws, that the president shall have the power and it shall be his duty, to sigh contract; but this has reference rahter to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an independent power to make contract binding on the corporation. The fact that the power to make corporate contracts is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for a board can create liability, like an individual, by other means than by a formal expression of its will.

Participation of the stockholders. The letter accepting the offer was dispatched in a meeting of the board called by Ramon Fernandez, where 4 members, including the president was present. The minutes add that terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter and definite action was postponed. From the meeting of the stockholders, it can be inferred that this body was then cognizant that the offer had already been accepted. It is not, however, necessary to find the judgment of the stockholder proceedings, even if the assumption is that they did not approve of the contract.

Both upon the principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored. The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contract between a corporation and third person must be made by the director and not by the stockholders. The corporation, in such matters, is represented by the former and not by the latter. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board. BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) – Petitioners, directors of respondent upto March 1929, sought to recover 1% (to each plaintiff) of the profits of the copany for the year 1929, under and in accordance with an amendment to the by-laws which was made at the general meeting of the stockholders on Feb. 1929, to which the lower court rendered in their favor. ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ claim? HELD: No. Sec. 20 of the Corporation Law limits the authority of a corporation to adopt by-laws which are not consistent with the provisions of the law. The appellees contend that the articled in question is merely a provision of the compensation of directors which is not only consistent with but expressly authorized by Sec. 21 of the Corporation Law. We cannot agree with this contention. The authority conferred upon corporations in that section refers only to providing compensation for the future services of directors, officers, and employees thereof after the adoption of the by-law or other provisions in relation thereto, and cannot in any sense be held to authorize the giving, as in this case, of continuous compensation to particular directors after their employment has terminated for part services rendered gratuitously by them to the corporation. To permit the transaction involved in this case would be to create an obligation unknown to law, and to countenance a misapplication of the funds of the

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

defendant building and loan association to the prejudice of the substantial rights of its shareholders. Irrespective of the above, the conclusion is the same. The article which the appellees rely upon is merely a by-law provision adopted by the stockholders of the defendant corporation, without any action having been takin in relation thereto by its board of directors. The law is settled that contracts between a corporation and third person must be made by or under the authority of its board of directors and not by its stockholders. Hence, the action of the stockholders in such matters is only advisory and not in any wise binding on the corporation. There could not be a contract without mutual consent, and it appears that the plaintiffs did not consent to the provisions of the by-law in question, but, on the contrary, they objected to and voted against it in the stockholders’ meeting in which it was adopted. QUALIFICATIONS AND DISQUALIFICATIONS (see discussion under

DIRECTORS/TRUSTEES in chapter 4)

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES, respondents.

(GR No. 93695; 205 SCRA 752; Feb. 4, 1992)

FACTS: A complaint for a sum of money was filed by International Corporate Bank, Inc. against the private respondents who, in turn, filed a third-party complaint against Alfa Integrated Textile Mills, Inc. The trial court ordered the issuance of alias summons upon Alfa through DBP, who is said to be the transferee of Alfa’s management by virtue of a voting trust agreement. DBP declined to receive the summons saying it is not authorized, Alfa having a personality separate and distinct. The trial court, in turn ordered private respondents to take the appropriate steps to serve the summons to Alfa which they made through the officers and later on, was later on declared to be proper service of summons. After the second motion for reconsideration, the trial court reversed itself, saying that the service of summons upon the petitioners were not proper, them not being officers of the corporation anymore. On appeal, the CA reversed the trial court. ISSUE: WON the petitioners can still be authorized to receive the summons despite the voting trust agreement with DBP? HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more definitive meaning. By its very nature, a VTA results in the separation of the voting right of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a VTA from proxies and other voting pool and agreements, it must pass three criteria or tests, namely: (1) the voting rights of the stock are separated from other attributes or ownership; (2) that the voting right granted are intended to be irrevocable for a definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. The execution of VTA, therefore, may create a dichotomy between the equitable and beneficial ownership of the corporate shares of stockholder, on the one hand and the legal title thereto, on the other hand. By virtue of the VTA, the petitioners are no longer directors. Under the old and new Corporation Code, the most immediate effect of a VTA on the status of a stockholder who is a party to its execution is that he becomes only an equitable or beneficial owner, from being the legal titleholder or owner of the shares subject of the VTA. Under the old code, the eligibility of a director, strictly speaking, cannot be

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adversely affected by a VTA inasmuch as he remains the owner (although beneficial or equitable only) of the shares subject of the VTA pursuant to which a transfer of the stockholder’s shares in favor of the trustee is required. No disqualification arises by virtue of the phrase “in his own right” provided under the Old Code, which has been omitted. Hence, this omission requires that in order to be eligible as director, what is material is the legal title to, not beneficial ownership, of the stock as appearing on the books of the corporation. The petitioners ceased to be the owners of at least one share standing in their names on the books of Alfa as required under Sec. 23 of the new Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Considering the VTA, DBP as trustee, became the stockholder of record with respect to the said shares of stocks. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 256; Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff Detective and Protective Bureau against defendant-respondent Fausto Alberto, alleging that defendant illegally seized and took control of all the assets as well as the books, records, vouchers and receipt of the corporation from the accountantcashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same. That on a meeting, the stockholders removed defendant as managing director and elected Jose dela Rosa. Alberto, on the other hand, stated that Jose dela Rosa could not be elected managing director because he did not own any stock in the corporation. ISSUE: WON dela Rosa may be elected managing director? HELD: No. There is no record showing that Jose dela Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to Sec. 30 of the Corporation Law and consequently he cannot be a managing director by virtue of the by-laws of the corporation that the manager shall be elected by the BOD among its members. Accordingly, Faustino Alberto could not be compelled to vacate his office and cede the same to dela Rosa because the by-laws provide that the Directors shall serve until the election and qualification of their duly qualified successor. ELECTION AND VOTING Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital

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stock, or if there be no capital stock, a majority of the member entitled to vote. NOTE: 1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the election of the directors; or majority of members entitled to vote, in the case of a non-stock corporation. If the required quorum is not obtaining, the meeting may be adjourned; 2. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce would suffice. 3. The candidates receiving the highest number of votes shall be elected. CUMULATIVE VOTING: 1. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal or he may distribute them among the candidates as he may see fit. 2. This is granted by law to each stockholder with voting rights. However, in non-stock corporations, cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-laws. 3. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000 votes which he may cast in favor of one candidate or may apportion to any number of candidate he may wish; 4. PURPOSE: to allow the minority to have a rightful representation in the board of directors. Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. NOTE: 1. Except in a close corporation where the corporate officers may be elected directly by the stockholders, the Code requires the BOD to elect the said officers; 2. The officers that may be elected are the: a. President – who must be a director; b. Treasurer – who may or may not be a director; c. Secretary – who should be a resident and citizen of the Philippines; d. Such other officers as may be provided for in the by-laws. 3. Any two or more positions may be held concurrently by the same person, except: a. The president and the secretary; b. The president and the treasurer. B.

VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS

Sec. 25. Corporate officers, quorum xxx The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. QUORUM: requirement for a valid board meeting is the majority of the number of the board fixed in the AOI, and a decision of at least a majority of the directors/trustees present in a meeting at which there is a quorum shall be a valid corporate act, except: 1. Election of officers, which shall require the majority of all the members

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2.

of the board; and Unless the AOI or the by-laws provide for a greater quorum/voting requirement.

Every action of the board without a meeting and without the required voting and quorum requirement will not bind the corporation unless subsequently ratified, expressly or impliedly. Individual directors, however, can rightfully be considered as agents of the corporation. And although they cannot bind the corporation by their individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of authority; (2) when expressly conferred; or (3) where the officer or agent is clothed with actual or apparent authority. YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – Constacio B. Malagna, President and Chairman of the Board of private respondent Prime White Cement Corporation (PWCC), sent a letter-offer (Exhibit A) to Mr. Yao for the delivery of cement, which was accepted by the latter by delivering a check for P243,000. ISSUE: WON the letter-offer sent by Malagna binds the corporation? HELD: No. A corporation can act only through its officers and agents, all acts within the powers of said corporation may be performed by agents of his selection and except in so far as limitations or restrictions may be imposed by special charter, by-law or statutory provisions, the same general provision of law which govern the relation of agency for natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and the agents once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons. Moreover, a corporate officer or agent may represent and bind the corporation in transactions with third person to the extent that authority has been conferred upon him, and this includes powers which have been (1) intentionally conferred, and (2) also such powers as, in the usual course of business, are incidental thereto, or may be implied therefrom, (3) powers added by custom and usage, as usually pertaining to the particular officer or agent, and (4) such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. While Mr. Maglana was an officer, the by-laws do not in any way confer upon the president the authority to enter into contracts for the corporation independently of the BOD. That power is expressly lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the President shall sign the contact for the corporation. No greater power can be implied from such express, but limited delegated authority. Neither can it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglana’s position as president and chairman of the corporation. Although there is authority "that if the president is given general control and supervision over the affairs of the corporation, it will be presumed that he has authority to make contract and do acts within the course of its ordinary business," We find such inapplicable in this case. We note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active and direct management of the business and operation of the corporation, conducting the same accordingly to the order, directives or resolutions of the Board of Directors or of the president." It goes without saying then that Mr. Maglana did not have a direct and active and in the management of the business and operations of the corporation. Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time." Also, "if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority in real, as to innocent third persons dealing in good faith with such officers or agents." This "apparent authority may result from (1) the general manner, by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar contract. This could have been easily done by evidence of similar acts executed either in its favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that no contract can be signed by the president without first being approved by the Board of Directors; such approval may only be given after the contract passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel. LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) – Petitioner corporation approved two resolutions providing for the gratuity pay of its employees. Except for Asuncion Lopez-Gonzales, who was then abroad, the remaining member of the board convened a special meeting and passed a resolution adopting the above-mentioned resolutions. Private respondents requested for the full payment of the gratuity pay which was granted. At that time, however, petitioner Asuncion was still abroad, and allegedly sent a cablegram objecting to certain matters taken up by the board in her absence.

Despite lack of notice to Asuncion, we can glean from the records that she was aware of the corporation’s obligations under the said resolution. More importantly she acquiesced thereto by affixing her signature on two cash vouchers. The conduct of petitioners had estopped them from assailing the validity of the said board resolutions. PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) – W. Neumark, president of defendant corporation borrowed P15000 from plaintiff which was delivered by means of a check in favor of defendant and deposited in BPI and the amount of it credited to the corporation’s current account. ISSUE: WON the corporation is responsible for the money borrowed by its president? HELD: Yes. W. Neumark is the principal stockholder, president and general business manager of the defendant corporation. On behalf of the corporation, he solicited a loan and was given a check, which was endorsed by him in his capacity as president and deposited to the corporation’s account. It may be true that a large part of the amount so deposited was diverted by Neumark to his own use, but that does not alter that the money was borrowed for the corporation and was placed in its possession. It is conceded that Neumark was not expressly authorized by the board of directors to borrow the money in question and the general rule is that a business manager or other officer of a corporation, has no implied power to borrow money on its behalf. But much depends upon the circumstances of each particular case and the rule state is subject to important exceptions. Thus, where a general business manager of a corporation is clothed with apparent authority to borrow money and the amount borrowed does not exceed the ordinary requirements of the business, it has often been held that the authority is implied and that the corporation is bound.

Notwithstanding a corporate squabble between Asuncion and Arturo Lopez, the first two installments of the gratuity pay of private respondents were paid. Also, petitioner corporation had prepared the cash vouchers and checks for the thir installment. For some reason, said voucher was cancelled by petitioner Asuncion.

YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or TC Chen, General Manager of defendant corporation Kong Li Po, entered into an agreement with the plaintiffs by which the latter bound themselves to do the necessary printing for the newspaper. Later on, the new general manager, Tan Tian Hong, discharged plaintiffs with no special reasons. Aggrieved, plaintiffs sought to recover full payment of the remaining term of the contract, which was originally for 3 years, as stated therein.

A complaint was filed before the labor arbiter who decided in favor of private respondents.

ISSUE: WON Chen had the power to bind the corporation under a contract of that character?

ISSUE: WON the gratuity pay should be paid?

HELD: No. The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be expressly or impliedly be delegated to other officers or agents of the corporation, and it is well settled that except where the authority of employing servants and agents is expressly vested in the BOD/T, an officer or agent who has general control and management of the corporation’s business, or a specific part thereof, may bind the corporation as are usual and necessary in th conduct of such business. But the contracts of employment must be reasonable.

HELD: Yes. The general rules is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, the directors must act as a body in a meeting called pursuant to the law or the corporation’s by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either (1) expressly, by the action of the directors in subsequent legal meeting, or (2) impliedly, by the corporations’ subsequent conduct. Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or acquiescence. Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in question. Such ratification may be expressed or may be inferred from silence and inaction.

Chen, as general manager of Kong Li Po, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs, but we do not think that contract here in question can be so considered. Not only is the term of employment usually long, but the conditions are otherwise so onerous to the defendant that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. This fact, in itself was, in our opinion, sufficient to put the plaintiffs upon inquiry as to the extent of the business manager’s authority; they had not the right to presume that he or any other single officer or employee of that corporation had implied authority to enter into a contract of employment which might bring about its ruin.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolution granting gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two installments thereof.

TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) – Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged her property in QC. For being in arrears in her installments, GSIS extrajudicially foreclosed the mortgage.

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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal, general manager of GSIS, offering to redeem the property which was replied to by Andal through a telegram saying “GSIS BOARD APPROVED YOUR REQUEST RE REDEMTPION OF FORECLOSED PROPERTY OF YOUR DAUGHTER” Later, inasmuch as, according to the defendant GSIS, the remittances made by Atty. Francisco were allegedly not sufficient to pay off her daughter’s arrears, the one year redemption period has expired, said defendant consolidated title to the property in its name. ISSUE: WON the telegram sent by the Andal binds the corporation? HELD: Yes. The terms of the offer were clear and over the signature of Andnal, plaintiff was informed that the proposal has been accepted. There was nothing in the telegram that hinted at any anomaly, or gave grounds to suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There is no denying that the telegram was within Andal’s apparent authority, but eh defense is that he did not sign it, but that it was sent by the board secretary in his name and without his knowledge. Assuming this to be true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation were held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. Indeed, it is well-settled that If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the binding effect produced by the telegram. The error in the wording cannot be taken seriously. All the while GSIS pocketed the various remittances, and kept silent as to the true facts as it now alleges. This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff constitutes in itself a binding ratification of the original agreement. THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10, 1965) – National Coconut Corporation (NACOCO) embarked on copra trading activities led by its General Manager Maximo Kalaw and the other defendants as members of the board. Due to natural calamities, the business of copra became unprofitable. Kalaw made a full disclosure of the situation and apprised the baord of the impending losses on the contracts already entered into, but no action was taken. But later on, the contracts were unanimously approved by the Board. The buyers threated damage suits, but some were settled. Louis Dreyfus & Co. Ltd. Actually sued but was also culminated in an out-of-court settlement. NACOCO now seeks to recover the sum paid to Louis from general manager and board chairman Kalaw and the other members who approved the contracts. It charges Kalaw with negligence and bad faith and/or breach of trust for having approved the contracts, which was dismissed by the trial court. ISSUE: WON the contracts executed by Kalaw binds the corporation? HELD: Yes. A rule that has gained acceptance through the years is that a corporate officer “entrusted” with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. As such officer, he may, without any special authority from the BOD perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business.

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Long before the disputed contracts came into being, Kalaw contracted by himself alone as general manager – for forward sales of corpra (which is a necessity in the business) which were profitable. So pleased was NACOCO;s BOD that it voted to grant Kalaw special bonus in recognition of the signal achievement rendered by him. These previous contacts, it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing. Obviously, NACOCO’s board met difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO’s general manager Maximo Kalaw. Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the BOD. In varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the BOD has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval. If the bylaws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But the Board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval. BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) – As a consequence of P200,000 worth of ECA allocated to the Bowen & Co., Inc., it required a letter of credit in the amount of P100,000 with the PNB. As the corporation did not have at the time the necessary funds to put up the required cash marginal deposit of P60,000, its president Geoffrey Bowen, obligating the corporation and himself in his personal capacity, offered to pay Fracisco Buenaseda 37 ½% of the profits to be realized from the sale of the ECA procurement materials, should he be able to obtain and produce the amount necessary to cover the cash marginal deposit – which Buenaseda was able to do. The corporation refused to pay, Buenaseda filed an action in the CFI to recover the same. ISSUE: WON the agreement was binding? HELD: Yes. It is not here pretended that the BOD of the defendant corporation had no knowledge of the agreement between Bowen and plaintiff. Indeed, at the time the said Agreement was made, the BOD of the corporation was composed of Bowen himself, his wife, Buenaseda and two others, with Bowen and his wife controlling the majority of the stocks of the corporation. The Board did not repudiate the agreement but on the contrary, acquiesced in and took advantage of the benefits afforded by said agreement. Such acts are equivalent to an implied ratification of the agreement by the BOD and bound the corporation even without formal resolution passed and recorded. It is agreed by the respondents, defendants below, that the profits of the corporation form part of its assets and payment of a certain percentage of the profits requires a declaration of dividends and/or resolution of the BOD. The agreement is untenable. Although the plaintiff is a stockholder of the corporation he does not, however, claim a share of the profits as such stockholder, but under the agreement between him and the president of the corporation which has been impliedly ratified by the BOD.

IN SUMMARY: An unauthorized act, or the act of a single director, officer or

agent of a corporation may be ratified either expressly or impliedly. 1. Express ratification is made through a formal board action; 2. Implied ratification can either be (a) silence or acquiescence; (b) acceptance and/or retention of benefits, or (c) by recognition or adoption. C.

REMOVAL AND FILLING UP OF VACANCIES

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a nonstock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the  stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. 



NOTE: 1. By-laws may provide for casues or grounds for removal of a director;  2. A director representing the minority may not be removed except for  those causes; 3. A director NOT representing the minority may be removed even without a cause. REQUIREMENTS FOR A VALID REMOVAL: 1. The removal should take place at a general or special meeting duly call for that purpose; 2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital stock or the members entitled to vote in cases of non-stock corporations; and 3. There must be a previous notice to the stockholders or members of the intention to propose such removal at the meeting either by publication or on written notice to the stockholders or members. JURISDICTION OF THE COURT: The law, as it stands now, grants the proper court, the power and authority to hear and decide cases “involving controversies in the election or appointment of directors, trustees, officers, or managers of such corporation, partnership or association.” DEADLOCK: In the case of deadlock in a close corporation, the SEC is also authorized to issue an Order as it deems appropriate “canceling, altering or enjoining any resolution or other act of the corporation or its board of directors or “directing or prohibiting” any act the corporation or the other board of directors thereby effectively taking away the rights of the directors to act as manager of the corporation.

VACANCY: 1. 2.

If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the filling of the vacancy by the election of a replacement at the same meeting; If it occurs NOT by removal, Sec. 29 applies.

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular

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or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. If the VACANCY is either resulting from (1) expiration of term; or (2) other causes other than removal, the BOARD OF DIRECTORS, if still constituting a quorum, may fill the vacancy. VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners vs. Victor Africa, Respondend

(GR No. 151969; Sept. 4, 2009)

FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were elected as BOD during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the requisite quorum could not be obtained so they continued to act as directors in a hold-over capacity. On September 1, 1998, Dinglasan resigned, BOD still constituting a quorom elected Eric Roxas (Roxas) followed by Macalintal. On March 6, 2001, Jose Ramirez (Ramirez) was elected by the remaining BOD. Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary to Sec. 23 and 29 of the Corporation Code. The RTC decided in favor of Africa. ISSUE: WON the appointment of Roxas and Ramirez made by the remaining members of the Board, still constituting a quorum, were valid? HELD: No. The resolution of this legal issue is significantly hinged on the determination of what constitutes a director’s term of office.

The holdover period is not part of the term of office of a member of the board of directors. The word “term” has acquired a definite meaning in jurisprudence. In several cases, we have defined “term” as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. Term is distinguished from tenure in that an officer’s “tenure” represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. Based on the above discussion, when Section 23 of the Corporation Code declares that “the board of directors…shall hold office for one (1) year until their successors are elected and qualified,” we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of office is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be considered as extending his term. This holdover period is not to be considered as part of his term, which, as declared, had already expired. With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 29 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in 1998, not by the expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long before his resignation.

The powers of the corporation’s board of directors emanate from its stockholders This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not by the expiration of a member’s term, the successor “so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office.” The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve only to the “unexpired term of his predecessor in office.” It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term.

2. 3.

As provided in the by-laws or upon a majority vote of the stockholders; and If they are performing functions other than that of a director.

(3) above: Sec. 30 is clear on the point when it provides “as such directors”. Therefore, special and extraordinary service rendered, outside of the regular duties, may form the basis for a claim of special compensation, such as when a director acts as a general counsel. REASON: the office of a director is usually filled up by those chiefly interested in the welfare of the institution by virtue of their interest in stock or other advantages and such interests are presumed to be the motive for executing duties of the office without compensation. MAY THE COURTS LOOK INTO THE REASONABLENESS OF COMPENSATION? The courts will not generally undertake to review the fairness of official salaries, at the suit of a stockholder unless wrongdoing and oppression or possible abuse of fiduciary position are shown. When the recipient does not stand in the dual relation of the (1) one compensated and (2) a participant in fixing his own compensation, it is considered outside the proper judicial function to go into business policy question of the fairness or reasonableness of compensation as fixed by the board. Otherwise, it will call for a scrutiny of the reasonableness or fairness of the compensation. Likewise, even if consented to by the majority of stockholders, the courts may still look into such reasonableness if: (1) it would amount to giving away corporate funds in the guise of compensation as against the interest of the dissenting minority; or (2) in fraud of creditors, either amounting to wastage of assets. CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA 593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for the refund of certain amounts received by respondent when he served as member of the board of directors of CCE, which were said t be per diems and transportation expenses, representation expenses and cummutable discretionary funds.

CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the BOD to the SEC:

ISSUE: WON the BOD had the power to appropriate funds for the expenses claimed by respondent?

Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission

HELD: No. The by-laws expressly reserved unto the stockholders the power to determine the compensation of the members of the BOD, and the stockholders did restrict such compensation to (1) actual transportation expenses plus (2) per diems of P30 and (3) actual expenses while waiting. Even without the express prohibition, the directors are not entitled to compensation for “The law is well-settled that directors of corporations presumptively serve without compensation and in the absence of an express agreement or a resolution thereto, no claim can be asserted therefor. Thus it has been held that there can be no recovery of compensation, unless expressly provided for, when director serves as president or vice-president, as secretary or treasurer or cashier, as member of an executive committee, as chairman of a building committee, or similar offices.

PURPOSE: to give public information, under sanction of oath responsible officers, of the nature of the business, financial condition and operational status of the company together with information on its key officers or managers so that hose dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation’s financial resources and business responsibility” D.

COMPENSATION OF DIRECTORS

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. GENERALLY: Directors are not entitled to receive any compensation, EXCEPT: 1. Reasonable per diems;

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Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as express in the by-laws. WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioner, vs. RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALASTUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents

(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)

FACTS: In a special board meeting, a resolution was passed providing for compensation of officers. A few years later, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavitcomplaint for falsification of public documents (for submission of an income

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

reflecting the resolution as passed on 1985, when in fact it was passed in 1986) and estafa (for the disbursement of funds by effecting payment to the aforesaid salaries) against herein respondents who were members of the Board of Trustees who were also officers of the corporation. The trial court acquitted respondents in both charges without civil liability. The motion for reconsideration on the civil aspect being denied, petitioners filed this petition.

Ong put a stop payment on the check when NAWASA refused to pay on the account that aside from the defects on the lawn mower, the engine (sold by dela Costa) was a reconditioned unit.

ISSUE: WON the resolution granting compensation to OFFICERS of the corporation is valid?

ISSUE: WON Ong should be held jointly and severally liable?

HELD: Yes. The proscription under Sec. 30, is against granting compensation to directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Sec 30 which states “… [T]he directors shall not receive any compensation, as such directors, …” The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. In the case at bench, the Resolution granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of WIT. Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the compensation to 10% of the net income before income tax does not likewise find application in this case since the compensation is being given to private respondents in their capacity as officers of WIT and not as board members. GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) – The members of the board of El Hogar Filipino receives 5% of the net profit as shown in the balance sheet and is distributed in proportion to their attendance to meetings of the board. A complaint was filed against the, and the sixth cause of action alleged that the directors, instead of serving without pay, or receiving nominal pay or a fixed salary - as the complainant supposes would be proper – have been receiving large compensation in varying amounts. ISSUE: WON the courts may declared the by-law provision null and void? HELD: No. The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and propriety of this provision was a proper matter for the shareholders when the by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the remedy is in the hands of the stockholders who have the power at any lawful meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our opinion without merit. E.

LIBABILITY OF CORPORATE OFFICERS

The general rule is that unless the law specifically provides a corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent, or when absent bad faith or malice. TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) – Melchor dela Cuesta, doing business under the name Farmers Machineries, sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s president and manager issued a check for P33,500. Tramat sold the tractor, together with an attached lawn mower fabricated by it, to NAWASA. David

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De la Costa filed an action for recovery of money which was granted by the court.

HELD: No. It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when — 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; 4. He is made, by a specific provision of law, to personally answer for his corporate action. In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases. RICARDO A. LLAMADO, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents

(GR No. 99032; 270 SCRA 423; March 26, 1997)

FACTS: Private complainant Leon Gaw delivered to the accused Ricardo Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in 6 months with 12% interest. As security, the accused issued and signed a postdated check which was later on stopped and dishonored for being drawn against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22. Pascual remained at large and the trial on the merits against Llamado was conducted. The trial court convicted Llamado. ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be held civilly and criminally liable? HELD: Yes. Petitioner denies knowledge of the issuance of the check without sufficient funds and involvement in the transaction with private complainant. However, knowledge involves a state of mind difficult to establish. Thus, the statute itself creates a prima facie presumption, i.e., that the drawer had knowledge of the insufficiency of his funds in or credit with the bank at the time of the issuance and on the check's presentment for payment. Petitioner failed to rebut the presumption by paying the amount of the check within five (5) banking days from notice of the dishonor. His claim that he signed the check in blank which allegedly is common business practice, is hardly a defense. If as he claims, he signed the check in blank, he made himself prone to being charged with violation of BP 22. It became incumbent upon him to prove his defenses. As Treasurer of the corporation who signed the check in his capacity as an officer of the corporation, lack of involvement in the negotiation for the transaction is not a defense. Petitioner's argument that he should not be held personally liable for the amount of the check because it was a check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of the

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22 states: “Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act” ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents

(GR No. 121434; 273 SCRA 35; June 2, 1997)

FACTS: Private respondents were employees of Crispa, Inc. who were dismissed due to alleged retrenchment. They filed an illegal dismissal complaint with the NLRC against Crispa, Inc., Valeriano Floro (major stockholder, incorporation and director of Crispa) and petitioners, who were high ranking officials and directors of Crispa. The Lbor Arbiter dismissed the complaint but ordered petitioners, Floro and Crispa to pay separation pay. ISSUE: WON petitioners can be held liable? HELD: Yes. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as in the following cases: “1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.”i In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They were the ones, who as highranking officers and directors of Crispa, Inc., signed the Board Resolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with Crispa, Inc. for all the money claims of the illegally terminated respondent employees in this case. F.

THREE-FOLD DUTY OF DIRECTORS

Directors owe a three-fold duty to the corporation: (1) Obedience; (2) Diligence and (3) Loyalty. Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

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When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting or assenting, either willfully or knowingly, to patently unlawful acts thereby making the responsible director liable for damages resulting therefrom; DILIGENCE: Under the second part of Sec. 31, the directors are required to manage the corporate affairs with reasonable care and prudence. This is because the liability of a corporation is not limited to willful breach of trust or excess of power, but extends also to negligence. Their liability rests upon the common law rule which renders liable every agent who violates his authority or neglects his duty to the damage of his principal. The degree of diligence is relative. The more fair and satisfactory rule is that degree of care and diligence which an ordinary prudent director could reasonably be expected to exercise in a like position under similar circumstances.

BUSINESS JUDGMENT RULE: Although directors are commonly said to be

responsible both for reasonable care and also prudence, the formula is continually repeated that they are not liable for losses due to imprudence or honest error of judgment. The business judgment rule in effect states that questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. The directors are business managers and as long as they act in good faith, its actuations are not subject to judicial review. ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs. BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

(GR No. L-15092; 5 SCRA 36; May 18, 1962)

FACTS: Appellants have been sugar planter adhered to defendat-appellees sugar central mill under identical milling contracts with a 55% share of the resulting product. There was a proposal to increase the planter’s share to 60% which was adopted by defendant in an Amended Milling Contract and consequently a Board Resolution. In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills in the province, had already granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. The trial court decided in favor of defendant, thus the present appeal. ISSUE: WON the resolutions passed by the bard are valid and binding? HELD: Yes. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. “They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.

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Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).” And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which produce over onethird of the entire annual sugar production in Occidental Negros) have granted progressively increasing participations to their adhered planter at an average rate of 62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.

LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:

Generally: a director is not liable for the acts of their co-directors, unless: (1) He connives or participates; or (2) He is negligent in not discovering or acting to prevent it. Thus, absent of actual knowledge of the wrongful activities, on the part of the co-directors, the same cannot be imputed to the other director unless in the exercise of reasonable care attending his responsibilities, he should have been aware of suspicious circumstances demanding correlative action. LOYALTY: refers to the proscription imposed on directors on acquiring any personal or pecuniary interest in conflict with their duty as director. Their relationship is regarded as “fiduciary relation”. As fiduciaries, they are obliged to act with utmost candor and fair dealing for the interest of the corporation and without selfish motives. Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following instances: 1. When a director or trustee “acquires any personal or pecuniary interest in conflict with (his) duty as such director or trustee”; 2. When he “attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect to any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf”; and 3. When he, “by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profit to the prejudice of such corporation”.

FORBIDDEN PROFITS: Forbidden in the sense that directors and officers

are fiduciary representatives of the corporation and as such they are not allowed to obtain any personal profit, commission, bonus or gain for their official actions. This may also refer to those arising from transactions of directors with third persons which may involve misappropriation of corporate opportunities and disloyal diverting of business. Directors and officers are

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corporate insiders and cannot, therefore, utilize their strategic position for their own preferment or use their powers and opportunities for their personal advantage to the exclusion of the interest which they represent.

CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to himself opportunity which in fairness should belong to the corporation.

RATIFICATION: 1.

2.

The second paragraph of Sec. 31 which makes a director liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owing or representing at least 2/3 of the outstanding capital stock.

Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of P100M for P90M. a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 34 and may be subject to ratification; A merely acquired a business opportunity owing to the corporation. b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit of P5M, it would fall under Sec. 31 and not subject to ratification, A should return the profits to REALTY CORP. It was a matter reposed in him in confidence. STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the Philippine Islands, on behalf of the government, made an offer of purchase for the total sum of $6,,043,219.47 in gold for all the friar lands, though owned by different owners. While this state of things existed, and before the final offer had been made by the Governor, the defendant, although still holding out for a higher price for the lands, took steps to purchase the 800 shares of stock in his own company from Mrs. Strong, which he knew were in the possession of F. Stuart Jones, as her agent. The defendant employed Krauffman and the latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr. Sloan, the husband, did not know who wanted to buy the shares nor did Jones when he was spoken to. Jones would not have sold at the price he did had he known it was the defendant who was purchasing, because, as he said, it would show increased value, as the defendant would not be likely to purchase ore stock unless the price was going up. ISSUE: WON it was the duty of the defendant to disclose to the agent of the plaintiff the facts bearing upon or which might affect the value of the stock? HELD: Yes. A director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in this case. In this case, the facts clearly indicate that a director of a corporation owning friar lands in the Philippine Islands, and who controlled the action of the corporation, had so concealed his exclusive knowledge of the impending sale to the government from a shareholder from whom he purchased, through an agent, shares in the corporation, that the concealment was in violation of his duty as a director to disclose such knowledge, and amounted to deceit sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the shareholder's agent did or did not have power to sell the stock. In addition to his ownership of almost three-fourths of the shares of the stock of the company, the defendant was one of the five directors of the company, and was elected by the board the agent and administrator general of such

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company, "with exclusive intervention in the management" of its general business.

Napoleon Co for the marketing of white cement in Mindanao. Hence, this suit.

Concealing his identity when procuring the purchase of stock, by his agent, was in itself stock evidence of fraud on the part of the defendant. The concealment was not a mere inadvertent omission but was a studied and intentional omission, to be characterized as part of the deceitful machination to obtain the purchase without giving information whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to, in that way, obtain the same at a lower price.

ISSUE: WON the dealership agreement entered into by Te with his own corporation is valid and binding?

G.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders.

SELF-DEALING DIRECTORS

The self-dealing director is one who deals or transacts business with his own corporation. Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was nor necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. Generally: A contract entered into by a director with his own corporation is voidable at the latter’s option, except when all the conditions laid down in Sec. 32 are met. On the other hand, where any of the first two conditions is absent, the contract becomes voidable subject to the ratification of the stockholders representing 2/3 of the outstanding capital stock – the requirements of which are: (1) there must be a meeting called for that purpose; (2) full disclosure of the adverse interest of the director; and (3) the contract is fair and reasonable under the circumstances. If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification easily possible, the last sentence of Sec. 32 should be made to apply by determining reasonableness of the transaction to which there is no yardstick. Every case stands upon its own bottom, and the ultimate question is whether the contract was honest and beneficial which is always a question of fact. PRIME WHITE CEMENT CORPORATION, petitioner, vs. IAC and ALEJANDRO TE, respondents

(GR No. L-68555; 220 SCRA 103; March 19, 1993)

FACTS: Respondent Alejandro Te, a director of petitioner corporation, was awarded a dealership agreement whereby Te would be the exclusive dealer and/or distributor of the corporation in the entire Mindanao. As a consequence, Te entered into different contracts for selling white cement. Laer on, defendant corporation decided to impose certain conditions upon the dealership agreement. Several demands to comply with the agreement were made by Te to the corporation but was refused and Te was constrained to cancel the contracts he entered into. Defendant corporation entered into an exclusive dealership agreement with

40

HELD: No. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee and Gaudencio Galang stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs)

As director, especially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty. CHARLES W. MEAD, plaintiff-appellant, vs. E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY, defendant-appellants

(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)

FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed the Philippine Engineering and Construction Company, the incorporators being the only stockholders and directors of the company. When Mead left for China, the other directors entered into an agreement where all the rights in a “wrecking contract” with the naval authorities were sold to defendant.

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The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John Macleod and TH Twentyman, and retaining one sixth interest, formed Manila Salvage Association. ISSUE: WON officers or directors of the corporation may purchase the corporate property?

the business would be at a loss and where there was no prospect or hope that the enterprise would be profitable." We therefore conclude that the sale or transfer made by the quorum of the board of directors — a majority of the stockholders — is valid and binding upon the majority-the plaintiff.

HELD: Yes. While a corporation remains solvent, we can see no reason why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.)

H.

In the case of the Twin-Lick Oil Company vs. Marbury, he court said:

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in regard to contracts of this class, is, not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it. We say, this is the general rule; for there may be cases where such contracts would be void ab initio; as when an agent to sell buys of himself, and by his power of attorney conveys to himself that which he was authorized to sell. but even here, acts which amount t a ratification by the principal may validate the sale The sale or transfer of the corporate property in the case at bar was made by three directors who were at the same time a majority of stockholders. If a majority of the stockholders have a clear and a better right to sell the corporate property than a majority of the directors, then it can be said that a majority of the stockholders made this sale or transfer to the defendant McCullough. What were the circumstances under which said sale was made? The corporation had been going from bad to worse. The work of trying to raise the sunken Spanish fleet had been for several months abandoned. The corporation under the management of the plaintiff had entirely failed in this undertaking. It had broken its contract with the naval authorities and the $10,000 Mexican currency deposited had been confiscated. It had no money. It was considerably in debt. It was a losing concern and a financial failure. To continue its operation meant more losses. Success was impossible. The corporation was civilly dead and had passed into the limbo of utter insolvency. The majority of the stockholders or directors sold the assets of this corporation, thereby relieving themselves and the plaintiff of all responsibility. This was only the wise and sensible thing for them to do. They acted in perfectly good faith and for the best interests of all the stockholders. "It would be a harsh rule that would permit one stockholder, or any minority of stockholders to hold a majority to their investment where a continuation of

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INTERLOCKING DIRECTORS

An interlocking director is a director in one corporation who deals or transacts with another corporation of which he is also a director. In such case, there may effectively be a dual agency, a divided allegiance where allegiance in one corporation may subordinated to the other. The prevailing view is that these contracts entered into where there is an interlocking director is not voidable merely by reason of conflicting duties or interest as to corporations represented, even when a majority or all of the directors are common to both corporations. It is recognized that such will be upheld if there is no bad faith or unfairness or collusion. Sec. 33. Contracts between corporations with interlocking directors. – (1) Except in cases of fraud, and provided (2) the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

NOTE: 1. The contract between corporations with interlocking director is valid absent fraud and provided it is reasonable under the circumstances; 2. If the interest of the interlocking director in one corporation exceeds 20% and in the other merely nominal, the contract becomes voidable at the latter corporation’s option. In effect, the director would be treated as a self-dealing director under Sec. 32; 3. If the interest in both companies is either both substantial or both nominal, Sec. 33 will apply. I.

DERIVATIVE SUIT

In case of a wrongful or fraudulent act of a director, officer or agent, stockholders have the following options: 1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to inspect corporate books and records or pre-emptive rights; 2. Representative or Class Suit – in which one or more members of a class sue for themselves as a class or for all to whom the right was denied, either as an individual action or a derivative suit; and a 3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation. It is a suit granted to any stockholder to institute a case to remedy a wrong done directly to the corporation and indirectly to stockholders. CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees

(GR No. L-5174; 19 Phil. 83; March 17, 1911)

FACTS: During 1903-1907, the defendant-appellees, without the knowledge and acquiescence of the stockholders deducted their compensation from gross income instead of from the net profits of the bank, the same with their predecessors for the years 1899-1902. Plaintiff-appellant brings this action in his own right as a stockholder of the bank, for the benefit of the bank and all the stockholders, in behalf of the corporation, which, even though, nominally a defendant, is to all intents and

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

purposes the real plaintiff in this case as shown in the prayer of the complaint. ISSUE: WON plaintiff has capacity to sue? HELD: Yes. In suits of this character the corporation itself and not the plaintiff stockholder is the real party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of all the stockholders. Text writers illustrate this rule by the familiar example of one person or entity owning all the stock and still having no greater or essentially different title than if he owned but one single share. Since, therefore, the stockholder has no title, it is evident that what he does have, with respect to the corporation and his fellow stockholder, are certain rights sui generis. These rights are generally enumerated as being, first, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate assets upon the dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554.) The right of individual stockholders to maintain suits for and on behalf of the corporation was denied until within a comparatively short time, but his right is now no longer doubted. Accordingly, in 1843, in the leading case of Foss vs. Harbottle, a stockholder brought suit in the name of himself and other defrauded stockholders, and for the benefit of the corporation, against the directors, for a breach of their duty to the corporation. This case was decided against the complaining stockholder, on the ground that the complainant had not proved that the corporation itself was under the control of the guilty parties, and had not proved that it was unable to institute suit. The court, however, broadly intimated that a case might arise when a suit instituted by defrauded stockholders would be entertained by the court and redress given. Acting upon this suggestion, and impelled by the utter inadequacy of suits instituted by the corporation, defrauded stockholders continued to institute these suits and to urge the courts of equity to grant relief. These efforts were unsuccessful in clearly establishing the right of stockholders herein until the cases of Atwol against Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, in 1855. These two great and leading cases have firmly established the law for England and America, that where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for what purpose he acquired the shares which he now owns. In the determination of these questions we can not see how, if it be true that the bank is a quasi-public institution, it can affect in any way the final result. It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the defendants, as members of the board of directors and board of government, respectively, during each and all the years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice of the bank and its stockholders, appropriate to their own use from the profits of the bank sums of money amounting approximately to P20,000 per annum. It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903, the shares which he now owns, injured or affected in any manner by the transactions set forth in the second cause of action. His vendor could have complained of these transactions, but he did not choose to do so. The discretion whether to sue to set them aside, or to acquiesce in and agree to them, is, in our opinion, incapable of transfer. If the plaintiff himself had been injured by the acts of defendants' predecessors that is another matter. He ought to take things as he found them when he voluntarily acquired his ten shares. If he was defrauded in the purchase of these shares he should sue his vendor. (Thus, he may sue for the second half

42

of 1903 to 1907 but not for the years 1989 to the first half of 1903.) So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law, that a stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had not devolved upon him since by operation of law, cannot maintain suits of this character, unless such transactions continue and are injurious to the stockholder, or affect him especially and specifically in some other way. HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON, plaintiffs-appellants, vs. THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH, defendants-appellees.

(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)

FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company (Company), entered into a Memorandum of Agreement and Voting Trust Agreement with defendant Asia Banking Corporation (Bank) with the understanding that it was intended for the protection of all parties thereto from outside creditors, but that they were not intended to be enforced according to the letter thereof, and that they did not contain the true agreement between the Bank and the Company which was to finance the company without interference from the above-named creditors. That shortly after, Mullen caused the removal of the plaintiffs as directors of the Company and their replacement. The defendants thereafter gave pledges and mortgages from the Company to the Bank and entered into contracts as directed by the Bank, and permitted the Bank to foreclose the same and to sell the property of the Company itself and permitted the Bank to institute suits against the Company, in which the Company was not represented by anyone having its interest at heart and in which reason the Bank occupied both plaintiff and defendant and tricked and deluded the courts into giving judgment in which the rights of the real parties were concealed and unknown to the courts. Thereafter, defendants incorporated Philippine Motors Corporation where all the assets and goodwill of the Company were transferred by the Bank. ISSUE: WON the plaintiffs have the legal capacity to bring an action? HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, the appellees argue — and the court below held — that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal and Company is under the complete control of the principal defendants in the case, and, in these circumstances, it is obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. (Exchange bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U. S., 450.) The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors Corporation, had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon a misconception of the character of the action. In this proceeding it was necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to the alleged loss of their property and, in making a full disclosure, references to the Philippine Motors Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings. In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not in any respect fatally defective. The judgment of

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the court below is therefore reversed, the defendants demurrer is overruled, and it is ordered that the return of the record to the Court within ten days from the return of the record to the Court of First Instance. So ordered REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant, vs. MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees

(GR No. L-22399; 19 SCRA 671; March 30, 1967)

FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a derivative suit against defendant Pablo Roman, then President of the Bank, for granting certain loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies on the basis of fictitious or inflated appraised value of real estate properties, in connivance with other officials. The complaint alleged that Miguel Cuaderno, then Central Bank Governor, acting upon the complaint, and the Monetary Board ordered an investigation and found violations of the General Banking Act, but no information was filed until his retirement; that to neutralize the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant and selected Bienvenido Dizon as Chairman of the Board of the Bank; that such appointment was done in bad faith and without intention to protect the interest of the Bank but were only prompted to protect Pablo Roman. The complaint, therefore, prayed for a writ of preliminary injunction against eh Monetary Board in confirming such appointments, but was dismissed by the lower court. ISSUE: WON the court below erred in dismissing the complaint? HELD: Yes. The defendants mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever (1) the officials of the corporation refuse to sue, or (2) are the ones to be sued or (3) hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in conformity, with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.).

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Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other stockholders to be of any significance, no issues having even been joined. ISSUE2: WON the Corporation should be a plaintiff or defendant? HELD2: The English practice is to make the corporation a party plaintiff, while in the United States, the usage leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised against either method. (1) Absence of corporate authority would seem to militate against making the corporation a party plaintiff, while (2) joining it as defendant places the entity in the awkward position of resisting an action instituted for its benefit. What is important is that the corporation' should be made a party, in order to make the Court's judgment binding upon it, and thus bar future relitigation of the issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.) ISSUE3: WON the action of the plaintiff amounts to a quo warranto proceeding? HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on the corporation's bank business. Whether the complaint's allegations to such effect are true or not must be determined after due hearing. WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under Compensation of Directors) – Petitioners assert that the motion for reconsideration of the civil aspect of the RTC decision acquitting respondents is a derivative suit brought by them as minority stockholders of WIT for and on behalf of the corporation ISSUE: WON the appeal may be considered as a derivative action? HELD: No. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action. This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal failed to impose any civil liability against the private respondents. By no amount of equity considerations, if at all

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deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit. Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The ease should have been filed with the Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A. SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.

(GR No. 85339; 176 SCRA 447; Aug. 11, 1989)

FACTS: Eduardo de los Angeles was a director appointed by PCGG who sequestered the shares of Andres Soriano III claiming it to belong to Eduardo Conjuangco, a close associate and dummy of then President Marcos. De los Angeles initiated a derivative suit against herein respondents, in behalf of SMC, for the revocation of a Board Resolution adopted to assume the loans incurred by Neptunia Corporation, a foreign company, said to be a whollyowned subsidiary of SMC. The action was dismissed by the SEC on the grounds that De los Angeles does not have adequate shares to represent the interest of the stockholders and that his assumed role as a PCGG appointed director is inconsistent with his assumed role as a representative of minority stockholders.

being plainly a director's duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative suit. ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders similarly situated and for the benefit of AMERICAN MACHINERY AND PARTS MANUFACTURING, INC., plaintiff-appellant, vs. DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B. FRANCIA and DOLORES A. BUENCAMINO, respondents.

(GR No. L-20395; 136 SCRA 365; May 13, 1985)

FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement with Dr. Buencamino and William Cranker (already business partners) for the establishment of a factory in Manila called American Machinery Engineering Parts, Inc. (Amparts), where chase was to transfer his tractor plant, ship his machineries from his former plant in America to Manila, install said machineries at Amparts plant and he is to be the production manager of Amparts. For some time the three maintained harmonious relations until Chase tendered his resignation which was accepted by Buencamino and Cranker. Chase initially filed a case in California against Cranker for the recovery of the purchase price of his plant, but this died a natural death. Eventually, he filed a case before the CFI alleging various acts of frauds allegedly committed by the other two.

ISSUE: WON De Los Angeles can institute a derivative suit?

ISSUE: WON Chase has capacity to institute a derivative suit?

HELD: Yes. The theory that de los Angeles has no personality to bring suit in behalf of the corporation — because his stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG — cannot be sustained.

HELD: Yes. The evidence of defendants proves very clearly that right from the start, Chase was by them recognized as a stockholder and initial incorporator with 600 paid up shares representing a 1/3 interest in Amparts, and that would be enough for Chase to have the correct personality to institute this derivative suit; the second place, it also appears apparently undenied that Chase did not win in California so that he did not recover the $150,000.00 that he had prayed for there against Overseas, which if he had would really in the mind of the Court have put him in estoppel to intervene in any manner as incorporator or stockholder of Amparts; and in the third place and most important it should not be forgotten that Chase has filed the present case not for his personal benefit, but for the benefit of Amparts, so that to the Court the argument of estoppel as against him would appear to be out of place; the estoppel to be valid as a defense must be an estoppel against Amparts itself; the long and short of it is that the Court is impelled and constrained to discard all the other defenses set up by Dr. Buencamino on the principal complaint; the result of all these would be to sustain so far, the position of Chase that Dr. Buencamino must account for the P570,000.00 used to pay the second series of payment on the subscription, the P330,000.00 used in paying the lsst series on the subscription, plus another sum of P245,000.00 entered as loan on his favor and against Amparts, for the sum of P434,000.00 earned in the blackmarketing of the excess of $140,000.00 dollars on the forwarding costs and promotional expenses, for the sum of P391,200.00 earned in the blackmarketing of the excess of $117,000.00 in the transaction with Bertoni and Cotti, and all these would reach a total of P1,970,200.00; and as the appropriation of the profits for himself was a quasi-delict, the liability therefore assuming that it had been done with the cooperation of Cranker would have to be solidary, 2194 New Civil Code.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock — finds no support whatever in the law. 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 bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not having been elected by the minority stockholders, his vote would necessarily never consider the latter's interests. The proposition is not only logically indefensible, non sequitur, but also constitutes an erroneous conception of a director's role and function, it

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CATALINA R. REYES, petitioner, vs. HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.

(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)

FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New York for raw materials but were found out to consist of already finished product for which reason the Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

to the paralyzation of the operations. It was alleged that the supplier of the said finished goods was United Commercial Company of New York in which Dalamal, appointed by the BOD of the Textile Mills as co-manager, had inrterests and that the letter of credit for said goods were guaranteed by the Indian Commercial Company and Indian Traders in which Dalamal likewise has interests. It was further alleged that the sale of the finished products was the business of Indian Commercial Company of Manila who cannot obtain dollar allocations for imporations of finished goods. An action for the appointment of a receiver was filed before the trial court after the BOD refused to proceed against Dalamal, which was granted. ISSUE: WON Justiniani may be allowed to institute the case for receivership and damages? HELD: Yes. It is not denied by petitioner that the allocation of dollars to the corporation for the importation of raw materials was suspended. In the eyes of the court below, as well as in our own, the importation of textiles instead of raw materials, as well as the failure of the Board of Directors to take action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority stockholder on behalf of the corporation. “It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this Court as early as 1911. In that case, the Banco Español-Filipino suffered heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was contended, could have been avoided if the president and directors had been more vigilant in the administration of the affairs of the bank. The stockholders constituting the minority brought a suit in behalf of the bank against the directors to recover damages, and this over the objection of the majority of the stockholders and the directors. This court held that the suit could properly be maintained.” (64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697). The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is also without merit. During that period of time respondent had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their own wrong doing. Only after such period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the corporation property and business. We are led to agree with the judge below that the appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills. RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMABORROMEO, petitioners, vs. HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.

(GR No. -40620; 90 SCRA 40; May 6, 1979)

FACTS: A writ of prelimiary injunction was filed by herein respondents as purchasers of 1,328 shares of stock of Inocented De La Rama, inc. after herein petitioners surreptitiously met and authorized the sale of 823 shares to forestall the petitioner’s takeover from the previous president and vicepresident (sellers of the 1,328 shares), in violation of their pre-emptive right. The trial court ruled in favor of respondents. Later on, private respondents entered into a compromise agreement with the recipients for the transfer of

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the 823 shares, against which the petitioners filed a motion to dismiss which was denied. ISSUE: WON a derivative suit is the more proper action that should have been filed by respondents? HELD: No. The petitioners contend that the proper remedy of the plaintiffs would be to institute a derivative suit against the petitioners in the name of the corporation in order to secure a binding relief after exhausting all the possible remedies available within the corporation. 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 the 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 a nominal party, with the corporation as the real party in interest. In the case at bar, however, the plaintiffs are alleging and vindicating their own individual interests or prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties is not a ground to dismiss an action. JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS, defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D. Evangelista, et. al. are minority stockholders of the Vitali Lumber Company, Inc., while Rafael Santos holds more than 50% of the stocks of said corporation and also is and always has been the president, manager, and treasurer thereof. Santos, in such triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render an account of his administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them; and (3) to pay the costs of suit. Evangelista, et. al. also ask for such other remedy as may be and equitable. The trial court dismissed the action on the ground of improper venue and lack of cause of action. ISSUE: WON plaintiffs have a right to bring the action for their benefit? HELD: No. The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to that of the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of section 16 of the Corporation Law. But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any one of the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation itself and not the plaintiff stockholder that is the real property in interest, so that such damages as may be recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation, which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295). In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law. It results that plaintiff's complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on that ground. While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first complied with, we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in the wrong court, so that the same last to be dismissed. The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in which the venue shall be laid in the proper province. Appellant's shall pay costs. So ordered

IN SUMMARY: 1.

2.

3.

4.

5.

J.

That the party bringing the suit should be a stockholder as of the time the act or transaction complained of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not apply if such act or transaction continues and is injurious to the stockholder or affect him specifically in some other way. The number of his shares is immaterial since he is not suing in his own behalf or for the protection or vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for the benefit of the corporation. He has tried to exhaust intra-corporate remedies, he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required if the company is under the complete control of the directors who are the very ones to be sued (or where it becomes obvious that a demand upon them would have been futile and useless) since the law does not require a litigant to perform useless acts; The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is dismissible. This is because the cause of action actually devolves on the corporation and not to a particular stockholder. The corporation should be made a party, either as party-plaintiff or defendant, in order to make the court’s judgment binding upon it, and thus, bar future litigation of the same issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the court to direct the making of amendment of the pleading, by adding or dropping parties, as may be required in the interest of justice. Misjoinder of parties is not a ground to dismiss action; and, Any benefit or damages recovered shall pertain to the corporation. This is so because in all instances, derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an individual or personal suit to vindicate his personal or individual right. Or, for that matter, representative or class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or individually. EXECUTIVE COMMITTEE

Sec. 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the

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board; (3) the amendment or repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders CHAPTER 7: CORPORATE POWERS AND AUTHORITY Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. The statement of the objects, purposes or powers in the AOI results practically in defining the scope of the authorized corporate enterprise or undertaking. This statement both confers and also limits the actual authority of the corporation. Along with the powers indicated in the AOI, a corporation can also exercise powers that may be granted by law, particularly those provided under Sec. 36 and 44 of the Corporation Code and those which may be necessary or incidental to tis existence. In short, corporate authority may be classified as: 1. Express powers – those expressly granted by law inclusive of the corporate charter or AOI; 2. Implied Powers – those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers; and 3. Incidental Powers – those incidental to its existence. A.

POWER TO SUE AND BE SUED

A corporation may sue and be sued in its corporate name just like any other person.

VENUE: the action filed against it must be instituted at the place of principal office of the corporation.

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SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: Sec. 11. Service upon domestic private juridical entity. When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. Service of summons upon persons other than those named under than those named in the above provision is without force and effect. DELTA MOTOR SALES CORPORATION, petitioner, vs. HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS PAMINTUAN, respondents

(GR No. L-41667; April 30, 1976)

FACTS: Herein respondent Pamintuan initiated an action against petitioner Delta Motors for the alleged defective Toyota car sold to him and for failure to fulfill the warranty obligation by not repairing the car. The summons were served on Dionisia Miranda, employee of the petitioner. Delta Motors failed to answer the complaint and was declared in default and evidence was presented and a decision was rendered against herein petitioner. Petitioner filed a motion to lift the order of default and to set aside the judgment and for new trial, which was denied. ISSUE: WON there was proper service of summons? HELD: No. Rule 14 of the Revised Rules of Court provides: SEC. 13. Service upoin private domestic corporation or partnership. — If defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors. For the purpose of receiving service of summons and being bound by it, a corporation is identified with its agent or officer who under the rule is designated to accept service of process. "The corporate power to receive and act on such service, so far as to make it known to the corporation, is thus vested in such officer or agent." (Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453). A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whon service is made be one who is named in the statute; otherwise the service is insufficient. So, where the statute required that in the case of a domestic corporation summons should be served on "the president or head of the corporation secretary treasurer, cashier or managing agent thereof", service of summons on the secretary's wife did not confer jurisdiction over the corporation in the foreclosure proceeding against it. Hence, the the decree of forclosure and the deficiency judgment were void and should be vacated. (Reader vs. District Court, 94 Pacific 2nd 858). The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. In other words, "to bring home to the corporation notice of the filing of the action". (35A C.J.S. 288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249). In the instant case the Manila court did not acquire jurisdiction over Delta Motor because it was not properly served with summons. The service of summons on Dionisia G. Miranda, who is not among the persons mentioned in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor. Courts acquire jurisdiction over the person of a party defendant and of the

47

subject-matter of the action by vertue of the service of summons in the manner required by law. Where there is no service of summons or a voluntary general appearance by the defendant, the court acquires no jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556). Consequently, the order of default, the judgment by default and the execution in Civil Case No. 97373 are void and should be set aside. E. B. VILLAROSA & PARTNER CO., LTD., petitioner, vs. HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION, respondent.

(GR No. 136426; Aug. 6, 1999)

FACTS: Petitioner is a limited partnership with principal office address at Davao City and with branch offices at Parañaque, Metro Manila and Lapasan, Cagayan de Oro City. Petitioner and private respondent executed a Deed of Sale with Development Agreement wherein the former agreed to develop certain parcels of land located at Cagayan de Oro belonging to the latter into a housing subdivision for the construction of low cost housing units. They further agreed that in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper courts of Makati. Private respondent, as plaintiff, filed a Complaint for Breach of Contract and Damages against petitioner, as defendant, before the RTC Makati for failure of the latter to comply with its contractual obligation in that, other than a few unfinished low cost houses, there were no substantial developments therein. Summons, together with the complaint, were served upon the defendant, through its Branch Manager at the stated address at Cagayan de Oro City but the Sheriff's Return of Service stated that the summons was duly served "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by the signature on the face of the original copy of the summons. Defendant filed a motion to dismiss on the ground of improper service of summons which was denied. ISSUE: WON the court acquired jurisdiction? HELD: No. Earlier cases have uphold service of summons upon a construction project manager; a corporation's assistant manager; ordinary clerk of a corporation; private secretary of corporate executives; retained counsel; officials who had charge or control of the operations of the corporation, like the assistant general manager; or the corporation's Chief Finance and Administrative Officer. In these cases, these persons were considered as "agent" within the contemplation of the old rule. Notably, under the new Rules, service of summons upon an agent of the corporation is no longer authorized. The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership is now limited and more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule now states "general manager" instead of only "manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is conspicuously deleted in the new rule. The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz Regalado, thus: . . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be made on the president, manager, secretary, cashier, agent or any of its directors." The aforesaid

terms were obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word "agent" of the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely appeared to challenge the validity of service of summons but whose very appearance

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

for that purpose was seized upon to validate the defective service, is an illustration of the need for this revised section with limited scope and specific terminology. Thus the absurd result in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the corporation who is in effect an employee of the corporation, as distinguished from an independent practitioner. (emphasis supplied). Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision Committee, stated that "(T)he rule must be strictly observed. Service must be made to one named in (the) statute . . . It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict compliance with the rules has been enjoined. In the case of Delta Motor Sales Corporation vs. Mangosing, the Court held:

Admission, as well as termination of members is a prerogative granted by law to non-stock corporations and the manner, requirements or procedures for such admission or termination may be contained in the AOI or by-laws. G.

POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL PROPERTY

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, (1) as the transaction of the lawful business of the corporation may reasonably and necessarily require, (2) subject to the limitations prescribed by law and the Constitution.

The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in which summons should be served on a domestic corporation. . .

The first limitation practically sets the limit of the corporate authority to acquire, own, hold or alienate property. As it has been said the purpose clause in the AOI grants as well as limits the powers which a corporation may exercise. Verily, WON the acquisition of such property is within the corporate powers or authority may reasonably be determined from the purpose or purposes indicated in the AOI.

POWER OF SUCCESSION

POWER TO ADOPT AND USE A COMMON SEAL

This right has be expressly granted by law. However, it is not mandatory but merely permissive. This is because the corporate seal performs no further or greater function than to impart prima facie evidence of the due execution by the corporation of a written document or obligation. POWER TO AMEND ITS ARTICLES OF INCORPORATION

The procedures for the exercise of this right are provided under Sec. 16, Sec. 37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER AND ITS AMENDMENTS. As far as corporations created by special law are concerned, amendment may NOT be considered as a matter of right. The law creating it may or may not authorize or empower the corporation to make any changes in its AOI or charter. However, whether empowered or not, Congress may amend or repeal a corporate charter by virtue of its inherent authority to amend or repeal laws under the Consitution. E.

The power of a corporation to issue or sell its stocks is an inherent right of any stock corporation except only as it may be regulated by law or by the AOI.

The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. In other words, "to bring home to the corporation notice of the filing of the action." . . . .

This right basically means that the corporation persists to exist despite death, incapacity, civil interdiction, or withdrawal of the stockholders or members thereof.

D.

POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS

When a corporation is expressly empowered by law to acquire or alienate real and/or personal properties, the limitations imposed by Sec. 36 are as follows:

Accordingly, we rule that the service of summons upon the branch manager of petitioner at its branch office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner.

C.

F.

A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made must be one who is named in the statute; otherwise the service is insufficient. . . .

. . (emphasis supplied).

B.

Amendment of the by-laws are allowed subject to the procedure and requirement provided under Sec. 48.

POWER TO ADOPT BY-LAWS

The Corporation Code actually REQUIRES a corporation to adopt by-laws, not contrary to law, morals, or public policy, within 1 month from receipt of official notice of the issuance of the certificate of incorporation or registration (Sec. 46).

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Sec. 36. Xxx

LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL., respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a chattel mortgage covering a certificate of public convenience grnted to him to operate taxicab service of 27 units in Manila, in favor of petitioner, to secure a loan evidenced by a promissory note guaranteed by Concepcion and one Placido Esteban. Concepcion mortgaged the same certificate to cover a second loan with Rehabilitation Finance. Petitioner filed an action to foreclose the mortgage. While it was pending, RF also foreclosed the second chattel mortgage where the certificate was sold at a public auction in favor of AD Santos who applied for the approval of the sale which was granted by the Public Service Commission. Later on, the CFI rendered a judgment in favor of petitioner, where the certificate was sold at a public auction in favor of the petitioner who immediately filed for approval with the Commission. AD Santos Inc., recipient of the certificate from AD Santos, opposed the application for approval. ISSUE: WON Petitioner may acquire the certificate of public convenience? HELD: No. Petitioner claims in this regard that its corporate purposes are to carry on a general mercantile and commercial business, etc., and that it is authorized in its articles of incorporation to operate and otherwise deal in and concerning automobiles and automobile accessories' business in all its multifarious ramification (petitioner's brief p. 7) and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and operate steamship and sailing ships and other floating craft and deal in the same and engage in the Philippine Islands and elsewhere in the transportation of persons, merchandise and chattels by water; all this incidental to the transportation of automobiles (id. pp. 7-8 and Exhibit B). We find nothing in the legal provision and the provisions of petitioner's articles of incorporation relied upon that could justify petitioner's contention in this case. To the contrary, they are precisely the best evidence that it has no authority at all to engage in the business of land transportation and

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

operate a taxicab service. That it may operate and otherwise deal in automobiles and automobile accessories; that it may engage in the transportation of persons by water does not mean that it may engage in the business of land transportation — an entirely different line of business. If it could not thus engage in the line of business, it follows that it may not acquire an certificate of public convenience to operate a taxicab service, such as the one in question, because such acquisition would be without purpose and would have no necessary connection with petitioner's legitimate business. GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El Hogar Filipino erected a modern reinforced concrete office building at the site of its old building. The acquisition of the lot and the construction of the new office building thereon is not the subject of the second cause of action for being ultra vires on the part of the corporation. ISSUE: WON the erection of the building was reasonable? HELD: Yes. With this contention we are unable to agree. Under the Corporation Law, every corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of the corporation may reasonably and necessarily require. When this property was acquired in 1916, the business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify its directors in acquiring a lot in the financial district of the City of Manila and in constructing thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of the lot — 1,413 square meters — was in excess of its reasonable requirements. The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner; and an intention to discriminate between owners in this respect is not lightly to be imputed to the Legislature. The point here involved has been the subject of consideration in many decisions of American courts under statutes even more restrictive than that which prevails in this jurisdiction; and the conclusion has uniformly been that a corporations whose business may properly be conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirements It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the foregoing authorities. In dealing with the powers of a national bank the court, in this case, said: When an occasion arises for an investment in real property for either of the purposes specified in the statute the national bank act permits banking associations to act as any prudent person would act in making an investment in real estate, and to exercise the same measure of judgment and discretion. The act ought not to be construed in such a way as to compel a national bank, when it acquires real property for a legitimate purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with such property. At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts alleged in the second cause of action to have been done by the respondent in excess of its powers that we refrain from commenting at any length upon said cases. The ground stated in the second cause of action is in our opinion without merit. THE DIRECTOR OF LANDS, petitioner, vs.

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THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO, respondents

(GR No. L56613; March 14, 1988)

FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for registration of a parcel of land which it claimed to have acquired by virtue of a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant and its predecessors-in-interest have been in actual, continuous, public, peaceful and adverse possession and occupation of the said land for more than 30 years, which was opposed by the Government as represented by the Director of Lands. The CFI and the CA ruled in favor of INC. ISSUE: WON the corporation may acquire the land in question? HELD Yes. As observed at the outset, had this case been resolved immediately after it was submitted for decision, the result may have been quite adverse to private respondent. For the rule then prevailing under the case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases involving private respondent adverted to above', is that a juridical person, private respondent in particular, is disqualified under the 1973 Constitution from applying for registration in its name alienable public land, as such land ceases to be public land "only upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No. 141, as amended. These are precisely the cases cited by petitioner in support of its theory of disqualification. Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among others. Thus, in the recent case of Director of Lands v. Intermediate Appellate Court, 146 SCRA 509, We categorically stated that the majority ruling in Meralco is "no longer deemed to be binding precedent", and that "[T]he correct rule, ... is that alienable public land held by a possessor, personally or through his predecessors-in-interest, openly, continuously and exclusively for the prescribed statutory period [30 years under the Public Land Act, as amended] is converted to private property by mere lapse or completion of said period, ipso jure." We further reiterated therein the timehonored principle of non-impairment of vested rights. The crucial factor to be determined therefore is the length of time private respondent and its predecessors-in-interest had been in possession of the land in question prior to the institution of the instant registration proceedings. The land under consideration was acquired by private respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No. 141, as amended, "those who by themselves or through their predecessorsin-interest have been in open, continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain, under a bona fide claim of acquisition or ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title except when prevented by war or force majeure" may apply to the Court of First Instance of the province where the land is located for confirmation of their claims, and the issuance of a certificate of title therefor, under the Land Registration Act. Said paragraph [b] further provides that "these shall be conclusively presumed to have performed all the conditions essential to a Government grant and shall be entitled to a certificate of title under the provisions of this chapter." Taking the year 1936 as the reckoning point, there being no showing as to when the Ramoses first took possession and occupation of the land in question, the 30-year period of open, continuous, exclusive and notorious possession and occupation required by law was completed in 1966. The completion by private respondent of this statutory 30-year period has dual significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point, the land in question ceased by operation of law to be part of the public domain; and [2] private respondent could have its title thereto confirmed through the appropriate proceedings as under the Constitution then in force, private corporations or associations were not prohibited from acquiring public lands, but merely prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the registration proceedings were commenced. This being the case, the prohibition under the 1973 Constitution would have no application. Otherwise construed, if in 1966, private respondent could have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can neither impair nor defeat. H.

POWER TO ENTER INTO MERGER OR CONSOLIDATION

This is an express power granted by the law under the Code, particularly Title IX thereof. I.

POWER TO MAKE REASONABLE DONATIONS

Ordinarily, a pure gift of funds or property by a corporation not created for charitable purpose is not authorized and would constitute a violation of the rights of its stockholders unless it is empowered by statute. There are circumstances, however, under which a donation by a corporation may be to it benefit as a means of increasing its business or promoting patronage. Thus, Sec. 36 (9) expressly authorizes a corporation to make donations, subject to the following limitations: 1. The donation must be reasonable; 2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and 3. It shall not be in aid of political party or candidate, or for purposes of partisan political aactivity. J.

POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS

It is now generally recognized in almost all jurisdiction to empower a corporation to establish pension plans, pension trust, profit sharing plans, stock bonus or stock option plans and other incentive plans to directors, officers and employees. In fact, the power may include any act to promote convenience, welfare and benefit of the employees or officers. REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, 1963) - A post office branch was opened in herein respondent’s mining camp at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an employee of such company, was the postmaster. Prior to the opening the company, at the request of the Bureau of Posts, adopted a resolution that the former would assume full responsibility for all cash received by the postmaster. On May 11, 1954, the postmaster went on a three day leave but never returned. As a result, an action was brought by the government to recover P13,867.24, the amount of shortage in the accounts of the postmaster, from the company. ISSUE: WON the subject resolution is within the powers of the company to adopt? HELD: Yes. The opening of the post office branch was undertaken because of a request submitted by respondent company to promote the convenience and benefit of its employees. The idea did not come from the government and the Director of Posts was prevailed upon to agree to the request only after studying the necessity for its establishment and after imposing upon the company certain requirements intended to safeguard and protect the interest of the government. Accordingly, the company cannot now be heard to complain of its liability upon the technical plea that the resolution is ultra vires. The least that can be said is that it cannot now go back on its plighted word on the ground of estoppel. The resolution covers a subject which concerns the benefit, convenience and welfare of the company’s employees and their families. There are certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. Thus, it has been held that “although not expressly authorized to do so a corporation may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its business”, and here it is undisputed that the establishment of the local post office is a vital improvement in the living condition of its employees and laborers who

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came to settle in it mining camp which is far removed from the postal facilities or means of communication accorded to people living in a city or municipality. IMPLIED POWERS Sec. 36. Xxx 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation It is a question, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. For if the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation’s charter powers (Montelibano vs. Bacolod-Murcia Milling

Co., Inc. as cited in NPC vs. VERA) I.

POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS PURPOSES

TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198; Sept. 25, 1967) – Respondent Filipinas Cement Corporation filed an application with herein respondent PSC for a certificate of public convenience to install, maintain and operate an electric plant in Teresa, Rizal for the purpose of supplying electric power and light to its cement factory and its employees living within its compound. Herein petitioner, operating an electric plant in Teresa Rizal filed an opposition claiming that Filipinas is not authorized to operate the proposed electric plant under its articles of incorporation. PSC decided in favor of Filipinas. ISSUE: WON under its articles of incorporation, Filipinas is authorized to operate and maintain an electric plant? HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to secure from any governmental, state, municipality, or provincial, city or other authority, and to utilize and dispose of in any lawful manner, rights, powers, privileges, franchises and concessions – obviously necessary or at least related to the operation of its cement factory. Moreover, said AOI also provide that the corporation may generally perform any and all acts connected with the business of manufacturing portland cement or arising therefrom or incidental thereto. It cannot be denied that the operation of an electric light, heat and power plant is necessarily connected with the business of manufacturing cement. If in the modern world where we live today electricity is virtually a necessity for our daily needs, it is more so in the case of industries like the manufacture of cement. NPC VS. VERA (170 SCRA 721; Feb. 27, 1989) FACTS: Private Respondent Sea Lion International Port Terminal Services Inc. filed a complaint for prohibition and mandamus with damages against petitioner NPC and Philippine Ports Authority after NPC did not renew its Contract for Stevedoring Services for coal-handling of NPC’s plant and in taking over its stevedoring services. ISSUE: WON NPC may embark in stevedoring and arrastre services? HELD: Yes. The NPC was created and empowered not only to construct, operate and maintain power plants, reservois, transmission lines and other works, but also:

…to exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose… (Sec. 3[1] of RA 6395, as amended) To determine whether or not the NPC act falls within the purview of the

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above provision, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation’s charter powers (Montelibano vs. Bacolod-Murcia Milling

Co., Inc.)

In the instant case, it is an undisputed fact that the pier owned by NPC, receives various shipment of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. The Court holds that NPC is empowered under its Charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988) FACTS: 14 plaintiffs, all associate members of the International School, Inc. brought an action for injunction against 10 members of the Board of Trustees, after a letter of Donal Marshall, president of the board, was sent stating that the school would be collecting a “development fee” of P2,625 per enrollee for the purpose of constructing new buildings and remodel existing ones to accommodate the increasing enrollment in the school which would need P35M. The CFI of Manila dismissed the complaint. ISSUE: WON the imposition of the development fee is within the powers of the school? HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol, expressly authorized the Board of Trustees “upon consultation with the Secretary of Education and Culture” to determine the amount of fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the school’s standard of education. Such consultation complied with and the Secretary expressed his conformity with the reasonableness of the assessment. The lower court observed that: Xxx the expansion of the school facilities, which is to be done by improving old buildings and/or constructing new ones, is an ordinary business transaction well within the competence of the Board of Trustees to act upon. Xxx Being directly related to the purpose of elevating and maintaining the school’s standard of instruction, which is ordained in fact by PD 732, the expansion cannot result in any radical or fundamental change in the kind of activity being conducted by the school that might require the consent of the members composing it. J.

POWER TO EXTEND OR SHORTEN CORPORATE TERM

This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS AMENDMENTS. Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. From the above-provision and jurisprudence, the requirements and procedure for extending or shortening the corporate term are as follows: 1. Approval by the majority vote of the BOD/T; 2. Ratification by the stockholders representing at least 2/3 of the

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3. 4.

5. 6. 7. 8. 9.

outstanding capital stock (including non-voting shares) or 2/3 of the members in case of non-stock corporations; The ratification must be made at a meeting duly called for that purpose; Prior written notice of the proposal to extend or shorten the corporate term must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service; In case of extension, the same cannot be made earlier than 5 years prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier extension; In case of extension, the same must be made during the lifetime of the corporation; Any dissenting stockholder may exercise his appraisal right; Submission of the amended articles with the SEC; and Approval thereof by the SEC (as required under Sec. 37 for extension, and Sec. 120 for shortening the term with the effect of dissolution)

READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC K.

POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five

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(25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. The following requirements or procedure should be complied with: 1. Approval by the majority vote of the BOD/T; 2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock (including non-voting shares) or 2/3 of the members in case of non-stock corporations at a meeting duly called for that purpose; 3. Prior written notice of the proposal to extend or shorten the corporate term must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service; 4. A certificaate in duplicate must be signed by a majority of the directors of the corporation, countersigned by the chairman and the secretary of the stockholders meeting, setting forth the matters contained in subsection 1 to 7 of Sec. 38; 5. In case of increase in capital stock, 25% of such increased capital must be subscribed and that at least 25% of the amount subscribed must be paid either in cash or property; 6. In case of decrease of capital stock, the same must not prejudice the right of the creditors; 7. Filing of the certificate of increase and amended AOI with the SEC; and 8. Approval thereof by the SEC.

METHODS OF INCREASING CAPITAL STOCK: 1. 2. 3.

Increase the par value of the existing number of shares without increasing the number of shares; Increase the number of existing shares without increasing the par value thereof; Increasing the number of shares and at the same time increasing the par value of the shares

REASONS/PURPOSE FOR THE INCREASE: 1. 2. 3.

Expansion; Payment of Debt Obligations; To acquire additional assets such as providing cars to employees to distribute the goods;

*Nothing in law prohibits increase of capital stock

REASONS FOR DECREASE: 1. 2. 3.

To reduce or wipe out existing deficit where no creditors would thereby by affected; When the capital is more than what is necessary to procreate the business or reduction of capital surplus; To write down the value of its fixed assets to reflect their present actual value in case where there is a decline in the value of the fixed assets of the corporation.

TRUST FUND DOCTRINE: The subscriptions to capital stock of the corporation constitute a fund which the creditors have a right to look up for the satisfaction of their claims. Accordingly, if the decrease would affect the rights of creditors, the same would not be approved by the SEC.

PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923) - Shortly after its incorporation, the stockholders of Cooperativa Naval Filipina, adopted a resolution to the effect that the capital should be reduced

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by 50% and the subscribers be released from the obligation to pay their unpaid balance. In the course of time, the company became insolvent and went into the hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and by it this action was instituted to recover ½ of the stock subscription of herein defendant who subscribed to 450 of the 1,000 authorized capital stock. It does not appear that the formalities under the Corporation Code for the reduction of capital stock were observed and in particular it does not appear that any certificate was at any time filed in the Bureau of Commerce and Industry, showing such reduction. Respondent judge ruled in favor of Philtrust and directed respondent to pay ½ of the subscription price of his shares. ISSUE: WON the reduction is valid and proper? HELD: No. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the AOI. Moreover, strict compliance with the statutory regulations is necessary. In the case before us, the resolution releasing the shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawals of so much capital from the fund upon which the company’s creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual. MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) The Madrigal Central Office Employees Union sought for the renewal of its CBA, proposing a P200 wage increase and an allowance of P100 a month. Petitioner company requested for the deferment of its negotiation. Meanwhile, the company effected two reductions of its capital stock by issuing marketable securities owned by petitioner in exchange for shareholders’ shares. After the petitioner’s failure to sit down with the respondent union, the latter commenced a case with the NLRC for unfair labor practice. In due time, petitioner filed its position paper, alleging operating losses. The Labor Arbiter rendered a decision in favor of respondent Union. ISSUE: WON the decrease in capital stock is valid and binding? HELD: No. What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increase, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company’s piling profits, the unionists had the right to demand for such salary adjustments. That the petitioner made quite handsome profits is clear from the records. This court is convinced that the petitioner’s capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in it employee ranks, especially the union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice. L.

POWER TO DENY PRE-EMPTIVE RIGHT

PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders

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of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective holdings, subject only to the limitation imposed under Sec. 39, which provides: Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.

BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired and undiluted, of the old stockholders’ relative and proportionate voting strength and control, that is, the existing ratio of their property interest and voting power in the corporation.

EXCEPTIONS (Under Sec. 39): 1. 2.

When shares to be issued is in compliance with laws requiring stock offerings or minimum stock ownership by the public; or Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock either: a. In exchange for property needed for corporate purpose; or b. In payment of a previously contracted debt.

The exceptions will not apply to stockholders of close corporation whose preemptive right, is broader if not absolute. See Sec. 102. The right may likewise be lost by waiver, express or implied or inability or failure to exercise it having been notified of the proposed disposition of shares. BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized capital stock divided into 20,000 shares, of which 460 belong to herein petitioner. In a stockholders meeting, an increase of the authorized capital stock to P1,000,000 was approved, where the previously unissued shares were all issued. Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC alleging that the additional issue of previously unissued shares was made in violation of his pre-emptive right and that the increase of capital stock was illegal considering that the stockholders on record were not notified, and that such issuance be cancelled. SEC Ruling: Benito is not entitled to pre-emptive right with respect to the original unsubscribed shares, but can exercise such right with regards the increase capitalization. ISSUE: WON the above ruling is correct? HELD: Yes. The issuance of the unsubscribed portion of the capital stock or P110,980 is valid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the bard of directors and no stockholders’ meeting is necessary to consider it because such issuance does not need approval of stockholders. The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on theory that when a corporation, at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are reoffered, he cannot therefore claim a dilution of interest. With respect to the claim that the increase in the authorized capital stock was without consent, expressed or implied, of the stockholder, it was the finding

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of the Commission that a meeting was called for the purpose. The petitioner had not sufficiently overcome the evidence of respondent that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time, attending the Mecca pilgrimage. Another thing that petitioner was able to disprove was the allegation that all stockholders who did not subscribe to the increase have waived their pre-emptive right. As far as petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings. M.

POWER TO SELL OR DISPOSE OF ASSETS

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is (1) necessary in the usual and regular course of business of said corporation or (2) if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. The conditions for the valid exercise of this power are thus as follows: 1. Resolution by a majority of the BOD/T; 2. Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members; 3. The ratification of the stockholders or member must be made at a meeting duly called for that purpose; 4. Prior written notice of the proposed action and of the time and place of meeting must be made addressed to all stockholders of record, either by mail or personal service; 5. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies; and 6. Any dissenting stockholder shall have the option to exercise his appraisal right.

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The above requirements will not apply: 1. In case the sale is NOT covering all or substantially all of the assets of a corporation as to render it incapable of continuing the business or accomplishing the purpose for which it was incorporated; or if the proceeds are to be used to continue the conduct of the remaining business of the company; 2. If the sale is in the usual and regular course of business of the company. ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454; May 4, 1997) – The Islamic Directorate of the Philippines received two parcels of land from the Libyan government for the purpose of putting up a Mosque, Madrasah (arabic school) and other religious infrastructures. In 1972, Martial Law was declared, most of the members of the Board of Trustees, together with petitioner Sen. Mamintal Tamano, fled to the middleeast to escape political prosecution. Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One headed by Engr. Farouk Caprizo, not having been properly elected as new members of the Board of Trustees caused to be sold, through a resolution of IDP, the two lots to respondent Iglesia Ni Cristo. The 1971 Board of Trustees now filed a petition to declare the sale null and void. ISSUE: WON the sale is valid? HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its consent through a legitimate Board of Trustees. Therefore, this is not a case of vitiated consent, but one where consent on the part of one of the contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever. The Caprizo group-INC sale is further deemed null and void ab initio because of the Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation. The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of Sec. 40. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met as the Caprizo Groups which voted to sell the property was a fake Board and those whose names and signatures were affixed by the Caprizo Group together with the sham Board Resolution authorizing negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29, 1965) - The appellant secured in a civil case against Insular Famrs, Inc. a judgment for the balance of the price of a pump sold by the former to the latter. A writ of execution was issued but was returned unsatisfied, saying that Insular Farms had no leviable property. Soon after appelant filed with the same Municipal Court the present action against Pacific Farms claiming it to be an alter ego of Insular Farms, which the court denied. On appeal, the CFI and CA also denied the petition. ISSUE: WON Pacific Farms should answer for the liability of Insular Farms? HELD: No. It appears on record that the appellee purchase 1,000 shares of stock of Insular Farms, and thereupon sold said shares of stock to certain individuals, who forthwith reorganized said corporation and that the board of directors thereof, as reorganized, then caused its assets, including its leasehold right over a public land in Pangasinan to be sold to herein appellee. These facts do not prove that the appellee is an alter ego of Insular Farms, or is liable for its debts. Generally where on corporation sells or otherwise transfers all o its assets to another corporation, the latter is not liable for the debts and liabilities of the

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transferor, except: (1) where the purchaser expressly or impliedly agrees to assumes such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. In the case at bar, there is neither proof nor allegation of the foregoing exceptions. In fact, these sales took place not only over 6 months before the rendition of the judgment sought to be collected in the present action, but also, appellee purchase the shares of stock of Insular Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for the obligation of Insular Farms in favor of said bank. N.

POWER TO ACQUIRE OWN SHARES

Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. The limitation that the corporation must at all times have “unrestricted retained earnings” is a condition for the exercise of this power, EXCEPT: 1. Redemption of redeemable shares under Sec. 8; 2. Exercise of stockholders right to compel a close corporation to purchase his shares for any reason under Sec. 105 when the corporation has sufficient assets in its book to cover its debts and liabilities exclusive of capital stock; 3. In case of deadlocks under Sec. 104. Once purchased, the shares are considered as treasury shares and while they remain so, they have no voting rights and dividend rights. The corporation may (1) re-issue them even below par; (2) issue them as stock dividends; (3) retire or cancel them and thereby remove from issue effectively reducing the number of shares issued stated in the AOI. STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of Directors of Trading Company approved and authorized the purchases of the capital stock of the company from its various stockholder, herein respondents, at par value amounting to P3,300. Petitioner assails the recovery of the amount paid to such stockholders and the P3,000 dividends declared which were claimed to be made to the injury and in fraud of its creditors. The complaint was dismissed. ISSUE: WON recovery can be made? HELD: Yes. The Board of Directors acted on the assumption that it had accounts receivable of the face value of P19,126.02 but there was no stipulation as to the value of such accounts and P12,512.47 of which had but little, if any value. The purchase of the stocks and the dividend declaration further decreased the assets of the corporation. The profits amounted only to P3,314.72. In other words, that the corporation did not then have actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would “affect the financial condition of the corporation”. It is indeed peculiar that the action of the board in the assailed acts was all done at the same meeting of the board of directors, and it appears that the stockholders, whose shares were purchased, were former directors and resigned before the board approved the purchase and declaration of dividends. In other words, the directors were permitted to resign so that they could sell their stock to the corporation. In this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent. The amount involved in this case is not large, but the legal principles are important and we have given them consideration which they deserve. O.

POWER TO INVEST FUNDS

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. “MAY INVEST FUNDS” has been held by the SEC to mean an investment in the form of money, stock, bonds and other liquid assets and does not include real properties or other fixed assets, otherwise the law would have phrased Sec. 42 to include “assets” rather than “to invest funds”.

SECONDARY PURPOSE: the law uses the phrase “for any purpose other

than the primary purpose” signifying that even if the business or undertaking is allowed or authorized in the secondary purpose or purposes of the corporation, the provision of Sec. 42 would apply.

REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS:

“j. Power to acquire or dispose of shares or securities. – A private corporation, in order to accomplish it purpose as stated in its articles of incorporation, and imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary” “40. Power to invest corporate funds. – A private corporation has the power to invest its corporate funds in any other corporation or business, or for any other purpose other than the main purpose for which it was organized, provided that its board of directors has been authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders’ meeting called for that purpose. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation, the approval of the stockholders is not necessary” We agree with Professor Guevarra. We therefore agree with the finding of the lower court that the investment in question does not fall under the purview of Sec. 17 ½ fo the Corporation Law. JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.

(GR No. L-45911; April 11, 1979)

FACTS: Petitioner John Gokongwei alleged that the respondent corporation has been investing corporate funds in other corporations or business outside of its primary purpose in violation of Sec. 17 ½ of the Corporation Law.

Resolution by a majority of the BOD/T; Ratification by the stockholders representing 2/3 of the outstanding capital stock (or 2/3 of members); The ratification must be made at a meeting duly called for that purpose; Prior written notice of the proposed investment and the time and place of the meeting shall be made, addressed to each stockholder or member by mail or by personal service; and Any dissenting stockholder shall have the option to exercise his appraisal right.

Respondents sent notices of the annual stockholders’ meeting including in the agenda thereof the re-affirmation of the authorization of the BOD by the stockholders at the meeting to invest corporate funds in other companies or businesses or for purposes other than the main purpose. An injunction was prayed for by petitioner, but the date of hearing originally set was cancelled. No action was taken up to the date of the filing of the instant petition.

RATIFICATION: as a requirement, applies only to investments that are

HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary.

1. 2. 3. 4. 5.

beyond the corporation’s primary purpose, or outside the express or implied powers of the investing corporation. Thus, if the investment is reasonably necessary to accomplish its primary purpose, the approval of the stockholders or members is not required. DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; Feb. 28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the manufacture of sugar, invested P655,000 in shares of stock of Philippine Fiber Processing Co., Inc., which is engaged in the manufacture of sugar bags. The sale, though not previously authorized, was ratified by the 2/3 vote of the stockholders. Claiming the business of defendant is not related to that of Philippine Fiber, such sale was attacked but the trial court decided on its legality. ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec. 17-1/2 of the Corporation Law? HELD: Yes. In his work entitled “The Philippine Corporation Law”, Professor Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9) and (10) of Sec. 13, as follows:

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ISSUE: WON respondent SEC committed grave abuse of discretion in allowing the above agenda to be taken up in the stockholders’ meeting?

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 19701971 thru the organization of SMI in Bermuda as a tax free reorganization.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors.” Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers. P.

POWER TO DECLARE DIVIDENDS

DIVIDENDS are corporate profits set aside, declared and ordered by the BOD to be paid to the stockholders. It is a fruit of investment, the recurrent return, analogous to interest and rent upon other forms of invested capital.

Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends.

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TYPES OF DIVIDENDS: 1. 2. 3.

Cash dividends – payable in lawful money or currency; Property dividends - those paid in the form property (e.g., bonds, notes, shares in another corporation); Stock dividends – corporation’s own shares of stock out of the remaining unissued shares which would require the approval of the stockholders representing 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose. This is to be valued at par value or issue price.

Cash and property dividends have the effect of reducing corporate assets to the extent of the dividends declared. In stock dividends, it would generally not increase the proportionate interest of the stockholders of the corporation although it will have the effect of increasing the subscribed and paid-up capital (exception is when the stock dividend declaration would result in fractional shares like when 1 share is declared as dividend for every 9 shares held)

OVERISSUANCE OF SHARES: happens when a corporation issues shares beyond its authorized capital stock, even in the form of stock dividends.

DELINQUENCY: is a requirement for the application of the second part of

the first paragraph of Sec. 43. Such that, cash dividends declared are first applied on the unpaid balance on the subscription plus costs and expenses and stock dividends are withheld until the subscription is fully paid.

WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to declare dividends, except: (1) When the unrestricted retained earnings is in excess of 100% of the paid-up capital; and (2) In the case of Mandatory If Earned Preference Shares.

The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively, unreasonably or unjustly; or (4) abuse of discretion can be shown as to impair the rights of the complaining shareholders. The TEST of bad faith is to determine if the policy of the directors is dictated by their personal interest

rather than the corporate welfare.

WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the

right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally declared by the BOD. It is not revocable unless: (1) it has not been officially communicated to the stockholders; or (2) it is in the form of stock dividends which is revocable any time prior to distribution because this does not result in the distribution of assets but merely the division of existing shares of a stockholder into smaller units or integers.

TRANSFER OF SHARES: The dividends already declared belong to the owner at the time of declaration. Usually, however, the dividends are payable to stockholders of record on a specific future date and as far as the corporation is concerned, the registered owner is the one entitled to dividends. As against his transferor, however, the transferee has presumably the right to such dividends and is oftentimes taken into account in entering effecting the transfer of shares. NIELSON & COMPANY, INC., plaintiff-appellant, vs. LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee

(GR No. L-21601; Dec. 28, 1968)

FACTS: This is a motion for reconsideration filed by respondent Lepanto contending that the order of the SC to pay Nielson 10% of the stock dividends, declared by Lepanto during the extension of the contract, as compensation for services under a management contract is in violation of the Corporation Law and that it could not be the intention of the parties that the services of Nielson should be paid in stock dividends. ISSUE: WON Nielson & Co. is entitled to receive stock dividends? HELD: No. The consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property. Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par. When a corporation issues stock dividends, it shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution. Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same. If a stockholder is deprived of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder — then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.

stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. This provision was inserted to assure not only technical competence but continuity in management policy in running corporate affairs which can be achieved through a management contract.

REQUIREMENTS OF A VALID MANAGEMENT CONTRACT: 1. 2. 3. 4.

5.

The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as dividends and duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests. It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record. Q.

POWER TO ENTER INTO MANAGEMENT CONTRACT

Sec. 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by

57

R.

Resolution of the BOD; Approval by the stockholders representing a majority of the outstanding capital stock or majority of the members of both the managing and the managed corporation; The approval of the stockholders or members must be made at the meeting called for that purpose; and The contract shall not be for a period longer than 5 years for any one term, except those which relate to exploration, development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations; 2/3 of the stockholders or members would be required, where: a. The stockholders representing the same interest of both the managing and the managed corporation own or control more than 1/3 of the total outstanding capital stock of the managing corporation; b. A majority f the members of the BOD of the managing corporation also constitute a majority of the directors of the managed corporation; c. The contract would constitute the management or operation of all or substantially all of the business of another corporation, whether such contracts are called service contracts. If it will not constitute the management of all or substantially all of the business of another corporation, the first paragraph of Sec. 44 will apply and not that of the second, that is, only the vote of the majority is required. ULTRA VIRES ACTS

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are not within its express, inherent, or implied powers as defined by its charter or AOI. Accordingly, it may be subject to a collateral attack questioning the authority of the corporation to engage in such particular endeavor. CONSEQUENCES: 1. On the Corporation itself: The proper forum may suspend or revoke, after proper notice and hearing, the franchise or certificate of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

2.

3.

registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public. On the rights of the Stockholders: A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. If already performed, a derivative suit against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract. On the immediate parties: a. If the contract is fully executed in both sides, the contract is effective and the courts will not interfere to deprive either party of what has been acquired under it; b. If the contract is executory on both sides,, as a rule, neither party can maintain an action for its non-performance; and c. Where the contract is executory on one side only, and has been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts, however, hold that the party who has received benefits from the performance is “estopped” to set up that the contract is ultra vires to defeat an action on the contract.

READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining (both in this chapter) PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec. 29, 1954) - The Board of directors of defendant company adopted a resolution wherein the proceeds of the insurance taken on the life of its previous President and General Manager Enrico Privano be set aside and used to purchase 4,000 shares to be given to Privano’s heirs, which was approved by the stockholders in a meeting duly called for the purpose. The donation of the shares was later on modified to transfer all the proceeds directly to the heirs which would become a loan of the company with 5% interest per annum and payable after the settlement of its bonded indebtedness, and still later, modified to be payable “whenever the company is in a position to meet said obligation”. On an opinion by the SEC, sought by the President of the corporation, Sergio Osmena, Jr., it was opined by the SEC that the donation was void for being ultra vires. The Board planned to adopt a different resolution to effect the donation but failed to act on it. The heirs, through Mrs. Estefania R. Privano, acting as guardian, demanded the settlement of the obligation. ISSUE: WON the donation was an ultra vires act? HELD: No. After a careful perusal of the AOI, we find that the corporation was given broad and almost unlimited powers to carry out the purposes for which it was organized among them, (1) “to invest and deal with the money of the company not immediately required, in such manner as fro time to time may be determined” and (2) “to aid in any manner any person association, or corporation or in the affairs of the property of which this corporation has lawful interest”. The donation in question undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds were not immediately required when they were given away. We don’t see much distinction between the acts of generosity of the benevolence extended to some employees of the corporation, and even to some in whom the corporation was merely interested because of certain moral or political consideration, and the donations which the corporation has seen fit to give the children of the late Enrico Privano from the point of view of the power of the corporation as expressed in the AOI. And if the former had been sanctioned and had been valid and intra-vires, we see no plausible reaons why the latter should now be deemed ultra-vires. It may perhaps be argued that the donation given to the children of the late Enrico Privano is so large and disproportionate that it can hardly be considered a pension or gratuity that can be placed ona par with the instances above-mentioned, but this argument overlooks one consideration: the gratuity here given was not merely motivated by pure liberality or act of generosity, but by a deep sense of recognition of the valuable services rendered by the late Enrico Privano

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which had immensely contributed to the growth of the corporation to the extent that from its humble capitalization it blossomed into a multi-million corporation that it is today. Granting that it was ultra-vires, it may be said that the same cannot be invalidated, or declared legally ineffective for that reason alone, it appearing that the donation represents not only the act of the BOD but of the stockholders themselves as shown by the fact the same has been expressly ratified in a resolution duly approved by the latter. By this ratification, the infirmity of the corporate act, if any has been obliterated thereby making the act perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and consummated and no creditors are prejudiced, or if there are creditors affected, the latter has expressly given their conformity. ISSUE2: What is the difference between an illegal act and that which is ultra-vires? HELD: The former contemplates the doing of an act which is contrary to law, morals, or public order or contravene some rules of public policy or public duty, and are, like similar transactions between the individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance, ratification or estoppel. Mere ultra-vires acts, on the other hand, or those which are not illegal and void ab initio, but are merely beyond the scope of the AOI, are merely voidable and may become binding and enforceable when ratified by the stockholders. Since it is not contended that the donation under consideration is illegal, or contrary to any of the express provisions of the AOI, nor prejudicial to the creditors of the defendant corporation, we cannot but logically conclude that said donation, even if ultra vires in the supposition we have adverted to, is not void, and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation. The corporation is now prevented or estopped from contesting the validity of the donation. IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL., defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar Company (MSC) transferred all of its property to Philippine Trust Company (PTC) in consideration of the bonds it had issued to the value of P3,000,000, each bond being $1,000, which par value, with interest at 8% per annum, PTC guaranteed to the holders. PTC paid Ramon Diaz upon presentation of the coupons, the stipulated interest from the date of maturity until July 1, 1928, when its stopped payments, alleging that it did not deem itself bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. The CFI of Manila absolved the defendants from the complaint except MSC which was sentenced to pay the value of the bond. ISSUE: WON PTC’s act was ultra-vires? HELD: No. Firstly, PTC although secondarily engaged in banking, was primarily organized as a trust corporation with full power to acquire personal property such as the bonds in question according to both sec. 13 (par. 5) of the Corporation Law and its duly registered by-laws and AOI; Secondly, that being thus authoriezd to acquire the bonds, it was given implied power to guarantee them in order to place them upon the market under better, more advantageous conditions, and thereby secure the profit derived from their sale. “It is not, however, ultra vires for a corporation to enter into contracts of guaranty where it does so in the legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial papers or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale, it may in order to make them more readily marketable, indorse or guarantee their payment.” Even if PTC did not acquire the bonds in question, but only guaranteed them,

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

it would at any rate, be valid and the said corporation is bound to pay the appellant their value with the accrued interest in view of the fact that they become due on account of the lapse of 60 days, without the accrued interest due having been paid; and the reason is that it is estopped from denying the validity of its guarantee. The doctrine of ultra vires as a defense, is by some courts regarded as an ungracious and odious one, to be sustained only where the most persuasive consideration of public policy are involved, and there are numerous decisions and dicta to the effect that the plea should not as a general rule prevail whether interposed for or against the corporation, where it will not advance justice but on the contrary will accomplish a legal wrong. When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of untra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong. JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil 540; May 23, 1957) - The SEC issued an order requiring petitioner herein and its President Alfredo Abcede to show cause why it should not be proceeded against for making misrepresentations to the public about the need of registering and depositing war notes, with a view of probable redemption as contemplated in Senate Bill No. 163 and in Senate Concurrent Resolution No. 14, for otherwise they would be valueless. Petitioner contended that the statement was made in good faith as President Magsaysay would soon make representations to the US to have the war notes redeemed. Respondent SEC found that according to its AOI, the petitioner has the privilege to work for the redemption of the war notes of its members alone, but that it cannot offer its services to the public for a valuable consideration, because there is nothing definite and tangible about the redemption of the war notes and its success is speculative that any authority given to offer services can easily degenerate into a racket; that under its AOI the petitioner is a civic and non-stock corporation and upon should not engage in business for profit; that it has received war notes for deposit, upon payment of fees, without authority in its articles to do so; that it had previously been rendered to desist from collecting from those registering the war notes, but notwithstanding this prohibition it has done so in the guise of service fees. Hence the Commission ordered to stop receiving war notes, receiving same for deposit and chargin fees therefore. ISSUE: WON the SEC erred in issuing the questioned order? HELD: No. The articles authorize collection of fees from members; but they do not authorize the corporation to engage in the business of registering and accepting war notes for deposit and collecting fees from such services. This was the ruling of the Commission and this we find to be correct. Neither do we find any merit in the third contention that the association has authority to accept and collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers of the association as embodied in its articles and have absolutely no relation to the avowed purpose of the association to work for the redemption of war notes. ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) The Vice-president of Mover Enterprises, Inc. issued a check drawn against Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the accommodation of his client. Petitioner-payee was charged with the knowledge that the check was issued at the instance and for the personal account of the President who merely prevailed upon respondent vicepresident to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. While it was the corporation's check which was issued to petitioner for the amount involved, petitioner actually had no transaction directly with said corporation. ISSUE: WON private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party

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under NIL and a debtor of petitioner to the extent of the amount of said check? HELD: Yes. The liability of an accommodation party to a holder for value, although such holder does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. One who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the signatories thereof (president and vice-president) shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith. CHAPTER 8: BY-LAWS BY-LAWS are rules and ordinances made by a corporation for its own government; to regulate the conduct and define the duties of the stockholders or members towards the corporation and among themselves. They are the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and tis stockholder or members and directors and officers with relation thereto and among themselves in their relation to it. Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. EFFECTIVITY: After approval of the SEC. BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the incorporators without the need of the affirmative vote of the majority of the outstanding capital stock or the members provided it is submitted together with the AOI.

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AFTER INCPORPORATION: Must be submitted one month after the issuance of the certificate of incorporation and must be approved by a majority of the outstanding capital stock or members and signed by such stockholders or members voting for them. Failure to file within 1 month may result to suspenion or revocation of corporate franchise. THIRD PERSONS: are generally not bound, affected or prejudiced the bylaws, it being merely internal rules of the corporation, EXCEPT: if they have knowledge of its existence and contents. CONTENTS: Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. AMENDMENT: Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of twothirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. TWO MODES OF AMENDMENT: 1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members, at a regular or special meeting called for that purpose; or 2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital stock or 2/3 of the members. This power, however, is considered revoked, when so voted by a majority of the outstanding capital stock or members in a regular or special meeting.

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LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO, respondents.

(GR No. 117188; Aug. 7, 1997)

FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner and developer of the subdivision was the first president of the Association. Later on, asking on the status of petitioner, Soliven discovered that the said association was already dissolved (according to the head of the legal department of HIGC), and accordingly caused the registration of HIGC as the association covering Phases West I, East I and East II of the subdivision. ISSUE: WON the Association can be considered dissolved for non-adoption of by-laws? HELD: Yes. As correctly postulated by the petitioner, interpretation of this provision of Sec. 46 begins with the determination of the meaning and import of the word "must" in this section. Ordinarily, the word "must" connotes an imperative act or operates to impose a duty which may be enforced. It is synonymous with "ought" which connotes compulsion or mandatoriness. However, the word "must" in a statute, like "shall," is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it is used demands or requires. This is equally true as regards the word "must." Thus, if the languages of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning. In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are illuminating: MR. FUENTEBELLA. Thank you, Mr. Speaker. On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker, that by-laws must immediately be filed within one month after the issuance? In other words, would this be mandatory or directory in character? MR. MENDOZA. This is mandatory. MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of the corporation to file these by-laws within one month? MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes the consequences of violations of any provision of this Code. One such consequences is the dissolution of the corporation for its inability, or perhaps, incurring certain penalties. MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely failing to file the by-laws within one month. Supposing the corporation was late, say, five days, what would be the mandatory penalty? MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo warranto action is brought, one takes into account the gravity of the violation committed. If the by-laws were late — the filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a tolerable delay, but if they are delayed over a period of months — as is happening now — because of the absence of a clear requirement that by-laws must be completed within a specified period of time, the corporation must suffer certain consequences. This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature. Moreover, even without resorting to the records of

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deliberations of the Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner. Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum), Section 46 aforequoted reveals the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: In the absence of charter or statutory provisions to the contrary, bylaws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the

power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid. (Emphasis supplied.)

As Fletcher aptly puts it: It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner of their adoption. The mere fact,

however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts.

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state: Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx xxx xxx (1) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: xxx xxx xxx Failure to file by-laws within the required period. Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice and hearing

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are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence. As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court, as follows: “Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to "suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation" on the ground inter alia of "failure to file by-laws within the required period." It is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.” HENRY FLEISCHER, plaintiff-appellee, vs. BOTICA NOLASCO CO., INC., defendant-appellant.

(GR No. L-23241; March 14 ,1925)

FACTS: Manuel Gonzales, the original owner of 5 shares of stock in question of Defendant Company, assigned and transferred to herein plaintiff Fleischer. Two days after, Dr. Miciano, secretary-treasurer of the company, offered to buy from Fleischer the said shares in behalf of the corporation, contending that Art. 12 of the by-laws grants the company preferential right to buy Gonzales’ shares. Plaintiff refused and requested Dr. Miciano to register said shares in his name, and the latter refused to do so. ISSUE: WON Fleischer is bound by the provisions of the corporation’s bylaws? HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. It follows from said provision, that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459. Said section specifically provides that the shares of stock

"are personal property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the nature, character

and transferability of shares of stock. Under said section they are personal property and may be transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of

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personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith. As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.) On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. (People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.) The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)

“The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon

the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-laws are intended merely for the protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take away or abridge the substantial rights of stockholder. Under a

statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137, p. 674.

The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to

alien them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or

to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold that the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter. The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number

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of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser. GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It appears that among the by-laws of the association there is an article (No. 10) which reads as follows: “The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.” ISSUE: WON the above provision is valid? HELD: No. This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the bylaws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view that said article was invalid. It was therefore suggested that the article in question should be eliminated from the by-laws. At the next meeting of the board of directors the matter was called to their attention and it was resolved to recommend to the shareholders that in their next annual meeting the article in question be abrogated. It appears, however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a quorum, with the result that the provision referred to has not been eliminated from the by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict with the law. It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action. ISSUE2: Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article 71 of the bylaws, which reads as follows: “ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting” WON Art. 71 is valid? HELD: Yes. We are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance at

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to holdover until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expressions in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year on until their successors shall have been elected and taken possession of their offices."

situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director.

It result that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling positions of responsibility in corporate affairs.

The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.

READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6) GOKONGWEI VS. SEC (supra) - As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. ISSUE: WON the amended by-laws of SMC disqualifying a competitor from nomination or election to the BOD are valid and reasonable? HELD: Yes. The validity or reasonableness of a by-law of a corporation in purely a question of law. Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications. This is the exact opposite of the

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It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal.

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

valid and reasonable. ISSUE2: WON the Corporation has the power to prescribe qualifications? HELD2: Yes. Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors. It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " In Government v. El Hogar, the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice ISSUE3: WON stockholders have the vested right to be elected a director? HELD: No. Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted bylaws and not forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new bylaws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. It being settled that the corporation has the power to provide for the qualifications of its directors, it has also been settled that the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority. CHAPTER 9: MEETINGS Meetings applies to every duly convened assembly either of stockholders, members, directors or trustees, managers, etc. for any legal purpose or the transaction of business of common interest.

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Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special. A.

STOCKHOLDERS’ MEETING

Sec. 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. The stockholders have no power to act as or for the corporation except at a corporate meeting called and conducted according to law. This rule arises from the need to protect the stockholder by providing them with notice of meeting and giving them opportunity to attend the meeting, discuss the issues and vote (an exception would be an ordinary amendment where “written asset” is acceptable). DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not fixed, on any date of April of very year as the BOD/T may determine. April, because this is the time the Audited Financial Statements are already available. DATE OF SPECIAL MEETING: At any time deemed necessary or as provided for in the by-laws. REQUIREMENTS FOR A VALID STOCKHOLDERS’ MEETING: 1. It Must Be Held On The Date Fixed In The By-Laws Or In Accordance With The Law. The date required, as previously discussed, admits of an exception, as when the annual meeting cannot be held on the appointed time for some valid and meritorious reasons. 2.

Prior Notice Must Be Given Sec 50 and 51 requires that written notice of regular meeting shall be sent at least 2 weeks prior to the meeting, whereas, 1 week prior notice is required for special meetings. EXCEPTIONS: (a) If the by-laws provide for a different period for sending out notice for regular or special meetings (failure to comply would render the resolutions adopted at the option of the stockholder who was not notified); (b) Waiver, either express or implied. The Notice must contain the agenda or business matter/s that may be taken up before the meeting otherwise it may become voidable at the instance of any objecting stockholder or member.

THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL., petitioners,

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

vs. HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.

(GR No. L-12282; March 31, 1959)

FACTS: A meeting electing the BOD of herein petitioner was declared null and void by the Court in a suit filed by John Castillo, et. al. In compliance with the order, another election was scheduled on March 28 at 5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the meeting is composed of the same people that had conducted and supervised the previously nullified meeting; that the election to be conducted did not comply with the 5 day notice requirement required by the by-laws and the constitution of the association, since the notice was posted and sent out only on March 26 and the election was to be held on March 28. ISSUE: WON the notice requirement is complied with? HELD: No. Section 3, article III, of the constitution and by-laws the association provides: “Notice of the time and place of holding of any annual meeting, or any special meeting, the members, shall be given either by posting the same in a postage prepaid envelope, addressed to each member on the record at the address left by such member with the Secretary of the Association, or at his known post-office address or by delivering the same person at least (5) days before the date set for such meeting. . . . In lieu of addressing or serving personal notices to the members, notice of the members, notice of a regular annual meeting or of a special meeting of the members may be given by posting copies of said notice at the different departments and plants of the San Miguel Brewery Inc., not less than five (5) days prior to the date of the meeting. (Annex K.)” Notice of a special meeting of the members should be given at least five days before the date of the meeting. Therefore, the five days previous notice required would not be complied with. 3.

It Must Be Held at the Proper Place

Sec. 51. Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. Meeting must, at all times, be held in the city or municipality where the principal office is located, or if practicable at the principal office of the corporation. For this purpose, Metro Manila is considered as one city or municipality.

FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a stockholder’s meeting that the said corporation shall be voluntarily dissolved, and was placed under the receivership of Gapol, the largest stockholder. A petition for voluntary dissolution was drafted and signed by Ponce, which was to be filed with the appropriate authorities. It was found out that instead of filing the petition, Gapol filed a complaint in the CFI for the accounting of the funds and assets of the corporation, and to reimburse it the amounts expended for the purchase of a parcel of land, a loan extended to the wife of Ponce, and an amount spent by Ponce in a trip to the US. Gapol contends that such amount, taken from the corporation, was misapplied, misappropriated and misspent by Ponce to his own use and benefit, thus he prayed for the removal of Ponce as a member of the board of directors. Such removal was rejected by the court, but Gapol’s petition for the calling of a stockholders’ meeting, was granted. At said meeting, a new set of board of directors was elected. Ponce filed a petition in the lower court seeking to set aside its order, but the same was denied. Thus, they filed for an appeal to the SC. ISSUE: WON the Court may issue such order directing a stockholder to call a meeting of the stockholders of a corporation? HELD: Yes. The corporation law provides that “whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so refuses, fails or neglects to call a meeting, any judge of a CFI on the showing of a good cause therefore, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the corporation by giving the proper notice required”. Thus, on the showing of good cause therefore, the court may authorize a stockholder to call a meeting and to preside thereat until the majority stockholders representing a majority of the stock present and permitted to be voted shall have chosen one among them to preside. This showing of good cause exists when the court is apprised of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the board of directors but the call of the meeting has not been done. There is no need to issue a notice of hearing, nor is there any necessity to hold a hearing, upon the board of directors. The court here found good cause in calling the meeting for the election of a new board, because the chairman of the board of directors who is so authorized to call such meeting, failed, neglected or refused to perform his duty. Having the authority to grant such relief, the lower court did not exceed its jurisdiction nor did it abuse its discretion in granting it. NOTE: In a case decided by the SEC, it rules that under the present state of law, the Ponce case will apply ONLY “where there is no person authorized to call the meeting:, thus an ex-parte proceeding may be allowed as obviously there is no person to summon and no person whose right to due process will be violated. However, where there is an officer authorized to call the meeting and that officer refuses, fails or neglects to call a meeting then the Ponce case WILL NOT APPLY. This is so, because the phrase “or when the officer authorized to do so refuses, or fails, or neglects to call a meeting” has been deliberately omitted in Sec. 50 of the Corporation Code. Likewise, in the same ruling of the SEC, the Ponce case likened the questioned order to a writ of preliminary injunction which may be issued ex parte, the said PI can no longer be issued without notice and hearing under Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper remedy.

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

While there is no law allowing a STOCK corporation to hold a meeting outside the city or municipality where the principal office is located, NON-STOCK corporations are allowed to provide a provision in its by-laws any place of members’ meeting provided there is proper notice (Sec. 93) 4.

c.

It Must Be Called by the Proper Party

DOMINGO PONCE AND BUHAY L. PONCE, petitioners, vs. DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of Manila, Branch I, and POTENCIANO GAPOL, respondents

d. 5.

The person or persons authorized under the by-laws; Absent any provision in the by-laws, it may be called by the President; By the secretary on order of the president or on written demand of the stockholders representing at least a majority of the outstanding capital stock or majority of the members entitled to vote, or the stockholder or member making the demand if there is no secretary or he refuses to do so, under Sec. 28; and A stockholder as empowered by the proper forum pursuant to Sec. 50

Quorum and Voting Requirement Must Be Met

(GR No. L-5883; Nov. 28, 1953)

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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. A by-law provision may provide for a higher quorum requirement than that prescribed in the Code, but not less. Otherwise, the by-law provision providing for a lesser quorum requirement have no force and effect since a by-law provision is subordinate to the statute and could not defeat the requirements of the law. The same goes for a by-law provision providing for a voting requirement less than that provided in the Code. If the voting requirement is met, any resolution passed in the meeting, even if improperly held or called will be valid if ALL the stockholders or members are present or duly represented thereat, as provided under the last paragraph of Sec. 51:

All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. B.

DIRECTORS’/TRUSTEES’ MEETING

Sec. 53. Regular and special meetings of directors or trustees. Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. REGULAR MEETINGS: those held monthly or as the by-laws may provide; SPECIAL MEETINGS: those that are held at any time upon call of the President or the person authorized to do so as may be provided in the bylaws. PLACE: Unlike the meeting of stockholders, the meetings of directors/trustees may be held anywhere, within or even outside the Philippines, except when the by-laws provide otherwise. NOTICE REQUIREMENT: is necessary for the purpose of determining the legality of and binding effect of the resolution/s passed, EXCEPT: 1. When subsequently ratified; 2. In close corporations where a director may bid the corporation even without a meeting; 3. When the right to a notice is waived. The SEC has ruled that a special meeting conducted in the absence of some of the directors and without any notice to them is illegal and the action at such meeting although by a majority of the directors is invalid, unless ratified. However, if all the directors are present, their presence at the meeting waives the want of notice. PRESIDING OFFICER: Unless the by-laws otherwise provide, the presidnet. Sec. 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. QUORUM: Unless the AOI or by-laws provide for a greater majority, a majority of the members of the BOD/T as fixed in the AOI will constitute a quorum for the transaction of corporate business and the decision of the majority of those present shall be valid as a corporate act. EXCEPT: election

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of corporate officers as provided under Sec. 25 which required the vote of a majority of all the members of the board. PROXY VOTING: is not allowed for a director or trustee, since he was supposedly elected because of his expertise in management or his business acumen such that he is expected to personally attend and vote on matters brought before the meeting. C.

STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING

Being a property right, a stockholder can vote his share the way he pleases except in the following: 1. Non-voting shares are not entitled to vote except in those instances provided in the penultimate paragraph of Sec. 6 of the Code; 2. Treasury shares have no voting rights while they remain in the treasury (Sec. 57); 3. Shares of stock declared delinquent are not entitled to vote at any meeting; and 4. Unregistered transferee of shares of stock. PROXY VOTING: is allowed or through a voting trust agreement, or by the executor, administrator, receiver or other legal representative appointed by the court. PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are entitled to vote in the absence of an agreement to the contrary: Sec. 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. SHARES OWNED BY TWO OR MORE PERSONS JOINTLY: Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. D.

PROXY AND OTHER REPRESENTATIVE VOTING

PROXY: is a species of absentee voting by mail by a one way ballot for the slate or proposals suggested by the management or even perhaps, the solicitor thereof. It is the authority given by the stockholder or member to another to vote for him at a stockholders’ or members’ meeting. The term is also used to refer to the instrument or paper which is evidence of the authority of an agent or the holder thereof to vote for and in behalf of the stockholder or member. Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. PROXY VOTING: is a right granted by law to all stockholders entitled to vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a non-stock corporation with by-laws providing for a prohibition on the use of proxies (Sec. 89). REQUIREMENTS: In the absence of a by-law provision regulating the form and execution of proxy, Sec. 58 requires:

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

1. 2. 3.

The proxy must be in writing; It is signed by the stockholder or member or his duly authorized representative; and It is filed on or before the schedule meeting with the corporate secretary.

It is to be noted, however, that publicly listed companies are requreid to observe and comply with SEC Memorandum Circular No. 5 -1996, TYPES OF PROXIES: 1. General – gives a general discretionary power of attorney to vote for directors and all ordinary matters that my properly come before a meeting. It is not an authority, however, to vote for fundamental changes in the corporate charter or for other unusual transactions, unless so specified; 2. Special – restricts the authority to vote on specified matters only and may direct the manner in which the vote will be cast. DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5 years and for not more than 5 years for each renewal. Otherwise, it expires after the meeting for which it was given. VOTING TRUST: is one created by an agreement between a group of stockholders of a corporation and a trustee, or a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, shall be lodged in the trustee, either with or without reservation to the owners or persons designated by them the power to direct how such control shall be issued. Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors.

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The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. VOTING TRUSTS DISTINGUISHED FROM PROXY VOTING TRUST The beneficial owner of the shares ceased to be stockholder of record of the corporation since the shares are transferred to the trustee Trustee votes as owner of the shares The beneficial owner is disqualified to be a director Purpose is to acquire voting control of the corporation Irrevocable The trustee can act and vote at any meeting during the duration of the VTA Trustee may vote in person or by proxy Duration may exceed five years VTA to be valid and effective, must be notarized and filed with the SEC

PROXY Legal title to the shares remain with the beneficial owner Proxy votes merely as an agent The owner of the shares may be elected as such since legal title thereof remains with him Generally used to secure voting an quorum requirements or merely for the purpose of representing an absent stockholder Revocable anytime unless coupled with an interest Proxy can generally act as such only at a particular meeting Proxy holder must vote in person Proxy is of a shorter duration and may not exceed 5 years Unless required by the by-laws, proxies need not be notarized nor is it required to be filed with the SEC.

READ AGAIN: LEE VS. CA NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO, petitioners, vs. HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents.

(G.R. No. L-34192 June 30, 1988)

PHILIPPINE NATIONAL BANK, petitioner, vs. HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED, respondents

(G.R. No. L-34213 June 30, 1988)

FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a Voting Trust Agreement with petitioner NIDC, in order to assist the former with its financial obligations. The VTA was for a period of 5 years constituting 60% of the outstanding paid-up and subscribed shares of Batjak. 5 years therafter, or on Aug. 31, 1970, Batjak represented by majority stockholders, through Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the atter was still interest in negotiating the renewal of the VTA, but there was no reply even with the second letter sent on Sept. 22, 1970. On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a complete accounting of the assets, properties, management and operation of Batjak, preparatory to their turn-over and transfer to the stockholders of Batjak. NIDC replied that it had no intention to comply with such demand. Batjak filed an action for mandamus with preliminary injunction which was granted. ISSUE: WON Batjak has the personality to enforce the voting trust agreement executed by its stockholders and whether it may compel the trustee to turn over the assets of the corporation?

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HELD: No. In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak's complaint for mandamus is based on its claim or right to recovery of possession of the three (3) oil mills, on the ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that, in the Voting Trust Agreement, the parties thereto were NIDC and certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be prosecuted and defended in the name of the real party in interest. Applying the rule in the present case, the action should have been filed by the stockholders of Batjak, who executed the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a party to said agreement, and therefore, not the real party in interest in the suit to enforce the same. In addition, PNB claims that Batjak has no cause of action and prays that the petition for mandamus be dismissed. A careful reading of the Voting Trust Agreement shows that PNB was really not a party thereto. Hence, mandamus will not lie against PNB. Batjak has no clear right to be entitled to the writ prayed for. What Batjak seeks to recover is title to, or possession of, real property (the three (3) oil mills which really made up the assets of Batjak) but which the records show already belong to NIDC. It is not disputed that the mortgages on the three (3) oil mills were foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate foreclosure sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed to exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From the foregoing, it is evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of mandamus will not issue to give to the applicant anything to which he is not entitled by law. Batjak premises its right to the possession of the three (3) off mills on the Voting Trust Agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets, management and operations of Batjak, that due to the expiration of the Voting Trust Agreement, on 26 October 1970, NIDC should tum over the assets of the three (3) oil mills to Batjak From the foregoing provisions, it is clear that what was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the agreement. The power entrusted to NIDC also included the authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made of any transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. This is confirmed by paragraph No. 9 of the Voting Trust Agreement, thus: 9. TERMINATION — Upon termination of this Agreement as heretofore provided, the certificates delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates, and the duties of the TRUSTEE shall cease and terminate.Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement. In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of the agreement or control over the stock. The law on the matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which provides: Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of confering upon a trustee or trusties the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any one time: ...

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The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak. CHAPTER 10: STOCKS AND STOCKHOLDERS A person may become a stockholder in a corporation in either of three ways: 1. By a contract of subscription with the corporation; 2. By purchase of treasury shares from the corporation; and 3. By purchase or acquisition of shares from existing stockholders. A.

SUBSCRIPTION CONTRACT

A “subscription”, properly speaking, is the mutual agreement of the subscribers to take and pay for the stocks of the corporation. A “subscription contract”, on the other hand is specifically defined in Sec. 60: Sec. 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.

SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a

shareholder only upon full payment of the price. UNISSUE shares cannot be the subject of a “purchase”. “We may add that the law in force in this jurisdiction makes no distinction, in respect to the liability of the subscriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. In what is here said we have reference of course primarily to subscriptions to shares that have not been previously issued. It is conceivable that the power of the corporation to make terms with the purchaser would be greater where the shares which are the subject of the transaction have been acquired by the corporation in course of commerce, after they have already been once issued. But the shares with which are here concerned are not of this sort.” (National Exchange Co., Inc. vs. Dexter)

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

shares with a par value of P1. 500,000 has already been subscribed: 1. Z “purchased” 100,000 of the UNISSUED shares paying 50% down payment and the balance payable after 6 months, with a condition that he will not be considered a shareholder until full payment. – He is still liable for the balance because this will be considered a subscription no matter how the parties refer to it and accordingly, Z is liable as a shareholder therein. 2. Z was declared a delinquent shareholder and X Co. was declared as the winning bidder by paying P100,000 and acquired the delinquent shares. Later on, 20,000 of the shares were sold to Y – here, the shares being from treasury and not from unissued shares, may be the proper subject of a “purchase” and thus, a condition that Y would not became a shareholder until full payment may be valid.

ORAL: A subscription contract need not be in writing such that an oral

contract of subscription is valid and enforceable under the Statute of Frauds. Thus, it was ruled by the SC that such an agreement does not seem to fall within the definition of a sale under our substantive law, and is therefore believed that an oral subscription agreement as distinguished from sale of stock is valid and enforceable.

CONDITION: Subscriptions may be made upon a condition precedent or

upon special terms (condition subsequent). A conditional subscription, or one made upon a condition precedent, does not make the subscriber a stockholder, or render him to pay the amount of his subscription, until performance of the condition. A subscription upon special terms, on the other hand, is an absolut subscription, making the subscriber a stockholder, and rendering him liable as such, as soon as the subscription is accepted, the special term being an independent stipulation.

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In case of doubt in the intention of the parties, a subscription should be considered as an absolute subscription upon special terms, rather than conditional. The policy of giving protection to creditors and other subscribers has led to the adoption of this rule of construction favoring the immediate liability of the subscriber.

Conditional Subscriptions are valid provided: (1) there is nothing in the charter or enabling act prohibiting the same; and (2) providing the conditions are not such as to render their performance beyond the powers of the corporation or in violation of law or contrary to public policy. NAZARIO TRILLANA, administrator-appellee, vs. QUEZON COLLEGE, INC., claimant-appellant

(GR No. L-5003; June 27, 1953)

FACTS: Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon College: June 1, 1948 The BOARD OF TRUSTEES Quezon College Manila Gentlemen: Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable in accordance with law and the rules and regulations of the Quezon College. I hereby agree to shoulder the expenses connected with said shares of stock. I further submit myself to all lawful demands, decisions or directives of the Board of Trustees of the Quezon College and all its duly constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman). Very respectfully, (Sgd.) DAMASA CRISOSTOMO Signature of subscriber Nilagdaan sa aming harapan: JOSE CRISOSTOMO EDUARDO CRISOSTOMO On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions appear to have been made, herein appellant filed a claim in her testate proceedings for P20,000 which was opposed by the administrator, and dismissed by the CFI. ISSUE: WON the subscription is valid and enfroceable? HELD: No. It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was written on a general form indicating that an applicant will enclose an amount as initial payment and will pay the balance in accordance with law and the regulations of the College. On the other hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be entered) not only did not enclose any initial payment but stated that "babayaran kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the record to show that the Quezon College, Inc. accepted the term of payment suggested by Damasa Crisostomo, or that if there was any acceptance the same came to her knowledge during her lifetime. As the application of Damasa Crisostomo is obviously at variance with the terms evidenced in the form letter issued by the Quezon College, Inc., there was absolute necessity on the part of the College to express its agreement to Damasa's offer in order to bind the latter. Conversely, said acceptance was essential, because it would be unfair to immediately obligate the Quezon College, Inc. under Damasa's promise to pay the price of the subscription after she had caused fish to be caught. In other words, the relation between Damasa Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage

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whereby the latter offered its stock for subscription on the terms stated in the form letter, and Damasa applied for subscription fixing her own plan of payment, — a relation, in the absence as in the present case of acceptance by the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had not ripened into an enforceable contract. Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription after she has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, rendering the obligation void, under article 1115 of the old Civil Code which provides as follows: "If the fulfillment of the condition should depend upon the exclusive will of the debtor, the conditional obligation shall be void. If it should depend upon chance, or upon the will of a third person, the obligation shall produce all its effects in accordance with the provisions of this code." It cannot be argued that the condition solely is void, because it would have served to create the obligation to pay, unlike a case, exemplified by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition was held void because it referred merely to the fulfillment of an already existing indebtedness. In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already held that "a condition, facultative as to the debtor, is obnoxious to the first sentence contained in article 1115 and renders the whole obligation void." B.

PRE-INCORPORATION SUBSCRIPTION

Pre-incorporation subscriptions make reference to subscriptions for shares of stock of a corporation still to be formed while post-incorporation subscriptions are those made or executed after the formation or organization of the corporation. Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of 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 unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

IMMEDIATE BINDING EFFECT: This new provision gives an immediate

binding effect on pre-incorporation subscriptions as against the subscribers of the capital stock of a corporation still to be formed. Pre-incorporation subscriptions are, in fact, mandatory as may be culled from the provisions of Sec. 13 and 14 of the Code which mandates that a corporation may be registered as such only if at least 25% of its authorized capital stock has been subscribed and that at least 25% of the subscribed capital has been paid.

IRREVOCABLE: Pre-incorporation subscriptions are irrevocable: 1.

2.

For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent to the revocation; or (b) the incorporation fails to materialize within said period or within a longer period as may stipulated in the contract of subscription; and After submission of the AOI to the SEC.

C.

STOCK ISSUANCE

Stock issuance is generally the initial and primary source of corporate capital. Other sources may include corporate borrowings, loans and advances from creditors or stockholders. Corporate earnings may also be a source of corporate funds if it is reinvested or ploughed back to the company. Sec. 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation;

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2. 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; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

RECLASSIFICATION: Sec. 62(6) which provides that “outstanding shares

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission.

THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B. DEXTER, defendant-appellant

Shares of stock shall not be issued in exchange for promissory notes or future service.

FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written subscription to the corporate stock of C. S. Salmon & Co. in the following form:

The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

“ISSUE”: is generally employed to indicate the making of a share contract or

contract of subscription, that is, transaction by which a person becomes the owner of shares and by which new share contracts are created. It is often associated with the execution and delivery of a share certificate but the issuance of the shares is not dependent on the delivery of a certificate of stock.

“PAR” or “ISSUED PRICE”: while it may not reflect the true value of the

shares which constantly fluctuates, merely indicates the amount which the original subscribers are supposed to contribute to the corporate capital as the basis of the privilege of profit sharing with limited liability.

PROPERTY: If shares are issued in exchange for property, the value of such

should at least be equal to the par or issued value of the stocks. Such value, may be determined with reference to a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) BIR Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax Declaration. b. INTANGIBLE PROPERTY – as determined by the incorporators or the BOD subject to the approval of the SEC.

TRUE VALUE RULE: the motives and intent of those making the valuation

are disregarded and the sole and decisive factor or question is whether or not the property or services are in fact worth the value placed on them.

GOOD FAITH RULE: is based on the proposition that the value of the

property or services is a matter about which there can be an honest difference of opinion. Therefore, if the parties have acted in good faith without fraud or intentional over-valuation, the transaction cannot be overturned even if it later becomes evident that the property or services were in fact worth much less than the value fixed on them initially. Most jurisdiction follow the GOOD FAITH rule.

STOCK DIVIDENDS: Sec. 62(5) which states that “amounts transferred from unrestricted retained earnings to stated capital” refer to stock dividends where corporate earnings are capitalized rather than being distributed as cash dividend. It merely converts income into capital, the consideration being the retained earnings itself which would have accrued to the stockholders in proportion to their respective stockholdings.

NO CONSIDERATION: stocks may not be issued without consideration for

the following reasons: (1) it is discriminatory against other stockholders; and (2) it prejudices the rights of creditors under the Trust Fund Doctrine.

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exchanged for stocks in the event of reclassification or conversion” speaks of shares of stock surrendered to the corporation in exchange for new or different type of shares. Example: Found Shares which, after 5 years, may be converted to common stocks.

PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in

exchange for (1) promissory notes; or (2) future services – as their realization are not certain.

(GR No. L-27872; Feb. 25, 1928)

I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon and Company, payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid Upon subscription, defendant Dexter paid P15,000 from the dividends declared by the company and supplemented by money supplied personally be the subscriber. No other payment was made. ISSUE: WON the subscription to be paid out of the dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares? HELD: No. Under the American regime corporate franchises in the Philippine Islands are granted subject to the provisions of section 74 of the Organic Act of July 1, 1902, which, in the part here material, is substantially reproduced in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is among other things, declared: "That all franchises, privileges, or concessions granted under this Act shall forbid the issue of stock or bonds except in exchange for actual cash or for property at a fair valuation equal to the par value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.) Pursuant to this provision we find that the Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following provision: ". . . no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.) The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full equivalent in property is thus enshrined in both the organic and statutory law of the Philippine Islands; and it would seem that our lawmakers could scarcely have chosen language more directly suited to secure absolute equality stockholders with respect to their liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as that now under consideration, in a stock subscription, is illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is a discrimination in favor of the particular subscriber, and hence the stipulation is unlawful. The general doctrine of corporation law is in conformity with this conclusion, as may be seen from the following proposition taken from the standard encyclopedia treatise, Corpus Juris: Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers or stockholders by subjecting the particular subcriber to lighter burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the corporation by withdrawing or

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decreasing the capital. It is well settled therefore, as a general rule, that an agreement between a corporation and a particular subscriber, by which the subscription is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that the stock is really greater than it is, or for the purpose of preventing the predominance of certain stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription. (14 C. J., p. 570.) The rule thus stated is supported by a long line of decisions from numerous courts, with little or no diversity of opinion. As stated in the headnote to the opinion of the Supreme Court of United States in the case of Putnan vs. New Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that "Conditions attached to subscriptions, which, if valid, lessen the capital of the company, are a fraud upon the grantor of the franchise, and upon those who may become creditors of the corporation, and upon unconditional stockholders." In the appellant's brief attention is called to the third headnote to Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral agreement with a subscriber to stock that his subscription shall not be collectible except from dividends on the stock, is valid as between the parties and a complete defense to a suit on notes given for the amount of the subscription. A careful perusal of the decision will show that the rule thus broadly stated in the headnote is not justified by anything in the reported decision; for what the court really held was that the making of such promise by the agent of the corporation who sold the stock is admissible in evidence in support of the defense of fraud and failure of consideration. Moreover, even if the decision had been to the effect supposed, the rule announced in the headnote, could have no weight in a jurisdiction like this where there is a statutory provision prohibiting such agreements. D.

CERTIFICATE OF STOCK AND THEIR TRANSFER

Share of Stock: may rightfully be described as a profit sharing contract, a

series of units of interest and participation in a corporation in consideration of a proportionate right to participate in dividend and other distributions. They are personal properties and the owners thereof have the unbridled right to transfer the same to anyone they please subject only to reasonable charter provisions.

Certificate of Stock: is the piece of paper or document which evidences

the ownership of shares and a convenient instrument in the transfer of the title. Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock 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 by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or 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. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK: 1. 2. 3.

It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary; It must be sealed with the corporate seal, and The entire value thereof (together with the interest or expenses, if any) should have been paid.

RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares

of stock cannot be entitled to the issuance of a certificate of stock until the full amount of his subscription together with interest and expenses (in case of

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delinquent shares) if any is due, has been paid, a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the corresponding liability that attach thereunder: Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. In essence, the issuance of a certificate of stock is not a condition sine qua non to consider a subscriber a stockholder. To all intents and purposes, a subscriber is a shareholder upon subscription and entitled to the all the rights as such, except: 1. For the issuance of a certificate of stock; 2. If his shares are declared delinquent; or 3. When he exercises appraisal right under Sec. 83.

NEGOTIABILITY: A certificate of stock is not regarded as “negotiable” in

the sense same sense as a bill or a not, even if its endorsed in blank. Thus, while it may be transferred by endorsement coupled with delivery thereof, it is nonetheless non-negotiable in that the transferee takes it without prejudice to all the rights and defenses which the true and lawful owner may have except in so far as the principles governing estoppel may apply.

NON-REGISTRATION: of shares disposed of by the holder will not affect

the validity of the transfer at least in so far as the contracting parties are concerned. As regards, the corporation, the transferee will not be recognized as such stockholder and could not exercise the rights until the transfer has been duly recorded in the stock and transfer book. As such, “he cannot vote or be vote for, and he will not be entitled to dividends. The corporation may be protected when it pays dividends to the registered owner despite a previous transfer of which it had no knowledge. The purpose of registration therefore is two-fold: (1) to enable the transferee to exercise all the rights of stockholder, and (2) to inform the corporation of any change in share ownership so that it can ascertain the person entitled to the rights and subject to the liabilities of a corporation” (De Erquiga vs. CA)

REGISTRATION: is necessary to: 1. 2. 3. 4. 5.

Enable the corporation to know who its stockholders are; Enable the transferee to exercise his rights as a stockholder; Afford the corporation an opportunity to object or refuse registration of the transfer in cases allowed by law (as when it has unpaid claims on the shares transferred); Avoid fictitious and fraudulent transfers; and Protect creditors who have the right to look upon stockholders, in case of non-payment or watered shares, for the satisfaction of their claims.

MANDAMUS: If the corporate secretary refuses to registered or record the

transfer, mandamus will lie to compel the registration. This is because such duty is ministerial. HOWEVER, he cannot be compelled to do so when the transferee’s title to said shares has no prima facie validity or is uncertain.

TWO MODES OF TRANSFERRING STOCKS: 1. 2.

Endorsement and delivery of certificate of stock; Notarized deed.

The SEC has, however, ruled that when a corporation has already issued stock certificates, any transfer of the shares can only be effectively made by endorsement and delivery of the stock certificate. A deed of transfer, sale or assignment alone would not suffice (as affirmed by the SC in Rural Bank of Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent or fictitious transfer which the SEC seeks to avoid. In effect, while a formal contract of sale in a notarized document is equivalent to actual delivery of the certificate itself, this mode of transfer is available only if no certificate of stock has been issued.

RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Fleischer vs. Botica Nolasco, the SC held that every owner of corporate shares has the same uncontrollable right to alienate them and is under no obligation from selling them at his sacrifice and for the welfare and benefit of the corporation and other stockholders. But while unreasonable restrictions may not be allowed, the right to transfer may be “regulated” to give the corporation protection against colorable or fraudulent transfer or to enable it to know

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who its stockholders are. Also, as a matter of policy, the SEC allows the grant of “preferential rights” to existing stockholders and/or the corporation, giving them the first option to purchase the shares of a selling stockholder within a reasonable period not exceeding thirty days provided that the same is contained in the AOI and in all the stock certificates to be issued. This is considered “reasonable” since it merely suspends the right to transfer within the period specified.

OTHER RESTRICTIONS: 1. 2.

3. 4. 5. 6.

It is not valid, except as between the parties, until recorded in the books of the corporation; Shares of stock against which the corporation holds any unpaid claim shall not be transferrable in the books of the corporation. Unpaid claims, refer to claims arising from unpaid subscription and not to any indebtedness which a stockholder may owe the corporation such as monthly dues; Restrictions required to be indicated in the AOI, bylaws and stock certificates of a close corporation; Restrictions imposed by special law, such as the Public Service Act requiring the approval of the government agency concerned if it will vest unto the transferee 40% of the capital of the public service company; Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws; and Those covered by reasonable agreement of the parties.

TRANSFER: as used in the Corporation Code, refers to absolute and unconditional transfer to warrant registration in the books of the corporation in order to bind the latter and other third persons. ENRIQUE MONSERRAT, plaintiff-appellee, vs. CARLOS G. CERON, ET AL., defendants. ERMA, INC., and, THE SHERIFF OF MANILA, respondents

(G.R. No. 37078; September 27, 1933)

FACTS: Enrique Monserrat, president and manager of the Manila Yellow Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his 1,200 shares in consideration of the interest shown and the financial aid extended him (Monserrat) in the organization of the corporation. This assignment allowed Ceron to derive the right to enjoy the profits (during his lifetim) that may be derived from the shares but prohibited him from acts of absolute ownership, such acts and the right to vote, reserved to Monserrat and his heirs. Such assignment was recorded in the books of the corporation and the corresponding shares certificate was issued to Ceron.

No share of stock against which the corporation hold, any unpaid claim shall be transferable on the books of the corporation. The legal provision just quoted does not require any entry except of transfers of shares of stock in order that such transfers may be valid as against third persons. Now, what did the Legislature mean in using the word "transfer"? Inasmuch as it does not appear from the text of the Corporation Law that an attempt was made to give a special signification to the word "transfer", we shall construe it according to its accepted meaning in ordinary parlance. The word "transferencia" (transfer) is defined by the "Diccionario de la Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act and effect of transferring); and the verb "transferir", as "ceder o renunciar en otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de ella" (to assign or waive the right in, or absolute ownership of, a thing in favor of another, making him the owner thereof). In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589, the word "transfer" is defined as follows: "Transfer" means any act by which property of one person is vested in another, and "transfer of shares", as used in Uniform Stock Transfer Act (Comp. St. Supp., 690), implies any means whereby one may be divested of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136 A., 209, 210.)" In view of the definitions cited above, the question arises as to whether or not a mortgage constituted on certain shares of stock in accordance with Act No. 1508, as amended by Act No. 2496, is a transfer of such shares in the abovementioned sense. Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496, defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows: SEC. 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be avoided upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgage is hereby divested of his title.

Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute, the latter without knowledge of the existence of the assignment. Due to nonpayment, Matute foreclosed the mortgage and the shares were sold at a public auction.

According to the legal provision just quoted, although a chattel mortgage, accompanied by delivery of the mortgaged thing, transfers the title and ownership thereof to the mortgage creditor, such transfer is not absolute but constitutes a mere security for the payment of the mortgage debt, the transfer in question becoming null and void from the time the mortgage debtor complies with his obligation to pay his debt.

Monserrat claims ownership over the shares and the lower court rendered judgment in his favor, holding that the mortgage on the shares was null and void, but the mortgage on the usufruct is valid.

In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; 34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second series, vol. 4, p. 978, the following appears:

ISSUE: WON it is necessary to enter upon the books of the corporation a mortgage constituted on shares of stock in order that such mortgage may be valid and may have force and effect as against third persons?

A "transfer" is the act by which owner of a thing delivers it to another with the intent of passing the rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such term.

HELD: No. Section 35 of the Corporation Law provides the following: SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, counter signed by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer the number of the certificate, and the number of shares transferred.

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Therefore, the chattel mortgage is not the transfer referred to in section 35 of Act No. 1459 commonly known as the Corporation law, which transfer should be entered and noted upon the books of a corporation in order to be valid, and which, as has already been said, means the absolute and unconditional conveyance of the title and ownership of a share of stock. If, in accordance with said section 35 of the Corporation Law, only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the books of the corporation in order that such transfer may be valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of the dominion and ownership thereof, its entry

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

and notation upon the books of the corporation is not necessary requisite to its validity.

mortgagor resides the mortgage shall be recorded both in the province of the mortgagor's residence and in the province where the property is situated.

It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional purchaser of the shares of stock in question given as security for the payment of his credit, acquired in good faith Carlos G. Ceron's right and title to the 600 common shares of stock evidenced by certificate No. 7 of the MYTC, and as such conditional purchaser in good faith, it is entitled to the protection of the law.

If with respect to a chattel mortgage of shares of stock of a corporation, registration in the province of the owner's domicile should be sufficient, those who lend on such security would be confronted with the practical difficulty of being compelled not only to search the records of every province in which the mortgagor might have been domiciled but also every province in which a chattel mortgage by any former owner of such shares might be registered. We cannot think that it was the intention of the legislature to put this almost prohibitive impediment upon the hypothecation of shares of stock in view of the great volume of business that is done on the faith of the pledge of shares of stock as collateral.

In view of the foregoing considerations, we are of the opinion and so hold that, inasmuch as section 35 of the Corporation Law does not require the notation upon the books of a corporation of transactions relating to its shares, except the transfer of possession and ownership thereof, as a necessary requisite to the validity of such transfer, the notation upon the aforesaid books of the corporation, of a chattel mortgage constituted on the shares of stock in question is not necessary to its validity. GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, as president, secretary and treasurer respectively of the same, defendants-appellees

(G.R. No. L-42091; November 2, 1935)

FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his shares to Chua Chiu, such assignment recorded in the Office of the Register of Deeds and the books of the corporation. For non-payment, the mortgage was foreclosed and the shares were sold at a public auction with plaintiff Chua Guan as the highest bidder. The Company refused to cancel the certificates of stock and issue new ones to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine attachments had been issued and served and noted on the books of the corporation. Thus, a prayer for a writ of mandamus. The validity of the assignments and the mortgage is not in question. ISSUE: WON the registration of the mortgage in the registry of chattel mortgage in the office of the register of deeds give constructive notice to the said attaching creditors and thus gave preference to the mortgage over the other debts? HELD: No. In passing, let it be noted that the registration of the said chattel mortgage in the office of the corporation was not necessary and had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to whether or not shares of a corporation could be hypothecated by placing a chattel mortgage on the certificate representing such shares we now regard as settled by the case of Monserrat vs. Ceron, supra. But that case did not deal with any question relating to the registration of such a mortgage or the effect of such registration. Nothing appears in the record of that case even tending to show that the chattel mortgage there involved was ever registered anywhere except in the office of the corporation, and there was no question involved there as to the right of priority among conflicting claims of creditors of the owner of the shares Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall be effective against third persons. First, the possession of the property mortgage must be delivered to and retained by the mortgagee; and, second, without such delivery the mortgage must be recorded in the proper office or offices of the register or registers of deeds. If a chattel mortgage of shares of stock of a corporation may validly be made without the delivery of possession of the property to the mortgagee and the mere registration of the mortgage is sufficient to constructive notice to third parties, we are confronted with the question as to the proper place of registration of such a mortgage. Section 4 provides that in such a case the mortgage resides at the time of making the same or, if he is a non-resident, in the province in which the property is situated; and it also provides that if the property is situated in a different province from that in which the

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It is a common but not accurate generalization that the situs of shares of stock is at the domicile of the owner. The term situs is not one of fixed of invariable meaning or usage. Nor should we lose sight of the difference between the situs of the shares and the situs of the certificates of shares. The situs of shares of stock for some purposes may be at the domicile of the owner and for others at the domicile of the corporation; and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive. (Fletcher, Cyclopedia of the Law of Private Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450, Code of Civil Procedure.) By analogy with the foregoing and considering the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, it seems to us a reasonable construction of section 4 of Act No. 1508 to hold that the property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. If this province is also the province of the owner's domicile, a single registration sufficient. If not, the chattel mortgage should be registered both at the owner's domicile and in the province where the corporation has its principal office or place of business. In this sense the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. In view of the premises, the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant and the judgment appealed from must be affirmed without special pronouncement as to costs in this instance. TORIBIA USON, plaintiff-appellee, vs. VICENTE DIOSOMITO, ET AL., defendants. VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH ELECTRIC COMPANY, INC., appellants.

(G.R. No. L-42135; June 17, 1935)

FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment was levied on Jan. 18, 1932 upon the property of defendant Vicente Diosmomito including the question 75 shares of North Electric Company, Inc.. On March 20, 1933, the said shares were sold at a public auction to satisfy the claim of Uson. In the present action, appellant HPL Jollye claims ownership of said shares. Apparently, these shares were sold by Diosomito to Emetertio Barcelon on Feb. 3, 1931 but the certificates were cancelled and a new one issued only on Sep. 16, 1932. Later on, the same shares were sold to Jollye and registered in the books on Feb. 13, 1933. ISSUE: WON a bona fide transfer of the shares of a corporation, not registered or noted on the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not? HELD: Section 35 of the Corporation Law is as follows:

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SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred We prefer to adopt the line followed by the Supreme Courts of Massachusetts and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had under consideration a statute identical with our own section 35, supra, and the court said: We think the true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. To us the language of the legislature is plain to the effect that the right of the owner of the shares of stock of a Philippine corporation to transfer the same by delivery of the certificate, whether it be regarded as statutory on common law right, is limited and restricted by the express provision that "no transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation." Therefore, the transfer of the 75 shares in the North Electric Company, Inc., made by the defendant Diosomito to the defendant Barcelon was not valid as to the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date on which she obtained her attachment lien on said shares of stock which still stood in the name of Diosomito on the books of the corporation. CYRUS PADGETT, plaintiff-appellee, vs. BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendantsappellants

(G.R. No. L-38684; December 21, 1933)

FACTS: The appellee was an employee of the appellant corporation and rendered services as such from January 1, 1923, to April 15, 1929. During that period he bought 35 shares thereof at P100 a share at the suggestion of the president of said corporation. He was also the recipient of 9 shares by way of bonus during Christmas seasons. In this way the said appellee became the owner of 44 shares for which the 12 certificates, Exhibits F to F11, were issued in his favor. The word "nontransferable" appears on each and every one of these certificates. Before severing his connections with the said corporation, the appellee proposed to the president that the said corporation buy his 44 shares at par value plus the interest thereon, or that he be authorized to sell them to other persons. The corporation bought similar shares belonging to other employees, at par value. Sometime later, the said president offered to buy the appellee's shares first at P85 each and then at P80. The appellee did not agree thereto. ISSUE: WON the restriction imposed on the right to transfer the shares is valid? HELD: No. The opinion seems to be unanimous that a restriction imposed upon a certificate of shares, similar to the ones under consideration, is null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade.

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Shares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to do so is properly restricted, or the owner's privilege of disposing of his shares has been hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.) Any restriction on a stockholder's right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser. (Ibid., sec. 1035, pp. 665, 666.) In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have discussed the validity of a clause in the by-laws of the defendant corporation, which provided that, under the same conditions, the owner of a share of stock could not sell it to another person except to the defendant corporation. In deciding the legality and validity of said restriction, we held: The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459. This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meetings of stockholders, and for other purposes. But any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. (Id., p. 592.) It is obvious, therefore, that the restriction consisting in the word "nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is illegal and should be eliminated. ISSUE2: WON the corporation may be compelled to buy the shares of a selling stockholder? HELD: No. There is no existing law nor authority in support of the plaintiff's claim to the effect that the defendants are obliged to buy his shares of stock value at par value, plus the interest demanded thereon. In this respect, we hold that there has been no such contract, either express or implied, between the plaintiff and the defendants. In the absence of a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude that it would be unjust and unreasonable to compel the said defendants to comply with a non-existent or imaginary obligation. Whereupon, we are likewise compelled to conclude that the judgment originally rendered to that effect is untenable and should be set aside LEON J. LAMBERT, plaintiff-appellant, vs. T. J. FOX, defendant-appellee

(G.R. No. L-7991; January 29, 1914)

FACTS: Defendant and plaintiff, became two of the largest shareholders of John R. Edgar & Co., Inc. was incorporated. They were former creditors who agreed to aid the financially distressed predecessor John R. Edgar & Co.. They entered into an agreement a few days after incorporation as follows: Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar and Co, Inc; and, Whereas it is recognized that the success of said corporation depends, now and for at least one year next following, in the larger stockholders retaining their respective interests in the business of said corporation: Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date hereof.

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Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained. Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc. A complaint was filed and the trial court decided in favor of defendant. ISSUE: WON the stipulation in the contract is valid? HELD: Yes. It is urged by the appellee in this case that the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. We do not so regard it. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid. EMBASSY FARMS, INC., petitioner, vs. HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON. ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B. EVANGELISTA, respondents

(G.R. No. 80682 August 13, 1990)

FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a Memorandum of Agreement (MOA) with the following obligations: 



EVANGELISTA: 1. To transfer to Asuncion 19 parcels of agricultural land registered in his name, together with the stocks, equipment and facilities of Embassy Farms, Inc. wherein 90% of the shares of stock is owned by Evangelista; 2. To cede, transfer and convey “in a manner absolute and irrevocable any and all of his shares of stocks” in Embassy Farms, Inc. to Asuncion or his nominees “until the total of said shares of stock so transferred shall constitute 90% of the paid-in equity of said corporation” within a reasonable time from signing the document. ASUNCION: 1. To pay Evangelista P8,630,999; 2. To organize and register a new corporation with an authorized capital stock of P10M which upon registration will take over all the rights and liabilities of Asuncion.

Effective control and management of the piggery at Embassy Farms, Inc. was transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In accordance with clause 15, Evangelista served as President and Chief Executive of Embassy Farms. Evangelista also endorsed in blank all his shares of stock including that of his wife and three nominees with minor holdings but retained possession of said shares and opted to deliver to Asuncion only upon full compliance of the latter of his obligations under the MOA. For failure to comply with his obligations, Evangelista intimated the institution of the appropriate legal action. But Asuncion eventually filed for the rescission of the MOA. ISSUE: WON Evangelista has a better right to the shares and control of the corporate affairs? HELD: Yes. From the pleadings submitted by the parties it is clear that although Evangelista has indorsed in blank the shares outstanding in his

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name he has not delivered the certificate of stocks to Asuncion because the latter has not fully complied with his obligations under the MOA. There being no delivery of the indorsed shares of stock Asuncion cannot therefore effectively transfer to other person or his nominees the undelivered shares of stock. For an effective transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferree of the certificate properly indorsed. Title may be vested in the transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines). In the case at bar the indorsed certificate of stock was not actually delivered to Asuncion so that Evangelista is still the controlling stockholder of Embassy Farms despite the execution of the memorandum of agreement and the turnover of control and management of the Embassy Farms to Asuncion on August 2, 1984. When Asuncion filed on April 10, 1986 an action for the rescission of contracts with damages, the Pasig Court merely restored and established the status quo prior to the execution of the MOA by the issuance of a restraining order on July 10, 1987 and the writ of preliminary injunction on July 30, 1987. It would be unjust and unfair to allow Asuncion and his nominees to control and manage the Embassy Farms despite the fact that Asuncion, who is the source of their supposed shares of stock in the corporation, is not asking for the delivery of the indorsed certificate of stock but for the rescission of the MOA. Rescission would result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow Evangelista to manage the farm. Compared to Asuncion or his nominees Evangelista would be more interested in the preservation of the assets, equipment and facilities of Embassy Farms during the pendency of the main case. ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN, respondents.

(G.R. No. 74306 March 16, 1992)

VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON, INC., respondents

(G.R. No. 74315 March 16, 1992)

FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962. However, it began operations only in 1966 since the other incorporators withdrew from the said corporation. The petitioner then distributed the stocks previously placed in the names of the withdrawing nominal incorporators to some friends, among them the late Juan T. Chuidian to whom he gave 1,500 shares. The shares of stocks were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same Chuidian delivered to petitioner the stock certificate in 1966, and since then petitioner had in his possession such certificate, until the time, he delivered it for deposit with PBCom under the parties’ joint custody pursuant to their agreement embodied in the trial court’s order. ISSUE: WON petitioner Razon is the rightful owner of the shares? HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

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. . . For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the Corporation Law) In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was elected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. (See Section 30, Corporation Code) From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in accordance with the provisions of law. The petitioner failed in both instances. The petitioner did not present any bylaws which could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to the instant case. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian cannot overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Moreover, the preponderance of evidence supports the appellate court's factual findings that the shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal affairs of the corporation. We give credence to the testimony of the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. Petitioner Razon failed to overcome this testimony. RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS, petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR., respondents

(G.R. No. 96674 June 26, 1992)

FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the dispositions.

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Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-inFact, executed the following assignments of shares of stocks: Luz Andico (457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5 shares); and Francisco Guerrero, Sr. (1 share). The last share was transferred 2 months before the death of Clemente. Subsequently, Melania Guerrero presented the Deeds of Assignments and requested for the cancellation of the certificates of stock and new ones to be issued in the name of transferees. However, petitioner Bank refused. Melania Guerrero filed for an action for mandamus with the SEC. Maripol Guerrero, a legally adopted daughter of Melania and Clemente filed for intervention claiming that two weeks before filing the action for mandamus, a petition for the administration of the estate of Celemente has been filed and that the deeds of assignment were fictitious and antedated. SEC denied the motion for intervention. Maripol filed a complaint before the CFI for the annulment of the Deeds of Assignment. Later on, the SEC rendered a decision granting the action for mandamus which was affirmed by the SEC en banc and still later, by the CA. ISSUE: WON the mandamus was properly granted for the registration of the transfer of the 473 shares in question? HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit: Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or 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 . . . In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise: Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. . . . The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred, which is absent here. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because: . . . Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. Nolasco, Supra). The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus: Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of

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the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47 Phil. 583, 594). The corporation's obligation to register is ministerial. In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. (Fletcher, Sec. 5528, page 434). The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause, it may be compelled to do so by mandamus. (See. 5518, 12 Fletcher 394) For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the Decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question. LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents

(G.R. No. 126891; August 5, 1998)

FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso Lim, each executed a contract of pledge covering their respective 300 shares in favor of petitioner Lim Tay where they indorsed in blank and delivered their shares of stock to Tay. For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against Go Fay & Compny, Inc. to cancel the old certificates and issue a new one in his name, which was granted by the SEC but reversed by the CA. ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas case will apply? HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.

ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock

in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the corporate secretary, Norberto Braga, refused to record the transfer of the shares in the corporate books and instead asked for the annulment of the sale, claiming that he and his wife had a pre-emptive right over some of the shares, and that his wife's shares were sold without consideration or consent. At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby demonstrating that Telectronic Systems, Inc. was already the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, at the time the Bragas questioned the validity of the tranfers made by the Abejos, Telectronic Systems, Inc. was already a prima facie shareholder of the corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature. Hence, the Court held that "the issue is not on ownership of shares but rather the non-performance by the corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary." Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged. Further, whether prescription effectively transferred ownership of the shares, whether there was a novation of the contracts of

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pledge, and whether laches had set in were difficult legal issues, which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him. In Rural Bank of Salinas: Melenia Guerrero executed deeds of assignment for the shares in favor of the respondents in that case. When the corporate secretary refused to register the transfer, an action for mandamus was instituted. Subsequently, a motion for intervention was filed, seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in fact donations because the considerations therefor were below the book value of the shares. Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie shareholders when the deeds of assignment were questioned. If the said deeds were to be annulled later on, respondents would still be considered shareholders of the corporation from the time of the assignment until the annulment of such contracts. ISSUE2: WON petitioner is entitled to the relief of mandamus as against the company? HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent corporation to have the shares transferred to his name in the corporate books, to issue new certificates of stock and to deliver the corresponding dividends to him. In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required. It neither confers powers nor imposes duties and is never issued in doubtful cases. It is simply a command to exercise a power already possessed and to perform a duty already imposed. In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established. ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares automatically passed to Lim Tay? HELD: No. On appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not agree. At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states: “The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim.” Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of clarity: “3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice

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to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided;” There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code: “Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.” RICARDO A. NAVA, petitioner-appellant. vs. PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI, respondents-appellees

(G.R. No. L-28120; November 25, 1976)

FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid 25% of the subscription. No certificate of stock was issued to him. Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of P100, or P2,000. Nava requested herein private respondents, officers of Peers Marketing Corporation, to register him as owner of the shares, but they refused, Po being delinquent in the payment of the balance due his subscription. Po filed an action for mandamus in the CFI of Negros but it was dismissed. Po claims that the trial court erred in applying the ruling in Fua Cun vs. Summers and China Banking Corporation wherein it was ruled that the payment of one-half of the subscription does not entitle the subscriber to a certificate for one-half of the number of shares subscribed. ISSUE: WON Peers Marketing Corporation may be compelled by mandamus to enter in its stock and transfer book the sale made by Po to Nava of the 20 shares forming part of Po’s subscription of 80 shares, it being admitted that the corporation has an unpaid claim of P6,000 as the balance on said subscription? HELD: No. We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law. As a rule, the shares which may be alienated are those which are covered by certificates of stock, as shown in the following provisions of the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and Hodges vs. Lezama, 14 SCRA 1030). SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.

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SEC. 36. (re voting trust agreement) ... The certificates of stock so transferred shall be surrendered and cancelled, and new certificates therefor issued to such person or persons, or corporation, as such trustee or trustees, in which new certificates it shall appear that they are issued pursuant to said agreement. xxx xxx xxx As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance with the mode of transfer prescribed by law (18 C.J.S. 930). The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138, 143-4). That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746). A corporation cannot release an original subscriber from paying for his shares without a valuable consideration (Philippine National Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders (Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404). Under the facts of this case, there is no clear legal duty on the part of the officers of the corporation to register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus As already stressed, in this case no stock certificate was issued to Po. Without stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction (Davis vs. Wachter, 140 So. 361). The delivery of the stock certificate, which represents the shares to be alienated , is essential for the protection of both the corporation and its stockholders (Smallwood vs. Moretti, 128 So. 2d 628). THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA USI, respondents

(G.R. No. 124535; September 28, 2001)

FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural Bank of Lipa City, Inc. executed a Deed of Assignment wherein he assigned his shares, as well as those of eight stockholders under his control with a

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total of 10,457 shares, in favor of stockholders of the Bank represented by its BOD. At the same time, He and his wife executed an agreement wherein he acknowledge their indebtedness of P4M and stipulated that the said debt will be paid out of the proceeds of the sale of their real property described in the agreement.

status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in question is resolved with finality.

The Villanueva spouses failed to settle their obligation on the due date, and the BOD sent a demand letter for the surrender of the said shares and for the delivery of sufficient collateral to cover the balance of the debt, which the Villanueva spouses ignored. Their shares were converted into Treasury shares.

There being no showing that any of the requisites mandated by law was complied with, the SEC Hearing Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding the SEC en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of the instant petition for review.

The Villanueva spouses questioned the legality of the such conversion and filed with the SEC a petition for annulment of the stockholders’ meeting and election of directors and officers because they were not notified of such meeting. The SEC hearing officer dismissed the application for issuance of a preliminary injunction, but was granted on reconsideration. The decision was affirmed by the SEC en banc and later by the CA. ISSUE: WON the transfer of the shares is ineffective for non-indorsement and non-delivery of the certificate of stocks? HELD: Yes. The Corporation Code specifically provides: SECTION 63. Certificate of stock and transfer of shares. — The capital stock of stock 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 by-laws. Shares of

stocks so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-infact or 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 so as to show 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. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Emphasis ours) Petitioners argue that by virtue of the Deed of Assignment, private respondents had relinquished to them any and all rights they may have had as stockholders of the Bank. While it may be true that there was an assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock certificate: (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of the corporation. As it is, compliance with any of these requisites has not been clearly and sufficiently shown. It may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. While the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the

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ALFONSO S. TAN, Petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and PATRICIA AGUILAR, Respondents

(G.R. No. 95696; March 3, 1992)

FACTS: With the withdrawal of two of the original incorporators, petitioner Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No. 2) to his brother Angel S. Tan, private respondent. Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the president and member of the board. With the cancellation of Certificate of stock No. 2 and the subsequent issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the remaining 350 shares, Stock Certificate No. 8 was issued in the name of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging that: 9. That in view of his having taken 33 1/3 interest, I was personally requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I delivered to Tan Su Ching. 10. That the cancellation of his stock (Stock No. 2) was known by him in 1981; that it was Stock No. 8 that was delivered in March 1983 for his endorsement and cancellation. Petitioner filed with the SEC a case questioning the cancellation of the aforesaid Stock Nos. 2 and 8. ISSUE: WON the cancellation and transfer of stock certificate no. 2 was valid? HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that Section 63 of the Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual delivery and endorsement of the certificate in question, there can be no transfer, or that such transfer is null and void. Contrary to the understanding of the petitioner with respect to the use of the word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27 November 1990), this Court held, that "Remedial law statues are to be construed liberally." The term 'may' as used in adjective rules, is only permissive and not mandatory. This Court held in Chua v. Samahang Magsasaka, that "the word "may" indicates that the transfer may be effected in a manner different from that provided for in the law." (62 Phil. 472)

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Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement. For all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent Commission, there was no necessity for the same certificate to be endorsed by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks were attendant and even the corporation was protected from other parties, considering that said transfer was earlier recorded or registered in the corporate stock and transfer book. Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where this Court held, that: But delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation, and have the custody of the stock book . . . (67 Phi. 36). Furthermore, there is a necessity to delineate the function of the stock itself from the actual delivery or endorsement of the certificate of stock itself as is the question in the instant case. A certificate of stock is not necessary to render one a stockholder in corporation. Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share in stock or the nation of the relation of shareholder to the corporation. (13 Am. Jur. 2d, 769) Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof. Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it is sometime regarded as quasinegotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferror's creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." (De los Santos vs. McGrath, 96 Phil. 577) To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants a stock corporation the authority to determine in the by-laws "the manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to

prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. (Emphasis supplied)

In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the president or board of directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. (47 Phil. 583)

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LEE E. WON alias RAMON LEE, plaintiff-appellant, vs. WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee

(G.R. No. L-10122; August 30, 1958)

FACTS: The defendant corporation issued membership certificate no. 201 to Iwao Teruyama which on April 1944, was assigned to MT Reyes and on the same year assigned to herein plaintiff-appellant. On April 26, 1955, the plaintiff filed an action against the defendant alleging that shortly after its rehabilitation after the war, plaintiff asked that the assignment be registered in the books of the defendant and that the latter refused and still refuses to do so unlawfully. Defendant filed a motion to dismiss on the ground that 11 years have elapsed from the time of the assignment upto the time of the filing of the complaint, beyond the 5 year period provided under Art. 1149 of the Civil Code. The trial court dismissed the action and denied reconsideration. ISSUE: WON plaintiff was bound to present and register the certificate assigned to him within any definite or fixed period? HELD: No. The defendant has not made herein any pretense to that effect; but it contends that from the moment the certificate was assigned to the plaintiff, the latter's right to have the assignment registered commenced to exist. This contention is correct, but it would not follow that said right should be exercised immediately or within a definite period. The

existence of a right is one thing, and the duration of said right is another.

On the other hand, it is stated in the appealed order of dismissal that the plaintiff sought to register the assignment on April 13, 1955; whereas in plaintiff's brief it is alleged that it was only in February, 1955, when the defendant refused to recognize the plaintiff. If, as already observed, there is no fixed period for registering an assignment, how can the complaint be considered as already barred by the Statute of Limitations when it was filed on April 26, 1955, or barely a few days (according to the lower court) and two months (according to the plaintiff), after the demand for registration and its denial by the defendant. Plaintiff's right was violated only sometime in 1955, and it could not accordingly have asserted any cause of action against the defendant before that. The defendant seems to believe that the plaintiff was compelled immediately to register his assignment. Any such compulsion is obviously for the benefit of the plaintiff, because it is only after registration that the transfer would be binding against the defendant. But we are not here concerned with a situation where the plaintiff claims anything against the defendant allegedly accruing under the outstanding certificate in question between the date of the assignment to the plaintiff and the date of the latter’s demand for registration and issuance of a new certificate. APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffsappellees, vs. J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE UNITED STATES, defendant-appellant. REPUBLIC OF THE PHILIPPINES, intervenor-appellant

(G.R. No. L-4818; February 28, 1955)

FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later 200,000 shares from Carl Hess and much later 800,000 still from Hess (for the account and benefit of Astraquillo). Both of the supposed vendors, now deceased. By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was, however, vested in the Alien Property Custodian of the US. In due course, the Vested Property Claims Committee of the Philippine Alien Property Administration made a “determination” allowing said claims, which were considered and hear jointly. But upon personal review of the Philippine Alien Property Administrator, the “determination” was reversed and decreed that

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“title to the shares in question shall remain in the name of the Philippine Alien Property Administrator”. Consequently, plaintiffs instituted the present action to establish title to the aforementioned shares of stock. Defendant Attorney General of the US contends that the shares were bought by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan, abranch office of a Japanese company; and that Madrigal endorsed in blank and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or otherwise disposed of the said shares; and that the stock certificates must have been stolen or looted during the emergency from the liberation. ISSUE: WON plaintiffs are the rightful owners of the shares? HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares of stock in question, as testified to by De los Santos, the result, insofar as plaintiffs are concerned, would be the same. It is not disputed that said shares of stock were registered, in the records of the Lepanto, in the name of Vicente Madrigal. Neither is it denied that the latter was, as regards said shares of stock, a mere trustee for the benefit of the Mitsuis. The record shows — and there is no evidence to the contrary — that Madrigal had never disposed of said shares of stock in any manner whatsoever, except by turning over the corresponding stock certificates, late in 1941, to the Mitsuis, the beneficial and true owners thereof. It has, moreover, been established, by the uncontradicted testimony of Kitajima and Miwa, the managers of the Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares of stock, nor delivered the aforementioned stock certificates, to anybody during said period. Section 35 of the Corporation Law reads: The capital stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,

except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.

Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. However, the transfer shall "not be valid, except as between the parties," until it is "entered and noted upon the books of the corporation." no such entry in the name of the plaintiffs herein having been made, it follows that the transfer allegedly effected by Juan Campos and Carl Hess in their favor is "not valid, except as between" themselves. It does not bind either Madrigal or the Mitsuis, who are not parties to said alleged transaction. What is more, the same is "not valid," or, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) — which were quoted approval in Uson vs. Diosomito (61 Phil., 535) — "absolutely void" and, hence, as good as non-existent, insofar as Madrigal and the Mitsuis are concerned. For this reason, although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee under a forged assignment acquires no title which can be asserted against the true owner, unless his own negligence has been such as to create an estoppel against him (Clarke on Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed

it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).

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In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is not even claimed that either had, through negligence, given — occasion for an improper or irregular disposition of the corresponding stock certificates. E.

FORGED AND UNAUTHORIZED TRANSFERS

FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or

unauthorized is the transfer of the certificate from the true and lawful owner to another person. While the latter refers to the act of the corporation in issuing the certificate, either fraudulently or by mistake. In forged or unauthorized transfer: 1. The purchaser or purchasers, no matter how innocent they may have been, will acquire no title as against the lawful owner by virtue of the doctrine of non-negotiability of certificates of stock; 2. The purchaser will have no right or remedy against the corporation because he took the shares not by virtue of a misrepresentation made by the corporation but on the faith of a forged endorsement or unauthorized transfer; 3. The corporation incurs no liability to the person in whose favor the certificate is endorsed or issued. 4. If the old certificate is cancelled and new one is issued by the corporation, the holder thereof may be required to return the same for its cancellation; 5. However, if new certificates are issued and passes into the hands of a subsequent bona fide purchaser, the latter may rightfully acquire title thereto since the corporation will be estopped to deny the validity thereof; 6. The subsequent purchaser in good faith took the shares, not by virtue of a forged or unauthorized transfer but on reliance to the genuineness of the certificate issued by the corporation or by virtue of the representation made by the corporation that the same is valid and therefore, compel the corporation to recognize him as a stockholder or claim reimbursement and damages against the latter. Example: A owns 100 shares of X Co., B stole the stock certificate and forged A’s signature: a. If B indorsed and sold it to C: 1. C will not acquire title to the shares whether he is innocent or not; 2. C cannot compel the corporation to register him as stockholder; 3. X Co. does not incur any liability in favor of C b. If X Co. cancelled the certificate and issued a new one to C: 1. If A later on finds out that his certificate was stolen, C may still be required to return the new certificate; 2. If C sold it to D, an innocent purchaser, D may rightfully acquire thereto since X Co. is estopped to deny the validity of the certificate; 3. If A later on finds out that his certificate was stole, X Co. may be compelled to recognize both A and D as stockholders.* *This is so because the A cannot be deprived of his rights as owner by virtue of a forged transfer, and B, because of X Co.’s representation that the person named therein is the owner of shares in the corporation. c.

If (b3) above would result in over-issuance of shares 1. Only A, the rightful owner may be recognized and A will have a right to compel X Co. to issue him a new certificate; 2. D will be entitled to damages from the X Co.; 3. X Co. will have a right of action against the who made false representation and in whose favor a new certificate is issued.**

**In this sense, if D sues X Co., the latter will have no valid defense, but he may institute a third party complaint against C. If C is an innocent purchaser, X Co., may file a fourth party complaint against B. ISSUANCE OF STOCK CERTIFICATION Subscriptions to shares of stock are indivisible such that a subscriber to such shares will not be entitled to the issuance of a stock certificate until he has

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paid the full amount of his subscription. Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.

INDIVISIBILITY: As the law stands now, subscription to shares of stock

are deemed indivisible and no certificate of stock can be issued unless and until the full amount of his subscription including interest and expenses, if any is paid. The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where a subscriber may opt to apply his partial payment to a corresponding number of shares, will not hold true. Thus, even if under the old law, where a corporation may, under a by-law provision or by custom, practice or tradition, issue stock certificates covering the number of shares that might have been correspondingly paid, this authority or practice is valid only two years after the effectivity of the Corporation Code and after which corporations, registered under the said law should comply with the mandatory requirement of Sec. 64. The Corporation Code thus provides: Sec. 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same.

MANDAMUS: Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock certificate and in the event that the corporation refuses to do so, the stockholder may institute a case for mandamus with damages, such issuance being ministerial. FUA CUN (alias Tua Cun), plaintiff-appellee, vs. RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, defendants-appellants

(G.R. No. L-19441; March 27, 1923)

FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50% of the subscription price and a corresponding receipt being issued therefor. Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced by a promissory note, together with the receipt, which was endorsed and delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank about the transaction but was told to await action by the BOD. In the meantime, Chua Soco became indebted to the bank, and in the action for recovery of money, his 500 shares were attached. Fua Cun thereupon instituted the present action maintaining that the payment of 50% of the subscription entitled Chua Soco to 250 shares and prayed that his lien on the shares by virtue of the chattel mortgage be declared to have priority over the claim of defendant Bank. The trial court rendered judgment in favor of plaintiff. ISSUE: (1) WON Chua Soco became entitled to 250 shares or the proportionate share to his partial payment? (2) WON plaintiff had a superior claim over that of the Bank? HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment appealed from is in the main correct. The claim of the defendant Banking Corporation upon which it brought the action in which the writ of attachment was issued, was for the non-payment

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of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not been called to any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law." There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above mentioned reads: For value received, I assign all my rights in these shares in favor of Mr. Tua Cun. Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a conditional equitable assignment. As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the latter. It follows that as against these rights the defendant bank holds no lien whatever. As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said five hundred shares in his favor." The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the costs against the appellants Banking Corporation. So ordered. F.

WATERED STOCKS

DEFINITION: Watered stocks may be defined as one which is issued by the

corporation as fully paid-up shares, when in fact the whole amount of the value thereof has not been paid. If the shares have thus been issued by the corporation as fully paid, when in fact it has intentionally and knowingly received or agreed to receive nothing at all for them, or less than their par value, either in money, property or services, the shares are said to be “watered” or “fictitiously paid-up” to the extent to which they have not been issued or are not to be paid for” Sec. 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

RIGHT OF CORPORATION AND CREDITORS: The law does not make any distinction as to the right of the corporation and its creditors to enforce payment of the water in the stocks issued, thus, it applies to all creditors whether prior or subsequent to the issuance of the watered stock.

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SOLIDARY LIABILITY: All consenting directors and officers are solidarily liable for the “water” in the stock.

NON-CONSENTING DIRECTORS: may be absolved of liability by their

3. 4.

written dissent. Otherwise, if they did not issue such written dissent or are passive, they may be held liable for not objecting thereto.

ISSUANCE OF WATERED STOCKS: may be effected in the following ways: 1. 2. 3. 4.

For a monetary consideration less than its par or issue value; For a consideration in property, tangible or intangible, valued in excess of its market value; Gratuitously or under an agreement that nothing shall be paid at all; or In the guise of stock dividends when there are no surplus profits of the corporation.

5. 6.

ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1)

5M shares at P1.00 par value; and (2) 1M no par value shares with issued value at P5.00. A acquired 1M of the par value shares for P.80 and 100,000 no par value shares at P4.00: 1. WATERED STOCK: There is stock watering for both shares. Sec. 65 speaks of issuance of shares at “less than its par or issued value”; 2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the issuance or were passive about it, without written dissent, are solidarily liable with A for the difference of P.20; 3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because the no par value shares are “deemed fully paid and non-assessable” (Sec. 6). Accordingly, only the directors or officers consenting to the issuance are liable.

ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into

100M shares at P1.00 par value, there is a provision in the by-laws denying the pre-emptive right of the shareholders. The Board of Directors subscribed to 1M of the unissued shares at P2.00 each when the fair market value of the shares was P12.00. 1. WATERED STOCK: No stock watering, since the shares were subscribed for more than the par value, notwithstanding if it less than the fair market value; 2. If 3 days later, the members of the Board sold those purchased shares at P12.00 per share, making a profit of P10.00 per share, they cannot be held liable for stock watering but they can be question on their duty of loyalty. Since the whole P12.00 per share could’ve gone to the coffers of the corporation instead of them reaping the profits for themselves.

EFFECTS OF ISSUANCE OF WATERED STOCKS: 1. 2. 3.

The corporation is deprived of its capital thereby hurting its business prospects, financial capability and responsibility; Stockholder who paid their subscriptions in full, or promised to pay the same, are injured and prejudiced by the reduction of their proportionate interest in the corporation; and Present and future creditors are deprived of the corporate assets for the protections of their interest.

BASIS OF LIABILITY: 1.

2.

“Trust Fund Doctrine” – the capital stock of the corporation is treated as inclusive of the unpaid portion of subscriptions to said capital, as a “trust fund” which the creditors have a right to look up to for the satisfaction of their claims. Stockholders, therefore, are mandated to pay the full value of their shares. “Fraud or Misrepresentation Theory” – liability is based on the false representation made by the corporation and the stockholder concerned to the creditors that the true par value or issued price of the shares has been paid or promised to be paid in full.

CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER): 1.

2.

As to the corporation – when a corporation is guilty of ultra-vires or illegal acts which constitute an injury to or fraud upon the public, or which will tend to injure or defraud the public, the State may institute a quo-warranto proceeding to forfeit its charter for the misuse or abuse of its franchise; As between the corporation and the subscriber – the subscription is void. Such being the case, the subscriber is liable to pay the full or par

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or issued value thereof, to render it valid and effective; As to the consenting stockholders – they are estopped from raising any objection thereto; As to dissenting stockholders – in view of the dilution of their proportionate interest in the corporation, they may compel the payment of the “water” in the stock solidarily against the responsible and consenting directors and officers inclusive of the holder of the watered stock; As to creditors – they may enforce payment of the difference in the price, or the water in the stock, solidarily against the responsible directors/officers and the stockholders concerned; and As against the transferees of the watered stocks – his right is the same as that of his transferor. If, however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at least as against the corporation, since he took the shares on reliance of the misrepresentation made by the corporation that the stock certificate is valid and subsisting. This is because a corporation is prohibited from issuing certificates of stock until the full value of the subscriptions have been paid and could not, therefore, deny the validity of the stock certificate it issued as against a purchaser in good faith. Thus, Ballantine states that whether there is any liability on the part of the transferee of watered stock is made to depend upon whether he acquired the same without notice, either as purchaser or donee. If he had knowledge thereof, he is subject to the same liability as his transferor.

LIABILITY FOR INTEREST: Aside from the value of their subscription,

subscribers may likewise be required to pay interest on all unpaid subscriptions if so imposed in the contract or in the corporate by-laws at such rate as may be indicated thereat or the legal rate if so not fixed. Unless so required or provided, however, the subscribers to shares of stock, not fully paid, are not liable to pay interest on their unpaid subscriptions. Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. G.

ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

TIME OF PAYMENT: Unpaid subscription or any percentage thereof,

together with interest if required by the by-laws or the contract of subscription, shall be paid either: 1. On the date or dates fixed in the contract or subscription; 2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all unpaid portion thereof to be so payable.

REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION: 1. 2.

By board action in accordance with the procedure laid down in Sec. 67 to 69 of the Code; and By a collection case in court as provided for in section 70.

CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect

payment of unpaid subscription will not prevent the creditors or the receiver of the corporation to institute a court action to collect the unpaid portion thereof. This is because the capital of the corporation is the basis of the credit of and financial responsibility of the corporation. Persons dealing with a corporation and extending credit to it have a right to insist that the unpaid subscription shall be paid in when this becomes necessary for the satisfaction of their claims. This is otherwise known as the Trust Fund Doctrine which states that subscriptions to the capital of a corporation constitute a fund to which creditors have the right to look up to for the satisfaction of their claims. Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary.

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Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code*, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

PROCEDURE: 1.

2.

3. 4. 5. 6. 7. 8. 9.

The BOD, by a formal Resolution, declares the whole or any percentage unpaid subscriptions to be due and payable on a specified date. However, if the contract of subscription provides the date or dates when payment is due, no ”call” or declaration by the board is necessary; The stockholders concerned are given notice of the board resolution by the corporation either personally or by registered mail. Publication of the notice of call is not required unless the by-laws provide otherwise. Notice is not likewise necessary if the contract of the subscription stipulates a specific date when any unpaid portion is due and payable; Payment shall be made on the date specified in the call or on the date provided for in the contract of subscription; Failure to pay on the date required in the call or as specified in the contract of subscription will render the entire balance due and payable and making the stockholder liable for the interest; If within 30 days from the date, no payment is made, all the stock covered by the subscription shall become delinquent and shall be subject to a delinquency sale; The board, by resolution, orders the sale of the delinquent stock stating the amount due and the date, time and place of the sale; The sale shall be made not less than 30 days nor more than 60 days from the date the stocks become delinquent; Publication of the notice of sale must be made once a week for 2 consecutive weeks in the newspaper of general circulation in the province or city where the principal office is located; Sale at public auction, if no payment is made by the delinquent

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10. 11. 12. 13.

stockholder, in favor of the bidder who offered to pay the full amount of the balance in the subscription, inclusive of interest, cost of advertisement and expenses for the smallest number of shares; Registration or transfer of the shares of stock in the name of the bidder and corresponding issuance of the stock certificate covering the shares successfully bidded; If there be any remaining shares, the same shall be credited in favor of the delinquent stockholder who shall be entitled to the issuance of a certificate of stock covering such shares; If there is no bidder at the public auction, the corporation may, subject to the provisions of the Code, bid for the same and the total amount due shall be credited or paid in full in the corporate books; and The shares so purchased by the corporation shall be vested in the latter as treasury shares.

HIGHEST BIDDER: in the case of sale of delinquent stock, and as indicated

in number 10 above, is such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. It should be properly termed “Lowest” Bidder because the bidders are offering to pay the same amount, and their bids are based on the number of shares they are willing to receive, the lowest of which is the winning bid. Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50% and later on declared to be delinquent. For the full amount of P5,000 (unpaid balance) and the interests, costs, and expenses, the following bidders are willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X would be the highest bidder. The remaining 30 shares would be credited to A.

*NO BIDDER: If there was no bidder, the company has to have unrestricted

retained earnings in order to acquire the shares as thus provided under Sec. 41 of the Corporation Code (Power to Acquire Own Shares). Accordingly, if the company has no unrestricted retained earnings, it cannot acquire the said shares by virtue of a delinquency sale, however, it may institute an action for the recovery of the subscription price under Sec. 70.

MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights as such, and pending the sale, the shares still stand in his name. Even after the sale, he may still be credited to some of the shares and he only needs 1 to qualify as a director.

QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE NOTICE OR IN THE SALE ITSELF: Sec. 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale

TWO CONDITIONS: 1. 2.

The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of the sale at the legal rate; and The action shall be commenced by the filing of a complaint within 6 months from the date of sale.

ACTION BY THE CORPORATION: Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce payment of unpaid subscriptions by court action. Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued

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interest, costs and expenses.

CALL: Consistent with Art. 1169 of the Civil Code, a “call” is a condition

precedent before the right of action to institute a recovery suit accrues. This is because a demand is required before a debtor may incur a delay in the performance of his obligation. As earlier said however, a call is not necessary if the contract of subscription provides for a date or dates when payment is due, or when the corporation has become insolvent. MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.), plaintiff-appellant, vs. JEAN M. POIZAT, defendant-appellee

(G.R. No. L-11528; March 15, 1918)

FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The Philippine Chemical Product Co., of which 5 were paid. In an action instituted by Miguel Velasco as assignee of the company, he seeks to recover the balance of the subscription. The CFI rendered a judgment dismissing the complaint. Hence, this appeal. ISSUE: WON defendant is liable for the balance? HELD: Yes. We think that Poizat is liable upon this subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The provisions of the Corporation Law (Act No. 1459) has given recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive of the Corporation Law are applicable and must be followed. The other remedy is by action in court, concerning which we find in section 49 the following provision: “Nothing in this Act shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred.” ARNALDO F. DE SILVA, plaintiff-appellant, vs. ABOITIZ & COMPANY, INC., defendant-appellee

(G.R. No. L-19893; March 31, 1923)

FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and paid 200 of such subscription leaving a balance of P225,000. On April 22, 1922, he was informed by the corporate secretary that he has been declared delinquent by the BOD and that he should pay the unpaid subscription otherwise such shares shall be sold at a public auction. De Silva filed a complaint in the CFI of Cebu, contending among others that the resolution adopted was violative of Art. 46 of the by-laws stating that all shares subscribed and were not paid at the time of the incorporation shall be paid out of the 70% of the profit obtained until such shares are paid in full. De Silva contends that such article provides for the operative method of payment of the shares, and by declaring the unpaid subscription to have become due and payable on May 31st and in publishing the notice declaring his shares to be delinquent, the company has exceeded its executive authority.

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ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or enforce payment of the same despite the provision of the by-laws? HELD: Yes. It is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of a part of the 70 percent of the profit distributable in equal parts on the payment of the shares subscribed to and not fully paid. If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for accomplishing the same purpose. As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802): “The first and most special remedy given by the statute consists in permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. The other remedy is by action in court.” Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract between the defendant corporation and its stockholders , yet as it is only to the board of directors of the corporation that said articles gives the authority or right to apply on the payment of unpaid subscriptions such amount of the 70 percent of the profit distributable among the shareholders in equal parts as may be deemed fit, it cannot be maintained that the said article has prescribe an operative method for the payment of said subscription continuously until their full amortization. In the instant case, the defendant corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies provided by the aforesaid law. On the other hand, the plaintiff has no right whatsoever under the provision of the above cited article 46 of the said by-laws to prevent the board of directors from following, for that purpose, any other method than that mentioned in the said article, for the very reason that the same does not give the stockholders any right in connection with the determination of the question whether or not there should be deducted from the 70 percent of the profit distributable among the stockholders such amount as may be deemed fit for the payment of subscriptions due and unpaid. Therefore, it is evident that the defendant corporation has not violated, nor disregarded any right of the plaintiff recognized by the said by-laws, nor exceeded its authority in the discharge of its executive functions, nor abused its discretion when it performed the acts mentioned in the complaint as grounds thereof, and, consequently, the facts therein alleged do not constitute a cause of action. LINGAYEN GULF ELECTRIC POWER appellant, vs. IRINEO BALTAZAR, defendant-appellee.

COMPANY,

INC.,

plaintiff-

(G.R. No. L-4824; June 30, 1953)

LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, vs. IRINEO BALTAZAR, defendant and appellant

(G.R. No. L-6244; June 30, 1953)

FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at P100.000 par value per share, of the plaintiff corporation paying P15,000 and making further payments leaving a balance of P18,500. On July 23, 1946, the stockholders, including herein defendant, approved Resolution No. 17 agreeing: (1) to “call” of the balance of the unpaid subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid unpaid subscriptions after the due dates of both calls to be subject to 12% interest per annum; (3) that after the expiration of a grace period of 60 days, all unpaid subscribed shares would revert to the corporation. A demand was made against defendant, but was ignored. Hence this action. ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription

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HELD: No. We agree with the lower court that the law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. This is clear from the provisions of section 40 of the Corporation Law, Act No. 1459, as amended. It will be noted that section 40 is mandatory as regards publication, using the word "must". As correctly stated by the trial court, the reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on stockholders. (14 C.J. 639). We find the citation of authorities made by the plaintiff and appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. Said the court in that case: “. . . . it is now quite well settled that when the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of suits to collect unpaid balance on subscription.” But when the corporation is a solvent concern, the rule is: “It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or assessment against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a solvent going corporation to collect a subscription, and in certain suits provided by statute this would be true;. . . . . (Id.)” ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of 1946 of the BOD released him from the obligation to pay for his unpaid subscription? HELD: No. There must be unanimous consent of the stockholders of the corporation. We quote some authorities: Subject to certain exceptions, considered in subdivision (3) of this section, the general rule is that a valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the company, even under a secret or collateral agreement for cancellation made with the subscriber at the time of the subscription, as against persons who subsequently subscribed or purchased without notice of such agreement. (18 C.J.S. 874). “(3) Exceptions. In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time. (18 C.J.S. 874).”

FACTS: Petitioner, an employee of respondent company, subscribed to 1,500 shares at P100 per share. He paid an initial payment P37,500. On Sept. 1, 1975, he was appointed President and General Manager of the company but on Jan. 2, 1986, he resigned. He filed a complaint with the NLRC claiming unpaid wages, cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Respondent admitted that petitioner was entitled to P17,060.07 but the same was already set-off against his unpaid subscription. Petitioner questioned such set-off claiming that no call or notice was made. The Labor Arbiter decided in favor of petitioner. On appeal, such decision was reversed by the NLRC. ISSUE: WON the set-off was properly made? HELD: No. Firstly, the NLRC has no jurisdiction to determine such intracorporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission. Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation. What the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions. No doubt such set-off was without lawful basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable. BONIFACIO LUMANLAN, plaintiff-appellee, vs. JACINTO R. CURA, ET AL., defendants. DIZON & CO., INC., ETC., appellant.

(G.R. No. L-39861; March 21, 1934)

FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at a par value of P50. Layag was appointed the receiver of said company, at the instance of its creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the unpaid subscriptions, there appearing that the company had no assets except the credits against those who had subscribed for shares of stock. The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan liable for the unpaid subscription and loans and advances together with interests.

In the present case, the release claimed by defendant and appellant does not fall under the exception above referred to, because it was not given pursuant to a bona fide compromise, or to set off a debt due from the corporation, and there was no consideration for it.

Pending appeal, the parties entered into an agreement where Lumanlan would dismiss the appeal and the corporation would collect only 50% of the amount subscribed by him for stock, provided that in case the 50% was inufficient to pay Valenzuela he should pay an additional amount not to exceed the judgment against him in that case. Lumanlan paid Valenzuela the sum of P11,840 including interest.

In conclusion we hold that under the Corporation Law, notice of call for payment for unpaid subscribed stock must be published, except when the corporation is insolvent, in which case, payment is immediately demandable. We also rule that release from such payment must be made by all the stockholders.

Disregarding the agreement, appellant company asked for and order of execution of the CFI decision which was granted and the provincial sheriff levied upon two parcels of land of Lumanlan.

ERNESTO M. APODACA, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS PHILS., INC., respondents

(G.R. No. 80039; April 18, 1989)

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ISSUE: WON Lumanlan is still liable to the corporation? HELD: Yes. In the promissory note given by the corporation to Valenzuela the former obligated itself to pay Valenzuela the sum of P8,000 with interest at 12 per cent per annum and, upon failure to pay said sum and interest

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when due, 25 per cent of the principal as expenses of collection and judicial costs in case of litigation. By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to collect, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840. This leaves a balance due Dizon & co., Inc., of P1,269 on that judgment with interest thereon at 6 per cent per annum from August 30, 1930. It appears from the record that during the trial of the case now under consideration, the Bank of the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was appointed assignee in case No. 43065 of the Court of First Instance of the City of Manila on November 28, 1932. It is therefore evident that there are still other creditors of Dizon & Co., Inc. This being the case that corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it. It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.) PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN LUMBER CO., INC., defendants-appellees.

(G.R. Nos. L-24177-85; June 29, 1968)

FACTS: In various suits decided jointly, PNB as creditor, and therefore the real party in interest, was allowed by the lower court to substitute the receiver of the Philippine Lumber Distributing Agency in these respective actions for the recovery from the defendant lumber producers the balance of their stock subscriptions. The defendant lumber producers were convinced by the late President Manuel Roxas to form a cooperative and ensure the stable supply of lumber in the country and to eliminate alien middlemen. To induce them, the president promised and agreed to invest P9.00 for every P1.00 that the members would invest therein. There was no appropriation made by congress for the P9.00 investment. The President then instructed Hon. Emilio Abello, then Executive Secretary and chairman of the BOD of PNB to grant an overdraft of P250,000 (later increased to P350,000) which was approved by the BOD of PNB with interest at 6%. The Philippines did not invest the P9.00 for every peso coming from defendant lumber producers. The loan extended by PNB was not paid. Hence, these suits which the trial court dismissed. ISSUE: WON the lumber producers are liable for the full value of their subscriptions? HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of Velasco v. Poizat, this Court held: "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debt.... A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory

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regulations is necessary...." The Poizat doctrine found acceptance in later cases. One of the latest cases, Lingayen Gulf Electric Power v. Baltazar, Speaks to this effect: "In the case of Velasco v. Poizat, the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee." It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be invested by the Government would not be available. Even if such were the case, however, and such a promise were in fact made, to further the laudable purpose to which the proposed corporation would be devoted and the possibility that the lumber producers would lose money in the process, still the plain and specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the prerogative of suspending the operation of any statute or any of its terms. EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C. ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.

(G.R. No. L-68097; January 16, 1986)

FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc. as exclusive distributor of its household products in Panay and Negros. Under its sales agreement, Keller sold on credit its products to COB Group Marketing. The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm owed Keller about P179,000. Keller sued COB Marketing and its stockholders. ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders? HELD: Yes. It is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2). GERARDO GARCIA, plaintiff-appellee, vs. ANGEL SUAREZ, defendant-appellant

(G.R. No. L-45493; April 21, 1939)

FACTS: Appellant Suarez subscribed to 16 shares of Compania HispanoFilipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400. Plaintiff-appellee Garcia was appointed by the court as receiver of the company, to collect the unpaid subscription, among others. On June 18, 1931, Garcia brought an action to recover from Suarez and other shareholders the balance of their subscriptions, but the complaint was dismissed for lack of prosecution. On Oct. 10, 1935, a similar action was instituted which was granted by the CFI holding defendant liable for the balance of his unpaid subscription and interest. On appeal, the defendant raises the issue of prescription. ISSUE: WON defendant Suarez is liable? HELD: Yes. The premise of the argument is wrong because it confuses two distinct obligations: the obligation to pay interest and that to pay the amount of the subscription. The said section 37 of the Corporation Law provides when the obligation to pay interest arises and when payment should be made, but it is absolutely silent as to when the subscription to a stock should be paid. Of course, the obligation to pay arises from the date of the

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subscription, but the coming into being of an obligation should not be confused with the time when it becomes demandable. In a loan for example, the obligation to pay arises from the time the loan is taken; but the maturity of that obligation, the date when the debtor can be compelled to pay, is not the date itself of the loan, because this would be absurd. The date when payment can be demanded is necessarily distinct from and subsequent to that the obligation is contracted. By the same token, the subscription to the capital stock of the corporation, unless otherwise stipulation, is not payable at the moment of the subscription but on a subsequent date which may be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518, provides that: “The board of directors or trustees of any stock corporation formed, organized, or existing under this Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock . . . .” The board of directors of the Compañia Hispano-Filipino, Inc., not having declared due and payable the stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his capacity as receiver and in the exercise of the power conferred upon him by the said section 38 of the Corporation Law, demanded of the appellant to pay the balance of his subscription. The present action having been filed on October 10, 1935, the defense of prescription is entirely without basis.

DELINQUENT: Shares of stock become delinquent when no payment is

made on the balance of all or any portion of the subscription on the date or dates fixed in the contract of subscription without need of call, or on the date specified by the BOD pursuant to a call made by it in accordance with the provisions of Sec. 67.

EFFECT OF DELINQUENCY: The stockholder thereof immediately loses the right to vote and be voted upon or represented in any stockholders meeting as well as all the rights pertaining to a stockholder except the right to receive dividends in accordance with the Code.

Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any.

RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that “any cash dividend due on delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost and expenses, while stock dividends shall be withheld until his unpaid subscription is paid in full”

RIGHTS OF UNPAID SHARES: If the shares are not delinquent, however, subscribers to the capital stock of a corporation though not fully paid, are entitled to all the rights of a stockholder (Sec. 72) EXCEPT the issuance of certificate of stocks (Sec. 64). They can vote and be voted upon and entitled to receive all dividends due their shares.

setting forth, if possible, (1) the circumstances as to how the certificate was lost, stolen or destroyed, (2) the number of shares represented by such certificate, (3) the serial number of the certificate and (4) the name of the corporation which issued the same. He shall also submit such (B) other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state (1) the name of said corporation, (2) the name of the registered owner and (3) the serial number of said certificate, and (4) the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.

RATIONALE: 1. 2. 3.

To avoid duplication of certificates of stock; To avoid fictitious and fraudulent transfers; and To protect the corporation against damage from whatever source arising from the issuance of the duplicate certificate inluding liability to the holder of the original certificate or to innocent holders of certificate based on the duplicate.

Thus, the BOD has the authority to decide the amount and the kind of surety bond that may be required for the issuance of a certificate of stock, in liey of the lost or destroyed one, if the same is to be issued prior to the expiration of the 1 year period provided by Sec. 73.

ISSUANCE OF NEW CERTIFICATES: 1. 2. 3.

After the above procedures have been complied with, the new certificate will be issued 1 year from the date of the last publication; Nevertheless, the stockholder may file a bond or other security to have the shares issued before the 1 year prescribed. If a contest has been present to the corporation or an action is pending in court, the issuance of the new certificate shall be suspended until final decision.

Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.

H.

NON-STOCK CORPORATIONS: The rules on delinquent shareholders

RIGHTS OF A STOCKHOLDER:

applies to non-stock corporations, such as when members are delinquent in paying membership dues.

1.

RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:

2.

Sec. 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed:

3.

1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation (A) an affidavit in triplicate

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4.

RIGHTS AND LIABILITIES OF STOCKHOLDERS Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either personally or by proxy as provided for under Sec. 50 and 58 of the Code; To enter into a voting trust agreement subject to the procedure, requirements and limitations imposed under Sec. 50; To receive dividends and to compel their declaration if warranted under Sec. 43; To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as may be allowed by law inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation as provided for in Sec. 63;

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

To be issued a certificate of stock for fully paid-up shares in accordance with Sec. 64; To exercise pre-emptive rights as provided for in Sec. 39; To exercise their appraisal right in accordance with the provision of Sec. 81 and in those instance allowed by law such as Sec. 42 and 105; To institute and file a derivative suit; To recover shares of stock unlawfully sold for delinquency as may be allowed under Sec. 69; To inspect the books of the corporation subject only to the limitations imposed by Sec. 75; To be furnished by the most recent financial statement of the corporation as by Sec. 75; To be issued a new stock certificate in lieu of the lost or destroyed one subject to the procedure laid down in Sec. 73; To have the corporation dissolved under Sec. 118 to 121, and Sec. 105 in a close corporation; To participate in the distribution of assets of the corporation upon dissolution under Sec. 122; In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock as allowed under Sec. 104; and Also in the case of a close corporation, to withdraw therefrom, for any reason, and compel the corporation to purchase his shares as provided for in Sec. 105.

OBLIGATIONS AND LIABILITIES: 1. 2. 3. 4. 5. 6.

To pay the corporation the balance of his unpaid subscriptions subject to the provision of Sec. 67-70; To pay interest on his unpaid subscription, if required by the bylaws or by the contract of subscription in accordance with Sec. 66; To answer to the creditor for the unpaid portion of his subscription under the Trust Fund Doctrine; To answer the “water” in his stocks as provided for in Sec. 65; To be liable, as general partners, for all debts, liabilities and damages of determinable corporation as envisioned under Sec. 21 (corporation by estoppel); and To be personally liable for torts, in the event that a stockholder in a close corporation actively participates in the management of corporate affairs.

it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No 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 unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer 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.

THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE CORPORATION: 1.

2.

CHAPTER 11: CORPORATE BOOKS AND RECORDS A.

BOOKS AND RECORDS TO BE KEPT

Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That

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3.

Records of all business transactions which include, among others, (1) journals, (2) ledger, (3) contracts, (4) vouchers and receipts, (5) financial statements and other books of accounts, (6) income tax returns, and (7) voting trust agreements - which must be kept and carefully preserved at its principal office; Minutes of all meetings of stockholders or members and of the directors or trustees setting forth in detail (1) the date, time and place of meeting, (2) how authorized, (3) the notice given, (4) whether the same be regular or special, and if special, the purpose thereof shall be specified, (5) those present and absent, and (6) every act done or ordered done thereat - which must likewise be kept at the principal office of the said corporation; and Stock and Transfer Book showing the (1) names of the stockholders, (2) the amount paid or unpaid on all stocks for which the subscription has been made, (3) a statement of every alienation, sale or transfer of stock made, if any (4) the date thereof, and (5) by whom and to whom - which must also be kept at the principal office of the corporation or in the office of its stock transfer agent.

STOCK AND TRANSFER AGENT: is the person who records every movement of the shares by the minute or by the hour.

NON-STOCK CORPORATIONS: can also have a stock and transfer agent for purposes of the club share-membership.

INSPECTION & COPIES: These books are subject to inspection by any of

the directors, trustees, stockholders or members of the corporation at reasonable hours on business days and a copy of excerpts of said records may be demanded. In fact, in so far as Financial Statements are concerned, the Code provides: Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation.

BASIS OF RIGHT: is to protect his interest as a stockholder. Thus, it has

been said that: “The right of the shareholders to ascertain how the affairs of his company are being conducted by its directors and officers is founded by his beneficial interest through ownership of shares and the necessity of selfprotection. Managers of some corporations deliberately keep the shareholders in ignorance or under misapprehension as to the true condition of its affairs. Business prudence demands that the investor keep a watchful eye on the management and the condition of the business. Those in charge of the company may be guilty of gross incompetence or dishonesty for years and escape liability if the shareholders cannot inspect the records and obtain information.”

BOOKS OF SUBSIDIARY: The right of the stockholder to examine

corporate books extends to a wholly owned subsidiary which is completely under the control and management of the parent company where he is such a stockholder. But if the two entities are legally being operated as separate and distinct entities, there is no such right of inspection on the part of the stockholder of the parent company.

INSPECTION BY AGENT: while the right is founded on stock ownership,

thus personal in nature, it may be made by the stockholder’s agent or representative since it may be unavailing in many instances.

INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or

member, the right of a director or trustee to inspect and examine corporate books and records is considered absolute and unqualified and without regard to motive. This is because a director supervises, directs and manages corporate business and it is necessary that he be equipped with all the information and data with regard to the affairs of the company in order that he may manage and direct its operations intelligently and according to this best judgment in the interest of all the stockholders he represents. Thus, while stockholders and mmebers are entitled to inspect and examine the books and records as provided in Sec. 74 and 75 they may not gain access to highly sensitive and confidential information. In the case of directors, “it is not denied” that they have such access. This would include, among others, (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals for mergers or tie-ups with other firms.

REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC) 1.

2. 3.

Mandamus. In such event, the corporate secretary shall be included as a party respondent since he is customarily charged with the custody of all documents or records of the corporation and against whom personal order of the court would be made; Damages either against the corporation or the responsible officer who refused the inspection; or Criminal complaint for violation of his right to inspect and copy excerpts of all business transactions and minutes of meetings. The officer or agent who refused the examination or copying thereof, shall be guilty and liable of an offense punishable under Sec. 144 of the Code. Sec. 144 imposes a penalty of a fine of not less than P1,000 but not more than P10,000 or an imprisonment for not less than 30 days but not more than 5 years, or both, at the discretion of the court. If the refusal is pursuant to a resolution or order of the board, the liability shall be imposed upon the directors/trustees who voted for such refusal.

W. G. PHILPOTTS, petitioner, vs. PHILIPPINE MANUFACTURING respondents.

COMPANY

and

F.

N.

BERRY,

(G.R. No. L-15568; November 8, 1919) FACTS: Petitioner seeks to obtain a writ of mandamus to compel the respondents to permit him, in person or by some authorized agent or attorney, to inspect and examine the records of the business by Philippine Manufacturing Company, of which he is a stockholder. Respondents interposed a demurrer. ISSUE: WON the right the law concedes to a stockholder may be exercised by a proper agent or attorney? HELD: Yes. The right of inspection given to a stockholder can be exercised either by himself or by any proper representative or attorney in fact, and either with or without the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may do through another; and we find nothing in the statute that would justify us in qualifying the right in the manner suggested by the respondents. This conclusion is supported by the undoubted weight of authority in the United States, where it is generally held that the provisions of law conceding the right of inspection to stockholders of corporations are to be liberally construed and that said right may be exercised through any other properly authorized person. As was said in Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in the sense that only a stockholder may enjoy it; but the inspection and examination may be made by another. Otherwise it would be unavailing in many instances." An observation to the same effect is contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said: "The possession of the right in question would be futile if the possessor of it, through lack of knowledge necessary to exercise it, were debarred the right of procuring in his behalf the services of one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have the right to inspect the books of the corporation, taking minutes from the same, at all reasonable times, and may be aided in this by experts and counsel, so as to make the inspection valuable to them, is a principle too well settled to need discussion." Authorities on this point could be accumulated in great abundance, but as they may be found cited in any legal encyclopedia or treaties devoted to the subject of corporations, it is unnecessary here to refer to other cases announcing the same rule. The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as prayed, unless within 5 days from notification hereof the respondents answer to the merits. ANTONIO PARDO, petitioner, vs. THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents

(G.R. No. L-22442; August 1, 1924)

FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to compel respondent company to permit petitioner and his duly authorized agent and representative to examine the records and business transactions of said company.

DEFENSE OF CORPRATE OFFICERS: (INL)

Respondents raised the defense that under Art. 10 of the by-laws, it is declared that “every shareholder may examine the books of the company and other documents pertaining to the same upon the days which the board of directors’ shall annually fix”. And thus was set from 15th to 25th of March by virtue of a board resolution.

2.

ISSUE: WON the BOD may choose specific performance and particular dates when the right of inspection may be exercised?

1.

3.

That the person demanding has improperly used any information secured through any prior examination of the records or minutes of such corporation or any other corporation; That he was not acting in good faith or for a legitimate purpose in making his demand; or The right is limited or restricted by special law or the law of its creation.

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HELD: No. The general right given by the statute may not be lawfully

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

abridged to the extent attempted in this resolution. It may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under other improper conditions; but neither the executive officers nor the board of directors have the power to deprive a stockholder of the right altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. Authorities to this effect are too numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.) The demurrer is, therefore, sustained; and the writ of mandamus will issue as prayed, with the costs against the respondent. EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar Company, Inc., petitioner, vs. ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents.

(G.R. No. L-37064; October 4, 1932)

FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ of mandamus to be issued to each and all of the respondents to, among others, place at his disposal at reasonable hours the minutes, documents and books of Isabela Sugar Company, Inc. (which he is a director and stockholder) for his inspection and to issue immediately, upon payment of the fees, certified copies of any documentation in connection with said minutes, documents and the books of the aforesaid corporation. Director Veraguth telegraphed the secretary of the company, asking the latter to forward in the shortest possible time a certified copy of the resolution of the board of directors concerning the payment of attorney's fees in the case against the Isabela Sugar Company and others. To this the secretary made answer by letter stating that, since the minutes of the meeting in question had not been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of the stockholders a request should be made to the president of the Isabela Sugar Company, Inc. It further appears that the board of directors adopted a resolution providing for inspection of the books and the taking of copies "by authority of the President of the corporation previously obtained in each case." ISSUE: WON the corporate secretary is justified in refusing to furnish copies of the minutes of the meeting of the BOD? HELD: Yes. The Corporation Law, section 51, provides that: “All business corporations shall keep and carefully preserve a record of all business transactions, and a minute of all meetings of directors, members, or stockholders, in which shall be set forth in detail the time and place of holding the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. . .. The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member, or stockholder of the corporation at reasonable hours.” The above puts in statutory form the general principles of Corporation Law. Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. Pretexts may not be put forward by officers of corporations to keep a director or shareholder from inspecting the books and minutes of the corporation, and the right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. A director or stockholder cannot of course make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the corporation. We do not conceive, however, that a director or stockholder has any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)

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Combining the facts and the law, we do not think that anything improper occurred when the secretary declined to furnish certified copies of minutes which had not been approved by the board of directors, and that while so much of the last resolution of the board of directors as provides for prior approval of the president of the corporation before the books of the corporation can be inspected puts an illegal obstacle in the way of a stockholder or director, that resolution, so far as we are aware, has not been enforced to the detriment of anyone. In addition, it should be said that this is a family dispute, the petitioner and the individual respondents belonging to the same family; that a test case between the petitioner and the respondents has not been begun in the Court of First Instance of Occidental Negros involving hundreds of thousands of pesos, and that the appellate court should not intrude its views to give an advantage to either party. We rule that the petitioner has not made out a case for relief by mandamus. GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON petitioner may be properly denied examination of the books and records of San Miguel International, Inc., a fully owned subsidiary of SMC? HELD: No. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours." The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In

other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. In Grey v. Insular Lumber, this Court held that "the right to examine the books

of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a whollyowned subsidiary of the corporation in which he is a stockholder is a different thing. Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination, and that a writ of mandamus, may be granted, as the records

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. Mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. Likewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest." In the Nash case, The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York." In the Bailey case, stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors. In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly-owned subsidiary which are in respondent corporation's possession and control. The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him. RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL BANK, respondent.

(G.R. No. L-33320; May 30, 1983)

FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a special civil action for mandamus against the herein respondent PNB praying that the latter be ordered to allow him to look into the books and records of PNB to satisfy himself as to the truth of the published report that (1) the respondent has guaranteed the obligation of South Negros Development Corporation in the purchase of a US$ 23M sugar-mill to be financed by Japanese suppliers and financiers; that the respondent; (2) the respondent is financing the construction of the P21M Cebu-Mactan Bridge to be constructed by VC Ponce, Inc.; and (3) the construction of Passi Sugar Mill at Iloilo by the Homion Philippines, Inc.; as well as (4) to inquire into the validity of said transactions. The CFI dismissed the special civil action. Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows: Sec. 51. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours. Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is

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nothing improper in his purpose for asking for the examination and inspection herein involved. ISSUE: WON Petitioner is correct in saying that he has an unqualified right to inspect the books as provided under Sec. 51 of the Corporation Law? HELD: No. Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines." The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following: “The records of all business transactions of the corporation and the minutes of any meeting shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.” As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following (1) the records must be kept at the principal office of the corporation; (2) the inspection must be made on business days; (3) the stockholder may demand a copy of the excerpts of the records or minutes; (4) and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that (1) the one requesting it must not have been guilty of using improperly any information through a prior examination, and (2) that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand." The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68. ISSUE2: WON petitioner is in good faith in the exercise of his right to inspect the books of PNB?

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HELD: No. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one

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.

Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.

1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations;

share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation.

ISSUE3: WON the right of a stockholder to inspect the books provided under Sec. 74 of the Corporation Code is applicable to PNB? HELD: No. We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows: Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. — The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank' Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction,' Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides: SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this Code, insofar as they are applicable. The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. CHAPTER 12: MERGER AND CONSOLIDATION Sec. 36, par. 8 of the Corporation Code of the Philippines expressly empowers a corporation to merge or consolidate with another corporation subject to the requirements and procedure prescribed in TITLE IX. Sec. 76. Plan or merger of consolidation. - Two or more corporations

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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: (NTSO)

2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. Sec. 77. Stockholder's or member's approval. - Upon approval by 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, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. Sec. 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, 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: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation

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of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange 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. Sec. 80. Effects of merger or consolidation. - The merger or consolidation shall have the following effects: 1. 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; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

by another which survives and continues the combined business. It is the uniting of two or more corporations by the transfer of property to one of them which continue in existence, the other or the others being dissolved and merged therein. Example: It was agreed that B Company will take over and acquire all the business, assets, properties, rights and liabilities of C Corporation and by virtue of which B will absorb C which is to be dissolved.

CONSOLIDATION: is the uniting or amalgamation of two or more existing

corporations to form a new corporation. It signifies a union as necessarily results in the creation of a new corporation and the termination of existence of old ones. The united concern resulting from such union is called consolidated corporation. Thus, in the example given, if B and C agreed to form a new corporation, A Company, which will absorb both business, and all of B’s and C’s assets, properties, rights and liabilities are transferred to A which will continue their combined business while B and C will be dissolved, a consolidation takes place. In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing or surviving corporation is not, only the absorbed.

3. 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;

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or 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

2.

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.

1.

3.

4.

5.

6.

REASON FOR REORGANIZATION: The reasons inducing a reorganization

are not in every case the same, but for the most part, they are to be found in the weak financial or insolvent condition of the particular corporations. The aim of corporate reorganization or combination is generally to put the company upon a sound financial basis and to enable it to take care of its obligations thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization is effected notwithstanding the fact that the corporation is solvent.

ILLEGAL COMBINATIONS: While a merger or consolidation is a right,

The BOD/T of each constituent corporations shall approve a plan or merger or consolidation setting for the matters required in Sec. 76; Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the member in non-stock corporations of each of such corporations at separate corporate meetings called for the purpose; Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given to all stockholders or members at least 2 weeks prior to the scheduled meeting, either personally or by registered mail stating the purpose thereof; Execution of the articles of merger or consolidation by each constituent corporations to be signed by the president or vice-president and certified by the corporate secretary or assistant secretary setting forth the matters required in Sec. 78; Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement of Sec. 79 that if it involve corporations under direct supervision of any other government agency or governed by special laws the favorable recommendation of the government agency concerned shall first be secured; and Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give the corporations concerned an opportunity to be heard upon notice and thereafter, the Commission shall proceed as provided in the Code.

EFFECTS OF MERGER OR CONSOLIDATION: 1. 2.

There will only be a single corporation. In case of merger, the surviving corporation or the consolidate corporation in case of consolidation; The termination of corporate existence of the constituent corporations, except that of the surviving corporation or the consolidated corporation; The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code; The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of the constituent corporations, and all property and all receivables due, including subscriptions to shares and other choses in action, and every other interest of, or belonging to or due to the constituent corporations shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the merger or consolidation.

granted by law, to corporations registered under the Code, Act 3518 proscribes illegal combination. It provides, under Sec. 20 thereof that “no corporation engaged in commerce may acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation or corporations engaged in commerce, where the effect of such acquisitions may be to substantially lessen competition between the corporation or corporations whose stock is so acquired and the corporation making the acquisition, or between any of them, or to restrain such commerce in any section community, or ten to create a monopoly of any line of commerce.” Corollary to this is Art. 186 of the Revised Penal Code which imposes a penalty of imprisonment and/or fine on any person who enters into a contract or conspiracy to create monopolies and combinations in restraint of trade.

3.

MERGER: is a union effected by absorbing one or more existing corporations

LIQUIDATION: There would be no need to liquidate or wind-up the affairs

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4.

5.

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of the corporation because (1) there are no assets to distribute; (2) no debts and liabilities to pay – since all these are transferred to the surviving or consolidated corporation. ASSOCIATED BANK, petitioner, vs. COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

(G.R. No. 123793; June 29, 1998)

FACTS: Associated Banking Corporation and Citizens Bank and Trust Company merged to form Associated Citizens Bank which subsequently changed its corporate name to Associate Bank. The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of Associated Bank for P2.5M of which P2.25M remains unpaid. Despite repeated demands, the defendant failed to pay the sum due. Defendant denied all pertinent allegations in the complaint and alleged as affirmative and/or special defense that Associated Bank is not the real party in interest because the promissory note was executed in favor of Citizens Bank and Trust Company. Defendant was declared in default for not appearing in the Pre-Trial Conference and the plaintiff was allowed to present evidence ex-parte, the Motion to Life Order of Default and or Reconsideration of the Order being dismissed. The trial court ruled in favor of Associated Bank. On appeal, the CA reversed the trial court. ISSUE: WON Associated Bank, the surviving corporation, may enforce the promissory note made by Sarmiento in favor of CBTC, the absorbed company after the effectivity of the merger? HELD: Yes. Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is prescribed under the Corporation Code. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, which Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity "shall, for all intents and purposes, be the date when the necessary papers to carry out this [m]erger shall have been approved by the Securities and Exchange Commission." As to the transfer of the properties of CBTC to ABC, the agreement provides: “10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and property of [CBTC], whether real, personal or mixed, and including [CBTC's] goodwill and tradename, and all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act or deed”

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The records do not show when the SEC approved the merger. Private respondent's theory is that it took effect on the date of the execution of the agreement itself, which was September 16, 1975. Private respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 — two years after the merger agreement had been executed — CBTC could not have conveyed or transferred to petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such right properly pertains only to CBTC. Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement leads to a different conclusion. The provision quoted earlier has this other clause: Upon the effective date of the [m]erger, all references to [CBTC] in any

deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. . . .

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, "as if such reference [was a] direct reference to" the latter "for all intents and purposes." No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision must be given its literal meaning and applied without a convoluted interpretation. Verba lelegis non est recedendum. In light of the foregoing, the Court holds that petitioner has a valid cause of action against private respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former. BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS IN BPI UNIBANK, Respondent

(G.R. No. 164301; August 10, 2010)

FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed on January 20, 2000 by and between BPI, herein petitioner, and FEBTC. This Article and Plan of Merger was approved by the Securities and Exchange Commission on April 7, 2000. Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC were transferred to and absorbed by BPI as the surviving corporation. FEBTC employees, including those in its different branches across the country, were hired by petitioner as its own employees, with their status and tenure recognized and salaries and benefits maintained. BPI has an existing Union Shop Clause agreement with the BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union) whereby it is a pre-condition that new employees must join the union before they can be regularized otherwise they will not have a continued employment. By reason of the failure of the FEBTC employees to join the union, BPI Union recommended to BPI their dismissal. BPI refused. The issue

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

went to voluntary arbitration where BPI won but the Court of Appeals reversed the Voluntary Arbitrator. Hence, this petition. ISSUE: WON employees of a dissolved corporation in a merger are considered absorbed by the surviving corporation? HELD: No. Absorbed FEBTC Employees are neither assets nor liabilities. In legal parlance, however, human beings are never embraced in the term "assets and liabilities." Moreover, BPI’s absorption of former FEBTC employees was neither by operation of law nor by legal consequence of contract. There was no government regulation or law that compelled the merger of the two banks or the absorption of the employees of the dissolved corporation by the surviving corporation. Had there been such law or regulation, the absorption of employees of the non-surviving entities of the merger would have been mandatory on the surviving corporation. In the present case, the merger was voluntarily entered into by both banks presumably for some mutually acceptable consideration. In fact, the Corporation Code does not also mandate the absorption of the employees of the non-surviving corporation by the surviving corporation in the case of a merger. Section 80 of the Corporation Code provides. This Court believes that it is contrary to public policy to declare the former FEBTC employees as forming part of the assets or liabilities of FEBTC that were transferred and absorbed by BPI in the Articles of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property rights and obligations of FEBTC and do not include the employment contracts of its personnel. A corporation cannot unilaterally transfer its employees to another employer like chattel. Certainly, if BPI as an employer had the right to choose who to retain among FEBTC’s employees, FEBTC employees had the concomitant right to choose not to be absorbed by BPI. Even though FEBTC employees had no choice or control over the merger of their employer with BPI, they had a choice whether or not they would allow themselves to be absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from resigning or retiring and seeking employment elsewhere instead of going along with the proposed absorption. Employment is a personal consensual contract and absorption by BPI of a former FEBTC employee without the consent of the employee is in violation of an individual’s freedom to contract. It would have been a different matter if there was an express provision in the articles of merger that as a condition for the merger, BPI was being required to assume all the employment contracts of all existing FEBTC employees with the conformity of the employees. In the absence of such a provision in the articles of merger, then BPI clearly had the business management decision as to whether or not employ FEBTC’s employees. FEBTC employees likewise retained the prerogative to allow themselves to be absorbed or not; otherwise, that would be tantamount to involuntary servitude. There appears to be no dispute that with respect to FEBTC employees that BPI chose not to employ or FEBTC employees who chose to retire or be separated from employment instead of "being absorbed," BPI’s assumed liability to these employees pursuant to the merger is FEBTC’s liability to them in terms of separation pay, retirement pay or other benefits that may be due them depending on the circumstances. Although not binding on this Court, American jurisprudence on the consequences of voluntary mergers on the right to employment and seniority rights is persuasive and illuminating. We quote the following pertinent discussion from the American Law Reports: Several cases have involved the situation where as a result of mergers, consolidations, or shutdowns, one group of employees, who had accumulated seniority at one plant or for one employer, finds that their jobs have been discontinued except to the extent that they are offered employment at the place or by the employer where the work is to be carried on in the future. Such cases have involved the question whether such transferring employees should be entitled to carry with them their accumulated seniority or whether they are to be compelled to start over at the bottom of the seniority list in the "new" job. It has been recognized in some cases that the accumulated seniority does not survive and cannot be transferred to the "new" job.

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In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that, absent some specific contract provision otherwise, seniority rights were ordinarily limited to the employment in which they were earned, and concluding that the contract for which specific performance was sought was not such a completed and binding agreement as would support such equitable relief, since the railroad, whose concurrence in the arrangements made was essential to their effectuation, was not a party to the agreement. Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the dissolved corporation’s employees or the recognition of the absorbed employees’ service with their previous employer may be demanded from the surviving corporation if required by provision of law or contract. The dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and conditions of employment of the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take away from corporate management the prerogative to make purely business decisions on the hiring of employees or will give it an excuse not to apply the CBA in force to the prejudice of its own employees and their recognized collective bargaining agent. In this regard, we disagree with Justice Brion. Justice Brion takes the position that because the surviving corporation continues the personality of the dissolved corporation and acquires all the latter’s rights and obligations, it is duty-bound to absorb the dissolved corporation’s employees, even in the absence of a stipulation in the plan of merger. He proposes that this interpretation would provide the necessary protection to labor as it spares workers from being "left in legal limbo." However, there are instances where an employer can validly discontinue or terminate the employment of an employee without violating his right to security of tenure. Among others, in case of redundancy, for example, superfluous employees may be terminated and such termination would be authorized under Article 283 of the Labor Code. The lack of a provision in the plan of merger regarding the transfer of employment contracts to the surviving corporation could have very well been deliberated on the part of the parties to the merger, in order to grant the surviving corporation the freedom to choose who among the dissolved corporation’s employees to retain, in accordance with the surviving corporation’s business needs. If terminations, for instance due to redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be valid. The surviving corporation too is duty-bound to protect the rights of its own employees who may be affected by the merger in terms of seniority and other conditions of their employment due to the merger. Thus, we are not convinced that in the absence of a stipulation in the merger plan the surviving corporation was compelled, or may be judicially compelled, to absorb all employees under the same terms and conditions obtaining in the dissolved corporation as the surviving corporation should also take into consideration the state of its business and its obligations to its own employees, and to their certified collective bargaining agent or labor union. Even assuming we accept Justice Brion’s theory that in a merger situation the surviving corporation should be compelled to absorb the dissolved corporation’s employees as a legal consequence of the merger and as a social justice consideration, it bears to emphasize his dissent also recognizes that the employee may choose to end his employment at any time by voluntarily resigning. For the employee to be "absorbed" by BPI, it requires the employees’ implied or express consent. It is because of this human element in employment contracts and the personal, consensual nature thereof that we cannot agree that, in a merger situation, employment contracts are automatically transferable from one entity to another in the same manner that a contract pertaining to purely proprietary rights – such as a promissory note or a deed of sale of property – is perfectly and automatically transferable to the surviving corporation. That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool to adjudicate rights and obligations between and among the merged corporations and the persons that deal with them. Although in a merger it is as if there is no change in the personality of the employer, there is in reality a change in the situation of the employee. Once an FEBTC employee is absorbed, there are presumably changes in his condition of employment even if his previous tenure and salary rate is recognized by BPI.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

It is reasonable to assume that BPI would have different rules and regulations and company practices than FEBTC and it is incumbent upon the former FEBTC employees to obey these new rules and adapt to their new environment. Not the least of the changes in employment condition that the absorbed FEBTC employees must face is the fact that prior to the merger they were employees of an unorganized establishment and after the merger they became employees of a unionized company that had an existing collective bargaining agreement with the certified union. This presupposes that the union who is party to the collective bargaining agreement is the certified union that has, in the appropriate certification election, been shown to represent a majority of the members of the bargaining unit. Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to be absorbed, then due to BPI’s blanket assumption of liabilities and obligations under the articles of merger, BPI was bound to respect the years of service of these FEBTC employees and to pay the same, or commensurate salaries and other benefits that these employees previously enjoyed with FEBTC. As the Union likewise pointed out in its pleadings, there were benefits under the CBA that the former FEBTC employees did not enjoy with their previous employer. As BPI employees, they will enjoy all these CBA benefits upon their "absorption." Thus, although in a sense BPI is continuing FEBTC’s employment of these absorbed employees, BPI’s employment of these absorbed employees was not under exactly the same terms and conditions as stated in the latter’s employment contracts with FEBTC. This further strengthens the view that BPI and the former FEBTC employees voluntarily contracted with each other for their employment in the surviving corporation. CHAPTER 13: APPRAISAL RIGHT A.

DEFINITION

Appraisal Right is the method of paying a shareholder for the taking of his property. It is a statutory means whereby a stockholder can avoid the conversion of this property into another property not of his own choosing and is given to a shareholder as compensation for the abrogation of the commonlaw rule that a single stockholder could block a certain corporate act such as merger.

PURPOSE: is to protect the property rights of dissenting stockholders from

actions by the majority shareholders which alters the nature and character of their investment. In effect, it is a right granted to dissenting stockholders on certain corporate or business decisions to demand payment of the fair market value of their shares. B.

WHEN EXERCISED

Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 3.

4.

In case any 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; 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 the Code; and

corporation has sufficient assets to cover its debts and liabilities, exclusive of capital stock (Sec. 105).

NOT ALL AMENDMENTS: the right may only be exercised in cases of

amendment which “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”. Accordingly, if the amendment is to increase or decrease the number of directors, or change the corporate name, or change of principal office, the appraisal right is not available.

STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the

appraisal right, since the subscriber is entitled to all the rights of a stockholder under Sec. 72 and although Sec. 82 provides for the submission of certificate of stock, Sec. 86 provides that the notation to such certificate of stock is OPTIONAL at the instance of the corporation. C.

Sec. 82. How right is exercised. – The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: 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 or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved 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 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 earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.

REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF THIS RIGHT ARE: 1. 2.

3.

4.

3. In case of merger or consolidation.

ENUMERATION NOT EXCLUSIVE: it may also cover: 1. 2.

Investment of funds in another corporation or business or for any other purpose other than its primary purpose as provided in Sec. 42; Likewise, in a close corporation, a stockholder has the unbridled right to compel the corporation “for any reason” to purchase his shares at their fair value which shall not be less than the par or issued value, when the

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REQUIREMENTS AND PROCEDURE

5. D.

The stockholder must have voted against the proposed corporate action in any of the instances allowed by law for the exercise of the right of appraisal; The written demand for payment must be made by the dissenting stockholder within 30 days after the date on which the vote was taken. Failure to make the demand within the said period shall be deemed a waiver on the part of the stockholder concerned to exercise his appraisal right; Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and the payment of the corporation of the fair market value of the said shares as of the day prior to the date on which the vote was taken. If the stockholder and the corporation cannot agree on the fair market value thereof, the same shall be determined in accordance with the provisions of par.2 of Sec. 82; The fair value of the shares of the dissenting stockholder must be paid by the corporation only if it has “unrestricted retained earnings” in its books to cover such payment. If the corporation has no unrestricted retained earnings, the dissenting stockholder may not, therefore, be able to effectively exercise his appraisal right, EXCEPT in the case of a close corporation under Sec. 105; Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to the corporation. EFFECT OF EXERCISE OF APPRAISAL RIGHT

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Sec. 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the steps provided in Sec. 82, the stockholder concerned is regarded as having made an election to withdraw from the corporate enterprise and take the value of his stock. Such a procedure suspends (for a maximum period of 30 days) certain ownership rights associated with stockholder status, such as the right to receive dividends or distribution and the right to vote which cannot be restored without compliance with the governing statutory conditions.

DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to function as such, prior to payment, unless there is a contrary provision in the by-laws. E.

WHEN RIGHT TO PAYMENT CEASES

Sec. 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him.

INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO BE PAID THE FAIR VALUE OF HIS SHARES CEASES: 1.

6.

When he withdraws his demand for payment and the corporation consents thereto; When the proposed action is abandoned or rescinded by the corporation; When the proposed action is disapproved by the SEC where such approval is necessary; When the SEC determines that he is not entitled to exercise his appraisal right; When he fails to submit the stock certificate within ten (10) days from demand to the corporation for notation that such shares are dissenting shares; and, If the shares are transferred and the certificate subsequently cancelled.

F.

COST OF APPRAISAL

2. 3. 4. 5.

If the corporation and the dissenting stockholder do not agree, an appraisal to be made by three disinterested person may be made. Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified.

THE CORPORATION BEARS THE COST IF: a.

b.

The price offered by the corporation is lower than the fair value of the shares of the dissenting stockholder as determined by the appraisers; Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified.

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DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND EXPENSES OF APPRAISAL WHEN: a.

b. G.

When the price offered by the corporation is approximately the same as the fair value ascertained by the appraisers; Where the action filed by the dissenting stockholder and his refusal to accept payment is found by the court to be unjustified. NOTATION

Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee.

PURPOSE: to give notice and guide to the corporation to determine the respective rights of stockholder.

SALE: The law does not prohibit the dissenting stockholder to sell, transfer or assign his shares. If such be the case, the right of the dissenting stockholder to be paid the fair value of his shares shall cease and the transferee will acquire all the rights of a regular stockholder inclusive of all dividends which would have accrued on such shares. CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI) A.

DEFINITION

Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident 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 corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title.

CAPITAL STOCK: the old notion is that a non-stock corporation is one which has no capital stock divided into shares – this may no longer hold true under the definition provided by Sec. 87. Thus, even if it may have capital stock divided into shares, proprietary or otherwise, a corporation is considered “non-stock” so long as it does not distribute dividends to its members and officers. We have, for instance, Club shares issued t the members, the totality of which may rightfully represent “capital” of the corporation but whose income (if there be any) is not distributed by way of dividends during its corporate existence. The corporation, in such a case, is legally “non-stock”.

PROFITS: A non-stock corporation is generally not allowed to engage in any business undertaking or activity for profit as it would run counter to its very nature as a non-profit entity. However, as may be allowed and specified in its AOI or incidental to the objects and purposes indicated therein, it may engage in certain money-making ventures or economic activities provided that any profits derived therefrom shall be used for the furtherance of the purposes for which the corporation was organized or to defray the operating expenses of the entity. It has thus been said that the fact that a non-profit corporation earns a profit, gain or income for the corporation or members does not make it a profit-making corporation where such profit or income is used for the purpose set forth in the AOI and is not distributable to its incorporators, members or officers, since mere intangible or pecuniary benefits to the members do not change the nature of the corporation.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

The determination of whether or not a non-stock corporation can engage in profit-making business or activity depends largely on the purpose or purposes indicated in the AOI. If the business activity is authorized in the said articles, necessary, incidental or essential thereto, the same may be undertaken by the corporation, otherwise, not, as it would be an ultra-vires act under Sec. 45 B.

PURPOSE

Sec. 88. Purposes. - Non-stock 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 non-stock corporations. Non-stock corporations may be organized or formed for any purpose or purposes allowed or indicated in the above provision. The enumeration, however, is not exclusive as the law itself recognizes similar or allied purpose or purposes for which non-stock corporations may be organized. Recreational, sports club, athletic or allied activities of similar import, for instance, may likewise be lawful purpose of a non-stock corporation. C.

MEMBERSHIP AND VOTING RIGHTS

Sec. 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.

CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is not

allowed, accordingly, even if the members may cast as many votes are there are trustees to be elected, he may not cast more than one vote for one candidate, UNLESS: allowed in the AOI or the by-laws.

CLASSIFICATION: The by-laws or the AOI may provide for classification as

to members with voting or non-voting rights, since it is provided that “the right of the members of any class or classes to vote may be limited, broadened or denied”.

PROXY VOTING: Generally, allowed unless disallowed by the AOI or the bylaws.

VOTING OTHER THAN IN PERSON: may also be allowed by the AOI or

by-laws. Contrary to a stock corporation, a stockholder has to vote in the meeting called for the purpose except in case of a general amendment where “written assent” is allowed. Sec. 90. Non-transferability of membership. - Membership in a nonstock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. Sec. 91. Termination of membership. - Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.

MEMBERSHIP: non-stock corporations have the right to adopt rules

prescribing the mode and manner in which membership thereat can be obtained or maintained. This includes the right to limit membership. In other words, membership in non-stock corporations may be acquired by complying with the provisions of its rules prescribed in the by-laws. This is in

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consonance with the express power granted by law under Sec. 36, par. 6 of the Code, authorizing them to admit members thereof and that authority carries with it the power to prescribe rules on membership. It has thus been stated that in the absence of charter or statutory restrictions, non-stock corporations may determine who shall be admitted to membership and how they shall be admitted. It may exclude any person whom it deems unfit for membership. Indeed, in the absence of restrictions, it may act arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere. In other words, it is free to fix qualifications for membership and to provide for termination of membership.

AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if any, shall govern. Absent any provision to the contrary, it must necessarily be lodged with the BOT since it is the body that exercises all corporate powers as enunciated in Sec. 23 of the Code.

SPECIAL CASES: the law itself may provide certain limitations or even perhaps proscription on transfer of membership. Thus, RA 4726, otherwise known as the Condominium Act requires that membership therein shall not be transferred separately from the condominium unit of which it is appurtenant and that when a member ceases to own a unit, he shall automatically cease to be a member.

TERMINATION OF MEMBERSHIP: Membership may be terminated in the

manner and for causes provided in the AOI or by-laws and when a member is so terminated it shall extinguish all his rights in the corporation or in its property unless otherwise provided in the said articles or by-laws. The power or authority to terminate members in non-stock corporations is said to be inherent but strict compliance with the manner and procedure laid down in the by-laws must be observed, otherwise it may render the expulsion ineffective and invalid. In the absence of any provision in the AOI or by-laws relative to the manner and causes of termination or expulsion of member, the decided weight of authority is to the effect that the power is inherent and may be exercised in certain situations, namely: 1. When an offense is committed which, although it has no immediate relation to a member’s duty as such, it is so infamous as to render him unfit for society of honest men, and which is indictable at common law; 2. When the offense is a violation of his duty as member of the corporation; and 3. When the offense is of a mixed nature, being both against his duty as a member of the corporation, and also indictable at common law. As to whether or not a member should be expelled or maintained is the established right of the corporation to determine and the courts are without authority to strip a member of his membership without cause. CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director and President of the said Association, and JUANITO K. TAN, in his capacity as Recording Secretary of the said Association, petitioners, vs. VICTOR CHING and THE COURT OF APPEALS, respondents

(G.R. No. L-36929; June 18, 1976)

FACTS: Respondent Ching, a member of the BOD of petitioner Chinese YMCA, filed an action in the CFI, alleging that on the Membership Campaign of the Chinese YMCA held from Sept. 27, 1965, only 175 applicants were submitted, canvassed and accepted on the last day of the membership campaign, which was Nov. 26, 1965, NOT more than 240, as reported in the Nov. 28, 1965 issue of the Chinese Commercial News. The trial court rendered a decision in favor of herein respondent declaring that only 174 applications constitute the present active membership of the association. ISSUE: WON the trial court is justified in stripping members of their membership in a non-stock corporation?

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

HELD: No. The documentary evidence itself as cited by the trial court, consisting of the applications and the receipts for payment of the membership fees show that they were filed and paid not later than the November 26, 1965 deadline, and this was further supported by the bank statement of the petitioner YMCA deposit account with the China Banking Corporation and the checks paid by certain members to the YMCA which show that the application fees corresponding to the questioned 74 applications (that raised the total to 249 from 175) were already paid to petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6-A, 6-B and 6-C). No evidence could be cited by the trial court to rebut this well nigh conclusive documentary evidence other than respondent's unsupported suspicion which the trial court adopted in a negative manner with its statement that it is "not improbable" that "some of those applications filed after said deadline". If there were indeed any applications filed after the deadline, they certainly should have been positively pin-pointed and specifically annulled. What is worse, 175 membership applications were undisputedly filed within the deadline (including the 75 withdrawn by respondent) and yet the 100 remaining unquestioned memberships were nullified by the questioned decision without the individuals concerned ever having been impleaded or heard (except the individual petitioners president and secretary). The appealed decision thus contravened the established principle that the courts cannot strip a member of a non-stock non-profit corporation of his membership therein without cause. Otherwise, that would be an unwarranted and undue interference with the well-established right of a corporation to determine its membership, as announced by Fletcher, as follows: Compliance with provisions of charter, constitution or by-laws. —In order that membership may be acquired in a non-stock corporation and valid bylaws must be complied with, except in so far as they may be and are waived. *** But provisions in the by-laws as to formal steps to be taken to acquire membership may be waived by the corporation, or it may be estopped to assert that they have not been taken. [12A Fletcher Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]

special non-proprietary member. The designation was thereafter approved by the CCCI’s Board of Directors. In 1996, respondent filed with CCCI an application for proprietary membership. The application was indorsed by CCCI’s two (2) proprietary members, namely: Edmundo T. Misa and Silvano Ludo. As the price of a proprietary share was around the P5 million range, Benito Unchuan, then president of CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however, purchased the share of a certain Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to respondent. During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of Directors, action on respondent’s application for proprietary membership was deferred. In another Board meeting held on July 30, 1997, respondent’s application was voted upon. Subsequently, or on August 1, 1997, respondent received a letter from Julius Z. Neri, CCCI’s corporate secretary, informing him that the Board disapproved his application for proprietary membership. On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of reconsideration. Still, CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter inquiring whether any member of the Board objected to his application. Again, CCCI did not reply. Consequently, on December 23, 1998, respondent filed with the Regional Trial Court (RTC), Branch 71, Pasig City a complaint for damages against petitioners, docketed as Civil Case No. 67190. After trial, the RTC rendered its Decision dated February 14, 2001 in favor of respondent. On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003, affirmed the trial court’s Decision and denied the Motion for Reconsideration subsequently filed.

Finally, the appealed decision did not give due importance to the undisputed fact therein stated that "at the board meeting of the association held on December 7, 1965, a list of 174 applications for membership, old and new, was submitted to the board and approved by the latter, over the objection of the petitioner [therein private respondent] who was present at said meeting." Such action of the petitioner association's board of directors approving the 174 membership applications of old and new members constituting its active membership as duly processed and screened by the authorized committee just be deemed a waiver on its part of any technicality or requirement of form, since otherwise the association would be practically paralyzed and deprived of the substantial revenues from the membership dues of P17,400.00 (at P100.00 per application).

Hence, the present petition.

WHEREFORE the respondent court's decision is hereby set aside and in lieu thereof judgment is rendered dismissing private respondent's petition in the Court of First Instance of Manila and dissolving the preliminary injunction, with costs against private respondent.

CCCI’s Articles of Incorporation provide in part:

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and JOSE B. SALA, petitioners, vs. RICARDO F. ELIZAGAQUE, respondent

(G.R. No. 160273 ; January 18, 2008)

FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a non-profit and non-stock private membership club, having its principal place of business in Banilad, Cebu City. Petitioners herein are members of its Board of Directors. Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for the Visayas and Mindanao, as a

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ISSUE: WON in disapproving respondent’s application for proprietary membership with CCCI, petitioners are liable to respondent for damages? HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to respondent despite the lack of evidence that they acted in bad faith in disapproving the latter’s application; and in disregarding their defense of damnum absque injuria. For his part, respondent maintains that the petition lacks merit, hence, should be denied.

SEVENTH: That this is a non-stock corporation and membership therein as well as the right of participation in its assets shall be limited to qualified persons who are duly accredited owners of Proprietary Ownership Certificates issued by the corporation in accordance with its By-Laws. Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides: SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the admission of new members of the Club shall be as follows: (a) Any proprietary member, seconded by another voting proprietary member, shall submit to the Secretary a written proposal for the admission of a candidate to the "Eligible-for-Membership List"; (b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club bulletin board during which time any member may interpose objections to the admission of the applicant by communicating the same to the Board of Directors; (c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if there are, the Board considers the objections

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unmeritorious, the candidate shall be qualified for inclusion in the "Eligiblefor-Membership List"; (d) Once included in the "Eligible-for-Membership List" and after the candidate shall have acquired in his name a valid POC duly recorded in the books of the corporation as his own, he shall become a Proprietary Member, upon a non-refundable admission fee of P1,000.00, provided that admission fees will only be collected once from any person. On March 1, 1978, Section 3(c) was amended to read as follows: (c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote of all directors present at a regular or special meeting, approve the inclusion of the candidate in the "Eligible-forMembership List". As shown by the records, the Board adopted a secret balloting known as the "black ball system" of voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended, cited above, a unanimous vote of the directors is required. When respondent’s application for proprietary membership was voted upon during the Board meeting on July 30, 1997, the ballot box contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved. Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or disapprove an application for proprietary membership. But such right should not be exercised arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide restrictions. In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it with Article 21, thus: “This article, known to contain what is commonly referred to as the principle of abuse of rights, sets certain standards which must be observed not only in the exercise of one's rights but also in the performance of one's duties. These standards are the following: to act with justice; to give everyone his due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A right, though by itself legal because recognized or granted by law as such, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for the government of human relations and for the maintenance of social order, it does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or Article 21 would be proper. (Emphasis in the original)” In rejecting respondent’s application for proprietary membership, we find that petitioners violated the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings and for the stability of social order. The trial court and the Court of Appeals aptly held that petitioners committed fraud and evident bad faith in disapproving respondent’s applications. This is contrary to morals, good custom or public policy. Hence, petitioners are liable for damages pursuant to Article 19 in relation to Article 21 of the same Code. It bears stressing that the amendment to Section 3(c) of CCCI’s Amended ByLaws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form respondent filled and submitted to CCCI. What was printed thereon was the original provision of Section 3(c) which was silent on the required number of votes needed for admission of an applicant as a proprietary member. Petitioners explained that the amendment was not printed on the application form due to economic reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being extremely significant, was introduced way back in 1978 or almost twenty (20) years before respondent filed his application. We cannot fathom why such a prestigious and exclusive golf

country club, like the CCCI, whose members are all affluent, did not have enough money to cause the printing of an updated application form. It is thus clear that respondent was left groping in the dark wondering why his application was disapproved. He was not even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration and an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, respondent did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they should have informed him why his application was disapproved. The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible. It bears reiterating that the trial court and the Court of Appeals held that petitioners’ disapproval of respondent’s application is characterized by bad faith. As to petitioners’ reliance on the principle of damnum absque injuria or damage without injury, suffice it to state that the same is misplaced. In Amonoy v. Gutierrez, we held that this principle does not apply when there is an abuse of a person’s right, as in this case. As to the appellate court’s award to respondent of moral damages, we find the same in order. Under Article 2219 of the New Civil Code, moral damages may be recovered, among others, in acts and actions referred to in Article 21. We believe respondent’s testimony that he suffered mental anguish, social humiliation and wounded feelings as a result of the arbitrary denial of his application. ISSUE2: WON the liability is solidary considering that only one voted for disapproval? HELD: Yes. Section 31 of the Corporation Code provides: SEC. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Emphasis ours) WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED with modification in the sense that (a) the award of moral damages is reduced from P2,000,000.00 to P50,000.00; (b) the award of exemplary damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of attorney’s fees and litigation expenses is reduced from P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00, respectively. D.

TRUSTEES AND OFFICERS

The word “trustees” as used in Sec. 92 makes reference to the governing board or body in a non-stock corporation. Sec. 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of nonstock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the

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DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, and

HELD: No. We adopt the general rule that "... the courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members, or questions of policy, discipline, or internal government, so long as the government of the society is fairly and honestly administered in conformity with its laws and the law of the land, and no property or civil rights are invaded. Under such circumstances, the decision of the governing body or established private tribunal of the association is binding and conclusive and not subject to review or collateral attack in the courts. " (7 C.J.S. pp. 38- 39).

NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or by-

The general rule of non-interference in the internal affairs of associations is, however, subject to exceptions, but the power of review is extremely

corporation. Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members.

QUALIFICATIONS OF TRUSTEES: 1. 2. 3.

He is a member of the association; Majority thereof must be residents of the Philippines; and Other qualifications as may be provided for in the by-laws.

Sec. 29 and 30 as to removal also apply to Trustees.

laws, contrary to a stock corporation whose BOD must not exceed 15 members.

TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office

and may vary depending on the needs of a specific corporation. By analogy of the provisions of Sec. 7, however, a term in excess of 5 years is not allowed as it would unduly deprive other members to take active part in corporate management.

STAGGERED TERM: The term of office may also be staggered unless the

AOI or by-laws otherwise provide. If such be the case, the board shall classify themselves in order that 1/3 of their number shall expire every year and subsequent elections of trustees comprising 1/3 shall be held annually. The trustees so elected to fill up any vacancy occurring before the expiration of a particular term shall hold office only for the unexpired portion of his predecessor.

GOVERNING BOARDS: While the Code speaks of the BOT as the governing

board or body in a non-stock corporation the same law allows a non-stock corporation or any other special corporation to designate their governing board by any other name other than BOD/T. The Rotary Club for instance, designates it as Board of Governors while the Evangelica Independence Metodista En Las Islas Filipinas calls it as the Consistory of Elders.

ELECTION BY MEMBERS OF OFFICERS: One of the significant features of a non-stock corporation is that it allows the AOI or by-laws to provide that the officers thereof shall be directly elected by the members. Unlike in a stock corporation where corporate officers are elected by the BOD.

Section 138. Designation of governing boards. - The provisions of specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners, vs. HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA, respondents.

(G.R. No. L-61259; April 26, 1983)

FACTS: Vicente Josefa and James L. So entered into an agreement whereby So would withdraw his candidacy for the post of Governor of District 301-A of herein petitioner Lions Club International. Such withdrawal was accepted by Governor Huang, however news items were published conveying the idea that So had not withdrawn from the gubernatorial race. Josefa filed a complaint before the CFI for quo warranto, injunction or at least a temporary restraining order alleging irregularities in the election; that although at the old site of the election, Josefa won, the Lions Club Internation unlawfully recognized So as the winner.

limited. Accordingly, the courts have and will exercise power to interfere in the internal affairs of an association where (1) law and justice so require, and (2) the proceedings of the association are subject to judicial review where there is fraud, oppression, or bad faith, or (3) where the action complained of is capricious, arbitrary, or unjustly discriminatory. Also, the courts will usually entertain jurisdiction to grant relief (4) in case property or civil rights are invaded, although it has also been held that the involvement of property rights does not necessarily authorize judicial intervention, in the absence of arbitrariness, fraud or collusion. Moreover, the courts will intervene (5) where the proceedings in question are violative of the laws of the society, or the law of the land, as by depriving a person of due process of law. Similarly, judicial intervention is warranted (6) where there is a lack of jurisdiction on the part of the tribunal conducting the proceedings, where the organization exceeds its powers, or where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41). In accordance with the general rules as to judicial interference cited above, the decision of an unincorporated association on the question of an election to office is a matter peculiarly and exclusively to be determined by the association, and, in the absence of fraud, is final and binding on the courts. (7 C.J.S., p. 44). The instant controversy between petitioner So and respondent Josefa falls squarely within the ambit of the rule of judicial non-intervention or noninterference. The elections in dispute, the manner by which it was conducted and the results thereof, is strictly the internal affair that concerns only the Lions association and/or its members, and We find from the records that the same was resolved within the organization of Lions Clubs International in accordance with the Constitution and By-Laws which are not immoral, unreasonable, contrary to public policy, or in contravention of the laws of the land At the meeting of the International Board of Directors held on June 27, 1982, the election of petitioner James L. So to serve as District Governor of District 301-Al for the fiscal year 1982-83 was approved and said petitioner was duly informed thereof by Richard G. Rice, Manager, District Operations Department, Lions Clubs International in his letter dated July 8, 1982 and marked Annex "K" to the petition, p. 79, Records. Petitioner attended and completed the District Governors' Executive Seminar as District Governor of 301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was proclaimed, sworn to and installed to office as District Governor of District 301-Al by the President of Lions International at the close of the 65th Lions Clubs International Convention held in Atlanta, Georgia, U.S.A The findings upon the evidence submitted and examined at the hearing of the election protest before the Committee personally attended by both petitioner So and respondent Josefa may not be disturbed by the courts. The decision of the Association's tribunal, the International Board of Directors, is controlling since respondent Josefa alleges no invasion of this property or civil rights and neither is it claimed that the government of the Association is not fairly and honestly administered in conformity with its laws and the law of the land.

The trial court issued the TRO which was later on lifted and on appeal, the CA issued a new TRO.

E.

ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue cognizable by the courts?

Sec. 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is

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PLACE OF MEETINGS

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located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. PLACE OF MEETING: another distinctive feature of a non-stock corporation is that membership meeting may be held anywhere in the Philippines whereas in a stock corporation, the stockholders’ meeting is mandated to be held or conducted within the city or municipality where the principal office is located, and as far as practicable, within the principal office of the corporation. F.

DISTRIBUTION OF ASSETS UPON DISSOLUTION

Corporations, stock and non-stock, may be dissolved in accordance and pursuant to the provisions of Sections 118 to 121 of the Corporation Code and the pertinent provisions of P.D. 902-A, as amended. If such be the case, the assets of the corporation are to be distributed in accordance with law and established jurisprudence. Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. Culled from the law is that non-stock corporations may provide in the AOI or by-laws, for the distribution of its assets among its members subject to the provisions of Sec. 94 and 95. That is, the exception relative to assets which it holds upon some trust. In which event, the claims of the state, beneficiaries, rightful owners or donors will have to be considered. Thus, assets not subject to the provisions of number 2-4 of Sec. 94 may be distributed in accordance with a plan of distribution thereof in accordance with the rule established in Sec. 95 of the Code.

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CHAPTER 15: CLOSE CORPORATION A.

DEFINITION

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) 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); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. The ultimate effect of the special provisions of the law on close corporations is to furnish another form of business organization – a “de facto corporation with a corporate shell”. It is referred to sometimes as a hybrid of both the corporate and partnership forms, an “incorporated partnership” or “corporation de jure but a de facto partnership”. This is because a close corporation may partake the nature of a partnership in that the stockholders thereof take an active role in the management of the corporate affairs either as directors, officers or even perhaps as partners in management which is akin to the partnership form of business. This, in fact, is the main distinction between a close corporation and the ordinary stock corporation where, in the latter, the stockholders have hardly a voice in management except perhaps to elect the directors. Despite this, the stockholders who are active in management still enjoy limited liability to the extent of their subscription in so far as corporate obligations are concerned. It will be noted, however, that under no. 5 of Sec. 100 of the Code, they are made personally liable for corporate torts unless they have obtained a reasonably adequate insurance liability.

CLOSE CORPORAIONS: must contain the three provisions required to be

indicated in the AOI as provided by Sec. 96. Absent any of the provisions required by the said section, the corporation, will not, for all legal intents and purposes, be considered as a close corporation and would thus not be governed by TITLE XII of the Code, but by the general provisions governing ordinary corporation. “A corporation does not become a close corporation just because man and his wife owns 99.86% if the capital stock” (San Juan Structural Steel vs. CA). The qualifying conditions requreid by law must be complied with.

2/3 OWNED BY ANOTHER CORPORATION: Even if another corporation

owns or controls 2/3 of the “voting” stocks of a close corporation, the latter may still be considered as such close corporation if the corporation owning or controlling the shares is also a close corporation.

BUSINESS WITH PUBLIC INTEREST: may not be formed as close corporation under the second paragraph of Sec. 95. Sec. 140 of the Code lays down a similar policy authorizing NEDA to recommend to the legislature the setting of maximum limits to family or group ownership of stock in corporations vested with public interest, and the determination of whether or not it should be vested with public interest within its domain. B.

PERMISSIVE PROVISIONS

Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide:

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1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.

CLASSIFICATION OF SHARES: Under no. 1 above, the close corporation

may classify its shares into different classes to be held of record only by specified persons. Example: Classes A, B and C. Class A is to be held only by the incorporators; Class B by their relatives within the third civil degree of consanguinity or affinity; Class C by their close business associates.

CLASSIFICATION OF DIRECTORS: Under no. 2 above, a close

2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors.

ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a close

corporation to provide that all officers or employees shall be elected or appointed by the stockholders instead of the BOD. C.

EFFECT OF BREACH OF QUALIFYING CONDITIONS

Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. The restriction must be indicated not only in the AOI and the stock certificates but also in the by-laws. The restrictions, however, shall not be more onerous than granting existing stockholders or the corporation the option to purchase the shares of the selling or transferring stockholder within reasonable terms, conditions and period. If, after the expiration of the period, the existing stockholders or the corporation fails to exercise the option, the stockholder concerned may transfer his shares to any third person subject to the provisions, however, of Sec. 99:

corporation may provide for a classification of directors into one or more class, each of whom may be voted for and elected solely by a particular class of stock. Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C shares. The AOI may provide that each class shall have a representation in the BOD regardless of the number of shares within each class. So, if the close corporation has 5 directors, then the AOI may allocate 3 directors for Class A shares, 1 for B and 1 for C. Within each class, cumulative voting may also be exercised by the stockholders of such class to elect their representative in the board. But to the extent that each class can elect its own directors regardless of the number of shares in such class, cumulative voting may, in effect be restricted. This is so because if there is no provision for a classification of directors, then Class A stockholders, by cumulating their votes (5x1000) will have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B shares, having 2,500 votes can vote 2 members and Class C shares having only 1,000 votes cannot be guaranteed to any seat in the board.

Sec. 99. Effects of issuance or transfer of stock in breach of

QUORUM AND VOTING REQUIREMENT: a close corporation may provide

have notice of this fact.

for a greater quorum or voting requirement under no. 3 above. Although the AOI or by-laws of other stock corporations may provide for greater quorum and voting requirements in directors’ meeting as provided in Sec. 25 of the Code, those for stockholder’ meeting, unlike in a close corporation, may not be altered or increased. This provisions in effect, increases the veto power of the minority stockholders.

DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close

corporation may provide that the corporation shall be managed by the stockholders rather than by the BOD. If such be the case, the stockholders are deemed directors and are subject to all the rights and liabilities of a director. However, their liability would be more extensive in that they are personally lilable for torts unless, again, the corporation has obtained reasonably adequate liability insurance. As distinguished from the ordinary stock corporation, directors hereof are liable for corporate torts only if they have been negligent or acted fraudulently in the performance of their functions. As to what is “reasonably adequate liability insurance” would vary depending on the facts and circumstances of the case. In order that the provision allowing a close corporation to do away with a BOD may be effective, the same must contain the continuing provisions required in par. 2 of Sec. 97: 1. No meeting of stockholders need be called to elect directors;

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qualifying conditions. –

1. If stock of a close corporation is issued or transferred to any person who is

not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.

2. If the articles of incorporation of a close corporation states the number of

persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.

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6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied.

SALE OF SHARES: Apparently, a selling stockholder may not be able to transfer his shares if to do so would violate the qualifying conditions indicated in the AOI unless of course, all the stockholder consents to the transfer or the AOI is amended (no. 5 above).

STOCKHOLDER: concerned is not, however, left without any recourse as he may compel the close corporation to purchase his shares at their fair value for any reason subject only to the condition laid down in Sec. 105.

TRANSFEREE: may rescind the transaction or to recover from the transferor under any applicable warranty, express or implied. D.

STOCKHOLDERS’ AGREEMENT

Sec. 100. Agreements by stockholders. –

CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the

subject of an agreement, in writing, and will be effective and binding despite the fact that it may make them partners among themselves. Agreements may also be entered into by and between the stockholders of a close corporation which relates to the management of the corporate affairs which would not otherwise be valid and binding in other corporations. This is because stockholders’ agreement in the latter cannot limit or restrict the discretion and powers of the BOD to manage the corporate affairs. E.

WHEN BOARD MEETINGS NOT NECESSARY:

As a rule, directors in ordinary stock corporations must act as a body at a duly constituted meeting to have a valid corporate transaction. In a close corporation, directors may validly act even without a meeting subject only to the conditions laid down in the Code under Sec. 101: Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or

1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation.

2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.

If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.

3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors.

3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

F.

PRE-EMPTIVE RIGHTS

Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. G.

AMENDMENTS TO ARTICLES OF INCORPORATION

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

Sec. 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.

PRE-INCORPORATION AGREEMENTS: under par.1 do not ordinarily

H.

VOTING AGREEMENTS or rights or the manner of exercising voting rights

Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) canceling,

survive the corporation in ordinary stock corporations unless it has been ratified or adopted by the corporation after incorporation. Only in such case may the corporation be bound by said agreement. In a close corporation, these pre-incorporation agreements survive and continue to be valid and binding, if such be the intent of the stockholders, provided that the agreement is not inconsistent with the AOI under par. 2 may be the subject of agreement of stockholders, such as to vote for a specific person or group or to maintain a certain stockholder as their president or chairman.

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DEADLOCKS

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. The provision above-quoted gives the SEC a very wide discretion in respect to management of a close corporation in the event of a deadlock. It may: 1. Cancel or alter any provision in the AOI, by-laws or any stockholders’ agreement; 2. Cancel, alter or enjoin any resolution or other act of the corporation or its BOD, stockholders or officers; 3. Prohibit any act of the corporation or its BOD, stockholders or officers or other persons party to the action; 4. Requiring the purchase of the par value of the shares of any stockholders, either by the corporation regardless of availability of unrestricted retained earnings, or by the other shareholders; 5. Appointment of a provisional director; - the second paragraph of Sec. 104 will govern. The provisional director may break the deadlock by casting the deciding vote. 6. Dissolving the corporation; or 7. Other relief as the circumstances may warrant. I.

WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION

If a stockholder wishes to withdraw therefrom, he may do so “for any reason” and compel the corporation to purchase his shares at their fair value provided only that the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock. This can be done by a stockholder in ordinary stock corporation only upon the exercise of his appraisal right in those instances allowed under Sec. 81 of the Code. Likewise a corporation may be dissolved on petitioner of only one stockholder on the grounds indicated in Sec. 105 which include even mere dishonesty. It provides: Sec. 105. Withdrawal of stockholder or dissolution of corporation. In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. J.

CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION CLOSE CORPORATION

The number of stockholders cannot

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No

ORDINARY STOCK CORPORATION limitation as to number

exceed 20 To the extent that all stockholders can be deemed directors, the number of directors can effectively be more than 15 Shares of stock are subject to specified restrictions Shares of stock are prohibited from being listed in the stock exchange or offered for sale to the public Stockholders may take an active part in corporate management by vesting management to them rather than a Board of Director Those active in management are personally liable for corporate torts unless the corporation has obtained an adequate liability insurance Directors can validly act even without a meeting Agreements between stockholders regarding the operations of the business can validly be made To the extent that directors may be classified into one or more classes and to be voted solely by a particular class of stock, cumulative voting may, in effect, be restricted The articles of incorporation may provide that all officers shall be elected or appointed by the stockholders It may provide for greater quorum and voting requirements in meetings of stockholders and directors

Restriction on transfer of shares should be indicated in the articles of incorporation, by-laws and stock certificates Pre-emptive rights of stockholders is broader as it include all issues without exception A stockholder may withdraw and compel the corporation to purchase his shares for any reason with the limitation only that the corporation has sufficient assets to cover its liabilities exclusive of capital stock The proper forum may interfere in the management of a close corporation in case of deadlocks under Section 104, even of the directors/stockholders are acting in good faith Any stockholder may petition the SEC for corporate dissolution on grounds among others, provides for in section 105.

shareholder Maximum number of directors is 15

Generally no restriction on transfer of shares No prohibition Management is lodged in the Board of Directors Directors are liable for torts only if they have acted negligently or fraudulently Directors must, as a rule, act as a body at a duly constituted meeting Not valid and binding since stockholders’ agreement cannot limit the discretion of the Board to manage corporate affairs Ordinarily, no such classification and no restrictions on cumulative voting

Officers are elected by the Board of Directors Although the articles of incorporation or by-laws may provide for greater quorum and voting requirements in directors’ meeting under section 25, those for stockholders’ meeting cannot generally be altered Valid and binding if indicated in the articles of incorporation and stock certificates Pre-emptive rights may be denied as provided for in section 39 Unless he sells his shares, a stockholder cannot get back his investment nor compel the corporation to buy his shares except in the exercise of his appraisal right Courts cannot interfere I the business judgment of the directors/stockholders “BUSINESS JUDGMENT RULE” Dissolution may be had only on the grounds provided by the provisions of the Code on dissolution and P.D. 902-A, as amended

MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO REDOVAN, petitioners, vs. THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO, respondents.

(G.R. No. 91889; August 27, 1993) of

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises, Inc., through Board Resolution No. 18 sold the subject property, known as the Dulay Apartment, to private respondent Maria Theresa Veloso where a Memorandum to the Deed of Absolute Sale was executed giving Manuel Dulay within 2 years to repurchase the property. Respondent Veloso mortgaged said property to secure a loan from private respondent Manuel Torres. For non-payment of the said loan, Torres foreclosed the mortgage and was declared the highest bidder in the public auction. For Dulay’s and Veloso’s failure to redeem said property, Torres applied for consolidation of title, to which petitioner Virgilio Dulay, vice president of the corporation intervened alleging that Manuel Dulay was never authorized by the corporation to sell the property. Instead of impleading Virgilio Dulay, Torres withdrew his petition and moved for its dismissal which was granted. Later on, Torres and Edgardo Pabalan, real estate administrator of Torres, filed an action against petitioners (Redovan as tenant of Dulay Apartment) for the recovery of possession, sum of money and damages with preliminary injunction. Private respondents and Torres later on filed an action against spouses Florentino Manalastas, a tenant of Dulay Apartment with petitioner corporation for ejectment. The MTC decided in favor of respondents which was affirmed by the RTC and later by the CA. ISSUE: WON the sale of the subject property between private respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of the subject property was resolved without the approval of all the members of the board of directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary? HELD: No. Section 101 of the Corporation Code of the Philippines provides: Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors, or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiese of all the stockholders, or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors' meeting is held without call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do. Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. As correctly pointed out by the respondent Court of Appeals: Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never participated nor was even aware of any meeting or

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resolution authorizing the mortgage or sale of the subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the contrary, he is very much privy to the transactions involved. To begin with, he is a incorporator and one of the board of directors designated at the time of the organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely referred to as a "family corporation". The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father whose name identifies their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit that he was a signatory witness to the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private respondent Torres indicates that he was aware of the transaction executed between his father and private respondents and had, therefore, adequate knowledge about the sale of the subject property to private respondents. Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is valid and binding. As stated by the trial court: . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and treasurer but also the general manager of the corporation. The corporation was a closed family corporation and the only non-relative in the board of directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. There is no denying the fact, however, that Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation. SERGIO F. NAGUIAT, doing business under the name and style SERGIO F. NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION), NATIONAL ORGANIZATION OF WORKINGMEN and its members, LEONARDO T. GALANG, et al., respondents.

(G.R. No. 116123; March 13, 1997)

FACTS: Private respondents were employed as taxi drivers of Clark Field Taxi, Inc. which held a concessionaire’s contract with Army Air Force Exchange Services (AAFES) for the operation of taxi services within the Clark Air Base. Due to the phase-out of the US Military Bases in the Philippines, which Clark Air Base was not spared, the AAFES was dissolved and the services of individual respondents were officially terminated. The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a separation pay of P500 per year of service to which private respondents did not agree. Private respondents filed a complaint against Sergio Naguiat, president of CFTI, doing business under the name and style of Sergio F. Naguiat Enterprises, Inc., AAFES and the drivers’ union for separation pay which was granted by the Labor Arbiter at P1,200 per year of service for humanitarian considerations. On appeal, the NLRC granted separation pay to private respondents. ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily liable with CFTI?

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

HELD: No. From the evidence proffered by both parties, there is no substantial basis to hold that Naguiat Enterprises is an indirect employer of individual respondents much less a labor only contractor. On the contrary, petitioners submitted documents such as the drivers' applications for employment with CFTI, and social security remittances and payroll of Naguiat Enterprises showing that none of the individual respondents were its employees. Moreover, in the contract between CFTI and AAFES, the former, as concessionaire, agreed to purchase from AAFES for a certain amount within a specified period a fleet of vehicles to be "ke(pt) on the road" by CFTI, pursuant to their concessionaire's contract. This indicates that CFTI became the owner of the taxicabs which became the principal investment and asset of the company.

duty imposed by law. Simply stated, tort is a breach of a legal duty. Article 283 of the Labor Code mandates the employer to grant separation pay to employees in case of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, which is the condition obtaining at bar. CFTI failed to comply with this law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable.

Private respondents failed to substantiate their claim that Naguiat Enterprises managed, supervised and controlled their employment. It appears that they were confused on the personalities of Sergio F. Naguiat as an individual who was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate corporate entity with a separate business. They presumed that Sergio F. Naguiat, who was at the same time a stockholder and director of Sergio F. Naguiat Enterprises, Inc., was managing and controlling the taxi business on behalf of the latter. A closer scrutiny and analysis of the records, however, evince the truth of the matter: that Sergio F. Naguiat, in supervising the taxi drivers and determining their employment terms, was rather carrying out his responsibilities as president of CFTI. Hence, Naguiat Enterprises as a separate corporation does not appear to be involved at all in the taxi business.

The Court here finds no application to the rule that a corporate officer cannot be held solidarily liable with a corporation in the absence of evidence that he had acted in bad faith or with malice. In the present case, Sergio Naguiat is held solidarily liable for corporate tort because he had actively engaged in the management and operation of CFTI, a close corporation.

And, although the witness insisted that Naguiat Enterprises was his employer, he could not deny that he received his salary from the office of CFTI inside the base. Another driver-claimant admitted, upon the prodding of counsel for the corporations, that Naguiat Enterprises was in the trading business while CFTI was in taxi services. In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, admittedly, was the union of individual respondents while still working at Clark Air Base, states that members thereof are the employees of CFTI and "(f)or collective bargaining purposes, the definite employer is the Clark Field Taxi Inc." ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI may be solidarily liable with CFTI? HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president of CFTI, cannot be exonerated from joint and several liability in the payment of separation pay to individual respondents. Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the business. Thus, applying the ruling in A.C. Ransom, he falls within the meaning of an "employer" as contemplated by the Labor Code, who may be held jointly and severally liable for the obligations of the corporation to its dismissed employees. Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were "close family corporations" owned by the Naguiat family. Section 100, paragraph 5, (under Title XII on Close Corporations) of the Corporation Code, states: (5) To the extent that the stockholders are actively engage(d) in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. (emphasis supplied) Nothing in the records show whether CFTI obtained "reasonably adequate liability insurance;" thus, what remains is to determine whether there was corporate tort. Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially, "tort" consists in the violation of a right given or the omission of a

108

As pointed out earlier, the fifth paragraph of Section 100 of the Corporation Code specifically imposes personal liability upon the stockholder actively managing or operating the business and affairs of the close corporation.

Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title of "general manager" as well, it had not been shown that he had acted in such capacity. Furthermore, no evidence on the extent of his participation in the management or operation of the business was proferred. In this light, he cannot be held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private respondents. CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII) A.

CHAPTER I – EDUCATIONAL INSTITUTIONS

Sec. 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code.

EDUCATIONAL INSTITUTIONS are those that provide facilities for teaching or instruction. It includes both public and private schools or colleges and universities and are subject to the provisions of special laws and by the general provisions of the Code.

PUBLIC SCHOOLS or those created by the government are, however,

subject to the law of their creation. UP for instance has its own special charter and would thus be governed by the special law creating it. Insofar as they may be applicable however, the provisions of any special law or the Corporation Code supplement the law of their creation.

PRIVATE SCHOOLS OR COLLEGES include any private institutions for

teaching, managed by private individuals or corporations which offer courses of kindergarten, primary, intermediary or secondary instructions or superior courses in vocational, technical, professional or special schools by which diploma or certificates are to be granted or titles and degrees conferred (Sec. 2, Act No. 2076, as amended by CA 180). These instructions of learning once recognized by the government as such are mandated by law to be incorporated within 90 days under the provisions of the Corporation Code and must, perforce, comply with the requirements and procedure laid down thereunder. (Sec. 5, supra) Their failure to do so will not immune the educational institution from suit as a corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra) The SEC, however, shall not act on the incorporation of any educational corporation, unless the provision of Sec. 107 is complied with: Sec. 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution

BOARD OF DIRECTORS/TRUSTEES: or the governing board by any name of an educational institution is similar in number as to any other corporation except that in case it is non-stock, the number must be in multiples of five (5). As compared to stock corporation, their number may be within the vicinity of five (5) to fifteen (15).

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

TERM OF OFFICE: Members of the Board may hold office for five years but they shall be staggered so that 1/5 of their number shall expire every year. Sec. 108 provides:

Sec. 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations.

CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2,

Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and Sports) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines. No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this sub section shall not apply to schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided by law, for other foreign temporary residents. Culled from this is that while foreigners may own a maximum of 40% of the capital stock of an educational corporation, not one of them may sit as a member of the governing board thereof. Neither may they act as an officer with the power of control and administration of the institution. In effect their ownership of any capital would be limited to “non-controlling” interest. B.

CHAPTER II - RELIGIOUS CORPORATIONS

REGLIGIOUS CORPORATIONS are those composed entirely of spiritual persons, which are created for the furtherance of religion or perpetuating the rights of the church or for the administration of church or religious work or property.

CLASSES OF RELIGIOUS CORPORATIONS: Sec. 109. Classes of religious corporations. - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. C.

CORPORATION SOLE

CORPORATION SOLE: consists of one person only and his successor in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had.

PURPOSE

109

OF

INCORPORATION

AND

PERSONS

WHO

MAY

INCORPORATE: Sec. 110. 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.

CONTENTS OF THE ARTICLES OF INCORPORATION: Sec. 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation.

PROCEDURE FOR THE ORGANIZATION: Sec. 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a

corporation sole does not require a provision for its term of existence. For obvious reasons, since a corporation sole is supposed to exist in perpetuity. It may, however, be dissolved in accordance with Sec. 115 of the Code.

BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified AOI with the SEC and the documents required under Sec. 112. This serves as an exception to the rule that a corporation acquires juridical personality only upon the issuance of a certificate of incorporation by the said government agency.

POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its

power to mortgage or sell real properties is, however, subject to certain restriction, that is, a proper court order must first be secured for that purpose, which is not otherwise imposed in any other corporation.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Intervention of the court may dispensed with only if the rules, regulations and discipline of the religious denomination, sect or church concerned provide or regulate the manner or method of holding or alienating properties. Sec. 113 provides: Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.

OWNERSHIP OF PROPERTY: does not vest unto the head upon registration of real property in the name of the corporation sole, such devolving upon the church or congregation acquiring it.

CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does not apply to corporation sole with regards ownership of real property in its own name. It has thus been held that the Roman Catholic Church of the Philippines, a corporation sole, has no nationality and that the framers of the Constitution did not have in mind the religious corporation sole when they provided that 60% of the capital of the corporation acquiring it must be owned by Filipino citizens.

CHARACTER OF THE LAND: at the time of institution of registration

proceedings must first be determined before a corporation sole, or any private corporation for that matter, can acquire the land must first be determined. If it does not form part of public domain, the constitutional prohibition against its acquisition by private corporation will not apply. Thus, it has likewise been earlier held that under the Public Land Act, alienable public land may be subject to registration by a possessor if he, personally or through his predecessors-in-interest, had openly continuously and exclusively possessed the same for 30 years as the same is converted into private property by mere lapse or completion of the said period. THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, INC., petitioner, s. THE LAND REGISTRATION COMMISSION and THE REGISTER OF DEEDS OF DAVAO CITY, respondents

(G.R. No. L-8451; December 20, 1957)

FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a Canadian citizen, as actual incumbent. When the deed of sale was presented to the Register of Deeds of Davao for registration, the latter required the corporation to submit an affidavit declaring that 60% of the members thereof were Filipino citizens. Entertaining some doubts as to the registrability of the deed of sale, the Register of Deeds referred the matter to the Land Registration Commission which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the Philippine Constitution, the vendee was not qualified to acquire private lands in the Philippines in the absence of proof that at least 60% of the capital, property, or assets of the Roman Catholic Apostolic Administrator of Davao, Inc. was actually owned or controlled by Filipino citizens. ISSUE: WON the corporation sole may register the property transferred?

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HELD: Yes. In solving the problem thus submitted to our consideration, We can say the following: A corporation sole is a special form of corporation usually associated with the clergy. Conceived and introduced into 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 which was regarded as the property owner (See I Couvier's Law Dictionary, p. 682-683). A corporation sole consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had. In this sense, the king is a sole corporation; so is a bishop, or dens, distinct from their several chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846). That leaves no room for doubt that the bishops or archbishops, as the case may be, as corporation's sole are merely administrators of the church properties that come to their possession, in which they hold in trust for the church. It can also be said that while it is true that church properties could be administered by a natural persons, problems regarding succession to said properties can not be avoided to rise upon his death. Through this legal fiction, however, church properties acquired by the incumbent of a corporation sole pass, by operation of law, upon his death not his personal heirs but to his successor in office. It could be seen, therefore, that a corporation sole is created not only to administer the temporalities of the church or religious society where he belongs but also to hold and transmit the same to his successor in said office. If the ownership or title to the properties do not pass to the administrators, who are the owners of church properties?. Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment: In matters regarding property belonging to the Universal Church and to the Apostolic See, the Supreme Pontiff exercises his office of supreme administrator through the Roman Curia; in matters regarding other church property, through the administrators of the individual moral persons in the Church according to that norms, laid down in the Code of Cannon Law.

This does not mean, however, that the Roman Pontiff is the owner of all the church property; but merely that he is the supreme guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).

We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to such artificial being under the laws of that country, separate and distinct from the personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with the latter which are governed by the Canon Law or their rules and regulations. The Corporation Law also contains the following provisions: SECTION 159. Any corporation sole may purchase and hold real estate and personal; property for its church, charitable, benevolent, or educational purposes, and may receive bequests or gifts of such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the Court of First Instance of the province in which the property is situated; but before making the order proof must be made to the satisfaction of the Court that notice of the application for leave to mortgage or sell has been given by publication or otherwise in such manner and for such time as said Court or the Judge thereof may have directed, and that it is to the interest of the corporation that leave to mortgage or sell must be made by petition, duly verified by the bishop, chief priest, or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, society or church represented by the corporation sole: Provided, however, That in cases where the rules, regulations, and discipline of the religious denomination,

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society or church concerned represented by such corporation sole regulate the methods of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations, and discipline shall control and the intervention of the Courts shall not be necessary. It can, therefore, be noticed that the power of a corporation sole to purchase real property, like the power exercised in the case at bar, it is not restricted although the power to sell or mortgage sometimes is, depending upon the rules, regulations, and discipline of the church concerned represented by said corporation sole. If corporations sole can purchase and sell real estate for its church, charitable, benevolent, or educational purposes, can they register said real properties? As provided by law, lands held in trust for specific purposes me be subject of registration (section 69, Act 496), and the capacity of a corporation sole, like petitioner herein, to register lands belonging to it is acknowledged, and title thereto may be issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is absurd that while the corporations sole that might be in need of acquiring lands for the erection of temples where the faithful can pray, or schools and cemeteries which they are expressly authorized by law to acquire in connection with the propagation of the Roman Catholic Apostolic faith or in furtherance of their freedom of religion they could not register said properties in their name. As professor Javier J. Nepomuceno very well says "Man in his search for the immortal and imponderable, has, even before the dawn of recorded history, erected temples to the Unknown God, and there is no doubt that he will continue to do so for all time to come, as long as he continues 'imploring the aid of Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41, September, 1956). Under the circumstances of this case, We might safely state that even before the establishment of the Philippine Commonwealth and of the Republic of the Philippines every corporation sole then organized and registered had by express provision of law the necessary power and qualification to purchase in its name private lands located in the territory in which it exercised its functions or ministry and for which it was created, independently of the nationality of its incumbent unique and single member and head, the bishop of the dioceses. It can be also maintained without fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and that the framers of the Constitution, as will be hereunder explained, did not have in mind the religious corporations sole when they provided that 60 per centum of the capital thereof be owned by Filipino citizens. THE DIRECTOR OF LANDS vs. CA (supra, POWER TO ACQUIRE

PROPERTY)

FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for registration of a parcel of land which it claimed to have acquired by virtue of a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant and its predecessors-in-interest have been in actual, continuous, public, peaceful and adverse possession and occupation of the said land for more than 30 years, which was opposed by the Government as represented by the Director of Lands. The CFI and the CA ruled in favor of INC. ISSUE: WON the registration of the land should be upheld? HELD: As observed at the outset, had this case been resolved immediately after it was submitted for decision, the result may have been quite adverse to private respondent. For the rule then prevailing under the case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases involving private respondent adverted to above', is that a juridical person, private respondent in particular, is disqualified under the 1973 Constitution from applying for registration in its name alienable public land, as such land ceases to be public land "only upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No. 141, as amended. These are precisely the cases cited by petitioner in support of its theory of disqualification. Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among others. Thus, in the recent case of Director of Lands v. Intermediate Appellate Court, 146 SCRA 509, We categorically stated that the majority

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ruling in Meralco is "no longer deemed to be binding precedent", and that "[T]he correct rule, ... is that alienable public land held by a possessor, personally or through his predecessors-in-interest, openly, continuously and exclusively for the prescribed statutory period [30 years under the Public Land Act, as amended] is converted to private property by mere lapse or completion of said period, ipso jure." We further reiterated therein the timehonored principle of nonimpairment of vested rights. The crucial factor to be determined therefore is the length of time private respondent and its predecessors-in-interest had been in possession of the land in question prior to the institution of the instant registration proceedings. The land under consideration was acquired by private respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No. 141, as amended, "those who by themselves or through their predecessorsin-interest have been in open, continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain, under a bona fide claim of acquisition or ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title except when prevented by war or force majeure" may apply to the Court of First Instance of the province where the land is located for confirmation of their claims, and the issuance of a certificate of title therefor, under the Land Registration Act. Said paragraph [b] further provides that "these shall be conclusively presumed to have performed all the conditions essential to a Government grant and shall be entitled to a certificate of title under the provisions of this chapter." Taking the year 1936 as the reckoning point, there being no showing as to when the Ramoses first took possession and occupation of the land in question, the 30-year period of open, continuous, exclusive and notorious possession and occupation required by law was completed in 1966. The completion by private respondent of this statutory 30-year period has dual significance in the light of Section 48[b] of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point, the land in question ceased by operation of law to be part of the public domain; and [2] private respondent could have its title thereto confirmed through the appropriate proceedings as under the Constitution then in force, private corporations or associations were not prohibited from acquiring public lands, but merely prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares. If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the registration proceedings were commenced. This being the case, the prohibition under the 1973 Constitution would have no application. Otherwise construed, if in 1966, private respondent could have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can neither impair nor defeat. REPUBLIC OF THE PHILIPPINES, petitioner, vs. INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP OF LUCENA, represented by Msgr. Jose T. Sanchez, and REGIONAL TRIAL COURT, BRANCH LIII, LUCENA CITY, respondents

(G.R. No. 75042; November 29, 1988)

FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr. Jose T. Sanchez, filed an application for confirmation of title to 4 parcels of land which were said to have been obtained either by purchase or donation dating as far back as 1928, which was granted by the CFI. Against this decision, the Solicitor General filed a Motion for reconsideration on the following grounds: 1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a private corporation from acquiring alienable lands for the public domain; 2. In the case at bar the application was filed after the effectivity on the New Constitution on January 17, 1973; which was denied by the lower court for lack of merit.

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Still insisting of the alleged unconstitutionality of the registration (a point which, incidentally, the appellant never raised in the lower court prior to its Motion for Reconsideration), the Republic elevated this appeal, and the IAC affirmed the lower court’s decision. ISSUE: WON private respondent, corporation sole, is entitled to confirmation of its title to the 4 parcels of land? HELD: The parties herein do not dispute that since the acquisition of the four (4) lots by the applicant, it has been in continuous possession and enjoyment thereof, and such possession, together with its predecessors-in-interest, covering a period of more than 52 years (at least from the date of survey in 1928) with respect to lots 1 and 2, about 62 years with respect to lot 3, all of plan PSU-65686; and more than 39 years with respect to the fourth parcel described in plan PSU-11 2592 (at least from the date of the survey in 1940) have been open, public, continuous, peaceful, adverse against the whole world, and in the concept of owner. Petitioner argues that considering such constitutional prohibition, private respondent is disqualified to own and register its title to the lots in question. Further, it argues that since the application for registration was filed only on February 2, 1979, long after the 1973 Constitution took effect on January 17, 1973, the application for registration and confirmation of title is ineffectual because at the time it was filed, private corporation had been declared ineligible to acquire alienable lands of the public domain pursuant to Art. XIV, Sec. 11 of the said constitution. (Rollo, p. 41) The questioned posed before this Court has been settled in the case of DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509 [1986]) which reversed the ruling first enunciated in the 1982 case of Manila Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the constitutional ban on public land acquisition by private corporations which ruling was declared emphatically as res judicata on January 7, 1986 in Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., (141 SCRA 21 [1986]). In said case, (Director of Lands v. IAC, supra), this Court stated that a determination of the character of the lands at the time of institution of the registration proceedings must be made. If they were then still part of the public domain, it must be answered in the negative. If, on the other hand, they were already private lands, the constitutional prohibition against their acquisition by private corporation or association obviously does not apply. In affirming the Decision of the Intermediate Appellate Court in said case, this Court adopted the vigorous dissent of the then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in 1980, which developed, affirmed and reaffirmed the doctrine that open, exclusive and undisputed possession of alienable public land for the period prescribed by law creates the legal fiction whereby the land, upon completion of the requisite period ipso jure and without the need of judicial or other sanction, ceases to be public land and becomes' private property. (DIRECTOR OF LANDS vs. IAC, supra, p. 518). It must be emphasized that the Court is not here saying that a corporation sole should be treated like an ordinary private corporation. In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land Registration Commission, et al. (L-8451, December 20,1957,102 Phil. 596). We articulated: In solving the problem thus submitted to our consideration, We can say the following: A corporation sole is a special form of corporation usually associated with the clergy. Conceived and introduced into 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 which was regarded as the property owner (See 1 Bouvier's Law Dictionary, p. 682-683). A corporation sole consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and

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advantages, particulary that of perpetuity, which in their natural persons they could not have had. There is no doubt that a corporation sole by the nature of its Incorporation is vested with the right to purchase and hold real estate and personal property. It need not therefore be treated as an ordinary private corporation because whether or not it be so treated as such, the Constitutional provision involved will, nevertheless, be not applicable. In the light of the facts obtaining in this case and the ruling of this Court in Director of Lands vs. IAC, (supra, 513), the lands subject of this petition were already private property at the time the application for confirmation of title was filed in 1979. There is therefore no cogent reason to disturb the findings of the appellate court.

VACANCY: in the office of the “head” of the corporation, the person authorized by the rules, regulations or discipline of the denomination shall exercise all the powers and authority of the corporation sole during such vacancy and until such vacancy has been filled-up. The manner in which the vacancy is to be filled in clearly spelled out in Sec. 114 of the Code: Sec. 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. Under the above-provision, it is required that the successor, in order to be permitted to transact business as a corporation sole, must file with the SEC a copy of his commission, certificate of election, or letter of appointment, duly certified by a notary public.

DISSOLUTION: Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. The declaration of dissolution shall set forth: (NRAN) 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.

DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because of the doctrine of separation of the Church and the State. However, the State may exercise its police power if the corporation is being carried out and is being used for illegal purposes. D.

RELIGIOUS SOCIETIES

Under common law, a religious society is a body of persons associated together for the purpose of maintaining religious worship. The religious society and the church are distinct bodies, independent of each other, though they may exist with each other.

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Under Philippine Law, a religious society, order, diocese, synod or district organization of any religious denomination, sect or church may incorporate for the administration of its temporalities or for the management of its affairs, properties and estate in accordance with the Code: Sec. 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). Apparent from the foregoing, is that a religious society is not mandated by law to register as a corporation but may do so to acquire juridical personality and for the purpose of administration of its temporalities and properties and even to acquire properties of its own. Thus, it has been held that an unincorporated religious association cannot acquire private agricultural lands in the Philippines (Register of Deeds vs. Ung Sui Temple)

TERM OF EXITENCE: Like the corporation sole, the AOI of a religious society need not contain a term of its existence as it is supposed to exist in perpetuity.

BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the certificate of registration by the SEC. Absent any specific provision of the law, it must be deemed to fall within the general rule under Sec. 19. CHAPTER XVII: DISSOLUTION (TITLE XIV) A.

DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for which it was incorporated. It will nevertheless continue as a body corporate for another period of three years from the time it is dissolved but only for the purpose of winding up its affairs and the liquidation of its assets.

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B.

METHODS OF DISSOLUTION

THREE WAYS OF DISSOLUTION: 1. 2. 3.

Expiration of its corporate term; Voluntary surrender of its primary franchise (voluntary dissolution); and The revocation of its corporate franchise (involuntary dissolution)

Sec. 117, however, mentions only two methods: Sec. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. This is rightfully so, because the expiration of corporate term can be considered voluntary dissolution t being the intention of the stockholders that it shall exist only for such period. C.

EXPIRATION OF CORPORATE TERM

A corporation registered under the Corporation Code, with the exception of religious ones, is required to indicate its term of existence in the AOI. It ceases to exist and is deemed automatically dissolved upon the expiration of the term indicated thereat without the need of any formal proceedings.

EXTENSION: It is to be observed, however, that the original term of existence indicated in the AOI is subject to extension in accordance with the provisions of Sec. 11 and 37 of the Code. If such be the case, the corporation continues to be possessed with juridical personality and may carry out its business for the period of time granted by virtue of such extension.

The extension should nonetheless be made before the expiration of the original term, but not earlier than 5 years prior to such expiration, otherwise the corporation is dissolved, ipso facto. PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI, PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @ BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @ VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL, PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents

(G.R. No. 63201; May 27, 1992)

FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate existence of 25 years, entered into a lease contract with private respondents, whereby the latter shall lease the parcels of land owned by them to PBM for a period of 20 years, extendible to another 20 years, provided that PBM extend its corporate existence in accordance with law. PBM introduced improvements on the land which were annotated with the Register of Deeds. Later on, PBM executed a deed of assignment in favor of PNB over its leasehold rights and later on a real estate mortgage covering all the improvements to secure a loan. PBM filed a petition for registration of improvements in the titles of real property of private respondents which was opposed by private respondents on the ground that PBM failed to renew the contract of lease and apply for extension of its corporate existence. The CFI issued an order directing the cancellation of the inscriptions on respondents’ certificates of title. ISSUE: WON the cancellation of entries on respondents’ title is valid and proper? HELD: Yes. The contract of lease expressly provides that the term of the lease shall be twenty years from the execution of the contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be extended in accordance with law. Clearly, the

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option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as corporation renews or extends its corporate term of existence in accordance with the Corporation Code which is the applicable law. Contracts are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of the contract of lease which commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee continued to occupy the leased premises beyond that date with the acquiescence and consent of the respondents as lessor. Records show however, that PBM as a corporation had a corporate life of only twenty-five (25) years which ended an January 19, 1977. It should be noted however that PBM allowed its corporate term to expire without complying with the requirements provided by law for the extension of its corporate term of existence. Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617). When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. But it shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets (Sec. 122, Corporation Code). There is no need for the institution of a proceeding for quo warranto to determine the time or date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation. When such period expires and without any extension having been made pursuant to law, the corporation is dissolved automatically insofar as the continuation of its business is concerned. The quo warranto proceeding under Rule 66 of the Rules of Court, as amended, may be instituted by the Solicitor General only for the involuntary dissolution of a corporation on the following grounds: a) when the corporation has offended against a provision of an Act for its creation or renewal; b) when it has forfeited its privileges and franchises by non-user; c) when it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises; d) when it has mis-used a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. Hence, there is no need for the SEC to make an involuntary dissolution of a corporation whose corporate term had ended because its articles of incorporation had in effect expired by its own limitation. Considering the foregoing in relation to the contract of lease between the parties herein, when PBM's corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired on January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977 because PBM failed to renew or extend its corporate life in accordance with law. From then on, the respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract. The rights of the lessor and the lessee over the improvements which the latter constructed on the leased premises is governed by Article 1678 of the Civil Code. The provision gives the lessee the right to remove the improvements if the lessor chooses not to pay one-half of the value thereof. However, in the case at bar, the law will not apply because the parties herein have stipulated in the contract their own terms and conditions concerning the improvements, to wit, that the lessee, namely PBM, bound itself to remove the improvements before the termination of the lease. Petitioner PNB, as assignee of PBM succeeded to the obligation of the latter under the contract of lease. It could not possess rights more than what PBM had as lessee under the contract. Hence, petitioner was duty bound to remove the improvements before the expiration of the period of lease as what we have already discussed in the preceding paragraphs. Its failure to do so when the lease was terminated

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was tantamount to a waiver of its rights and interests over the improvements on the leased premises. D.

SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)

MODES OF VOLUNTARY DISSOUTION:

1. Voluntary Dissolution where no creditors are affected (Sec. 118); 2. Voluntary Dissolution where creditors are affected (Sec. 119); 3. Shortening of corporate term (Sec. 120). 1.

VOLLUNTARY AFFECTED:

DISSOUTION

WHERE

NO

CREDITORS

ARE

Sec. 118. 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 effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution.

FORMAL AND PROCEDURAL REQUIREMENTS: 1. 2.

3.

4. 5. 6.

Majority vote of the board of directors or trustees; Sending of notice of each stockholders or member either by registered mail or personal delivery at least thirty (30) days prior to the meeting (scheduled by the board for the purpose of submitting the board action to dissolve the corporation for approval of the stockholder or members.); Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located or in a newspaper of general circulation in the Philippines; Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose; A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors or trustees and countersigned by the corporate secretary; Issuance of a certificate of dissolution by the SEC.

FAILURE TO COMPLY: with the above requirements will have no effect on

the legal existence of the corporation. Elsewise stated, a corporation benig a creation of the law by the grant of its existence by the State, may only be dissolved in the manner prescribed by the law of its creation. Since it is the State that grants its right to exist, it is only through the State which can allow th termination of existence. Unless dissolved pursuant thereto, a corporation does not cease to have a juridical personality. A mere resolution by the stockholders or the BOD of a corporation to dissolve the same does not affect the dissolution but that some other steps, administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce) 2.

VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED

Sec. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at

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least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.

FORMAL AND PROCEDURAL REQUIREMENTS: 1. 2.

3.

4.

5. 6. 7.

Affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting duly called for that purpose; Petition for dissolution shall be filed with the SEC (the proper forum) signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by the president or secretary or one of its directors or trustees, setting forth all claims and demands against it. Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on or before which objections thereto may be filed by any person, which date shall not be less than thirty days nor more than sixty days after entry of the order. Before such date, a copy of the order must be published once a week for three (3) consecutive weeks in a newspaper of general circulation published in the city or municipality where the principal office is situated or in a newspaper of general circulation in the Philippines. Posting of the same order for three (3) consecutive weeks in three (3) public places in such city or municipality. Upon five (5) days’ notice, given after the date on which the right to file objections has expired, the SEC shall hear the petition and try any issue made by the objections filed. Judgment dissolving the corporation and directing of its assets as justice requires and the appointment of a receiver (if necessary in its discretion) to collect such assets and pay the debts of the corporation

APPOINTMENT OF A RECEIVER: While the foregoing are mandatory

requirements, the appointment of a receiver is only permissive. As can be gleaned from the second paragraph of Sec. 119, it uses the phrase “and may appoint a receiver”, showing the clear intent of the aw that the same is merely discretionary on the part of the proper forum. Such language, held by the High Court, “tends to recognize that in cases of voluntary dissolution, there is no occasion for the appointment of a receiver except under special circumstances and upon proper showing” (China Bank vs. Michellin) 3.

DISSOLUTION BY SHORTENING CORPORATE TERM

Sec. 120 was inserted to incorporate the long standing practice of dissolving a corporation by amendment of the AOI by shortening the corporate existence. A corporation may exist for 50 years, but there is no law which prevents the shareholders thereof to shorten that period and effect a dissolution of the corporation.

merely means that it has the capacity of continuous existence during a particular period or until dissolved in accordance with law. It may thus amend its AOI and provide a term of existence or shorten it which may have the effect of a dissolution. Thus, while Sec. 115 of the Code provides for the process and procedure for the dissolution of a corporation sole, there is nothing in the law itself which would prohibit it from amending its AOI. It is believed, however, that authorization for the dissolution by the particular religious denomination, sect or church, as required in subparagraph 3 of Sec. 115 would still be necessary in the case of amending the AOI to affect dissolution. Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation.

SPECIAL AMENDMENT: Shortening of the corporate term with the effect of

dissolution is a special type of amendment covered and governed by the special provisions of Sec. 37 of the Code. Thus, while the general provision on amendment under Sec. 16 allows “written assent” in determining the voting requirement for ordinary amendments, sec. 37 mandates that the vote must be cast at a duly constituted meeting. Likewise, sec. 16 provides that amendment of the AOI is deemed approved if not acted upon by the SEC within 6 months from the date of filing for a cause not attributable to the corporation. This is not applicable in case of shortening the corporate term which will have the effect of dissolution in Sec. 120, which requires the approval of the SEC. E.

Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. Culled from the above provision is that this is a dissolution is by judicial decree.

JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by the SC, actions, for quo warranto against corporations or against persons who usurps an office in a corporation fall under the jurisdiction of the SEC

(Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999).

This, however, is no longer exclusive and absolute in view of the amendments introduced by the Securities Regulations Code (SRC) of 2000, or RA 8799, which transferred the jurisdiction of the SEC under Sec. 5 of PD 902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA 8799). The jurisdiction of the courts and the SEC over revocation proceedings seems to be concurrent under the present set up since Sec. 5 of RA 8799, particularly par. (m) thereof, provides that the SEC has the power to “suspend, or revoke, after proper notice and hearing the franchise and certificate of registration of corporations, partnership or associations, upon any ground provided by law”. This, despite the transfer of its jurisdiction under the SRC.

GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Sec. 6 of PD 902-A: (FSRCFF) 1. 2. 3.

PERPETUAL SUCCESSION: In fact, a corporation may be given the capacity of “perpetual succession” like the corporation sole and the religious society. It does not mean, however, that it shall continue to exist forever. It

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INVOLUNTARY DISSOLUTION

4. 5.

Fraud in procuring its certificate of registration; Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise; Continuous inoperation for a period of at least five (5) years; Failure to file by-laws within the required period;

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6.

Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.

OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE: 1. 2. 3.

Violation of any provision of the Code under section 144; In case of deadlock in a close corporation as provided for in section 105; In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets are being misapplied or wasted under section 105.

INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a capital punishment. Thus, it has been laid to rest in the case of Government vs. Philippine Sugar Estate that courts proceed with extreme caution which have

for their object the forfeiture of corporate franchise, and forfeiture will not be allowed, except under express limitation, or for plain abuse of power by which the corporation fails to fulfil the design and purpose of its organization. But when the abuse or violation constitutes or threatens a substantial injury to the public or such as to amount to a violation of the fundamental conditions of its charter, or its conduct is characterized by “obduracy or pertinacity in contempt of law”, dissolution will be granted. Likewise, it has been held that the relief of dissolution will be awarded only where no other adequate remedy is available and it will not be allowed where the rights of the stockholders can be, or are, protected in some other way. THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant, vs. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.) defendant-appellant

(G.R. No. L-11789; April 2, 1918)

FACTS: Defendant corporation by its charter is authorized among others:

j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y

Almacenes de Depositos, and, in this manner or otherwise, to engage in any mercantile or industrial enterprise. (k) With no other restrictions than those provided by law, place funds of the corporation in hypothecary or pignorative loans, in public securities of the United States, in stocks or shares issued by firms, corporations, or companies that are legally organized and operated, and in rural and urban property. It may also contract and guarantee all kinds of obligations, in conformity with existing laws These powers are necessarily limited by Sec. 75 of of the Act of Congress of July 1, 1902, and by the section 13 Act of 1459, the latter being a reproduction of the former, which is as follows: That no corporation shall be authorized to conduct the business of buying and selling real estate or be permitted to hold or own real estate except such as may be reasonably necessary to enable it to carry out the purposes for which it is created, . . . . Corporations, however, may loan funds upon real estate, security, and purchase real estate when necessary for the collection of loans, but they shall dispose of real estate so obtained within five years after receiving the title . . . The defendant corporation entered into a contract with The Tayabas Land Company (TLC) where PSEC invested P400,000 in the TLC and that “All lands bought or which may be bought with the credit, which The Philippine Sugar brings to The Tayabas Land Company and which lie within and without the railway line from Pagbilao to Lopez, shall be held as security for such credit, at their respective cost price, until their alienation, except the part thereof which pertains to D. Mariano Lim in The Tayabas Land Company” and that if TLC is to sell the land and its improvements at a price lower than P0.50 per square meter TLC is to obtain the consent of PSEC first. An action for quo warranto was brought by the Attorney General for and in behalf of the Government of the Philippine Islands for the purpose of having the charter of the defendant corporation PSEC declared forfeited for engaging in the “buying and selling of real estate” along the right of way of Manila

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Railroad Company with the view of reselling the same to Manila Railroad for a profit; that it had continuously offended against the laws of the Philippine Islands and had misused its corporate authority, franchise and privileges and had assumed privileges and franchises not granted. ISSUE: WON defendant corporation should be dissolved? HELD: No. Section 212 of Act No. 190 provides a judgment which may be rendered in said case: When in any such action, it is found and adjudged that the corporation has, by any act done or omitted surrendered, or forfeited its corporate rights, privileges, and franchise, or has not used the same during the term of five years, judgment shall be entered that it be ousted and excluded therefrom and that it be dissolved; but when it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be ousted from the continuance of such offense or the exercise of such power. It will be seen that said section (212) gives the court a wide discretion in its judgment in depriving corporations of their franchise. High, in his work on Extraordinary Legal Remedies, says at page 606: It is to be observed in the outset that the courts proceed with extreme caution in the proceeding which have for their object the forfeiture of corporate franchises, and a forfeiture will not be allowed, except under express limitation, or for a plain abuse of power by which the corporation fails to fulfill the design and purpose of its organization. In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co. (3 L.R.A. 510) the court said (p. 518): The scope of the remedy furnished by its (quo warranto) is to forfeit the franchises of a corporation for misuser or nonuser. It is therefore necessary in order to secure a judicial forfeiture of respondent's charter to show a misuser of its franchises justifying such a forfeiture. And as already remarked the object being to protect the public, and not to redress private grievances, the misuser must be such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant; and ordinarily the wrong or evil must be one remediable in no other form of judicial proceeding. Courts always proceed with great caution in declaring a forfeiture of franchises, and require the prosecutor seeking the forfeiture to bring the case clearly within the rules of law entitling him to exact so severe a penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State vs. Portland Natural Gas Co., 153, Ind., 483.) While it is true that the courts are given a wide discretion in ordering the dissolution of corporations for violations of its franchises, etc., yet nevertheless, when such abuses and violations constitute or threaten a substantial injury to the public or such as to amount to a violation of the fundamental conditions of the contract (charter) by which the franchises were granted and thus defeat the purpose of the grant, then the power of the courts should be exercised for the protection of the people. Under the law the people of the Philippine Islands have guaranteed the payment of the interest upon cost of the construction of the railroad which occupied or occupies at least some of the lands purchased by the defendant. Every additional dollar of increase in the price of the land purchased by the railroad company added that much to the costs of construction and thereby increased the burden imposed upon the people. The very and sole purpose of the intervention of the defendants in the purchase of the land from the original owners was for the purpose of selling the same to the Railroad Company at profit — at an increased price, thereby directly increasing the burden of the people by way of additional taxation. The purpose of the

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intervention of the defendant in the transactions in question, was to enrich itself at the expense of the taxpayers of the Philippine Islands, who had, by a franchise granted, permitted the defendant to exist and do business as a corporation. The defendant was not willing to allow the Railroad Company to purchase the land of the original owners. Its intervention with The Tayabas Land Company was to obtain an increase in the price of the land in a resale of the same to the railroad company. The conduct of the defendant in the premises merits the severest condemnation of the law. The judgment of the lower court should be modified. It is hereby ordered and decreed that the franchise heretofore granted to the defendant by which it was permitted to exist and do business as a corporation in the Philippine Islands, be withdrawn and annulled and that it be disallowed to do and to continue doing business in the Philippine Islands, unless it shall within a period of six months after final decision, liquidate, dissolve and separate absolutely in every respect and in all of its relations, complained of in the petition, with The Tayabas Land Company, without any findings to costs. THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff, vs. EL HOGAR FILIPINO, defendant

(G.R. No. L-26649; July 13, 1927)

FACTS: The Attorney General of the Government of the Philippine Islands instituted the present quo warranto for the purpose of depriving defendant corporation of its franchise upon 17 distinct causes of action, the first of which is: Plaintiff “alleged illegal holding by the respondent of the title to real property for a period in excess of five years after the property had been bought in by the respondent at one of its own foreclosure sales. The provision of law relevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.) In both of these provisions it is in substance declared that while corporations may loan funds upon real estate security and purchase real estate when necessary for the collection of loans, they shall dispose of real estate so obtained within five years after receiving the title” ISSUE: WON the corporation should be dissolved on the first cause of action? HELD: No. It is evident that the strict letter of the law was violated by the respondent; but it is equally obvious that its conduct has not been characterized by obduracy or pertinacity in contempt of the law. Moreover, several facts connected with the incident tend to mitigate the offense. It has been held by this court that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value unless his vendor is able to place in his hands an owner's duplicate showing the title of such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any purchaser. In this connection it will be noted that section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the corporation "five years after receiving the title," within which to dispose of the property. A fair interpretation of these provisions would seem to indicate that the date of the receiving of the title in this case was the date when the respondent received the owner's certificate, or May 7, 1921, for it was only after that date that the respondent had an unequivocal and unquestionable power to pass a complete title. The failure of the respondent to receive the certificate sooner was not due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held accountable. The question then arises whether the failure of the respondent to get rid of the San Clemente property within five years after it first acquired the deed thereto, even supposing the five-year period to be properly counted from that date, is such a violation of law as should work a forfeiture of its franchise and

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require a judgment to be entered for its dissolution in this action of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. Certainly no court with any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the extreme penalty of the law as a consequence of the delinquency here shown to have been committed. The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure, as applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered against a corporation in an action of quo warranto, among other things says: . . . When it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be outset from the continuance of such offense or the exercise of such power. This provision clearly shows that the court has a discretion with respect to the infliction of capital punishment upon corporation and that there are certain misdemeanors and misuses of franchises which should not be recognized as requiring their dissolution.

Government of the Philippine Islands vs. Philippine Sugar Estates Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the

offending corporation had been largely (though indirectly) engaged in the buying and holding or real property for speculative purposes in contravention of its charter and contrary to the express provisions of law. Moreover, in that case the offending corporation was found to be still interested in the properties so purchased for speculative at the time the action was brought. Nevertheless, instead of making an absolute and unconditional

order for the dissolution of the corporation, the judgment of ouster was made conditional upon the failure of the corporation to discontinue its unlawful conduct within six months after final decision. In the case before us the respondent appears to have rid itself of the San Clemente property many months prior to the institution of this action. It is evident from this that the dissolution of the respondent would not be an appropriate remedy in this case. We do not of course undertake to say that a corporation might not be dissolved for offenses of this nature perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt of law.

Third cause of action. — Under the third cause of action the respondent is charged with engaging in activities foreign to the purposes for which the corporation was created and not reasonable necessary to its legitimate ends. The specifications under this cause of action relate to three different sorts of activities. The first consist of the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public.

The second specification under the third cause of action has reference to the administration and management of properties belonging to delinquent shareholders of the association The third specification under this cause of action relates to certain activities which are described in the following paragraphs contained in the agreed statements of facts: El Hogar Filipino has undertaken the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so For the services so rendered in the management of such properties El Hogar Filipino receives compensation in the form of commissions upon the gross receipts from such properties at rates varying from two and one-half

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per centum to five per centum of the sums so collected, according to the location of the property and the effort involved in its management. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. ISSUE2: WON the defendant should be dissolved on the above-ground? HELD: No. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort.

Fourth cause of action. — It appears that among the by-laws of the association there is an article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable. ISSUE3: WON if the above by-law is invalid, the corporation may be dissolved? HELD: No. This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action. REPUBLIC OF THE PHILIPPINES, petitioner, vs. SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.

(G.R. No. L-20583; January 23, 1967)

FACTS: The AOI of defendant corporation were registered with the SEC on March 27, 1961. Based on the opinion of legal counsel of the Central Bank of the Philippines, that the defendant corporation is a banking institution, the Monetary Board promulgated Resolution No. 1095, declaring that the corporation is performing banking operations without having first complied with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution, the company still continued with its operations and was able to establish 74 branches all over the Philippines and induced the public to open 59,643 savings deposit accounts. The Solicitor General initiated this quo warranto proceeding to dissolve said company.

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ISSUE: WON the company should be dissolved? HELD: Yes. Although, admittedly, defendant corporation has not secured the requisite authority to engage in banking, defendants deny that its transactions partake of the nature of banking operations. It is conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463 savings account deposits have been made by the public with the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Accordingly, defendant corporation has violated the law by engaging in banking without securing the administrative authority required in Republic Act No. 337. That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby. Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly, ordered dissolved. REPUBLIC OF THE PHILIPPINES, petitioner-appellee, vs. BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO A. REYES (Original Respondents); and ANTONIO V. CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. (New Directors of respondent corporation), respondent-appellees. MIGUEL CUENCO, respondent-crossclaimant-appellant.

(G.R. No. L-31490; January 6, 1978)

FACTS: The Solicitor General initiated this quo warranto proceedings against respondent corporation on the following nine causes of action: 1. 2.

3.

4.

5. 6.

7. 8.

9.

To conceal its illegal transaction, respondent corporation falsely reconstituted its articles of incorporation in July 1948 by adding new cattle ranch, agriculture, and general merchandise; On May 25, 1948, respondent corporation through its Board of Directors, adopted a resolution authorizing it to acquire 1,024 hectares of public land in Zamboanga and 10,000 hectares of timber concession in Mindanao in violation of Section 6, Act No. 143); In May, 1949, respondent office constituting themselves as Board of Directors of respondent corporation, passed a resolution authorizing the corporation to lease a pasture land of 2,000 hectares of cattle ranch on a public land in Bayawan, Negros Occidental; From August 1946 to the end of 1952, respondent corporation operated a general merchandise store, a business which is neither for, nor incidental to, the accomplishment of its principal business for which it was organized, i.e., the operation of land and water transportation; Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to act as president in 1945 to 1948 and 1953 to 1954, respectively, when at that time, neither of them owned a single stock; In violation of its charter and articles of incorporation, as well as applicable statutes concerning its operation, it engaged in mining by organizing the Jose P. Velez Coal Mines, and allowing said corporation to use the facilities and assets of respondent corporation; It imported and sold at black market prices to third persons truck spare Parts, the of which were appropriated by respondent directors; It paid its laborers and employees wages below the minimum wage law to the great prejudice of its labor force, and in violation of the laws of the state, manipulating its books and records so as to make it appear that its laborers and employees were and have been paid their salaries and wages in accordance with the minimum wage law; It deliberately failed to maintain accurate and faithful stock and transfer books since 1945 up to the filing of the petition, enabling it to defraud

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the state, mislead the general public, its creditors, investors and its stockholders by not accurately and faithfully making a. an adequate, accurate and complete record of dividend distribution, and b. an adequate, accurate and complete record of transfers of its stocks Later on, the Solicitor General filed a motion for the dismissal of the complaint which was granted by the lower court. ISSUE: WON the lower court is correct in not dissolving the corporation? HELD: Yes. After a very careful and deliberate consideration of the evidence adduced by petitioner, the lower court came to the conclusion that the same did not really warrant a quo warranto by the State that could truly justify to decapitate corporate life, and that the corporate acts or missions complained of had not resulted in substantial injury to the public, nor were they wilful and clearly obdurate. The court found that the several acts of misuse and misapplication of the funds and/or assets of the Bisaya Land Transportation Co., Inc. were committed new particularly by the respondent Dr. Manuel Cuenco with the cooperation of Jose P. Velez, for the commission of which they may be personally held liable. There appears to be no reason for us to disregard the findings of the trial court, which, applying well settled doctrines, ought to be given due weight and credit (De la Rama vs. Ma-ao Sugar Central, L-17504 & L-17506, Feb. 28, 1969). Besides, the court a quo found that the controversy between the parties was more personal than anything else and did not at all affect public interest. The Solicitor General himself asserts that the only purpose of his ration for the of this quo warranto is to take the State out of an unnecessary court litigation, so that the dismissal of the case would result in the disposition solely of the quo warranto by and between petitioner Republic of the Philippines and the respondents named therein. Other interested parties who might feel aggrieved, therefore, would not be without their remedies since they can still maintain whatever claims they may have against each other. It has been held that relief by dissolution will be awarded only where no other adequate remedy is available, and is not available where the rights of the stockholders can be, or are, protected in some other way (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing vs. McDonald", 134 Minn. 148,156 N.W. 780,158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank of St. Paul, 7 Minn. 252, cited in De la Rama vs. Ma-ao Sugar Central, supra). ACCORDINGLY, without prejudice to the rights of the private parties herein to take proper steps to enforce whatever causes of action they may have against each other, the order of the lower court embodied in its "Resolution" dated April 3, 1968, granting the Solicitor General's motion to dismiss the quo warranto proceedings is hereby upheld. FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO ARANETA, petitioners, vs. HON. JOSE TEODORO, Judge of the Court of First Instance of Negros Occidental, Branch II, and ENCARNACION LIZARES VDA. DE PANLILIO, respondents

(G.R. No. L-4900; August 31, 1953)

FACTS: In civil case No. 1924 of the Court of First Instance of Negros Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the other minority stockholders of the Financing Corporation of the Philippines, filed a complaint against the said corporation and J. Amado Araneta, its president and general manager, claiming among other things alleged gross mismanagement and fraudulent conduct of the corporate affairs of the defendant corporation by J. Amado Araneta, and asking that the corporation be dissolved; that J. Amado Araneta be declared personally accountable for the amounts of the unauthorized and fraudulent disbursements and disposition of assets made by him, and that he be required to account for said assets, and that pending trial and disposition of the case on its merits a receiver be appointed to take possession of the books, records and assets of the defendant corporation preparatory to its dissolution and liquidation and distribution of the assets. Over the strong objection of the defendants, the trial court granted the petition for the appointment of a receiver and

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designated Mr. Alfredo Yulo as such receiver with a bond of P50,000. ISSUE: The main contention of the petitioners in opposing the appointment of a receiver in this case is that said appointment is merely an auxiliary remedy; that the principal remedy sought by the respondents in the action in Negros Occidental was the dissolution of the Financing Corporation of the Philippines; that according to the law a suit for the dissolution of a corporation can be brought and maintained only by the State through its legal counsel, and that respondents, much less the minority stockholders of said corporation, have no right or personality to maintain the action for dissolution, and that inasmuch as said action cannot be maintained legally by the respondents, then the auxiliary remedy for the appointment of a receiver has no basis. HELD: True it is that the general rule is that the minority stockholders of a corporation cannot sue and demand its dissolution. However, there are cases that hold that even minority stockholders may ask for dissolution, this, under the theory that such minority members, if unable to obtain redress and protection of their rights within the corporation, must not and should not be left without redress and remedy. This was what probably prompted this Court to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598 (47 Off. Gaz. No. 12 Supp., p. 200) that even the existence of a de jure corporation may be terminated in a private suit for its dissolution by the stockholders without the intervention of the State. We repeat that although as a rule, minority stockholders of a corporation may not ask for its dissolution in a private suit, and that such action should be brought by the Government through its legal officer in a quo warranto case, at their instance and request, there might be exceptional cases wherein the intervention of the State, for one reason or another, cannot be obtained, as when the State is not interested because the complaint is strictly a matter between the stockholders and does not involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting quo warranto proceedings, in which minority stockholders are entitled to have such dissolution. When such action or private suit is brought by them, the trial court had jurisdiction and may or may not grant the prayer, depending upon the facts and circumstances attending it. The trial court's decision is of course subject to review by the appellate tribunal. Having such jurisdiction, the appointment of a receiver pendente lite is left to the sound discretion of the trial court. As was said in the case of Angeles vs. Santos (64 Phil., 697), the action having been properly brought and the trial court having entertained the same, it was within the power of said court upon proper showing to appoint a receiver pendente lite for the corporation; that although the appointment of a receiver upon application of the minority stockholders is a power to be exercised with great caution, nevertheless, it should be exercised necessary in order not to entirely ignore and disregard the rights of said minority stockholders, especially when said minority stockholders are unable to obtain redress and protection of their rights within the corporation itself.

PRESENT STATE OF LAW: any stockholder or member of a corporation can

institute a dissolution proceeding against his own corporation before the proper forum. This is clear from the provisions of PD 902-A, as amended, when it provides that the SEC, now the Special Commercial Courts, shall hear and decide cases involving “intra-corporate dispute or partnership relations between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporations, partnerships or association and the State insofar as it concerns their individual franchise or right to exist as such entity” (Sec. 5(b) as further amended by Sec. 5.2 of RA 8799). Of note, however, is that under Sec. 5(m) of RA 8799, the SEC appears to have concurrent jurisdiction to “suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations upon any of the grounds provided by law. It has thus been held as early as 1950 that “even the existence of a de jure corporation may be determined in a private suit for its dissolution between stockholders, without the intervention of the state” (Hall vs. Piccio). Likewise, in a close corporation, a petition for the dissolution of the corporation may be

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instituted by any one individual shareholder on the ground, even by mere dishonesty. F.

EFFECTS OF DISSOLUTION

Dissolution terminates its power to enter into contracts or to continue the business as a going concern. The SC held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant (Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a contract executed prior to its dissolution for the purpose of continuing the business of its organization (Cebu Ports vs. State Marine). Debts due to or by a corporation are not extinguished. It has thus been held that the termination of the life of a juridical entity does not, by itself, imply the diminution or extinction of rights demandable against such juridical entity

(Gonzales vs. Sugar Regulatory Adm.)

Sec. 145. Amendment or repeal. - No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.

PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms,

terminate where the corporation cease to exist. But unless the lease so provides, the rights and obligations thereunder are not extinguished by the corporation’s dissolution since leases affect property rights and survives the death of the parties. The stockholders succeed to the rights and liabilities of the dissolved corporation in an unexpired leasehold state which may be enforced by or against the receiver or liquidating trustee.

CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold true in cases of contracts for personal services which are deemed terminated by the dissolution of the corporation. In such cases, there is found an “implied condition” that the contract shall terminate in such event.

PERIOD OF LIQUIDATION: Despite its dissolution, a corporation

nonetheless, continues to be a body corporate for a period of 3 years for purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration of the 3 year period to wind up its affairs, the juridical personality of the corporation ceases for all intent and purposes, and as a general rule, it can no longer sue and be sued (see Gelano vs. CA). JAIME T. BUENAFLOR, petitioner, vs. CAMARINES SUR INDUSTRY CORPORATION, respondent

(G.R. Nos. L-14991-94; May 30, 1960)

FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the Public Service Commission for the construction of a 5-ton ice plant and to establish a cold storage and refrigeration service of about 6,000 cubic feet capacity in Sabang, respectively. After being served a copy of the application of petitioner, respondent corporation also filed the same applications on Oct. 1957. Counsel for Buenaflor presented a motion to dismiss on the ground that the corporate life of respondent already expired in Nov. 1953. Respondent Corporation then registered on Oct. 1957, a new AOI and transferred all assets of the old corporation together with existing certificate of public convenience to the new corporation. The PSC provisionally approved the transfer of the assets, as well as the certificate of public convenience to the new corporation. On Nov. 1957, the new corporation answered the motion to dismiss by alleging its recent incorporation. ISSUE: WON Buenaflor’s application should be approved?

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HELD: Yes. It is admitted — and the Commission found – that the needs of Sabang Barrio will be conveniently served with the establishment of a 5-ton ice plant. But it elected to deny Buenaflor's application, even as it awarded the privilege to the new Camarines Corporation on the ground that it (the old corporation) had been serving ice in Sabang up to the time of Buenaflor's application, and was, consequently, the pioneer operator there. The fact, however, is that since 1953, the old Corporation had been illegally plying its business of selling ice in Sabang because, under the Corporation Law, Sec. 77, after November 1953, it could not lawfully continue the business for which it had been established (operate ice plant, sell ice, etc). After November 1953, it could only continue to exist for three years for the purpose of prosecuting and defending suits by or against it, and of enabling it gradually to settle and close its affairs, to dispose and convey its property and to divide its capital stock. It could not, without violating the law, continue to sell ice. And yet, the Commission awarded the certificate on the basis of such serve and distribution of ice — applying the "prior operator" rule. In other words, the new Camarines Corporation is rewarded, precisely because the old corporation, its predecessor, had violated the law during that period (1953-1957). We cannot, and should not countenance such anomalous result. On the other hand, when the old Camarines Corporation docketed its application October 1, 1957, it had no juridical personality, it had ceased to exist as a corporation and could not sue nor apply for certificate, for it was incapable of receiving a grant. It was not even a corporation de facto. And then, there is no application subscribed by the new Camarines Corporation. Far from being mere technicality, these point support a conclusion which appears to be just and equitable, not only for the reasons already indicated, but also to compensate Buenaflor's diligence and courage in exposing the irregular practice of a "ghost" corporation foisting its services upon the unsuspecting public of Sabang and neighboring territory — enjoying a franchise without paying, perhaps, the corporate income tax and other burdens attached to corporate existence. Remembering the Camarines Corporation's automatic cessation in November 1956 (three years after November 1953) we must decline to regard the new Camarines Corporation (formed October 30, 1957) as a continuation of the old. At most, it is the transferee of the properties of the old corporation (or more properly, the assets of the stockholders) plus the certificate of public convenience to operate the ice plant in Naga and Magarao. And yet, as stated, the new corporation has not filed any application for certificate of public convenience in Sabang, and has not published such application Wherefore, revoking the appealed decision in so far as it awarded the certificate to said Corporation, we hereby approve Buenaflor's application for five tons, instead of one ton, subject to the usual conditions imposed by the Public Service Commission on ice plant establishments. CEBU PORT LABOR UNION, represented by this President ALEJO CABABAJAY, petitioner, vs. STATES MARINE CORPORATION, NICASIO PANSACALA, ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS, respondents

(G.R. No. L-9350; May 20, 1957)

FACTS: On Sept. 12, 1953, petitioner filed a petition for “recognition of stevedoring services and injunction” against respondents claiming that it was awarded a contract for the exclusive right of loading and unloading of the cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO., though at the time of the filing of the petition it was owned and operated by the States Marine Corporaiton. Respondent corporation filed a motion to dismiss on the ground that it has no legal capacity to sue or be sued, it having been dissolved on Oct. 17, 1952 and therefore has no personality to enter or refuse to enter into any contract, much less of threatening the petitioner as alleged in the petition. Petitioner relied on Sec. 77 to include said corporation as party respondent despite the fact that counsel for the other respondents called already the

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attention of the Court that the State Marine Corporation was non-existing and suggested that proper substitution or amendment of the petition be made. ISSUE: WON State Marine Corp can be made a party respondent? HELD: Section 77 of the Corporation Law reads as follows: SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established. Even a cursory reading of the above-quoted provision would convey the idea clearly manifested in the limitation "but not for the purpose of continuing the business for which it was established", that the 3-year period allowed by the law is only for the purpose of winding up its affairs. Petitioner-appellee prayed that it be declared to have the right to stevedoring work in question "thereby respecting the contract entered into by petitioner and the Elizalde & Co. and subsequently enforced and continued by the respondent States Marine Corporation". It appearing that the said States Marine Corporation was already dissolved at the time said petition was filed, and the vessel subject of the agreement having changed hands, it cannot be compelled now to respect such agreement specially considering the fact that it cannot even be made a party to this suit (See. 1, Rule 3, of the Rules of Court. SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES, petitioners, vs. SUGAR REGULATORY ADMINISTRATION, respondent

(G.R. No. 84606; June 28, 1989)

FACTS: Petitioner spouses file a complaint seeking cancellation of a mortgage and recovery of a sum of money for the overpayment they made, on a loan secured from RP Bank, by virtue of an alleged deduction made by Philippine Sugar Commission (Philsucom) of the proceeds of sugar exports. Petitioners filed an amended complaint which assailed the constitutionality of EO No. 18 abolishing Philsucom which in effect destroyed petitioners’ right to recover from PSC. They assert that the transfer from Philsucom to SRA are unconstitutional and ineffective. On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as SRA is concerned while denying that same motion insofar as RP Bank and Philsucom were concerned. ISSUE: WON SRA could be made a party-respondent liable to the claim of the petitioners? HELD: Yes. The termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against such juridical entity. Executive Order No. 18, promulgated on 28 May 1986, abolished the Philsucom, created the SRA and authorized the transfer of assets from Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part: Assets and records that, as determined by the Sugar Regulatory Administration, are required in its operation are hereby transferred to the Sugar Regulatory Administration. Although the Philsucom is hereby abolished, it shall nevertheless continue as a juridical entity for three years after the time when it would have been so abolished, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the functions for which it was established, under the supervision of the Sugar Regulatory Administration.

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We believe, that Section 13 of Executive Order No. 18 is not to be interpreted as authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable obligations by simply taking over Philsucom's assets and immunizing them from legitimate claims against Philsucom. The right of those who have previously contracted with, or otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right. We think that such an interpretation would result in Section 13 of Executive Order No. 18 colliding with the nonimpairment of contracts clause of the Constitution insofar as contractual claims are concerned, and with the due process clause insofar as the noncontractual claims are concerned. To avoid such a result, we believe and so hold that should the assets of Philsucom remaining in Philsucom at the time of its abolition not be adequate to pay for all lawful claims against Philsucom, respondent SRA must be held liable for such claims against Philsucom to the extent of the fair value of assets actually taken over by the SRA from Philsucom, if any. To this extent, claimants against Philsucom do have a right to follow Philsucom's assets in the hands of SRA or any other agency for that matter. We conclude that dismissal of petitioners' complaint against respondent SRA was clearly premature. Petitioners have a cause of action against SRA to the extent that they are able to prove lawful claims against Philsucom, which claims Philsucom is or may be unable to satisfy, and to the extent respondent SRA did, or does, in fact take over all or some of the assets of Philsucom. At the very least, the motion to dismiss was not shown to rest upon indubitable grounds and should, therefore, have been denied not only in respect of Philsucom but also in respect of respondent SRA. G.

LIQUIDATION AND WINDING UP

During the course of liquidation and winding up, the assets will be collected and realized, the rights and claims of creditors will be settled or provided for and a distribution of the remaining assets to the shareholders who are entitled thereto. Therefore, liquidation or winding up of corporate affairs therefore means the collection of all corporate assets, the payments of all its debts and settlement of its obligations and the ultimate distribution of corporate assets, if any of it remains, to all stockholders in accordance with their proportionate stockholdings in the corporation or in accordance with their respective contracts of subscription. After dissolution, a body corporate continues to exist for 3 years for the purpose of liquidation and winding up of its affairs: Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.

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Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS: 1. a.

b. c. d.

By the corporation itself through the BOD This is the usual method or procedure of liquidating a corporation (China Banking Corp vs. Michelin) and although there is no law authorizing it, neither is there anything that prohibits the BOD from undertaking the same If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation Claims for or against the corporate entity not filed within the period will become unenforceable as there exist no corporate entity against which they can be enforced. Actions pending for or against the corporation when the 3 year period expires are abated, since after the period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued

(National Abaca & Other Fibers Co. vs. Pore) 2. a. b. c.

3. a. b.

c.

d.

e.

By a trustee appointed by the corporation The corporation may opt to convey all corporate assets to a trustees who will take charge of liquidation If this method is used, the three year period limitation imposed by section 122 will not apply provided the designation of the trustee is made within that period. Thus, during the period of liquidation, but before the completion thereof, a dissolved corporation is still liable for all its debts and liabilities in an action filed against it through its trustee even if the case is filed beyond the 3 year period of liquidation. By appointment of a receiver A receiver may be appointed by the proper forum on petition or motu proprio upon the dissolution of the corporation (Sec. 119) The appointment of a receiver is, however, permissive rather than mandatory and the law tends to recognize that in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances and upon proper showing (China Banking

vs. Michelin)

If a receiver is appointed, the 3 year period fixed by law within which to complete the task of liquidation will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be sued even after that period (Sumera vs. Valencia). Thus, it has been held that when a corporation is dissolved and the liquidation of assets is placed in the hands of a receiver or assignee, the 3 year period is not applicable and the assignee may institute all actions leading to the liquidation of the corporation even after the expiration of 3 years. Note however, that a receiver may be appointed by the court even while the corporation is a going concern and does not always imply dissolution of a corporation.

NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiffappellant, vs. APOLONIA PORE, defendant-appellee

(G.R. No. L-16779; August 16, 1961)

FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal Court of Tacloban, Leyte, against defendant for the recovery of advances the latter failed to account for, amounting to P1,213.34. The court rendered a decision holding that defendant is liable for P272.49.

that the case was filed on Nov. 14, 1953, or before the expiration of the 3 year period. ISSUE: WON the action commenced within the 3 year period may be continued after the expiration of the said period? HELD: No. The rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs. It is generally held, that where a statute continues the existence of a corporation for a certain period after its dissolution for the purpose of prosecuting and defending suits, etc., the corporation becomes defunct upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action can afterwards be brought by or against it, and must be dismissed. Actions pending by or against the corporation when the period allowed by the statute expires, ordinarily abate. . . . This time limit does not apply unless the circumstances are such as to bring the corporation within the provision of the statute. However, the wording of the statutes, in some jurisdictions authorize suits after the expiration of the time limit, where the statute provides that for the purpose of any suit brought by or against the corporation shall continue beyond such period for a further named period after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892-893.). Our Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years. In fact, section 77 of said law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been . . . dissolved, for the purpose of prosecuting and defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, section 78 of the same law authorizes the corporation, "at any time during said three years . . . to convey all of its property to trustees for the benefit of members, stockholders, creditors and other interested", evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. Hence, commenting on said sections, Judge Fisher, in his work entitled Philippines Law on Stock Corporations (1929 ed.), has the following to say: It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but that there is no time limit within the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of section 78 may sue and be sued as such in all matters connected with the liquidation. By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia [67 Phil. 721, 726-727).

Said court denying reconsideration, plaintiff appealed before the CFI to which a motion to dismiss was filed by defendant on the ground that EO No. 372 abolished plaintiff and thus it no longer had capacity to sue.

Obviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending. The first question must, therefore, be answered in the negative.

Plaintiff objected there to on the ground that the said EO granted plaintiff to continue in existence for 3 years from Nov. 30, 1950, the effectivity date of the EO, for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators to gradually settle the its affairs and

Wherefore, actions commenced within the 3 year period of liquidation may be continued by the trustee despite the expiration of the said period.

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TIBURCIO SUMERA, as receiver of the corporation "Devota de Nuestra Señora de la Correa", plaintiff-appellant, vs. EUGENIO VALENCIA, defendant-appellee

(G.R. No. 45485; May 3, 1939)

FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 appointing Damaso Nicolas as assignee to take charge of liquidation. Nicolas was substituted by herein appellant Sumera who filed a motion with the court asking defendant Valencia to deliver to him the P400.00 funds of the corporation which was denied, reserving, however to said assignee the right to bring the proper action. Accordingly, on June 5, 1936, Sumera filed the present complaint for recovery of money. The defendant interposed the defense that the right against him had already prescribed which was found by the lower court to be tenable, the case not being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459. ISSUE: WON the 3 year period prescribed by the Corporation Law is applicable if the liquidation is placed on the hands of a receiver or assignee? HELD: No. Passing now to discuss the question raised by plaintiff and appellant in his sole assignment of alleged error, section 77 of Act No. 1459 provides that "Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established." And section 77 of the same Act provides, "At any time during said three years said corporation is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested. From and after any such conveyance by the corporation of its property in trust for the benefit of its members, stockholders, creditors, and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the members, stockholders, creditors, or other persons in interest. Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations, says: 6537. Effect of expiration of statutory extension of life. — In general. — The qualified existence after dissolution, as provided for by statute, terminates at the expiration of the time fixed, or, no time is fixed, at the expiration of a reasonable time. Where the extreme limit to which the statute has extended the life of a corporation after its dissolution has expired, it has no offices which can bind it by agreement, but only has statutory trustees. After the expiration of such time, it is generally held not only that the corporation cannot sue or be sued but that actions pending at such time are abated. But a statute authorizing the continuance of a corporation for three years to wind up its affairs, does not preclude an action to wind up brought after the three years. In the light of the legal provisions and authorities cited, interpretative of said laws, if the corporation carries out the liquidation of its assets through its own officers and continues and defends the actions brought by or against it, its existence shall terminate at the end of three years from the time of dissolution; but if a receiver or assignee is appointed, as has been done in the present case, with or without a transfer of its properties within three years, the legal interest passes to the assignee, the beneficial interest remaining in the members, stockholders, creditors and other interested persons; and said assignee may bring an action, prosecute that which has already been commenced for the benefit of the corporation, or defend the latter against any other action already instituted or which may be instituted even outside of the period of three years fixed for the offices of the corporation.

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For the foregoing considerations, we are of the opinion and so hold that when a corporation is dissolved and the liquidation of its assets is placed in the hands of a receiver or assignee, the period of three years prescribed by section 77 of Act No. 1459 known as the Corporation Law is not applicable, and the assignee may institute all actions leading to the liquidation of the assets of the corporation even after the expiration of three years. Wherefore, the order appealed from is reversed and it is ordered that the case be remanded to the court of origin to the end that it may decide the same on the merits, with costs against the appellee. THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees

(G.R. No. L-18805; August 14, 1967)

FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum of money from National Coconut Corporation’s (NACOCO) general manager and board chairman Maximo Kalaw and other defendants as directors. The defendants pose that since the three year period has elapsed since its abolition by virtue of EO 372, the Board of Liquidators may not now continue with, and prosecute, the present case to its conclusion. ISSUE: WON the Board of Liquidators has personality to proceed as partyplaintiff in this case? HELD: Yes. The executive order abolishing NACOCO and creating the Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various government owned corporations, including NACOCO. By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at the same time, however, the President had chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our conclusions. Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. She failed to account for that money. We there said that "the rule appears to be well settled that, in the absence of statutory provision to the

contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law contains no provision

authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years." However, these precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending. CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO, petitioners, vs. THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC., respondents

(G.R. No. L-39050; February 24, 1981)

FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal property of petitioner-wife Guillermina Mendoza de Gelano. It was while private respondent was leasing the property that its officers and directors had come to know petitioner-husband Carlos Gelano who received from the corporation cash advances on account of rent to be paid by the corporation to the land. Despite repeated demands by the private respondent refused to pay the cash advances. Petitioner-wife refused to pay on the ground that the cash advances was for the personal account of her husband asked for by, and given to him, without the knowledge and consent and did not benefit the family. On May 29, 1959, the corporation, through its lawyer, filed a complaint for collection against petitioners. Meanwhile, the corporation amended its AOI to shorten its term of existence up to Dec. 31, 1960 only which was approved by the SEC but the trial court was not notified of such amendment. On Nov. 20, 1964, almost 4 years after the dissolution, the trial court rendered a decision in favor of private respondent. ISSUE: WON a corporation whose corporate life had ceased by the expiration of its term of existence, could still continue prosecuting and defending suits after its dissolution and beyond the period of 3 years to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee? HELD: Yes. In American corporate law, upon which our Corporation Law was patterned, it is well settled that, unless the statutes otherwise provide, all pending suits and actions by and against a corporation are abated by a dissolution of the corporation. Section 77 of the Corporation Law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been ... dissolved, for the purpose of prosecuting and defending suits By or against it ...," so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, Section 78 of the same law authorizes the corporation, "at any time during said three years ... to convey all of its property to trustees for the benefit of members, Stockholders, creditors and other interested," evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the Corporation Law, it still has the right until December 31, 1963 to prosecute in its name the present case. After the expiration of said period, the corporation ceased to exist for all purposes and it can no longer sue or be sued. However, a corporation that has a pending action and which cannot be terminated within the three-year period after its dissolution is authorized under Section 78 to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the Threeyear period. Although private respondent did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. Said counsel had been handling the case when the same was pending before the trial court until it was appealed before the Court of Appeals and finally to this Court. We therefore hold that there was a substantial compliance with Section 78 of the Corporation Law and as such,

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private respondent Insular Sawmill, Inc. could still continue prosecuting the present case even beyond the period of three (3) years from the time of its dissolution. The word "trustee" as sued in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. Debtors like the petitioners herein may not take advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the first place. To sustain petitioners' contention would be to allow them to enrich themselves at the expense of another, which all enlightened legal systems condemn. REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his capacity as Liquidator of the Marsman Development Company, defendants-appellants.

(G.R. No. L-18956; April 27, 1972)

FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on the business operation and activities of defendant corporation leading to the discovery of deficiency taxes on logs produced from its concession. The Collector of Internal Revenue demanded payment for forest charges and 25% surcharge. After further investigation, another assessment was sent to the defendant by the BIR demanding a total sum of P45, 541.66 representing deficiency taxes, forest charges, surcharges and penalties. Later on, another assessment was sent to defendant corporation for discharging lumber without permit. Defendant contend that the present action was barred by Sec. 77 of the Corporation Law which allows corporate existence to continue after dissolution only for a period of 3 years. That the company was extra-judicially dissolved on April 23, 1954, the orginal complaint was filed only on Sept. 8, 1958 and the amended complaint on Aug. 26, 1956. The trial court ruled in favor of the government holding that the amended complaint was precisely to include FH Burgess, liquidator of the company, as party defendant. ISSUE: WON the case should prosper? HELD: Yes. It is to be recalled that the assessments against appellant corporation for deficiency taxes due for its operations since 1947 were made by the Bureau of Internal Revenue on October 15, 1953, September 13, 1954 and November 8, 1954, such that the first was before its dissolution and the last two not later than six months after such dissolution. Thus, in whatever way the matter may be viewed, the Government became the creditor of the corporation before the completion of its dissolution by the liquidation of its assets. Appellant F.H. Burgess, whom it chose as liquidator, became in law the trustee of all its assets for the benefit of all persons enumerated in Section 78, including its creditors, among whom is the Government, for the taxes herein involved. To assume otherwise would render the extra-judicial dissolution illegal and void, since, according to Section 62 of the Corporation Law, such kind of dissolution is permitted only when it "does not affect the rights of any creditor having a claim against the corporation." It is immaterial that the present action was filed after the expiration of three years after April 23, 1954, for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that the actual liquidation has not been terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation. And since the suit at bar is only for the collection of taxes finally assessed against the corporation within the three years invoked by appellants, their assignment of error cannot be sustained.

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Judgment of the trial court is affirmed.

STOCKHOLDERS

UPON DISSOLUTION: Upon dissolution of a corporation, it is considered in equity, even in the absence of a statute that its assets are held for the benefit of its stockholders after payment of its debts and will be so distributed to the said stockholders in accordance with their proportionate interest in the corporation or their contracts of subscription. PREFERRED SHAREHOLDERS: It must herein be remembered that holders of preferred shares may be granted certain rights or privileges upon dissolution of the corporation. The preference may be in the form of receiving a certain part or portion of corporate assets upon dissolution. And, depending on their contracts of subscription, they may or may not be entitled to share any of the assets remaining, after they may have received their respective preference in accordance therewith.

INCORPORATION OF A NEW CORPORATION: During the 3 year period granted to a corporation to liquidate or wind up its affairs, the BOD is not normally permitted to undertake any activity outside of the usual liquidation of the corporation. There is, however, nothing to prevent the stockholders from conveying their respective shareholdings