CORPO NOTES III.

Section 21 – Corporation by Estoppel

(a.k.a. Ostensible Corporation)
I. De Jure Corporation - This is not a corporation at all and its
- It has been issued a certificate of existence is based on the principle of
incorporation because it has complied with estoppel.
all the requirements set forth by law - A group of persons misrepresenting
- A de jure corporation can sue and be sued themselves as a corporation knowing that
in its own name as stated in the AOI. When the same is without authority.
impleaded as a defendant, summons must - In case of liability, they (the one forming it)
be served in the principal office stated in the are liable as general partners
AOI. Here, if judgment was rendered - In a corporation by estoppel, the persons
against the corporation, the properties misrepresenting themselves as a
subject of the levy would be that belonging corporation cannot sue under the name of
to the corporation alone. said corporation. Here, the persons
impleaded are those who are
II. De Facto Corporation misrepresenting themselves as a
- Does not legally exist in so far as the state corporation
is concerned but merely exists as a fact.
- Example: A and B, doing business under
A. Elements to be considered as a de facto the name and style of Pogi, Inc. Here, if
corporation (LIPC) judgment was rendered against the
1. There must be a valid law allowing the ostensible corporation, the liability of the
formation and incorporation of persons misrepresenting themselves is akin
corporations; to that of general partners (subsidiary and
2. There must be a bona fide attempt on solidary). Subsidiary liability because there
the part of a group of persons to is a need to exhaust first all the partnership
incorporate (meaning, there is an assets.
agreement among a group of at least 5
persons trying to incorporate in good IV. Once a certificate of incorporation was
faith a corporation) issued, the following subsequent
3. There must be a bona fide user of conditions must be complied with:
corporate powers (meaning, the group
of individuals started assuming A. It must obtain a secondary franchise (a.k.a.
themselves as a corporation in good Certificate of Authority to Engage in
faith for the purpose of their corporation Business)
in the latter’s name) – mere colorable - Purpose: For the duly constituted
title as a corporation corporation to lawfully engage in a business
4. That the de facto corporation possesses stated in the AOI
a certificate of incorporation (here, the - This secondary franchise must be obtained
certificate was issued in error because from the appropriate agency which issued
of some serious flaw in its incorporation; the favorable recommendation
e.g. oversight) - This franchise is needed only when the
business is regulated by law as when the
- As far as all third persons, except the State, business is imbued with public interest (e.g.
are concerned, a de facto corporation has banking, insurance, transportation)
all the rights and powers as a de jure
corporation. That is why, no collateral attack - The certificate of incorporation is the
is allowed to question the legal existence of primary franchise.
a corporation. Only the state can question
the same thru a Quo Warranto proceeding B. The corporation must organize itself and
commence its business or purpose within 2
- Can a de facto corporation assert its rights years from the date of incorporation (Sec.
against the Republic or the state? No 22)
because as far as the state is concerned, it - This requires that the corporation must
has no legal existence. exercise its privilege thru positive acts
- Example: Ribbon-cutting; hiring of
- A de facto corporation can also sue in its employees; actually entering into contracts
own name as stated in the AOI. When etc., otherwise, the corporation will be guilty
impleaded as a defendant, summons must of non-user of corporate powers
be served in the principal office stated in the - Consequence of non-user of corporate
AOI. Here, if judgment was rendered powers within 2 years from the date of
against the corporation, the properties incorporation:
subject of the levy would be that belonging - In case of non-use of corporate powers,
to the corporation alone. there is revocation of the Certificate of
Incorporation but the same is not
Automatic. There is no such thing as an
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 automatic dissolution of a corporation; - When the perpetration of malice, ill will, and
the corporation, although guilty of non- other forms of deceit is concealed through a
user of corporate powers, is still entitled corporation.
to notice and hearing. - A generic allegation of fraud committed
under a corporate structure is sufficient to
- Non-user is not the same as continuous pierce the veil of corporate fiction
inoperation for a period of atleast 5
years. In continuous inoperation, the B. Instrumentality or Alter-ego Cases
presumption is that the corporation
commences its business operation within - Note that the mere fact that a
the first 2 years except that it was rendered corporation is the subsidiary of another
inoperative for 5 years continuously. corporation is not enough. It must be
Continuous inoperation is also a ground for further shown that the following
the revocation of the certificate of indicative signs are present in the
incorporation upon notice and hearing relationship of the parent company and
conducted by the SEC. its subsidiary:
1. The parent and the subsidiary have
V. Theory of Corporate Fiction the same members of the Board of
- A corporation is an entity separate and Directors and other key officers;
distinct from those of persons comprising it. 2. That the parent and the subsidiary
- Under the Theory of Corporate Fiction, have the same stockholders or that
property belonging to the corporation is not the parent company owns the
the property of its members. Likewise, its entirety of the capital stock of the
liability cannot be extended to those subsidiary;
persons comprising it. The rights granted to 3. That the subsidiary was created
the corporation cannot be extended to its precisely for the business of the
shareholders or board members. In other parent company;
words, the corporation and the stockholders 4. That the subsidiary engages in
or members are distinct and separate from business with no other except the
each other. parent company;
- However, under the Doctrine of Corporate 5. That the entirety of the assets as
Fiction, the separate and distinct personality well as the capital of the subsidiary
of a corporation should be disregarded if the were furnished by the parent;
said personality was used to perpetuate 6. That the parent treats the subsidiary
fraud, commit crime, defend wrongdoing, as a mere department or division;
avoid lawful obligation, evade public 7. That the employees of the subsidiary
convenience or confuse legitimate issues. are treated as employees of the
This is otherwise known as principle of parent company
Piercing the Veil of Corporate Fiction.
- When a majority of these facts are proved,
- Kapamilya, Inc. was sued by Vivian for the subsidiary is considered the same as
illegal dismissal and damages. that of the parent company. Thus, any
Kapamilya, Inc. was ordered to pay liability incurred by the subsidiary may be
damages amounting to 5M in favor of enforced against the parent company. The
Vivian. When a writ of execution as subsidiary is treated as an ordinary adjunct
enforced there was no property to be or extension of the parent. But here, the
seized in the name of the defendant. piercing must apply only to that particular
Would levy and execution be proper on action or situation.
the personal and real property owned by - Here, the parent company is the principal
Charot Santos who owns 90% of the whole the subsidiary is the agent (principal-
OCS of Kapamilya, Inc.? agent relationship)
- No. Apply Doctrine of Corporate Fiction
that the corporation has a distinct and - Requisites to pierce the veil of corporate
separate personality from that of its fiction under alter-ego cases: (CFH)
officers, stockholders or members. The
exception here is when there is 1. Control test
convincing evidence that the veil of - This shows that one corporation
corporate fiction should be pierced. exercises absolute domination over
another corporation.
VI. Piercing the Veil of Corporate Fiction - By absolute domination means not only
(PFI) majority control in the stockholdings but
- Piercing the veil of corporate fiction is control in the business policies and
applied in the following cases: practices, finances, as well as in the
management.
A. Fraud cases

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 - The controlled corporation is left without - This must be with prior written notice to
a separate and independent will. It the stockholders or members on record
cannot act out of its volition. - If the proposed amendment seeks to
reorganize the business or restructure
- Probative factors: the corporation if involves substantial
a. That between the two corporations, change in the nature and character of
there is identity of stockholders; the corporation, the second option is the
b. Identity of businesses; only option – meaning, the 2/3 vote can
c. Identity of management including only be obtained in a meeting called for
Board of Directors; that purpose.
d. And other similar factors as would - After the 2/3 votes have been obtained,
lead to the conclusion that one of a copy of the original AOI along with the
these corporations is merely used as amendments underscored shall be
a business conduit for the submitted to the SEC for approval.
convenience of the other - However, if the business of the
corporation is regulated, then the
- After satisfying the control test, the next favorable recommendation of the
is the fraud test. appropriate government regulator must
also be obtained.
2. Fraud test
- There must be a showing that the B. When shall the amendments take effect?
control exercised by a corporation over - The amended AOI cannot take effect
another facilitated or in fact the principal without approval.
motivating factor for the commission of
the fraud to injure or prejudice the - However, approval may be obtained two
plaintiff ways:

3. Harm test 1. Express on the part of SEC

- The control exercised by one - The amended AOI takes effect from the
corporation over another is the date of the said approval of SEC (proof:
proximate cause of the injury suffered certificate of amended articles)
by the plaintiff - The following amendments must be
expressly approved by the SEC:
- The concurrence of the three tests is 1. Increase or decrease of the capital
sufficient to pierce the veil of corporate stock;
fiction and to disregard the corporate entity. 2. Merger or consolidation;
3. Any amendment that will dilute the
- Whether the corporate fiction is to be existing rights of the current
pierced is a question of fact. The purpose of stockholders or would be prejudicial
piercing the veil of corporation is not to to the existing stockholders
dissolve the corporation but merely to
determine liability. 2. Through lapsation
- If within 6 months from the date the
VII. Section 16 – Amendment of AOI proposed amendments were submitted
- This can only be done after the issuance of to the SEC and the SEC does not take
the Certificate of Incorporation and all any specific course of action, then the
amendments to the AOI or charter must be amended AOI are deemed approved
formally done and effective from the date of filing with
- This requires a majority vote of the BOD the SEC (retroactive to the date of filing)
(majority of the number fixed in the AOI)
with ratification of shareholders of members
representing at least 2/3rds of the
outstanding capital stock (OCS)
A. The 2/3 votes may be obtained under
Section 16 in two ways:

1. By written assent
- This does not require the conduct of
actual meeting by the shareholders or
members
- This is done by ballots sent to the
addresses of stockholders or members
of record (eg. Check the box)

2. In a Meeting held for that purpose

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 TITLE V – By Laws 8. The penalties for violation of the by-
laws;
9. In the case of stock corporations, the
I. By-Laws (BL)
manner of issuing stock certificates; and
- Set of instruments that confer but likewise
10. Such other matters as may be
limit power and authority within the
necessary for the proper or convenient
corporation.
transaction of its corporate business and
- This serves as the internal rules for
affairs
government within the corporation and
regulate the relationship of the corporation
B. General Attributes of Valid BL
and its SHs or members.
1. Must be consistent with law, public
- Since the by-laws are merely internal in
policy, public order;
both enforcement and application, third
2. Must be consistent with the AOI; in case
persons have no positive duty to know the
of conflict between the AOI and the BL,
corporate by-laws.
the AOI shall prevail
3. Must be general and uniform in
II. Section 46 – Kinds of BL Based on Time
application (the BL cannot be used as a
of Adoption:
discriminatory tool within the
corporation)
A. Pre-Incorporation BL
- At the option of the incorporators, they may
C. The following had been invalidated by the
already draft and submit to the SEC along
SC:
with the AOI and favorable recommendation
1. A BL provision allowing a person to sit
at the time when they applied for
as a director even if he is not a SH;
registration.
2. In case of stock corporation, a BL
- This is optional.
provision which provide a term longer
- Here, all incorporators must sign the same.
than 1 year for the directors;
B. Post-incorporation BL
IV. Section 48 – Amendment to BL
- This is mandatory for all registrants who
- When the BL are amended, or was totally
have not yet filed their BL with the SEC
rejected and a new one was adopted, the
earlier.
following is the method to amend or adopt
- It must be submitted within 1 month from
BL:
the issuance of the certificate of
incorporation.
A. By a majority vote of the Board and majority
- Failure to file BL within the reglementary
vote of the OCS or membership
period is one ground under PD 902-A for
- Here, the majority vote of the OCS can only
involuntary dissolution. Here, it is enough
be obtained in a meeting. The vote must be
that the same is adopted and approved by a
reflected in a Board Resolution which must
majority vote of Board as well as a majority
be submitted to the SEC for approval
vote of the OCS or the members.
B. By majority vote of the Board only
III. Section 47 - Contents of the BL
- If earlier the Board was granted delegated
authority or power to amend by the
A. Contents (BSQPQ-EEPIO)
stockholders representing atleast 2/3 of the
1. The time, place and manner of calling
OCS. The delegated power may be revoked
and conducting regular or special
by a mere majority of the OCS.
meetings of the directors or trustees;
2. The time and manner of calling and
- When the BL are amended and the
conducting regular or special meetings
amendment is approved by the SEC, there
of the stockholders or members;
must be a Certificate of Amended BL issued
3. The required quorum in meetings of
by the SEC.
stockholders or members and the
manner of voting therein;
- Amendment BL must always be with the
4. The form for proxies of stockholders and
approval of the SEC as opposed to AOI
members and the manner of voting
which can take effect by mere lapsation
them;
5. The qualifications, duties and
- The new BL cannot be given retroactive
compensation of directors or trustees,
effect if the same would prejudice or impair
officers and employees;
vested rights.
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;

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 TITLE III – Board of voted for, unless there is a special
Directors/Trustees/Officers class called;
2. founder’s shares – has the right to vote
and be voted for but only for a maximum
I. Management of a Corporation
period of 5 years
- One benefit of a corporate structure is that
regardless of the number of owners of the
B. How often should elections be held in the
capital stock, the law always vests
corporation?
management of the business or the
- If it is stock corporation:
corporation in a collective collegial body
- GR: Every year – because maximum
known as the Board of Directors (BOD) and
time of being a BOD is only 1 year
that is why there is a centralized
- If non-stock corporation
management in a corporation.
- If the AOI provides for a term of the
Trustees longer than 1 year, then the
II. Section 23 – The Board of Directors
election shall be held at the end of such
(BOD) of Trustees
term – maximum term is 3 years
- For educational non-stock corporations,
A. Stock Corporation
the maximum is 5 years
- Management body is always called BOD
- Minimum no. is 5
C. When should elections be conducted?
- Maximum no. is 15, except for consolidated
- Regular elections – Must be held on the
banks or merged banks where 21 BOD is
date fixed in the AOI
allowed
- If BL/AOI is silent – on any day on April or
under SEC Rules, along with the annual
B. Non-Stock Corporation
SH’s meeting as fixed in the BL
- In case of non-stock corporations –
- Under SEC Rules, the annual meeting of
minimum of 5 trustees is required but there
SH is on the 1st Tuesday following the 1st
is no maximum fixed by the law, as long as
Monday of the year (1st Tuesday of the
a definite number is chosen
year)
- If the BL fixes the date and no election was
C. Essential and indispensable qualifications
conducted, an explanation in written form
- All BOD must be owners of at least 1 share
must be submitted to SEC, otherwise
recorded in their name at the time of their
penalties shall be imposed
election
- In case of trustees in a non-stock
IV. Section 25 – Corporate Officers, Quorum
corporation, they must be at least members
of record
A. During the election, upon prior notice, there
must be a quorum
- In case of BOD for stock corporations –
- There is quorum if there is majority of SH
ownership may be mere legal title over the
entitled to vote who are actually present or
share – he has legal title if his/her name
are represented
appears as owner of the shares in the stock
- If there is no quorum and elections are
and transfer book of the corporation,
conducted, the results are void, no one can
whether or not held in trust or for the benefit
sit as BOD
of another – nominee director
- There is presence when the owner of the
- In case of non-stock corporation, to qualify
share is actually, physically present in the
as a trustee, he/she must be a voting
room
member
- If represented – this is usually used by
D. Where will the candidates for directorship
corporations owning shares – the following
come from?
are the methods:
- The SH themselves
1. Proxy
- All SH can file certificate of candidacy
2. Voting Trust Agreement (VTA)
3. Any other acceptable deed of
III. Section 24 – Election of Directors or
assignment
Trustees
4. Special Power of Attorney (SPA)
A. How to install BOD/Trustees into office: 2
- Once there is a quorum, the elections must
ways
now be conducted in the manner prescribed
1. Through election
in the BL
- Popular vote on the part of the
- If the BL requires balloting, that is the
sovereign power of the corporation
only manner by which elections must be
who are the voting stock
held
- Those SH who owns voting shares
are not just entitled to vote but to be

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 - If BL is silent, Corporation Code - This may take place thru transfer of
requires voting viva voce – raising the all shares to another because the
hand requirement that s/he remains as SH
is a continuing requirement
B. Who shall be proclaimed as winners?
- Those who obtained the plurality of the 4. Disqualification during the term
votes, not majority of votes - The following are statutory grounds
- Plurality of votes: Highest number of votes to disqualify a BOD:
a. That s/he has been convicted of
V. Section 26 – Report of Election of any crime involving the penalty
Directors, Trustees and Officers of 6 years or more (Sec. 27)
- Once a BOD is elected and proclaimed, the b. Has committed a criminal
Corporate Secretary is required by the violation of the Corporation Code
Corporation Code to submit a report of the committed within 5 years prior to
results of the elections. This is a mandatory the election (Sec. 27)
positive duty - Other disqualifications may be
provided for in the AOI or BL of the
- Only the BOD whose names are corporation
registered and listed in the SEC can
validly bind the corporation. 5. Removal
- Who can remove an incumbent BOD
VI. Section 30 – Compensation of Directors – the same power that elected such
- GR: Once elected as BOD, they are entitled BOD – the SH
to no salaries or compensation - To remove an incumbent BOD, there
- XPN: They are only entitled to such if: must be an actual meeting called
1. The BL allows or grants them and conducted and at least 2/3 of
compensation; or the OCS must vote to remove
2. A subsequent resolution of a majority of - Since BOD are elected based on
SH or members is passed conferring trust and confidence, when
salaries or compensation to the BOD removed, there is no need for SH to
- When compensation is allowed, there is a show cause of removal because the
legal limit on how much they can receive. It law already presumed that it is a
should not go beyond 10% of the annual net withdrawal or revocation of the trust
income of the corporation before taxes and confidence. SH need not
- The law provides salary cap to prevent BOD present any ground
from unduly benefitting from their position - However, if the BOD being removed
and to provide a disincentive to commit is the one elected as the minority
conflicts of interest in other forms of representative, there must be a just
corporate corruption and valid cause for the removal to
prevent the majority from exercising
- If the BL is silent or if there is no resolution their powers with oppression.
of the majority of OCS, can BOD, in the - If the meeting to remove an
discharge of their given duties demand incumbent BOD cannot be called by
salaries? – No. They serve pro bono. the President thru the Corporate
Therefore, are entitled only for reasonable Secretary because they refuse, the
per diems – reimbursement of actual meeting to remove may be held
expenses incurred in the performance of upon order of the special
official functions commercial court – meaning, file a
petition for conduct of a meeting to
VII. Section 27 – Disqualification of such effect.
Directors, Trustees or Officers & Section
28 – Removal of Directors or Trustees 6. Expiration of term

A. How long must BOD serve as such? 7. Increase in the number of BOD
- For the term provided for under AOI, unless - These are the grounds for vacancy
that term is cut short by any of the following in the BOD
events: - This means that in the original AOI,
there were fewer BOD but an
1. Resignation amendment is later approved to
- Resignation as BOD does not mean increase the same
termination of relationship as a SH.
VIII. Section 29 – Vacancies in the Office of
2. Death in office or during the term Director or Trustee

3. Withdrawal as a SH Ground for Ending Filling up the vacancy

the Term
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1. Resignation 1. Appointment but the same happened so they
2. Death - This must be extended their hold over term for
3. Withdrawal done by the another year. It was during the last hold
4. Disqualification remaining over term that A and B resigned. C, D
members of the and E chose X and Y to serve the
BOD for as long remaining term of A and B. Is this valid?
as they still - SC: The appointment of X and Y are
constitute a void because the mere fact that C, D
quorum and E were already in their hold over
- Who can be term at the time they appointed X and Y
appointed: Can shows that their regular terms have
choose among already expired and as such under the
the SH – BOD Corporation Code, when the terms had
must be SH expired, there is only one way to fill up
- The one the vacancy which is election. Hold over
appointed will BOD can no longer fill up vacancies in
only serve the the BOD.
unexpired term;
have same power - Once directors have been chosen and
as a regular BOD elected and have qualified and their
and same respective names registered with the SEC,
benefits the power to represent the Corporation in all
its acts is inherent upon them and in fact the
2. Special Election representative capacity or power shall
- If there is no likewise be considered as exclusive upon
longer a quorum the BOD. That is the power to give consent
in the BOD to contracts or perfect the contract or bind
- There must be a the corporation in a suit is lodged
quorum of the exclusively upon the BOD.
voting stock,
either present or IX. Delegated Powers
represented - Even the complexity of the business or
- Votes must be purpose of the corporation, there may be a
cast in the necessity for practical purposes to delegate
manner provided some powers of the BOD to some persons.
by the AOI/BL - Who may exercise in a limited and
1. Removal 1. Election by SH delegated capacity the power to represent a
2. Expiration of - The only way to corporation? (SBEM)
term fill up the vacancy 1. Statutory corporate officers
3. Increase in the 2. To those created and described in the
number of BOD BL
- May create additional corporate
- Africa v. Valleverde officers and provide for their specific
- A, B, C, D and E were enjoying their first tasks and responsibilities and for as
term as duly elected BOD. Their first long as done within the scope of
term is from 2011-2012. However, said authority, the acts of these
before their regular term expired, they officers shall be binding upon the
already called for an election. Notices corporation
were sent to SH but during the - Example: Vice-President, Vice-
appointed time and date, very few President for Finance, Vice-
showed up so there was no quorum so President for Academics, COO
any election cannot be conducted. As a 3. Executive Committee
matter of law, the incumbent BOD 4. Managing Corporations under
cannot abandon their offices. Thus, if no Management Contract
subsequent election is held by the BOD, - Their acts are considered as valid and
then the last one elected must remain in binding and enforceable upon the
a hold over capacity. By 2012-2013, A, corporation for as long as authorized by
B, C, D and E remained in office in a the BOD
hold over capacity – hold over BOD. - As far as the delegees and BOD are
Hold over BOD de facto officers concerned, apply the principles of agency.
because the right to office has already They are considered as agents of the
ceased, the right to hold office is only for corporation, therefore, for as long as they
the purposes of preventing vacuum in act within the scope of their given authority,
the management of the corporation. their acts are binding upon their principal –
When the first hold over term was again the corporation.
about to expire, they called for elections,
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- And acting as mere agents, they cannot be – in case of non-stock corporation, to
held personally liable. Personal liability may maintain the membership book
arise from breach of the so-called fiduciary - S/he signs, along with the President, all
duties of corporate directors and officers. stock certificates issued by the
corporation
A. Who are Statutory Corporate Officers? - S/he has the legal duty to take down
1. President and prepare minutes of meetings,
2. Secretary whether of the BOD or the SH
3. Treasurer - S/he can represent the corporation in
acts inherent to said office
- They can enter into contracts or perform - S/he may or may not be a BOD, this will
acts in the name of the corporation for as largely depend on the qualification
long as: provided in the BL but must be a
1. There is prior approval of the BOD resident of the Philippines
- Any act entered into by these
corporate officers cannot bind the - Who is the Corporate Treasurer?
corporation and cannot be enforced - Custodian of all corporate funds, money,
against the corporation until and and property, inclusive of those received
unless there is subsequent approval by the corporation out of the disposition
by the BOD itself of the capital stock
- Once approved, it is as if it is the act - Tasked by law to prepare and submit
of the BOD and therefore, the act of financial statements to the SEC and
the corporation government regulators
2. In the absence of such approval, the BL - S/he may or may not be a BOD, this will
or resolution of the BOD authorizes largely depend on the qualification
them to do so provided in the BL
- If the BL or a written resolution of the
BOD authorizes the specific acts, - Under Civil Procedure, service of summons
they need not go back to the BOD upon a corporation must be made upon the
for approval or ratification, the act President, Managing Partner, General
per se is valid and binding upon the Manager, Corporate Secretary, Treasurer or
corporation because there is a In-House Counsel (Sec. 11, Rule 14, ROC)
written instrument allowing them to
exercise such power or enter into - The law has put in place the system of
said contract checks and balances that is why:
1. President cannot concurrently serve as
- Who is the President of the corporation? secretary not treasurer
- By law, s/he must come from the BOD 2. Secretary can concurrently serve as
itself. This means that you cannot have treasurer
a President of a corporation who is not
incumbent BOD – this is violative of the - Whether or not a person is a corporate
Corporation Code officer is determined by the following:
- The President shall be chosen in the a. If the position is provided for in the
manner prescribed in the BL. A Corporation Code
foreigner can be a president of the b. If the position is provided for in the in the
corporation. AOI or in the BL (the position must be
- If BL is silent, then President can be named in the AOI or BL)
chosen by the BOD itself from among - Other than these, they are not corporate
themselves officers
- Inherent to the function of the President
is that s/he is the chief executive or - Ringaw v. Sangu; Matling v. Coro
operating officer of the corporation and - The disputed positions here involved
therefore administers the day to day Vice-President and Comptroller,
operation and management of the respectively. They claimed that were
business illegally dismissed and as such they filed
- He is also the implementor and executor with the NLRC illegal dismissal cases.
of the policies laid down by the BOD The NLRC initially dismissed for lack of
(policy-making body) jurisdiction claiming that since they
occupied a very high rank in the
- Who is the Corporate Secretary? corporation, this is not an ordinary labor
- S/he is the official custodian of all case and this is in fact cognizable by the
corporate books and records special commercial court being an intra-
- S/he has the legal duty to maintain and corporate controversies. Are these
update and record transfer of all shares corporate officers?
of stock in said stock and transfer book - SC: The position of the Vice-President
and Comptroller are not found in the
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 Corporation Code (president, secretary, - Requisites:
treasurer, BOD). In the BL it stated that 1. The unauthorized person must first have
the BOD is granted the power to create acted in a manner that would lead a
such other positions as the BOD may reasonable person to believe that s/he is
deem necessary and convenient but an officer, employee or agent of the
nothing in the BL were these positions corporation
written. Thus, the positions are not 2. The corporation is guilty of knowledge of
corporate officers. Therefore, the illegal the acts of unauthorized person or
dismissal case is not an intra-corporate acquiesced to said acts
controversy; it is an ordinary labor 3. Third person relied on the appearance
dispute cognizable by the NLRC. of said authority conferred by the
corporation upon the person
B. Executive Committee (Sec. 35) - The person really has no representative
- This is a mere adjunct of the BOD and can power as far as the corporation is
only be created if BL permits concerned. However, by performing acts
- At minimum, the executive committee must that made it appear that authority or
be composed of at least 3 incumbent BOD, agency is present, when in truth there is
additional officers may be provided for by none and the corporation is guilty of
the BL allowing said person to act on its behalf,
- This may be tasked with specific powers then the corporation is bound.
and responsibilities to assist the BOD in the
discharge of its functions X. Section 31 – Liability of Directors,
- The source of the power of the executive Trustees of Officers – What are the
committee may be the BL as well as duties of the BOD and officers as
resolutions of the BOD fiduciaries? – 3-Fold Duty – ODL
- Under the Corporation Code, the executive - They are not acting as ordinary agents for
committee cannot perform the following and in behalf of the corporation, their
acts, otherwise it is void: position is reposed with trust and
1. Pass a resolution that requires SH’s confidence given that the BOD exercises all
approval corporate powers, it is the BOD that has
2. Fill up vacancies in the BOD custody of all corporate property and it is
3. Declare dividends the BOD that undertakes and administers all
4. Amend the BL business of the corporation, they must
5. Amend any resolution of the BOD that observe their 3-fold duties as fiduciaries
by its terms is not so amendable - The 3-fold duty is expressed in the negative
form under Sec. 31
C. Managing Corporations under Management
Contract (Sec. 32) A. Obedience
- The delegated power here is the power to - Members of the BOD as well as all other
manage some or all of the business of officers of the corporation must observe the
another corporation limits of their authority by following the 1987
- Who exercises the delegated power – Constitution, all statutes specially the
managing corporation Corporation Code, and the law that regulate
- their business. They must obey the AOI and
- Requisites for validity and enforceability of the BL.
management contract between 2 - Flagrant and deliberate violation of these
corporations: instruments shall subject the offending BOD
1. Approval of the management contract or officers to criminal, civil and
by majority vote of their respective BOD; administrative liabilities.
and
2. Majority of their respective capital stock B. Diligence
or membership - Opposite of negligence
- The management contract shall not exceed - Diligence is taking the necessary steps to
a period of 5 years, unless the contract is prevent harm or injury
for exploration development and utility of - The duty of diligence is imposed upon the
natural resources, in which case the BOD whenever they decide on matters or
Constitution and special law that shall enter into acts for and in behalf of the
govern – co-production, joint-venture, profit corporation
sharing - Under the business judgment rule –
decisions of the BOD regarding policies and
D. Doctrine of Apparent Authority practices pertaining to the business of the
- Some other persons, without authority may corporation are not subject to judicial review
in fact bind the corporation under the and court has no authority to substitute its
Doctrine of Apparent Authority or Doctrine own judgment with that of the BOD
of Ostensible Agency - Such respect must be accorded to decisions
of the BOD only if said decisions were
9
 arrived at with honesty and good faith and fair and reasonable. But where any of the
for as long as these decisions are toward first two requirements is not complied with,
the best interest of the corporation, the BOD contract can still be ratified by 2/3rds vote of
be held personally liable even if he the OCS provided there is full disclosure of
decisions would result to losses the adverse interest involved and contract is
- Losses alone suffered by the corporation in still fair and reasonable.
its operations is not enough to hold the BOD - Nominal interest – 20% and below of the
personally liable OCS
- Substantial interest – Above 20%
C. Loyalty
- During the incumbency of BOD, they cannot - The best way: the interlocking director
serve 2 masters at the same time should not participate at all in the decision.
- This requires that in all cases and in all
matters, the best interest and welfare of the XIII. Section 34 – Disloyalty of a Director
corporation must be upheld by its agents - Doctrine of Corporate Opportunity – A
rather their own personal benefit even if it director commits disloyalty when he
means personal sacrifice on their part, they acquires or seizes a business opportunity
have to protect the corporation rightfully belonging to the corporation that
- There are safeguards under the Corporation the corporation is able to undertake but
Code to make sure that loyalty is always which the director acquires for himself. In
observed by BOD and officers of the short, directors are liable whenever they
corporation compete their own corporation.

XI. Self-Dealing Director or Officer A. Sanction

- Director who in his or her own capacity - All profits derived by the disloyal director in
personally enters into a contract with the the competing business are deemed
corporation in which he is a director during forfeited in favor of the corporation even if
his or her incumbency he uses his own capital.
- You cannot profit from the idea of others.
-The contract entered into is voidable (This is - Under the law, the disloyal director is
the general rule) at the instance of the considered as a mere trustee of the
corporation because the law presumes that corporation.
there is either fraud or undue influence exerted - If in the process, the disloyal director
in the corporation. But if the presence of the misappropriated corporate funds and
self-dealing director is not necessary to obtain property, then the entire business may be
quorum in a meeting and to approve the forfeited in favor of the corporation.
contract, and that the contract is fair and
reasonable, the contract is valid. B. Redeeming Clause in Section 34
-But even if the first two is absent that is - Those profits may be retained by the
(presence of the self-dealing director is not disloyal director upon ratification by 2/3 of
necessary to obtain quorum in a meeting and to the OCS.
approve the contract), the contract can still be - It is a form of condoning the disloyalty.
ratifies by 2/3rds vote of the OCS and provided
further that the contract is fair and reasonable. XIV. Violation of the 3-Fold Fiduciary Duties
- For violation of the three-fold fiduciary
duties, go back to Section 31.
XII. Section 33 – Contracts between - Directors shall be liable for patently
Corporations with Interlocking Directors assenting to the unlawful or illegal acts of
- Another safeguard to ensure loyalty is the the corporation or for gross negligence in
exceptional clause under Section 33 conducting the affairs of the corporation or
regarding contracts between corporations for acquiring a pecuniary benefit, interest or
with interlocking directors. advantage directly in conflict with that of
- Interlocking director – when one or some or their position as a director.
all of the directors in ne corporation are the
directors in another corporation. A. However, personal liability may also be
- RULE: If the interest of the interlocking borne or acquire by the directors or officers
director in both corporations is substantial, in the following instances in addition to
the contract entered into shall not be Section 31:
invalidated on that ground alone except if it 1. Section 65 for assenting to the issuance
is fraudulent or not fair and reasonable. If of watered down shares;
the interest of the interlocking director in 2. Failing to object in writing after knowing
one corporation is substantial and nominal of said watered down shares;
in the other, the contract is valid provided 3. If the directors agree to hold themselves
that his presence where is not necessary for personally liable with the corporation;
approval of the contract, his vote is not and
necessary for quorum, and the contract is
10
 4. When they are held liable by specific representative suit; the SH who
provision of law initiates the suit is a mere nominal
party; the real-party-in-interest is the
- Example: corporation because the suit is for its
1. Under the Labor Code, directors or protection against abusive officers);
officers may be help personally liable for and
illegal dismissal if they acted with d. It must be proved that the appraisal
evident bad faith or malice; right is not available – this is to
2. Under SEC, directors or officers may be prove that the derivative suit is not a
help personally liable for insider trading harassment suit filed by the minority
or for manipulation of security prices SH
and other frauds;
3. Under BP 22, directors or officers may - A derivative suit is a deterrent to the
be help personally liable if they members of the Board to continue with the
knowingly issue a check which is business of the corporation. It serves as
unfunded or failing to maintain sufficient checks against abuses committed by the
funds for the encashment of the said Board.
checks;
4. Under the Corporation Code, directors - Quantum of evidence: Substantial evidence
or officers may be held personally liable
for willful violation of the Corporation - Once the offenses are proved, the damages
Code or for refusing without a valid awarded by the court will inure to the benefit
cause the inspection and examination of the corporation since it is the real-party-
rights of the SHs in-interest. The SH who initiates the suit is
only entitled to reimbursement of the
B. How may the personal liabilities be necessary expenses in bringing the suit,
enforced? which expenses is recoverable by way of
cost.
1. By way of a criminal case (here, there is - Since a derivative suit is for the protection of
a need for a specific provision of law the corporation, it would be wrong for the
imposing criminal liability upon a specific court to dissolve the corporation.
officer);
- As a rule, a corporation is not entitled to
2. Civil liability by way of a civil action moral damages because a corporation
against an erring director either by a SH cannot experience mental anguish, etc.
or by a third person who suffered an because it has no central nervous system.
injury (individual action or class suit); XPN: besmirched reputation or tainted
goodwill
3. As a derivative suit – civil action to
enforced the civil liability of the offending C. Appraisal right
directors or officers of a corporation - The right of a SH to demand from the
- It may be in the form of: corporation that the latter pay back or
a. An action for damages or action for repurchase the shares of stocks;
specific performance; or surrendering back the shares of stocks to
b. By a petition for mandamus when a the corporation and the corporation will pay
director failed or refuse to perform a those shares; this terminates the intra-
ministerial duty; or corporate relation between the SH and the
c. An action to annul a contract entered corporation
into by the Board such as in the - Appraisal right is available to the
case of Section 32; or stockholders under those instances
d. An action for injunction provided in Section 81.

- Requisites of derivative suit: XV. Doctrine of Forbidden Profits

a. That it must be filed by a SH - Refers to all kinds of profits of pecuniary
(regardless of the amount of shares advantages acquired by BOD of Officers of
held in the corporation) or member a corporation in violation of their fiduciary
at the time of the commission of the duties. (Par. 2, Sec. 31, BP 68)
acts complained of;
b. That there is exhaustion of all
available administrative or
intracorporate remedies; (similar to
Article 151, FC)
c. That the corporation is impleaded or
named in the derivative suit,
otherwise, the case will be
dismissed (a derivative suit is a
11
 TITLE IV – Powers of Corporations
- A corporation have general and special
powers. Between the general and special
- A corporation can only enjoy rights or
powers, if an act or contract, whether
exercise powers that are expressly granted
involving the use of the corporate funds is
by law or implied to those express powers
related to the general powers, then only the
or inherent or incidental to its existence as a
Board needs to approve the same because
corporation
it is part of the ordinary course business
- What a corporation can and cannot do is
unless the law or the AOI or BL require
based on the law itself.
otherwise.
- On the other hand, the exercise of special
I. Section 36 – Corporate Powers and
corporate powers requires not only the
Capacity – Theory of Special Capacities
approval of the Board but assent of the
OCS or membership.
A. Powers granted under the Corporation
Code (SSAAB-SRM-DPO)
- General powers of a corporation: In the
1. To sue and be sued in its corporate
exercise of these powers, only the approval
name;
of the members of the Board is necessary
2. Of succession by its corporate name for
because the same is pursuant to the
the period of time stated in the articles
business judgment prerogative of the
of incorporation and the certificate of
management of the corporation.
incorporation;
3. To adopt and use a corporate seal;
- Special Powers of the corporation: The
4. To amend its articles of incorporation in
exercise of these powers requires the
accordance with the provisions of this
approval of both the members of the Board
Code;
and the shareholders representing 2/3 of
5. To adopt by-laws, not contrary to law,
the OCS
morals, or public policy, and to amend
or repeal the same in accordance with
- Power to donate: Valid if the following are
this Code;
present:
6. In case of stock corporations, to issue or
1. That the donation is approved by the
sell stocks to subscribers and to sell
proper authority within the corporation.
stocks to subscribers and to sell
Generally, this would only require the
treasury stocks in accordance with the
approval of the Board regardless of the
provisions of this Code; and to admit
amount of the donation. However, if the
members to the corporation if it be a
BL require the SHs approval, then the
non-stock corporation;
BL prevail. The approval must be in
7. To purchase, receive, take or grant,
accordance with the manner provided
hold, convey, sell, lease, pledge,
by the by – laws;
mortgage and otherwise deal with such
2. The amount of the donation must be
real and personal property, including
reasonable. The reasonableness of the
securities and bonds of other
amount depends upon the financial
corporations, as the transaction of the
condition of the corporation at the time
lawful business of the corporation may
of the giving of the donation. Hence, an
reasonably and necessarily require,
insolvent corporation has no right to
subject to the limitations prescribed by
make a donation;
law and the Constitution;
3. It must be for any of the following
8. To enter into merger or consolidation
legitimate purposes: For charity or any
with other corporations as provided in
charitable organizations.
this Code;
9. To make reasonable donations,
- No donation can be given by a corporation
including those for the public welfare or
to any political candidate, political parties, or
for hospital, charitable, cultural,
partisan political activity (void donations)
scientific, civic, or similar purposes:
- Rationale: Corporations are not voters.
Provided, That no corporation, domestic
They cannot directly or indirectly influence
or foreign, shall give donations in aid of
the outcome of the election. Political
any political party or candidate or for
elections are left by the Constitution to the
purposes of partisan political activity;
electorate.
10. To establish pension, retirement, and
other plans for the benefit of its
II. Section 37 – Power to Extend or Shorten
directors, trustees, officers and
Corporate Term – Special Powers
employees; and
- This power may be exercised anytime
11. To exercise such other powers as may
- It is not dependent on the present financial
be essential or necessary to carry out its
condition of the corporation.
purpose or purposes as stated in the
articles of incorporation.

12
III. Section 38 – Power to Increase and - In pre-emptive right offering, the Board may
Decrease Capital Stock – Special Powers also set a time limit. This means that the
- The AOI must state the maximum number offering must be under reasonable terms
of shares, which the corporation is legally and conditions as the Board may decide
permitted to issue. This is both a right and a and at the price set by the Board. The price
limitation. here is not always at par value because the
corporation has to make money. The
- This also requires formal amendment to the customary period for pre-emptive right
AOI expressly approved by the SEC and the offering is 30 days.
government regulator
- If the corporation offers the shares to others
A. What would prompt a decrease in the without first offering the same to its existing
capital stock: SHs, then any subsequent dispositions shall
1. To eliminate surplus capital be considered null and void. The SHs who
2. To reflect the true value of the present were prejudiced of their rights may nullify
assets of the corporation – assets of the the sales in order for them to exercise their
corporation depreciates through time pre-emptive right. However, despite said
3. To forestall losses suffered by the offer, the SHs do not have the obligation to
corporation (losses represent liabilities) buy.

- Instances when a corporation may - Once the shareholder rejects the offer, the
reduce its capital stock. sale of the shares to others can no longer
- When there is amendment of the AOI be questioned, except in a close
and when the trust fund doctrine is corporation. The pre-emptive right in a close
followed (meaning, there is no violation corporation is demandable in all cases and
of the trust fund doctrine-a doctrine in every disposition of the shares.
which states all corporate assets are
primarily reserved for corporate C. The pre-emptive right cannot be asserted in
creditors). the following instances: (PND)

- In reducing the capital stock, there must first 1. When the issuances of the new shares
be a certification executed by the Secretary are in compliance with legal
and affirmed and signed by the majority of requirements for minimum ownership by
the BOD stating the present value of the the public
assets, the total liabilities of the corporation,
and a certification that creditor’s rights are 2. If the issuance of the shares is for the
not affected by the reduction – This should payment of the existing rights of the
be done because the reduction of the corporation or to acquire property
capital stock also reduces the trust fund needed by the corporation for the
reserve for corporate creditors. business
- Example: Dacion en pago such as a
- If the reduction of the capital stock would be loan for equity swap – This means that
prejudicial to the rights of the creditors of the bank would agree to have the loan
the corporation, the SEC will not approve be paid by way of shares of stocks of
the reduction. Under the trust fund doctrine, the debtor. This means that the creditor
the assets of the corporation represent a becomes the shareholder of the debtor
fund that corporate creditors may look upon corporation.
for the satisfaction of the debts - Barter – Such as paying shares of
stocks in exchange with the supply or
equipment given
B. Pre-Emptive Right
- The disposition of the new shares is subject 3. If the pre-emptive right is expressly
to the pre-emptive right of existing denied in the AOI, either in the original
shareholders. This is the statutory right of or amended AOI
existing stockholders to be offered first and
subscribe new shares to be offered by the IV. Section 38 – Power to Incur, Create or
corporation. Increase Bonded Indebtedness
- First form of corporate financing is sale of
- Rationale: to prevent dilution of the existing corporate Shares of Stocks (SS)
equity and interest of the existing SHs. In - Second form of corporate financing is to
effect, to maintain said interest or equity. borrow money for the corporation to
The new shares must be offered first to prosecute or continue for the purpose it was
the existing SHs in the same proportion organized
as their current interests in the
corporation. A. 2 Kinds of Corporate Borrowing

13
 1. Ordinary Loans - A corporation sells SS to finance the
- The New Civil Code shall apply business and once the financing is ready,
- In case of loan, the practice is that the you now have cash – you need the cash to
borrower shall deliver some security or buy the assets such as materials,
collateral – specific property belonging equipment to further the business and then
to the corporation is used as a mortgage you sell these assets.
in order to ensure the payment of the - If the sale renders the corporation unable to
principal loan pursue or continue the business for which it
- Corporate securitization – corporate was originally organized, the sale requires
assets are used to ensure the payment majority vote of the BOD and 2/3 of the
of the principal obligation OCS – because this means abandonment
of the original business and therefore entails
2. Bonded Indebtedness a change in the nature of the investment
- Borrowing from the public in general in made by the SH – that is why they must
the form of bonds or similar evidence of approve the same
debt - The abandonment of the original business
- Bond as Debt Insurance: Evidence on here does not necessarily result to the
writing of an obligation contracted by the dissolution of the corporation. It is an
corporation that the public may opportunity for the corporation to embark on
subscribe to at a predetermined interest an entirely new business
rate
- Under SRC – Bonds may either be, as - Example: Prior to recession, X is a
to maturity date: manufacturing company for the export
a. Short Term – 365 or less from issue market, producing tablecloth, napkins, etc.
becomes demandable or has for the market of the US. But the export
matured business is continued based on the
b. Long Term – more than 1 year equipment you have. You have 2,000 units
becomes demandable or has of high speed swing machines and several
matured units of iron. And then recession hits. So the
US does not necessarily need anymore X’s
- Who can buy the bonds? products. X no longer has a market for its
- Anyone products. So it sold all its equipment –
- It means that the corporation is liquidating its assets – by this it frees its
entering a contract with you to capital – convert them into cash. One way
borrow an amount and that the to cut the losses. And from the proceeds, X
corporation guarantees that you will can now think a new business or embark on
be paid back the amount or the fair the secondary purpose.
value of the bond after a stipulated
date and a fixed interest - If the proceeds of the sale of all the assets
are intended for an entirely new primary
- Floating of Bonds purpose, the AOI must be amended.
- Means public offer of bonds - No amendment is necessary if the proceeds
of the sale are to be invested for the
- Bond holders are not SH, they are secondary purposes already laid down in
creditors of the corporation. the AOI.

- What is the collateral? - In all cases however, the sale must comply
- None. Unlike ordinary loans. with the bulk sales law:
- The only collateral there are other a. That the prior written consent of all the
general assets of the corporation. creditors of the seller must be procured
The owners are not secured - Otherwise, the sale may be annulled
creditors. at the instance of any of the
creditors because the sale of the
- This activity must first have prior permit trust fund doctrine– the asset of the
from the SEC corporation constitutes a trust fund
reserve by law for the corporate
- To create such bonded indebtedness, creditors – if you sell all assets, then
there must be approval of the majority the creditors are bereft of such
vote of the BOD and 2/3 of the OCS assets.

V. Section 40 – Sale or Other Disposition of - If the sale of the assets is done in

Assets the ordinary course of the business,
- This does not necessarily require an the transactions are valid even
amendment to the AOI but it always without SH’s consent – e.g.: sale of
involves a restructuring of the business mineral ores of mining companies
itself.
14
VI. Section 42 – Power to Invest Corporate issuing corporation – when they are
Funds in Another Corporation or redeemed or bought back this is
Business or for any Other Purpose tantamount to paying the obligations
- The investment of funds here must be or liabilities of the corporation –
construed as a means by which the redemption of redeemable shares is
corporation acquires passive income or not reacquisition of shares per se
additional profits. but it is payment of debt by the
- If the investment of corporate funds is for its corporation – payment of debt is not
secondary purpose or in a corporation anchored on unrestricted retained
whose business is not related to the earnings
business of the investing corporation, - The following are limitations:
majority vote of the BOD and 2/3 of the 1. The corporation must not be
OCS is required insolvent;
- The investment here is authorized by law 2. The corporation should not
but requires SH’s approval because it has suffer from illiquidity as a
both positive and negative effect – positive consequence of such
because the investment tends to increase redemption
the sources of profits for the corporation – - If in the meantime the
negative because it poses a greater risk for corporation is suffering cash flow
the SH because their money will now be or liquidity problem the right of
used by the corporation to buy SS of the holder of the redeemable
another corporation, so there is additional share is simply suspended until
risk for the SH of the investing corporation such time that the corporation
- If the investment is for a contract or a has sufficient cash but not
business or a corporation directly related or invalidated – can still demand
auxiliary to the business of the investing pay back from the corporation
corporation, SH’s assent is not necessary
- Why does the law as a GR may
VII. Section 41 – Power to Acquire its Own require unrestricted retained
Shares earnings before a corporation may
- In the reacquisition of its own shares, the reacquire its own shares – to protect
corporation must meet the following the trust fund reserve for corporate
requisites: creditors because by obtaining the
fund necessary for said reacquisition
a. The reacquisition must be for a valid out of the unrestricted retained
purpose – valid if legitimate and earnings, then the legal capital of the
authorized by law or by AOI and BL corporation remains untouched or
unimpaired
Why re-acquire shares? -
1) To eliminate fractional shares VIII. Section 45 – Ultra Vires Act of
Corporations
2) To compromise any - Opposite of intra vires – refers to any act
indebtedness owing to the within the lawful exercise of the power of the
corporation arising out of the corporation
sale of its shares - Power of the corporation – Express, implied
- This arises from delinquency or inherent powers
of subscription - If the act is intra vires, whether executed by
the BOD or through any authorized officer –
3) To pay the fair value of its the corporation will be bound by such
dissenting or withdrawing SH transaction even if it creates liability on the
- Pursuant to appraisal rights part of the corporation
- If the act is ultra vires, the act or contract is
4) To redeem the redeemable outside the powers granted by law for
shares corporations

b. The reacquisition is out of an A. 2 Kinds of Ultra Vires Act

unrestricted retained earnings or surplus
profits (extra profits) 1. Merely Outside of the Present Power or
- In the absence of unrestricted Rights of the Corporation
retained earnings, the corporation - Merely in excess of what the current
cannot reacquire its own shares powers of the corporation are and if the
except in the case of redeemable ultra vires act is not illegal act, it is
shares. subject to ratification.
- Who can ratify an ultra vires but not
- Why? Because redeemable shares illegal act?
constitute debts incurred by the
15
 a. BOD – If the ultra vires act was
committed by an authorized
employee or officer
b. SH – If the ultra vires act was
committed by the BOD
c. Amend the AOI/BL – If the BOD or
the 2/3 of the OCS committed the
ultra vires act; conform the
instrument with the act

2. Illegal Acts
- Not all ultra vires acts are illegal but all
illegal acts of the corporation are ultra
vires

- Consequences:
a. As to the Corporation
- Sufficient ground for revocation of
the certificate of incorporation
- PD 902-A – This is involuntary
dissolution

b. As to the BOD or Officer

- They are held directly and personally
liable for:
i. Any crime – corporation itself
cannot commit a crime, any
criminal liability is imputable
upon the agent or officer of the
corporation
ii. Civil case filed by any party who
may be injured
iii. Administrative case

c. As to SH
- They are held directly and personally
liable for:
i. Any crime – corporation itself
cannot commit a crime, any
criminal liability is imputable
upon the agent or officer of the
corporation
ii. Civil case filed by any party who
may be injured
iii. Administrative case

16
 TITLE VII – Stock and Stockholders a. With par value: Sell not below the
par value
These provisions are optional for non-stock
b. No par value: Sell not below the
corporations and are mandatory for stock
stated value which cannot be less
corporations
than P 5.00
I. 3 General Ways for a Person to Own SS
B. What makes a subscription contract unique
(shares of stocks)
are the following:
1. By subscription – this is a special kind of
1. Subject matter: shares of stocks only
sale contract
2. Like any contracts of sale, a creditor-
2. By repurchase of treasury shares which
debtor relationship is established.
are reissued
- Here, the debtor is the subscriber as to
3. By acquiring the shares of existing
the obligation to pay the full
stockholders
consideration. Once there is full
payment, the obligation of the
First Way
corporation to issue certificate of stocks
now arises. (Reciprocal obligation)
II. Subscription Contract (Sec. 60)
- This is a contract for the sale and
- The obligation of the subscriber to pay is
disposition of capital stock for the first time –
mandatory and absolute. The moment the
this is the original or first disposition of the
contract is perfected, the entirety of the
capital stock
consideration forms part of the trust fund.
- This is a contract for the simultaneous
- No rescission is allowed because it will be
disposition or acquisition shares of stocks
prejudicial to the creditors. The only remedy
coming from the original and unissued
of the corporation is to enforce the
shares of the corporation (disposition of the
obligation.
capital stock for the first time). This will
- The trust fund doctrine should be observed
always be treated as a subscription contract
in all subscription contracts.
regardless of how the parties call it.
C. How will the total consideration be paid?
A. Parties
(Sec. 62)
- Depends as to the time of perfection of the
- In determining the price of each share, the
contract – As to time:
minimum is the par or stated value.
1. Pre-incorporation (before incorporation)
1. Cash (Philippine legal tender or foreign
subscription
currency)
- This is irrevocable from the moment of
- Promissory notes, checks and other
perfection.
debt instruments are not allowed
because encashment is uncertain.
- Once the draft of the AOI and the
- Manager’s check or cashier’s check is
Treasurer’s Affidavit has been submitted
allowed only when allowed by the BL or
to the SEC, no revocation of the pre-
by the resolution of the Board.
incorporation subscription shall be
permitted.
2. Property other than cash needed by the
- The pre-incorporation subscriber’s name
corporation for its business (real or
is listed in the AOI.
personal)
- Violation of this rule will justify denial of
- Form of barter
the issuance of the certificate of
- The property must first be appraised by
incorporation on the ground of
the Board and the appraisal shall be
misrepresentation.
approved by the SEC.
- This is to prevent the watering down of
- Parties:
shares.
a. The promoter (whether acting in his
own name of for and in behalf of the
3. Labor or services
proposed corporation); and
- Minimum requirement here is that the
b. The subscriber
shares shall be issued only after the
service has been performed to the
2. Post-Incorporation subscription
corporation. Hence, it always pertains to
past services.
- Parties:
- The appraisal rule shall likewise be
a. Corporation, as represented by the
applied here.
Board; and
b. The subscriber (individual or another
4. Previously incurred indebtedness of the
juridical entity)
corporation – dacion en pago
- In corporate rehabilitation, it is known as
- Note:
debt for equity swap.
17
 - Treasury shares were outstanding shares
D. When are shares issued in violation of issued by the corporation and sold but
Section 65? Watering down of shares which the corporation reacquired through
1. When shares are issued below par or redemption, buy-back, donation or similar
stated value means.
2. When the stock dividends are declared - The holders of the same are not entitled to
and distributed to the shareholders the following rights because they belong to
without unrestricted retained earnings the corporation, they are the corporation’s
3. When shares are issued in exchange of own shares:
property less than the par or stated 1. The right to vote
value of the shares 2. The right to dividends
4. When shares are donated by the 3. The right to the assets
corporation to another (the donation is
void) A. When the corporation has treasury shares,
it has 2 options:
- Consequences when watered shares are
issued: 1. Cancel and retire the treasury shares
- For the members of the Board who - There must be an appropriate reduction
voted in favor, or those who need not of the CS by amending the AOI
vote but failed to object in writing after
obtaining knowledge of such watered 2. Reissue treasury shares
down shares, shall be solidarily liable - Reselling
with the subscriber who acquired the - The resale price can be below par
same. It becomes a personal obligation. because it is already used share
“wagwag”
- How to enforce the personal liability?
- Action for sum of money under a IV. Section 70 – How may the Corporation
derivative suit plus damages in case of Enforce the Delinquent Balance
fraud
A. Judicially
E. When to pay the subscription price? - By filing an action for collection against the
subscriber
1. On the date stipulated by the parties - This is an intra-corporate controversy even
- The payment can be lump sum or fixed if it is a simple collection case
or by stated installments - Regardless of the amount due, it must be
filed before the commercial court
2. If no date was stipulated, then the
remaining balance is due upon Call by 1. Extra judicially
the Board. - Cheapest means
- By the corporation conducting a
- For as long as not delinquent, one who delinquency sale – auction – the highest
subscribes already has all the rights of a bidder will be the one who offers the
fully paid stockholder even if the least number of shares for the highest
subscription is not yet paid or fully paid. He price
can already enjoy voting and dividend rights - A notice of delinquency must also be
as well as asset rights in case of dissolution. served upon the affected subscribers –
But, he cannot still have the right to transfer so that they can still pay before the
the shares and demand a certificate of auction
stock. - What if there is No Bidder
- For as long as not delinquent, one who - This is indicative that the corporation’s
subscribes already have all the rights of a shares are not in demand in the market,
fully paid SH even if the subscription is not there are no investors willing to take that
yet paid. risk
- As far as proprietary rights pertain to the - The corporation may acquire those
shares concerned, there is really no crucial delinquent shares provided that it has
difference between one who has paid in full unrestricted retained earnings
and one who has not paid in full. In fact,
once the subscription contract has been If subscription is already paid, it is now a
perfected, the subscriber, even if did not ministerial duty on the part of the corporation to
pay anything; can already demand that issue a stock certificate. It must be:
his/her name be entered in the corporate 1. In writing under the name of the
stock and transfer book or records. corporation
2. Stating the number of shares
Second Way 3. Par value or stated value
4. Name and address of SH
III. Treasury Shares 5. Serial number of the certificate
18
 6. Signature of both president and - Once the transfer is complete and regular, it
corporate secretary. now becomes a ministerial duty on the art of
- Once a stock certificate is issued by the the corporation to register the same.
corporation, the proper entry in the stock
and transfer book must now be made as - There is valid transfer only if the
well indorsement and delivery was made by the
- The certificate of stock, once issued is itself SH of record or the latter’s agent. If there
personal property of the SH but it is paper was no valid transfer because it was
representative of ownership of capital stock unauthorized or a result of a forgery or theft
in the corporation of the certificate – the corporate secretary
- In general, a certificate is not necessary to can refuse to register the transfer – when
enjoy rights as a SH. All that is sufficient is the title of the transferee is in doubt no
the name must be in the stock and transfer registration can take place
book
- Because the issuance of stock certificate is V. Ownership of Shares in a Corporation
ministerial on the part of the corporate Entails 3 Principal Rights in favor of the
secretary once there is full payment, it may SH or Subscriber
now be compelled by mandamus
- The stock certificate, being a property itself, A. Right to Participate in the Management of
is actually a convenient tool to transfer the the Corporation
shares and the certificate itself – acquiring - SHs in general, enjoy only limited residual
the shares of an existing SH (3rd mode of management rights, limited to those
how to acquire SS) instances where their ratification or assent
is required by the Corporation Code, by
Third Way statute or by the AOI or BL
- It is merely residual management right
- Under the Corporation Code, in order to because in a corporate set-up, there is a
transfer the property represented by the centralized management vested by law in
certificate and all the rights pertaining favor of the BOD
thereto, there must be indorsement and - How do SH exercise this residual
delivery of the physical certificate to the management right – Through voting
transferee - The right to vote includes the right to be
- A stock certificate is a quasi-negotiable voted for.
instrument
- Example: X has now paid in full so all that - However, this right to vote and be voted for
he needs to do is follow the quasi- cannot be invoked by the holders or owners
negotiability principle as regard the stock of the following shares:
certificate to sell his shares. Indorse the
certificate of stock – the indorsement must 1. Delinquent Shares
contain the name of the transferee. If it is - Subscribed shares that have
indorsed in blank, it becomes a street outstanding balances on their total
certificate – similar to negotiable instrument subscription price and where there is
– it is now a bearer instrument – Street already default in the payment of said
Certificate – Any certificate of stock balance
indorsed in blank – one that does not - During the period of delinquency, the
contain the name of the transferee – that is subscriber on record is deprived of the
why it becomes a bearer instrument. right to vote and be voted for
- When Y makes full payment, Y must
insure that he obtains physical custody 2. Shares Subject to Appraisal
of the certificate, that is why there must - Pursuant to the appraisal right stated in
be indorsement plus delivery and from Sec. 81, from the moment that a written
that moment on, when the 2 step demand is made by a dissenting SH
process has been completed the upon the corporation to pay the fair
transferee is placed in ownership over value of said shares, then the shares
the property and has now a right against are suspended in all their rights, the only
the corporation to have the transfer right remaining to the shares subject of
registered. appraisal is the right to be paid by the
- If it was indorsed but was not delivered corporation as part of the withdrawal
– the transferee cannot compel the process
registration of the transfer
- If it was delivered but was not indorsed 3. Treasury Shares
– the corporate secretary can refuse - Shares reacquired by the corporation
registration which are former outstanding shares
- Complete the 2 step process whether the reacquisition is by
redemption, buy-back or even donation
to the corporation
19
 - While they are in the treasury, they are from accumulating profits for its own and
not outstanding it would be absurd for denying its investors their rightful share
the corporation to vote its own treasury to said profits
shares
- Such action for mandamus may be
4. Shares that are Classified as Non- dismissed based on the following: (Sec.
Voting in the AOI 43)
- Unless deprived, the right to vote in the 1. URE or surplus profits are needed
AOI, all shares are deemed to be voting by the corporation to finance a
shares definite expansion program already
- The kinds of shares that may be denied approved by the BOD
voting rights in the AOI – preferred or 2. That the corporation is bound by a
redeemable subsisting agreement with a creditor
- Even if the shares are classified as non- prohibiting it from declaring
voting, the denial is limited to the right to dividends without the consent of the
vote directors. They still enjoy the right creditor and such consent has not
to vote in (ABISIMID) been obtained
3. That there is a need to provide for
B. Right to a Share in the Profits Derived by possible contingencies such as
the Corporation probable losses and similar external
- SH are investors, they use their own money factors where the URE may be used
or funds in order to acquire SS of the
corporation and by using their own funds to - The power to declare dividends is
acquire said property, they invest and lodged on the BOD alone. But in case of
therefore acquire risk in said acquisition declaration of stock dividends, 2/3 of the
OCS must assent.
- Every SH has a reasonable expectation to
receive a proportionate distribution of the - Kinds of Dividends that a Corporation
profits of the corporation in the form of may Declare
dividends
- The power to declare dividends is exclusive 1. Cash Dividends
to stock corporations, absolutely prohibited - Kind of dividend payable in actual
for non-stock corporations cash denominated in a sum of
money per share belonging to a SH
- Dividends - Whenever cash dividends are
- Constitutes a proportionate distribution declared and already announced,
of the profits earned by the corporation the declaration is deemed
out of its business irrevocable and therefore, the
- The source of said dividends must be corporation must now pay to the
limited to the so-called surplus profits or SHs of record
unrestricted retained earnings
- The basic rule is that no part of the CS, 2. Property Dividends
whether subscribed or paid-in may used - Actually cash dividends but they are
by the corporation to pay its own SH payable by way of property
dividends belonging to the corporation and no
- Whenever the corporation has longer needed for the business
unrestricted retained earnings, it is
absolutely discretionary upon the BOD 3. Stock Dividends
whether to declare all or some of the - This is the better alternative of cash
unrestricted retained earnings for and property dividends
distribution - The URE derived by the corporation
is used by the corporation to acquire
- GR: The BOD cannot be compelled to unissued SS
declare dividends - it is as if the URE will be used by
- XPN: When the corporation has already the corporation to buy its own SS so
accumulated surplus profits or that its own shares will be distributed
unrestricted retained earning (URE) in to its SHs – there is no diminution in
excess of 100% of its subscribed capital the property, assets or money of the
stock – totality of all shares which are in corporation even if dividends are
the hands of persons other than the distributed – but on the part of the
corporation subject of existing SH, there is an increased in the
subscription contracts whether fully paid actual number of shares held of
or not record
- The law allows an action for mandamus C. Right to Assets
for the BOD to declare dividends in such - The assets cannot be distributed to any of
situation – To prevent the corporation the shareholders for as long as the
20
 corporation is still existing because those of ownership, it also serves as a convenient
assets, whether in the form of cash, tool to transfer the SS themselves.
equipment, or land, are reserved by law for - The right to transfer shares possessed by a
the benefit of corporate creditors. fully paid SH is almost an absolute and
- Any distribution of assets during the unbridled. As a rule, any restrictions
existence of the corporation may be imposed by the corporation upon its own SH
questioned by the creditors if such as to their right to transfer is considered
distribution impairs the rights of the void as an undue restriction on trade.
creditors.
A. The following provisions in the BL are held
- Distribution of the assets during the term is by SC as void:
allowed only in the following: If there is
surplus capital. 1. Inscription on the stock certificate as
well as on the AOI and BL classifying
VI. Citizenship of a Corporation – shares as non-transferable
TESTS IN DETERMINING THE CITIZENSHIP - This is void because it restricts the
OF A CORPORATION ownership right of the SH
a. Place of incorporation-the nationality of
a corporation is determined by the state 2. Right of first refusal is void
of the incorporation regardless of the - This is an imposition of restriction
nationality of the stockholders. imposed by the corporation that before
b. Control test-in determining the any SH can transfer or convey the
nationality of a corporation, the control shares, the same must first be offered to
tests uses the nationality of the the corporation or to the other existing
controlling stockholders or members of SH
the corporation. - This is void because it restricts the
c. The grandfather rule-used in case there ownership right of the SH
is doubt in the citizenship of a - XPN: Close corporation – by their very
corporation nature and or as long as stated in the
d. Domiciliary test-nationality is determined AOI, BL and certificates, a right of first
by the principal place of business of the refusal is a valid one even the very
corporation limited ownership or membership in a
close corporation since ownership of
NOTES: In determining the citizenship of a shares in a close corporation is subject
corporation, where the corporation is engaged to specified eligibilities
in activity, enterprise or business which is
wholly or partly nationalized, the said B. Valid Restrictions in the Exercise of the
determination must be based on the voting Right to Transfer
control and beneficial ownership. (Gamboa v. - While the right to transfer cannot be
Teves) restricted it can be regulated

- Public utilities (e.g. telecommunications): 1. Manner by which the certificate may be

60-40 requirements (this represents a transferred
maximum and a minimum: 60% is the - Such as indorsement + delivery – as
minimum for Filipino citizens while the 40% long as this is present there is no need
is the maximum for non – Filipino citizens). for a separate instrument such as deed
Breach of this threshold is a violation of the of sale executed by the parties
Constitution.
. 2. If the consent of the proper government
A. Agencies tasked to encourage foreign agency is required to be first obtained
investments (direct or indirect) in the prior to recording of the transfer
Philippines: - This is a legal regulation to allow the
1. SEC government to determine whether there
2. Board of Investments (BOI) is compliance with citizenship
- These agencies apply the ordinary control requirement
test, even with corporate layers – meaning, - Example: For transfer of shares in
for as long as one of the parents is a Filipino corporations that are registered with the
citizen, their child is Filipino. This is actually Department of Tourism, the DOT
the liberal interpretation of the grandfather Secretary must first be obtained; or
rule. (Thus, Cute, Inc. is a Filipino since companies which are granted a
Pogi, Inc. is a Filipino.) franchise or privilege under
Environmental Laws for Exploration
VII. Right to Transfer SS Development and Utilization of natural
- The stock certificate serves as paper resources – DENR’s consent must first
evidence of ownership of SS. As evidence be obtained

21
 3. No Transfer Clause
- Constitutionally founded
- This is any transfer that would reduce
ownership that would reduce Filipino
ownership that is below that which
prescribed by the Constitution or special
law shall not be recorded in the books of
the corporation

- For as long as the transfer was validly made

– it is by the owner or the latter’s agent and
in the manner prescribed by the corporation
and the law, whoever holds and whose
name appears as the indorser of the
certificate acquires all the rights founded
thereon and therefore will have the right to
compel the corporation to register the
transfer

VIII. Section 73 – Lost or Destroyed

Certificate
- In case of lost or destroyed certificates, an
affidavit of loss is required to be executed
and published at the expense of the SH
concerned
- But no new certificate shall issue in case
there is an ownership dispute as to the
certificate and to the shares and until such
time that such dispute is resolved judicially

- Example: The certificate of stock of X was

stolen by Y. Y sold the stolen certificate to Z
for a valuable consideration. X discovered
the loss of the certificate and applies for the
replacement of the certificate with the
corporate secretary – should the corporate
secretary issue a new certificate?
- No.
- The certificate is not lost, it is with Z.
- Only when the certificate is lost or
destroyed

22
 TITLE VIII – Corporate Books and Records 1. In case of unauthorized transfers
2. In case of forged indorsements or
falsified indorsements
- All valid transfers must be registered in the
3. Where the certificate itself was stolen
books of the corporation
B. Rules
I. Purpose for Recording in the Stock and
1. The principle here is that while a
Transfer Book (STB)
certificate of stock is a quasi-negotiable
1. For the corporation to track change in
instrument, it is not a negotiable
the ownership of its capital stock
instrument because there are only 2
2. Enable the transferee to exercise the
negotiable instrument under the
rights of a SH as against the corporation
Philippine law – PN and BoE
– including the right to vote and be
2. In stock certificates, the holder in due
voted for
course defense is not applicable.
3. To allow the government to monitor the
- Whoever acquires even if in good faith,
changes in the ownership and ascertain
a certificate stock that was transferred
compliance with law, rules and
without authority from its lawful owner
regulations
cannot assert rights superior to the
lawful owner
- Only those transfers that convey upon the
- Regardless of how many transferees
transferee absolute title or ownership of the
and no matter how innocent these
shares may be registered or should be
subsequent transferees are – no one
registered
can defeat the right of the owner
- Any transaction that creates a mere lien or
encumbrance whether voluntary or
- XPN: The certificate holder/owner is
involuntary of the shares are not
negligent – negligence gives rise to
registerable
estoppel
- Modes to transfer absolute title: Sale by way
of indorsement and delivery; donation
III. Other Rights of a SH
- Question: If you want to donate your SS
A. Right to Inspect and Examine Corporate
covered by a certificate, do you need to
Books and Records
indorse and deliver the certificate?
- This stems from ownership of shares in
- Yes. There is no need to execute a
stock corporation or membership in a non-
deed of donation as far as the
stock corporations because members pay
corporation is concerned. From the
contributions
perspective of Civil Law, the deed of
- This right is inseparable from title of the
donation is necessary to show a
property
perfected donation – there must be
- Not all books or records of the corporation
acceptance by the donee
are subject to these right
- Question: Writ of attachment over SS – can
- Books that are required to be kept and
this be registered in the books of the
maintained under the law
corporation?
- No. it is not a complete transfer.
1. Public and inspectable books and
records
Question: Can the attaching creditor compel
- Refer to all corporate books and records
the corporate secretary to register the writ of
that are required to be submitted and
attachment in the books of the corporation?
filed with the SEC, government
- No because it is not an absolute
regulator, as well as other government
conveyance of title
agencies pursuant to statute, rules and
- Regardless of the writ of attachment
regulations
issued by the court, the writ itself cannot
- These refer to all official filings made by
be registered in the books of the
the corporation
corporation – the corporate secretary
- Example: AOI, BL, all amendments of
cannot be compelled by mandamus to
the AOI, all amendments of the BL
do so
- Once submitted pursuant to law, they
acquire the character of public records –
II. What Transfers are Not to be Registered
benefit of public records in evidence –
in the Books of the Corporation
they enjoy the presumption of regularity
in the discharge of official duties; prima
A. In all instances where the title of the
facie evidence of the correctness of
transferee is in doubt the corporate
entries
secretary may validly refuse any request or
- Who may inspect: Anyone upon proper
demand for registration
request
- When may such doubt arise or exist?

23
2. Non-public and inspectable books and then all of them shall be solidarily liable
records to the injured SH
- They are required to be kept and
maintained within the corporation - When an action to compel access to the
- Books required under the Corporation books and record is filed, and the same
Code is denied, the corporation through its
- They are inspectable only by SH or BOD or corporate secretary may invoke
members of the corporation – they are the following grounds:
not accessible to the public in general – a. That the requesting SH is not
any subsisting SH or member of the founded by a legitimate purpose or
corporation may demand as a matter of interest
right inspection and examination which b. That the requesting SH is motivated
includes the right to make copies and by bad faith in exercising the rights
excerpts c. That the requesting SH has misused
- The inspection and examination right information obtained from prior
may be exercised directly by the SH of inspection to the prejudice of the
record or by the latter’s duly authorized corporation
agent anytime during reasonable hours
of business days of the corporation 3. Non-public and non-inspectable books
- Any restriction on this right, even if and records
found in the BL should be nullified - Non – public because the circulation of
said information or record is very limited.
- Examples: Not even a director or shareholder is
a. All minutes of meetings of SH; allowed.
b. Minutes (reflects matters that are - Relates to trade secrets and other
resolved or decided; summary) of all confidential information within the
meetings of the BOD; corporation that cannot be open to its
c. Records of all business transactions; shareholders.
d. All contracts or dealings where the - The aim here is to protect the business
corporation is a party to, including all interest of the corporation.
communications prior to said
contract and subsequent thereto; - PNB v. Gonzales
e. For stock corporations – stock and - The right to inspect and examine
transfer book which is an corporate books and records must be
alphabetical listing of all subscriber coupled with a legitimate purpose. It
and SH of the corporation – beside must be connected with the proprietary
the name if each must be the interest, which the stockholder has in
number of shares; class of such the corporation.
share; par value; consideration or
price; payment; balance to be paid; - Te v. Te
and if fully paid, serial number of the - Mere pendency of a criminal case
certificate of stock against a shareholder who happens to
f. Financial statements be in this case to be the corporate
- Required for all stock and non-stock secretary will not terminate nor suspend
corporations on an annual basis inspection and examination rights. This
- These are under the custody of the right is effective for as long as he or she
corporate treasurer – any request is a shareholder.
must be forwarded to him
- The financial statements include: IV. Section 74 – Stock and Transfer Agent
i. SALN of corporations - For stock corporation, the stock and transfer
ii. Statement of financial condition book may be kept by the corporation which
iii. Profit and loss statement is usually in the official custody of the
iv. Audit report by an independent corporate secretary, but at the discretion of
auditor – required for all the corporation, a stock and transfer agent
corporations may be hired or engaged
- However, the stock and transfer agent must
- Equivalent of a stock and transfer book be licensed as such by the SEC
in a stock corporation is a membership - This is especially necessary for corporations
book whose shares are listed in the Phil Stock
Exchange
- Any unjustified denial of the right to
inspect and examine corporate books
and records gives rise to personal
liability on the part of the secretary and if
the denial was affirmed by the BOD,

24
 TITLE VI – Meetings - In turn, the trustee must now issue and
execute a voting trust certificate (VTC)
after the issuance of a new stock
I. Exercising the Right to Vote through
certificate in the name of the trustor.
Representation
This must be delivered to the trustor.
- Personally (written assent or attendance) or
Thus, it has now the following effects-
representation (proxy or VTA)
legal title to the (trustee) and beneficial
title to the (trustor) over the shares.
II. Section 58 – Proxies
- To be understood in 3 senses:
- The voting trust certificate is transferable
like a stock certificate by indorsement and
a. Legal authority conferred by the SH or
delivery. The VTC is held by the trustor so
subscriber to another for the latter to
the trustor can indorse and deliver it to
attend and vote in a meeting – refers to
another even while the VTA is still pending,
agency
however, the transferees of the VTC cannot
vote because the right to vote is inherent in
b. Refers to the written form containing
the trustee.
such legal authority – under the
Corporation Code it must be in writing
- NOTE: in proxy, the representative can vote
and submitted to the corporate secretary
but cannot be voted for. In VTA, legal title
before the meeting, unless the BL
passes to the trustee, hence he can be
prescribes a different form
voted for.
- Regardless of the provision in the BL, it
is only for maximum period of 5 years
IV. When may the Right to Vote and be
- If the proxy is silent, it is good and valid
voted for be Exercised
only for 1 year
- In the absence of specific dates prescribed
in the subscription contract between the
c. It refers to the person authorized –
parties – GR: Any portion of the entire
agent – pursuant to the rules on agency,
balance of the subscription is due and must
the agent can only vote to what is
be paid when a call is made by the BOD. A
instructed
call is a demand of payment of the
subscription and it must be embodied in a
- The proxy cannot be voted for on the basis
resolution passed by the BOD stating the:
of the proxy, he acquires no legal title to the
1. Amount of percentage of the total
shares represented
balance due
2. The date when payment must be made
III. Section 59 – Voting Trust Agreement
3. Any interest and penalties that may be
(VTA)
imposed on the balance
- A form of express trust where power to vote
4. The same call must also carry a warning
shares of SH is conveyed to another called
that if no payment is received by the
the trustee. To bind the corporation, it must
corporation under on the date specified,
be submitted to the corporate secretary and
then the SS will be declared delinquent
the SEC.
and may be sold at public auction
- Example: X subscribed to 1M shares. X
- Each affected subscriber is entitled to a
incurred a loan obligation from Y. Y
notice of call at the address specified in the
imposed the condition that as a collateral, X
books of the corporation
must issue a voting trust agreement.
- For all SHs who received a valid call, they
- Unless the BL prescribes differently, the
must pay as required
voting trust agreement must be duly
- In case they fail to pay, then those who
notarized
renege on his obligation may now be
- The trustee must cost the registration of the
declared delinquent and therefor shall loss
VTA in the books of records which is the
their right to vote and be voted for.
duty of the corporate secretary – the
registration is a two-step process:
a. Corporate secretary will now cancel the
stock certificate issued in the name of
the trustor
b. A new stock certificate will be issued in
the name of the trustee
- The new certificate will bear an
annotation that it is pursuant to a VTA
- From this moment on, the trustee is the
legal owner of the shares for a period of
5 years, unless the VTA is pursuant to a
loan contract, valid until the loan is
extinguished

25
 TITLE X – Appraisal Right 2. Extrajudicial means
- Convening an ad hoc committee of
three:
I. Section 81 – Instances of Appraisal Right
a. Appointed by the corporation;
- This is a right that may be invoked only by
b. Appointed by the shareholder; and
the following:
c. Appointed by the both the
corporation and the shareholder
A. Shareholders who dissented or objected to
specific corporate acts (the dissenting vote
- The decision of the committee is final
must be in writing or reflected in the minutes
and executory. The corporation must
of the meeting)
pay within 30 days.
- That it is invoked under the following
instances:
III. Section 84 – When Right to Payment
1. Any amendment to the AOI with the
Ceases
following effects:
- The right to be paid of the dissenting
i. Restricting the rights of current
shareholder is extinguished under the
shareholders
following:
ii. Granting preferences not presently
1. The corporation voluntarily abandons
enjoyed by the OCS;
the proposed corporate act;
iii. Shortens or extends corporate term;
2. The proposed corporate act was
2. Proposed sale of all or substantially all
disapproved by the SEC;
assets of the corporation;
3. That the SEC determined that the
3. Merger or consolidation;
dissenting shareholder is not entitled to
4. Investment of corporate funds in another
appraisal;
corporation;
4. When the shareholder transfers the
5. All other instances as may be described
shares to another; and
in the AOI or BL
5. When the corporation has no
unrestricted retained earnings
B. That the dissenting stockholder has paid in
full the subscription price
- The appraisal right is actually a peace-
setting mechanism.
C. That the corporation must have unrestricted
retained earnings
- Once paid, the stock certificate will be
cancelled. The re-acquired shares are
- The only right left to the dissenting
called treasury shares.
stockholder at this point is the right to be
paid the value of the shares.
- Who will pay? – The corporation

II. Surrender Value

A. The price voluntarily agreed upon by the

parties;

B. If they did not agree, then the price fixed by

the Corporation Code

C. Either:

1. By way of final judgment of a court in an

appropriate proceeding (action for sum
of money or consignation) (this is an
intra-corporate controversy)
- The decision of the court is considered
final and executory and the cost of
judicial appraisal shall be borne by all.
- If the price determined is equal to or
near the offer of the corporation, the
shareholder pays for the cost of judicial
appraisal.
- If the price determined is equal to or
close to the amount demanded by the
dissenting shareholder, the cost of
judicial appraisal shall be borne by the
corporation.

26
 TITLE IX – Merger and Consolidation - The plan of merger or consolidation must be
expressly approved by the SEC. Once
approved, the following are the legal
I. Merger or Consolidation
consequences:
- Marriage or union between 2 or more
1. Only a single entity will exist (the
corporations to form among them a single
surviving corporation or the new
entity.
corporation);
- The parties here are called constituent
2. That corporation will have powers and
corporations.
privileges like any corporation;
3. The corporate personality of the
A. Merger
constituents shall be extinguished;
- A Corp + B Corp = A Corp
4. The assets and liabilities except those
- Some of them being absorbed in one of
expressly excluded in the plan shall be
them; the latter being the surviving
transferred without further act or deed.
corporation
- Example: Merger between A and B =
B. Consolidation
approved
- A Corp + B Corp = C Corp
- EFFECTS:
- An entirely new corporation
- The properties of B become the
properties of A, the surviving
II. Section 76 – Plan of Merger or
corporation.
Consolidation
- A is entitled to indemnity from an
- How: Plan of Merger or Consolidation –
insurance secured by B. There is no
must be perfected among the constituent
transfer since B became A.
corporations. It must be a common one
- As to action filed in court, the action will
among them.
be continued in the name of the
surviving corporation. Notify the court
- The plan must include the following:
about the merger.
1. The name of the constituents;
- As to employees, without any stipulation
2. Manner that would carry out the
in the plan of merger, the employees of
proposed merger or consolidation (what
B automatically become the employees
is included or excluded as to assets,
of A.
liabilities, etc.);
3. In case of merger, the provision in the
AOI of the surviving entity that will be
amended

- In case of consolidation, the plan, in writing,

shall set forth all contents of the AOI that
are required by law (new corporation).

- Once the plan is complete, submit it for the

approval of the constituents (majority vote
and at least 2/3 OCS for each constituent).
- Thereafter, submit the plan to the SEC, Fair
Competition Commission, and the
government regulator.

- The government regulator can reject the

proposed merger or consolidation on the
following:
1. Unlawful combinations of trade;
2. The merger or consolidation will result to
unfair competition (takes place when
one entity or merchant gains undue
advantage of a market segment – e.g.
predatory pricing (pricing the product too
low)
3. If it creates monopoly (Anti-trust)

- If any of the said causes are not present,

then the plan shall be approved. The SEC
will issue the so-called Articles of Merger or
Consolidation which is an offshoot of the
duly approved plan.

27
 TITLE XI – Non-Stock Corporations (President, Secretary, and
Treasurer). For non – stock,
I. Stock Corporation vs. Non-Stock additional officers may be
Corporation provided in the by – laws.

Stock Private Non- II. Chapter 1 - Members

Corporation Stock - The Board shall have the power to
Corporation determine who may be qualified to be
admitted as members.
Purpose For profit or For non-profit
- Provided that said qualifications are
gain purposes (e.g.
prescribed in the AOI and by-laws.
charity,
- The qualifications must be reasonable. The
education,
religious same is true with respect to the expulsion of
members.
purposes)

Specify the A. Section 90 – Non-Transferability of

Membership
purpose. The
secondary - In non-stock corporations, membership is
purely personal.
purpose must
not contravene - The State cannot interfere with the affairs of
the nature of the the corporation in such a way as to impose
corporation or dictate as to who the members should
itself. be.
- Once membership is granted, the member
Management Board of Board of
cannot transfer the membership at will
Directors Trustees or
because members shall pass the
some other
qualifications prescribed in the AOI. Here,
name by which
non-transferability clause is allowed. (as
the AOI refer to
opposed to stock corporations)
the
management or
B. Section 91 – Termination of Membership
governing body
(minimum of 5; - Payment of membership dues is one of the
qualifications for the maintenance of one’s
can go beyond
membership in the corporation. Failure to
15; for as long
as a definite continue paying the same can be a valid
ground for expulsion. Expulsion, however,
number is stated
in the AOI) cannot be arbitrarily exercised. Due process
must be observed.
Director Must be a Must be
shareholder members of the
C. Who can be members?
corporation and
- GR: Only natural persons
their names
- XPN: Upon special application and for as
must appear in
long as written in the AOI and by-laws,
the membership
juridical persons can be admitted as
book.
members.
- However, they are denied the right to
The directors
vote within the corporation and only
may be
non-stock corporations may be
classified in
admitted.
such a way that
certain kinds of - Stock corporations cannot be members
members can of non-stock corporations.
vote a specified - The membership does not entitle the
number. (e.g. member to a share in the profits derived by
out of the 15 the corporation.
trustees, the 10 - Dividend declarations are absolutely
shall be voted prohibited.
only by the - All the profits earned by the corporation
original must be devoted to the furtherance of its
members and non-profit purpose.
the remaining 5 - For taxation purposes, there must be proof
shall be voted that not more than 30% of the funds of the
only by the corporation is used for administrative
subsequent purposes and the remainder shall be utilized
members) for its non – profit purposes.
Same statutory officers

28
 - Non-stock educational and religious the head of the church or denomination that
corporations – express exemption from RPT is seeking to organize.
and income tax under the Constitution. - This merely serves as a fiduciary or trustee
of the church as well as its properties.
TITLE XIII – Special Corporations - The beneficial owner of said properties is
the members of the religious corporation.
Chapter I – Educational Corporations - The only limitation to its power is that in
case there is a necessity to dispose,
I. Section 106 – Incorporation alienate or mortgage its properties of the
- Technically, it can be organized as stock or church, there must be a petition filed with
non-stock corporation. the Regional Trial Court (RTC) where the
- But beginning the Education Act of 1982, all property is located.
educational corporations in the Philippines - The RTC will ascertain whether or not the
are required to organize as non-stock. sale or disposition is for the benefit of the
members of the church.
II. Section 108 – Board of Trustees - If the corporation sole is changed, the
- In educational corporation, whether stock or substitute shall submit to the SEC a copy of
non-stock, the members of the Board must the assignment, designation or
not go beyond 15 and always in multiples of appointment.
5. - Once a voluntary dissolution (decided by
- The AOI may prescribe a maximum period the bishop, archbishop, or the head) is
of 5 years for the term of the members of prayed for by the corporation sole, there is
the Board. no need to file a petition in court. A mere
- They may also adopt a staggered system notice to the SEC is sufficient.
whereby 1/5 of the entire Board shall have
terms expiring every year. III. Section 116 – Religious Societies
- Corporation aggregate/religious society –
III. Educational corporations are required to religious corporation aggregate (e.g. CICM)
obtain a secondary franchise. - It must still comply with the AOI prescribed
1. Basic education – DepEd under the Corporation Code.
2. Higher/tertiary education – CHED - The filing thereof to the SEC shall be
approved by the majority of the governing
- Not all tertiary educational corporations can Board as well as 2/3 of the members.
use the term university in their names. - As to the term of the governing Board, the
- College: Bachelor’s degree only limitation imposed by the Corporation Code
- University: Confers post-graduate is not necessary. The same is governed by
degrees the rules internal to the church.

- Chapter II – Religious Corporations - INC Methodica Case

- The members of the church do not have
I. Classes of Religious Corporations any right to the property of the church. A
1. Corporation Sole corporation sole can be transformed into
2. Corporation aggregate/religious society a corporation aggregate by merely
- Both are organized principally to manage amending the AOI. The amendment will
and administer the temporalities or be approved by the corporation sole. He
properties of the church and to promote and has the sole authority to amend or
further their religious belief. dissolve whichever he chooses.
- They are covered by the freedom of religion
under the Constitution.
- As such, once their AOI is filed to the SEC,
it is deemed approved right away and the
SEC has no power to deny the same.
- The State has no power to involuntarily
dissolve a religious corporation and cannot
be subjected to the usual regulatory
mechanisms imposed on ordinary
corporations such as reporting
requirements.
- They are not required to state a definite
term. Hence, they can exist perpetually.

II. Section 110 – Corporation Sole

- Called the “freak” in corporation law
- Composed of only one individual; that
individual may the bishop, archbishop, or

29
 TITLE XII – Close Corporations 1. Amendment of the provision of the AOI
or by-laws
2. Amendment of any resolution of the
I. Section 96 – Definition and Applicability
Board or stockholders’ agreement
of Title
3. Appointment of a provisional director
- This is actually a stock corporation except
(must not come from the shareholders;
that by law, it has the following unique
appointed to break the impasse within
features:
the corporation); he is entitled to all the
1. Based on the AOI, it shall have a limited
emoluments of the office but the same
number of shareholders which shall not
duties and responsibilities as well; shall
exceed 20. That number shall be fixed
serve until the tie is broken
in the AOI.
2. Acquisition and ownership of shares in
- For actions which are intra-corporate in
the corporation is subject to certain
character, provisional remedies can only be
stated restricted limitations and
resorted to by way of an intra-corporate
qualifications. Not everyone can buy
complaint. The SEC is no longer possesses
shares of stocks in a close corporation.
of the authority to issue provisional orders
3. No close corporation is permitted to list
or remedies.
its shares in any exchange because the
- Controversies within a close corporation are
stock exchange is the public market for
intra-corporate in nature; hence, it is RTC
shares of stocks. This contravenes the
which has jurisdiction.
nature of a close corporation. If more
than 2/3 of the OCS is already owned by
- The most drastic provisional remedy is the
an open corporation, then the close
order of the dissolution of the close
corporation losses its character as such.
corporation.
- An example of a closed corporation is a
III. Section 105 – Withdrawal of Stockholder
family corporation but not all family
or Dissolution
corporations are closed corporations.
- In a close corporation, every shareholder
has the right to petition the dissolution of the
- A close corporation is actually an
corporation for any ground but especially for
incorporated partnership. It is organized
the following as provided by the Corporation
primarily because of the close affinity or
Code:
perianal trust and confidence which the
1. Dissipation or wastage corporate assets
incorporators and shareholders enjoy with
by the management or members of the
one another.
Board
2. When any of the members of the
II. Section 97 – Articles of Incorporation
governing body is guilty of fraud or
- Special provisions which a close corporation
misrepresentation
may provide in its AOI:
- The petition shall be filed either with the
A. As to its management, there are two ways
SEC or the RTC.
by which it may decide to manage itself:
IV. Appraisal Right
1. Thru the ordinary BOD
- In a close corporation, shareholders have a
- Here the right to elect the members of
broader appraisal right.
the Board is given only to a certain class
- The said right can be exercised at any time
of shareholders
regardless of the cause and the same is not
- Any meeting of the Board is rendered
anchored on the presence of unrestricted
unnecessary in all cases in order for the
retained earnings.
Board to bind the corporation
- The only limitation is that the corporation
has sufficient assets to pay the withdrawing
2. By all of the shareholders
shareholders.
- Here, all shareholders are directors;
- Similar to a partnership, a shareholder
here, there is no need to conduct
cannot be forced to remain in a corporation.
election; the shareholders acquire all the
rights, privileges and liabilities of
V. Right of First Refusal
directors except when they obtain
- Another unique right is the right of first
adequate insurance against such
liability. refusal.
- It serves both as a right and a restriction. It
- The liability of the corporation becomes
a personal liability of the shareholders. is a restriction to the shareholders who are
intending to sell their shares. It is a right for
B. In cases of dissention, the following are the the other shareholders of the corporation.
- Before any shareholder can sell or transfer
remedies available:
the shares, the same must first be offered to
the other shareholders within the
30
 corporation. If none of them bought the
shares, the sale shall be offered to the
corporation.
- Ownership and acquisition of shares in the
close corporation are subject to certain
requirements or eligibilities.
- If the transferee did not pass the prescribed
eligibilities, the disposition of the shares
shall not be binding upon the corporation.

31
 TITLE XIV – Dissolution 2. Willful defiance to a cease and desist or
other orders issued by the SEC or the
government regulator
I. Section 117 – Methods of Dissolution
3. Non-user or continuous inoperation
4. Failure to file the BL (when to file: within
A. Expiration of the term or lapse of time when
one month from the issuance of the
the term has not been extended or renewed
certificate of incorporation)
by amendment or if the extended period has
5. Failure to comply with the reportorial
also expired; it is ipso facto dissolved the
requirements (annual basis) (e.g.
day after its last day
General Information sheet, annual
- Without waiting for the original period to
audited financial statements, current
elapse, the corporation may file a petition
directors and officers)
for the shortening of its corporate term
(amend the AOI to shorten the term = does
- In involuntary dissolution, jurisdiction
not require the approval of the Articles of
belongs either to the SEC or RTC
the Amendment to take effect); dissolved
depending on the ground.
upon the expiration of the shortened term
1. SEC:
a. Failure to comply with the reportorial
B. By way of a petition
requirements
- This is voluntary because it is initiated by
b. Non-user or continuous inoperation
the corporation itself
c. Willful defiance to SEC
- Must be approved by majority of the Board
and 2/3 of the OCS (this must be alleged in
2. RTC
the petition)
- All other grounds (since they affect the
- SEC has jurisdiction.
franchise, file a petition for quo
warranto)
- Two kinds of petition:
1. If at the time of the filing of the petition,
- Involuntary dissolution is forfeiture of the
the corporation has no existing liabilities,
franchise.
the corporation is dissolved as of the
- Voluntary dissolution is surrender of the
date of filing of the petition with the
franchise.
SEC. (summary in nature and
- Expiration is the lapse of the franchise.
immediately effective)
2. If there are unpaid obligations on the
- Once the corporation is dissolved, its civil
part of the petitioner, the petition must
personality is terminated but only for the
enumerate the names of the creditors of
purpose for which it was created. That is
the corporation so that once filed the
why it is prohibited to enter into any
SEC must set a date of hearing and
transactions that would further its business
notify the creditors of the pendency of
operations.
the said petition. The hearing enables
the SEC to verify the claims of the
II. The dissolved corporation retains a
various creditors and to ensure that the
limited civil personality for the following
petitioner corporation makes adequate
purposes (powers at liquidation):
provisions to pay the creditors. The
1. To prosecute and defend suits
presence of the outstanding debts will
2. To settle or wind up its affairs; Liquidate
not prevent an issuance of an order
the assets and close the business
dissolving the corporation. Here, the
3. Convey assets or property in favor of
corporation is dissolved upon finality of
another who will acquire legal title while
the order of the SEC dissolving it.
retaining beneficial ownership in favor of
creditors and ultimately the
C. Section 121 – Involuntary dissolution
shareholders or members
- Here there is a finding that the corporation
has infringed its franchise or privilege.
III. Section 122 – Methods of Corporate
- Dissolved from the date of finality of the
Liquidation – Who may Enjoy the Powers
order issued either by the SEC or RTC.
During the Liquidation
- This entails the revocation of the certificate
of incorporation and may or may not carry
A. Liquidation by the corporation itself
with it the revocation of the secondary
- Once the corporation decides to liquidate its
franchise.
own affairs the BOD ceased the power to
manage the affairs if the corporation and
- Grounds for involuntary dissolution under
now convert and transfer their roles into
P.D. No. 902-A:
liquidators – they cannot enter into any
1. Fraud or misrepresentation as to what
contract that would further the business but
the corporation can or is doing to the
they are still authorized to act for and in
great damage and prejudice of the
behalf of the dissolved corporation to enter
public
into any contract relevant to the following
32
 1. Prosecute or defend the corporation in its liquidation.” In case the liquidation is
suits done by some other entity or person – “A,
2. Settle and wind up the business and on behalf of dissolved Pogi, Inc. v. X” – can
affairs of the corporation be done even after the 3-year period
3. Convey legal title over the property or - Questions:
assets of the corporation 1. Dissolved corporation sell shares –
- When the corporation per se is liquidating cannot be done within the 3-year period
itself, all the transactions arising from the 2. Dissolved corporation declare dividends
above-mentioned powers may still be – if the dividends are earned by the
entered into in the name of the dissolved dissolved corporation, it is prohibited
corporation within the 3-year period; if liquidating
- However, such powers are time bound that dividends – a pro rata distribution of the
is why the BOD must observe the 3-year assets of the dissolved corporation after
limitation – after this, exercise of these creditors has been paid – can be done
powers can no longer be in the name of the within the 3-year period
corporation because for all intents and 3. Dissolved corporation conducting an
purposes, the corporation has ceased when annual election – cannot be done within
the 3-year period elapses – these powers in the 3-year period
the name of the corporation are abated 4. Would the BOD be required to conduct
meetings – can be done within the 3-
B. Receiver/Assignee year period because they hold the
- The liquidator in case of involuntary powers at liquidation, unless they have
dissolution of the corporation appointee a receiver or trustee
- They are always court appointed and 5. Can the dissolved corporation enter or
therefore cease the power of the BOD for perfect contracts – can be done within
purposes of closing the business and the 3-year period provided the contracts
enjoying transactions are related to liquidation
- If the liquidation process is not limited to the a. Contract for sale of its property –
3-year period unlike if the liquidation is can be because this is inherent in
taken by the corporation itself liquidation
b. Purchase of new property or new
C. Trustee assets – GR: No
- The trustee is voluntarily named by the c. Perfect a lease or renew a lease –
corporation – not judicially appointed can be assuming it has no own
- The selection of the trustee may be done office – necessary for liquidation
prior to dissolution or during the 3-year purposes. In one decision of the SC
period the dissolution of the corporation
- If the liquidation process is not limited to the does not ipso facto terminate a
3-year period unlike if the liquidation is subsisting lease contract to which
taken by the corporation itself – it may the corporation is a party. If the
continue for as long as necessary until the lease is for a definite period and in
business and all its affairs will be finally the intervening period the
terminated corporation is dissolved, this is not a
- Example: Y Corporation was dissolved as of valid ground for the lessor to pre-
31 December 2010. After its voluntary terminate the lease
dissolution, the corporation did not bother to 6. Do the SH of such corporation has the
appoint a trustee. So within the 3-year same rights as against the corporation
period from 31 December 2010 to 31 as they have prior to dissolution (right to
December 2013 – the corporation attempted vote, right to be voted for, right to
to liquidate the corporation but could not dividends, right to assets, right to
finish all the transactions. Within the 3-year inspect and examine books, right to
period, the corporation may still enter into attend meetings) – No with respect to
contracts under its own name, prosecute right to vote and be voted for except in
and defend suits in its own name because decisions necessary to liquidation where
the BOD is empowered to do acting now as they have limited right. Right to
liquidators. But, by 01 January 2014, no dividends is absolutely prohibited except
new suit may be filed in the name of the for liquidating dividends. Right to inspect
dissolved corporation. It should now be and examine books still subsists for
under the name of the them to know how much is the asset of
receiver/assignee/trustee the corporation and their shares.
- Example: Within the 3-year period, there is 7. If after dissolution, still some of the SH
a case Pogi, Inc. v. X. This is still a valid has not yet paid in full their
complaint but the corporation is no longer subscriptions – The balance will not be
existing so indicated “duly registered extinguished, they must still pay the
corporation but has been subsequently same
dissolved and the action is filed pursuant to
33
- If there is no receiver or trustee appointed

- Metrobank v. CA
- SC: In the absence of a duly
appointed trustee or receiver or
assignee, then the BOD are ipso
facto and ipso jure considered as
trustees of the corporation. They
must continue representing their
corporation in their capacity as their
trustees. Even if the 3-year period
has been expired, the members of
the BOD may still be sued and sue
in their own name representing the
dissolved corporation because by
law, they are now considered as
trustees.

- Helano v. CA
- The lawyer in this case filed a
motion to be discharged as counsel
of the corporation alleging that the
corporation has already been
dissolved and he has experiencing
difficulties in continuing the case for
lack of instruction from his principal.
The case was already appealed
before the CA.
- SC: In such a situation in cases of
pending litigation when no new
trustee or receiver is appointed,
counsel of record is deemed to be
the trustee of the corporation,
therefore cannot be discharged as
counsel.

- Chung Ka Biok v. CA
- The corporation had so many assets
that they were undivided several
years after it was dissolved. The
members of the BOD abandoned
their offices after dissolution after the
termination of the life of the
corporation. Some of the SH
petitioned for distribution of the
assets.
- SC: One of the SH was appointed as
trustee of the corporation.

- Case
- SC: A creditor was appointed as
trustee subject to specified
safeguards in order to prevent
abuse.

D. Petition of Liquidation under FRIA

- When there is full distribution of the assets,

the corporation ceases for all legal intents
and purposes, it is now considered as fully
terminated but this corporation does not
prevent it from incorporating with the same
persons and personalities

34
 TITLE XV – Foreign Corporations business here in the Philippines through
their domestic licensees
I. Section 123 – Definition and Rights of
4. Participating in the management of a
Foreign Corporations
domestic business whether organized
- Measure used by the Corporation Code as
as sole proprietorship, partnership or
to whether or not a corporation is foreign is
corporation
simple – it is a foreign corporation if its was
- Mere exercise of a right as a SH should
formed and organized under laws of another
not be construed as doing business on
state
the part of the foreign corporation –
- Therefore, if a corporation is formed and
means that if a foreign corporation
organized under Philippine law, it is a
happens to be a SH of a domestic
domestic corporation
corporation and as a domestic
- A corporation which is foreign has no legal
corporation it is entitled to vote and be
personality outside the territory where it was
voted for this is an exercise of his
created – the conferment of a status as a
ordinary rights being a SH of the
corporation is a mere privilege exclusive to
corporation and the foreign corporation
the state
should not be construed as doing
- As such, outside of those territory, the
business for which it is required a
corporation may be denied the right to exist
license
or may be subjected to certain requirements
- Participating in the management is
before it may be afforded legal recognition –
tantamount to doing business in the
we adopt this is in the Philippines
Philippines and therefore a license is
required if the participation is active in
II. Section 125 – Requirements to Allow a
character
Foreign Corporation here in the
- It is active participation is it is
Philippines – Apply for a License
beyond the ordinary participation of
a mere SH, like when the foreign
A. License
corporation is able to: - active
- That license is necessary whenever it seeks
participation here must amount to
to engage or transact in business in the
control in the corporation
Philippines
a. Elect its representative in the
BOD or governing body
B. Acts of doing or transacting business here
b. Appoint key officers
in the Philippines: Under Foreign
c. Dictate or even influence
Investments Act
policies, rules and practices
within the corporation
1. It solicits orders or purchases in the
Philippines
5. When the foreign corporation engages
in series of commercial dealings
2. It opens a branch or an office in the
intended to prosecute and promote the
Philippines even if such office is called a
main body of the business for which it
liaison office
was organized
- not all foreign airlines are granted
- It is not the number of dealings but it is
landing rights in the Philippines but they
the nature and purpose of such dealing
are able to sell tickets here in the
to determine whether or not it is doing
Philippine through agents or agencies or
business
partnerships with other airlines to sell
- If there is showing that the dealings
ticket for them. If this is the case, they
entered into by the foreign corporation in
are considered as doing business here
the Philippines is toward a progressive
in the Philippines. For the foreign
prosecution of its business, then it must
airlines granted landing rights they are
obtain a license
definitely doing business here in the
Philippines
C. Where should a license be applied?
- Principally, it is with the SEC
3. Appointing any person or representative
- Subject to Foreign Investors Act, which they
for the conduct of its business here in
also need to comply with certain
the Philippines where such agent is
documentary requirements with the Board
domiciled in the Philippines for at least
of Investments
180 days in a given year
- The application for a license require certain
- The 180 days may be continuous or
documentary submissions such as:
cumulative
1. Copy of the AOI and BL
- From point of view of the Corporation
2. Financial condition of the foreign
Code, the domestic agents of foreign
corporation
recruitment agencies are in fact doing
3. List of current BOD and officers

35
- But, among these documents, it must also articles of merger or consolidation within
appoint a so-called resident agent the time prescribed by this Title;
5. A misrepresentation of any material
D. Section 127and 128 – Resident Agent matter in any application, report,
- Resident agent may be a natural or juridical affidavit or other document submitted by
person who is domiciled in the Philippines such corporation pursuant to this Title;
and is authorized to receive and accept 6. Failure to pay any and all taxes,
summons and papers for and in behalf of imposts, assessments or penalties, if
the foreign principal any, lawfully due to the Philippine
- Service of summons upon the resident Government or any of its agencies or
agent is service to the foreign corporation political subdivisions;
- In case the resident agent previously 7. Transacting business in the Philippines
appointed should die or resign and no one outside of the purpose or purposes for
has been appointed in the meantime, the which such corporation is authorized
foreign corporation is required to execute an under its license;
undertaking that service to the SEC is 8. Transacting business in the Philippines
service to the foreign corporation – This is as agent of or acting for and in behalf of
to prevent the foreign corporation from any foreign corporation or entity not duly
thwarting any case against it on the mere licensed to do business in the
lack of jurisdiction as a ground Philippines; or
9. Any other ground as would render it
- The application for license must specify the unfit to transact business in the
kind of business that the foreign corporation Philippines.
seeks to engage in in the Philippines – if
this business is regulated, a secondary III. Power to Sue and be Sued
franchise must also be obtained from the - One principal right that arises whenever a
BSP, IC, etc. foreign corporation shows that it has
- The license to do business is limited to the obtained the necessary license is that it has
business applied for and approved – no the power to sue and be sued
other transactions may be validly entered
into if it is not directly connected to the Doing Business
licensed business With Without License
- The license may be amended to add other License
businesses, subject to approval of SEC and To ✓ GR: ✗
other government agencies sue By establishing domicile
in the Philippines for its
- Once the license has been issued, whether business without the
the original or the expounded one, the requisite authority, it
foreign corporation is now subject to cannot seek the
Philippine laws – agrees to bind itself to intervention of Philippine
Philippine law, rules and regulations courts for the protection
of its interest.
- Once it is already enjoying such license
(privilege), it may surrender the same. XPNs: ✓
However, as a condition for such surrender, 1. May prosecute any
it must prove that it has paid all its case under the RPC
outstanding liabilities in the Philippines or other penal laws –
no need to show
E. Section 134 – Revocation of License license because
- The license may be cancelled or revoked by criminal cases in the
the SEC for reasons such as: Philippines are
1. Failure to file its annual report or pay instituted in the name
any fees as required by this Code; of the People of the
2. Failure to appoint and maintain a Philippines –
resident agent in the Philippines as therefore it may be a
required by this Title; private offended party
3. Failure, after change of its resident or complainant in a
agent or of his address, to submit to the criminal case – no
Securities and Exchange Commission a need to show capacity
statement of such change as required
to sue
by this Title;
2. Estoppel on the part
4. Failure to submit to the Securities and of the defendant to
Exchange Commission an authenticated question the legal
copy of any amendment to its articles of personality of the
incorporation or by- laws or of any corporation– no need

36
 to show capacity to not charge or fix the
sue fees for its services –
percentage
Case agreement. The
- A foreign corporation foreign corporation
was a manufacturer of discovered that the
computers and it dealer was selling
entered into 2 computers bearing
contracts for the sale brands of other
and repair or servicing companies and
of these computers because of such, the
sold in the foreign corporation
Philippines. The suffered losses by
contracts were called reason of such breach
representative of trust and
agreement. The confidence prompting
domestic dealer as it to file a suit in the
well as the domestic Philippines against its
providers for repairs own dealer for breach
were not allowed to of contract and for
enter in their own accounting and for
name but always in breach of damages.
the name of the In am motion to
foreign corporation dismiss filed by the
and before any domestic corporation,
employee can be it alleged that the
hired by the domestic plaintiff is an
corporation, the said unlicensed foreign
employee must first corporation and
be approved and therefore has no legal
must pass the capacity to sue. Is the
standards imposed by foreign corporation
the foreign doing business in the
corporation. Philippines, for which
Furthermore, in all a license was
communications necessary?
entered into by the - SC: Yes. A scrutiny of
domestic dealer and the representative
domestic service agreement shows that
provider, they must the domestic dealer
always use the and service provider
letterhead provided are both reduced to
for by the foreign mere agents of the
corporation. Under foreign corporation
the representative and they have no will
agreement, all sales and volition of their
made by the domestic own as to the manner
dealer it will be by which the business
entitled to a may be conducted
commission, however because the entire
it is absolutely methodology and
prohibited from selling administration of the
computer products of business is dictated
other companies and by the foreign
it bound itself to sell corporation. Thus, the
and distribute in the domestic corporations
Philippines only are agents of the
products of the foreign corporation
foreign company. The and under the Foreign
domestic service Investment Act,
provider, whenever it appointment of
enters into repair or agents is an act of
any of these doing or engaging in
computers, he is also business. The foreign
entitled to only a corporation can also
commission and does maintain the
37
 complaint because Enrile filed a motion to
the defendant is in dismiss this certiorari
estoppel – after so case saying that Time
many years of is doing business in
maintaining the the Philippines
arrangement with the without a license and
unlicensed foreign therefore it has no
corporation, knowing right to sue on a
it to be without the certiorari.
authority to do such - SC: Since Enrile sued
business, the Time, Time is entitled
domestic corporations to avail of all
reap benefits out of remedies that are
said arrangement. extended by the
They cannot now Philippine law to all
repudiate their defendants alike and
arrangement since defendants, if
whenever they are feeling aggrieved, can
held liable. petition for certiorari
under Rule 65, when
3. Foreign corporation is Time availed of this
merely defending remedy, it was merely
itself in an action filed defending itself in the
against it in the suit filed by Enrile
Philippines against it. The
certiorari case is an
Time, Inc. v. Reyes offshoot of the case
- This involves a civil filed by Enrile.
action for damages
filed by Enrile against It is the licensed that
Time. Enrile felt capacitates it to sue in
seriously impugned or case a foreign
maligned and corporation wants to sue.
embarrassed by a To ✓ ✓
particular story that be Can be Sanction for failing to
appeared in one of Sued held liable comply with Philippine
the issues of Time for any law.
Magazine about the claim
1986 EDSA arising from How to sue: Where to
Revolution. According its business serve the summon – if it
to Enrile, he was in the has an office in the
pictured as a power Philippines Philippines, then send it
hungry and a corrupt in their office or to the
defense minister. (In person representing the
libel, file the case foreign corporation for its
should be filed in the business in the
RTC of the place Philippines
where the first If it has no office here in
publication was the Philippines: Amended
made.) Time rules for service of
immediately filed a summon to unlicensed
motion to dismiss on foreign juridical entities
the ground of lack of a. By personal
jurisdiction citing that service of
the suit should have summon to the
been filed in Makati unlicensed
where the first juridical entity at
distribution was the place of its
made. The RTC judge residence or
denied the motion to domicile abroad
dismiss. Felling through the DFA
aggrieved, Time filed and a court in said
a petition for certiorari foreign jurisdiction
with CA (original b. Summons by
action although a publication in a
mode of review). newspaper of
38
 general circulation foreign bank raised the defense
abroad where the that the suit arose from a single
unlicensed foreign loan contract and it cannot be
corporation has its deemed doing business on the
domicile or last basis of one loan transaction it
known address – granted.
this must be - SC: The business of banking is
accompanied by the business of lending and
proof of service therefore, when it extended that
through registered single loan to a domestic
mail of the borrower; it was already
summons engaged in business. The suit
c. Electronic mail – was barred.
facsimile – cannot
use personal e- - Case
mail to serve - Import-export transaction –
summon it must Importer: Japan; Exporter: US –
be the court’s e- the exporter loaded the
mail imported cargo on board a
d. Any other means vessel, the vessel en route to its
with leave of court final destination in Japan.
Vessel made a stop at the port
If all these are not of Manila. Because of
available, file the case negligence of the arrastre
abroad operator, vessel and cargo got
burned. The importer and
Not Doing Business exporter sued the arrastre
Not required to obtain a license operator for negligence to
To GR: ✗ recover both the vessel and
sue XPNs: ✓ cargo on board. Arrastre
1. Isolated transactions operator filed a motion to
- The suit must arise out of a contract dismiss citing that these foreign
corporations are not licensed to
or transaction that is not directly
related to its main body of its do business in the Philippines,
business so they cannot file a case here
- It is not the number of transaction in the Philippines.
but the nature and purpose of the - SC: The suit is not related to
transaction that determines whether any of the business of these
he is doing business or not foreign corporations. The suit
arose from a quasi-delict liability
- Case enforced against the arrastre
- A foreign bank not licensed to operator – this is an isolated
do business in the Philippines transaction – it should be given
was able to negotiate and due course
extended a loan to a domestic
company. All the phases of the 2. May sue to protect their intellectual
contract were done abroad and property rights (IPL)
the proceeds of the loan were - IPR is a right in rem and not
forwarded by the foreign bank to required to be registered
the local deposit of the domestic - Cases involving infringement or
borrower. Unfortunately, the unfair competition may be litigated
domestic borrower reneged on without necessity of showing
its obligation to pay back so it capacity to sue by virtue of a
negotiated for a loan license
- International norm is that
restructuring. Foreign
corporation agreed under new intellectual property rights must be
conditions and terms but again afforded protection (members of
the domestic borrower failed to WTO)
pay the loan. Foreign bank files To ✗
an action in court for collection be Lack of jurisdiction
of sum of money against the Sued
domestic borrower. Borrower
moves to dismiss on the ground
that the foreign bank is doing
business without license. The

39
40
 Securities
Regulation Code

Republic Act No.

8799

41
 Table of Contents
CHAPTER I – Title and Definitions ............................................................................................... 43
I. Securities Regulation Code ................................................................................................ 43
II. Capital Markets ................................................................................................................. 43
III. Section 31 – Definition of Terms –
Securities ................................................................................................................................. 43
IV. In securities transactions, there are 2
stages regulated by the SRC: (1) Primary
Market Transaction .................................................................................................................. 44
V. How does SRC Regulate Primary
Market Transaction – Registration
Statement (Sec. 8), Chapter III ................................................................................................ 44
VI. In Securities Transactions, there are
2 staged regulated by the SRC: (2)
Secondary Market Transactions............................................................................................... 46
CHAPTER II – Securities and Exchange
Commission ................................................................................................................................... 48
I. Securities and Exchange Commission
(SEC) ....................................................................................................................................... 48
II. Section 5 – Powers and Functions of
the Commission ....................................................................................................................... 48
III. Section 7 – Reorganization .............................................................................................. 49
CHAPTER VII – Prohibition on Fraud,
Manipulation and Insider Trading................................................................................................. 56
I. Insider Trading ................................................................................................................... 56
II. Tender Offer ..................................................................................................................... 56
III. Margin Trading................................................................................................................. 57
IV. Fraudulent Transactions and
Manipulations of Security Prices .............................................................................................. 58
V. Short Sale/Short Order ...................................................................................................... 59
CHAPTER XIII – General Provisions............................................................................................. 61
I. Settlement Offer ................................................................................................................. 61

42
 CHAPTER I – Title and Definitions
“Securities are shares,
participation or interests in a
I. Securities Regulation Code
corporation or in a commercial
- Primary legal and preparatory framework for
enterprise or profit-making
capital markets in the Philippines
venture and evidenced by a
certificate, contract, instrument,
II. Capital Markets
whether written or electronic in
- Capital Markets: Serves a function similar to
character. It includes:
all other financial markets in the Philippines
a. Shares of stock,
bonds, debentures, notes,
- Several Capital Markets in the Philippines
evidences of indebtedness,
asset-backed securities;
A. Financial Capital Market
b. Investment
- Where you go in case you need money for
contracts, certificates of interest
your business
or participation in a profit sharing
- This serve as a financial intermediary –
agreement, certificates of deposit
because they make available money,
for a future subscription;
property or goods to those in need from
c. Fractional
those who are in need of them – like banks
undivided interests in oil, gas or
other mineral rights;
- Capital Market is further divided into 2:
d. Derivatives like
1. Equities Market
option and warrants;
- The underlying or principal asset sold
e. Certificates of
here would be SS
assignments, certificates of
- Provisions on the Corporation Code
participation, trust certificates,
regarding transfer of SS
voting trust certificates or similar
instruments;
2. Debt Market
f. Proprietary or non-
- What is being sold or traded here are
proprietary membership
debt instruments – the purpose of the
certificate in corporations; and
debt is to raise capital or finance a
g. Other instruments
business
as may in the future be
- Provisions on the Corporation Code
determined by the Commission.”
regarding the power to create or
increase bonded indebtedness
- Securities may partake of shares, interests
or participation of a:
- Capital market is governed by SRC that is
1. Corporation
why the primary object in the capital market
2. Commercial enterprise
are the so-called securities – SS or debt
3. Profit-making venture
instruments are securities
- Whether such share, interest or participation
- Reason why there is a need to regulate this:
is evidenced by a written contract,
To prevent unscrupulous parties from
agreement, or even if the same is electronic
committing fraud by promising high rate of
or digital in form
return of investment – this is also called the
- However, the definition under Sec. 3 go
Blue Sky Law
further by enumerating kinds of securities –
- Blue Sky because they promise very
such enumeration shall not be considered
high impossible returns as high as the
as exclusive – this is a definition by
sky only that once they get what they
enumeration
want they will leave you with nothing –
- Examples of Securities:
run away with your money
1. Shares of stocks – called equities
- The SRC requires that no security shall
2. Bonds – debts instruments
be sold or offered for sale in the
3. Investment contracts
Philippines without a permit or license
4. Similar profit sharing agreement
from the SEC
- The term securities should be understood in
the sense that it is the Howey Test – it is
B. Non-Capital Market
essentially an investment contract
- You have the so-called commodities market
(agricultural products), foreign exchange
A. Howey Test
market – no centralized location
- It is pursuant to the decision of the United
- Forward Contracts – contract for the sale or
States SC in the case of Howey v. SEC
delivery of future things – like oil companies
- This is not governed by the SRC
- The following are the elements of securities
or investment contract:
III. Section 31 – Definition of Terms –
1. That there is investment of money or
Securities
property
43
 2. In a common or commercial enterprise - Let us say the agreement is that within 3
3. Where the investor is led to expectation months, BDO shall be able to sell those
of profit 100M shares and generate in favor of
4. Solely out of the efforts of another or Pogi the desired target of 1B. Within the
third persons 3-month period, out of the 100M shares,
- Meaning, an investment or securities only 90M were sold. But despite best
transaction leads the investor to an and diligent effort, 10M are unsold. For
expectation of passive income or profit – the the 90M shares sold through BDO – A,
income here is passive because there are B, C and so on are now considered as
third persons who ensure that such profits SH – Under a clearing agency, their
are gained and such gained profits are names will now be entered in the books
distributed to the various investors – all of Pogi, Inc – they are required to pay
those who buys SS in a company are under the terms of IPO (usually in cash).
investors, they are entering into an The compensation of BDO is entitlement
investment contract because they are led to to a commission.
an expectation of profit – SH are investors - The 10M unsold – because BDO
and investors are risk takers underwrote the entire 100M SS, it is now
obligated for the unsold shares – BDO
IV. In securities transactions, there are 2 capital is now the SH of Pogi, Inc. – in
stages regulated by the SRC: (1) Primary banking, a universal bank has the power
Market Transaction of a commercial bank as well as an
- Initial regulations of these contracts take investment house and every licensed
place in the so-called primary market investment house does not just engaged
transactions in the business of underwriting but also
- Who are the parties in a primary market it engages in the business of securities
transaction: dealer – this means BDO would be
a. Issuer interested in acquiring this shares so
b. Initial subscribers of the security that in some future time, it can resell
c. Underwriter – between the 2 them (buys SS for its own account and
in the ordinary course of business)
- Example: Pogi, Inc. after it recently
amended its AOI to increase the capital - From the time that Pogi, Inc. made available
stock – there are now 100M new common for sale or disposition those 100M shares
shares available for disposition. The issuer and up to the time the IPO period expired –
here the maker or originator of the security. the parties are the issuer and the
Pogi, Inc. is the issuer. It wants to raise, out subscribers
of the 100M common shares, 1B worth of - From issuer to subscriber – that is a primary
new capital within a period of less than 6 market transaction – it refers to the original
months. For Pogi, Inc. to sell all 100M new disposition of the security
shares – it may not have the time or - Under the Corporation Code, from
inclination to do so and it wants to do a corporation to another under a subscription
public offering of such – what it can do is to contract – that is a primary market
appoint an underwriter under an transaction
underwriting agreement so that the
underwriter will guarantee that all or a V. How does SRC Regulate Primary Market
portion of the 100M new shares will be sold Transaction – Registration Statement
within a definite period. The 10M new (Sec. 8), Chapter III
shares are the securities. - First requirement is that no security of any
- The business of underwriting can be class or kind may be offered for sale in the
performed by investment houses as well Philippines without a registration statement
as universal banks - Registration statement is an application filed
- BDO Capital, Inc. entered into an by the issuer with the SEC to obtain a
underwriting contract with Pogi, Inc. as license or permit to sell the security publicly
the underwriter, BDO guarantees that all - Example: Before Pogi, Inc. can offer these
100M new shares of Pogi, Inc. shall be 100M new shares to the public, it must
sold within 3 months. Thus, BDO capital comply with a registration statement
will sell or offer for sale to its own
customers said 100M new shares under A. What must be contained in the Registration
a so-called Initial Public Offering (IPO) of Statement:
those securities in the form of SS. They - There must be a complete and detailed
are being sold publicly because the sale historical and financial information regarding
or disposition is being done unlimited to the issuer and the security sought to be
the existing SH of the corporation – offered publicly – describe who is the issuer;
anyone who may have the money to buy how long has it been in business; kind of
can buy. business; who are its officers and directors;
what is his financial condition, etc.
44
 a. That the issuer is either judicially
B. Why is there a need for a registration insolvent
statement? b. That the issuer has committed, is
- To inform the investing public regarding the about to commit or committing a
issuer and the security fraudulent transaction
- The SRC does not guarantee that investors c. That the issuer has disobeyed any
will generate profit out of their investment order of the SEC related to any of its
- What the SRC guarantees is that the securities
investing public is duly informed of all d. That the issuer has made any false
material facts relating to the issuer and or misleading statement regarding
security to enable the investing public to the security
make presumed investment decisions
2. Grounds arising from the issuers officers
C. Disclosure Regime and directors if any of them should have
- It mandates that all necessary and relevant been convicted by a final judgment for
information for investment decisions are the following crimes:
available to the public a. Involving moral turpitude
- How: Through requiring disclosures in every b. Fraudulent transactions
step of the securities transaction c. Has been legally restrained from
engaging in any securities
D. Registration Statement must be transaction
accompanied by the Following: - Such conviction by final judgment may
1. Resolution of the BOD of the issuer come from a domestic or even foreign
authorizing the filing of registration tribunal
statement
2. If any, a due diligence 3. Grounds based on the statement itself
- In securities transaction, a due diligence - SEC will reject the registration statement
is actually an independent third party if it contains false or misleading
review of the financial condition of the statements or omits to state a material
issuer and the security fact
3. Written consent of the SH if the public
offering includes securities currently - If rejected, the issuer or any of its Directors,
owned by person other than the issuer Officers, Employees or Agents cannot sell
4. Prospectus or offer for sale the security
- This is the selling document that is
circulated to the public - If the SEC approves the registration
- SEC must approve the contents thereof statement, the SEC will now issue in favor
of the issuer a license or permit to sell – this
E. Who must Sign the Registration Statement is the time that the issuer can publicly offer
- This is a legal duty for sale the shares and enter into an
- Chief/Principal Executive Officer underwriting agreement with an underwriter
(CEO/PEO), Principal/Chief Operating or make any transaction related to that
Officer (POO/ COO), Principal of Chief original disposition
Administrative Officer (PAO/CAO), - The security now covered by the permit will
Chief/Principal Financial Officer (CFO/PFO), now be entered by the SEC in its own
Comptroller and all other persons who have registry of securities
contributed to any portion of the registration - All licensed securities must be entered in
statement this registry of security
- Why: Because they are the persons who
can be held liable for any false or G. Section 9 – Exempt Securities
misleading statement contained in the - Exempt from registration requirements –
registration statement or for omitting a thus no permit is necessary from the SEC
material fact or statement in the said before these securities may be sold in the
document Philippines

F. Section 13 – Rejection and Revocation of 1. Those issued by the Republic of the

Registration Securities Philippines or any of its agencies,
- Once the registration statement is submitted instrumentalities, including LGUs –
to the SEC – the power of the SEC to Sovereign Bonds
consider the same is discretionary – the - Treasury bonds – issuer is the Republic
SEC may reject the same - Code NGO v. BIR
- The Peace Bonds offered for sale
- Grounds for Rejection: and actually sold by Code NGO
belong to this category of exempt
1. Grounds based on Status or acts of the securities because, while the
issuer Philippine Government does not
45
 directly issue them, the same A. Requirements:
guarantees them. In order for these
Peace Bonds to be sold, there is no 1. Registration
necessity for them to be covered by - All transfers involving or arising from
the SEC – because sovereign bonds secondary market transactions must in
are licensed by a different themselves be registered because of the
government agency – Department of disclosure regime enforced by the SRC
Finance through the Bureau of so that people can keep track of the
Treasury changes in the ownership of the
registered security.
2. Securities Sold by a Foreign
Government with who the Philippines - Two kinds of registration under the SRC:
enjoy diplomatic relations and that also a. Original registration; and
allows securities of the Philippine b. Subsequent registration
government to be sold in its territory - Akin to registration of property.
3. Securities Regulated by the Following
Agencies: - Exempt transactions: Registration is not
a. HLURB – Contracts to Sell required due to:
subdivisions or condominium units – a. Limited scope of the offering;
you are already paying for a unit b. Does not involve the public;
when the building has not been c. Small amount involved
constructed yet – this is an - Examples:
investment a. Pre-incorporation subscriptions
b. Insurance Commissioner (IC) – - Means by which the corporation
Insurance contracts – this is an obtains the minimum
investment because premium capitalization. Atleast 5
payments earn dividends overtime incorporators are required;
c. BIR – Tax credit certificate (TCC) – hence, the public is not involved.
these are overpayments to the BIR b. Pre-emptive rights offering
d. Similar specialized government - The offerer is the corporation and
agencies the offeree is its own existing
shareholders. The public is not
4. Issued by banks except its own SS involved here as it is limited to
- Saving account is an investment within the corporation.
contract – passive investors because c. Stock dividends:
the bank pays you interest - When declared, the unrestricted
- When a bank offers for sale to the public retained earnings is transferred
its own SS, it must obtain a permit not to the capital stock. The public is
just from BSP but also from the SEC not involved here because only
the shareholders are entitled to
5. Securities which are authorized for sale dividends.
but are by a court pursuant to a d. Any transfer involving 20 persons or
bankruptcy or insolvency proceedings or less:
other similar proceedings - Same threshold in banking; not
- Increase of capital stock in FRIA – those an offering to the public
new SS for a corporation under e. Brokers’ transactions:
rehabilitation are already judicially - Because they do not do it for
authorized their own account. The
corporations involved are the one
- These are exempt from registration because who are required to report the
there is no need for a registration statement same.
to protect public interest because of the f. Sale of securities to any of the
status of the issuer as a trusted entity and following:
that the security is not speculative in i. Banks
character – return to investor is somewhat ii. Investment houses
guaranteed iii. Other trusted entities

- Non – speculative: The return to investor is 2. The secondary transactions are likewise
somewhat guaranteed. required to be reported to the SEC.
- Who must comply with the reportorial
VI. In Securities Transactions, there are 2 requirements: all public companies as
staged regulated by the SRC: (2) defined under the SRC
Secondary Market Transactions
- Under the SRC, all transactions involving - A public company is any of the following:
securities shall likewise be registered. a. Any corporation where any class of
its securities are covered by a
46
 registration statement with the SEC
(all with permits or license to sell)
b. All companies whose shares are
listed in any exchange
c. Those which have assets of atleast
P 50 million, with atleast 200
shareholders on record owning
atleast 100 shares in their names

- Philippine Veterans Bank v. SEC

- The reportorial requirements is
applicable even if the entity is a
GOCC with original charter.

- Union Bank v. SEC

- SC: whenever a bank issues its
shares of stocks, it is now governed
by the provisions of SRC. Hence, all
reportorial requirements shall be
filed with the SEC and not only with
the BSP.

B. Stock Exchange
- Stock Exchange = public market for shares
of stocks. Transactions here are secondary
market transactions since the issuer
corporation is no longer involved. The
parties here are existing holders of the
security in favor of buyers. This is still
governed by the SRC.
- Secondary market transaction under the
Corporation Code is acquiring shares of
stocks of an existing shareholder. This is
done by indorsement coupled with delivery.

- Securities broker:
- A person, whether natural or juridical,
licensed to engage in the business of
buying and selling securities for the
account of others (either buyer or seller).
- They are required to incorporate.
- And for them to enjoy the facilities of the
Philippine Stock Exchange (PSE), they
must be members of the PSE, Inc.
- They do business through associated
persons who must in themselves be
licensed by the SEC.
- The associated persons are those who
are authorized to trade in the name of
the broker. They must be individually
licensed. Salesmen are not necessarily
associated persons.

- The transactions in the PSE are

uncertificated because there are no
certificates of stocks which are indorsed and
delivered. The PSE follows a digital book
entry system.

47
 CHAPTER II – Securities and Exchange borrower because it is the
Commission borrower’s asset

2. Investment Houses
I. Securities and Exchange Commission
- Under Investment House Act, these are
(SEC)
entities engaged in business of
underwriting securities
- SEC, as far as the Corporation Code is
- Business of underwriting: Guaranteeing
concerned, is the primary government
the sale of any class of securities within
agency that is tasked in enforcing and
the Philippines
implementation of the provisions of the
Corporation Code
3. All Entities Engaged in Securities
- SEC has exclusive power, authority and
Transactions under the SRC
jurisdiction and supervision over all
- This entities are:
associations and corporations as well as
a. Securities Dealers: Those who buy
partnerships that are the grantees of a
and sell securities for their own
primary franchise
account
b. Securities Brokers: Those who buy
A. However, the SEC also grants secondary
and sell securities for the account of
franchises to the following corporations:
others
c. Clearing and Settlement Agencies:
1. All financing companies
Those who effect payment as well
- Both primary and secondary franchise of
as delivery of securities including SS
these companies come from SEC
between buyers and sellers (SRC)
d. Third Party Custodian: Those who
- Financing Company: A company or
are entrusted with either the digital
entity engaged in the business of
or physical certificates of stocks
lending for agricultural, consumer or
needed in securities transactions
similar loans
effected through a stock exchange
- Financing: A special arrangement
- Example: Bought SS through the
whereby the purchase price of certain
stock exchange but you bought them
facilities or equipment shall be
without any intent of buying and
advanced by the financing company
selling them in the ordinary course of
payable on installment by the borrower
business – you want them as a long
– aside from banks, all financing
term investment – you will not meet
companies are required to comply with
the seller instead a clearing and
the Truth and Lending Act
settlement agency will register your
name in the books of the corporation
- Financial Leasing Company: A specie of
as the buyer and current owner of
financing; under the jurisdiction of the
the property and pursuant to SEC
SEC – This is a company advances the
rules, a third party custodian will be
purchase price of certain machineries or
in-charged of getting your certificate
equipment for purposes of agriculture,
of stock from company secretary
industrial or commercial purposes and
and delivering it to you physically
the borrower is given one or two or more
e. Stock exchanges as well as all the
options: Metrobank v. CA
SROs under the SRC
a. To pay rental on a regular or
- Stock Exchange: A public market for
periodic basis
buying and selling of SS
- At the end of the period fixed in the
- Self-Regulatory Organization (SRO):
contract, the machinery or
This may pertain to stock or non-
equipment shall be returned to the
stock corporations engaged in
financing company
providing facilities for a stock
- It is an ordinary lease arrangement
exchange (Philippine Stock
- The repairs will be paid by the
Incorporated in the Philippines
financing company and not the
operates and administers the PSE)
borrower
b. Traditional financing scheme
II. Section 5 – Powers and Functions of the
- The borrower shall pay the purchase
Commission
price back at periodic installment
- At the end of the period fixed in their
A. Issue Certificates of Incorporation
contract, ownership shall vest upon
the borrower
B. Suspend or Revoke Certificates of
- If the machineries are in need of
Incorporation
repair in the course of the period of
- In revoking certificates of stocks the SEC
the contract, the repair is paid by the
has concurrent power with the special
commercial courts depending on the ground
48
 petitions under the FRIA but applicable
C. Investigate Compliance or Violations by to corporate debtors
Companies of the Corporation Code and All
other Special Laws placed under its B. SCC has the Power to Hear and Decide all
enforcement so-called Intra-Corporate Controversies
- It is an intra-corporate controversy when:
D. Pursuant to its Investigatory Powers, it can - While it may appear on its face that it is
Issue Sub Poena an ordinary civil action, if the 2-pronged
- Both duces tecum and ad testificandum test is applicable then it is the RTC that
- If the SEC finds that there is indeed should exercise jurisdiction as a special
violation, it can only impose administrative commercial court – it does not belong to
fines and sanctions the general jurisdiction of the MTC or
- SEC does not have prosecutorial powers RTC – usual rules on jurisdiction shall
not apply for this category of cases –
E. Policy-Making Body because, first and foremost, under the
- Most important power of the SEC 2-pronged test, plaintiff and defendant
- SEC has the power to promulgate rules and has an existing intra-corporate
regulations relationship
- In order to vest jurisdiction upon the
III. Section 7 – Reorganization SCC, that intra-corporate relationship
- Looking at the provisions of RA 8799, it must have been present and existing at
reorganized and restructured the Securities the time when the dispute or
and Exchange Commission from its former controversy arose between the parties
structure designed under PD 902-A - There is an intra-corporate relationship
- RA 8799 did not completely repealed PD when:
902-A
- Although PD 902-A created the SEC, RA 1. Relationship Test
8799, merely reorganized the SEC and part
of such organization under RA 8799 is to a. Corporation vis-a-vis:
focus the function of the SEC into capital
market development and part on the focus i. State/Republic/Public – with
of capital market development is to remove respect to its franchise
from the SEC its quasi-judicial powers
- Thus, the various cases formerly cognizable - To the State: A quo warranto
by the SEC under Sec. 5 of PD 902-A have petition for the revocation of the
now been transferred, pursuant to RA 8799, certificate of incorporation –
to the RTC – that is why instead of quasi- involuntary dissolution – this falls
judicial, these are now judicial controversies under the jurisdiction of the SCC
or cases
- To the Public: Special jurisdiction
A. The following are various categories of is necessary in instances when
cases covered by the so called transferred the corporation or its agents are
jurisdiction (Sec. 5, PD 902-A) guilty of committing corporate
- Special Commercial Courts (SCC) fraud, devises of schemes
- SEC has no quasi-judicial powers they are amounting to fraud or
now judicial and special jurisdiction was misrepresentation even if the
conferred under RA 8799 to the SCC, which victim of such fraud is a SH or
is a branch of the RTC one who is a complete stranger
1. Devices or schemes amounting to fraud to the corporation – for as long
or misrepresentation committed by the as the complaint specifically
corporation, partnership or association, avers fraud committed by a duly
its directors or officers, SH or members registered corporation or any of
or their agents and associates its duly constituted agents or
2. All cases involving intra-corporate officers, whether the plaintiff or
relations complainant is a SH or a
3. All cases arising out of hiring or stranger – the SCC must
termination as well as election or exercise jurisdiction – it is the
appointment of corporate officers corporate fraud itself that
4. All petitions for suspension of payments characterizes special jurisdiction
by corporations - At present, M Incorporated
- However, under Financial Rehabilitation (pyramiding). They did not
and Insolvency Act (FRIA) – the 4th deliver the money they
cognizable cases cognizable under the promised. You tried to
SCC is not limited to suspension of recover your capital but they
payments but petitions under the FRIA – cannot be found. You will
now file an action for
49
 recovery of money or because of the presence
property. But since the fraud of intra-corporate
was committed against you relationship between the
by a duly registered parties at the time the
corporation, it is the SCC that controversy started – he
has jurisdiction. was still a treasurer and a
- The amount involved in member. When he
cases of corporate fraud is continued such fraud, he
immaterial – always with the used company property
SCC to entice unwitting
members of the public to
- Aleje v. Shape, Inc. become members of the
- Shape, Inc. is a duly same. He did not tell
registered non-stock, them that he was merely
non-profit company. It is operating on his own and
a sports, physical fitness that they are not formally
and recreational members of the main
corporation. It operated a corporation. He
gymnasium equipped perpetrated a fraud upon
with facilities for fitness. the public and he used
In order to support the the corporation as a
expenses incurred by the device to continue such
company for the fraud. This case belongs
operation of such, it to the SCC.
required membership. It - All civil actions for recovery
had a long list of of money and property or for
members who were specific performance for a
required to pay an initial fraud committed by a
membership fee and company must be filed with
regular monthly dues the SCC.
from all the members.
One of its members was - Example: Pyramiding scams
elected as treasurer of - Fraud was perpetrated or
the company. While continued by the corporation
acting as treasurer, he or any of its known
used company money associate, then the action to
and property to put up a redress the fraud is an intra-
branch in another part of corporate controversy
the city. He also called
this branch Shape, Inc. ii. SH or members
That branch solicited and - Under the relationship test, to
maintained its own confer special jurisdiction upon
members’ list – they also the RTC, there must exist an
paid initial membership intra-corporate relationship at the
dues and regular monthly time of the commission of the act
dues. All profits and complained of
income from this branch
were not submitted to the - Stock Corporation: When does
main office instead he an intra-corporate relationship
misappropriated them. begin between the corporation
Upon knowing such, he and a SH – how a SH becomes
was terminated as a a member of capital stock – 3
member and company ways:
treasurer but he 1) By subscription
continued operating said 2) By purchasing re-issued
branch and opened treasury shares
another branch. A case 3) By acquiring SS of an
was filed against him for existing SH
recovery of public funds
and property. - Case:
- SC: This is an intra- - The following
corporate controversy subscription contract was
despite the fact that the executed between the
defendant is no longer a corporation and another.
member or a treasurer of For 100 SS at 100/share
the company. First, coming form the capital
50
 stock of the company
payable through a - Example: If the name of the
potestative condition subscriber has been entered
(“kapag ako’y in the stock and transfer
nakapagpahuli na ng book and that the entire
isda”) consideration has been paid.
- SC: This contract is void Upon full payment, the
because the obligation to subscriber can now demand
pay the subscription price for a certificate of stock. The
is entirely dependent on corporate secretary refuses
the sole will of the debtor to issue one. Subscriber who
– whether or not she will has paid in full filed a
caused fish to be mandamus. Is this intra-
harvested is left entirely corporate or not?
to her discretion and - Yes. Certificate of stock
therefore it is a purely is not material for the
potestative one and a exercise of a subscriber
potestative condition of his right as such for as
makes a contract void long as he is already fully
- If this is decided today paid; it becomes a matter
when the corporation now of right for the subscriber
judicially demands the to be issued a certificate
payment of the SS – it is of stock.
the regular court that has
jurisdiction – there is no - Example: A certificate of
intra-corporate stock was issued to X. X now
relationship because the sells the shares to Y. Valid
contract is void because method to transfer this is
of the potestative indorsement + delivery. The
condition – the contract agreement between X and Y
was never perfected at all is that the purchase price
shall be paid by Y in 2
- Example: 1,000 SS at 1,000 installments. There was initial
per subscription – under the payment by Y so X indorsed
subscription contract, the the same but does not
entire balance shall be deliver the same until the
payable upon call by the final payment is given by Y.
BOD. A call was made but Y now pays the last
subscriber refuses to pay. installment but X still refuses
Corporation decided to file a to deliver the certificate. Y
judicial action for collection of now requests the corporate
sum of money from the secretary to register the
subscriber. Is there an intra- stocks in his name but the
corporate relationship corporate secretary refuses.
between the corporation and - This is under the
the subscriber? jurisdiction of the regular
- None. Nothing was paid court because Y is a
yet. The intra-corporate complete stranger. Under
relationship has not yet the Corporation Code, to
begun. bind the corporation,
- Intra-corporate there must be
relationship, for purposes indorsement + delivery.
of fixing the jurisdiction, it Y’s remedy is against X
begins during the name
of the subscriber is - Embassy Farms v. CA
entered in the stock and - Agreement between X
transfer book of the and Y is for the sale and
corporation. transfer of the SS
- If the subscriber’s name covered by a certificate.
is not indicated in the X owns 90% of the
stock and transfer book – outstanding controlling
collection of sum of stock of the company.
money must be filed The agreement is that X
before the regular courts shall deliver the 90% plus
– depending on the several other parcels of
amount land belonging to X (not
51
 to the corporation) in - Example: Indorsed in blank and
favor of Y. It is also physically delivered (no specific
stipulated that Y shall pay transferee)
in installments. Once Y - Effect: The certificate of
has paid the earnest stock is converted into a
money, he will be given street certificate (whoever
control of the business holds it is presumed to have
operated by the acquired title over the
company. Y did not pay. certificate; same with bearer
X now files an action to instrument)
rescind their agreement
on the ground of non- - Case: Transferee pays in full and
payment. Is there an transferee presents the
intra-corporate certificate to the corporate
relationship? secretary. The secretary refused
- SC: None. The company to register the transfer on the
here was improperly following grounds:
impleaded because the - Violates the right of first
company here is not privy refusal of the secretary
to the contract between X (private agreement between
and Y. As such, it is an the transferor and the
ordinary breach of corporate secretary);
contract case between - SC: Despite the private
the seller and buyer. The agreement between the
mere fact that the buyer transferor and the corporate
was given temporary secretary, that agreement did
control over the business not divest the transferor of
does not make him a SH the right to sell the shares.
of the corporation The remedy of the secretary
specially that he has not is to file a case against the
yet paid in full. transferor. He cannot refuse
the registration because
- Razon v. IAC there was already an
- Pursuant to their indorsement and delivery.
conditional sale, buyer Since the transfer is
must first pay in full the complete, registration
contract price before the becomes ministerial.
seller will indorse the
certificate of stock. Upon - Example: A (registered owner).
down payment, the B stole the certificate and forged
unendorsed certificate the indorsement. B presents it to
will be delivered to the the corporate secretary for
buyer as a token of trust registration. The secretary
between them, but the refused to register. B filed a
seller will not yet indorse case. Is there an intracorporate
it. The buyer will merely relationship?
have physical possession - None. He did not acquire title
of the certificate. Full to the certificate. The case is
payment was already not within the jurisdiction of
made but seller refuses the commercial court.
to indorse. Buyer
presents the certificate of - Example: B (the thief) indorses
stock to the corporate and delivers the certificate to C,
secretary. Is there an an innocent purchaser for value.
intra-corporate C presents the certificate to the
relationship? secretary. The secretary refuses
- SC: None. Transfer is to register. C appealed to the
binding upon the Board. The Board upheld the
corporation if there is denial. C filed a mandamus
indorsement + delivery. case. Is there an intracorporate
The transfer was never relationship?
complete under the law. - None. C never became the
There is no prima facie owner of the shares because
title over the certificate. the certificate originated from
one who has no authority
over the same.
52
 - SC: Even if the position is not
- How to end the intra-corporate the AOI or BL of the
relationship? (here, the corporation, there still
commercial court losses remains an intra-corporate
jurisdiction over the case) relationship because by way
of further allegations in his
- Spouses Turner v. Lorenzo complaint, he alleged that he
Shipping was appointed as the Vice-
- Here, the corporation refuses President on the condition
to pay the shareholders that he is a stockholder.
because of the absence of Meaning, for as long as
unrestricted retained stockholders are qualified to
earnings. When Lorenzo a particular position, the
Shipping realizes Board would give preference
unrestricted retained to those inside the company.
earnings, the spouses filed a Aside from that, his
civil action for collection. complaint also alleged that
his position was declared
- Is there still an intra-corporarte vacant by an illegal act of the
relationship? When does the Board because the meeting
intra-corporate relationship was without notice (illegal
between the dissenting meeting). Hence, he has the
stockholder and the corporation right to maintain an action
end? against the Board. (Filing the
- From the time that the case as a stockholder)
certificate of the dissenting
stockholder are cancelled in b. SH or members among themselves
the stock and transfer books.
2. Nature of the Controversy Test
iii. Directors/Trustees/Officers/Corp - After satisfying the relationship test,
orate Agents prove now that the nature of the
- Dismissal of the corporate controversy requires the exercise of
officers – If the controversy such special jurisdiction. Because even
revolves around the legality of if there is an intra-corporate relationship
the dismissal, the intra-corporate between the parties, if such relationship
relationship remains until the is merely incidental to the controversy, it
final determination by the court. is not an intra-corporate controversy.
The case is still cognizable by
the special commercial courts. - Would the case survive in the special
- As corporate officers, they are commercial court without the intra-
entitled to security of tenure. corporate relationship?
- If no, it is not an intra-corporate
- Who are corporate officers? controversy. If yes, it is.
1. Those whose positions are - To make it an intra-corporate
provided for by law controversy the cause of action must
(President, Secretary, pertain to the enforcement of rights
Treasurer, and the members and obligations under the
of the Board); Corporation Code, and or the AOI or
2. Those created by the AOI of BL of the corporation. If the cause of
BL action is different, then regular
courts have jurisdiction.
- PSBA v. SEC
- During the stockholders - Perrera v. IAC (nature of the
meeting, elections were also controversy test)
conducted. After the election, - The corporation owned a building
the Board immediately where it had its main office. One
assumed office. As their first floor of the building is used by the
act, they declared all other corporation as the employees’
management positions in the canteen. The canteen is operated by
corporation as vacant a canteen concessionaire who is a
(termination). Hence, a case stockholder of the corporation. The
for illegal dismissal was filed concessionaire shall pay regular
by the vice – president rents and a portion of the sale.
whose position was affected When there was failure to regularly
by the said declaration. pay the rent, a notice to terminate
and a notice to vacate was given by
53
 the corporation. The corporation filed hearing the case. When the matter was
a case for collection of sum of brought back to the NLRC, NLRC
money with a prayer to vacate. The dismissed it again. Hence, the case was
concessionaire questions the brought to the SC.
jurisdiction of the regular court - SC: The answer effectively converted
raising that being a stockholder of the matter into an intra-corporate
the corporation, then the matter controversy because there is a need to
should be resolve before a determine the validity of the set-off
commercial court. alleged by the corporation. The fact that
- SC: The intra-corporate relationship he resigned as president did not
here is merely incidental to the terminate his relationship with the
issue. Hence, the regular court has corporation as a stockholder. The trial
jurisdiction over the case. What court should have heard the case.
belongs to the nature of the
controversy test as to make it an - Sunset View v. Campos
intra-corporate controversy is a - He bought a condominium unit and
derivative suit. pursuant to the contract to sell, he paid
a part of the purchase price and the
- Example of intra-corporate remainder is payable by monthly
controversies: installment. Even if there is yet no full
1. Action to collect balance under a payment, the possession of the
subscription contract; condominium was already given to him.
2. Mandamus to compel the issuance Part of the obligation is the payment of
of a certificate for fully paid shares; monthly dues. Non-payment thereof for
3. To register the transfer when the 6 months will entitle the seller to file an
right of the transferee is not in doubt; action for ejectment against the buyer.
4. Mandamus to compel the When the buyer defaulted in the
corporation to declare dividends = payment of the monthly dues, an action
this happens when the corporation for ejectment was filed with the MTC.
has accumulated surplus profits in The defendant questions the jurisdiction
excess of its subscribed capital of the MTC on the ground that having
stock; purchased a condominium unit, he
5. Petition to conduct an election automatically becomes a member of the
condominium corporation (to administer
- If the two tests concur, then definitely, it the common areas). As such, the case
shall be the special commercial courts that should be filed with the commercial
shall take cognizance of the case. court.
- SC: The SC did an investigation to
- Ang Co v. NLRC determine whether there is a stipulation
- He is a stockholder of a corporation but in the contract to sell as well as in the
still has a pending subscription balance master or enabling deed that in fact
(balance is payable upon call). He was automatically confers membership in the
chosen as a director and president of corporation in favor of every buyer.
the Corporation. He later resigned as There was none. Hence, there is a need
President. He demanded that the to look into the provision of the
corporation pay him his salaries and Condominium Act. And under the
other money claims. The corporation Condominium Act, a buyer becomes a
ignored said demand. He then filed a shareholder of the corporation only upon
money claim with the NLRC. Does the full payment of the purchase price. As
NLRC have jurisdiction? such, MTC retains jurisdiction.
- If a corporate officer is not questioning
his dismissal and all he is questioning is - QPB+7, Inc. v. Aguirre
his entitlement to his money claims, - The corporation was formed to operate
then it should be the NLRC which has an agri-business. It bought a parcel of
jurisdiction. land for the said business. However,
- Answer if the corporation = that the after that, the corporation becomes
corporation refuses to pay his claim inactive. No meeting and election was
because the same was applied to his held. The initial set of directors and
pending subscription balance. As such, officers remain the same. Until Aguirre
NLRC dismissed the case. The matter is discovered recently that election was
an intra-corporate controversy. As such, being conducted without him being
the matter was brought to the informed. He went to the SEC and
commercial court which however learned that for the past three years,
dismissed the case on the ground that elections and meetings were in fact
since the NLRC has already acquired held. He did not receive any notice for
jurisdiction, then it should continue these meetings. None of the elected
54
 directors and officers was known to him.
He also discovered that the land which
was in the name of the corporation was
in the possession of the persons whom
he calls impostors. He then filed a
petition before the trial court for
accounting, recovery of the property,
and nullification of the contract,
elections, and meetings. The petition is
in the nature of a personal suit to protect
his right and a derivative suit. The
impostors moved to dismiss on the
ground that the special commercial
court has no jurisdiction over the case
because at the time of the filing of the
case, the corporation has already been
dissolved by order of the SEC for failure
to comply with the reportorial
requirements.
- SC: The dissolution of the corporation
does not extinguish the intra-corporate
relationship between and among the
parties. It is only upon final liquidation of
a corporation that the relationship dies.

- The derivative suit (action for accounting of

corporate funds and property as well as
nullification of certain contracts) is actually a
suit inherent/intrinsic in the liquidation
process. There is necessity, in liquidation, to
gather all assets to pay off all creditors.

55
 CHAPTER VII – Prohibition on Fraud,
Manipulation and Insider Trading - Under the SRC, all material information are
required to be covered by a disclosure
ITMFS
statement filed with the SEC and publish in
a newspaper of general circulation in the
I. Insider Trading
Philippines.
- Criminalization or prohibition of insider
trading
- The disclosure statement under the SRC is
- There is insider trading whenever insiders
different from that of the Truth and Lending
buy or sell securities while in possession of
Act.
material non-public information
- Disclosure statement is also required for
A. Insiders refer to:
facts of special significance: These are facts
that a reasonably prudent person would
1. Issuer of shares of stocks
consider important in making an investment
decision (to buy, to sell, or to hold on to
2. Directors or officers of the issuer when
those shares)
by virtue of their position they come into
- Example: Apple Company (Steve Jobs)
possession of information which are not
generally available to the public
- See: Section 31 and 34 of the
Corporation Code
- Strong v. Rapide
- The respondent here is the President of
3. Any person who by virtue of said
the company. He was appointed by the
relationship or past relationship has
company to negotiate with the Republic
access to material and non-public
of the Philippines. The Philippine
information
government offered to buy all the lands
belonging to the company. As a
4. Officers or employees of:
negotiator, he knew that the government
a. Government agencies (e.g. SEC)
is very willing to buy the lands which
b. Clearing agencies (these are entities
would actually have a positive effect on
engaged in the business of
the company as the market price of the
delivering securities for settlement or
shares will eventually increase upon
payment)
consummation of the contract. He then
c. Stock exchanges
instructed his brokers to buy shares of
d. Or other similar self-regulatory
stocks of the existing shareholders of his
organizations that may have access
company and not to his disclose his
to material non-public information
identity to the sellers. After the contract,
e. Constructive insider: Any person
Rapide owned 80% of the shares.
who obtains material non-public
- SC: Rapide is guilty of insider trading.
information from any of the above
and this may include but is not
C. Defenses for insider trading:
limited to:
1. That the material non-public information
i. Spouse (legitimate or common
was not known to the insider at the time
law)
of the transaction;
ii. ii. Relatives up to the 4th
2. That the insider disclose the material
degree of consanguinity or
non-public information to the other party;
affinity
or
3. That the insider had reason to believe
B. Material information
that the other party to the transaction
- Any information that will affect or likely to
also knew of the material non-public
affect the price of the security on being
information
made public. This refers to objective facts
such as:
- Insider trading warrants the imposition of
1. Any propose or plan merger of
imprisonment of 7 to 21 years or a fine of
consolidation;
not more than P 1 million, but civilly, triple
2. Infusion of new capital;
the amount of the transaction.
3. Increase or decrease in the
- Correlate with the duties of the officers and
capitalization;
directors of the corporation not to take
4. Losses or profits in the operation of its
advantage of information which come into
business;
their knowledge by reason of their position.
5. Election of officers or directors
6. In the case of companies engaged in
II. Tender Offer
wasting assets, discovery of new mines
- A tender made by a person or a group of
or minerals
persons acting in concert with one another
7. Other similar information

56
 to acquire the controlling stockholdings or were then bought by Coca – cola).
equity in a public company. Thereafter, the members of the
- It is one means by which a person (either a Concepcion family were removed in the
stockholder or third person) may gain Board since they were no longer
control over the management of the shareholders of Cosmos. Coca – cola
company by purchasing the OCS within the then placed its own directors in the
company. Board without the necessity of calling for
- A tender offer may either be voluntary or a meeting.
mandatory.
- The aim of the mandatory tender offer is
A. Voluntary to afford the minority stockholders of the
- May be made at any time and for any public company an equal opportunity to
reason withdrawal under the same terms and
conditions and for the same price as the
B. Mandatory controlling shareholders

- Made in the following instances: - A tender offer is not an unlimited tender

offer. The acquirer can fix the time within
1. Whenever a person or a group of which the tender offer may be exercise
persons acquire in a single transaction by the minority shareholders. The
atleast 15% of the outstanding customary period is 30 days. When the
controlling equity in a company. If they tender offer is mandatory, it must be
acquired 30% (may be in a series of publish once a week for three
transactions) over a 12 -month period, consecutive weeks in a newspaper of
this is known as a creeping transaction. general circulation before the offer
2. Acquires more than 50%, whether in a period begins.
single or a series of transactions
regardless of the stand of the company - Before the CEMCO v. National life, the
interpretation of the mandatory tender
- Current Rules on Mandatory Tender Offer: offer is limited to direct acquisition.
(pursuant to the rule-making power of the
SEC) - CEMCO v. National Life
- CEMCO is a stockholder of Union
- If a person or group of persons acquires Cement (UC). It owns 30% OCS.
in a single or series of transaction The controlling state in UC is held by
atleast 15% of the outstanding equities UCHC. UCHC is owned by Atlas
in public company, then a declaration (21%), Bacnotan (30%), and
shall be filed with the SEC. the CEMCO (9%). CEMCO is both a
declaration is tantamount to disclosure. direct and an indirect stockholder of
The declaration, however, will not yet UC. After a series of transactions,
trigger a mandatory tender offer. both Atlas and Bacnotan sold their
shares in UCHC in favor of CEMCO.
- When is mandatory tender offer Hence, CEMCO now owns 60% of
triggered? = When a person or group of UCHC. National Life is a minority
persons actually acquire atleast 35% of and direct stockholder of UC. It
the outstanding voting equities in the demanded that CEMCO make a
company or acquires such percentage mandatory tender offer under the
of the outstanding voting stock as would SRC.
influence and control the company. - SC: A mandatory tender offer covers
(Even below 35% for as long as it both direct and indirect acquisitions
translates to control) in the absence of any provision
under the SRC as to how control is
- Example: Coca – Cola Company sought gained in one company.
to buy a controlling interest in Cosmos
Bottling (under a Concepcion group of - If the mandatory tender offer is violated,
companies) without need of entering into the SEC will not approve the acquisition
a formal merger. Both of their stocks are by the acquirer and it has the power to
listed in the stock exchange; hence, invalidate it. This is to protect the
both are public companies. Offer of minority shareholders.
Coca – cola is to buy the shares at
market price. The Concepcion family III. Margin Trading
refused. Coca – cola made another offer - Margin trading is highly regulated
at P 5 per share. Again, it was refused. - Margin trading is buying and/or selling
Next offer was P 20 above market price. shares of stocks on margin, meaning, on
The final price was around P 70. This credit furnish by the broker to the customer
offer was accepted. (320 million shares or investor.
57
 - There are various ways by which market
- Example: X = investor and customer of manipulation may be committed
broker A; he places an order of 1 million - The persons interested in performing
shares from Pogi, Inc.. Usually, he must market manipulation are either:
already pay the same. P 10 per share. 1. Those who have existing shares that
Hence, pay 10 million. But X only has P 1 they want to unload or sell off at a
million. X predicted that the amount of the higher price; or
shares will double the following year. 2. Those want to acquire more

- Broker A can open a margin account for X A. Various Forms of Manipulation of Security
(this must consist of a margin and debit Prices
balance = credit advance or lent by the
broker for the customer). Margin is the 1. By giving the false appearance of active
amount of cash deposited by the customer trading of security
to the broker to effect the transaction. This - Refers to dormant equities or SS
is a collateralized loan, the shares being the - It might trigger manipulation when
collateral. suddenly there is someone who bought
in bulk a previously inactive SS
- Brokers earn by commission.
2. By artificially increasing the price in
- The following year, the prediction of X came order to effect a purchase thereof; or
true. The shares are now at P 20 per share. artificially decreasing the price in order
X can then get P 20 million from the sale of to effect a sale thereof
said shares.
3. By disseminating or stipulating false
- As a whole, he makes a profit of 10 million information regarding the security
(20 million – 9 million loan – 1 million initial
investment) - Example: BW Resources Case
- It has its SS listed in the Philippines
- If the prediction however proves to be Stock Exchange (PSE) but for along
wrong, then cut the losses by selling all time its shares were dormant –
shares meaning the existing SH even of
- The regulation of the margin trading is to they wanted to sell cannot sell
protect the credit and banking system. because no one was willing to buy.
However, BW Resources was a
A. How is margin trading regulated: company headed by the best friend
- By prescribing maximum or ceiling to the of then Pres. Estrada – Dante Tan.
lending or credit provided by the broker to Dante Tan was able to make known
the customer (not the margin deposit) publicly that he was a close friend of
the Pres. Estrada. To give the
- Maximum: The debit balance or credit appearance of active trading over
cannot exceed 65% of the current market BW Resources shares, he went on
price of the security (based on the trading public relations campaign so that
price at the stock exchange) or 100% of the slowly his company will be known.
lowest market price over the last 36 months Dante Tan made the following press
but not more than 75% of current market release: (1) BW Resources has
price, whichever is higher applied a gaming license with
PAGCOR; (2) He is applying the first
- Example: P 10 per share at trading price = online gambling franchise in favor of
10 million for 1 million shares = can only BW Resources; (3) He will go into
lend P 6.5 gambling partnership with Stanley
Ho; (4) Stanley Ho will invest in a
- Example: In the last 36 months, the lowest joint venture with Dante Tan not on
market price of Pogi shares is P 2.00 per land-based casinos but on floating
share. = only 2 million can be lent casinos; (5) Stanley Ho came into
the Philippines and they went to
- Between the two examples, the lending can Malacañang. From 1.00 per share,
be up to P 6.5. BW Resources’ shares went up to
140.00 per share. When Stanley Ho
B. If no deposit can be furnish, then the went bank to Macau, he announced
following are the options: that he has no plans in investing in
1. Reduce the volume of the transaction; or the Philippines. At this point, BW
2. Not execute the transaction at all Resources’ shares steeply went
down.
IV. Fraudulent Transactions and
Manipulations of Security Prices 4. Wash Sales
58
 - Period is 60 days (under Tax Code) - When you hype, there is a tendency that
- Under SRC, a wash sale involves a people will buy more and increase the
transaction or series of transactions price – it because there is a limited
involving the same security of the same supply, when you reach the level that
size or volume without a change in the you are comfortable with, this is the time
beneficial ownership you dump the market with the shares –
there is now an over supply making the
- Example: prices decrease

Time Broker Broker Price 9. Squeezing the Float

(All on A B - Float means the availability to the public
the - When you hold, you stifle the supply
same side while the demand side is increasing
day) – the tendency is to increase the price
9:15 Sell 10.00 - The existing SH has the capacity to
9:30 Buy 12.00 squeeze the float
Investor X
Owner of 10:00 Sell 15.00 10. Daisy Chain
1M shares 10:30 Buy 20.00 - Series of wash sales
of Pogi,
Inc. 11:00 Sell 22.00 11. Boiler Room Operations
11:30 Buy 30.00 - This is a form of aggressive marketing
- The seller is X and the buyer is also of securities usually employing
X. There is no change in the fraudulent promises to lure investors –
ownership. This is illegal. The like using scare tactics
purpose here is to artificially
increase or decrease – it is artificial V. Short Sale/Short Order
because share prices must be - When you short a security, it means that
market driven – it depends on you are selling the security which does not
legitimate demand or supply. Here belong to you – meaning the security is
there is no legitimate demand. borrowed by the investor without knowledge
of the true owner
5. Illegal Match Order - This contradict the fundamental rule in
securities transaction that you buy low so
6. Painting the Tape that you can sell high – in this case the
- If the wash sale also has the result of an investor buys high and then sells low
artificial price, whether increase or - This is usually done in conspiracy with
decrease, the manipulation of the brokers – because they hold in their custody
security price during the trading day the securities purchased by their customers
- At the time that there was a piece of until such time that the loan is fully paid
paper generated by the machine, they - Example: X studied that Pogi, Inc. shares
erase to place the artificial price and this will go down. He borrowed Pogi shares from
will become known to other brokerage Broker A which is owned by Y who is
houses and announce to their own abroad. Y did margin trading and so his
customers – no legitimate demand shares are in the custody if A. X sells the
1M shares of Y for 25M. After 6 months, it
7. Marking the Close went down to 15.00 from 25.00. This is the
- Manipulating the security prices at the time that he will purchase again for 15M
end of the trading day only. He gained 10M from shares he does
- Ends a few minutes before 12 noon in not own.
the PSE ends - What if his prediction is wrong – there will
- The last price at the end of the trading be a lost and the likelihood is that the
day will be the opening price the security will no longer be returned and an
following day – either to make it lower innocent 3rd person will be prejudiced
so that they can buy more or to make it
higher so that they can sell more - The only agency that can investigate or
make formal inquiries regarding such
8. Hype and Dump violation is the SEC and it can invoke all of
- This is part of the strategy to give the its powers in order to determine violations
false appearance of active trading in and impose administrative sanction is
dormant security – make a press whenever necessary
release – circulate false information - All civil or criminal prosecutions involving
regarding the security just so you can violations of the SRC must come from an
generate activity investigation coming from the SEC
- Nonetheless, when a person or group of
persons, natural or juridical, broker, dealers
59
or investors, are the subject of an inquiry by
the SEC, they may stop said investigation
by making a so-called settlement offer to the
SEC

60
 CHAPTER XIII – General Provisions

I. Settlement Offer
- It is a combination of a consent decree and
nolo contendere plea

- Consent decree: Usually in administrative

investigations conducted by the federal
commission in the US if a person is found to
be guilty of wrongdoing, such person may
enter into such – I agree or consent to any
judgment being impose upon me (summary
judgment) – this is not admission on liability
you just want to do away with litigation
- Nolo Contendere: This is used in criminal
cases; neither a guilty or not guilty plea; to
avoid negative publicity brought about by
long trials – I will not contend or contest –
also not an admission of criminal guilt

- Under settlement offer, the person under

investigation may make an offer to the SEC
which may include a promise not to commit
similar acts in the future as well as payment
of a sum of money to SEC
- The sum of money is not in the nature of a
fine
- When settlement offer is received by the
SEC the SEC must desire to meet based on
the following:
1. Timing – if you make a settlement offer
too late in the course of investigation
and a decision is about to be reached,
SEC will accept it
2. Public Interest – If there is no material
interest in the public confidence in the
stock market caused by said
wrongdoing, the SEC may accept the
settlement offer

- If settlement offer was accepted by the

SEC, SEC must publish it and in the
absence of any objection, the SEC will
conform said offer biding upon the offeror –
so the offeror now must comply with
whatever is stipulated and then pay sum of
money to SEC
- The acceptance of the settlement offer will
stop the inquiry by SEC
- The money paid by the offeror to the SEC
becomes public and not money to be paid to
the victim

- Whether acceptance of the SEC of the

settlement offer is tantamount to dismissal
of criminal cases – not yet settled by any
jurisprudence – Ma’am Lulu: No – what
evidence will you have, all the records are
with the SEC – under seal against the public
– it takes a court order to unseal

61
 Financial
Rehabilitation
and
Insolvency Act of
2010

FRIA

(RA No. 10142)

62
 Table of Contents
CHAPTER I – General Provisions ................................................................................................. 64
I. FRIA................................................................................................................................... 64
II. Old Insolvency Law: Remedies for
individual and corporate debtors .............................................................................................. 64
III. Remedies of Corporate Debtors
under the FRIA: ....................................................................................................................... 64
IV. Corporate debtors under FRIA: ........................................................................................ 64
V. Since corporations exist for profit or
gain, the operation of their business may
be beset by internal or external problems. ............................................................................... 64
CHAPTER II – Court-Supervised
Rehabilitation ................................................................................................................................. 65
Remedies of Corporate Debtors ............................................................................................... 65
I. Petition for Corporate Rehabilitation ................................................................................... 65
II. Petition for Approval of Pre-Negotiated
Rehabilitation Plan ................................................................................................................... 70
III. Petition for Assistance in Out of
Court/Informal Restructuring Agreement
(OCRA) .................................................................................................................................... 70
IV. Petition for Liquidation...................................................................................................... 71

63
 CHAPTER I – General Provisions
B. External problems include:
1. Political events;
I. FRIA
2. Radical adjustments as to the foreign
- It completely repealed the old insolvency
currency of value of goods and services
act, which came into force in the Philippines
in 1902.
- General notion: An uncompetitive enterprise
shall be removed in the market place.
II. Old Insolvency Law: Remedies for
individual and corporate debtors
1. Filing of a petition for suspension of
payments (a.k.a. technical insolvency) =
allowed only if the debtor has sufficient
assets to cover all the liabilities but
cannot pay the obligations as they fall
due because of lack of liquidity; the
objective here is to defer and to re-
schedule payments
2. Filing a petition for insolvency = the
objective of insolvency is to effect a pro-
rata distribution of the assets of the
debtor and to comply with the
preferences and concurrences of credit
under the NCC

- In either petition, it shall be filed with the

RTC of the place where the debtor resides.

III. Remedies of Corporate Debtors under

the FRIA:

A. Petition for Corporate Rehabilitation

1. Voluntary
2. Involuntary

B. Petition for approval of a Pre-Negotiated

Rehabilitation Plan

C. Petitions for OCRA

D. Petition for Liquidation

1. Voluntary
2. Involuntary

IV. Corporate debtors under FRIA:

A. Juridical Debtors
- Partnerships, corporations, associations
duly registered with the SEC and even sole
proprietorships which are franchised by their
respective LGUs and duly recorded in the
DTI

B. Individual Persons
- Natural persons who operate business in
their own name

V. Since corporations exist for profit or

gain, the operation of their business may
be beset by internal or external
problems.

A. Internal problems include:

1. Mismanagement
2. Inability to expand its operations or
market based

64
 CHAPTER II – Court-Supervised c. Tax clearances from the BIR and
Rehabilitation BoC; and
d. All other annexes that are
considered part and parcel of the
Remedies of Corporate Debtors
petition
I. Petition for Corporate Rehabilitation
2. Involuntary
- The objective here under the old SEC Rules
- Creditor-initiated petition
is to prevent a closure of the business of the
corporation whole it is undertaking means
- To vest legal personality to file the
and method to address it financial
petition, the following must be alleged
difficulties.
and proved:
- RA 8799: Petition for corporate
rehabilitation is now under the jurisdiction of
1. The creditors or group of creditors
special commercial court
hold at least 1 million worth of
- The petition is by law a proceeding in rem.
liabilities or claims against the
- Rehabilitation refers to the restoration of
corporation; or That their aggregate
financial solvency and economic viability of
claims is equivalent to at least 25%
a corporation where there is reasonable
of the subscribed capital stock of the
hope or expectation that its creditors will
corporation, whichever is higher
recover more by continuing the business
(non-compliance of this requirement
rather than liquidating or dissolving it. The
shall cause the dismissal of the case
corporation remains open for business
because the petitioner is devoid of
despite the pendency of the petition in court.
any right to initiate the proceeding)
A. Two Kinds:
- Example: SCS of the corporation is
valued at 100 million representing 10
1. Voluntary
million shares (25% of that is 25
- This is a debtor-initiated petition.
million)
- It is the financially distressed
- Creditors X, Y, and Z =
corporation itself that is filing the
combined claim of 30 million,
petition.
then X, Y, and Z can already file
the petition for corporate
- Who is a debtor?
rehabilitation.
- Any of the juridical entities.
- But for purposes of corporate
2. It must likewise be alleged that there
rehabilitation, it may include a group
is no substantial issue in fact
of companies who are affiliated with
regarding the outstanding liabilities
one another.
of the corporation;
- If it can be shown that the financial
difficulties of one of the member
3. That the corporation is remiss in
group shall affect the other
paying its obligations to various
companies within the same group,
creditors at least 60 days prior to the
then the petition may cover all of
petition; and
them even those who are not
suffering from financial difficulties
4. That another creditor/s not the
Because it may happen that the
petitioners have initiated foreclosure
close affiliation of these companies
proceedings or about to perfect a
may pertain to certain commonality
lien over the assets of the debtor.
of ownership in the assets.
- Between ordinary and unsecured creditors
- The petition shall be approved by
and preferred and secured creditors, the
majority of the Board and 2/3 OCS.
former will ordinarily file a petition for
corporate rehabilitation.
- It must be alleged in the petition that the
corporation is suffering from insolvency
- Once the petition has been filed in court, the
and that it consistently failed to answer
court must immediately make an ex-parte
for its outstanding obligations as they
determination as to whether the petition is
fall due.
sufficient in form and in substance.
- If it sufficient in form and in substance, it
- The petition itself must already be
must now issue a commencement order.
accompanied by:
- On the other hand, if it finds that the petition
a. A draft or proposed rehabilitation
is deficient either in form or in substance,
plan with a list of nominees for
then the court can simply issue a corrective
appointment as receiver;
order to be addressed to the petitioner
b. Financial statement;
specifying the rectifications to be made to
65
 the petition. It will require an amended
petition.
In re: The Petition for Corporate
- One common ground for a corrective order Rehabilitation of Pogi, Inc.
is the failure to attach a rehabilitation plan in
the petition. Pogi, Inc.,
Petitioner
B. Rehabilitation Plan
- This is a detailed plan specifying the various Involuntary Petition
methods by which the rehabilitation or
restoration of financial viability of the In re:
corporation may be achieved. ____________________________________
- It must be based on logical assumptions as
to how profit may be obtained to address Creditors X, Y, and Z,
the condition of the corporation and to Petitioners
eliminate or reduce its current debts.
v.
- It may include the following mechanisms or
modes: Pogi, Inc.,
Defendant
1. Debt restructuring agreement
- Form of objective novation; can reduce C. Commencement Order
the debt or the interest or imposing a - Deemed effective from the date of issue.
different rate of interest, etc. - This is required to be publish is a
newspaper of general and national
2. Debt condonation circulation in the Philippines once a week
- Gratuitous abandonment of the debt. It for two consecutive weeks after its
may pertain to accrued penalties and issuance.
interest or principal, or both - Without the publication, the proceedings
cannot commence formally to trial.
3. Debt for equity swap
- Dacion en pago; special form of - The order must contain, among others, the
payment whereby the monetary debts of following:
the corporation is paid by way of its own
shares of stocks delivered to the 1. Set the case for initial hearing with a
creditors. Make the creditors as statement that all creditors of the debtor
shareholders. corporation must file verified claims with
the court at least 5 days before the said
4. Corporate restructuring or hearing.
reorganization - As a summary proceeding, the notice by
- Example: lose some branches, eliminate publication vest jurisdiction upon the
non-profitable business, minimize the rehabilitation or special commercial
number of corporate managers, court not just jurisdiction upon the
retrenchment of employees, sale of all matter but also jurisdiction over all
or some of the assets no longer needed persons.
for the business, sale of the business or - Should there be any creditor holding at
parts of the business, or proposal for the least 10% of the total liabilities of the
infusion of new capital corporation, that creditor is entitled to
separate notice as a matter of right
5. White knight (separate summons). If the creditor is
- Infusion of new capital not furnished with any notice, he can
- An entirely new entity or individual may contest any matter taken up during the
express interest in bringing in new proceeding.
money to the corporation in exchange
for shares of stocks; a professional 2. Declaration or pronouncement that the
investor. corporation is now under rehabilitation.
- The money is not necessarily from the - Thus, such judicial pronouncement
white knight. Usually it is from affects the legal capacity of the debtor
investment baking (consortium of corporation because it can no longer
lenders). freely enter into transactions.
- The infusion of capital may also come - The commencement order serves as a
from existing shareholders. valid and legal basis to declare null and
void all unauthorized or voluntary
unilateral actions or acts made by the
debtor from the moment that the
Voluntary Petition
66
 proceeding started. It is under court creditors and confirmed by the court.
supervision. Finalization of the rehabilitation plan is
by the receiver, approval thereof is by
3. Appoint a rehabilitation receiver. the creditors, and confirmation of the
- This may be a natural or juridical entity plan is by the court.
with known skills and expertise in the - Once approved and confirmed, the plan
industry where the business of the must now be implemented. The plan is
corporation is engaged in, whose legally binding upon all involved whether
character is beyond reproach and is not or not consented to by all.
suffering from a conflict of interest.
- The rehabilitation receiver is the 4. The receiver shall ensure that the duly
extension of the court, hence, approved plan is properly implemented.
considered as an officer of the court Nonetheless, the receiver will not
whose duty is to balance the competing directly manage or operate the business
interest of the creditors and debtor. of the corporation because the
corporation still has its Board of
- The rehabilitation is suffering from a Directors. The receiver, however, has
conflict of interest if: the power to review the action of the
1. He or she is the owner of the Board and recommend nullification or
business; or annulment of any transaction entered
2. Shareholder of the corporation; or into by the Board that would obstruct,
3. One of the corporation’s creditors; or delay or violate the rehabilitation plan.
4. Had such relationship with the
debtor within 5 years prior to the - The receiver is entitled to compensation
filing of the petition; or from the moment of assumption to the
5. Relative by affinity or consanguinity office. He is also allowed to engage the
of any of the above within the 4th services of professionals to assist the
degree; court in the proceedings (akin to that of
6. In case of juridical entity, it must not trial by commissioners).
be an underwriter of the securities of
the debtor or its creditors - From the moment of appointment, all
the assets of the corporation will be
D. Receiver placed under custodia legis and under
- The receiver must be capable of the trust by the receiver (fiduciary).
exercise of independent judgment in order
to prevent allegations of fraud or partiality. 5. Prohibition imposed upon all suppliers of
He must not be in a position as to be goods and services to the debtor from
materially influenced by either party. withholding or stopping said supplies
- There must be an investigation by the court and delivery. This is because the
to determine whether or not the nominees corporation is still open for business.
for rehabilitation receiver are suffering from
any of the disqualifications under the FRIA. 6. Authorize the payment of administrative
expenses (expenses incurred in the
- The one who qualifies and is willing shall be filing and continuation of the court
appointed by the court as the receiver. Mere proceedings, expenses requiring
appointment does not automatically vest payment incurred in the course of
powers upon the appointee because he is business as well as professional fees of
still required to take an oath. the receiver and the professionals
engaged by the receiver)
- The receiver has a series of positive legal
duties under the FRIA, like: 7. Stay or suspension order = equivalent to
an injunction or restraining order.
1. Filing an initial report that would serve - This covers the following:
as a basis whether or not the a. All actions whether judicial or
rehabilitations court can give due course otherwise for the enforcement of
or dismiss the petition. The report is due claims against the debtor.
20 days from the initial hearing. - A claim is a demand for money
or otherwise against the debtor
2. To meet with creditors. At least one or its property whether liquidated
meeting for each class of the creditors or unliquidated, fixed or
to obtain the approval of the creditors to contingent, matured or
any propose rehabilitation plan. unmatured, including claims
against the corporation by the
3. The most important duty of the receiver Republic of the Philippines for
is to draft and finalize the rehabilitation taxes, tariffs, customs fees or
plan so that it may be approved by the duties.
67
 - SC: There is no prejudicial question
- Conserve all present assets of the debtor because the mere fact that they
for the benefit of all creditors and to prevent deducted from the salaries of their
any of them from taking said assets to the employees and the fact that they are
detriment of the others. registered with the SSS means that
they have the mandatory obligation,
- The rehabilitation court shall notify the other regardless of the financial condition
courts (taking cognizance of cases involving of the corporation, to remit said
the debtor) regarding the rehabilitation contributions.
proceeding. The petitioner (voluntary or
involuntary petition) has the duty to inform 5. Civil Cases initiated by the Debtor
the rehabilitation court of the pendency of - They may be allowed by the court
such cases. The parties involved in the - The suspension is only over all actions
pending case/s shall file their respective for enforcement of claims against the
claims in the rehabilitation court debtor corporation – so where the
(consolidation of all claims in one corporation is the defendant – but if it is
proceeding). the debtor who is the plaintiff at the
discretion of the rehabilitation court, it
- The suspension of all actions has several may be exempt form the coverage of the
exceptions like – not covered by suspension suspension order
order:
6. All other cases pending before highly
1. Actions that are already pending before specialized administrative or quasi-
the SC; judicial tribunals
- At the discretion of the rehabilitation
2. All other actions pending against court
sureties (personal liability) of the debtors - If the rehabilitation court finds that these
or those solidarily liable with the debtor; specialized administrative or quasi-
judicial bodies can resolve the claim
3. Actions against issuers of letters of more fairly, expeditiously, then the
credit; rehabilitation court can yield its authority
- They are usually banks – this constitutes as a waiver on the part
- The other party here is the debtor – the of the rehabilitation court for highly
debtor of credit is for payment of goods specialized courts such as the
that are usually imported abroad and Insurance Commission (dispute
those goods are necessary for the involving an insurance policy or claim by
rehabilitation process – to maintain the the debtor) – rehabilitation court can
business of the corporation as an waive its jurisdiction momentarily – or in
ongoing concern – that is why those are favor of the SEC or NLRC
not stopped - This is discretionary upon the
rehabilitation court
4. Criminal Cases against the Directors, - Without the express waiver by the
SH, Officers of the Debtor rehabilitation court, all these cases are
- Panlilios v. CA deemed consolidated in the
- Fanillo, et. al. are accused for rehabilitation proceedings
violation of the SSS Law for non-
remittance of SSS contributions of - The enforcement of any judgment,
both employees and employer. They attachment or provisional remedy against
are members of the BOD and the debtor
Officers of Puerto Azul Land Inc. It - Even if there is already a writ of
was discovered that over 10 years execution issue against the debtor
the employer and employee corporation at the time when the
contribution to the SSS were never commencement took effect, no levy on
remitted. While the criminal case execution, sale on execution must be
was already pending, Puerto Azul conducted – because if sale was
underwent rehabilitation. The remove, such property will be removed
Panlilios sought the outright from the reaches of the rehabilitation
dismissal of the criminal cases court – that is why there shall be no
against them citing that since there enforcement even of final judgment
is now corporate rehabilitation
ongoing, then the corporate - All forms of voluntary payment made by the
rehabilitation proceedings pose a debtor in favor of any of its creditors
prejudicial question to their criminal - In fact, these are prohibited
liability because the reason why they - The only payments allowed, once the
did not remit the contributions is that proceedings begin, would be the so-
the corporation did not have cash. called administrative expenses –
68
 expenses incurred in the ordinary prohibition of transfer of assets, payments
course of business and suspension of all their claims – this is to
- Extrajudicial claims or enforcement or prevent one unscrupulous creditor from
remedies against the debtor are likewise having unnecessary advantage to the
prohibited and suspended detriment of the others
- Example: - With all the assets reserved and in tact, it
- As of December 5, 2015 – NLRC have the rehabilitation receiver the
already rendered a final and opportunity to craft a rehabilitation plan
executory judgment awarding 30M - From the time of filing, a rehabilitation plan
to several allegedly illegally must be approved and confirmed within 1
dismissed employees of Pogi, Inc. – year – if none is approved within said
Effect of the stay order on this period, the proceedings are deemed
judgment by the NLRC is that it terminated – the petition must be dismissed
cannot be enforced from December by the court – dismissal on said ground will
15. The illegally dismissed workers now restore the creditors to all their prior
entitled to the award will have to file rights and claims – all proceedings must
a claim with the rehabilitation court. now be resumed
However, because the award is - Once a petition for rehabilitation is filed, all
already final, it will be considered as taxes, fees and duties due to the Philippine
an undisputed claim – workers do Government are waived for that 1 year
not have to prove their right over the period – the period is directory rather than
same before the rehabilitation court mandatory
- For the current employees of Pogi,
Inc. the schedule of payment of - While ideally, the rehabilitation plan, being
salaries is every 15th and 30th of the reflective of collective nature process, must
month. As of December 15 (first day be consented to by at least majority of the
of effectivity of commencement creditors per class should any of them
order) should the employees be paid object to any proposed rehabilitation plan
their salaries? – No payment shall recommended by the receiver to the court,
be made if the expense or obligation their objective may be overridden, and the
is incurred prior to commencement rehabilitation plan confirmed and
date implemented
- Payroll for December 31 (from
period of December 16-30) – it - Pacific White v. Puerto Azul
must be paid – administrative - Despite the serious objections posed by
expenses the creditors against the rehabilitation
- Rentals due from Pogi, Inc. for the plan submitted for approval, the court
period January 1, 2015 up to confirmed it. Puerto Azul never gained
December 31, 2015 – the lease profit that is why it filed a petition for its
contract stipulates that the rentals own rehabilitation. By the time that a
shall be paid per annum – should it corporate rehabilitation was filed, it was
be paid? – No because it was already indebted to 60B accumulated
incurred prior to the effectivity of the over 30 years. Initially, a group of
commencement order creditors were able to negotiate certain
- Present rentals should be paid if terms for the payment of their claims
authorized by the rehabilitation against Puerto Azul and was allowed by
court because they are in the the rehabilitation court. When a more
nature of administrative expense comprehensive rehabilitation plan was
- You represent a creditor-bank – that recommended by the rehabilitation
holds a mortgage right of a land receiver and approved by the court, the
belonging to Pogi, Inc. The maturity group of lenders objected citing that
date of such loan is November 30, their constitutional right (non-impairment
2015. After the period expired clause) was violated. The rehabilitation
without payment, the bank has the plan imposed upon these creditors a
right to either demand cash or 50% cut on the principal; condonation of
foreclose the mortgage. Can you file all accrued penalties and interest; for
for extrajudicial foreclosure of the the amounts remaining a new interest
mortgage? – Under Act No. 3135 – rate is allowed by the court – 2% per
after December 15 no more – you annum for the first 5 years as penalty -
must now file and prove your claim for the last 5 years, 5% per annum – all
over the property with the of these obligations were given a new
rehabilitation court payment period; and only when there is
cash available – because pay first the
- For purposes of commencement or stay administrative expenses.
order, all creditors are considered on equal - SC: We are not talking of a law here, the
footing – all of them will be affected by the rehabilitation plan is a measure
69
 approved by the rehabilitation court. - Rehabilitation plan is a summary
That is why it is improper to raise the proceeding in rem. After the confirmation
constitutionality of the rehabilitation plan and approval of the rehabilitation plan, all
on the non-impairment clause because orders by the court may be issued ex parte.
they are questioning a law but a - Until such time that the corporation is
rehabilitation plan. Assuming that rehabilitated or restored to financial viability,
indeed that there is impairment of in such a case the court will issue a
existing obligations of contracts – the termination order.
FRIA was intended to serve public - If the rehabilitation plan is not successfully
policy and public interest and therefore, implemented, the court will likewise issue a
private contractual rights in favor of termination order to convert the proceedings
these group of creditors must always into a liquidation petition.
give to the greater demands of the
police power of the State – the power of II. Petition for Approval of Pre-Negotiated
the State to enacts laws or measures to Rehabilitation Plan
serve the common good and general - Less hostile
welfare – this is serve when the - Before going to court, the debtor and the
corporation rehabilitation plan is to be creditors have already finalized extra-
closed, hundreds of employees and judicially and among themselves a
their respective families will be rendered rehabilitation plan – this is tantamount to
without livelihood – the State itself will approval of the court of a compromise
be deprived of potential source of taxes agreement
and other revenues and the business to
be closed will open for the creditors to - For judicial approval – it must be alleged
have the company pay without any and shown that the pre-negotiated
rational allocation or distribution. Thus, rehabilitation plan is with the consent of the
even objections of these creditors, they debtor and creditors representing 2/3 of the
must accept the rehabilitation plan. total liabilities, provided that the 2/3 includes
more than 50% of secured and 50% of the
Express Investment v. BayanTel unsecured creditors
- Two of the most salient provisions in the - Example: 30B outstanding liabilities of Pogi,
rehabilitation plan are: (1) For the group of Inc. A holds 20B with security – various real
foreign creditors be allowed to take 77% of estate mortgages. B and C hold 2.5 B each.
the common and outstanding stock of The remaining 5B is to various hundred
BayanTel in exchange for payment of debt; creditors. The parties to the negotiated
(2) Abide by the pari passu provision in the rehabilitation plan are Pogi, Inc. (debtor)
rehabilitation plan. For the second and A. Should the court approve it?
agreement, pari passu means equity in - No. The 2/3 does not include the
equality – it is commonly used as a principle unsecured creditors.
in insolvency proceedings whereby all - Assuming the minimum requirements are
creditors shall be treated alike and on equal present, the court shall likewise issue, upon
footing in the distribution of moneys and approval of the petition a commencement
assets of the debtor. Since the debtor is order
already insolvent, the objective of pari - This is the same legal concept as the
passu is to pay all creditors regardless of commencement order in a court
class by distributing those assets pro rata supervised rehabilitation – binding upon
so that secured ad preferred creditors will all even those who objected or even
lose those securities and preferences and those who did not participate
they will stand side by side with ordinary
unsecured creditors – disregards III. Petition for Assistance in Out of
preferences and concurrence of credits. Court/Informal Restructuring Agreement
These foreign banks objective to the second (OCRA)
agreement stating the pari passu violate - Actually a piecemeal judicial intervention
their security rights – because they also - They still are negotiating – they are still in
held in a separate agreement the security the middle of negotiating a rehabilitation
over above 80% of all assets of BayanTel. plan
- SC: Nullified the first agreement because as - The policy of the law is to encourage such
a telecommunication company, it must out of court to settle any dispute among the
abide by the citizenship requirements. For parties
the second, applying the pari passu - Parties to the negotiation are the debtor and
principle, it serves general welfare and the creditor
common good better than allowing these
group of creditors to maintain and enjoy - Forms of Assistance the Law Gives the
their securities to the detriment of other Parties Negotiating under OCRA
creditors of BayanTel.

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 1. The law allows them a so-called “stand - How may the petition for liquidation of a
still” corporation come about? 2 Ways
- This is similar to an injunctive period
- It has the same effect as a 1. When a petition for rehabilitation is
commencement order converted by the court into a liquidation
- During the stand still period, which is petition
120 days, none of the creditors of the
debtor can enforce or perfect a claim of 2. By a separate and distinct petition
lien against the debtor – similar to a originally filed with the court
status quo order because should any - This may either be:
creditor start claiming debt or requiring
payment of enforcing mortgage rights – a. Voluntary
then the other creditors who are still in - It is debtor-initiated
the midst of negotiating with the debtor - It must be through a majority vote of
would be affected – it would render the BOD of the debtor-corporation
useless any potential restructuring and 2/3 of the OCS – secretary
agreement certificate must be attached
- The stand still may be considered - Allegation: When the corporation is
binding upon all creditors for as long as no longer able to discharge its
it is published and it is agreed upon by obligations as they fall due
50% of the secured and 50% of the
unsecured creditors b. Involuntary
- However, if during the stand still period - It is creditor initiated
there is restructuring agreement or - Requirement: Creditor or group of
rehabilitation plan that is undertaken by creditors holding at least 1M or at
the parties, the court can only recognize least 25% of the equivalent of the
it if the OCRA is with the consent of the subscribed capital stock, whichever
following: is higher
a. Debtor - Allegations: (1) No substantial issue
b. Creditors representing 67% (2/3) of of fact or law; (2) That the debtor
secured as well as 75% (3/4) of corporation has been unable to pay
unsecured for as long the totality is its maturing obligation for the last
at least 85% of all creditors – totality 180 days
of the claim that they have against
the debtor-corporation as against the - In liquidation, there is no substantial
totality of the obligation likelihood of rehabilitation of the debtor
- For the ongoing creditors, the parties to - The only recourse here is to extinguish its
the ongoing negotiation must be right to continue the business, close, settle,
approved of the 50% of the unsecured wind up said business by reason of its
and 50% of the secured – there shall be insolvency
a stand still among them – once the - If the petition is sufficient in form and in
stand still agreement is in place, it shall substance, within 5 days a liquidation order
be published and it shall be effective for shall be issued
a period of 120 days – so that they can - The liquidation order shall state that the
complete their negotiation – if during the corporation is dissolved – can no longer
120-day stand still period they come up continue the business
with an OCRA, the OCRA is binding - A liquidator must be appointed – same
upon all of them for as long as it is qualifications as a receiver except that the
consented to by the debtor and creditors primary objective of the liquidation court and
representing 67% of secured as well as the liquidator is to allocate the assets based
75% of unsecured for as long the totality on preferences and concurrence of credits
is at least 85% of all creditors under the NCC and Labor Code – similar to
- Once these minimum requirements are a commencement order, from the moment
met, the publication of the OCRA makes that the liquidation order takes effect (takes
it binding upon all parties concerned, effect from issuance), all current actions or
whether or not they took part on the pending actions against the debtor shall be
OCRA negotiations suspended – the same must now be filed
- Should any of them refuse to abide by with the liquidation court
the OCRA the court may issue a so - Who would be entitled to payment in
called “cram-down” liquidation: Only those creditors who have
- Being forced to accept it proved or undisputed claims – those which
are subject to judgment, no longer open to
IV. Petition for Liquidation controversy, those which were admitted and
- This is court supervised liquidation allowed by the liquidator

- RCBC v. CA
71
 - If a corporation is ordered dissolved and
liquidated, and its assets severely
deficient to pay all creditors, the court
may order a pari passu distribution of
the assets. Pari passu is equity in
equality that all creditors regardless of
class or rank shall be treated alike.
- This is not as if you will disregard the
preference

- Example: Total assets amount to 1B.

Inclusive of the 1B are the mortgage
assets amounting to 100M subject of
other secured assets. Unsecured assets
600M. If there are 12 creditors who hold
liens or securities over these 400M
worth of assets – apply pari passu –
they do not really lose their preference
as far as these assets are concerned
they will still be the first to be paid
except that it will be distributed pro rata
among them. Out of the 12 creditors
who hold 800M total. From the 1B
segregate the secured assets – they are
the ones with preference. Therefore,
distribute that among them
proportionately – from the 800M pay
them 400M from the assets, which they
hold in their favor. The unpaid is 400M –
add this to the unsecured claims.
Among themselves, they are equal but
they enjoy priority from others.

- Alemars v. Ilbiñas
- The preferences were disregard. All
were distributed pro rata.

- Property in trust held by the corporation in

trust for another shall be excluded. These
belong to the beneficiary or the trustor.

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