Corporation Code - de Leon PDF

THE CORPORATION CODE
OF THE
PHILIPPINES
(Batas Pambansa Big. 68.)
Introduction
Different f o r m s of b u s i n e s s organization.
With the development of business enterprise, there has been
a gradual evolution in the form of business organization. Various
influences and considerations enter into the selection of the busi-
ness form for any particular business enterprise.
(1) Individual proprietorship. — The primitive form of business
is, of course, that of the individual proprietor. The individual, as
a rule, operates a small business, usually with the limited capital,
and is responsible alone for its success or failure. registration to the DTI
(2) Partnership. — The partnership is the first step towards

a wider field of operation and a more complex organization.
Often, it is a family affair. The business of the individual grows
too large for his sole management and he takes his son or some
other member of the family into partnership. In other cases, two
men in the same business unite their capital in order to secure ad
equate capital for the conduct of their business. registration to the SEC
Whatever the motive and the circumstances, the partnership
is almost invariably a larger business unit than the proprietor-
ship. It is common in retail trade, in the professions, and to a
limited extent, among manufacturing establishments. As a form
of business organization, it is losing ground.
(3) Joint stock company. — The joint stock company is a form
of business organization at one time frequent in connection with
l
THE CORPORATION CODE OF THE PHILIPPINES
2
larger enterprises, which, so far as the United States is concerned,

is now almost extinct. This form of company was highly popular
in England during the seventeenth and early eighteenth centu-
ries.
The joint stock company can be best considered as a com-
bination of the partnership in that it is formed under a contract
and requires no special sanction from the State. The members are
liable, jointly and severally, for all the company's debts. It resem-
bles the corporation in control and management. The members
do not control the company but choose a board of directors who
were the authorized agents and managers. Thus, while mem-
bership in the company might change thru death or transfer of
membership interest, the company is not dissolved.
(4) Cooperative association. — It represents another form of
business organization which proved more popular in Europe
than in America. This form of organization is not of sufficient
interest or importance to the business world to require consider-
ation in this text. registration to the cooperative development authority
(5) Business trust. — Another form of business organization

less widely known is the business trust, sometimes called
1
the "Massachussets trust." The main feature of this form of
organization is that it is formed by a contract and that the title to
property and the conduct of business is in the hands of trustees
who act for a large group of beneficiaries.
(6) Corporation. — It is now the dominant form of organiza-
tion in modern business. The corporation is a creature of law and
all its rights, powers, and duties are derived from legislation. In
some forms of business of a public or quasi-public nature like
that of public utilities, railroads, insurance companies, and bank-
ing institutions, it is almost the exclusive form of business orga-
nization. In other fields of enterprise, the corporation competes
with other forms of business organization.
'Membership depends entirely upon the ownership of shares rather than on the
agreement of the associates as in the partnership. The death of a "partner" does not dis-
solve the firm. The trustees (managers) have a legal title to its property and act as prin-
cipals for the shareholders who have all the legal status of a cestui que trust (beneficiaries).
It bears such a close resemblance to a corporation that it is or has been frequently con-
sidered as a corporation. (Chester Rohlich, Organizing Corporate and Other Business
Enterprises [1953], p. 155.) But it is not a corporation.
INTRODUCTION 3
(7) Other business forms. — They arise where different enter-

prises, whether organized in the same form or different forms,
unite for a common purpose. The purpose may be temporary in
character, giving us the syndicate, or it may contemplate more
permanent associations, giving us varying forms of combina-
tions, "the trust," the holding company, and the like.
(a) The distinguishing characteristic of the syndicate is that
it is a temporary alliance of individuals, firms, or corporations,
usually for the purpose of financing an enterprise. After
the purpose of organization has been accomplished, the
syndicate is dissolved. It is a form of organization used
largely by bankers for underwriting purposes. Syndicates
reflect the general state of business — when business is at a
standstill, there is obviously little need for them and few are
formed.
(b) Combinations take varying forms. Their primary
purpose is to secure the savings and other advantages which
result from consolidation and large-scale operation. In the
first phase, such combinations were really "trusts" in the
sense above described, except that corporations formed the
constituent elements and beneficiaries of the trust. This form
of association having been in some instances declared to be
illegal by the courts, resort has been had to other methods.
(c) The practice followed in some cases is to organize a
new corporation which buys the individual plants it wishes to
bring into the combination and which thus becomes a single
owner of all the establishments. In the largest combinations,
however, the stock of the constituent companies is all
brought by a unifying company called a holding company. The
constituent companies retain their organization intact. They
are controlled by the central corporation as a stockholder
which has power to elect directors and officers at will and
thus have complete power over the management.
Though trusts as combinations of corporations have long
ceased to have any existence, popular phraseology continues to
use the word "trust" to designate any large aggregation of capi-
tal under unified direction and control, (see C.W. Gestenberg,
4
"Organization and Control," in 3 Modern Business [1919], pp.

3-8.)
In the Philippines, the only types of business organization
provided by law are the partnership (Arts. 1767-1806, Civil
Code.) and the corporation. No prohibition, however, exists for
the other forms. As distinguished from corporations, the other
types of business organization are unincorporated.
Theories as to origin of corporations.

(1) Ethnological theory. — There is authority for the statement
that the concept of collective entity antedates that of the indivi-
dual; that "groups of men united by the reality or fiction of blood
relationship" into families, clans or tribes were recognized units
of primitive society even before the individual was so regarded.
Upon this assumed ethnological predicate has been erected
the theory that the basic principle of corporate organization, the
embodiment of which is now described as a fictitious, intangible
person, created by law and existing only in contemplation there-
of, is in reality but a manifestation of the gregarious instinct in
man, existing inchoate from earliest times and before law itself
became an effective social force. The law, it is argued, has done
no more than to recognize the existence of this phase of human
activity, guide its development, and define its functions and rela-
tions.
In short, instead of the role of creator, assumed by the law for
its own convenience, the relation would be more aptly described
by assigning to the law the part of one who, having discovered a
foundling upon his doorstep, clothes and feeds it and thereafter
treats it as his own. Under this theory, the corporate idea, there-
fore, is the product of no one people and no one country, but, on
the contrary, developed more or less independently, in varying
forms among the several ethnological units.
(2) Imitative theory. — The other theory as to the origin of
corporations is the imitative theory of jural development. This
theory traces the genesis of the modern corporation to the Greece
of Solon (638-559 B.C.), citing the writings of Gaius on Roman
Law and passages from the Pandects of Justinians, as authority
for the assertion that laws fathered by the great Hellenic jurist
INTRODUCTION 5
permitted the formation of private corporations for certain

purposes, upon condition that they do not operate in violation of
the laws of the state.
Blackstone, however, ascribes the birth of the corporation
to the political necessities of Numa Pompilius (715-672 B.C.)
who, upon his accession to power in Rome, desiring to end the
disrupting influence of the private war being waged between the
Sabine and the Roman factions, "thought it a prudent and politic
measure to subdivide these two into smaller ones by instituting
separate societies of every manual trade and profession." (1
Fletcher, Cyclopedia of the Law of Private Corporations, Perm
Ed., p. 3, footnote No. 3, quoting Blackstone, 1 BL Comm. 468,
469.)
Rise a n d d e v e l o p m e n t o f c o r p o r a t i o n s .
(1) In Roman times. — The corporations, like most other
forms of business organization, take their rise in Roman times.
Probably the earliest form is that of the Collegium or college of
priests. This body had many of the rights and privileges which
the law gives to the modem corporation. The Collegium could
hold property; it could sue and be sued; the rights of the corpo-
rate body were separate from those of individual members; it
existed in perpetuity, and it was autonomous.
Besides the Collegium, other Roman organizations such as
municipalities, official societies engaged in state administration,
military groups, and trade and societies took on corporate form.
(2) In Medieval times. — In medieval times, something akin
to the Roman Collegia appeared in the municipal and guild
organizations which were often closely related. Like the non-
stock corporations of the present day, they embodied the idea of
the group working as a whole thru chosen representatives, and
so exhibit one of the chief characteristics of a corporation from
the legal standpoint.
Though the guilds are spoken of as trade and industrial cor-
porations and were intimately concerned with business affairs, it
would be a mistake to assume that they were like the present day
corporations — business units operating in any given trade or
6
industry for the joint profit of those who composed them. If you
can imagine a voluntary association of retailers or manufacturers
in any given line, clothed not only with the desire but full legal
authority to regulate the business practices of its members, you
have a much closer analogy to the real nature of the guild. It can
be understood, too, how, under such circumstances, the guilds
became so autocratic in their proceedings that as time went on,
they became a hindrance rather than a help to progress.
(3) In England. — At a later period, the regulated company,
such as The Plymouth Company, the Hudson Bay Company,
and the East India Company, became a dominant factor in
British trade, particularly in foreign trade. Chartered by the
government and granted special privileges by their charters,
these organizations were forerunners of modern corporations.
In some instances, the trading company was hardly a company
at all as we understand it. It consisted of a grant of the right to
carry on a certain kind of business in a certain place conferred
upon a group of persons. Any member of the group or a number
of member jointly might exercise the right, and only those who
participated in the particular venture would be entitled to its
profits. This was a frequent form of the trading company.
Other companies conducted their operations as a unit and all
the associates shared in the common profit. They became in effect
and often in name joint stock companies and in the early part of
the last century, this was the common form of organization for
larger business units in Great Britain.
(4) In the United States. — In the American colonies before the
Revolution, corporations were mostly educational, religious, or
military. They had not been introduced into business affairs. The
company as it was then known in the mother country smacked
of exclusive privilege and carried the idea of a monopoly
granted by the Crown. It was not until the beginning of the 19th
century, with the growth of manufactures brought about by the
Napoleonic wars and a consequent rise of an investing class,
that the corporation really began to make strides. In 1800 up to
1815, many manufacturing companies and turnpike companies
were incorporated and between the latter year and 1835, a large
number of canal and railway companies. Within this period too,
INTRODUCTION 7
banking institutions spread rapidly over the country so that the

corporate form of organization became thoroughly established.
While New York, in 1811, was the first state to provide for
incorporation under general laws for business purposes, it was
not until about the middle of the last century that the States in
general made provision for it. At the same time, the principle of
limited liability was generally recognized. This principle was not
adopted in England until 1855 when Parliament passed a statute
providing that only such companies which announce that their
stockholders' liability is limited shall escape the common-law
rule that stockholders shall be liable as partners. This is usually
done by the use of the abbreviation "Ltd." after the name of the
company. (C.W. Gesternberg, op. cit., pp. 94-97.)
(5) In the Philippines. — "During the Spanish regime and
prior to the enactment of the former Corporation Law (Act No.
1459.), there existed in the Philippines several forms of commer-
cial companies, associations, and partnerships. The concept of a
corporation not having introduced yet, these named associations
and partnerships were the most common entities by which busi-
ness was generally conducted during that time. Among these
were the sociedad en comandita (limited partnership) and the socie-
dad regular colectiva (general partnership), which were governed
by Articles 116 to 150 and 160 to 174 of the Code of Commerce
which became effective in these Islands on December 1, 1888.
Most known among these associations, however, was the socie-
dad anonima then governed by Article 151 to Article 159 of the
Code of Commerce. There was also a sociedad de cuentas en par-
ticipacion (joint account participation) governed by Articles 239
to 243 of the same Code of Commerce.
Of these Spanish commercial entities, the one which could
remarkably compare to the present day concept of corporate
entity is the sociedad anonima. This is not to say, however, that
the sociedad anonima exactly corresponded to the notion of
corporation in English and American Law — particularly in
matters concerning organization of the enterprise, the distribution
of dividends, and those in which equity intervenes for the benefit
of the stockholders (Harden vs. Benguet Consolidated Mining
Co., 58 Phil. 145 [1933].) but that this, of all the then existing
8
commercial entities, most nearly approached the concept of a

2
corporation.
With the passage of the former Corporation Law on March
1, 1906, and the later enactment of the new Civil Code, all these
societies and associations were abolished with the sole exception
of the sociedad de cuentas en participacion. The sociedad en comandita
and sociedad regular colectiva were abolished when Articles 116 to
150 and 160 to 174 of the Code of Commerce were repealed by
Article 2270 and superseded by the provisions on Partnership
in Title IX, Book IV of the new Civil Code." (C.G. Alvendia, The
Law of Private Corporations in the Philippines, 1967 ed., pp. 1-2.)
In the Philippine Bill of 1902, which was approved on July 1,
1902 after the Philippine Islands passed to the sovereignty of the
United States, the Congress of the United States inserted certain
provisions intended to control the law-making power in the Phil-
ippine Islands in the matter of granting of franchises, privileges
and concessions. These provisions were found in Sections 74
and 75 of the Bill. The provisions of Section 74 were superseded
by Section 28 of the Act of Congress of August 29, 1916, but in
Section 75, there is a provision referring to mining corporations
which then remained the law, as amended. The provision, in its
original form, reads as follows: "x x x it shall be unlawful for any
member of a corporation engaged in agriculture or mining and
for any corporation organized for any purpose except irrigation,
to be in any wise interested in any other corporation engaged in
agriculture or in mining.''
Under the guidance of the Philippine Bill of 1902 and certain
other Acts enacted by the U.S. Congress, including some Ameri-
can state corporation laws, the Philippine Commission, then the
law-making body in the Philippines, subsequently approved on
March 1, 1906, Act No. 1459, the former Corporation Law, pro-
viding for the organization of corporations in the Philippines.
The Act took effect on April 1,1906.
Before the passage of the present Corporation Code of the
Philippines on May 1, 1980, numerous statutes were enact-
'The partnerships and the sociedades anonimas, the business associations then exist-
ing, were created by mere agreements.
INTRODUCTION 9
ed affecting corporations. Among them are laws creating

government corporations, and those governing or relating to
special types of corporations, such as the General Banking Act
3
(R.A. No. 337. ), Rural Banks Act (R.A. No. 7353.), Investment
Company Act (R.A. No. 2629.), Savings and Loans Association
Act (R.A. No. 3779.), Private Development Banks Act (R.A. No.
4093.), Financing Company Act (R.A. No. 5980.), the Investment
Houses Law (Pres. Decree No. 129.), Pawnshop Regulation Act
(Pres. Decree No. 114.), and the Insurance Code of the Philippines.
(Pres. Decree No. 1460.)
(6) Corporations in modern business. — The merits of the cor-
poration so far overshadow its drawbacks that today it is the
representative type of modern business organization. Its growth
within the past half century has been by leaps and bounds. In
some fields particularly in public utilities, insurance, banking,
and manufacturing, it has, practically, exclusive possession.
(a) In the first place, its form is flexible. By means of various
kinds of stocks and bonds and thru the judicious drafting of
charter and by-laws, the control of the corporation can be
scientifically determined, the risk equitably apportioned,
and the income distributed among the owners and creditors.
(b) The corporation assembles huge quantities of capital
gathered from many different quarters and then provides the
means for efficiently administering it. It secures in this way
all the advantages which are a part of large-scale production.
(c) Moreover, it possesses a degree of permanence that
carries on its business beyond the span of any one genera-
tion. It usually outlives the men who make and manage it.
(C.W. Gestemberg, op.cit., p. 14.)
— oOo —
3
Now General Banking Act of 2000. (R.A. No. 8791.)
Title I
GENERAL PROVISIONS
DEFINITIONS AND CLASSIFICATIONS
Section 1. Title of the Code. — This Code shall be known

as "The Corporation Code of the Philippines." (a)*
Historical b a c k g r o u n d of our C o r p o r a t i o n
Code.
(1) Business associations under the Code of Commerce. — Prior
to 1906, the business associations existing were the partner-
ships and the sociedades anonimas which were created by mere
agreements. There was no entity in the Spanish Law exactly cor-
responding to the notion of the corporation in American Law.
Its attention drawn to this fact, the Philippine Commission, the
legislative body of the Philippines during the American regime,
enacted on March 1, 1906, Act No. 1459, a general law authoriz-
ing the creation of corporations in the Philippine Islands.
With the enactment of Act No. 1459, popularly known as the
Corporation Law, which took effect on April 1, 1906, providing
for the organization of corporations in the Philippines,it became
necessary to make certain adjustments in view of the existence of
the Spanish sociedades anonimas previously organized and exist-
ing in the Philippines.
(2) Business associations under the former Corporation Law. —
Accordingly, Section 75 of the Act was inserted under which
sociedades anonimas were made subject to the provisions of the
Corporation Law "so far as such provisions may be applicable"
•Signifies that original provision in Act No. 1459 has been amended.
10
Sec. 1 TITLE I. GENERAL PROVISIONS 11
Definitions and Classifications
and were given the "option to either continue business as such

corporation or to form and organize under and by virtue of the
provisions of this Act." Section 191 of the Act expressly repealed
the pertinent provisions of the Code of Commerce (Sees. 151-
159 thereof.) governing sociedades anonimas with the proviso that
"those which elect to continue their business as such sociedades
anonimas" instead of reforming and organizing "under the
Corporation Law shall continue to be governed by the Code
of Commerce" in relation to their organization and method of
transacting business and to the rights of members thereof as
among themselves." However, "their relations to the public and
public officials shall be governed by the provisions of this Act."
Thus, the old Corporation Law recognized the difference
between sociedades anonimas and corporations. (Phil. Products
Co. vs. Primatera [Phils.], Inc., 15 SCRA301 [1965].)
The evident purpose of the Philippine Commission in
enacting Act No. 1459 was to introduce into the Philippines the
American corporation as the standard commercial entity and
to hasten the day when the sociedad anonimas of the Spanish
Law would become obsolete. This rather elaborate Philippine
legislation is a sort of a codification of American corporate laws.
(Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141
[1933].) It remained practically intact except for some repeals or
amendments until the enactment of Batas Pambansa Big. 68.
(3) Business corporations under the Corporation Code. — The law
governing private corporations in the Philippines is now embod-
1
ied in Batas Pambansa Big. 68, the present Corporation Code
of the Philippines, which took effect on the date of its approval
on May 1,1980. (see Sec. 149.) The new Code supplants Act No.
1459, as amended. It reproduced with amendments many provi-
sions of the old Corporation Law. In its explanatory note, Cabi-
net Bill No. 3 which became Batas Pambansa Big. 68, states:
'A code, in modern times, is a systematic, complete, written collection of laws ar-
ranged logically with index and table of contents and covering fully one or more subject
of law. It is a written compilation of statutory laws of general and permanent impor-
tance, eliminating clerical errors and obsolete provisions, expressly repealing all prior
laws inconsistent with the compilation and occasionally including amendments and new
provisions, (see Webster's 3rd New International Dictionary, 1976 ed., p. 437; see note 2.)
THE CORPORATION CODE OF THE PHILIPPINES Sec. 1
12
"This bill is intended to supplant the present Corporation

Law, Act No. 1459, as amended, and to be hereafter known as
2
the 'Corporation Code of the Philippines.'
The proposed Code seeks to establish a new concept of
business corporations so that they are not merely entities
established for private gain but effective partners of the
National Government in spreading the benefits of capitalism
for the social and economic development of the nation.
Significant changes have been introduced in the proposed
Code in order to update the provisions of our present Corpo-
ration Law. Among the significant changes in this Code is the
grant of ample powers to the Securities and Exchange Com-
mission to enable it to exercise adequate supervision over
the operations and activities of private corporations. The other
innovative provisions constitute definite improvements to
make the proposed Code more responsive to the plans and
policies of the Government."
Section 16 of Article XII (National Economy and Patrimony)
of the Constitution provides:
"The Congress shall not, except by general law, provide
for the formation, organization, or regulation of private cor-
2
(l)The Corporation Code deleted the following sections of the old law: Sees. 8 (fees),
10 (articles of incorporation as prima facie evidence of facts therein stated), 12 (corporate
power of eminent domain), 15 (liability of corporation for holding persons in involuntary
servitude), 29 (time of holding election of directors except term of office), 32 (who may
call meeting for election of directors where no such meeting is held), 48 (posting of no-
tices of call, and delinquency and sale of stock), 53-55 (visitorial powers), 56-61 (forced
sale of franchises), 70 (license of foreign corporations organized before Act No. 1459), 74-
74-1/2 (miscellaneous provisions), 75 (sociedad anonima), 76 (1st sentence: legislative dis-
solution), 79 (delegated power of eminent domain), 80 (application of provisions), 81-102
(railroad corporations), 165-167,170 (provisions on colleges and institutions of learning),
and 161-164 (provisions on corporation sole).
(2) It amended the remaining provisions except Section 2. (now also Sec. 2.) In the
case of Section 35 (now Sec. 63.), the amendment consists merely in the substitution in the
first paragraph of "or clerk" by "or assistant secretary."
(3) It introduced title headings and rearranged accordingly the amended provisions.
(4) It added new provisions many of which were taken from judicial rulings on the
subject including principles in common law jurisdictions, rules and regulations of the
S.E.C., and recognized modem corporate practices.
The Code is divided into 16 titles and is composed of 149 sections.
Sec. 2 TITLE i. GENERAL PROVISIONS 13
porations. Government-owned or -controlled corporations

may be created or established by special charters in the inter-
est of the common good and subject to the test of viability."
The Corporation Code of the Philippines, the new general
law governing private corporations in the Philippines,
3
implements the above provision of the Constitution.
S c o p e o f the C o d e .
The Corporation Code of the Philippines law is an act which:
(1) provides for the incorporation, organization, and regula-
tion of private corporations, both stock and non-stock, including
educational and religious corporations;
(2) defines their powers and provides for their dissolution;
(3) fixes the duties and liabilities of directors or trustees and
other officers thereof;
(4) declares the rights and liabilities of stockholders and
members;
(5) prescribes the conditions under which corporations
including foreign corporations may transact business;
(6) provides penalties for violations of the Code; and
(7) repeals all laws and parts of laws in conflict and inconsis-
tent with the Code.
Sec. 2. Corporation defined. — A corporation is an

artificial being created by operation of law, having the right
of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
(2)*
ABCOL RS PAPEAL IE
Statutory definition of corporation.

Section 2 gives a definition of the "corporation." The above
T h e Corporation Code was enacted under the 1973 Constitution which provides a
similar restriction with respect to private corporations.
'Signifies section number of original provision in Act No. 1459. This is the only pro-
vision that has not been amended by the new Code.
14
statutory definition refers only to private corporations or to cor-

4
porations organized under the Corporation Code.
Judicial definitions of corporation.

A corporation was early defined by the Supreme Court of
the United States as "an artificial being, invisible, intangible, and
existing only in contemplation of law." (Dartmouth College vs.
Woodward, 4 Wheat [U.S.] 518, 4 L. ed. 629.)
Other judicial definitions of a corporation aggregate are:
(1) An artificial intellectual being, the mere creature of the
law, composed generally of natural persons in their natural
capacity, but which may also be composed of persons in their
political capacity of members of other corporations (Bank of
United States vs. Deveaux, 5 Cranch [U.S.] 61, 3 L. ed. 38.);
(2) An artificial being created by law, and composed of
individuals who subsist as a body politic under a special
denomination, with the capacity of perpetual succession, and of
acting, within the scope of its charter, as a natural person (Fietsam
vs. Hay, 122 111. 293,13 N.E. 501.);
(3) A collection of many individuals, united in one body un-
der a special denomination, and vested by the policy of the law
with the capacity of acting in several respects as an individual
(State vs. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279.); and
(4) A legal institution devised to confer upon the individu-
als of which it is composed powers, privileges, and immunities
which they would not otherwise possess, the most important of
which are continuous legal identity and perpetual or indefinite
succession under the corporate name, notwithstanding succes-
sor income tax purposes, "the term corporation" includes partnerships, no mat-
ter how created or organized, joint stock companies, joint accounts (cuentas en partici-
pation), associations or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy opera-
tions pursuant to an operating or consortium agreement under a service contract with the
Government. General professional partnerships are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business. (Sec. 20[b], National Internal Revenue
Code.)
sive changes by death or otherwise in the corporation or mem-

bers of the corporation. (Coyle vs. Mclntire, 7 Houst [Delll 4 30
A 728.)
But though the terminology varies, the elements are usually
the same. (18 Am. Jur. 2d 548-549.)
Attributes of a c o r p o r a t i o n .
An analysis of the definition in Section 2 reveals the follow-
ing attributes of a corporation:
(1) It is an artificial being;
(2) It is created by operation of law;
(3) It has the right of succession; and
(4) It has only the powers, attributes and properties express-
ly authorized by law or incident to its existence.
C o r p o r a t i o n as an artificial personality.
Doctrinally, a corporation is a legal or juridical person with
a personality separate and apart from its individual stockhold-
ers or members and from any other legal entity to which it may
be connected. It is not in fact and in reality a person but the law
treats it as though it were a person by process of fiction. The
stockholders or members who, as natural persons, are merged in
the corporate body, compose the corporation but they are not the
corporation.
As a consequence of this legal concept of a corporation:
(1) Liability for acts or contracts. — The general rule is
that obligations incurred by a corporation, acting through its
authorized agents, are its sole liabilities. Similarly, a corporation
may not, generally, be made to answer for acts or liabilities of its
stockholders (or members) or those of the legal entities to which
it may be connected and vice versa. (Creese vs. Court of Appeals,
93 SCRA 483 [1979]; Palay, Inc. vs. Clave, 124 SCRA 638 [1983];
ARB Construction Co., Inc. vs. Court of Appeals, 332 SCRA 427
[2000]; Tupaz IV vs. Court of Appeals, 475 SCRA 398 [2005].)
(a) A suit against certain stockholders of a corporation
cannot ipso facto be a suit against the unpleaded corporation
16
itself without violating the fundamental principle that a cor-

poration has a legal personality distinct and separate from
its stockholders. The failure to implead the corporations as
defendants and merely annexing a list of such corporations
to the complaint is a violation of their right to due process for
it would in effect be disregarding their separate personality
without a hearing. (Presidential Commission on Good Gov-
ernment vs. Sandiganbayan, 290 SCRA 639 [1998]; Booc vs.
Bantuas, 354 SCRA 279 [2000]; PCGG vs. Sandiganbayan, 365
SCRA 538 [2001].)
(b) A corporate officer is not personally and solidarily
liable with the corporation for the money claims of discharged
or retrenched employees unless he acted with evident malice
5
or bad faith in terminating their employment. (Business
Day vs. National Labor Relations Commission, 221 SCRA 9
[1993]; MAM Realty Development Corp. vs. National Labor
Relations Commission, 244 SCRA 797 [1995]; Asionics Phils.,
Inc. vs. National Labor Relations Commission, 290 SCRA 164
[1998].) The act of the President of a corporation in dismissing
an employee, done as such officer in good faith, cannot result
in his private liability. (Cebu Filveneer Corp. vs. National
Labor Relations Commission, 286 SCRA 556 [1998]; AMA
Computer College vs. Ignacio, 590 SCRA 633 [2009].)
(c) All contracts entered into in its name by its regular
appointed officers and agents are the contracts of the
corporation and not those of the stockholders or members. A
corporation cannot be held liable for the personal indebtedness
of a stockholder even if he should be its president. {Smith &
Co., Inc. vs. Ford, 63 Phil. 786 [1936].) The stockholder's debt
or credit is not the debt or credit of the corporation, nor is
the debt or credit of the latter that of the former. (Good Earth
Emporium, Inc. vs. Court of Appeals, supra.; Mendoza vs.
Banco Real Development Bank, 470 SCRA 86 [2005].)
înce a corporation is an artificial person it must have an officer who can be pre-
sumed to be the employer, being the "person acting in the interest of the employer." In
other words, the corporation, in the technical sense only, is the employer. The manager of
a corporation falls within the meaning of an "employer" as contemplated by the Labor
Code, who may be held solidarily liable for the obligations of the corporation to its dis-
missed employees. (NYK International Knitwear Corporation vs. National Labor Rela-
tions Commission, 397 SCRA 607 [2003].)
(d) For the same reason, the President and manager of

a corporation who entered into and signed a contract in his
official capacity, cannot be made liable thereunder in his in-
dividual capacity in the absence of stipulation to that effect.
(Rustan Pulp Paper Mills, Inc. vs. Intermediate Appellate
Court, 214 SCRA 665 [1992]; see Consolidated Bank and Trust
Corporation vs. Court of Appeals, 356 SCRA 671 [2001].) Cor-
porate officers cannot be held personally liable for the conse-
quences of their acts, for as long as they are for and on behalf
of the corporation, within the scope of their authority and in
good faith. (Solidbank Corporation vs. Mindanao Ferroalloy
Corporation, 463 SCRA 409 [2005]; Price v. Innodata Phils.,
Inc., 567 SCRA 269 [2008]; Dy-Dumalasa vs. Fernandez, 593
SCRA 656 [2009].)
(e) A corporation is vested by law with a personality
separate and distinct from its stockholders, including its
officers as well as from that of any other legal entity to
which it may be related. Thus, a company manager acting
in good faith within the scope of his authority in terminating
the services of certain employees cannot be held liable for
damages. (Sunio vs. National Labor Relations Commission,
127 SCRA 390 [1984]; Pabalan vs. National Labor Relations
Commission, 184 SCRA 495 [1990]; Malayang Samahan ng
Manggagawa vs. Ramos, 326 SCRA 428 [2000].) In cases
of illegal dismissal, corporate directors and officers are
solidarily liable with the corporation, where terminations of
employment are done with malice or bad faith. The fictional
veil of separate corporate entity may be pierced. (Acesite
Corporation vs. National Labor Relations Commission, 449
SCRA 360 [2004]; Perron Corporation vs. National Labor
Relations Commission, 505 SCRA 596 [2006].)
(f) The property of the corporation is not the property
of the stockholders or members and may not be sold by the
stockholders or members without express authorization of
its board of directors or trustees. (Woodchild Holdings, Inc.
vs. Roxas Election & Construction Company, 436 SCRA 235
[2004]; Sec. 23.) Their interest, if any, is indirect, contingent
and inchoate. (Asia's Emerging Dragon Corp. vs. Dept. of
Transportation and Communications, 579 SCRA 44 [2008].)
18
The separate personality of a corporation is a shield against

personal liability of its officers.
(2) Liability when exceptional circumstances warrant. — Personal
or solidary liability may be incurred by corporate agents acting
in behalf of the corporation only when exceptional circumstances
warrant. Thus, it may validly attach when the director/trustee or
officer acted maliciously or in bad faith, or with gross negligence
(see Sees. 31, 65.), or agreed to hold himself personally and soli-
darily liable with the corporation, or made, by specific provision
of law, personally liable for corporate action, or it is proven that
the officer has used the fiction of separate corporate personality
to defraud a third party or for wrongful ends.
There is no law that prohibits a corporate officer from bind-
ing himself personally to answer for a corporate debt. (Toh vs.
Solid Bank Corporation, 408 SCRA 544 [2003].)
(3) Right to bring actions. — It may incur obligations and
bring civil and criminal actions (Art. 46, Civil Code.) in its own
name in the same manner as a natural person, although it may
not perform certain actions that can be done only by natural per-
sons, such as the practice of law or medicine.
(a) A corporation has no personality to bring an action for
and in behalf of its stockholders or members for the purpose
of recovering property which belongs to said stockholders or
members in their personal capacities. (Sulo ng Bayan, Inc. vs.
G. Araneta, Inc., 72 SCRA 347 [1976].)
(b) Since it is well-settled that the legality of a seizure
can be contested only by the party whose rights had been
violated, the right to object to the seizure of papers and
documents of the corporation belongs to the corporation as a
separate entity and not to its stockholders as such. (Stonehill
vs. Diokno, 20 SCRA 383 [1967].)
(c) Whatever mental anguish, wounded feelings, etc.
(see Art. 2217, Civil Code.) the stockholders and officers of a
corporation may suffer cannot be considered to be equally felt
by the corporation, for it is elementary that a corporation is a
personality separate and distinct from that of its stockholders
and officers. Besmirched reputation cannot cause mental
anguish to a corporation unlike in the case of a natural

person, for a corporation has no reputation in the sense that
an individual has, and besides, it is inherently impossible
for a corporation to suffer mental anguish, (see The Insular
Life Assurance Co., Ltd. vs. Court of Appeals, 428 SCRA 79
[2004]; Rural Bank of Makati, Inc. vs. Municipality of Makati,
433 SCRA 362 [2004].)
(d) A juridical person is not entitled to moral damages
because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish, or moral shock. Mental
suffering can be experienced only by one having a nervous
system. However, a corporation may have a good reputation
which, if debased or besmirched resulting in social humi-
liation, may be a ground for recovery of moral damages and
attorney's fees. (Mambulao Lumber Co. vs. Phil. National
Bank, 22 SCRA 359 [1968]; People vs. Manero, Jr., 218 SCRA
85 [1993]; LBC Express, Inc. vs. Court of Appeals, 236 SCRA
602 [1994]; Acme Shoe, Rubber & Plastic Corp. vs. Court of
Appeals, 260 SCRA 714 [1996]; Solid Homes vs. Court of
Appeals, 275 SCRA 267 [1997].)
Moral damages include besmirched reputation which a
corporation may possibly suffer. (Art. 2217, Civil Code.) A
corporation whose credit reputation is not exactly something
to be considered sound and wholesome cannot be entitled to
a big amount of moral damages. (Asset Privatization Trust
vs. Court of Appeals, 300 SCRA 579 [1998].) While courts
may allow the grant of moral damages to corporations, there
must be proof of the existence of the factual basis of the
damage and its causal relation to the defendant's acts. This
is so because moral damages through incapable of pecuniary
estimation, are in the category of an award designed to
compensate the claimant for "actual injury" suffered and not
to impose a penalty on the wrongdoer. (Crystal vs. Bank of
the Phil. Islands, 572 SCRA 697 [2008].)
(e) For purposes of venue, the place of business of the
suing corporation is considered as its residence. The residence
of the president is not the residence of the corporation because
20
a corporation has a personality separate and distinct from

that of its officers and stockholders. (Sy vs. Tyson Enterprises,
Inc., 119 SCRA 367 [1982].)
(4) Right to acquire and possess property. — It may acquire and
possess property of all kinds. (Art. 46, Civil Code.) Property
conveyed to or acquired by the corporation is in law the property
of the corporation itself as a distinct legal entity (Art. 44[3], ibid.)
and not that of the stockholders or members as such and vice-
versa. Where real properties included in the inventory of the
estate of a decedent are in the possession of and are registered
in the name of the corporation, in the absence of any cogency
to shed the veil of corporate fiction (infra.), the presumption of
conclusiveness of the titles in favor of the corporation should
stand undisturbed. (Lim vs. Court of Appeals, 323 SCRA 102
[2000].)
(a) Stockholders or members are in no legal sense the
owners of corporate property (or credits) which is owned by
the corporation as a distinct person. (Traders Royal Bank vs.
Court of Appeals, 177 SCRA 788 [1989]; Magsaysay-Labrador
vs. Court of Appeals, 180 SCRA 266 [1989]; Good Earth
Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991].),
and may not be sold by them without express authorization
from the corporation's board of directors or trustees, (see Sec.
24.)
(b) While a share of stock represents a proportionate
interest in the property of the corporation, it does not vest
the owner thereof (even assuming that it / h e is the control-
ling shareholder) with any legal right or title to any of the
properties of the corporation owned by the latter as a distinct
juridical person. (Saw vs. Court of Appeals, 195 SCRA 740
[1991]; Silverio, Jr. vs. Filipino Business Consultants, Inc., 466
SCRA 584 [2005].) The ownership of that property is in the
corporation and not in the holders of shares of stocks. (Fisher
vs. Trinidad, 43 Phil. 973 [1922]; Mobilia Products, Inc. vs.
Umezaua, 452 SCRA 736 [2005].)
(c) The interest of shareholders in corporate property is
purely inchoate and, therefore, does not entitle them to inter-
vene in a litigation involving corporate property. (Ibid.)
(d) The mere fact that one is president of a corporation does

not render the property he owns or possesses the property of
the corporation, since the president, as an individual, and the
corporation, are separate entities. The power to "pierce the
veil of corporate entity" belongs to the court and a sheriff
usurps this power when he enforces a writ of execution, not
against the property of the corporation, the judgment debtor,
but against that of its president on the ground that they are
one and the same. (Cruz vs. Dalisay, 152 SCRA 482 [1987]; see
Rosario vs. Bascar, Jr., 206 SCRA 678 [1992]; Booc vs. Bantuas,
354 SCRA 279 [2001].)
(e) A tax exemption granted to a corporation cannot be
extended to include the dividends paid by such corporation
to its stockholders. (Manila Gas Corporation vs. Collector of
Internal Revenue, 71 Phil. 513 [1941].)
(f) The agreement of co-shareholders to mutually grant
the right of first refusal to each other, by itself does not
constitute a violation of the constitutional provision limiting
land ownership to Filipinos and Filipino corporations. If the
foreign shareholders of a landholding corporation exceeds
40%, it is not the foreign stockholders' ownership which is
adversely affected but the capacity of the corporation to own
land, i.e., the corporation becomes disqualified to own land.
The corporation and its shareholders being separate juridical
entities, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to
the corporation. (J.G. Summit Holdings, Inc. vs. Court of
Appeals, 450 SCRA 169 [2005].)
(4) Acquisition by court ofjurisdiction. — Where the appearance
in court of the president of a corporation was in the capacity
of counsel of another corporation and not as representative
or counsel of the first corporation, such appearance cannot be
construed as a voluntary submission of said corporation to
the court's jurisdiction. The personality of the president of a
corporation is distinct from that of the corporation itself. In the
absence of summons on the corporation, a judgment against it is
void for lack of jurisdiction and lack of due process. (Trimica, Inc.
vs. Polaris Marketing Corp., 60 SCRA 321 [1974].)
22
The participation by the general manager of a corporation

in an action involving the corporation cannot equate to partici-
pation by another corporation in the same proceedings, merely
because the general manager of the first corporation is also the
chairman of the board of the second corporation. (Padilla vs.
Court of Appeals, 370 SCRA 208 [2001].)
(5) Changes in individual membership. — Likewise, as an
entity distinct from its members or stockholders, a corporation
remains unchanged and unaffected in its identity by changes
in its individual membership. The corporation, as an artificial
person, continues to exist as such "in like manner that the River
Thames is still the same river though the parts which compose it
are changing every instant." (1 Fletcher, pp. 18-19.)
The doctrine of "corporate entity" fills a useful purpose in
business life, and whether the purpose be to gain an advantage
under the law of the state of incorporation or to avoid, or to
comply with the demands of creditors or to serve the creator's
personal or undisclosed convenience so long as that purpose is
the equivalent of business activity or is followed by the carrying
on of business of the corporation, the corporation remains a
separate entity. But the doctrine is one of substance and validity
(9-A Words and Phrases 385 [1960 ed.].), and courts will, in proper
cases, disregarding forms and looking to substance, ignore the
legal fiction of corporate entity, (infra.)
Corporation as a p e r s o n , resident,
or citizen.
A corporation is regarded as a "person," "resident," or "citi-
zen" within the purview of those terms as used in constitutional
or statutory provisions, whenever this becomes necessary in
order to give full effect to the purpose or spirit of the Constitution
or statute. The tendency is to regard corporations, as far as their
inherent nature will permit, as on the same footing as ordinary
individuals. Consequently, whether corporations are included
within a statute depends largely upon its object. (1 Fletcher, Sec.
53.)
(1) As a person. — Persons are divided into natural and arti-

ficial persons. The term "person" prima facie includes both and,
therefore, as a general rule, includes corporations (18 Am. Jur. 2d

568.) but in a figurative sense only.
(a) A corporation has been held to be included by the
word "person" in statutes concerning attachment, taxation,
usury, insolvency and bankruptcy, limitations, prior notice to
bring suit, right to appeal, allowing action of trespass, pro-
hibiting the banking business, conferring a cause of action for
wrongful death, allowing suit against usurpation of a public
office or franchise, allowing a petition to quiet title, and offer-
ing public lands for appropriation "by all persons" who enter
upon them.
(b) The word "person" has also been deemed to apply to
a corporation as used in statutes providing for suit because
of the wrongful exercise of a franchise by a "person," punish-
ing "any person" employing a minor child, and providing
for a civil action against "any person" unlawfully holding a
franchise. Where the word "person" is used in a definition of
libel, corporations are included. (1 Fletcher, pp. 70-71.)
(c) A corporation is a "person" within the meaning of
Section 1, Article III (Bill of Rights) of the Constitution that
"no person shall be deprived of life, liberty or property with-
out due process of law" and that it is entitled to the equal
protection of the laws in like manner as other persons in the
same situation, provided the corporation is "within the juris-
diction" of the State the protection of which is demanded.
(d) Insofar as liberty is concerned, however, a private
corporation is held not to be a person within the language
of the constitutional provision; the liberty guaranteed is the
liberty of natural, not artificial, persons. Neither is it a person
within the protection of Section 17, Article III of the Consti-
tution against self-mcrimination. (18 Am. Jur. 2d 570-571.)
Thus, while an individual may lawfully refuse to answer in-
criminating questions unless protected by an immunity sta-
tute, it does not follow that a corporation, vested with special
privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges. (Bataan Shipyard
& Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)
24
(e) But a corporation comes within the protection of

Section 3 of the same Article insuring the right of the people
to be secured in their persons against unreasonable seizures
and searches. A corporation is, after all, but an association
of individuals under an assumed name and with a distinct
legal entity. In organizing itself as a collective body, it waives
no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only
be proceeded against by due process of law, and is protected
against unlawful discrimination. (Bache & Co. [Phils.], Inc.
vs. Ruiz, 37 SCRA 823 [1971].)
(2) As a resident or nonresident. — Since a corporation is a per-
son in the law, it is also to be deemed a resident or a nonresident
of a particular state or country within the meaning of a statute,
if it is within the purpose and intent of the statute, as in the case
of statutes defining the jurisdiction of the courts, or relating to
venue, taxation, etc. (18 C.J.S. 388.)
(a) A corporation formed in one State may be, for certain
purposes, domiciled or a resident in another State in which
it has its offices and transacts business, notwithstanding the
fiction of the law that a corporation dwells only in the State
of its creation and cannot migrate therefrom. (18 Am. Jur. 2d
694.) Thus, in a case, it was held that a foreign corporation
licensed to do business in the Philippines (see Sec. 123.) is not
a nonresident within the meaning of Section 424 (par. 2.) of
the Code of Civil Procedure (now Sec. l[f], Rule 57, Rules of
Court.) which allows the attachment of the property of the
defendant in an action where such defendant "resides out
of the Philippines, or on whom summons may be served by
publication" as to make its property subject to attachment
under said section. (Claude Neon Lights, Inc. vs. Phil. Adver-
tising Corp. and Santamaria, 57 Phil. 607 [1932].)
ownership of land, if foreign
corporation, not allowed.
(b) For taxation purposes, a foreign corporation may
be either a resident or nonresident, the former referring to
a "foreign corporation engaged in trade or business within
the Philippines," and the latter, to a "foreign corporation not
engaged in trade or business in the Philippines and not hav-
ing any office or place of business therein." (see Sec. 20[h, i],
National Internal Revenue Code.)
(3) As a citizen. — "Citizenship" is the status of a citizen with
its rights and privileges and corresponding duties and obliga-
tions. The term "citizen," as it is commonly understood, implies
membership in a political body and, therefore, does not ordinar-
ily include a corporation, unless the general purpose and import
of the statute in which the term is found seem to require it. (18
Am. Jur. 2d 569.)
(a) There is, however, no absolute and inflexible rule that
a corporation cannot be deemed a citizen for certain purposes.
(Ibid.) A corporation is a citizen within the meaning of a
statute conferring rights, defining the jurisdiction of courts,
or otherwise relating to citizens/if the purpose and intent of
the statute renders it applicable, and for such purpose it is,
as a general rule, a citizen of the State or country by or under
the laws of which it was created and exists without regard to
the citizenship of its stockholders or members. (18 C.J.S. 388.)
(b) "Most often when the term 'citizenship' is used in
connection with corporations, it is not used in the sense under
Political Law, but more in the sense of indicating the country
under whose laws the corporations were organized. In this
respect, 'citizen,' as used in connection with corporations,
is synonymous with domicile or residence. In fact, our
Corporation Law requires that the principal office of the
corporation must be located in the Philippines.
However, when the term 'citizenship' is used synony-
mously with residence or domicile, said use is for jurisdic-
tional purposes only, for a corporation is subject to the juris-
diction of the country under whose laws it was organized.
Therefore, the citizenship of a corporation is not looked into
unless citizenship is an important factor in the determination
or the enjoyment of a privilege, exercise of a right or even the
legality of a contract entered into by the corporation." (C.G.
Alvendia, op. cit., pp. 10-11.)
26
Corporation as a collection
of individuals.
(1) True in actual fact. — Although the doctrine that a corpo-
ration is an artificial entity and a person in law, distinct from the
members who compose it, will always be recognized and given
effect, both at law and in equity, in cases which are within its
reason and when there is no controlling reason against it, it is
clear that a corporation is in fact a collection of individuals. In the
case of modern private corporations, it is really the individuals
composing it who own its property and carry on the corporate
business, through the corporation and its officers and agents, for
their own profit or benefit.
The idea of the corporation as a legal entity or person apart
from its members is a mere fiction of the law introduced for con-
venience in conducting the business in this privileged way. (14
C.J.S. 59.) Courts, as a general rule, disregard this theory of sepa-
rate entity under certain circumstances, as when the privilege is
misused by the corporation. (infra.)
(2) Recognized for many purposes. — This conception of a
corporation as a collection of individuals owning the corporate
property and doing business through the corporation and in the
corporate name has always been recognized for many purposes as
between the stockholders or members themselves and as between
them and the corporation, in order to enforce and protect their
rights. Thus, the stockholders of a corporation are entitled to the
profits in the way of dividends and may enforce their rights in
this respect. They are entitled to insist that the corporation shall
keep within the powers and purposes for which it was formed,
and may sue in equity, if necessary, to compel it to do so.
It is not only in cases like these that the law recognizes that
a corporation is in reality a collection of individuals and the cor-
porate entity a mere fiction, but the fiction also may be and often
is disregarded even for the purpose of giving effect to the acts of
the stockholders or members individually as the acts of the cor-
poration. (18 C.J.S. 379-380.)
Doctrine of piercing t h e veil of corporate

entity.
The doctrine that a corporation is a legal entity or a person
in law, distinct from the persons composing it or any other
corporation to which it may be related, is merely a legal fiction for
purposes of convenience and to subserve the ends of justice. This
fiction, therefore, cannot be extended to a point beyond its reason
and policy, (see 13 Am. Jur. 2d 559.) Peculiar situations or valid
grounds may exist to warrant the disregard of its independent
being and the piercing of the corporate veil. (China Banking
Corp. vs. Dyne-Semi Electronics Corp., 494 SCRA 493 [2006].)
(1) When legal fiction to be disregarded. — Being a mere crea-
ture of the law, a corporation may be allowed to exist solely for
lawful purposes but where the fiction of corporate entity is being
used as a cloak or cover for fraud or illegality, or "to defeat pub-
lic convenience, justify wrong, protect fraud, or defend crime"
(Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160
[1961].), or for ends subversive of the policy and purpose behind
its creation, especially where the corporation is a closed family
corporation (Emiliano Cano Enterprises, Inc. vs. Court of Indus-
trial Relations, 13 SCRA 290 [1965].), on equitable considerations,
this fiction will be disregarded and the individuals composing it
or two corporations will be treated as identical.
(a) In other words, the law will not recognize separate
corporate existence with reference to the particular transac-
tion involved. This non-recognition is sometimes referred to
as the doctrine of piercing the veil of corporate entity or disregard-
ing the fiction of corporate entity (see Claparols vs. Court of In-
dustrial Relations, 65 SCRA 613 [1965]; Republic vs. Razon, 20
SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156
[1968]; Liddel & Co., Inc. vs. Collector, 2 SCRA 632 [1961].) or
the doctrine of corporate alter ego. (9-A Words and Phrases 377.)
The rationale is to remove the barrier between the corpora-
tion from the persons comprising it to thwart the fraudulent
and illegal schemes of those who use the corporate personal-
ity as a shield for undertaking certain proscribed activities.
(Velarde vs. Lopez, Inc., 419 SCRA 422 [2003]; Francisco Mo-
tors vs. Court of Appeals, 309 SCRA 72 [1999].)
NNU TA6BILARAN
CCLLasE LffHtARY
28
(b) The doctrine requires the court to see through the pro-
tective shroud which exempts its stockholders from liabilities
that ordinarily they could be subject to, or distinguishes one
corporation from a seemingly separate one, were it not for
the existing corporate fiction. (Lim vs. Court of Appeals, 323
SCRA 102 [2000]; Marubeni Corporation vs. Lirag, 362 SCRA
620 [2001].)
(c) Moreover, for the corporate legal entity to be dis-
regarded, the wrongdoing must be clearly and convincingly
established; it cannot be presumed, (see Del Rosario vs.
National Labor Relations Commission, 187 SCRA 777
[1990]; Matuguina Integrated Wood Products, Inc. vs. Court
of Appeals, 263 SCRA 490 [1996]; Complex Electronics
Employees Assoc. vs. National Labor Relations Commission,
310 SCRA 403 [1999]; Solidbank Corporation vs. Mindanao
Ferroalloy Corporation, 464 SCRA 409 [2005]; China
Banking Corp. vs. Dyne-Sem Electronics Corp., supra.) The
presumption is that the stockholders or officers and the
corporation are distinct entities.
(d) The burden of proving otherwise is on the party seek-
ing to have the court pierce the veil. (Ramoso vs. Court of
Appeals, 347 SCRA 463 [2000]; Land Bank of the Phils, vs.
(2) Effect as to liability.—In any of the cases where the separate
corporate identity is disregarded, the corporation will be treated
merely as an association of persons and the stockholders or
members will be considered as the corporation, that is, liability
will attach personally or directly to the officers and stockholders
(Umali vs. Court of Appeals, 189 SCRA 529 [1990].) or, where
there are two corporations, they will be merged into one, the one
being merely regarded as the instrumentality, agency, conduit or
adjunct of the other. (Koppel [Phils.], Inc. vs. Yatco, 77 Phil. 496
[1946]; Cease vs. Court of Appeals, 93 SCRA 483 [1979].)
(a) In other words, the transactions or acts of the real
parties shall be dealt with as though no corporation had
been formed. (Republic vs. Sandiganbayan, 266 SCRA 515
[1997].) The corporate character, however, is not necessarily
abrogated. The corporation continues for other legitimate
objectives. (Pamplona Plantation Co., Inc. vs. Tingkil,
450 SCRA 421 [2005].) But in the absence of proof that the
corporation's separate and distinct personality was used
as a protective shield for any wrongdoing, the general rule
on corporate liability, not the exception, should be applied.
(Soriano vs. Court of Appeals, 174 SCRA 195 [1989]; Bayer-
Roxas vs. Court of Appeals, 211 SCRA 470 [1992].) Any
piercing of the corporate veil has to be done with caution.
(Reynoso IV vs. Court of Appeals, 345 SCRA 335 [2005];
Jardine Davies, Inc. vs. JRB Realty, Inc., 463 SCRA 555 [2005].)
(b) And even if fraud is established, this fact alone is not
sufficient to justify the piercing of the corporate fiction where
it is not sought to hold the officers and stockholders person-
ally liable for corporate debt. Thus, where the petitioners are
merely seeking the declaration of the nullity of a foreclosure
sale, piercing the corporate veil is not the proper remedy, for
such relief may be obtained without having to disregard the
legal corporate entity, and this is true even if grounds exist to
pierce it. (Umali vs. Court of Appeals, supra.)
(3) Application of doctrine in three areas. — The doctrine
applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle
for the evasion of an existing obligation; 2) fraud cases or when
the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely
a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer can-
not be made personally liable for corporate liabilities. (Pantianco
Employees Assoc. vs. National Labor Relations Commission, 581
SCRA 598 [2009].)
Instances w h e r e doctrine applied.

The question of piercing the corporate veil is essentially a
matter of proof.
In the instances given below and in furtherance of the ends
of justice to protect the rights of third persons, the courts have
30
pierced the veil of corporate entity, considering the corporation

and the individual or individuals owning all its stock and assets
as identical, or, in the case of two corporations, merging them
into one.
(1) Where a corporation functions for the benefit of a single person
who has complete control over the funds and the said person is
the sole owner thereof. In such case, the corporate entity is but
an alter ego or the business conduit of the owner and the property
of the corporation may be considered the property of the control-
ling individual and may be seized in an action against the latter.
(Marvel Bldg. Corp. vs. David, 94 Phil. 376 [1954]; Collector vs.
University of Visayas, 12 SCRA 193 [1964]; National Marketing
Corporation vs. Associated Finance Company, Inc., 19 SCRA 962
[1967]; Collector vs. Norton & Harrison Co., 11 SCRA 714 [1964];
see Valderrama vs. National Labor Relations Commission, 256
SCRA 466 [1996].)
(2) Similarly, where the transaction was entered into by the
President who was also the treasurer and general manager of a
close family corporation where the incorporators and directors belong
to one single family, the corporation is liable for the contract and
it cannot claim that it was entered into without the knowledge
and consent of the other members of the board. (M.R. Dulay
Enterprises, Inc. vs. Court of Appeals, 225 SCRA 678 [1993];
Camelcraft Corp. vs. National Labor Relations Commission, 186
SCRA 393 [1990].)
(a) The mere fact, however, that a corporation owns 50%
of the capital stock of another corporation (Manila Hotel
Corp. vs. National Labor Relations Commission, 343 SCRA
1 [2000].), or the mere majority ownership of the stocks of
a corporation is not per se a cause for piercing the corporate
veils (Republic vs. Sandiganbayan, 346 SCRA 760 [2000].),
nor the mere fact that a corporation owns all of the stocks
of another corporation, taken alone, sufficient to justify their
being treated as one entity. (MR Holdings, Ltd. vs. Bojar, 380
SCRA 617 [2002]; Borromeo vs. Court of Appeals, 550 SCRA
269 [2008].)
(b) Indeed, the mere fact that all or nearly all of the capital
stock of one or more corporations are owned and controlled
by the same or single stockholder or by another corporation,

or have the same president is not in itself sufficient ground
for disregarding separate corporate entities. There are three
(3) elements, all of which must be present for the ground (i.e.,
being a mere instrumentality or alter ego) to stand, (infra.) It
is lawful to obtain a corporation charter, even with a single
substantial stockholder, to engage in a specific activity, and
such activity may co-exist with other private activities of the
stockholder. If the corporation is a substantial one, conduct-
ed lawfully and without fraud on another, its separate activ-
ity or personality is to be respected, (see Liddel & Co., Inc. vs.
Coll. of Internal Revenue, 25 SCRA 632 [1961]; Palay, Inc. vs.
Clave, 124 SCRA 638 [1983]; Sunio vs. National Labor Rela-
tions Commission, 127 SCRA 390 [1984]; EPG Construction
Company, Inc. vs. Court of Appeals, 210 SCRA 230 [1992];
Traders Royal Bank vs. Court of Appeals, 269 SCRA 15 [1997];
Asionics Phils., Inc. vs. National Labor Relations Commis-
sion, 290 SCRA 164 [1998]; Complex Electronics Employees
Assoc. vs. National Labor Relations Commission, 310 SCRA
403 [1999]; Francisco vs. Mejia, 362 SCRA 738 [2001]; Secosa
vs. Heirs of E.S. Francisco, 433 SCRA 273 [2004]; Construc-
tion & Development Corp. of the Phils, vs. Cuenca, 466 SCRA
714 [2005]; Union Bank of the Phils, vs. Ong, 506 SCRA 256
[2006].)
(c) The liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective
business. The courts may, in the exercise of judicial discre-
tion, step in to prevent the abuses of separate entity privilege
and pierce the veil of corporate entity. (Philippine National
Bank vs. Retratto Group, Inc., 362 SCRA 216 [2001].)
(d) Likewise, substantial identity of the incorporators of
two corporations does not necessarily imply fraud. For the
separate juridical personality of a corporation to be disre-
garded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. (Del Rosario vs. National
Labor Relations Commission, 187 SCRA 777 [1990]; Develop-
ment Bank of the Phils, vs. Court of Appeals, 363 SCRA 307
[2001]; Construction & Development Corp. of the Phils, vs.
Cuenca, supra.) But the shield of corporate fiction will be dis-
32
regarded if it is shown that it is designed as a means to per-

petuate an illegal act or as a vehicle for the evasion of existing
obligations. (Pabalan vs. National Labor Relations Commis-
sion, 184 SCRA 495 [1970].)
(3) Where the corporation is a mere instrumentality of the indi-
vidual stockholders, the latter must individually answer for corpo-
rate obligations. To hold the stockholders liable for the corporate
obligations is not really to ignore the corporation's separate en-
tity but merely to apply the established principle that such entity
cannot be invoked or used for purposes that could not have been
intended by the law that created that separate personality. (Mc-
Connel vs. Court of Appeals, 1 SCRA 722 [1961]; also Ramirez
Telephone Corp. vs. Bank of America, 29 SCRA 191 [1962] ASJ
Corporation vs. Evangelista, 545 SCRA 300 [2008]; Phil. Com-
mercial & International Bank vs. Custodio, 545 SCRA 367 [2008].)
(4) Where a corporation is merely instrumentality, an adjunct,
business conduit or alter ego of another corporation, the separate per-
sonality of the corporation may be disregarded. (Tan Boon Bee &
Co. vs. Jarencio, 163 SCRA 153 [1988]; Heirs of Ramon Durano,
Sr. vs. Sps. Uy, 344 SCRA 238 [2000]; Lipat vs. Pacific Banking
Corporation, 402 SCRA 339 [2003]; Comm. of Internal Revenue
vs. Menguito, 565 SCRA 461 [2008].) The corporate mask may be
removed and the two seemingly separate entities treated as one
entity only. Thus:
(a) Where sales of cars are made by corporation X to
corporation Y which are later sold to the public at a higher
price and it appears that both corporations are owned and
controlled by the same taxpayer and corporation Y was the
medium created by corporation X to reduce the price and the
sales tax liability of corporation X on original sales of cars
under the National Internal Revenue Code (see Sec. 195,
NIRC), there is sufficient justification to disregard the sepa-
rate corporate identity of one from the other.
(b) Where three (3) security agencies are managed
through X Corporation with all their employees drawing
their salaries and wages from the latter entity, the agencies
have common and interlocking incorporators and officers,
and their employees have a single Mutual Benefit System
and followed a single system of compulsory retirement, with

security guards of one (1) agency being able easily to trans-
fer to another and then back again by simply filling-up a pro
forma slip called "Request for Transfer," the veil of corporate
fiction of the three (3) agencies should be lifted for the pur-
pose of allowing their employees to form a single labor union
without need of filing three (3) separate petitions for certifi-
cation election. (Phil. Scout Veterans Security & Investigation
Agency vs. Torres, 224 SCRA 682 [1993]; see Guatson Interna-
tional Travel & Tours, Inc. vs. National Labor Relations Com-
mission, 230 SCRA 815 [1994]; see Enriquez Security Services,
Inc. vs. Cabotaje, 496 SCRA 169 [2006].)
(c) Where it appears that (three) business enterprises
engaged in the same line of business (construction of public
roads and bridges) and using the same equipment including
manpower services are owned, conducted and controlled
by the same parties, both law and equity will, when
necessary to protect the rights of third persons (illegally
dismissed employees), disregard the legal fiction that the
(three) corporations are distinct entities and treat them as
identical and extend the liability of the corporations to the
responsible officers acting in the interest of the corporations
for the monetary awards due from the corporations for illegal
dismissal. (Tomas Lao Construction vs. National Labor
(d) Where two corporations have identical incorpora-
tors and directors and are headed by the same official, only
one office and one payroll, and are under one management,
a suit by the employees against one corporation should be
deemed as a suit against the other. The attempt to make the
two corporations appear as two separate entities, insofar as
the workers are concerned, should be viewed as a devious but
obvious means to defeat the ends of the law. The corporate
fiction must yield to truth and justice.
(e) The mere fact, however, that: 1) the businesses of
two or more corporations are interrelated (Diatagon Labor
Federation vs. Ople, 101 SCRA 534 [1980]; China Banking
Corporation vs. Dyne-Sem Electronics Corp., 494 SCRA
34
493 [2006].), or 2) a common director sits on the boards of

directors of all three (3) companies organized as separate
corporate entities (Sesbreno vs. Court of Appeals, 222 SCRA
466 [1993].), and 3) even where some of the employees of one
corporation are the same persons manning and providing for
auxiliary services to the units of the other corporation and
that the physical plants, offices and facilities are situated in
the same compound (Indo-Phil. Textile Mill Workers Union
vs. Calica, 205 SCRA 697 [1992].), or 4) two corporations
are admittedly sister companies and sharing personnel
and resources (Padilla vs. Court of Appeals, 370 SCRA 308
[2001].), or 5) the mere existence of interlocking directors
(see Sec. 33.), corporate officers and shareholders (Velarde
vs. Lopez, Inc., 419 SCRA 422 [2003]; Jardine Davies, Inc. vs.
JRB Realty, Inc., 463 SCRA 555 [2005]; "G" Holdings, Inc. vs.
National Mines and Allied Workers Union, Oct. 16, 2009.),
absent a sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third
persons of their rights, or perpetrate wrong, is not enough
justification for disregarding their separate personalities.
(f) Similarly, not because two foreign corporations came
from the same country and closely worked together on cer-
tain projects (i.e., first corporation as the supplier and con-
tractor of the project hired and subcontracted the project
to the second corporation), would the conclusion arise that
one was the conduit of the other, thus justifying the piercing
of the corporate veil. (Marubeni Corporation vs. Lirag, 362
SCRA 620 [2001]; Martinez vs. Court of Appeals, 438 SCRA
130 [2004].)
(g) The fiction of distinct corporate entities cannot be
disregarded where there is not the least indication that the
second corporation is a dummy or serves as a client of the
first corporate entity. (Yu vs. National Labor Relations Com-
mission, 245 SCRA 134 [1995].) The legal corporate entity is
disregarded only if it is sought to hold the officers and stock-
holders directly liable for a corporate debt or obligation.
(Umali vs. Court of Appeals, 189 SCRA 529 [1990].)
(h) Where a subsidiary company is created by a paren t company
merely as an agency of the latter especially if the stockholders or
officers of the two corporations are substantially the same or

their system of operations unified (Annotation: 1 A.R.L. 612;
also Yutivo Sons Hardware Company vs. Court of Appeals, 1
SCRA 160 [1961].); or where parent company assumes complete
control of the operation of its subsidiary's business, the separate
corporate existence of the subsidiary must be disregarded.
(Phil. Veterans Investment Development Corp. vs. Court
of Appeals, 181 SCRA 669 [1990]; see Reynoso vs. Court of
Appeals, 345 SCRA 335 [2000].)
(i) In workmen's compensation cases, where there is
admission that two corporations are sister companies, operating
under one single management, and housed in same building,
piercing the veil may be considered. (Telephone Engineering
& Service Co., Inc. vs. Workmen's Compensation Commission,
104 SCRA 354 [1981]; see Sibagat Timber Corp. vs. Garcia,
216 SCRA 470 [1992].) Where the corporate fiction was used
as a means to perpetrate a social injustice or as a vehicle to
evade obligations, it would be discarded and the two (2)
corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct
of the other. (Azcor Manufacturing, Inc. vs. National Labor
Relations Commission, 303 SCRA 26 [1999]; Pabalan vs.
National Labor Relations Commission, 184 SCRA 495 [1990].)
(j) But even when there is dominance over the affairs of
the subsidiary, the doctrine applies only when such fiction is
used as a subterfuge to commit injustice and circumvent the
law. (Union Bank of the Philippines vs. Court of Appeals, 290
SCRA 198 [1998]; Reynoso IV vs. Court of Appeals, supra.) In
the absence of circumstances justifying disregard of the cor-
porate entity, a holding or parent corporation has a separate
corporate existence and is to be treated as a separate entity,
distinct from its subsidiary; hence, any claim or suit against
the latter does not bind the former, and vice versa. (Villarde
vs. Lopez, 419 SCRA 422 [2004]; Jardine Davies, Inc. vs. JRB
Realty, Inc., 463 SCRA 555 [2005].)
(k) The subsidiary corporations, too, are ordinarily
independent of each other. (18 Am. Jur. 2d 564-565.) Thus,
as earlier noted, the mere fact that a corporation owns all the
36
stocks of another corporation, taken alone is not sufficient

to justify their being treated as one entity. If used to perform
legitimate functions a subsidiary's separate existence shall be
respected and the liability of the parent corporation as well
as the subsidiary will be confined to those arising in their
respective business. (MR Holdings, Ltd. vs. Bajar, 380 SCRA
617 [2002].)
(5) Where it appears that a corporation is merely a business con-
duit of its president who entered into a contract of administration
and supervision for the painting of the factory of another cor-
poration, and to evade liability, the first corporation claims that
the President acted as an agent of the second corporation. It is
a legal truism that when the veil of corporate fiction is made as
a shield to perpetrate a fraud and /or confuse legitimate issues
(here, the facts relating to employer-employee relationship), the
same should be pierced. (R.F. Sugay, Inc. vs. Reyes, 12 SCRA 700
[1964]; Jacinto vs. Court of Appeals, 198 SCRA 211 [1991].) Where
the petitioner, as president of the corporation, was ordered by
the court to pay the amounts adjudged, the fact that the obli-
gation was incurred in the name of the corporation and he had
ceased to be corporate president, would not free him from per-
sonal liability where the court has pierced the veil of corporate
fiction, because in such case, for all legal intents and purposes,
he and the corporation are one and the same. (Arcilla vs. Court
of Appeals, 215 SCRA 120 [1992].)
(6) Where a domestic or Philippine corporation is controlled
by aliens, its nationality shall be deemed that of the controlling
stockholders thereof during wartime, for reasons of national
security. (Filipinas Cia de Seguros vs. Christen Huenefeld
& Co., Inc., 89 Phil. 54 [1951]; Davis Winship vs. Philippine
Trust Company, 90 Phil. 744 [1952].) This is the control test in
determining the nationality of a private corporation.
(7) Where a corporation is dissolved and its assets are transferred to
another corporation to avoid a financial liability of the first corporation
to its employees, both firms being owned and controlled by the
same persons with the result that the second corporation should
be considered a continuation and successor of the first entity.
(Claparols vs. Court of Industrial Relations, supra; see National
Federation of Labor Union [NAFLU] vs. Ople, 143 SCRA 124
[1986]; see A.C. Ransom Labor Union CCLU vs. National

Labor Relations Commission, 150 SCRA 498 [1987]; Cagayan
Valley Enterprises, Inc. vs. Court of Appeals, 179 SCRA 218
[1989]; see Pepsi-Cola Bottling Co. vs. National Labor Relations
Commission, 210 SCRA 277 [1992]; Avon Dale Garments, Inc.
vs. National Labor Relations Commission, 246 SCRA 733 [1995];
Phil. Bank of Communications vs. Court of Appeals, 195 SCRA
567 [1985]; Concepts Builders, Inc. vs. National Labor Relations
Commission, supra; Heirs of P.V. Pajarillo vs. Court of Appeals,
537 SCRA 96 [2007].) Where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter
is not, by that fact alone, liable for the debts and liabilities of
the transfer. "In sale of assets, the purchaser is only interested
in the raw assets of the selling corporation perhaps to be used
to establish his own business enterprise or as an addition to his
on-going business enterprise." (Allied Banking Corp. vs. Dyne-
Semi Electronics Corp., 494 SCRA 493 [2006], citing Villanueva,
Philippine Corporate Law, 1998 Ed., p. 444.) Sale of assets is
legally distinct from merger, (see Sec. 80.)
(8) Where all the stockholders or members of a corporation, acting
as individuals instead of formal corporate action, enter into an illegal
act which, if done by formal corporate action, would be a ground
for forfeiting the charter of the corporation and dissolving it, the
fiction of corporate entity apart from the members will be disre-
garded, and such action of the stockholders or members will be
treated as the action of the corporation in a proceeding by the
State to forfeit the charter. (18 C.J.S. 381-382.)
(9) Where a corporation is formed by a seller of a certificate of pub-
lic convenience for the purpose of evading his individual contract that
he "shall not for a period of ten (10) years from the date of this
sale, apply for any TPU service identical or competing with the
buyer." (see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968].)
(10) Where petitioner started his employment with X Cor-
poration and was later transferred to Y Corporation, a sister
company, and the separation benefits given to the petitioner by
reason of his (illegal) dismissal corresponded only to the period
in which he was in the employ of Y Corporation, ignoring the
period when he was still in the employ of X Corporation. The
38
doctrine of corporate entity was envisaged for convenience and

to serve justice. Therefore, it should not be used as a subterfuge
to commit injustice and circumvent labor laws. (Indino vs. National
Labor Relations Commission, 178 SCRA 168 [1989].)
(11) Where a corporation is organized by an insolvent debtor
to defraud his creditors and he transfers his properties to it in
furtherance of such fraudulent purpose. (Kelluz vs. Douglas
County Back, 58 Conn. 43; see Palacio vs. Fely Transp. Co., 5
SCRA 1011 [1962].) But the mere amendment of the articles of
incorporation changing the name of the corporation is not an
indication to evade payment by one corporation of its obligations
to another. (Remo, Jr. vs. Intermediate Appellate Court, 172 SCRA
405 [1989].)
(12) Where a corporation is organized as a device in order to
evade an outstanding legal or equitable obligation, the courts, even
without reference to actual fraud, refuse to apply the doctrine of
corporate entity.
(a) In a California case, a lessee corporation with intent to
evade the payment of royalties under a lease, conveyed title
to a second corporation. Thereafter, the second corporation
conveyed to a third, with the same end in view. It appeared
that all of the three corporations had been formed by the same
persons, had their offices together in the same room and had
practically the same officers. The court did not find that there
was any actual fraud. Without regard to this, however, it
was held that the transfers were constructively fraudulent as
against the lessor and that all three corporations were jointly
liable for the payment of the royalties.
(b) In an old English case, a German vessel owned by a
German corporation, while sailing from Hamburg to London,
was sold by telegraph on August 1 to an English corporation,
controlled by the German corporation. On August 4, war
was declared between Germany and England. Next day,
the vessel arrived in England and was seized as a prize. The
English corporation claimed that the transfer to it made the
seizure illegal. The Prize Court held the seizure proper and
that the claim was invalid. It would clearly seem that in such
case the transfer was within the purview of the rule which
holds a transfer not valid when made in contemplation of
war and to avoid seizure as a prize. In such circumstances,
it was held that the application of the doctrine of distinct
corporate entity was uncalled for. (1 Fletcher, pp. 62-63.)
(13) Where the evidence on record shows that at the time
respondent pawned her jewelry, the pawnshop was owned by
petitioner (Sicam) himself and all the pawnshop receipts issued
to respondent shall all bear the words "Agenda de R.C. Sicam,
notwithstanding that the pawnshop was incorporated creating
the impression to respondent and the public as well that the
pawnshop was owned solely by petitioner and not by a corporation."
(Sicam vs. Jorge, 529 SCRA 443 [2007].)
(14) The corporate fiction has also been disregarded in
other cases as where it was used (a) to shield a violation of the
prohibition against forum shopping (First Phil. International
Bank vs. Court of Appeals, 252 SCRA 259 [1996].), or (b) to avoid
a judgment credit (Sibagat Timber Corp. vs. Garcia, 216 SCRA
470 [1992].), (c) to avoid the payment of higher taxes (Koppel
Phils., Inc. vs. Yatco, 77 Phil. 496 [1946]), or (d) to avoid inclusion
of corporate assets as part of the estate of a decedent (Cease vs.
Court of Appeals, 93 SCRA 483 [1979].), or (e) to promote unfair
objectives (Villanueva vs. Adre, 172 SCRA 876 [1989].), or (f)
to violate a provision under the Labor Code (see Arts. 288, 289
thereof.) declared to be penal in nature (Reahs Corporation vs.
National Labor Relations Commission, 271 SCRA 247 [1997].);
or (g) to confuse legitimate issues. (Jacinto vs. Court of Appeals,
198 SCRA 211 [1991].); or (h) to avoid a judgment in favor of an
employee where the employer corporation is no longer existing
and is unable to satisfy the judgment, the employee's recourse
being against the officers of the corporation who were, in effect,
acting in behalf of the corporation. (Restaurante Las Conchas vs.
Llego, 314 SCRA 24 [1999].)
When the veil of corporate fiction is pierced, the corporate
character is not necessarily abrogated. The corporation continues
for legitimate objectives. However, it is pierced in order to
remedy injustice. (Reynoso IV vs. Court of Appeals, 345 SCRA
335 [2000].)
40
Application of the "instrumentality" or

"alter e g o " rule.
The question of whether a corporation is a mere instrumen-
tality or alter ego, a mere sheet or paper corporation, a sham or a
subterfuge, is purely one of fact. (Phoenix Safety, Inc. vs. James,
28 Ariz. 514, 237; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.)
While there exists no definite test of general application
in determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have
been identified that will justify the application of the treatment
of the doctrine of the piercing of the corporate veil. The case
of Garrett vs. Southern Railway Co. (173 F Supp. 915, E.D. Term.
[1959].), cited in Philippine National Bank vs. Ritratto Group, Inc.
(362 SCRA 216 [2001].), involved a suit against the Southern
Railway Co. Plaintiff was employed by Lenoir Works and alleged
that he sustained injuries while working for Lenoir. He, however,
filed a suit against Southern Railway Company on the ground
that Southern had acquired the entire capital stock of Lenoir Car
Works, hence, the latter corporation but a mere instrumentality of
the former. The Tennessee Supreme Court stated that as a general
rule the stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable
for the torts of the subsidiary unless the separate existence of the
subsidiary is a mere sham, or unless the control of the subsidiary
is such that it is but an instrumentality or adjunct of the dominant
corporation.
Said Court then outlined the circumstances which may be
useful in the determination of whether the subsidiary is but a
mere instrumentality of the parent-corporation:
"The circumstances rendering the subsidiary an instru-
mentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common
circumstances which are important and which, if present in
the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital
stock of the subsidiary.
(b) The parent and subsidiary corporations have com-

mon directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except
with the parent corporation or no assets except those con-
veyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the state-
ments of its officers, the subsidiary is described as a depart-
ment or division of the parent corporation, or its business or
financial responsibility is referred to as the parent corpora-
tion's own.
(i) The parent corporation uses the property of the sub-
sidiary as its own.
(j) The directors or executives of the subsidiary do not
act independently in the interest of the subsidiary but take
their orders from the parent-corporation.
(k) The formal legal requirements of the subsidiary are
not observed.
The Tennessee Supreme Court ruled:
"In the case at bar only two of the eleven listed indicia
occur, namely, the ownership of most of the capital stock of
Lenoir by Southern, and possibly subscription to the capital
stock of Lenoir... The complaint must be dismissed."
In Philippine National Bank, the contract questioned was one
entered into between respondent and PNB-IFL, not PNB. In their
complaint, respondents admit that petitioner PNB was a mere
attorney-in-fact for the PNB-IFL with full power and authority
to, inter alia, foreclose on the properties mortgaged to secure their
loan obligations with PNB-IFL. In other words, petitioner was an
agent with limited authority and specific duties under a special
power of attorney incorporated in the real estate mortgage. It
42
was not privy to the loan contracts entered into by respondents

and PNB-IFL.
Our Supreme Court has laid the test in determining the ap-
plicability of the doctrine of piercing the corporate veil or corpo-
rate fiction if based on the "instrumentality" or "alter ego" rule.
In applying this rule, the courts are concerned with reality and
not with form, with how the corporation operated and the indi-
vidual defendant's relationship to that operation. The absence
of any of the three (3) elements below prevents, under said rule,
"piercing the corporate veil":
(1) Control, not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and business
in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separate mind, will, or
existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, violation of a statutory or other positive
duty, or dishonest and unjust act in contravention of plaintiff's
legal rights; and
(3) The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of. (Concept Builders,
Inc. vs. National Labor Relations Commission, 257 SCRA 149
[1996]; Lim vs. Court of Appeals, 323 SCRA 102 [2000]; Manila
Hotel Corp. vs. National Labor Relations Commission, 343 SCRA
1 [2000]; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.; see Ramoso
vs. Court of Appeals/ 347 SCRA 463 [2000]; Lipat vs. Pacific
Banking Corporation, 402 SCRA 399 [2005]; R & E Transport, Inc.
6
In Reynoso IV vs. Court of Appeals, 345 SCRA 335 (2000), infra., the Supreme Court
(First Division) pierced the vei] of corporate entity, holding General Credit Corpora-
tion (GCC), formerly Commercial Credit Corporation (CCC), liable for the obligations
of CCC-QC basing its ruling (which reversed the decision of the Court of Appeals) "on
the records." The issue was whether or not the judgment in favor of petitioner against
CCC-QC may be executed against GCC which was not a formal party in the case. The
ruling directly conflicts with the above cited Ramoso decision of the Supreme Court [Sec-
ond Division] affirming that of the Court of Appeals and that of the Securities and Ex-
change Commission that "the mere control on the part of GCC, one of the respondents,
through CCC Equity over the operations and business policies of the franchise companies
does not necessarily warrant piercing the corporate fiction without proof of fraud, x x x
Whether the existence of the corporation should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual
stockholders is insufficient."
vs. Latag, 422 SCRA 698 [2004]; Martinez vs. Court of Appeals,
438 SCRA 132 [2004]; Child Learning Center, Inc. vs. Tagorio, 476
SCRA 236 [2005]; Nisce vs. Equitable PCI Bank, Inc., 516 SCRA
231 [2007]; Hi-Cement Corp. vs. Bank of Asia and America, 534
SCRA 269 [2007]; Yamamoto vs. Nishiro Leather Industry, Inc.,
551 SCRA 447 [2008].) and other cases. With respect to the second
element, the fraud or wrongful or dishonest and unjust act must
be clearly and convincingly established.
In Philippine National Bank, the Supreme Court concluded:
"Aside from the fact that PNB-IFL is a wholly owned
subsidiary of petitioner PNB, there is no showing of the
indicative factors that the former corporation is a mere
instrumentality of the latter are present. Neither is there a
demonstration that any of the evils sought to be prevented by
the doctrine of piercing the corporate veil exists. Inescapably,
therefore, the doctrine of piercing the corporate veil based on
the alter ego or instrumentality doctrine finds no application
in the case at bar.
In any case, the parent-subsidiary relationship between
PNB and PNB-IFL is not the significant legal relationship in-
volved in this case since the petitioner was not sued because
it is the parent company of PNB-IFL. Rather, the petitioner
was sued because it acted as an attorney-in-fact of PNB-IFL
in initiating the foreclosure proceedings. A suit against an
agent cannot without compelling reasons be considered a
suit against the principal."
Corporation as a creation of law

or by operation of law.
It is well-established that no corporation can exist without
the consent or grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty. (18 Am. Jur.
2d 573.)
(1) Special authority or grant by the State required. — A corpo-
ration is created by law or by operation of law. This means that
corporations cannot come into existence by mere agreement of
the parties as in the case of business partnerships. They require
special authority or grant from the State. This power is exercised
44
by the State through the legislature, either by a special incorpo-

ration law or charter which directly creates the corporation or
by means of a general corporation law under which individuals
desiring to be and act as a corporation may incorporate.
In the Philippines, the general law which governs the creation
7
of private corporations is Batas Pambansa Big. 68. Private
corporations owned or controlled by the government can only
8
be created by special laws (Constitution of the Philippines, Art.
XII, Sec. 16.), often referred to as "charters."
An exception to the rule that legislative grant or authority is
necessary for the creation of a corporation obtains with respect to
corporations by prescription, (infra.)
(2) Compliance with conditions prescribed by law required. —
Corporations can only come into existence in the manner pre-
scribed by law. General laws authorizing the formation of cor-
porations are, in effect, general offers to any persons who may
bring themselves within their provisions; and if condition prec-
edents are prescribed in the statute, or certain acts are required to
be done, they are terms of the offer and must be complied with
substantially before legal corporate existence can be acquired.
(18 C.J.S. 468.)
A corporation as a creature of the State is presumed to be
incorporated for the benefit of the public. It receives certain spe-
cial privileges and franchises and holds them subject to the laws
of the State and the limitations of its charter. There is a reserved
right in the State to inquire how these privileges had been em-
ployed, and whether they had been abused. (Bataan Shipyard &
Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)
Right of succession of a c o r p o r a t i o n .
A corporation has a capacity of continuous existence irre-
spective of the death, withdrawal, insolvency, or incapacity of
'Article 45 of the Civil Code provides, among other things, that: "Private corpora-
tions are regulated by laws of general application on the subject. Partnerships and as-
sociations for private interest or purpose are governed by the provisions of this Code
concerning partnerships."
"Before the adoption of the 1935 Constitution, private corporations, whether gov-
ernment-owned or -controlled or not, could be created either by general or special law.
the individual stockholders or members and regardless of the

transfer of their interest or shares of stock. Thus, it is frequently
said that one of the attributes of a corporation aggregate is im-
mortality or perpetual succession. But the corporation is by no
means immortal.
(1) Under the Corporation Code, the life of the corporation is
limited to the period of time stated in the articles of incorporation
not exceeding 50 years from the date of incorporation unless
9
sooner dissolved or unless said period is extended (Sec
11.)
(2) Corporations created by special laws have the right of
succession for the term provided in the laws creating them.
P o w e r s , attributes, a n d properties
of a c o r p o r a t i o n .
10
A corporation, being purely a creation of law, may exer-
11
cise only such powers as are granted by the law of its creation.
An express grant, however, is not necessary. All powers which
may be implied from those expressly provided by law and those
which are incidental or essential to the corporation's existence
may also be exercised, (see Sees. 36[11], 45.)
The test to be applied is whether the act of the corporation is in
direct and immediate furtherance of its business, fairly inciden-
tal to the express powers and reasonably necessary to their exer-
'"Since ownership in the corporation may be transferred by a sale of its stock with-
out the assent of the other owners (see Sec. 63.), the corporation is highly permanent
— in some cases almost perpetual. Since the Dartmouth College case, 1918, in which the
United States Supreme Court held that a charter granted by a State to a corporation was
a binding contract and could not be altered by the State without the consent of the corpo-
ration (see Sec. 16.), state laws limit the life of the corporation usually to twenty or fifty
years, (see Sec. 11.) New charters, however, are obtained without much difficulty." (C.L.
James, Principles of Economics, 9th ed., p. 46; Barnes & Noble College Outline Series.)
10
Strictly speaking, this is true only with respect to corporations created by special
acts of the legislature. Those organized under the Corporation Code, a general law, are
really the result of the contract of the parties. The State merely gives its approval to their
agreement.
"The powers that may be exercised by a corporation are not entirely dependent
upon the State. The purpose or purposes of the corporation as stated in its articles of in-
corporation determine to a large extent the powers it may exercise, (see Sees. 10, 36[11].)
Subject only to certain restrictions, the incorporators, stockholders, or members are en-
tirely free to decide what the purpose or purposes of the corporation shall be. (see Sees.
14[2], 15[2nd].)
46
rise. If so, the corporation has the power to do it; otherwise, not.
(6 Fletcher, pp. 198-199; Montelibano vs. Bacolod-Murcia Milling
Co., Inc., 5 SCRA 36 [1962].)
(1) Thus, a corporation incorporated as a railroad corpora-
tion has the incidental power to build railroads because such
power is necessary for the accomplishment of the purpose for
which the corporation is created.
(2) Similarly, a corporation expressly authorized to engage
in agriculture has implied authority to buy agricultural lands
because such authority is reasonably appropriate to carry out its
express authority.
(3) Likewise, a corporation engaged in the manufacture of
cement could operate and maintain an electric plant for the pur-
pose exclusively of supplying electricity to its cement factory
and to its employees living within its factory compound where it
appears that the operation of such plant is necessarily connected
with the business of the manufacture of cement. (Teresa Electric
and Power Co., Inc. vs. Public Service Commission, 21 SCRA 252
[1967].)
(4) But a corporation organized for the purpose of supplying
electricity to the public has no power to buy and sell agricultural
lands because it is not within the power expressly or impliedly
authorized by law or incidental to its existence, (see Sees. 36 and
45.)
(5) Neither may a corporation authorized under its articles
of incorporation to operate and otherwise deal in automobiles
and automobile accessories and to engage in the transportation
of persons by water, engage in the business of land transportation
(e.g., operation of a taxicab service) because such would have no
necessary connection with the corporation's legitimate business.
(Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCRA 809 [1969].)
(6) Investment by a transportation company in an insurance
corporation with transportation operators as stockholders,
designed to reduce insurance costs, may be interpreted as an
act which is reasonably requisite and necessary to carry out the
business of land transportation, for the reason that insurance
costs form part of the legitimate expenses of a transportation
operator. (SEC Opinion, June 13,1961.)
(7) Also, a corporation which is engaged, among others, in

the manufacture of rubber shoes, slippers, sandals, and other
allied products may be permitted to buy worn-out or used shoes
and slippers to be reprocessed or reclaimed into raw materials
which are to be used in the manufacture of its products, and to
manufacture rubber cement, it appearing that the main ingredient
in the manufacture of the same is rubber and rubber cement is a
rubber product. (SEC Opinion, Dec. 15,1967.)
(8) But a corporation engaged primarily in fishing, and to
pursue this, it is empowered by its articles of incorporation "to
operate cold storage plants x x x as may be necessary for the car-
rying on of the said primary objective of the corporation" cannot
operate a cold storage plant or an ice plant as a public service
operator since it can operate such plant only insofar as it may
serve its primary purpose. (SEC Opinion, Feb. 17,1969.)
(9) The power to create or establish branch offices is generally
provided for in the articles of incorporation or in the by-laws.
In the absence, however, of such a provision, every corporation
formed under the law has the implied or incidental power to
establish branch offices in the Philippines or elsewhere as the
needs and exigencies of the business of the corporation may
require. Thus, the board of directors of a corporation may, even
in the absence of a provision in its articles of incorporation or
by-laws, establish branch offices if it is necessary or convenient
for the proper accomplishment of the purpose for which the
corporation has been created. (SEC Opinion, March 2,1970.)
(10) The Land Bank of the Philippines, being a commercial
bank clothed with authority to exercise all the general powers
mentioned in the Corporation Code and the General Banking Act,
as provided in its charter, among which is the power to write off
loans and advances, has been held to have also the lesser power
to charge off or condone interests and penalties. (Land Bank of
the Phils, vs. Commission on Audit, 190 SCRA 154 [1990].)
Distinctions between a partnership

a n d a corporation.
The following are the distinctions:
(1) Manner of creation. — A partnership is created by mere
48
agreement of the parties, while a corporation is created by law or

by operation of law (Sec. 2.);
(2) Number of incorporators. — A partnership may be orga-
nized by only two persons, while a corporation (except a corpo-
ration sole) requires at least five incorporators (Sec. 10.);
(3) Commencement of juridical personality. — A partnership
commences to acquire juridical personality from the moment of
the execution of the contract of partnership, while a corporation
begins to have corporate existence and juridical personality only
from the date of the issuance of the certificate of incorporation by
the Securities and Exchange Commission under its official seal
(Sec. 19.);
(4) Powers. — A partnership may exercise any power author-
ized by the partners provided it is not contrary to law, morals,
good customs, public order, or public policy (Art. 1306, Civil
Code.), while a corporation can exercise only the powers expressly
granted by law or implied from those granted or incident to its
existence (Sec. 2.);
(5) Management. — In a partnership, when the management
is not agreed upon, every partner is an agent of the partnership,
while in a corporation, the power to do business is vested in the
board of directors or trustees (Sec. 23.);
(6) Effect of mismanagement. — In a partnership, a partner as
such can sue a co-partner who mismanages, while in a corpora-
tion, the suit against a member of the board of directors or trust-
ees who mismanages must be in the name of the corporation;
(7) Right of succession. — A partnership has no right of
succession, while a corporation has such right (Sec. 2.);
(8) Extent of liability to third persons. — In a partnership, the
partners (except limited partners) are liable personally and sub-
sidiarily (sometimes solidarily) for partnership debts to third
persons, while in a corporation, the stockholders are liable only
to the extent of their investment as represented by the shares
subscribed by them (see Sees. 66, 67.);
(9) Transferability of interest. — In a partnership, a partner
cannot transfer his interest in the partnership so as to make the
transferee a partner without the consent of all the other exist-

ing partners because the partnership is based on the principle of
delectus personarum, while in a stock corporation, a stockholder
has the right to transfer his shares without the prior consent of
the other stockholders because a corporation is not based on this
principle (see Sec. 63.);
(10) Term of existence. — A partnership may be established
for any period of time stipulated by the partners, while a corpo-
ration may not be formed for a term in excess of 50 years extend-
ible to not more than 50 years in any one instance (Sec. 11.);
(11) Firm name. — A limited partnership is required by the
law to add the word "Ltd." to its name, while a corporation may
adopt any firm name provided it is not identical or deceptively
similar to any registered firm name or contrary to existing law
(see Sec. 18.);
(12) Dissolution. — A partnership may be dissolved at any
time by the will of any or all of the partners, while a corporation
can only be dissolved with the consent of the State, (see Sees. 117-
122.)
(13) Laws which govern. — A partnership is governed by the
Civil Code, while a corporation is governed by the Corporation
Code.
Similarities b e t w e e n a partnership
a n d a corporation.
The similarities are as follows:
(1) Like a partnership, a corporation has a juridical personal-
ity separate and distinct from that of the individuals composing
it;
(2) Like a partnership, a corporation can act only through
agents;
(3) Like a partnership, a corporation (except a corporation
sole) is an organization composed of an aggregate of individuals;
(4) Like a partnership, a (stock) corporation distributes its
profits to those who contribute capital to the business (although
an industrial partner also shares in partnership profits);
50
(5) Like a partnership, a corporation can be organized only

where there is a law authorizing its organization. To organize a
corporation or a partnership that could claim juridical personal-
ity of its own and transact business as such is not a matter of
absolute right but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose (Ang Pue
& Co. vs. Sec. of Commerce and Industry, 5 SCRA 645 [1962].);
and
12
(6) A partnership, no matter how created or organized,
is taxable as a corporation, subject to income tax. (Sec. 24[a],
National Internal Revenue Code.)
Corporation as a partner.
(1) General rule. — According to the prevailing view, corpo-
rations cannot ordinarily enter into partnership" with other cor-
porations or with individuals. The reasons are as follows:
(a) A corporation can only act through its duly authorized
officers and agents and is not bound by the acts of anyone
else, while in a partnership, each member binds the firm
when acting within the scope of the partnership business. In
entering into a partnership, the identity of the corporation
is lost or merged with that of another and the direction of
its affairs is placed in other hands than those provided by
the law of its creation (SEC Opinion, Jan. 26, 1961, citing 6
Fletcher, pp. 325-326.);
(b) The limitation is based on grounds of public policy,
since in a partnership the corporation would be bound by the
acts of persons who are not its duly appointed and authorized
agents and officers, which would be entirely inconsistent
with the policy of the law that the corporation shall manage
its own affairs separately and exclusively (13 Am. Jur. 830.)
through the directors (or trustees) or officers chosen by the
stockholders (or members); and
"Except general professional partnerships or "partnerships formed for the sole purpose
of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business." (Sec. 20[b], NIRC.)
13
A corporation may be a "partner" under the Uniform Partnership Act. (see Sees.
V
2, 6 thereof.)
(c) Furthermore, such an arrangement would permit the

corporate assets to be subjected to risks and liabilities not
contemplated by the stockholders at the time of making their
investment. (19 Am. Jur. 2d 505.)
(2) Exceptions. — The rule, however, is not absolute.
(a) Though a corporation has no power to enter into a
14
partnership, it may, however, enter into a joint venture with
another where the nature of that venture is in line with the
business authorized by their charters, (see Sec. 36[7].) Thus,
a corporation may be represented by another person, natural
or juridical, in a suit in court, where there is nothing in the
record to indicate that this venture in which the former is
represented by the latter as "its managing partner" is not in
line with the corporate business of either of them. (J.M. Tua-
zon & Co., Inc. vs. Bolanos, 95 Phil. 106 [1954].)
A joint venture need not be registered with the Securi-
ties and Exchange Commission provided it does not result
in the formation of a new corporation or partnership, and
provided further that existing laws governing joint ventures
and implementing rules and regulations are complied with.
(SEC Opinions, March 18,1993 and No. 04-42, Sept. 28,2004.)
(b) A joint venture partnership between a foreign cor-
poration licensed to do business in the Philippines and a
domestic corporation (or an individual) "for the purpose
of undertaking certain phases of the construction of the
Philippine Sintering Plant in Misamis Oriental, an economic
development project registered as a pioneer enterprise
with the Board of Investments," with the manager of the
"It is an association of two or more persons to carry out a single business enterprise
for profit. It relates to a single transaction rather than to a continuous business (L. Teller,
Law of Partnership, 1949 ed., p. 20.) and is, thus, temporary. A joint venture falls within
the meaning of the term "particular partnership" as defined in Article 1783 of the Civil
Code, which provides: "A particular partnership has for its object determinate things,
their use or fruits, or a specific undertaking, or the exercise of a profession or vocation," and
thus is governed by the Civil Code provisions on partnership.
But while a corporation cannot enter into a partnership contract, it may engage, ac-
cording to the Supreme Court, in a joint venture with others although "a joint venture is a
form of partnership and should thus be governed by the law of partnerships." (Aurbach
vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989].)
52
partnership to be appointed jointly by the partners from

among those nominated by the foreign corporation, may be
allowed provided that the agreement expressly stipulates
that both parties shall be jointly and severally liable for all the
obligations of the partners in the Philippines. (SEC Opinion,
Dec. 2,1974.)
(c) Where the partnership agreement provides that
the two partners will manage the partnership so that the
management of the corporate interest is not surrendered,
the general rule will not apply. The Securities and Exchange
Commission, to meet the objection to allowing a corporation
to enter into a contract of partnership, may impose proper
safeguards and conditions, particularly where the other
partner is an entity organized under a foreign law. (SEC
Opinions, Dec. 22,1966 and Aug. 31,1971.)
(d) While as a rule, only natural persons are considered
legally capable of entering into a contract of partnership,
there have been cases where the Securities and Exchange
Commission has allowed corporations to enter into partner-
ships with other corporations or with individuals, provided:
1) All the corporation partners must be managing
partners and consequently, the articles of partnership
must stipulate that all the partners are and shall be soli-
darily liable (see Arts. 1207,1208, Civil Code.) for all the
15
obligations of the partnership;
2) The statute or their respective charters or articles
of incorporation must expressly allow the corporations
"Under this condition, a partnership of corporations should be organized as a

general partnership wherein all the partners are general partners. In such a situation, all
corporate partners shall take part in the management and are solidarily liable with the
other partners, (see Arts. 1776,1816,1822-1824, Civil Code.) It may be true that a limited
partner is given the option "to take part in the management" of a limited partnership (see
Arts. 1843,1848, Ibid.), but if a corporation is allowed to be a limited partner only, there is
no assurance that it shall participate in the management of the partnership as required,
and this may create a situation wherein the corporations may not be bound by the acts
of the partnership in the event that, as a limited partner, it opts not to participate in the
management, thereby defeating the policy requiring that all partners of a partnership
composed of corporations shall be jointly and severally liable for all the obligations of the
partnership. (SEC Opinion, Feb. 23,1994.)
to enter into partnership agreement and the nature of the

business venture to be undertaken by the partnership is
in line with the business authorized by law or the articles
of incorporation of the constituent corporations; and
3) Where one of the partners is a foreign corpora-
tion, it must obtain a license to transact business in the
country in accordance with the Corporation Code (Sec.
123.) and the Foreign Investments Act. (see SEC Opinion,
Dec. 1,1993.)
The corporation-partners shall embody the terms and con-
ditions of their relationship in the partnership agreement and
upon approval by the Securities and Exchange Commission, the
partnership shall attain a juridical personality separate and dis-
tinct from the corporation-partners. (Art. 1768, Civil Code.) The
liability of the corporation-partners shall not be limited to their
contributions (Art. 1816, Ibid.) and even the dissolution of a cor-
poration-partner does not terminate a joint venture to which it
is a party so as to relieve the corporation of obligations incurred
by reason of its entering into the venture. (SEC Opinion, Aug. 24,
1981.)
(3) As a limited partner. — A foreign corporation can be a
limited partner in a Philippine limited partnership in view of the
following:
(a) There is no existing Philippine law expressly prohib-
iting a foreign corporation from becoming a limited partner
in a partnership;
(b) Just as a corporate investor has the power to make
passive investments in other corporations by purchasing
stock, a corporate investor should also be allowed to make
passive investments in a partnership as a limited partner. By
being a limited partner, the corporation would not be bound
beyond the amount of its investment by the acts of the other
partners who are not its duly appointed and authorized
agents and officers;
(c) Section 42 of the Corporation Code which permits
a corporation to invest its funds in another corporation or
business, does not require that the investing corporation be
54
involved in the management of the investee corporation with

a view to protect its investment. Accordingly, there is no risk
that a corporate limited partner would be solidarily liable
with the partnership;
(d) Jurisprudence and common commercial practice in
the United States indicate that corporations are not barred
from acting as limited partners; and
(e) Such a ruling would be consistent with the policy to
encourage and facilitate domestic and foreign investments in
Philippine business enterprises.
The foreign corporation still has to obtain a license to do
business in the Philippines and must be authorized under its
articles of incorporation to enter into a partnership agreement.
(SEC Opinion Aug. 17, 1995.) It is believed that a license is not
required where the participation of the foreign corporation as a
limited partner in a partnership is merely for investment pur-
poses and it shall not take part in the management and control of
the partnership as it shall not be deemed "doing business" in the
Philippines, (see Sees. 123-126.)
Advantages of a business c o r p o r a t i o n .
The advantages are the following:
(1) The corporation has a legal capacity to act and contract as
a distinct unit in its own name;
(2) It has continuity of existence because of its non-depen-
dence on the lives of those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management, and dissolution
are standardized as they are governed under one general incor-
poration law;
(6) It makes feasible gigantic financial undertakings since it
enables many individuals to invest their separate funds in the en-
terprise in order to furnish large amounts of capital upon which
big business depends;
(7) The shareholders have limited liability;
(8) They are not general agents of the business; and

(9) The shares of stocks can be transferred without the con-
sent of the other stockholders.
D i s a d v a n t a g e s of a b u s i n e s s corporation.
They are as follows:
(1) The corporation is relatively complicated in formation
and management;
(2) It entails relatively high cost of formation and operations;
(3) Its credit is weakened by the limited liability of the stock-
holders;
(4) There is ordinarily lack of personal element in view of the
transferability of shares;
(5) There is a greater degree of governmental control and su-
pervision than in any other forms of business organization;
(6) In large corporations, management and control are sepa-
rated from ownership;
(7) The stockholders' voting rights have become theoretical
particularly in large corporations because of the use of proxies
and widespread ownership; and
(8) The stockholders have little voice in the conduct of the
business.
Sec. 3. Classes of corporations. — Corporations formed

or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to
the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held are
stock corporations. All other corporations are non-stock
corporations. (3a)*
'Signifies section number of original provision in Act No. 1459 and that the
provision has been amended.
56
Classification of corporations under

the Code.
The Corporation Code classifies private corporations into
stock and non-stock corporations, according to whether their
membership is represented by shares of stock or not.
(1) A stock corporation is the ordinary business corporation
created and operated for the purpose of making a profit which
may be distributed in the form of dividends to stockholders on
the basis of their invested capital. The two (2) elements men-
tioned in Section 3 must be present to make a private corporation
fall under the definition of a stock corporation.
(2) Unlike stock corporations, non-stock corporations do not
issue stock and distribute dividends to their members; they are
created not for profit but for the public good and welfare. Of this
character are most of the charitable, religious, social, literary,
scientific, civic, and political organizations and societies. Non-
stock corporations are primarily governed by Title XI (Sees. 87-
95.) of the Code.
The provisions governing stock corporations, when perti-
nent, are applicable to non-stock corporations except as may be
covered by specific provisions of Title XI. (Sec. 87.)
Generally, a corporation may be organized either as a stock
or non-stock such as educational corporations, (see Sees. 106-
108.) But some kinds of corporations cannot be organized except
in the form of stock corporations, like banks (Sec. 7, R.A. No.
337.) and close corporations, (see Sec. 96.) A religious corporation
is always non-stock, (see Sec. 109.)
Other classifications of corporations.

There are other classifications of corporations, such as those
enumerated below.
(1) As to number of persons who compose them:
(a) Corporation aggregate or a corporation consisting of
more than one member or corporator; or
(b) Corporation sole or a special form of corporation usu-
ally associated with the clergy. Under the Code, it is a reli-
gious corporation which consists of one member or corpo-

rator only and his successors, such as a bishop. (Sec. 110.)
All other corporations must be corporation aggregate, that is,
they must be formed by "not less than five (5)" persons, (see
Sec. 10.)
A corporation aggregate does not become a corporation sole
by the mere fact that its shares of stock become vested in one
person because the shares may again be transferred or sold by
the holder to others. In the meantime, however, the holder and
the corporation may be treated as the same.
(2) As to whether they are for religious purposes or not:
(a) Ecclesiastical corporation or one organized for religious
purposes. Under the Code, religious corporations are classi-
fied into corporations sole and religious societies (Sec. 109,
par. 2.); or
(b) Lay corporation or one organized for a purpose other
than for religion. Lay corporations, in turn, may be either
eleemosynary or civil.
(3) As to whether they are for charitable purposes or not:
(a) Eleemosynary corporation or one established for or
devoted to charitable purposes or those supported by charity;
or
(b) Civil corporation or one established for business or
profit, i.e., with a view toward realizing gains to be distrib-
uted among its members.
(4) As to State under or by whose laws they have been created:
(a) Domestic corporation or one incorporated under the
laws of the Philippines; or
(b) Foreign corporation or one formed, organized, or
existing under any laws other than those of the Philippines.
It includes multinational corporations created under the laws
of another State, (see Sec. 123.) For tax purposes, a foreign
corporation is further classified into resident or non-resident.
(supra.)
58
(5) As to their legal right to corporate existence:

(a) Dejure corporation or a corporation existing in fact and
in law; or
(b) De facto corporation or a corporation existing in fact
but not in law. (see Sec. 21.)
(6) As to whether they are open to the public or not:
(a) Close corporation or one which is limited to selected
persons or members of a family (see Sees. 96-105.); or
(b) Open corporation or one which is open to any person
who may wish to become a stockholder or member thereto.
(7) As to their relation to another corporation:
(a) Parent or holding corporation or one which is so related
to another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such other
16
corporation;
(b) Subsidiary corporation or one which is so related to
another corporation that the majority of its directors can be
elected either directly or indirectly by such other corpora-
17
tion. It is one in which another corporation owns at least a
majority of the shares and thus has control; or
(c) Affiliated corporation or one related to another by own-
ing or being owned by common management or by a long-
term lease of its properties or other control device. An affili-
ation exists between a holding or parent company and its
subsidiary, or between two corporations owned or controlled
16
It is a corporation organized to hold the stock of another or other corporations
enabling it to control or substantially influence the policies and management of such cor-
poration or corporations. It holds stock in other companies for purposes of control rather
than for mere investment.
17
Normally, a corporation is considered a wholly-owned subsidiary only if the rest
of the stockholders, other than the parent company, own one (1) share in the corporation
and only for purposes of qualifying them as incorporators and/or directors. Where the
corporation is not such a wholly-owned subsidiary (i.e., some stockholders own more
than one share), the SEC ruling that "dividends either in the form of cash or stock should
be declared on the basis of the outstanding capital stock held by the stockholders and any
transfer thereof must be done only after the amount declared has been proportionately
distributed to the stockholders" is applicable. (SEC Opinion, Oct. 17,1994.)
by a third. (E.L. Kohler, A Dictionary for Accountants, 1975

ed., p. 26.)
(8) As to whether they are for public (government) or private pur-
pose:
(a) Public corporations or those formed or organized for
the government of a portion of the State for the general good
and welfare; or
(b) Private corporations or those formed for some private
purpose, benefit, or end; it may be either a stock or non-stock
corporation, government-owned or -controlled corporation
or quasi-public corporation.
The true test is the purpose of the corporation. If the corpora-
tion is created by the State as its own agency or instrumentality
for political or public purpose connected with the administra-
tion of government, then it is a public corporation. If not, it is a
private corporation notwithstanding that it is created to promote
public good, interest, or convenience although the whole, or sub-
stantially the whole interest in the corporation, belongs to the
State. In the Philippines, the public corporations are the provinc-
es, cities, municipalities, and barangays. In addition, the Consti-
tution mandates the creation of autonomous regions in Muslim
Mindanao and the Cordilleras, (see Art. X, Sec. 1 thereof.)
These local units are also called municipal corporations or
local governments.
The Code eliminated the classification of corporations
into public or private obviously for the reason that it applies
only to private corporations.
Private corporations include:
1) Government-owned or -controlled corporations or
those created or organized by the government or of which
18
the government is the majority stockholder.
la
It may be organized as a stock or non-stock corporation. A government instrumen-
tality (e.g., Manila International Airport Authority), which is neither a stock or non-stock
corporation vested with corporate powers to perform efficiently its governmental func-
tions, does not qualify as a government-owned or -controlled corporation. It remains
part of the national Government machinery although not integrated with the department
framework. (Manila International Airport Authority vs. Court of Appeals, 295 SCRA 591
[2006].)
60
These corporations are private and not public corpo-

rations because they are not established for the govern-
ment of a portion of the State. Where the government
engages in a particular business thru the instrumentality
of a corporation, it divests itself pro hac vice of its sover-
eign character, so as to subject itself to the rules govern-
ing private corporations. (Phil. National Bank vs. Paba-
lan, 83 SCRA 595 [1978].) Examples are the Government
Service Insurance System, National Power Corporation,
1
Philippine National Railways, etc.; ' and
2) Quasi-public corporations or private corporations
which have accepted from the State the grant of franchise
or contract involving the performance of public duties (1
Fletcher, p. 216.) but which are organized for profit. They
have been denned also as corporations private in owner-
I9
It has been ruled that employees of government-owned or -controlled corpora-
tions, whether formed by special law or under the Corporation Code (except private
firms taken over by the government in foreclosure or similar proceedings), are governed
by the Civil Service Law (Pres. Decree No. 807, as amended.) and not by the Labor Code
(Pres. Decree No. 442, as amended.) in view of Article XII-B, Section 1 of the 1973 Con-
stitution, which provides: "The Civil Service embraces every branch, agency, subdivision
and instrumentality of the Government, including every government-owned or -control-
led corporation."
A dissenting opinion holds that the constitutional provision contemplates only
those corporations created by special law. "Whether a corporation is government-owned
or -controlled depends upon the purpose of the inquiry. A corporation may be 'govern-
ment-owned or -controlled' for one purpose but not for another. In other words, it is not
possible to broadly categorize a corporation as 'government-owned or -controlled.' Thus,
if the National Housing Corporation (which was created pursuant to Act No. 1459, the
former Corporation Law) is not covered by the Civil Service, it is not necessarily covered
by the Labor Code. For it may well be that the NHC is in limbo." (National Housing
Corp. vs. Juco, 134 SCRA 172 [1985].) The ruling in Juco is no longer applicable.
Under the present Constitution, only government-owned or -controlled corpora-
tions "with original charter" (i.e., created by special law and not under the Corporation
Code) are embraced within the Civil Service. (Art. IX, B-Sec. 2[1] thereof.) But a private
corporation acquired by the government utilizing public funds, while retaining its cor-
porate existence, becomes a government-owned or -controlled corporation within the
constitutional precept of public accountability (see Art. XI, Sec. 1, Ibid.) and its employees
are, therefore, public servants, falling within the investigatory and prosecutory power
of the Office of the Ombudsman for purposes of the Anti-Graft and Corrupt Practices
Act. (Quimpo vs. Tanodbayan, 146 SCRA 137 [1986].) Neither are government-owned or
-controlled corporations which are organized as subsidiaries of such corporations under
the Corporation Code included in the Civil Service. (Bliss Development Corp. Employees
Union vs. Calleja, 237 SCRA 271 [1994].) Their employees are subject to the provisions of
the Labor Code.
ship but having an appropriate franchise from the State

to provide for a necessity or convenience of the general
public, incapable of being furnished through the ordinary
channels of private competitive business and dependent
for its exercise upon eminent domain or some agency of
the government. (Ibid., p. 217.) They are private corpora-
20
tions that perform public service.
These corporations are also known as "public utili-
ties" or "public service corporations." Examples of these
21
corporations are those organized as electric, water,
telephone and transportation companies. Because the
business in which they are engaged are impressed with
a public interest, they may not engage in that business
without authority of the State in the form of franchise.
Neither may they cease engaging in that business unless
the State permits them to do so. A quasi-public corpora-
tion is given certain powers of a public nature — such as
the power of eminent domain — in order to enable it to
discharge its duties for the public benefit, in which res-
pect it differs from an ordinary private corporation, the
powers of which are given and exercised exclusively for
the profit and advantage of its stockholders. (18 Am. Jur.
2d 555.)
(9) As to whether they are corporations in a true sense or
only in a limited sense:
^The fact that a certain juridical entity is impressed with public interest does not, by
that circumstance alone, make the entity a public corporation, inasmuch as a corporation
may be private although its charter contains provisions of a public character, incorporat-
ed solely for the public good. This class of corporations may be considered quasi-public
corporations, which are private corporations that render public service, supply public
wants, or pursue other eleemosynary objectives. While purposely organized for the gain
or benefit of its members, they are required by law to discharge functions for the public
benefit. (Phil. Society for the Prevention of Cruelty to Animals vs. Commission on Audit,
534 SCRA 112 [2007].)
"The juridical entities known as water districts created by Presidential Decree No.
198 have been held as quasi-public corporations, performing public services and supply-
ing public wants and are entirely distinct from corporations organized under the Corpo-
ration Code. The function of supervision or control over them is entrusted to the Local
Water Utilities Administration (LWUA), a government corporation established by the
decree. (Marilao Water Consumers' Assoc. vs. Intermediate Appellate Court, 201 SCRA
437 [1991].)
62
(a) True corporation or one which exists by statutory

authority; or
(b) Quasi-corporation or one which exists without formal
legislative grant. It is an exception to the general rule that a
corporation can exist only by authority of law. It may be:
1) Corporation by prescription or one which has
exercised corporate powers for an indefinite period
without interference on the part of the sovereign power
and which by fiction of law is given the status of a
corporation. (1 Fletcher, p. 415.)
The Roman Catholic Church has been recognized
as a corporation by prescription, having acted as such
and assumed corporate powers for a long period of
time. According to the Supreme Court, it "antedates by
almost a thousand years any other personality in Europe
and existed when the Grecian eloquence still flourished
in Antioch and when idols were still worshipped in
the temples of Mecca, x x x. Persecuted as an unlawful
association since the early days of its existence up to the
time of Galieno, who was the first of the Roman emperors
to admit it among the the juridical entities protected by
the laws of the Empire, it existed until then by mercy and
will of the faithful and depended for such existence upon
pious gifts and offerings. Since the latter half of the third
century, and more particularly since the year 313, when
Constantine, by the Edict of Milan, inaugurated an era
of protection for the church, the latter gradually entered
upon the exercise of such rights as were required for the
acquisition, preservation, and transmission of property
the same as any other juridical entity under the laws of
the Empire, x x x" (Barlin vs. Ramirez, 7 Phil. 41 [1906].);
or
2) Corporation by estoppel or one which in reality is

not a corporation, either de jure or de facto, because it is
so defectively formed, but is considered a corporation
in relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a
corporation. This legal assumption is not good, however,
as against the State but may arise only for purposes of

private litigation.
Corporation by estoppel is another instance whereby
a corporation may exist without formal statutory author-
ity. It has no real existence in law as has a de facto corpora-
tion but is a mere fiction. (8 Fletcher, pp. 218-219; see Sec
21.)
Important distinctions b e t w e e n public

a n d private c o r p o r a t i o n s .
The most important division of corporations is into public

and private, for there are many principles of law which apply to
the former and not to the latter.
(1) The most important distinction is with respect to gov-
ernmental control. Public corporations, being mere instrumen-
talities of the State, are subject to governmental visitation and
control, whereas the charter of a private corporation is a contract
between the State and the corporation or incorporators, which,
under the provision of the Constitution prohibiting laws impair-
ing the obligation of contracts, renders such corporations not
subject to visitation, control, or change by the State, except in the
exercise of the police power.
(2) Another distinction is that a public corporation may be
created without the consent of the locality to be affected, whereas
the consent of the incorporators is necessary to the creation of a
private corporation.
(3) The distinction is also important with respect to taxation,
to the question of liability for the torts or negligence of officers
and agents, and to various other questions. (14 C.J. 72-73.)
Dual status of public corporations.

A public or municipal corporation possesses two kinds of
power, governmental or public and proprietary or private, and
in the exercise of the former, it is a "municipal government,"
while as to the latter, it is a "corporate legal individual." (see 9-A
Words and Phrases 391.)
64
A public corporation engaged in the performance of govern-

mental or public functions {e.g., maintenance of peace and order)
as distinguished from corporate or proprietary functions (e.g.,
operation of a public market), in the absence of statute, is not liable
for damages occasioned by the negligent or wrongful actions
of its officers, agents, or employees. The test for distinguishing
the first kind of power from the second, and consequently, in
determining liability or nonliability for torts of its agents, is
whether the act performed is for the common good or whether it
is for the special benefit or profit of the corporate entity, (see Ibid.,
p. 390.)
Sec. 4. Corporations created by special laws or charters.

— Corporations created by special laws or charters shall
be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supple-
mented by the provisions of this Code, insofar as they are
applicable, (n)*
Incorporation of a private corporation

by a special act.
Section 4 authorizes the creation of private corporations by
special laws or charters. The enactment of special act creating a
private corporation is subject to the constitutional limitation that
such corporation shall be owned or controlled by the govern-
ment. (Constitution of the Philippines, Art. XII, Sec. 16.)
The reason for the restriction is obvious:
(1) It is chiefly to prevent the granting of special privileges
to one body of men without giving all others the right to obtain
them in the same conditions; and
(2) Perhaps, it is partly to prevent bribery and corruption of
the legislature. (Clark on Corporations, p. 45.)
A special law creating a private corporation which is neither
owned nor controlled by the government is void for being viola-
tive of the constitutional provision, (see National Development
Co. vs. Phil. Veterans Bank, 192 SCRA 257 [1990].)
'ignifies that the provision is new, not found in Act No. 1459.
G o v e r n i n g law.
(1) A corporation created by a special law or charter is

primarily governed by such law and suppletorily, by the provi-
sions of the Code "insofar as they are applicable," either because
they are not inconsistent with, or are expressly made applicable
22
by, the special law. Thus, it has been held that the Philippine
National Bank (PNB), having a charter of its own (R.A. No. 1300,
as amended.), was not governed, as a rule, by the Corporation
23
Code. In view of Sections 15, 16, and 30 of its charter, the
provision of Section 74 of the Code with respect to the right of
a stockholder to demand an inspection or examination of the
books of the corporation does not apply even in a supplemental
capacity to said bank. (Gonzales vs. Phil. National Bank, 122
SCRA489 [1983].) The Philippine National Red Cross (PNRC) is a
government-owned and -controlled corporation with an original
charter under R.A. No. 95, as amended. (Baluyot vs. Holganza,
325 SCRA 248 [2000].)
(2) Under the Constitution (Art. IX, B-Sec. 2[1] thereof.),
officers and employees of government-owned or -controlled
corporations with original charters, i.e., created by special law, are
placed under the Civil Service, and thus, subject to Civil Service
Law. Those incorporated under the general incorporation law,
the Corporation Code, are governed by the Labor Code.
(3) A government-owned or -controlled corporation may be
organized under the provisions of the Corporation Code and not
by special law. Therefore, it would be proper to increase its capi-
talization by amending its articles of incorporation (see Sec. 16.)
pursuant to the Corporation Code instead of Congress passing
legislation to this effect. (SEC Opinion, July 10,1997.)
22
See Presidential Decree No. 2029 (Feb. 4, 1986) "defining government-owned or
-controlled corporations and identifying their role in national development."
23
Section 15 provides that the bank shall be subject to inspection by the Department
of Supervision and Examination of the Central Bank; Section 16 declares as confidential
the information obtained from such inspection; and Section 30 imposes penalties for vio-
lation of the provisions of the Act.
R.A. No. 1300 was superseded by Presidential Decree No. 694, the 1975 Revised
Charter of the Philippine National Bank. The corresponding provisions are Sections 19,
20, and 34, respectively. The Philippine National Bank is now privately owned.
66
Government as a member
of a corporation.
(1) Jurisdiction of SEC. — The Securities and Exchange Com-
mission (SEC) has no jurisdiction over corporations with original
charter or created by special law. It follows that it has no power
to interpret the law creating it. However, the SEC can rule on the
status of a corporation as to whether it is a government-owned
or -controlled corporation belonging to this type. It has jurisdic-
tion to determine this issue, (see Phil. National Construction
Corporation vs. Pabion, 320 SCRA 188 [1999].)
(2) Rights, Powers, or privileges. — As a member of a corpo-
ration, the government never exercises its sovereignty; it acts
merely as a corporator. (18 Am. Jur. 2d 584.) And the mere fact
that the government happens to be a majority stockholder of a
corporation does not make it a public corporation. As a private
corporation, it has no greater rights, powers, or privileges than
any other corporation organized for the same purpose under the
Corporation Code. (National Coal Co. vs. Collector of Internal
Revenue, 46 Phil. 583 [1924].)
Sec. 5. Corporators and incorporators, stockholders and

members. — Corporators are those who compose a cor-
poration, whether as stockholders or members. Incorpora-
tors are those stockholders or members mentioned in the
articles of incorporation as originally forming and com-
posing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stock-

holders or shareholders. Corporators in a non-stock cor-
poration are called members. (4a)
C o m p o n e n t s of a corporation.
The four classes of persons composing a corporation are the

following:
(1) Corporators or those who compose the corporation,
whether stockholders or members. Hence, the term includes
incorporators and stockholders or members who become as such
after incorporation of the corporation;
Sec. 5 "TITLE I. GENERAL PROVISIONS 67
(2) Incorporators or those corporators mentioned in the

articles of incorporation as originally forming and composing
the corporation and who executed and signed the articles of
incorporation and acknowledged the same before a notary
public, (see Sees. 14,15.) So, all incorporators are corporators but
a corporator is not necessarily an incorporator.
The principal function of the incorporator is to incorporate
the corporation and to enable it to become a body politic and
corporate under the law. While the status of a corporator is tem-
porary because one may cease to be a stockholder or member, an
incorporator will forever retain his status as such, notwithstand-
ing that he has ceased to be a corporator. The articles of incorpo-
ration cannot be amended by deleting his name or substituting
it with that of another who is not an incorporator. Only natural
persons can be incorporators (Sec. 10.);
(3) Stockholders or the owners of shares of stock in a stock
corporation. They are the owners of the corporation. They are
also called shareholders. They are the corporators in a stock corpo-
ration. Stockholders may be natural or juridical persons but only
natural persons can be incorporators. (Sec. 10.)
Under Section 3, a corporation, to be classified as a stock cor-
poration, (a) must have capital stock divided into shares, and (b)
must be "authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the
shares held"; and
(4) Members or corporators of a corporation which has no
capital stocks. All incorporators in a stock corporation must now
own or at least be a subscriber to at least one (1) share of the capi-
tal stock of such corporation. (Sec. 10.)
Under the old rule, members include corporators of a stock
corporation who do not own capital stock. In other words, a stock
corporation may be composed of stockholders and members, the
latter referring to incorporators who do not own shares of stock.
It was not required that an incorporator be a subscriber for stock
as long as the minimum capital requirements are complied with.
The Code eliminated this rule.
68
Three other classes.

There are three other classes of persons who play important
roles in the formation and organization of a corporation, namely:
(1) Promoters or persons who bring about or cause to bring
about the formation and organization of a corporation by
bringing together the incorporators or the persons interested
in the enterprise, procuring subscriptions or capital for the
corporation and setting in motion the machinery which leads to
the incorporation of the corporation itself. Simply signing and
verifying the articles of incorporation and subscribing for stock
in the proposed company is said, however, not to make one a
promoter thereof. (18 Am. Jur. 2d 647.)
When used in connection with corporations, the term refers
to persons who undertake the formation of a corporation with-
out their being incorporators. They lay the groundwork for cor-
porate existence;
(2) Subscribers or "persons who have agreed to take and pay
for original, unissued shares of a corporation formed or to be
formed." (Ballantine on Corporations, p. 375; see Sees. 60,61.) So,
a subscriber may not be a stockholder. He becomes a stockholder
only from the time his subscription is accepted by the corpora-
tion or the corporation's offer is accepted by him. Technically, a
person is not a stockholder (or member) unless he is recorded as
such in the books of the corporation, (see Sec. 62.)
All incorporators (supra.) are subscribers but a subscriber
need not be an incorporator; and
(3) Underwriter or "a person, usually an investment banker,
who (a) has agreed, alone or with others, to buy at stated terms
an entire issue of securities or a substantial part thereof; or (b)
has guaranteed the sale of an issue by agreement to buy from
the issuing party any unsold portion at a stated price; or (c) has
agreed to use his "best efforts" to market all or part of an issue; or
(d) has offered for sale stock he has purchased from a controlling
stockholder." (E.L. Kohler, op. cit., p. 480; for definition of the term
under the Securities Regulation Code [R.A. No. 8799], Appendix
"A," see Sec. 3[1.15] thereof, and under the Investment Company
Act [R.A. No. 2629], Sec. 3[dd] thereof.)
A g r e e m e n t or contract with a corporation.

(1) Between corporators and corporation. — It is essential to the
existence of a private corporation that there shall be an agree-
ment between the corporators and the corporation creating a
contractual relation between them. There can be no such thing as
a corporation aggregate without members, and a person cannot
become a member except by his own agreement or contract.
(2) Between each member and corporation. — Some writers and
some cases say that there must be an agreement between the
members creating a contractual relation between them, but this
is inaccurate. There is ordinarily no contract between individual
members in the formation of a corporation. The contract is
between each individual member and the whole body of members
in their collective capacity, represented by the corporation, that
is, between each member and the corporation. A subscription
for shares, for instance, in the organization of a corporation is
not a contract between the subscriber and the other subscribers
individually, but it is a contract between each subscriber and the
corporate body. (Clark on Corporations, Sec. 27.)
Sec. 6. Classification of shares. — The shares of stock

corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may
be stated in the articles of incorporation: Provided, That
no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or
have no par value as may be provided for in the articles
of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no par value shares of stock.
Preferred shares of stock issued by any corporation
may be given preference in the distribution of the assets
to the corporation in case of liquidation and in the distri-
THE CORPORATION CODE OF THE PHILIPPINES Sec.
bution of dividends, or such other preferences as may be

stated in the articles of incorporation which are not viola-
tive of the provisions of this Code; Provided, That preferred
shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles
of incorporation, may fix the terms and conditions of pre-
ferred shares of stock or any series thereof: Provided, That
such terms and conditions shall be effective upon filing
of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall
be deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided, That shares without
par value may not be issued for a consideration less than
the value of five pesos (P5.00) per share: Provided, further,
That the entire consideration received by the corporation
for its no par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for
the purpose of insuring compliance with constitutional or
legal requirements.
Except as otherwise provided by the articles of incor-
poration and stated in the certificate of stock, each share
shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-
voting shares in the cases allowed by this Code, the hold-
ers of such shares shall nevertheless be entitled to vote on
the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate pro-
perty;
4. Incurring, creating or increasing bonded indebted-
ness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another corpora-

tion or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding para-
graph, the vote necessary to approve a particular corpo-
rate act as provided in this Code shall be deemed to refer
only to stocks with voting rights. (5a)
P o w e r to classify s h a r e s .
The shares of stock corporations "may be divided into classes
or series of shares, or both, any of which classes or series of shares
may have rights, privileges or restrictions as may be stated in the
articles of incorporation" (Sec. 6, par. 1.), not merely in the by-
laws. (Title V.) Unless restricted by the law or the provision of
its articles of incorporation (see Sees. 14, 15.), a corporation has
unrestricted freedom to issue such classes or series of shares as
the prospects and needs of its business may require to attract
investors. A "series" refers to a subdivision of a class of shares.
The primary classification of shares is common and pre-
ferred, each of which may be divided into other classes, (infra.)
Thus, shares of stock may differ with respect to voting rights,
dividend rights, and, in case of liquidation, rights to corporate
24
assets. There must be at least one class of stock, and by Section 6
(par. 1.), a corporation must have at least one class of stock with
voting rights.
A corporation may issue only one class or kind of share.
W h e n classification of s h a r e s
may be made.
(1) By the incorporators. — The classes and number of shares
which a corporation shall issue are first determined by the incor-
porators as stated in the articles of incorporation filed with the
Securities and Exchange Commission.
"Where no difference in "rights, privileges or restrictions" is provided for as re-

quired by Section 6, as where "the only difference between the series is that only B-l
Series shall be initially offered to the public and sold through the exchanges while B-2
Series shall be similarly offered and sold at a later date as the board of directors may de-
termine," the classification should not be allowed. (SEC Opinion, March 15,1989.)
72
(2) By the board of directors and the stockholders. — After the

corporation comes into existence, they may be altered by the
board of directors and the stockholders by amending the articles
of incorporation pursuant to Section 16. If the amendment
changes or restricts the rights of any class of shares, or authorizes
preferences in any respect superior to those of outstanding shares
of any class, any stockholder shall have the right to dissent and
demand payment of the fair value of his shares. (Sec. 81.)
Classification to comply with constitutional

or legal requirements.
(1) A corporation may, furthermore, classify its shares for
the purpose of insuring compliance with constitutional or legal
requirements (Sec. 7, par. 4.), such as those which prescribe the
minimum percentage of capital stock ownership of Filipino citi-
zens in corporations engaged in any business or activity reserved
for Filipino citizens (see Sec. 15[11].), or set the maximum limits
for stockholdings in corporations declared by law to be vested
with public interest, (see Sec. 140, par. 2.) Thus, the articles of in-
corporation may classify shares of stock into Class "A" and Class
" B " and provide that Class "A" shares shall be held exclusively
by Filipino citizens only, while Class " B " shares, by either Filipi-
25
no citizens or foreigners. In such case, aliens or foreign corpora-
tions cannot own "A" shares; otherwise, it would be tantamount
to amending the articles of incorporation contrary to Section 16.
The articles, however, may permit aliens to buy "A" shares.
^With the general perception that the country is dependent on foreign investments,
many local investors invest in "B" shares, thereby creating a bigger demand for said
shares which are limited. The lopsided market has developed a psychological advantage
and a dual pricing scheme in favor of "B" shares at the expense of "A" shares. The re-
sulting premium for "B" shares has been under attack from foreign fund managers who
questioned the wisdom of paying for a higher price than the "A" shares which are, with
exemption on foreign ownership, the same security with the same risks and yield. In
many cases, the local investors are the ones maintaining the relative strong performance
of "B" shares in the absence of foreign investors.
Without the classification, local investors will invest more in a particular issue not
because foreigners are investing but because of good potentials and foreigners can buy
more shares so long as they do not exceed the equity limit prescribed by the Constitu-
tion and existing laws. This will require strict monitoring to make sure that the limits on
foreign ownership will always be observed.
e p o U c y o f S E C t o a l l o w s h a
V* ^ r e s o f listed firms t o remain classified a s "A" and
"B" shares, while requiring firms still planning to go public to declassify their shares.
(2) Corporations classify shares for reasons of expediency,

primarily for monitoring purposes. The par value or number of
one class of shares may be more than the others. The classification
of common shares of stocks into Class "A" and Class " B " shares
have never been obligatory. Some corporations which engage
in business where there is a cap on foreign ownership classify
their shares with the number of B shares corresponding to the
maximum percentage of foreign ownership allowed so that they
won't have to keep checking on their foreign shareholders.
Since the Constitution does not distinguish between common
and preferred shares, the latter kind of shares should be included
in the computation of the foreign ownership limit for domestic
corporations. This gives more room for additional foreign invest-
ments.
repealed by supreme court decision. voting rights.
Shares presumed to be equal

in all respects.
The law provides that "Except as otherwise provided by the
articles of incorporation and stated in the certificate of stock, each
share shall be in all respects equal to every other share." (Sec. 6,
par. 5.) This is the doctrine of equality of shares. It means that in
the absence of any provision in the articles of incorporation and
in the certificate of stock to the contrary, all stocks, regardless of
their class nomenclature, enjoy the same rights and privileges
26
and subject to the same liabilities.
(1) Authority of the board of directors to classify others. — The
board of directors has no authority to classify shares of stock
where the articles of incorporations are silent on the matter.
Hence, a corporation cannot, without express authority in the
articles of incorporation, and without amendment thereof, issue
preferred shares with superior rights and privileges than other
"In the absence of special provisions, the holders of preferred stock in a corporation
are in precisely the same position, both with respect to the corporation itself and with
respect to the creditors of the corporation, as the holders of the common stock, except
only that they are entitled to receive dividends on their shares, to the extent guaranteed
or agreed upon, before any dividend can be paid to the holders of common stock. (SEC
Opinion, July 16,1996, citing Fletcher Cyc. Corps., Sec. 5290.)
74
shares. (Sec. 6, pars. 1,2,5.) Subscription contracts covering such

shares are void, (see Art. 1409[1, 3].)
(2) Consent of stockholders to change of terms and preferences of
shares. — The articles of incorporation or the charter of a corpora-
tion being considered as a contract between the corporation and
stockholders (see Sec. 16.), the corporation is under obligation to
observe the provisions thereof and it cannot without the consent
of the stockholders, change the terms and preferences of classes
of shares of stocks provided therein. Thus, any special agreement
between a particular subscriber and the corporation by which
he is allowed to subscribe for shares upon different terms from
other subscribers is invalid. (SEC Opinion, April 18,1985, citing
Ballantine, Rev. ed., p. 459.)
(3) Right to vote of all classes of shares. — If one class of shares
has the right to vote, all other classes are presumed to have the
same voting power. Stockholders have one vote for each share
held by them, which excludes fractional voting, (see Sec. 52.)
Section 6 (par. 5.) is construed to mean that unless denied in the
articles of incorporation, all shares regardless of class (e.g., with
par value and without par value, common and preferred) enjoy
all the rights of a stockholder. Hence, said provision cannot be
invoked as a basis for a proposed amendment of the articles of
incorporation whereby Class "A" shares shall be entitled to, say,
four votes per share, and Class " B " shares, to one vote per share.
(SEC Opinion, Aug. 11,1988.)
But the right to vote may be denied by implication as where
the articles of incorporation provides that "only holders of com-
mon stock shall have the right to vote."
(4) Authority of board of directors to fix terms and conditions of
preferred shares. — The terms and conditions of preferred shares
of stock may be fixed by the board of directors only when autho-
rized in the articles of incorporation. (Ibid., par. 2.) In such case,
the preference enjoyed by the preferred stock will not appear in
the articles of incorporation.
Capital stock a n d capital e x p l a i n e d .

(1) Capital stock is the amount fixed in the articles of incorpo-
ration, to be subscribed and paid in or agreed to be paid in by the
stockholders of a corporation, in money, property, services, or

other means at the organization of the corporation or afterwards
and upon which it is to conduct its business (see 2 Fletcher, p.
12.), such contribution being made either directly through stock
subscription (see Sec. 60.) or indirectly through the declaration of
stock dividends. (18 Am. Jur. 2d 735.)
The capital stock is the money value assigned to a corporation's
issued shares, constituting generally the legal capital (infra.)
of the corporation. (E.L. Kohler, op. cit., p. 84.) It represents the
equity of the stockholders in the corporate assets. It limits the
maximum amount or number of each class of shares that may
be issued by the corporation without formal amendment of the
articles of incorporation, (see Sec. 16.) It remains the same even
though the actual value of the shares as determined by the assets
of the corporations is diminished or increased, unaffected by
profits and losses.
(a) Authorized capital stock refers to the amount of capital
stock as specified in the articles of incorporation. It is synony-
mous with capital stock where the shares of the corporation
have par value, (see Sees. 14[8], 15 [seventh].) If the shares of
stock have no par value, the corporation has no authorized
capital stock, but it has capital stock the amount of which is
not specified in the articles of incorporation as it cannot be
determined until all the shares have been issued. (Ibid.) In
this case, the two terms are not synonymous.
Additional shares may not be issued unless the articles of
incorporation are amended by vote of the stockholders, (see
Sees. 16, 38.) But unissued authorized shares may be issued
at a later date without amendment of the articles of incorpo-
ration or approval of the stockholders.
(b) Subscribed capital stock is the amount of the capital
stock subscribed, whether fully paid or not. It connotes an
original subscription contract for the acquisition by a sub-
scriber of unissued shares in a corporation (see Sees. 60, 61.)
and would, therefore, preclude the acquisition of shares by
reason of subsequent transfer from a stockholder or resale of
treasury shares. (Sec. 9.)
76
(c) Outstanding capital stock is the portion of the capital

stock which is issued and held by persons other than the cor-
poration itself. The Code defines the term as "the total shares
of stock issued to subscribers or stockholders, whether or not
fully or partially paid (as long as there is a binding subscrip-
tion agreement), except treasury shares." (Sec. 137.) It is thus
broader than "subscribed capital stock."
The terms "subscribed capital stock" and "issued" or
"outstanding" capital stock are used synonymously since
subscribed capital stock, as distinguished from the certificate
of stock, can be issued even if not fully paid. But while every
subscribed share (assuming there is a binding subscription
agreement) is "outstanding," an issued share may not have
the status of outstanding shares. This is true in the case of
treasury shares. (Sec. 9.)
(d) Paid-up capital stock is that portion of the subscribed or
27
outstanding capital stock that is actually paid. (see Sec. 13.)
The term actual capital stock is also used to refer to the amount
of the capital stock actually subscribed and paid for.
(e) Unissued capital stock is that portion of the capital
stock that is not issued or subscribed. It does not vote and
draws no dividends.
(f) Legal capital is the amount equal to the aggregate par
value and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the premium or
excess is not to be considered as part of the legal capital, (see
Sec. 43.) In the case of no par value shares, the entire consid-
eration received forms part of legal capital and shall not be
available for distribution as dividends, (see Sec. 6, par. 3.)
^ r i o r approval of SEC is not necessary in case of increase of paid-up capital thru

payment of unpaid subscriptions, provided such payment consists in cash, (see Sec. 62,
par. 2.) If the increase is by way of issuance of unissued shares of the authorized capi-
tal stock, the corporation, whose shares of stock are not registered under the Securities
Regulation Code (Appendix "A."), must secure from SEC prior exemption from registra-
tion requirements under said Code, (see Sees. 8-10 thereof.) If it is in connection with an
increase of the authorized capital stock, the corporation must comply with the require-
ments laid down under Section 38. (SEC Opinion, March 18,1993.)
Under varying State laws, the term "stated capital" is

used instead of legal capital to refer to "the portion of the
amount contributed by purchasers of no par value stock that
is credited to the capital account." (E.L. Kohler, op. cit, 446.)
ILLUSTRATION:
Suppose the articles of incorporation of corporation X
provides that the authorized capital stock of said corporation
is P1,000,000.00 divided into 10,000 shares of the par value of
P100.00 per share. At its incorporation, only P250,000.00 of the
authorized capital stock was subscribed.
Under Section 13, at least 25% of the subscription is required
to be paid; thus, only P62,500.00 was paid to the treasurer of the
corporation.
Therefore, the authorized capital stock of corporation X is
P1,000,000.00, the subscribed, outstanding, or issued capital
stock is P250,000.00, the paid-up capital stock is P62,500.00,
and the unissued capital stock is P750,000.00. The legal capital
is also P250,000.00.
(2) Capital is used broadly to indicate the entire property

or assets of the corporation. It includes the amount invested by
the stockholders plus the undistributed earnings less losses and
expenses. In the strict sense, the term refers to that portion of
the net assets paid by the stockholders as consideration for the
shares issued to them, which is utilized for the prosecution of
the business of the corporation. It includes all balances or install-
ments due the corporation for shares of stock sold by it and all
unpaid subscription for shares.
In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the
"trust fund" (see Sec. 60.) for the payment of the debts of the
corporation, to which the creditors may look for satisfaction.
(National Telecommunications Commission vs. Court of
Appeals, 311 SCRA 508 [1999]; see Sees. 41, 22.)
The term is also used synonymously with the words "capital
stock," as meaning the amount subscribed and paid-in and upon
78
28
which the corporation is to conduct its operation (11 Fletcher
Cyc. Corp., p. 15 [1986 ed.].) and it is immaterial how the stock is
classified, whether as common or preferred.
Capital stock and capital distinguished.

(1) Capital is the actual corporate property. It is, therefore, a
concrete thing. Capital stock is an amount. It is, therefore, some-
thing abstract.
(2) Capital fluctuates or varies from day to day according
as there are profits or losses or appreciation or depreciation of
corporate assets. Capital stock is an amount fixed in the articles of
incorporation (where shares are with par value) and is unaffected
by profits and losses. Thus, capital may be greater or lesser than
the amount of the capital stock.
(3) It is said that capital belongs to the corporation and
capital stock when issued belongs to the stockholders, and that
capital may be either real or personal property but capital stock
is always personal. (18 Am. Jur. 2d 736.)
The term "capital," however, is frequently used loosely in the
sense of capital stock.
Capital stock a n d legal capital

distinguished.
Like capital stock, legal capital is merely an amount and
remains unchanged except as outstanding shares are increased
or reduced in number or amount. But while capital stock limits
the maximum amount or number of shares that may be issued
without formal amendment of the articles of incorporation (see
Sec. 38.), legal capital sets the nurtimum amount of the corporate
assets which for the protection of corporate creditors, may not be
lawfully distributed to stockholders.
^The term "capital" denotes the sum total of the shares subscribed and paid by the
stockholders or agreed to be paid irrespective of their nomenclature. It would, therefore,
be legal for foreigners to own more than 40% of the common shares but not more than
the 40% constitutional limit of the outstanding capital stock which would include both
common and non-voting preferred shares. (SEC Opinion, Feb. 15,1988.)
ILLUSTRATION:
In the previous illustration, the payment of the subscription
of 2,500 shares in the amount of P250,000.00 whether in cash
or property or any consideration allowed by law (see Sec. 62.)
constitutes the original capital of corporation X.
If the corporation makes a profit of P50,000.00, the capital
would become P300,000.00. On the other hand, the capital
would be reduced to P200,000.00 if there is a loss of P50,000.00.
Suppose the corporation borrows P150,000.00 from a bank.
The capital of the corporation would then be P450,000.00 or
P350,000.00, according as there are profits or losses.
In any case, the capital stock of P1,000,000.00 and the
legal capital of P250,000.00 remain constant unless, of course,
the articles of incorporation is amended, either increasing
or decreasing the capital stock, or the number or amount of
outstanding shares is increased by the issuance of more shares
out of the unissued authorized shares or decreased by the
acquisition of previously issued shares, (see Sees. 9, 41.)
A decrease of the capital stock may also result in the
reduction of legal capital, (see Sec. 38.)
S t o c k or s h a r e of stock d e f i n e d .
Stock or share of stock is one of the units into which the capi-
tal stock is divided. It represents the interest or right which the
owner has —
(1) in the management of the corporation in which he takes
29
part through his right to vote (if voting rights are permitted for
that class of stock by the articles of incorporation);
(2) in a portion of the corporate earnings, if and when segre-
gated in the form of dividends; and
(3) upon its dissolution and winding up, in the property and
assets of the corporation remaining after the payment of corpo-
rate debts and liabilities to creditors, (see 11 Fletcher, p. 18 [1971
ed.].)
"The stockholders' right of management consists primarily of their privilege

in the election and removal of directors. (Sees. 24, 28.)
80
Capital stock and share of stock

distinguished.
As distinguished from capital stock, the term "stock" or "share
of stock" is commonly used in a distributive sense to refer to the
stock in the hands of the stockholders and, therefore, belongs to
them. On the other hand, the former is used in a collective sense
to signify the whole body of shares of stock in the corporation.
(Ibid.)
Nature of share of stock.

(1) The ownership of share of stock confers no immediate
legal right or title to any of the property of the corporation. Each
share merely represents a distinct undivided share or interest in the
common property of the corporation. (18 Am. Jur. 2d 737.)
Such interest has been described as "indirect, contingent,
remote, conjectural, consequential, and collateral. It is purely
inchoate, or a mere expectancy of a right in the management
of the corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of
corporate debts and obligations." Hence, stockholders of such
are not entitled to intervene in a litigation involving corporate
property under Section 2, Rule 12 of the Rules of Court. (Saw vs.
(2) Shares of stock constitute property distinct from the capital or
tangible property of the corporation and belong to the different
10
owners. Incorporeal in nature, the shares are personal property (see
Sec. 63.) of the stockholder (except treasury stock which belongs
to the corporation; see Sec. 9.) and this is true even where the
property of the corporation consists wholly or chiefly of real
estate. This necessarily follows from the fact that the property
of a corporation does not belong, in law, to the stockholders but
to the corporation as a distinct legal entity or artificial person.
30
Art. 417. The following are also considered as personal property: x x x (2) Shares
of stock of agricultural, commercial, and industrial entities, although they may have real
estate. (Civil Code)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts and similar documents may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negoti-
able, must be indorsed. (Civil Code)
(Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds 6

SCRA 373 [1962].)
(3) They are in the nature of choses in action but are not such
in a strict sense. They do not constitute an indebtedness of the
corporation to the shareholder (18 Am. Jur. 2d 738.) and are,
therefore, not credits as to make the stockholder a creditor of
the corporation. (Garcia vs. Lim Chu Sing, 59 Phil. 562 [1936].)
Hence, no action can be maintained against the corporation for
the return of the contributions of the shareholders as long as the
corporation needs them and is not under dissolution, (see Sec.
64, as to nature of relation of stockholder to the corporation.)
(4) A share of stock only typifies a proportionate or aliquot part
of the corporation's property, or the right to share in its proceeds
to that extent when distributed according to law. It does not
represent property of a corporation. The corporation as a juridical
person, distinct from the members composing it, has property of
its own which consists chiefly of real estate.
As previously noted, a holder of shares is in no legal sense
the owner of any part of the capital of the corporation; nor is he
entitled to the possession of any definite portion of its property
or assets, nor a co-owner of the corporate property (see Stock-
holders of F. Guanzon & Sons, Inc. vs. Register of Deeds, supra;
Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].), his in-
terest in the corporate property being equitable or beneficial in
nature.
Certificate of stock d e f i n e d .
Certificate of stock is a written acknowledgment by the corpo-
ration of the interest, right, and participation of a person in the
management, profits, and assets of a corporation.
It is a formal written evidence of the holder's ownership of
one or more shares and is a convenient instrument for the trans-
fer of title, (see Sec. 63.)
Share of stock a n d certificate

of stock distinguished.
(1) Share of stock is incorporeal or intangible property, while
certificate of stock is tangible property;
82
(2) Share of stock represents the right or interest of a person

in a corporation, while certificate of stock is the written evidence
of that right or interest;
(3) Share of stock may be issued even if the subscription is
not fully paid (Sec. 137.), except in no par shares. (Sec. 6, par. 3.)
As a general rule, a certificate of stock may not be issued unless
the subscription is fully paid (Sec. 64.); and
(4) The situs of share of stock is deemed to be the State where
the corporation has its domicile which is ordinarily the State
under whose laws it was created, while a certificate of stock may
have a situs at the place where it is located or at the domicile of
the owner, even though the corporation is domiciled elsewhere.
(2 Fletcher, pp. 62-63, 95.) The situs of share of stock retains that
of the issuing corporation, even though the certificate is without
the State and is owned by a nonresident. (Ibid., p. 62.)
The possession of a certificate of stock is not essential to
ownership of stock because the right to stock may exist inde-
pendently of the certificate.
Situs of shares of stock for certain

purposes.
(1) For purposes of execution, attachment, and garnishment. —
The situs of shares of stock is the domicile or residence of the
corporation (Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil.
472 [1935].), which is the place where the principal office of the
corporation is located, (see Sec. 14[3].) "Stocks or shares, or an
interest in stocks or shares of any corporation or company" shall
be attached by the officer executing the order, "by leaving with
the president or managing agent thereof, a copy of the order
and a notice stating that the stock or interest of the party against
whom the attachment is issued, is attached in pursuance of such
order." (Rules of Court, Rule 57, Sec. 7[d].)
(2) For purposes of registration of chattel mortgages on shares of
stock. — The situs is the province or city in which the corpora-
tion has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc., supra.)
(3) For purposes of property taxation. — The general rule is that
the situs of intangible property is at the domicile or residence of

the owner.
(a) The above principle, however, is not controlling when
it is inconsistent with express provisions of statute, or when
justice does not demand that it should be, as where the prop-
erty has in fact a situs elsewhere, (see 15 Am. Jur. 474-475.)
Thus, shares of stock in a domestic corporation of a nonresi-
dent foreigner are taxable in the Philippines. The reason is
that said shares receive the protection and benefit of our law.
(Wells Fargo Bank and Union Trust Co. vs. Coll. of Internal
Revenue, 70 Phil. 325 [1940].)
(b) Under the National Internal Revenue Code (Pres.
Decree No. 1158, as amended.), for purposes of the estate tax,
the gross estate of a resident decedent, whether citizen or
alien, or a citizen decedent, whether resident or nonresident,
includes his intangible personal property wherever situated,
(see Sees. 78, 81 thereof.)
Classes of shares in general.

Shares of stock may be:
(1) Par value or no par value;
(2) Voting or non-voting;
(3) Common or preferred, and preferred shares may be
voting, convertible, or redeemable, (infra.) They may be:
(a) Preferred as to assets in case of liquidation or pre-
ferred as to dividends and the latter, in turn, may be either:
1) Cumulative or non-cumulative; or
2) Participating or non-participating;
(4) Promotion share;
(5) Shares in escrow;
(6) Convertible share;
(7) Founders' share (see Sec. 7.);
(8) Redeemable share (see Sec. 8.); and
(9) Treasury share, (see Sec. 9.)
84
As already mentioned, a corporation may issue such classes

or series of shares as the prospects and needs of its business may
require. Furthermore, it may classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
(Sec. 6, par. 4.)
Par value share.

Par value share is one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of stock.
(1) The primary purpose of par value is to fix the minimum
subscription or issue price of the shares, thus assuring creditors
that the corporation would receive a minimum amount for its
stock, (see Sec. 62.)
(2) A corporation may issue shares with different par values.
Shares issued less than par value are referred to as watered stock.
(see Sec. 65.)
(3) The par value of a stock remains the same regardless of
market value or book value (infra.) of the stock, except when
there is a stock split, (see annotation under Sec. 43.) It is not usu-
ally the price at which investors buy or sell the stock.
No par value s h a r e .
No par value share is one without any stated value appearing
on the face of the certificate of stock. In other words, it is a stock
which does not state how much money it represents.
(1) A no par value share has, therefore, no par value but it
has always an "issued value," i.e., the consideration fixed by the
corporation for its issuance, (see Sec. 62, last par.)
(2) A no par value share does not purport to represent any
stated proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such
shares of the issuing corporation.
(3) A corporation may issue no par value only, or together
with par value shares. No par value stockholders have the same
rights as holders of par value stock.
(4) The capital stock of a corporation issuing only no par
shares is not set forth by a stated amount of money, but instead
is expressed to be divided into a stated number of shares, such

as 1,000 shares. This indicates that a shareholder of 100 shares is
an aliquot sharer in the assets of the corporation, no matter what
value they may have, to the extent of 100/1,000 or 1/10. Thus,
by removing the par value of shares, the attention of persons
interested in the financial condition of the corporation is focused
upon the value of assets and the amount of its debts. (Delpher
Trades Corp. vs. Intermediate Appellate Court, 157 SCRA 349
[1988], citing Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Phils., Vol. Ill, 1980 ed., p. 107.)
Voting s h a r e .
Voting share is share with right to vote.
(1) It is generally customary to give the right to vote to the
common stock and to withhold it from the preferred.
Each common share shall be equal in all respects to every
other common share. Corporations are hereby prohibited from
issuing multiple voting and non-voting common shares nor can
they limit the maximum number of votes per stockholder irre-
spective of the number of shares he holds. (SEC Memo. Cir. No.
4, series of 2004.)
(2) Only shares classified and issued as "preferred" or
"redeemable" may be deprived of voting rights. Article 6 (par. 1.)
expressly prohibits the depreciation of voting rights except only
as to said shares. (Castillo vs. Balinghasay, 440 SCRA 442 [2004].)
But founders' shares may be given the exclusive right to vote and
be voted for in the election of directors for a limited period (Sec.
7.) in which case voting common stocks will have no right to vote
for directors.
(3) Under the Code, whenever a vote is necessary to approve
a particular corporate act, such vote refers only to stocks with voting
rights except in certain cases when even non-voting shares may
also vote. (Sec. 6, par. 6 and last par.) The rule is not "one stock-
holder, one vote" but "one share, one vote" because representa-
tion in a corporation is commensurate to extent of ownership.
86
66
Non-voting share.
Non-voting share is share without right to vote.
(1) If stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent of
the holder.
(2) Under the Code, no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in the Code. (Sec.
6, par. 1.) The proviso refers to fundamental matters enumerated
in Section 6 (par. 6[l-8].) on which holders of non-voting shares
in stock corporations shall nevertheless be entitled to vote. Note
that the enumeration in Section 6 does not include the election of
directors or trustees (see Sec. 24.) as one of the matters on which
non-voting shares may vote. In non-stock corporations, Section
89 governs the right of the members to vote on corporate matters.
(3) Where non-voting shares are provided for, the Code
requires that there shall always be a class or series of shares
which have complete voting rights. (Sec. 6, par. 1.)
(4) Under Section 6 (par. 1.), only preferred or redeemable
shares may be denied the right to vote. The issuance of common
stock with a feature that voting rights thereof shall be exercised
by a trustee violates the rule that common shares cannot be
deprived of voting rights. The automatic assignment of voting
rights is an indirect violation of Section 6. (SEC Opinion, July 15,
1997.)
(5) In case any amendment of the articles of incorporation
has the effect of changing or restricting the rights of any stock-
holder, the latter shall have the right to dissent and demand pay-
ment of the fair value of his shares. (Sec. 81[1].)
C o m m o n share.
Common share of stock is one which entitles the holder thereof
to a pro rata division of the profits, if there are any, and in its
assets upon dissolution, without any preference or advantage
in that respect over other stockholders or class of stockholders
but equally with all other stockholders except preferred stock-
holders.
(1) It is so-called because it is the basic class of stock which

private corporations generally issue (hence, the name) or because
its holders stand upon an equal footing, without extraordinary
rights or privileges.
(2) Common shares have complete voting rights. They can-
not be deprived of said rights except as provided by law.
(3) Common stockholders are the residual owners of the cor-
poration. They get only the assets left over in case of liquidation
after all other securities holders are paid.
(4) As a result of restrictions upon other classes of stock with
respect to voting rights, the common stock, normally, as to those
classes, has preference in the matter of management, (see 18 Am.
Jur. 2d 741.)
(5) The simplest corporate structure has only one kind of
stock — all common. When only a single class of stock is issued,
then all shares are alike and all issues are common stock. A cor-
poration may issue more than one class of common stock, being
designated "Class A," "Class B , " etc.
Preferred s h a r e .
31
Preferred share of stock is one with a stated par value which
entitles the holder thereof to certain preferences over the holders
32
of common stock.
(1) Under the Code, preferred shares of stock may be issued
only with a stated par value. (Sec. 5, par. 2.) More than one class
of preferred shares may be issued usually designated "first pre-
ferred," "second preferred," etc.
(2) The preferences are designed to induce persons to
33
subscribe for shares of a corporation. They may consist in
the payment of dividends or the distribution of the assets of
31
In accounting, if there is more than one issue of stock, each class of stock is reported
in the balance sheet separately and presented in the order of the priority of their rights in
liquidation. Thus, preferred stock is usually stated ahead of common stock. (PICPA Bul-
letin No. 10[10], November 1975.)
"Republic Planters Bank vs. Agana, Jr., 269 SCRA 1 (1997), citing DE LEON, The
Corporation Code of the Philippines Annotated, p. 62 (1989 ed.).
™lbid.
88
a corporation in case of its dissolution ahead of the common

stockholders, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions
of the Code. (Sec. 6, par. 2.) But as already stated, each share
shall be in all respects equal to every other share except as
otherwise provided in the articles of incorporation and stated in
the certificate of stock. (Ibid., par. 5.) Thus, unless otherwise so
provided, preferred stocks are presumed to be voting although
they are rarely given voting privileges.
(3) The term guaranteed stock is sometimes used as synony-
mous with preferred stock on which the payment of dividend is
34
guaranteed and a distinction is sometimes drawn to the effect
that guaranteed stock is entitled to arrears in dividends, while
ordinary preferred stock is not. (18 C.J.S. 650.)
(4) Interest bearing stock on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders is legal only when construed as requiring payment
35
of interest as dividends from net earnings or surplus only. (see
Sec. 43.) Such stock is, in effect, preferred stock, except perhaps
that the discretion of board of directors to use profits for other
corporate purposes may be more limited.
Common and preferred shares are the two main classes or
forms of stock. Holders of preferred shares do not lose the vot-
ing rights in all matters affecting the corporation. Section 6 (par.
6) provides for the cases when non-voting shares like preferred
shares are granted voting rights.
Promotion shares.
Promotion shares are such shares as are issued to promoters, or
those in some way interested in the company, for incorporating
the company, or for services rendered in launching or promoting
the welfare of the company, such as advancing the fees for incor-
porating, advertising, attorney's fees, surveying, etc. (11 Fletcher,
p. 48; Enright vs. Hekscher, 240 F. 863.)
The guaranty merely means that the holders are entitled to specified dividends if
there are profits out of which dividends may be paid, (see Sec. 43.)
"Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, supra, p. 62, note 9.
They may mean such shares as are issued to those who may
originally own the mining or valuable rights connected there-
with, in consideration of their deeding the same to the mining
company when the company is incorporated. (Ibid.)
Share in escrow.
Share in escrow is share subject to an agreement by virtue of
which the share is deposited by the grantor or his agent with a
third person to be kept by the depository until the performance
of a certain condition (usually the payment of the full subscrip-
tion price) or the happening of a certain event contained in the
agreement. (Cannon vs. Handley, 12 P. 315.)
(1) The escrow deposit makes the depository a trustee under
an express trust, (see Arts. 1440,1441, Civil Code.)
(2) The legal title to the subject matter to be conveyed remains
in the grantor until the condition is fulfilled. The issuance of the
shares is thus made subject to a suspensive condition. (Lusk vs.
Stevens, 64 Phil. 1054 [1937].)
(3) Before the fulfillment of the condition, the grantee or
holder is not yet the owner of the shares and consequently, he is
not entitled to the rights belonging to a regular stockholder.
Convertible share.
Convertible share is share which is convertible or changeable
by the stockholder from one class to another class (such as from
preferred to common) at a certain price and within a certain
period.
(1) Except as may be restricted by the articles of incorpora-
tion, the stockholder may demand conversion at his pleasure.
The conversion ratio is the price at which the common is to be
valued as against the preferred.
(2) Where the corporation has previously issued stock to
the entire authorized limit, it cannot, of course, issue additional
stocks if the authorized common stock of the corporation is fully
subscribed.
(a) If it becomes necessary to create additional common
stocks into which preferred stocks can be converted, this can
90
be done simply by reclassifying the preferred shares into

common in such amount as would be necessary to cover the
conversion through an amendment of the articles of incorpo-
ration in accordance with Section 16.
(b) Thus, although the preferred shares possess the qual-
ity of being convertible into common shares per articles of
incorporation, such conversion is not automatic. An amend-
ment of the articles of incorporation is required to formalize
the conversion which must not result in watering of stock
(see Sec. 65.), or issuance of stocks in excess of the authorized
capital stock of the corporation. (SEC Opinion, Sept. 3,1990.)
Convertibility of shares.
(1) Preferred shares into common. — In the absence of an express
provision in the articles of incorporation as to their convertibility
feature, preferred shares cannot be converted into common. The
terms of the preferred share contract cannot be changed without
the consent of the stockholders. (Sec. 6, par. 1; SEC Opinion, May
19, 1992.)
(2) No par value share to par value. — The conversion of no
par value shares to par value is allowed by SEC provided there
would be no change in the stockholders' percentage interest in
the total assets of the corporation. If the conversion would result
in the increase in the number of shares, the same should be al-
located to the existing stockholders in proportion to the number
of shares held by them without changing the total peso amount
of the total outstanding shares. The individual allocation of the
shares as converted should be based on the average issue value of
the no par value shares and not in the individual actual contribu-
tion of the stockholders. (SEC Opinion, July 7,1992.)
Nature of par value/book value/

market value.
(1) Par value. — The par value indicated in the certificate of
36
*"'Par" means equal, and "par value" means face value or value equal to the face of
the stocks or bonds. The par value of an interest-bearing bond on the day of its issuance is
the principal and the accrued interest. (31 Words and Phrases [1957 ed.] 559.) To say that a
bond is valued at par means that its value is equal to the face value of the bond. (Ibid., 63.)
stock represents the amount of money or property contributed

by the shareholder to the capital stock of the corporation. Pa-
tently, the assets of a company cannot always be equal to the par
value of the outstanding stock, the assets being constantly in a
state of fluctuation as the business prospers or declines. (13 Am.
Jur. 302.)
(2) Book value. — Hence, the par value does not always reflect
its book value or its actual or true value which may be deter-
mined by dividing the total stockholders' equity or the net value
of the total corporate assets (capital and surplus, if any) by the
number of shares issued or outstanding. Since unpaid subscrip-
tions (see Sec. 60.) are considered part of the asset of a corpora-
tion which the board of directors (see Sec. 24.) may at any time
declare due and payable (see Sec. 67.), they should be included in
the computation of book value. But book value does not attach to
unissued or reacquired shares, (see Sec. 9.)
(3) Market value. — Par value and book value may be more
or less than market value which may be defined as the price at
which a willing seller would sell and a willing buyer would buy,
assuming that both have a reasonable knowledge of the facts,
and neither being under abnormal pressure. Market value is
37
affected by the law of supply and demand.
ILLUSTRATION:
Suppose that X Corporation has an authorized capital
stock of P1,000,000.00 divided into 10,000 shares with a par
37
"In accounting practice, the journal entries for transactions are recorded in his-
torical value or cost. Thus, the purchase of properties or assets is recorded at acquisition
cost. The same is true with liabilities and equity transactions where the actual loan and
the amount paid for the subscription are recorded at the actual payment, including the
premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at his-
torical value or cost are not increased or decreased due to market forces. In the case of
properties, the appreciation in values is generally not recorded as income nor the increase
in the corresponding asset because the increase or decrease is not yet realized until the
property is actually sold. The same is true with the capital account. The market value may
be much higher than the actual payment of the par value and premium of capital stock.
Still, the books of account will not reflect such increase; and vice-versa, any decrease of
the value of stocks is likewise not reflected in the books of account." (PLDT vs. National
Telecommunications Communications, 539 SCRA 365 [2007].)
92
value of PI00.00 per share. The capital stock is fully subscribed

and paid up in cash. At this stage, the par value is the same
as its actual or book value. The book value is determined by
dividing P1,000,000.00, the net asset, by 10,000, the number of
shares issued or outstanding.
If the corporation makes a net profit of P100,000.00, the
increased book value of each share would be P110.00. On
the other hand, if the corporation suffers instead a loss of
P100,000.00, its net assets would then be reduced to P900,000.00,
thereby making the book value of each share at only P90.00.
The market value, however, of each share may not be
P100.00 or P110.00 or P90.00. Thus, the market value of each
share of X Corporation may be PI50.00 when the book value is
P110.00 or it may be P60.00 when the book value is P90.00. The
market value of stocks may be influenced by the present and
prospective net income of the corporation, attractive dividend
payments, and other factors.
Presumption as to value
of corporate stock.
Corporate stock is "at par" when it is worth its face value,
and is "above par" or at a "premium" when it is worth more. Ac-
cording to some authority, no presumption exists, in the absence
of supporting evidence, that corporate stock is worth its par or
face value. There is another authority, however, that in the ab-
sence of contrary evidence, there is a presumption that corporate
stock is worth its par or face value. (18 Am. Jur. 2d 750-751.)
It is difficult to determine the book or market value or price
of a corporation's stock when it is not traded publicly.
ILLUSTRATION:
C, the president, treasurer, and a director of X Corporation,
decided to withdraw from the corporation. According to its by-
laws, the person withdrawing had to determine the book value
of his shares as of the date the person gave notice of withdrawal,
which value would then be the purchase price of the stock. The
by-laws specified that book value should be determined by
sound and accepted accounting rules and practices carried out
by a certified public accounting firm. A difference arose as to the
book value, C using the straight line method to determine asset

costs rather than the accelerated depreciation method adopted
by X Corporation, with the result that his determination of the
book value per share was higher.
Which method of depreciation is the correct one?
The book value of stock is the difference between the assets
and liabilities of a corporation. Depreciation covers the original
cost of each asset over its established useful life, in proportion
to the actual annual decrease in the value of such asset. Factors
affecting depreciation adjustments are the asset's original cost,
its life in years, salvage value, and the method of depreciation
chosen.
The straight line method chosen by C permits an equal
amount to be charged off as expense during each year of the
asset's life. The accelerated method adopted by X Corporation
allows a larger portion of depreciation expense to be charged
as an expense in the first year and lesser amounts in the
following years. Accounting practices permit several methods
of depreciation for different purposes. X Corporation used its
method for taxation purposes; C, to arrive at the value of the
stock.
According to the by-laws, the one withdrawing has the
right to choose the method to determine book value. (Chadwick
vs. Cross, Abbot Co., 205 A. 2d 416 [Sup. Ct. Vt. 1964].)
Statutory restrictions regarding the issuance

of no par v a l u e s h a r e s .
Any or all of the shares or series of shares issued by a stock
corporation may have a par value or have no par value as may be
stated in the articles of incorporation. (Sec. 6, par. 1.) The follow-
ing are the limitations or restrictions imposed by law regarding
the issuance of no par value shares:
(1) Banks, trust companies, insurance companies, and build-
ing and loan associations shall not be permitted to issue no par
value shares of stock;
(2) Preferred shares of stock of any corporation may be
issued only with a stated par value (Ibid.);
(3) Shares issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not
94
be liable to the corporation or to its creditors in respect thereto.

(Ibid.) This does not mean that the holder is no longer liable for
38
the shares if they are not yet fully paid. It only means that the
holder shall not be liable beyond the issued price (see Sec. 62, last
par.), notwithstanding a change in their value;
(4) Shares without par value may not be issued for a consid-
eration less than the value of five pesos per share (Sec. 5, par. 3.);
and
(5) The entire consideration received by the corporation for
its no par value shares shall be treated as capital, and, therefore,
shall not be available for distribution as dividends. (Ibid.) The
theory is that the shareholders intended that all the amounts
paid for no par value shares shall be employed permanently to
the prosecution of the venture.
Consideration for no par value s h a r e s .

Since the value of corporate stocks fluctuates and rarely
represents the par value, corporations are authorized to issue no
par value shares. Such shares may aid the investor to understand
the factors which determine stock value. They also make it easier
for corporations to sell stock under circumstances which may
militate against the interest of the investor. (C.L. James, Principles
of Economics, supra, p. 50.)
(1) A no par value share has no "par value" but it has always
an "issued value" based on the consideration for which it is
issued. Under Section 6, a no par value share may not be issued
for less than P5.00 per share.
(2) While all the par value stocks must be issued at a uniform
value or price, no par value stocks may be issued from time to
time at different prices or values although the holders of all these
shares are entitled to share equally in the distribution of the
profits and assets of the corporation, (see Sec. 62, last par.)
"Issued shares include subscribed shares which are unpaid or partially unpaid, (see
Sec. 137.)
A d v a n t a g e s of par v a l u e s h a r e s .
(1) Par value shares are easily sold as the public is more at-
tracted to buy this kind of shares;
(2) There is greater protection to creditors;
(3) There is unlikelihood of sale of subsequently issued
shares at a lower price; and
(4) There is unlikelihood of the distribution of dividends that
are only ostensible profits, (see Harold, Corporation Finance, p.
35.)
D i s a d v a n t a g e s of par v a l u e s h a r e s .
The following may be mentioned:
(1) The subscribers are liable to corporate creditors for their
unpaid subscription; and
(2) The stated face value of the share is not an accurate crite-
rion of its true value.
A d v a n t a g e s of no par v a l u e s h a r e s .
They are the following:
(1) No par value shares are issued as fully paid and non-
assessable;
39
(2) Their price is flexible;
(3) Low-priced stocks (most no par shares are low-priced)
enjoy wider distribution;
(4) They tell no untruth concerning the value of the stock-
holder's contribution; and
(5) Stock dividends are more easily issued, thereby simplify-
ing accounting procedure. (Ibid.)
^They may be issued at their book value (but not less than P5.00) to raise funds
without the corporation having to incur or increase any bonded indebtedness, (see Sec.
38.)
96
Disadvantages of no par value shares.

(1) They legalize large issues of stock for property;
(2) They conceal the money or property represented by the
shares;
(3) They promote issuance of watered stock (19 Mich. L. Rev.
591-595; see Sec. 65.); and
(4) There is lesser protection to creditors.
Kinds of preferred shares.

They may be:
(1) Preferred share as to assets or share which gives the holder
thereof preference in the distribution of the assets of the corpora-
tion in case of liquidation. (Sec. 6, par. 2.) It has been held that
preferred stock, standing alone, creates a preference only to divi-
dends and not to assets in case of liquidation (Hellmen vs. Penn.
Electric Vehicle Co., 67 Atl. 834.); or
(2) Preferred share as to dividends or share the holder of which
is entitled to receive dividends on said share to the extent agreed
upon before any dividends at all are paid to the holders of
common stock. (2 Fletcher, p. 44.) There is no guaranty, however,
that it will receive any dividends. The corporation is not bound
to pay dividends unless the board of directors declare them. The
40
preference simply means that holders of common stock may
receive dividends only after the satisfaction of the prior claims
on dividends of preferred stockholders.
Preference a m o n g preferred shares.

A corporation may issue more than one class of preferred
stock as to assets or as to dividends. Thus, certain preferred
shares may be given first preference or second preference on
earnings.
Unless a classification is provided in the articles of incor-
poration, the rule is that preferred shares of stock enjoy the same
"Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, p. 69, note 9.
preferences or privileges. Thus, if the articles do not distinguish

between those preferred shares subscribed from the corporation
and those acquired by other modes, as far as preferences are
concerned, the former cannot be considered to enjoy privileges
different from those of the latter. (SEC Opinion, Dec. 4,1981.)
Preferred s t o c k h o l d e r s not creditors

of c o r p o r a t i o n .
Preferred shares of stock issued by a corporation may be
given such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of the
Code. (Sec. 6, par. 2.) Like common shares, they are part of the
corporation's stock. Both common and preferred stockholders
are no different from ordinary investors willing to share in the
profits and losses of the enterprise.
(1) Lien upon corporate property. — Preferences granted to pre-
ferred stockholders do not give them a lien upon the property of
the corporation nor make them creditors of the corporation, the
41
rights of the former being always subordinate to the latter.
(2) Stock issued with a fixed interest. — Stock cannot be issued
with a fixed interest instead of dividends inasmuch as this
will make the contract of subscription one of loan and make
the corporation a debtor of the subscriber. Shareholders, both
common and preferred, are risk takers who invest capital in the
business and who can look only to what is left after corporate
42
debts and liabilities are fully paid. (SEC Opinion, Feb. 10,1969,
citing Ballantine, p. 503.) They sink or swim with the corporation
and there is no obligation to return the value of their snares by
means of repurchase if the corporation incurs losses and financial
reverses, much less guarantee such repurchase through a surety
bond. (Lirag Textile Mills, Inc. vs. Social Security System, 153
SCRA 338 [1987].)
(3) Stock issued with dividends payable in the nature of interest.
— However, the dividends payable by the corporation may be in
the nature of interest as where the parties, under an agreement,
"Ibid.
a
lbid.
98
intended the repurchase by the corporation of preferred shares

with agreed cumulative dividends of a fixed percentage per an-
num, on their respective scheduled dates to be an absolute or un-
conditional obligation which does not depend upon the financial
ability of the corporation, especially so where the obligation is
secured by a surety, notwithstanding that the dividends are sup-
posed to be paid out of net profits and earned surplus. (Ibid.)
(4) Stock issued with dividends payable guaranteed. — The fact
that dividends are, in terms, guaranteed, does not make them
creditors. They are entitled to dividends only when there are
profits out of which dividends may be declared. (SEC Opinion,
Nov. 3, 1986.) Such a guarantee may, however, have the possible
effect of making the dividends cumulative (infra.), that is, mak-
ing the profits of one year make up for the deficiencies of the
preceding year or years. (SEC Opinion, Aug. 24, 1987, citing 11
Fletcher, Sec. 4294.)
(5) Stock issued to creditors. — It is immaterial how or where
the holder obtained his stock since the preference belongs to the
stock and not to the stockholder. Hence, the fact that preferred
stockholders were formerly corporate creditors gives them no
greater right as against creditors. By abandoning their position
as creditors, they lose their rights as such. (Ibid.)
Limitations regarding issuance

of preferred s h a r e s .
There are four (4) legal limitations regarding preferred shares:
(1) Preferred shares deprived of voting rights in the articles
of incorporation (Sec. 6, par. 1.) shall still be entitled to vote on
matters enumerated in Section 6 (par. 6.), although they shall not
be entitled to vote on other matters (last par.);
(2) The preferences of preferred shares must not be violative
of the provisions of the Code;
(3) Preferred shares may be issued only with a stated par
value; and
(4) The board of directors may fix the terms and conditions
of preferred shares of stock or any series thereof only when so
authorized by the articles of incorporation and such terms and
conditions shall be effective upon filing a certificate thereof with

the Securities and Exchange Commission. {Ibid., par. 2.)
A u t h o r i t y of b o a r d of directors to fix t e r m s
a n d c o n d i t i o n s of preferred s h a r e s .
Section 6 (par. 2.) empowers the board of directors, where
authorized in the articles of incorporation, to fix the terms and
conditions of preferred shares of stock or any series thereof. The
financing of an enterprise goes on year after year, as business ex-
pands or the needs of capital arise. (Ballantine, Rev. ed. 1 [1946],
p. 471.)
(1) Benefits from authority given. — The authority enables the
board, without the delay and expense of amendment of the articles
of incorporation, to "tailor its securities to meet changes in market
conditions which cannot be foreseen at the time of incorporation
or later amendment of the articles of incorporation. Typical of the
changes is the variance of the dividend rate to meet the demands
of the money market x x x. The resolution of the directors fixing
such preferences is generally required to be certified and filed or
recorded in the same manner as articles of incorporation, thus,
providing certain information as to the terms of the contract."
(SEC Opinion, Jan. 11,1982, citing Ballantine, Law of Corp., pp.
502-503, and 2 Fletcher, p. 531.)
(2) Concurrence of stockholders not required. — It would not
need the concurrence of two-thirds (2/3) of the outstanding capi-
tal under Section 16 for the board to fix the terms and conditions
of the preferred shares where authorized by the articles of incor-
poration; otherwise, it would defeat the very purpose for which
the authority was granted, which is to allow the corporation
to respond quickly to the fluctuating conditions in the market.
Besides, Section 16 admits or recognizes of exceptions thereto
which is Section 6. (SEC Opinion, Jan. 11,1982.)
(3) Blanket authority not contemplated. — It would be contrary
to Section 6 of the Code to give the board of directors blanket
authority to fix the terms and conditions of the preferred shares
without stating the privileges, preferences, restrictions, or rights
of the preferred shares, (see par. 1, 1st sentence; par. 2, 1st sen-
tence and 2nd proviso.) Unless certain features, guidelines and
100
standards as to the issue of preferred shares are stated or spelled

out in the articles of incorporation, such authorization becomes a
dangerous power which may adversely affect the rights of shares
already issued. (Ibid.) Thus, as a matter of policy, the Securities
and Exchange Commission does not allow a provision giving the
board of directors a blanket authority to fix the terms of preferred
shares unless such guidelines (e.g., setting a specific range of div-
idend rate with minimum and maximum limits) are followed in
the determination thereof. (SEC Opinion, May 24,1994.)
Kinds of preferred shares

as to dividends.
They may be cumulative, non-cumulative, participating,
non-participating, and cumulative-participating.
(1) Cumulative preferred share is share which entitles the hold-
er thereof not only to the payment of current dividends but also
to dividends in arrears. In other words, if the stipulated divi-
dend is not paid in a given year, it shall be added to the dividend
which shall be due the following year and the accumulated divi-
dends must be paid to the holder of said preferred share before
any dividend may be paid to the holders of common stock.
ILLUSTRATION:
Suppose S owns 10 preferred shares of X Corporation with
a par value of P100.00 per share at 5% guaranteed cumulative
dividends.
If after 4 years the corporation decided to declare the
regular annual dividend, S will receive a total of P250.00 for
the 10 shares: P50.00 for each year or a total of P200.00 for the 4
years (representing the dividends in arrears) plus the dividend
of P50.00 for the current year.
All the dividends must be paid to S before any dividends
can be paid to the holders of common shares. This kind of share
protects preferred stockholders against manipulation of the
financial accounts of the corporation to conceal profits.
(2) Non-cumulative preferred share is share which entitles

the holder thereof to the payment of current dividends only in
preference to common stockholders. In other words, if dividends
are not declared in a given year, the right to the dividends for
that particular year is extinguished.
ILLUSTRATION:
In the preceding illustration, if the dividends of S were
non-cumulative, he would be paid only for the current year at
P5.00 per share, or a total of P50.00 for the 10 shares.
(3) Participating preferred share is share which gives the holder

thereof not only the right to receive the stipulated dividends at
the preferred rate but also to participate with the holders of com-
mon shares in the remaining profits pro rata (or in the proportion
stated in the articles of incorporation) after the common shares
have been paid the amount of the stipulated dividend at the
same preferred rate.
(4) Non-participating preferred share is share which entitles the
holder thereof to receive the stipulated preferred dividends and
no more. The balance, if any, is given entirely to the common
stocks.
ILLUSTRATION:
Suppose the capital stock of X Corporation is P100,000.00
divided into 1,000 shares with a par value of P100.00 per share.
Three hundred (300) of the shares are preferred and 700 are
common. The preferred shares are entitled to dividends at the
preferred rate of 10%.
If, at a given year, the corporation declares a dividend of
P5,100.00, the 10% preference must first be paid to the owners
of preferred shares at P10.00 per share or a total of P3,000.00.
The balance of P2,100.00 will be divided among the holders of
common shares at P3.00 each share.
If the dividends declared amount to Pll,400.00, then
the holders of common stock would be receiving P8,400.00
or P12.00 each share. However, if the preferred shares are
participating, the owners thereof share also in the remaining
profits of Pl,400.00 with the holders of common stock after the
latter have been granted a share (P7,000.00) in the balance of
P8,400.00 (Pll,400.00 - P3,000.00) at the same rate of 10%. Thus,
each share will be entitled to an additional dividend of PI.40
(Pl,400.00 -1,000).
102
In the absence of an agreement, express or implied, divi-

dends should be deemed noncumulative and non-participating
in accordance with the presumption established in Section 6 (par.
5.) that shares are equal in all respects unless otherwise stated in
the articles of incorporation and in the certificate of stock.
(5) Cumulative-participating preferred share is share which is
a combination of the cumulative share and participating share.
This means that the holder is entitled not only to dividends in
arrears but also, after receiving his preferred share of dividends,
to participation with the holders of common stock in the
remaining profits.
Sec. 7. Founders'shares. — Founders' shares classified

as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to
vote and be voted for in the election of directors is granted,
it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange
Commission. Period shall commence from the date of
the aforesaid approval by the Securities and Exchange
Commission, (n)
Founders' shares.
Founders' shares have been defined as "shares issued to the
organizers and promoters of a corporation in consideration of
some supposed right or property. Such shares usually share in
profits only after a certain percentage has been paid upon the
common stock, but are often given special privileges over other
stock as to voting and as to division of profits in excess of a mini-
43
mum dividend on the common stock." (Webster's Second Inter-
"They are not to be confused with so-called management shares which are "corporate
stocks generally held by officers or directors of a company that receives no dividends un-
til a specified amount has been paid on the common stock but that receives a large share
of the residual profits." (Ibid. [Third], p. 1372.) Both shares have their origin in English
common law.
Founders' shares (also called managers' shares and deferred shares) are issued com-
monly in Great Britain, rarely in the United States. Their combined voting power is usu-
ally equal to the voting power of the common stock, and they generally have a special
Sec. 7 T I T L E I. G E N E R A L P R O V I S I O N S 103
national Dictionary, p. 997.)

(1) Special rights and privileges. — The shares of stock of a cor-
poration, close or non-close (see Title XII.), may include found-
ers' shares classified as such in the articles of incorporation. Such
shares may be given special rights and privileges not enjoyed
by the owners of other stock including common stocks, such as
preference in the payment of dividends and/or distribution of
assets in case of liquidation, right to convert the shares into other
shares, right to cumulative dividends, etc. to encourage them to
make large investments in the proposed corporation.
(2) Exclusive right to vote and be voted. — Where, however, the
exclusive right to vote and be voted for in the election of directors
is granted, such right must be for a limited period not exceeding
five (5) years subject to approval of the Securities and Exchange
Commission, the period to commence from the date of said
approval, (see Sec. 97[3].)
(a) The five-year period limitation and Commission
approval requirement are designed to protect the interests of
the other stockholders against possible abuse by a minority
holding founders' shares granted the exclusive right to vote
and be voted for in the election of directors, to hold office
for an unlimited term. The limitation is non-extendible. The
claim on earnings, either before or after the payment of dividends to other stockholders.
Their participation in the assets of the corporation in the event of dissolution is usually
limited to the remaining assets after other stockholders have received the amounts to
which they are entitled, according to the provisions of the respective issues. ( E . L . Kohler,
op. cit., p. 221.)
In the deliberation of the Batasang Pambansa on founders' shares, it was the con-
sensus of the lawmakers that the S E C will have to take into account: "x x x whether those
persons to whom the prerogative or right is reserved have, shall we say, contributed
substantially in the organization of the corporation or whether also the business of the
corporation is of a character that is necessary for a period of time that its control must be
to a certain group of individuals. Otherwise, it may not be able to obtain certain conces-
sions, certain loans or certain business because these founders' shares may not only serve
to remunerate possible promoters x x x because of the existence of a certain group of in-
dividuals who have perhaps special qualifications to manage a corporation by reason of
which it is in their competence only that certain other groups with which the corporation
may be dealing and willing or agreeable to enter into transactions with the corporation
but only if the management of that corporation is reserved to that group x x x." (Proceed-
ings of the Batasang Pambansa, Nov. 12,1979, cited in S E C Opinion, April 26,1981.)
It is not clear whether founders' shares would retain their character as such in case
they are transferred by their original owners.
104
Commission may approve or reject the grant of the exclusive

right having in mind as well the protection of the interests of
the corporation itself.
(b) Section 7 provides an exception to the rule in Section 6
(par. 1.) that "no share may be deprived of voting rights except
those classified and issued as 'preferred' or 'redeemable
shares/ unless otherwise provided in this Code."
(c) The limitation in Section 7 refers only to the exclu-
sive right to vote and be voted for in the election of directors,
a right normally enjoyed by holders of common shares, the
class of shares which are supposed to have complete voting
rights. After the expiration of the limitation period, founders
shall have equal rights with the holders of common shares.
Preferred shares are not affected by the provisions in Section
7. Their status remains even after the expiration of the five-
year period. (SEC Opinion, Aug. 8,1995.)
Sec. 8. Redeemable shares. — Redeemable shares may

be issued by the corporation when expressly so provided
in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incor-
poration, which terms and conditions must also be stated
in the certificate of stock representing said shares, (n)
Redeemable s h a r e s .
Redeemable or callable shares are shares, usually preferred,
which by their terms are redeemable at a fixed date or at the
option of either the issuing corporation or the stockholder or
44
both at a certain redemption price.
(1) Meaning of redemption. — It is the repurchase, the
reacquisition of stock by a corporation which issued the stock
in exchange for cash or property, whether or not the acquired
stock is cancelled, retired or held in the treasury. Essentially,
"Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, The
Corporation Code of the Philippines Annotated, p. 75 (1989 ed.).
the corporation gets back some of its stock, distributes cash

or property to the shareholder, and continues in business as
before. The redemption of stock dividends previously issued is
sometimes used by corporations as a veil for the constructive
45
distributions of cash dividends. (Comm. of Internal Revenue vs.
(2) When redeemable shares may be issued. — Under Section 8,
they refer to shares issued by a corporation which said corpo-
ration may purchase or take up from their holders upon the
expiration of a fixed period and upon such terms and conditions
expressly provided in its articles of incorporation and certificates
of stock representing said shares. They may be issued only when
expressly so provided in the articles of incorporation. Common
shares are never "redeemed."
(3) Redemption regardless of existence of unrestricted retained
earnings. — Upon the expiration of the period fixed, they may be
taken up or purchased by the corporation, regardless of the exis-
tence of unrestricted retained earnings (see Sec. 43.) in the books
of the corporation.
(a) The rule in Section 41 is different. The power of the
corporation to acquire its own shares for the purposes stated
therein is subject to the condition that there be unrestricted
retained earnings in its books to cover the shares purchased
or acquired. In the case of redeemable shares, the shareholder
is conferred the right of a creditor to attract corporate financ-
ing.
(b) The issuance of the shares may be likened to the issu-
ance of bonds or debt papers. Since the terms and conditions
of the purchase are stated in the articles of incorporation, as
well as in the corresponding certificates of stock, corporate
creditors and other shareholders are supposed to be aware of
the same.
(c) Strict compliance with statutory or contractual provi-
sions of redemption is essential. The retirement or redemp-
tion of stock by a corporation is different from a purchase by
"See "Tax treatment of stock dividends," under Section 43.

106
a corporation of its own stock. It is said that the manner in

which a duly authorized plan for retiring stock is to be car-
ried out is part of the corporate business, and in the absence
of fraud or bad faith, is not subject to judicial control, (see 11
Fletcher, pp. 381-382 [1971].)
(4) Where corporation insolvent. — Redeemable shares may
be redeemed regardless of the existence of unrestricted retained
earnings, provided that the corporation has, after such redemp-
tion, assets in its books to cover debts and liabilities inclusive of
capital stock. (Sec. 5, par. 5, SEC Rules Governing Redeemable
and Treasury Shares.) Therefore, redemption may not be made
where the corporation is insolvent or if such redemption would
cause insolvency or inability of the corporation to meet its debts
as they mature. (SEC Opinion, Jan. 23, 1985.) Such a limitation is
based on the principle that corporate assets are a trust fund for
creditors." (see Sec. 41.)
(5) Terms and conditions. — Section 8 requires that all the
terms and conditions affecting such shares must be stated not
only in the articles of incorporation but also in the certificate of
stock representing said shares.
Provisions in the articles relating to the redemption of pre-
ferred stock are, in effect, a contract between the issuing corpora-
tion and the preferred stockholders and strict compliance thereof
is essential. Thus, the corporation cannot redeem its preferred
shares before the redemption period or at a discount price in con-
travention of the articles of incorporation to improve its financial
position. The remedy is to amend the articles by changing the
redemption features of the preferred shares. (SEC Opinion, Jan.
23, 1985.)
(6) Redemption optional with corporation. — Except as other-
wise provided therein, the redemption rests entirely with the
"Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, p. 76.
If the redemption would prejudice the rights of corporate creditors, the latter have
the right to question the same. In case of dissolution, holders of redeemable shares are
not entitled to any part of the corporate assets until corporate debts and liabilities are
fully paid. The rights should be deemed subordinate to the rights of corporate creditors.
The rule then is that redeemable shares may be redeemed, regardless of the existence of
unrestricted retained earnings, provided that after such redemption, the corporation has
sufficient assets in its books to cover its debts and liabilities inclusive of its capital stock.
corporation, and the stockholder is without right to either com-

pel or refuse the redemption of his stock, i.e., the payment of cash
in exchange for the stock. The redeemable shares provided in
Section 8 are of the optional, not the obligatory type."
(7) Maintenance of a sinking fund. — For the protection of
stockholders, all corporations which have issued redeemable
shares with mandatory redemption features are required by the
SEC to set up and maintain a sinking fund where cash is gradually
set aside in order to accumulate the amount necessary to meet
the redemption price of redeemable shares at specified dates in
the future. The fund shall be deposited with a trustee bank and
shall not be invested in risky or speculative ventures, (see SEC
Rules Governing Redeemable and Treasury Shares, [CCP] No.
1-1982.)
(8) Purpose of redemption. — Redemption is not a preference
for the benefit of the shareholders but a restriction to be exercised
in the discretion of the board of directors for the benefit of the
owners of the corporation, holders of common shares. It is a safe-
guard to enable a corporation to retire an obligation or a claim
on the earnings, usually at a premium when it becomes advis-
able for purposes of financing. (Ballantine, p. 509 [1946 ed.].) It is
generally held that a corporation may redeem its preferred stock
only when it is expressly authorized by law or has contractually
reserved the right to do so, and that it has no inherent power in
this respect. (Bowman vs. Armour & Co., 17 111. 2d 43.)
In the light of the foregoing, unless expressly provided in the
articles of incorporation and stated in the certificate of stock, pre-
ferred shares shall be deemed irredeemable, (see SEC Opinion,
Dec. 4,1968.)
(9) Effect of redemption. — A redemption by the corporation
8
of its stock is, in a sense, a repurchase of it for cancellation.* The
"Ibid., citing DE LEON, pp. 76-77, note 1.

"Ibid.
The redemption price usually includes the capital component, at par or stated value
per share, and if dividends are cumulative, any arrearages to the redemption date as
the dividend component. Payment of an additional sum is frequently provided for as a
"premium component." (William L. Cary, Cases and Materials on Corporations, 1969 ed.
[University Case Book Series], p. 1616.)
108
retirement of a class of stock destroys all rights adhering to the

shares of that class. (18 Am. Jur. 2d 805.)
(a) In the case of redeemable shares reacquired by the
corporation, the same shall be considered retired and no
longer issuable, unless otherwise provided in its articles of
incorporation, (see SEC Rules [CCP] No. 1-1982, supra.) The
rule is different with respect to treasury shares, (infra.)
(b) Upon redemption, redeemable shares lose their status
as part of the outstanding or unissued authorized capital
stock. They are considered treasury shares after redemption
if by provision of the articles of incorporation they can be
reissued."
(c) Where the reissuance of redeemed shares is prohibited,
either expressly or impliedly by silence, the number of
authorized shares of the capital stock of the corporation is
reduced accordingly, and the articles of incorporation must
be amended to reflect such reduction, (see Sec. 16.)
(10) Voting rights. — Redeemable shares may be deprived of
voting rights in the articles of incorporation, unless otherwise
provided in the Code, (see Sec. 6, pars. 1, 6[l-8].)
Sec. 9. Treasury shares. — Treasury shares are shares

of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation, or through some other
lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors, (n)
Treasury shares.
Treasury shares are shares which have been lawfully issued
by the corporation and fully paid for and later reacquired by it
either by purchase, redemption (Sec. 8.), donation, forfeiture or
other lawful means.
(1) Status. — Section 41 expressly empowers a stock corpora-
tion to purchase or acquire its own snares for legitimate corporate
"Although they are no longer issuable, they may still be considered treasury shares
they continue to be part of the authorized capital stock of the corporation.
purposes. Only surplus earnings may be used for the purchase

of treasury shares. Under Section 68 (last par.), the corporation,
in the absence of a qualified bidder, may bid at the public sale
of delinquent shares and title to the shares purchased shall be
vested in the corporation as treasury shares. The purchase by the
corporation operates, in effect, as a forfeiture of the shares.
(a) Treasury shares are not retired shares. They do not
revert to the unissued shares of the corporation but are
regarded as property acquired by the corporation which may
be reissued or resold by the corporation at a price to be fixed
by the board of directors. (SEC Rules Governing Redeemable
and Treasury Shares, [CCP] No. 1-1982.) Hence, the price paid
out of retained earnings for the value of reacquired shares
should be treated in the corporate books as payment for the
purchase of the shares (SEC Opinion, Feb. 20, 1991.) and an
investment on such property.
Retirement of treasury shares can be effected by decreas-
ing the capital stock of the corporation in accordance with
Section 38 for the purpose of eliminating the treasury shares.
(SEC Rules, CCP No. 1-1982, supra.)
(b) Treasury shares are issued shares but being in the
treasury (hence, the name), they do not have the status of
outstanding shares (Comm. of Internal Revenue vs. Marining,
66 SCRA 14 [1975].), in the sense that they do not constitute
a liability of the corporation. They are, therefore, not a part
of outstanding capital stock, (see Sec. 137.) A corporation
may eliminate the treasury shares by reducing its authorized
capital stock, (see Sees. 38, 57.) Since they do not lose their
status as issued shares, they cannot be treated as new issues
50
when disposed of or reissued.
5
T h e transaction is subject to the registration requirement of the Revised Securi-
ties Act (Part II) considering that the re-issuance thereof may constitute distribution of
securities to the public and consequently, new or additional stockholders may come in.
However, the same may be exempted by the SEC if the transaction is of limited character
where the corporation does not normally acquire its own shares of stock and the number
of shares to be disposed of is usually minimal. But exemption is not automatic. The cor-
poration is still required to secure exemption from the SEC prior to such reissuance pur-
suant to Section 6(b) of the Act. (SEC Opinion, Jan. 14,1993.)
110
(c) A treasury share or stock, which may be common or

preferred, may be used for a variety of corporate purposes,
such as for a stock bonus plan for management and employees,
or for acquiring another company. It may be held indefinitely,
resold or retired. While held in the company's treasury, the
stock earns no dividends and has no vote in company's
affairs. (Philippine Coconut Producers Federation, Inc. vs.
Republic, 600 SCRA 102 [2009].)
(d) Treasury shares must be distinguished from the
authorized but unissued shares in that the acquisition of the
former does not reduce the number of issued shares or the
amount of stated capital stock and their sale does not increase
the number of issued shares or the amount of stated capital.
(SEC Opinion, Jan. 14, 1993, citing 11 Fletcher, chap. 58, sec.
5088.)
(2) Where acquisition from stockholders. — Shares may be
acquired by the corporation from stockholders by purchase,
redemption, or donation, or through some other lawful means.
(a) If the corporation acquires the shares by purchase
from stockholders, the transaction is, in effect, a return to
them of the value of their investments in the company, and
a reversion of the shares to the corporation. It is required in
such cases, however, that the corporation must have surplus
with which to buy the shares so that the transaction will not
cause an impairment of its capital, (see Sec. 41.)
(b) On the other hand, if the shares are donated to the
corporation by the stockholders, their act would simply
amount to the surrender of their stock without getting back
their investments which are, instead, voluntarily given to the
corporation.
In both kinds of acquisition of the corporation, therefore,
the shares would have value but inasmuch as they have been
acquired by the corporation, they would cease to represent any
right. (SEC Opinion, Nov. 22,1966.) Treasury shares are recorded
at cost.
(3) Dividend restriction on retained earnings. — As a general
rule, a corporation can reacquire its own shares provided it has
an adequate amount of unrestricted retained earnings to support

51
the cost of the said shares. Thus, the capital stock is preserved.
Accordingly, the amount of such earnings equivalent to the
cost of the treasury shares being held, cannot be declared and
distributed as dividends. Such restriction shall be lifted only
after the treasury shares are reissued or retired in accordance
with law. (SEC Rules, CCP No. 1-1982.)
(4) Declaration as property dividend. — Treasury shares being
unrealized income, are not considered as part of earned or
surplus profits, and, therefore, not distributable as dividends,
either in cash or stock. But if there are retained earnings arising
from the business of the corporation, treasury shares, being the
property of the corporation, may properly be distributed as
property dividend. (SEC Opinion, Oct. 1,1985.)
The Securities and Exchange Commission requires that an
amount of the retained earnings equivalent to the cost of treasury
shares be restricted from being declared as dividends, until said
shares are reissued or retired. Treasury shares may be declared
as property dividend to be issued out of the retained earnings
previously used to support their acquisition, provided that the
amount of the said retained earnings has not been subsequently
impaired by losses. Any declaration and issuance of treasury
shares as property dividend shall be disclosed and properly
designated as property dividend in the books of the corporation
and in its financial statements. (SEC Rules, CCP No. 182, supra.)
(5) Voting rights. — Treasury shares have no voting rights as
long as they remain in the treasury (Sec. 57.), i.e., uncancelled
and subject to reissue. A corporation cannot in any proper sense
be a stockholder in itself, and shares of its own stock, therefore,
held by it cannot be voted or be entitled to vote, for otherwise,
equal distribution of voting powers among stockholders will
be effectively lost and the directors will be able to perpetuate
their control of the corporation. (Comm. of Internal Revenue vs.
Manning, supra; San Miguel Corporation vs. Sandiganbayan, 340
SCRA 289 [2000].)
51
For exceptions to this rule, see note under Section 41.
112
(6) Right to dividends. — Neither are treasury shares entitled

to dividends or assets because dividends cannot be declared by a
corporation to itself. (Ibid.) Such distribution of dividends would
be like making the corporation debtor and creditor of the same
52
amount at the same time or requiring it to take money or stock
from one of its pockets and putting the same in another, which
would be pointless. Hence, stock dividend (see Sec. 43.) may
not be declared on treasury stock even on the express condition
that such dividend shall also be treated as treasury stock. (SEC
Opinion, Nov. 2,1966.) "So, what rights, if any, remain? Perhaps
the right of the corporation to reissue its treasury shares for a
valuable consideration if its charter permits but this is a mere
incident of incorporation which is applicable to unissued as well
as to issued shares x x x." (Ballantine, p. 615 [1946].) Treasury
shares are no longer part of the "outstanding capital stock." (see
Sec. 137.)
(7) Resale. — They may be sold by the corporation at any
price the board of directors sees fit to accept, even at less than
par or issued value, the corporation having already received
the full value upon their initial issuance, provided such price is
reasonable under the circumstances: (see Sec. 65.)
(a) Stockholders may rightfully complain if the price is
lower than reasonable.
(b) In case of sale or reissue, the treasury shares again
becomes outstanding stock and regain whatever dividends
and voting rights they originally held.
(c) Treasury shares differ from retired or cancelled
shares in that while the latter has disappeared altogether, the
former may be sold. Section 36(6) expressly authorizes stock
corporations to sell treasury shares subject to the provisions
M
of Section 9. Their status on resale differs from that of newly
52
Art. 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person. (Civil Code)
"There has been considerable discussion among accountants, and some shifting of
opinions, as to the proper accounting treatment of purchases of shares for the treasury.
Such shares are not, in fact, a corporate asset. Where they are acquired out of surplus, it
seems clear, particularly in states in which their acquisition out of capital is illegal, that
created shares which cannot be issued for less than the legal
minimum consideration, (see Sec. 62.)
(d) The sale of treasury shares should be treated as a sale
of ordinary property of the corporation; hence, the gain there-
from is subject to tax. The purpose of the sale is to recover the
amount paid by the corporation for said shares.
— oOo —
the surplus should be reduced or earmarked as restricted to the extent of the amount paid
for the shares. But the restriction may be lifted and the surplus restored, even as earned
surplus, if thereafter the treasury shares are resold (to the extent the amount received cov-
ers what has been paid to reacquire them), or if the shares are retired. (William L. Cary,
op. cit., p. 1615.)
Title II
INCORPORATION AND ORGANIZATION

OF PRIVATE CORPORATIONS
Sec. 10. Number and qualifications of incorporators. —

Any number of natural persons not less than five (5) but
not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of
the incorporators of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of
the corporation. (6a)
Incorporation of a private corporation

a mere privilege.
Generally, incorporation is generated by agreements of
a group of persons, and may, therefore, be likened to other
contracts which individuals may enter into. But such agreements
alone are not sufficient for a corporation to exist. It is necessary
that legislative authority be obtained to put a stamp of state
intervention in the creation of corporations, such power being
one of the attributes of sovereignty. (18 C.J.S. 404.)
In our jurisdiction, the right to be and act as a corporation
does not belong to any person as a natural and civil right, but
as a special privilege conferred upon a group of persons by the
sovereign power of the State. Until there is a grant of such right,
therefore, whether by special act of the legislature or under
general law, there can be no corporation. Under Section 10, the
formation of a corporation "for any lawful purpose or purposes,"
provided it is in accordance with the Code, is a matter of right
and cannot be restrained, (see Sec. 17.)
114
Sec. 10 TITLE n. INCORPORATION AND ORGANIZATION 115
Since a corporation is merely a creation of law, it can be dis-

solved at any time by legislative enactment subject to certain
limitations, (see Title XIV.)
Advantages of the corporate form.

The advantages of incorporation are so well understood that
it seems almost superfluous to enumerate them, (see Sec. 2.)
Nevertheless, it may be useful to mention here only its chief ad-
vantages as stated by a well-known authority.
First, through the process of incorporation, any number of
persons may unite in a single enterprise without using their
own names, without difficulty or inconvenience, and with the
valuable right to contract, to sue and be sued, to hold or convey
property in the corporate name, and to act as a legal unit.
Second, an individual stockholder may invest in the corporate
enterprise as much or as little as he sees fit, without risking more,
and, in the absence of statutes to the contrary, this is the limit of
his liability, since stockholders are not personally liable for the
debts of the corporation. They can transfer their shares without
the consent of the other stockholders.
Third, the rights and obligations of a corporation are not
affected by the death or change of the individual members, but
the corporate business continues uninterrupted and unaffected
so long as the corporate entity continues. Its credit is strengthened
by such continuity of existence.
Fourth, the modern corporation makes great undertakings
feasible since it enables many individuals to cooperate in order
to furnish the large amounts of capital necessary to finance the
gigantic enterprises of modern times, (see 1 Fletcher, p. 42.)
The resulting large-scale enterprise may be more efficient, thus
lowering the costs of production. (C.L. James, Principles of
Economics, supra, p. 46.)
Corporations a n d associations
distinguished.
(1) Concept of association. — A corporation is defined by Sec-
tion 2 of the Code. The word "association" is one of vague mean-
116
ing, used to indicate a collection of persons who have joined to-

gether for a certain object. The term is properly applied to an
unincorporated society or body of individuals, formed for moral,
benevolent, social, patriotic, or political purposes. (5 Am. Jur. 2d
430-431.)
(2) Possession of juridical personality. — While an association
may, in its broadest sense, include a corporation, the two terms
ordinarily are used to denote different conceptions. The princi-
pal distinction lies in the fact that a corporation is a legal entity
deriving its existence from franchise, whereas an association, in
the narrower sense of the term, is a creature of contract without a
legal entity separate from the individuals composing it. (7 C.J.S.
21.) It is clear from the foregoing that the two terms, "corpora-
tion" and "association," denote two different significations in the
strict legal sense.
(3) Governing law. — Moreover, private corporations are
governed by the Corporation Code, while associations are
generally governed by the provisions of the Civil Code or some
other laws. (SEC Opinion, July 27, 1962.) Article 45 of the Civil
Code provides, among other things, that "private corporations
are regulated by laws of general application on the subject; while
partnerships and associations for private purposes are governed
by the provisions of this Code concerning partnerships."
(4) Capacity to act in its name. — Article 46 of the Civil Code
also provides: "Juridical persons may acquire and possess
property of all kinds as well as incur obligations and bring civil
or criminal actions in conformity with the laws and regulations
of their organization." Thus, an association cannot sue or be
sued, it cannot enter into contracts in the name of the association,
and neither can it acquire properties under its common name.
Contracts entered into in its behalf make the person signing
or executing them liable to the other contracting party. (SEC
Opinion, July 23,1990.)
An association is not competent to act as agent or create
agents or confer upon another authority to act on its behalf, and
those who act or purport to act as its representatives or agents
do so at their own risk. (Vda. de Salvatierra vs. Garlitos, 103 Phil.
757 [1958].)
(5) Validity and enforcement of acts. — The fact, however, that

a group of persons adopt a name and operate without first being
organized as a legal entity, does not make their acts necessarily
void. Their acts may be valid, although unenforceable under the
name they have adopted. If a suit is to be brought to enforce their
rights, they have to sue as individuals and not in the name of the
group or association, it not being a legal unit, (see Rules of Court,
Rule 3, Sec. 15.)
It follows that although an association has no juridical per-
sonality, its subscription to the capital stock of a corporation is
not necessarily invalid. Of course, the subscription should not
be taken and accepted under such name, in the first place. (SEC
Opinion, March 11,1969.)
(6) Powers, rights, and privileges. — A society or association
not engaged in business and not desirous of acquiring juridical
personality need not be registered with the Securities and
Exchange Commission. (SEC Opinion, Aug. 22, 1989.) An
unregistered organization, however, cannot exercise the powers,
rights and privileges incident to incorporation and expressly
granted to registered corporations under Section 36 of the
Corporation Code.
(7) Policy of judicial non-interference. — The general rule is that
courts will not interfere with the internal affairs of an unincorpo-
rated association so as to settle disputes between the members
on questions of policy, discipline, or internal government. (Lions
Clubs International vs. Amores, 121 SCRA 621 [1983].)
Concept of franchise.
In common usage, the term "franchise" includes any special
privilege or right affected with public interest, conferred by the
State on corporations or persons and which does not belong to
the citizens of the country, generally as a matter of common right,
(see J.R.S. Business Corp. vs. Imperial Insurance, Inc., 11 SCRA
634 [1964]; National Power Corporation vs. City of Cabanatuan,
401 SCRA 259 [2003].) To illustrate:
No persons can make themselves a body corporate without
legislative authority. The right to exist, therefore, as a corpora-
118
tion is a (primary or corporate) franchise. No person can take

another's property even for public use, without such authority,
which is the same as to say that the right of eminent domain can
only be exercised by virtue of a legislative grant. This right of
eminent domain is a (secondary or special) franchise.
As a privilege, a franchise is not exercised by private indivi-
duals at their mere will and pleasure only but under such condi-
tions, regulations, and restrictions as the government may deem
necessary to impose in the public interest, security and safety.
Primary franchise a n d s e c o n d a r y franchise

defined and distinguished.
For practical purposes, franchises, so far as relating to corpo-
rations, have been divided into two kinds:
(1) Primary or corporate franchise is the right or privilege
granted to individuals by the State to be and act as a corporation
after its incorporation. This privilege, which is granted to the in-
corporators, enables them to act for certain designated purposes
as a single individual and exempts them, unless otherwise espe-
cially provided, from individual liability for corporate debts. (18
Am. Jur. 2d 608-609.)
The primary franchise (also called "general franchise") is
granted to and vests in the individuals who compose the corpo-
ration and not in the corporation itself.
(2) The right to exist as a corporation is thus distinguished
from the franchise to exercise powers and privileges granted
to such corporation to the business for which it was created,
including those conferred for purposes of public benefit such as
the power of eminent domain and other powers and privileges
enjoyed by public utilities, which is called secondary or special
franchise. Only quasi-public corporations or those affected with
public interest are given the power to institute condemnation
proceedings against owners of private property. It is unlawful
to grant the right of eminent domain to purely private entities,
exercising functions which are not public in nature. For in such
cases, they would be using the right to take property for private
use. (SEC Opinion, Oct. 28,1968.)
Sec. 10 TITLE II. INCORPORATION AND ORGANIZATION 119
The secondary franchise is conferred upon the corporation

after its incorporation and not upon the individuals who com-
pose the corporation.
It has been held by the Supreme Court that the term
"franchise" used in the 1935 Constitution of the Philippines,
that "no franchise, certificate or any other form of authorization
for the operation of a public utility shall be granted except to
corporations or other entities organized under the laws of the
Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines x x x." (Article XIV, Sec. 5 thereof.'),
refers to secondary franchise or the privilege to operate as a
public utility after the corporation has already come into being.
The Constitution does not prohibit the mere formation of a
public utility corporation without the required proportion of
capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility
to a corporation already in existence but without the requisite
proportion of Filipino capital. (People vs. Quasha, 93 Phil. 333
[1935].) This ruling must be qualified in view of Section 17(4).
(infra.)
Transferability of f r a n c h i s e .
The term "franchise" is generic, covering all the rights granted
by the State. It may mean either the corporate or primary franchise
which is the right granted to a group of individuals to exist and
act as a corporation, or the secondary or special franchise which
is the right granted to a corporation to exercise certain powers
and privileges, (supra.)
(1) The primary franchise is in its nature inalienable. It is part
of the corporation and cannot be sold or assigned; otherwise, a
corporation would be created without the consent of the legisla-
ture. (Memphis, etc., RRC vs. Railroad Comrs., 112 U.S. 609, 28
L. ed. 837.) It may be conveyed provided there is express legisla-
tive authority to do so. (J.R.S. vs. Imperial Insurance Co., Inc., 11
SCRA 634 [1964].)
(2) The secondary franchise, which is vested in the corporation
itself, may ordinarily be conveyed or mortgaged under a general
•Now Article XII, Section 11.

THE COPvPORATION CODE OF THE PHILIPPINES Sec. 10
120
power granted to a corporation to dispose of its property, except

such franchises as are charged with a public use. (Ibid.) Thus, if
the corporation is a public utility, its franchise can only be sold
subject to the prior approval and authorization of the (now de-
funct) Public Service Commission. (Act No. 156, Sec. 20[g], as
amended.) It has been held that even if the franchise is sold
under execution, such approval of the Public Service Commis-
sion is still necessary. (Raymundo vs. Luneta Motor Co., 58 Phil.
880 [1933].) In the absence of such approval in the transfer of
the property covered by the franchise, the transferor or grantee
continues to be responsible under the franchise in relation to the
Commission and to the public. The transferee holds the property
as agent for the registered owner as far as the law is concerned.
("Y" Transit Co., Inc. vs. National Labor Relations Commission,
229 SCRA 508 [1994].)
A secondary franchise is subject to levy and sale on execu-
tion, together with all the property necessary for the enjoyment
thereof. However, where the judgment does not contain any spe-
cial decree making the franchise of a private corporation answer-
able for its judgment debt, the inclusion of said corporation's
franchise (e.g., to operate a messenger as delivery service), trade
name and capital stocks in the execution sale of its properties
has no justification and such sale should be set aside insofar as it
2
authorizes such levy and sale. (J.R.S. Business Corp. vs. Imperial
Insurance, Inc., supra.)
Steps in the creation of a c o r p o r a t i o n .

There are three (3) steps in the creation and organization of a
corporation, namely:
(1) Promotion;
(2) Incorporation (Sec. 10.); and
2
Under the former Corporation Law (Act No. 1459, as amended.), voluntary transfer
of franchise is not permitted. Sections 51 to 61 of the law refer to forced or involuntary
transfer or sale of secondary franchise under execution. But the sale must be "especially
decreed and ordered in the judgment" of the court and "confirmed by the court after due
notice." (Sec. 56 thereof.)
(3) Formal organization and commencement of business

operations, (see Sec. 22.)
P r o m o t i o n of c o r p o r a t i o n s .
The term "promotion" is said to be not a legal but a business
term, usefully summing up in a single word, a number of
business operations peculiar to the commercial world by which
a company is generally brought into existence. (18 Am. Jur. 2d
647.)
The formation and organization of a corporation are brought
about generally at the instance and under the supervision of one
or more so called "promoters." (see Sec. 4.) The activity on the
part of such persons is not, strictly speaking, a formal part of the
organization of a corporation, inasmuch as it occurs outside the
corporate form and theoretically, at least, independent thereof.
(Ibid.) Upon incorporation, the practice is for the board of direc-
tors to pass a resolution ratifying the contracts entered into by
the incorporators with the promoters.
A corporation, however, may be formed and organized by
the incorporators themselves without getting the services of so-
called promoters.
P r o m o t e r s of c o r p o r a t i o n .
A promoter of a corporation is one who, alone or with others,
takes it upon himself to organize a corporation: to procure the
necessary legislation, where that is necessary; to procure the
necessary subscribers to the articles of incorporation, where
the corporation is organized under general laws; to see that
the necessary document is presented to the proper office to
be recorded and the certificate of incorporation issued; and
generally, to "float the company."
Promoters are often referred to, especially in the English
cases, as "projectors," "agents," "stewards," or "trustees,"
but whatever term is applied, it means "one who acts in the
formation, establishment, and control of a company prior to
the incorporation and the assumption of control by the board
of directors." (18 C.J.S. 521-522.) They are the agents of the
incorporators.
122
Stages in corporate promotion.

A corporate promotion is said to include three (3) stages, to
wit:
(1) Discovery. — This stage may represent a new product or
service, or the promoter may simply organize another company
in an existing line of business;
(2) Investigation. — This second phase involves an analysis of
needs — financial, management, plant, material and labor — and
a decision whether the estimated earnings justify the effort; and
(3) Assembly. — This last stage consists of bringing together
the property, money, and personnel into an organization. At
this stage, the promoter must have some assurance of control
lest third parties deprive him of the fruits of his efforts. Control
may cover such items, for example, as patents, leases, options on
property, and contracts for services.
The above is a description of the promoter in the economic
sense. At law, promoter problems arise in several contexts. For
example, the extent of his rewards and the manner of obtaining
them may sometimes be subject to question. (W.L. Cary, Cases
and Materials on Corporations, 1969 ed. [University Case Book
Series], p. 86.)
Nature of relations of p r o m o t e r s .
(1) To corporation. — A promoter has a unique relation to a
corporation representing its interest when it does not legally ex-
ist or has just been created.
(a) The promoters of a corporation are not in any sense
the agents of the corporation before it comes into existence,
for there cannot be an agency unless there is a principal. But
they may, of course, become the agents of the corporation
after it has been formed provided there is assent, express or
implied, on the part of the corporation. (18 C.J.S. 522.)
(b) Although promoters cannot occupy the relation of
agent of the corporation before its formation, and although
they are not trustees in the proper sense, it is well-settled
that they occupy a fiduciary or quasi-trust relation toward
the corporation when it comes into existence and towards
the subscribers prior to its organization, as long as they are

acting as promoters. (Ibid.) This fiduciary relation imposes
upon the promoter to act in good faith in all dealings in behalf
of the corporation to protect the corporation from dishonest
promoters. A promoter violates this duty if, for example, he
secretly acquires property which he knows the corporation
will acquire and then sells it to the corporation at a secret
profit.
(2) To subscribers or corporators. — Although promoters of
a corporation cannot be agents of the corporation before it is
formed, they may be agents of the subscribers or corporators.
(a) Since agency is a contract, it is essential that there is
an agreement to this effect.
(b) Even when there is no agency, the relation between
the promoters and the persons who have become, or who are
expected to become, subscribers for its capital stock, or cor-
porators, or purchasers of stock from the corporation, is one
of trust and confidence, so as to impose upon the former the
duty to act in perfect good faith and in the interest of all the
subscribers and corporators.
(c) Subscribers for stock in a proposed corporation do
not, without agreement to such effect, become partners with
the promoters of it. (14 C.J. 254.)
(d) Stockholders of a corporation cannot be held person-
ally liable for the compensation claimed by promoters for
services performed by them in the organization of the corpo-
ration in the absence of any showing that said stockholders
contracted such services. The fact that they benefited from
such services is no justification to hold them personally liable
therefor. The corporation should alone be liable for its cor-
porate acts as duly authorized by its officers and directors.
(Caram, Jr. vs. Court of Appeals, 151 SCRA 372 [1987].)
(3) Inter se. — A partnership can be created, as between the
parties themselves, only by mutual agreement, and, therefore,
promoters do not become partners as between themselves, in the
absence of such agreement, by merely joining in an attempt to
create a corporation, by uniting in subscriptions for stock, or by
124
otherwise promoting the creation of the corporation. But such a

relation may, of course, be created by agreement of the parties, in
which case it is governed by the general principles of the law of
partnership. (14 C.J. 254.)
It is, however, unimportant to determine whether the rela-
tionship is a partnership or a mere joint venture since in both
cases, the legal rules which apply and the principles which
govern the parties are the same. Each member is bound to the
same scrupulous good faith toward his fellow members as
though all were partners, and each has the right to demand from
the others the utmost good faith in everything concerning the
common interest. (18 Am. Jur. 2d 676.)
Liability of corporation for p r o m o t i o n

fees.
(1) General rule. — In the absence of character or statutory
provisions, a corporation is not liable to its promoters in respect
for any payment in services rendered or expenses incurred before
its incorporation in promoting it, unless after its incorporation it
expressly agrees to make such payment or from the other facts
the court can infer a new contract to reimburse.
(a) It is more reasonable to hold services performed or
expenses incurred prior to organization of a corporation to
have been gratuitous in view of the general good or private
benefit expected to result from the object of the corporation,
and because it is unjust to stockholders who subscribe and
pay for stock, that their property be subject to claims to which
they have no voice in creating.
(b) It is a fraud for promoters to undertake to decide for
the future stockholders in the corporation to be organized
that a large part of the capital stock is a fair remuneration
for their services, to issue that amount to themselves as such
remuneration, and then to invite the public to subscribe to
stock without disclosing that fact and getting the subscribers
consent to the payment of that remuneration. (18 Am. Jur. 2d
649.)
(2) Authorization by stockholders. — After due organization of
the corporation, it may, with the consent of all its stockholders
and where there is no question as to the rights of subsequent

stockholders, authorize the payment of compensation to pro-
moters and the issuance to them of stock unless prohibited by
statute. (Ibid.)
(3) Under the Revised Securities Act. — The Code contains
no provision regarding the payment of promotion fees for the
promotion of corporations. The Revised Securities Act, however,
authorizes the payment of such fees if the same is provided for
in the registration statement of securities filed with the Securities
and Exchange Commission under Section 8(34) of said Act. It
follows that if the securities of the company are not registered
under the Securities Act, the prevailing rule of proper corporate
practice on the payment of such fee should be the one observed,
but if the securities are registered under the said Act, the
provisions of the registration statement on the matter should be
followed.
(4) Amount. — The amount of promotion fees that the Securi-
ties and Exchange Commission allows depends principally upon
the effort exerted, the difficulties encountered, and the expenses
incurred in promoting and organizing the corporation. There is
no hard and fast rule in this regard. However, in certain cases in
which the Commission had authorized the payment of promo-
tion fees as in the case of mining companies, the maximum fee
that had been allowed did not exceed 5% of the amount paid and
received on the subscriptions.
As a rule, this promotion fee is not given in lump sum but in
stages as the company proceeds in its operations. (SEC Opinions,
July 10,1963 and July 22,1970.)
Liability of corporation on promoter's

contracts.
(1) Before incorporation and organization. — Until the certificate
of incorporation has been issued by the Securities and Exchange
Commission (see Sec. 19.), a corporation has no being, franchise
or faculties. Its promoters or those engaged in bringing it into
existence are in no sense identical with the corporation; nor do
they represent it in any relation of agency or have any authority
to enter into preliminary contracts binding upon the corporation.
126
Therefore, since a corporation cannot, before its organization,

have agents contract for itself, or be contracted with, it is not
liable upon any contract which a promoter attempts to make
for it prior to its organization unless the contract is expressly or
impliedly adopted or ratified by it after organization is completed
or liability is imposed by statute.
In other words, a promoter's contract does not, by the incor-
poration of a contemplated company, ipso facto become the con-
tract of the corporation.
(2) After incorporation and organization. — Under the gene-
ral rule permitting a corporation to assume liability on a
promoter's contract, the contract must, of course, be one such as
the corporation can itself make. A corporation as a legal entity
cannot assume the obligations of an ultra vires contract (see Sec.
45.) made by its promoters anymore than it can legally initiate
such contract. (18 Am. Jur. 2d 600-601; see Cagayan Fishing Dev.
Co., Inc. vs. Sandiko, 65 Phil. 223 [1937].)
Until such assumption of liability is made, the better rule
seems to be that contracts entered into by promoters "should at
most be deemed suspended, and enforceable only after the incor-
poration and organization" of the corporation, (see C.G. Alven-
dia, op. cit., p. 135.)
Liability of promoters for failure

to organize corporation.
(1) To subscribers. — If money is paid to promoters or provi-
sional directors by a subscriber for shares in a projected corpo-
ration preliminary to organization, and the promoters or provi-
sional directors fail to organize the corporation according to the
prospectus or other agreement or abandon the enterprise before
it has been carried into execution, it is a case of money paid on
a consideration which has failed. The subscriber may, therefore,
recover it back from the promoters or directors in an action at
law although the money has been applied in payment of prelimi-
nary expenses or otherwise. (18 C.J.S. 537.) Where, however, the
subscriber agrees that the amount paid on his subscription may
be applied on certain promotional or development expenses and
it is so applied, the promoters are not personally liable for the
amount paid on the subscription where the project to organize

the corporation is abandoned. (18 Am. Jur. 2d 660.)
It must be shown by the subscriber that the person receiving
the money sought to be recovered was authorized to receive it
for the promoters or provisional directors or for the abortive cor-
poration, and that he in fact did so receive it. (14 C.J. 276.)
(2) To each other. — While it has been held that as between
themselves the rights of the stockholders in a defectively
incorporated association should be governed by the laws of the
State relating thereto and not by the rules governing partners,
it is ordinarily held that persons who attempt, but fail, to form
a corporation and who carry on business under the corporate
name, occupy the position of partners inter se. (see Sees. 22-23.)
But such a relation should be implied only to do justice between
the parties. So, one who takes no part except to subscribe for
stock in a proposed corporation which is never legally formed
does not become a partner with the other subscribers. (Pioneer
Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668
[1989].)
Underwriting agreements.
Underwriting agreements are now resorted to very generally
in order to float stock issues of large corporations.
There are four general types of underwriting contract.
First, the syndicate may make a firm commitment under
3
which the members severally but not jointly agree to purchase

the whole issue outright at a particular price for resale at a price
differential to the public, or to dealers who sell at another differ-
ential to the public.
Second, the underwriters may make an all-or-nothing commit-
ment under which they agree to accept liability for the purchase
'Underwriting syndicate is the term used to refer to a group of investment bankers

who have pooled their resources to share in the profits of an underwriting on a pro rata
basis according to the amount of underwriting risk assumed. (Ibid., p. 64.) The contract
may be entered into by the underwriter or underwriters with the corporation or with the
promoter before incorporation.
128
of an issue at a given price only if the entire issue is not sold —

usually within a 30-day period.
Third, the syndicate may make a standby commitment or rights
offering under which it will purchase and distribute at predeter-
mined prices to the public any amount of the issue not taken by
stockholders in exercising their pre-emptive rights.
Fourth, the underwriters may decide to make only a best
efforts commitment. This merely means that the syndicate will
use its best efforts to distribute the issue to the public. Under
such commitment, the syndicate does not agree to purchase the
issue at predetermined prices. The security is sold for whatever
price it will bring, the underwriters take a predetermined spread,
and the issuers take the residual. Under a variation of this
arrangement, there may be a fixed price but no guarantee on the
quantity sold, (see J. Zwick & N. Norton, "Investment Banking
and Underwriting," in The Stock Market Handbook, edited by F.
Zarb & G. Kerekes, Vol. 1,1970 ed., p. 65.)
The term "underwriting" is defined under the Investment
Houses Law (Pres. Decree No. 129.) as "the act or process of
guaranteeing the distribution and sale of securities of any kind
issued by another corporation." (Sec. 3[a] thereof.)
Incorporation distinguished f r o m
creation.
The term "incorporation" is narrower in scope than the term

"creation."
The first "refers to the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts, certifications
or records, which give the corporation its existence." On the other
hand, the second, "understood in its broadest sense, includes all
of the acts and doings from the enactment of the general incorpo-
ration law by the legislature through the promotion, underwrit-
ing, preparation and execution and filing of the incorporation
papers and obtaining the certificate or charter, to the organiza-
tion and first meeting and election which set the corporation in
motion full-pledged." (C.G. Alvendia, op. cit., p. 73.)
Incorporation distinguished f r o m
corporation.
A corporation is a civil institution established by a law of

the State from considerations of public policy. Its existence, its
capacities, and its powers are all conferred by law from some
real or supposed public benefit to result from it. It is a political
institution of the State.
The words "corporation" and "incorporation" are frequently
confounded, particularly in the old books. The distinction between
them is, however, obvious: one is a legal or juridical institution;
the other, only the act by which that institution is created. When
a corporation is said to be a person, it is understood to be so
only in certain respects and for certain purposes, for it is strictly
a legal institution, (see 9-A Words and Phrases 453.)
S t e p s in incorporation.
Incorporation includes the following:
(1) Drafting and execution of the articles of incorporation by
the incorporators and other documents required for registration
of the corporation. In this connection, the person chosen as tem-
porary treasurer pending incorporation must also execute:
(a) An affidavit certifying compliance with subscription
and paid-up requirements as to capital stock (see Sec. 14, last
par.);
(2) Filing with the Securities and Exchange Commission of
4
the articles of incorporation together with the following:
4
The Securities and Exchange Commission also requires the following documents to
be submitted with the articles of incorporation:
(1) Verification Slip, a certification to be attached to the articles of incorporation/
partnership and executed by the chief of the Records Section that the proposed name of
the corporation /partnership has been verified and found to be distinct from the names of
already existing corporations/partnerships or those pending registration;
(2) Sworn Statement of Assets and Liabilities, duly executed under oath by the corpo-
rate treasurer together with the amount of P50.00 to defray publication expenses;
(3) Bank Certificate of Deposit, issued under oath either by the Bank Manager or
any authorized Bank Officer that there is, as deposited, a stated amount representing
the paid-up capital of the corporation either in the name of the Treasurer in trust for the
corporation or in the name of the corporation itself, likewise to be attached to the articles
of incorporation;
130
(a) Treasurer's affidavit in the form prescribed in Section

15 showing at least 25% of the entire authorized shares has
been subscribed and at least 25% of the subscription has been
paid in cash and/or property to the corporation (Ibid.); and
(b) In case the corporation is governed by a special law
(e.g., educational institution), a favorable recommendation of
the appropriate government agency (i.e., Department of Edu-
cation, Culture and Sports) that such articles of incorporation
is in accordance with law (see Sec. 17, last par.);
(3) Payment of the filing and publication fees (see Sec. 139.);
and
(4) The issuance by the Securities and Exchange Commis-
sion of the certificate of incorporation if all the papers filed after
verification and examination are found in order, (see Sec. 19.)
There are rules or requirements under special laws to be
complied with in organizing specific business and to endow the
corporation with the capacity to transact the business for which
5
it was created.
Substantial c o m p l i a n c e w i t h r e q u i r e m e n t s .
Where the formation or organization of corporations is not
governed by special laws (e.g., those engaged in real estate devel-
opment), the Securities and Exchange Commission may accept
and approve the articles of incorporation or amendments therein
upon mere showing of a substantial compliance with the Corpo-
ration Code (SEC Opinion, Oct. 12, 1988.) and that it meets the
guidelines established by the Commission. (SEC Opinion, June
19,1989.)
(4) Written Authority to Verify Bank Deposits, signed by the corporate treasurer em-
powering the SEC and / or the Central Bank to check and inspect the existence of the bank
deposit of the corporate paid-up capital;
(5) Taxpayer Account Number (TAN), now Taxpayer Identification Number (TIN) of the
Incorporators, pursuant to Executive Order No. 213; and
(6) Registration Data Sheet, a statement in statistical data form signed by an
authorized representative of the corporation regarding important information about the
corporation seal, corporate name, principal office, capital structure, incorporators, their
subscriptions, and TAN (SEC Bulletin, Oct. 1982, p. 6 ) , now TIN.
sSee Guidelines in the Formation and Organization of a Private Stock Corporation.
(Appendix "D.")
It is a general principle that substantial compliance with

the requirements of the statute authorizing the formation of
corporations is all that is necessary to legal incorporation and
to the existence of a corporation. Thus, Section 14 requires
that articles of incorporation shall contain "substantially" the
matters enumerated, "except as otherwise provided by this
Code or by special law," while Section 15 provides that the
articles of incorporation shall comply "substantially" with the
form prescribed therein. Section 17(1) likewise requires a mere
substantial compliance with the form prescribed in the Code
relative to the approval of articles of incorporation and any
amendment thereto. (Ibid.)
Where there is substantial compliance with the legal require-
ments, the registration of the proposed corporation becomes a
matter of right, (see Sec. 17.)
The Securities and Exchange Commission has adopted an
express lane service whereby the required forms for incorporation
of corporations, whether stock or non-stock, are made available
to the public for nominal fees.
Incorporators: n u m b e r a n d qualifications.
Section 10 provides that the incorporators must be not less
than five but not more than fifteen, all of legal age, a majority of
whom are residents of the Philippines, and each of whom must
own or be a subscriber to at least one share of the capital stock
of the corporation. If the number of incorporators is more than
fifteen, the excess will not be considered as incorporators. Unless
otherwise expressly provided in the articles of incorporation, a
corporation cannot impose other qualifications. The same rule
applies as to stockholders.
The general practice is for the incorporators to serve as the
first directors of the corporation.
(1) These five or more persons must be natural persons. Con-
sequently, a corporation cannot be an incorporator of another
corporation. (El Hogar Filipino vs. Government, 50 Phil. 399
[1927].) The rule is premised on the nature of corporations as fol-
lows: "Artificial persons, without brain or body, existing only on
paper through legislative command and incapable of thought or
132
action except through natural persons, cannot create other arti-

ficial persons, and those others still, until the line is so extended
and the capital stock so duplicated and reduplicated as to result
in confusion and fraud." (Schwab vs. Poeter Co., 194 N.Y. 409.)
As an example of an exception to the rule, Section 4 of R.A.
No. 7353 (Rural Banks Act of 1992.) provides that duly estab-
lished cooperatives and corporations primarily organized to
hold equities in rural banks may organize rural banks and/or
subscribe to shares of stock of any rural bank. Accordingly, if the
corporation is a cooperative, it may become an incorporator of a
rural banking corporation.
In any case, a corporation may become a stockholder
in another corporation by subscribing to or purchasing the
latter's stock (see Sec. 36[7].), for the power of one corporation
to own stock in another corporation is entirely different from
its power to create or itself become one of the incorporators of
another corporation, (see 18 C.J.S. 414.) However, as a practical
matter, a corporation could have its stockholders, directors, or
officers, acting as individuals, organize a new corporation and
thereafter the first corporation could acquire the stock of the new
corporation. (18 Am. Jur. 2d 584.)
(2) The incorporators must have the capacity to enter into a
valid contract, the act of forming a corporation as between the
parties being contractual. Furthermore, the articles of incorpora-
tion, under Section 15, must be acknowledged by the incorpora-
tors before a notary public. There is thereby the requirement that
the incorporators must be qualified to enter into a contract. The
purpose of requiring the acknowledgment is to secure the State
and all concerned against the possibility of any fictitious name
being subscribed to the articles and to furnish proof of the genu-
ineness of the signatures. (1 Fletcher, p. 414.)
A married woman may be an incorporator without the need of
obtaining the consent of her husband since under the law, "either
spouse may exercise any legitimate profession, occupation,
business or activity without the consent of the other" subject
to the right of the husband to "object only on valid, serious
and moral grounds." (Art. 73, Family Code.) A minor who is
emancipated either by marriage or by voluntary concession of

the parents is not qualified to be an incorporator because Section
6
10 requires that the incorporators must be "all of legal age."
The Code does not prohibit the formation or organization of
corporations with same stockholders/incorporators, subject to
the provisions of Section 140. (SEC Opinion, July 28,1978.)
(3) A majority of the incorporators must be residents of the
7
Philippines, the rest may be persons who are neither residents
nor citizens of the Philippines. Hence, a corporation composed
entirely of aliens may be incorporated as long as the majority of
the incorporators are residents of the Philippines except in the
case of nationalized corporations, (see Sees. 12,14 [eleventh].)
The Code does not define the word "residents" but the term
must be construed to mean domiciled residents, as distinguished
from temporary residents with a domicile in another country.
The term "resident" or "residence," as used in corporate statutes
requiring one or certain number of directors to be residents of the
State, is equivalent to domicile, the pertinent elements of which
are physical presence in the State and an intention to remain
therein. (SEC Opinion, Jan. 17, 1985, citing 2 Fletcher, 1969 ed.,
Sec. 307, p. 97.) The domicile of natural persons is the place of
their habitual residence (Art. 50, Civil Code.); it is the place
where one has his true, fixed, permanent home and to which he,
whenever he is absent, has the intention of returning. (25 Am.
Jur. 2d 5.)
The residence requirement is likewise mandatory. Section
10, however, does not require that majority of the members must
'Article 236 of the Family Code (Exec. Order No. 209, July 6, 1987.), however, pro-
vides: "Emancipation for any cause shall terminate parental authority over the person
and property of the child who shall then be qualified and responsible for all acts of civil
life." The Corporation Code is a special law. The Family Code, however, has reduced the
majority age to 18 years. (Art. 234.)
If the parents of minor children are still living and exercising parental authority over
them, other nominees cannot act as their legal guardians or trustees to hold the minors'
shares in trust. (SEC Opinion, Aug. 10,1987; see Arts. 220, 225, 226, Family Code.)
'Alien residents are required to submit the original as well as the photostat of their
Alien Certificate of Registration (ACR), Immigrant Certificate of Registration (ICR), and
the latest renewal of their ACR. In lieu of these certificates, a certification by the munici-
pal or city treasurer of the municipality where the alien resides as to the number, place
and date of the ARC and IRC may be submitted. (SEC Bulletin, October 1982, p. 5.)
134
also be residents. Accordingly, a situation wherein majority of

the members of a corporation are nonresidents is allowable. (SEC
Opinion, July 22,1994.) But a majority of the directors or trustees
of all corporations must be residents of the Philippines, (see Sec.
23, last sentence.)
(4) By specific constitutional and legal provisions, citizenship
is a necessary qualification for incorporators in corporations in
which a certain percentage of the capital stock is required to be
owned by Filipino citizens, (infra., under Sec. 15[llth].) Foreign
shareholders may be debarred from certain nationalized activi-
ties which are exclusively reserved for Filipino citizens. The rule
applies to directors or trustees, (see Sees. 12, 23.) Enemy aliens
cannot become incorporators, for subjects of one country cannot
lawfully contract with the subjects of the country with which it is
at war. (White vs. Burneley, 20 How. 235.)
(5) The Code now expressly requires that "each of the incor-
porators of a stock corporation must own or be a subscriber to
at least one (1) share of the capital stock of the corporation."
(Sec. 10.) The presumption is that where an incorporator has a
pecuniary interest in the corporation, he will be concerned with
the management of its affairs.
Requirement regarding m i n i m u m n u m b e r
of incorporators mandatory.
The requirement of the law regarding the minimum number
of incorporators is mandatory and a dejure corporation (Sec. 20.)
cannot be legally formed by less than the prescribed number
except in the case of a corporation sole, (see Sec. 110.) In case of
educational corporations, their incorporation "shall be governed
by special laws and by the general provisions of [the] Code."
(Sec. 106.)
(1) Reduction of stockholders or members to less than minimum.
— The number of stockholders (or members) after the corpora-
tion is organized may become less than the minimum number
required for incorporation without affecting corporate existence
unless valid grounds exist for piercing or lifting the corporate
veil, (see Sec. 2.)
(2) Beneficial ownership in one individual. — The requirement

of minimum number of incorporators is one of those provisions,
however, which are formal rather than substantial and which are
regularly evaded in practice. Since the law permits a scheme by
which all the shares are owned by a single individual, the latter
may incorporate provided he associates with him, at least nomi-
nally, the number of persons required by the law. (Louiseville
Banking Co. vs. Eisenmen, 21 S.W. 531.)
The validity of the incorporation is not affected by the fact
that it is formed in the interest of a single individual, and that
the other persons under his control, without any substantial
interest, or without individual responsibility who may only be
called "qualifying stockholders," or who are popularly known
8
as dummies or "men of straw." Beneficial ownership is not
necessary, and a person who holds the legal title to stock is
qualified to become an incorporator.
(3) Subsequent accumulation of shares in one individual. —
Nor is the existence of the corporation originally formed by the
required number of incorporators affected by the subsequent
accumulation of all the shares in the hands of one individual (18
C.J.S. 415-416.), unless, as previously said, circumstances exist to
justify the piercing of the veil of corporate entity, (see Sec. 2.)
Sec. 11. Corporate term. — A corporation shall exist

for a period not exceeding fifty (50) years from the date
of incorporation unless sooner dissolved or unless said
period is extended. That corporate term as originally
stated in the articles of incorporation may be extended
for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation,
in accordance with this Code: Provided, That no extension
8
"In jurisdictions where the incorporators elect the directors, the custom is that the
dummy incorporators should terminate their duties with the meeting of the incorpora-
tors, and at that time elect those who are to be actual directors of the company. If, under
the statute, the incorporators are also directors, they may present to the first meeting their
resignation as directors and, as incorporators, proceed to fill the vacancies. If the incorpo-
rators are dummies and also subscribers to shares, they would execute the assignments of
their subscriptions to the real parties in interest, which assignments would be approved
at the meeting and annexed to the minutes. This would, of course, be the last item of the
business done at the meeting." (W.L. Cary, op. cit., p. 43.)
136
can be made earlier than five (5) years prior to the original
or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by
the Securities and Exchange Commission. (6a)
Term of corporate existence.

The corporation shall exist for the term specified in the
articles of incorporation' not exceeding fifty years, unless sooner
legally dissolved (Sees. 19, 22, 117-122, 144, 145.) or unless its
registration is revoked upon any of the grounds provided by law.
(see Sec. 6, Pres. Decree No. 902-A; see also Sec. 22.)
The corporate life may be reduced (see Sec. 120.) or extend-
ed by amendment of the articles of incorporation by complying
with the procedural requirements laid down in Section 37.
Extension of corporate t e r m .
(1) Limitations. — The extension of corporate term is subject
to the following limitations:
(a) The term shall not exceed fifty years in any one
10
instance;
(b) The amendment is effected" before the expiration
'In line with the policy of the government encouraging deregulation in economic ac-
tivities and eliminating the requirement of unnecessary licenses and permits to such legal
extent as possible and taking into consideration the huge number of existing corporations
and partnerships registered, the Securities and Exchange Commission does not require a
mandatory annual renewal of the Certificate of Registration of any corporation, partner-
ship, or association under its jurisdiction. (SEC Opinion, July 29,1994.)
"The suspension of the activities and operations of a corporation during the period
of enemy occupation may not be considered as having automatically operated to deprive
it of a corresponding part of its juridical life as fixed in its articles of incorporation.
Consequently, the original term of existence cannot be extended without violating the
law. (SEC Opinion, Nov. 21,1962.) Under Article 605 of the Civil Code, "usufruct cannot
be constituted in favor of a town, corporation or association for more than fifty years x x
x." The law clearly limits any usufruct in favor of a corporation to 50 years. A usufruct is
meant only as a lifetime grant. The period cannot be extended in case the corporation's
lifetime is extended. (National Housing Authority vs. Court of Appeals, 456 SCRA 17
[2005].) '
"Under the doctrine of relation which has been applied in American decisions, where
the delay in effecting the amendment is due to the neglect of the officer with whom the
application is required to be filed or to a wrongful refusal on his part to receive it, the
same will be treated as having been filed before the expiry date. The doctrine does not
apply where the delay is attributable to the corporation. (SEC Opinion, May 14,1987.)
of the corporate term of existence, for after dissolution by

expiration of the corporate term there is no more corporate
12
life to extend. Hence, the extension cannot be done during
the three-year period of liquidation (Alhambra Cigar vs SEC
24 SCRA 269 [1968]; see Sec. 122.); and
(c) The extension cannot be made earlier than five (5)
years prior to the expiration date unless there are justifiable
reasons therefor as may be determined by the Securities and
Exchange Commission.
(2) Effect of extension!expiration of term. — The mere extension
of the corporate term of existence made before the expiration of
the original term constitutes a continuation of the old, and not
the creation of a new, corporation.
Upon the expiration of the period fixed in the articles of
incorporation, in the absence of compliance with the legal
requisites for the extension of the period, the corporation ceases
to exist and is dissolved ipso facto. (Phil. National Bank vs. CFI of
Rizal, 209 SCRA 294 [1992].)
The expiration of the term for which the corporation was
created does not, however, produce its immediate dissolution for
all purposes. (Sec. 122.)
liability to third parties
The occurrence of a fortuitous event (Act of God) or force majeure (Act of Man) is
considered a meritorious reason by the SEC to justify the doctrine. The test applied by
the SEC is whether under the particular circumstances there was such an insuperable
interference occurring without the corporation's intervention as could not have been pre-
vented by prudence, diligence, and care. However, since the privilege of extension is
purely statutory, all of the statutory conditions precedent for extension of corporate life
are not to be given a liberal interpretation. (SEC Opinion, July 7,1987.)
"However, if it is desired to continue the business for which the corporation was
originally organized, the following steps leading to its reincorporation may be taken:
(1) A meeting of the stockholders should be called for the purpose of discussing and
deciding the question of reincorporation. Stockholders who do not consent to the rein-
corporation should be given their corresponding participations in the remaining assets
of the company after providing for its outstanding liabilities; (2) A copy of the resolution
signed by all the stockholders voting for the reincorporation of the company and duly
countersigned by the president and secretary of the meeting should be submitted to the
Securities and Exchange Commission, together with the new articles of incorporation
duly executed in accordance with law; and (3) A proper deed of assignment of the assets
and liabilities of the defunct corporation being conveyed to the new one may include,
among other things, the use of the corporate name of the former in case the latter desires
to do business under the old name, and should be attached to the articles of reincorpora-
tion. The deed of assignment should include or be accompanied by a detailed inventory
of the said assets and liabilities. (SEC Opinion, Nov. 21,1962.)
138
A corporation whose corporate life has expired may be re-

incorporated only by complying with the registration require-
ments under the Corporation Code, viz., filing of new articles
of incorporation and by-laws accompanied by supporting
documents required for registration. A corporation that has been
reincorporated after its original terms of existence has expired
does not automatically succeed to the assets of the original
corporation which is deemed dissolved in the absence of a
corporate liquidation under Section 222. (SEC Opinion No. 06-
33, Oct. 3, 2006.)
(3) Automatic extension of term. — Section 11 allows the
automatic extension of the corporate existence by amendment
of the articles of incorporation within the five (5)-year period
before the expiration date of the existing term, during which the
Securities and Exchange Commission may look, if necessary, into
the financial structure of the corporation and its past operations
or actuations. (SEC Opinion, Dec. 18,1963.)
The Code places no limit to the number of extensions that
may be made.
Period of corporate existence a matter

of public interest.
The State has an obvious interest in the term of life of cor-
porations, since the conferment of juridical capacity upon them
during such period is a privilege that is derived from statute. It
is obvious that no agreement between the stockholders or mem-
bers can result in giving rise to a new and distinct personality,
possessing independent rights and obligations, unless the law
itself shall decree such result.
And the State is naturally interested that this privilege be
enjoyed only under the conditions and not beyond the period
that it sees fit to grant; and, particularly, that it be not abused
in fraud and to the detriment of other parties; for this reason,
it has been ruled that the limitation (of corporate existence) to
a definite period is an exercise of control in the interest of the
public. (Benguet Consolidated Mining Co. vs. Pineda, 98 Phil.
711 [1956], citing Smith vs. Eastwood Wire Manufacturing; Co.,
43 Atl. 568.)
Sec. 12. Minimum capital stock required of stock corpora-

tions. — Stock corporations incorporated under this Code
shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for
by special law, and subject to the provisions of the follow-
ing section, (n)
Capital stock r e q u i r e m e n t .
The Code does not set a minimum authorized capital stock
except as otherwise provided by special law as long as the paid-
13
up capital as required by Section 13 is not less than P5,000.00.
The old law has also no capital stock requirement. It merely re-
quires that the articles of incorporation state the amount of the
corporation's capital stock.
A minimum capital stock requirement is considered arbitrary
and does not assure any practical protection to corporate credi-
tors. Special laws may, however, require a higher paid-up capital,
as in the case of commercial banks, insurance companies, and
investment houses.
Filipino p e r c e n t a g e o w n e r s h i p requirement
regarding corporate capital.
By specific constitutional and legal provisions, Filipino own-
ership of a certain percentage of the capital stock or capital is
required in certain cases, such as:
(1) Corporations for exploration, development, and utilization of
natural resources. — at least 60% of the capital of which is owned
by citizens of the Philippines. (Constitution of the Philippines,
Art. XII, Sec. 2.) The word "capital" in the above constitutional
provision should be understood to mean "outstanding capital
stock" in case of stock corporation;
(2) Public service corporations. — at least 60% of the capital of
which is owned by citizens of the Philippines. The participation
of foreign investors in the governing body of any public utility
l3
The Securities and Exchange Commission does not entertain any application for
incorporation or increase of capital stock where the par value per share is less than P0.01.
(SEC Bulletin, October 1982, p. 5.)
140
enterprise shall be limited to their proportionate share in its capi-

tal, and all the executive and managing officers of such corpora-
tion must be Filipino citizens (Ibid., Art. XII, Sec. 11.);
(3) Educational corporations. — other than those established
by religious orders and mission boards, at least 60% of the capi-
tal of which is owned by citizens of the Philippines. The control
and administration of educational institutions shall be vested in
Filipino citizens (Ibid., Art. XIV, Sec. 4[1].);
(4) Corporations engaged in mass media and advertising industry.
— the first must be wholly (i.e., 100%) owned and managed
14
by Filipino citizens, while at least 70% of the capital stock of
the second must be owned by citizens of the Philippines. The
participation of foreign investors in the governing body of a
corporation engaged in the advertising industry shall be limited
to their proportionate share in the capital thereof, and all the
executive and managing officer of such corporation must be
Filipino citizens (Ibid., Art. XVI, Sec. 11.);
(5) Banking corporations. — at least 60% of the capital stock of
any bank or banking institution which may be established after
the approval of the General Banking Act (July 24, 1948) shall be
owned by citizens of the Philippines (Rep. Act No. 377, Sec. 2.);
(6) Corporations engaged in retail trade. — the capital of which
must be wholly owned by citizens of the Philippines (R.A. No.
1180, Sec. 1.);
(7) Rural banks. — the capital stock of which must be fully
owned and held directly or indirectly by Filipino citizens or cor-
porations, associations, or cooperatives qualified under Philip-
pine laws to own or hold such capital stock (R.A. No. 7353, Sec.
4.);
(8) Corporations engaged in coastwise shipping. — at least 60%
of the capital stock of which or of any interest in said capital is
totally owned by citizens of the Philippines (Pres. Decree No.
1464 [Tariff and Customs Code], Sec. 806.);
4
While a 60% Filipino/40% foreign-owned corporation may be considered a "Phil-
ippine National" (see Sec. 123.) for purposes of investment in another corporation, it is
not qualified to invest in business activities the ownership of which under the Constitu-
tion or other special laws is limited to Filipino citizens only. (SEC Opinion, June 18,1998.)
(9) Financing companies. — at least 60% of the capital stock

shall be owned by citizens of the Philippines (R.A. No. 5980, as
amended, Sec. 16.);
(10) Corporations engaged in the pawnshop business. — at least
70% of the voting capital stock shall be owned by citizens of the
Philippines (Pres. Decree No. 114, Sec. 8.);
(11) Corporations engaged in the recruitment and placement of
workers, locally or overseas. — at least 75% of the authorized and
voting capital stock is owned and controlled by Filipino citizens
(Pres. Decree No. 442 [Labor Code], as amended, Sec. 27.);
(12) Corporations engaged in the operation of a private detective,
watchman or security guard agencies. — Must be 100% Filipino
owned (R.A. No. 5487, Sec. 4.); and
(13) Under the Flag Law. — In the purchase of articles for
the Government, preference shall be given to materials and
supplies produced, made, or manufactured in the Philippines,
and to domestic entities. The term "domestic entities" means any
citizen of the Philippines or any corporate body or commercial
company at least 75% of the capital of which is owned by citizens
of the Philippines. (C.A. No. 138, Sec. 1.)
Sec. 13. Amount of capital stock to be subscribed and paid

for purposes of incorporation. — At least twenty-five percent
(25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five percent (25%)
of the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in no case
shall the paid-up capital be less than five thousand pesos
(P5.000.00). (n)
M i n i m u m subscription and paid-up

capital.
(1) Pre-incorporation. — Section 13 requires that at least 25%
of the amount of the authorized capital stocks has been actually
142
subscribed and that at least 25% of such subscription paid. In no

case shall the paid-up capital be less than P5,000.00. Violation of
the provision may subject the erring incorporators and/or direc-
tors for prosecution as provided under Section 144.
(a) The Commission, however, has the power to
require that the authorized capital stock to be not less than
a certain amount (e.g., P100,000.00) such that the 25% paid-
up capital will be more than P5,000.00. These requirements
are mandatory. Accordingly, if they are not complied with,
no stock corporation can be lawfully incorporated even if a
certificate of incorporation has been issued by the Securities
15
and Exchange Commission in good faith.
(b) The policy of the Commission is to require full pay-
ment of subscription by foreigners as it will be difficult to
compel them to pay their unpaid subscriptions when they
are outside the country unless they can give sufficient secu-
rity to guarantee full payment. (SEC Opinion, Aug. 28,1989.)
(c) The number of shares subscribed, the amount subs-
cribed, and the amount paid by each stockholder must be
stated in the articles of incorporation. (Sees. 14[8], 14[8th,
9th].)
(d) Special laws may require a higher paid-up capital. For
example, the minimum paid-up capital of insurance corpora-
tion is P5 million. (Pres. Decree No. 1460 [Insurance Code],
15
"If a corporation is organized and carries on business without substantial capital
in such a way that the corporation is likely to have no sufficient assets available to meet
its debts, it is inequitable that shareholders should set up such a flimsy organization to
escape personal liability. The attempt to do corporate business without providing any
sufficient basis of financial responsibility to creditors is an abuse of the separate entity
and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be
recognized as the policy of the law that shareholders should in good faith put at the risk
of the business unencumbered capital reasonably adequate for its prospective liabilities.
If capital is illusory or trifling compared with the business to be done and the risks of loss,
this is a ground for denying the separate entity privilege." (Keating, Judge [dissenting],
citing Ballantine, pp. 302-303, in Walkovszky vs. Carlton, 18 N.Y. 2d 414, 223 N.E. 2d 6.)
"An obvious inadequacy of capital, measured by the nature and magnitude of the
corporate undertaking, has frequently been an important factor in cases denying stock-
holders their defense of limited liability . . . that rule has been invoked even in absence of
a legislative policy which undercapitalization would defeat." (Anderson vs. Abbot, 321
U.S. 349, 362-363.)
Sec. 188.) A pawnshop established as a corporation must

have a paid-up capital of at least P100,000.00. (Pres. Decree
No. 114, Sec. 7.) A minimum paid-up capital of P50 million
is required for a financial intermediary applying (beginning
Aug. 22,1980.) for authority to perform quasi-banking func-
tions. (Central Bank Cir. No. 757, dated Aug. 22,1980.)
(2) Post incorporation. — The minimum 25% subscription and
25% paid-up capital is required not only during the incorpora-
tion period but also in case of increase of the authorized capital
1
stock. - (Sec. 38, par. 4.)
(a) The requirement is designed to give assurance to
the investing public dealing with the corporation that it is
financially and actually able to operate and undertake to do
business and meet its obligations as they arise from the start
of its operations. Accordingly, the 25% minimum paid-up
capital requirement would not apply to subsequent subscrip-
tions to the unsubscribed shares of the corporation since the
evils or risks of insolvency against which the law intends to
safeguard the public no longer exist. (SEC Opinion, June 29,
1976.)
(b) The call by the board of directors for the payment of
the balance of subscriptions (see Sec. 67.) is required only
when there is no fixed date for payment in the contract of
subscription.
(c) It is not required for purposes of incorporation that
each and every subscriber shall pay 25% of his subscription.
The paid-up requirement is met as long as "25% of the total
subscription" is paid although some subscribers have paid
less than 25%, or even have not paid any amount.
16
It is the policy of the Securities and Exchange Commission to require full payment
of the subscription where the subscriber is a nonresident foreign individual. If full pay-
ment thereof cannot be made, any of the resident subscribers may, alone or jointly and
severally with other subscribers, undertake to pay the unpaid balance of the subscription
if the same is not paid upon call. (SEC Opinion, Nov. 14,1973.)
If female subscribers are married and the payments on their subscription consist of
conjugal funds, they must submit the written consent of their respective husbands. If the
subscription to the authorized capital stock exceeds 25% and the subscribers are more
than 15 persons, a request must be filed for exemption from registration under the Securi-
ties Act of the total issuance of shares. (SEC Bulletin, October 1982, p. 6.)
144
(d) It would seem that the minimum 25% paid-up require-

ment applies only to par value shares because a subscriber to
no par value shares must pay in full his subscription since
under Section 6 (par. 2.), "shares of capital stock issued
without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to
the corporation or to its creditors in respect thereto."
ILLUSTRATION:
Suppose it be desired that Corporation X be incorporated
with a capital stock of P100,000.00 divided into 1,000 shares
with a par value of P100.00 per share.
In such case, there must be subscribed 250 shares of the
par value of P25,000.00 which "shares represent twenty-five
percent (25%) of the authorized capital stock" and of the
subscription, there must be paid to the corporation "at least
twenty-five percent (25%)" thereof or P6,250.00 (paid-up
capital), in actual cash and/or property the fair valuation of
which equals P6,250.00. (see Sec. 14, last par.)
If the amount of the authorized capital stock is only
P75,000.00, the 25% subscription would be P18,750.00 and if
25% of the latter amount is paid, the paid-up capital would
only be P4,687.50. Section 13 requires that the paid-up capital
be not less than P5,000.00.
It is not required for purposes of incorporation that
each and every subscriber shall pay 25% of his subscription.
The paid-up requirement is met as long as "25% of the total
subscription" is paid although some subscribers have paid less
than 25%, or even have not paid any amount.
Computation of the 2 5 % subscription

requirement.
(1) Where the capital stock consists only of par value shares,
the minimum subscription should be 25% of the a m o u n t of the
authorized capital stock or 25% of the aggregate value of all the
shares of stock the corporation is authorized to issue.
In par value stock corporations, the percentage subscription
requirement shall always be based on the a m o u n t of the author-
ized capital stock irrespective of the class, number, and par value
of the shares.
(2) Where the capital stock consists only of no par value shares,
the 25% requirement shall be computed on the basis of the entire
number of authorized shares. Corporations whose shares have
no par value have no authorized capital stock, (see Sec. ^ [ s e v -
enth].) The issued price of no par value shares need not be fixed
in the articles of incorporation, (see Sec. 62, last par.)
(3) Where the capital stock is divided into par value shares and
no par value shares, the requirement as to par value shares is as
indicated above and for the no par value shares, the 25% is based
on the number of said no par value shares.
Subscription of corporations.
(1) Domestic corporations. — They may subscribe initially to
the capital stock of another proposed corporation but their sub-
scriptions cannot be taken into consideration in the computation
of the 25% subscription and 25% paid-up capital requirement of
the law. The reason is because a corporation cannot become in-
corporators under Section 10. (SEC Opinion, May 23,1967.)
(2) Foreign corporations. — Such corporations, whether resi-
dent (i.e., engaged in business in the Philippines) and nonresi-
dent, may subscribe to the stocks of domestic corporations as
long as they are authorized by their charters to hold shares in
other corporations. Their subscriptions shall not also be counted
in the computation of the minimum subscription and payment
requirements. (SEC Opinion, Nov. 14,1973.)
It is the policy of the Securities and Exchange Commission
to require corporations to pay their subscriptions in full. This is
based upon the fact that while a corporation has an unlimited
capacity to contract obligations, it has only a limited capacity to
pay. (SEC Opinion, May 23,1967.)
Sec. 14. Contents of articles of incorporation. — All

corporations organized under this Code shall file with
the Securities and Exchange Commission articles of
incorporation In any of the official languages duly signed
and acknowledged by all of the incorporators, containing
146
substantially the following matters, except as otherwise

prescribed by this Code or by special law:
(1) The name of the corporation;
(2) The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation
has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose and
which is/are the secondary purpose or purposes; Provided,
That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
(3) The place where the principal office of the corpora-
tion is to be located, which must be within the Philippines;
(4) The term for which the corporation is to exist;
(5) The names, nationalities and residences of the
incorporators;
(6) The number of directors or trustees, which shall
not be less than five (5) nor more than fifteen (15);
(7) The names, nationalities and residences of the
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified
in accordance with this Code;
(8) If it be a stock corporation, the amount of its
authorized capital stock in lawful money of the Philippines,
the number of shares into which it is divided, and in case
the shares are par value shares, the par value of each,
the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are
without par value, such fact must be stated;
(9) If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of the
contributors and the amount contributed by each; and
(10) Such other matters as are not inconsistent with
law and which the incorporators may deem necessary and
convenient.
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock corporation
unless accompanied by a sworn statement of the Treasurer
. 15 TITLE II. INCORPORATION AND ORGANIZATION
elected by the subscribers showing that at least twenty-

five percent (25%) of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five
percent (25%) of the total subscription has been fully paid
to him in actual cash and/or in property the fair valuation
of which is equal to at least twenty-five percent (25%) of
the said subscription, such paid-up capital being not less
than five thousand pesos (P5,000.00). (6a, 9a)
Sec. 15. Form of Articles of Incorporation. — Unless

otherwise prescribed by special law, articles of incorpo-
ration of all domestic corporations shall comply substan-
tially with the following form:
ARTICLES OF INCORPORATION
OF
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have
this day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the Philip-
pines.
And we hereby certify:

FIRST: That the name of said corporation shall be
«• Inc. or
Corporation";
SECOND: That the purpose or purposes for which
such corporation is incorporated are (If there is more than
one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is
located in the City/Municipality of
Province of
Philippines;
FOURTH: That the term for which the said corporation
is to exist is years from and after the date
of issuance of the certificate of incorporation;
148
FIFTH: That the names, nationalities and residences of

the incorporators of the corporation are as follows:
Name Nationality Residence
SIXTH: That the number of directors or trustees of the

corporation shall be ; and the names,
nationalities and residences of the first directors or trust-
ees of the corporation are as follows:
Name Nationality Residence
SEVENTH: That the authorized capital stock of the cor-

poration is (P. ) pesos in
lawful money of the Philippines, divided into
shares with the par value of (P. )
pesos per share.
(In case all the shares are without par value):
That the capital stock of the corporation is
shares without par value. (In case some shares have par
value and some are without par value): That the capi-
tal stock of said corporation consists of
shares of which shares are of the par value of
(P- ) pesos each, and of which
shares are without par value.
EIGHTH: That at least twenty-five percent (25%) of the
authorized capital stock above stated has been subscribed
as follows:
15 TITLE II. INCORPORATION AND ORGANIZATION
No. of
Name of Shares Amount
Subscriber Nationality Subscribed Subscribed
NINTH: That the above-named subscribers have paid

at least twenty-five percent (25%) of the total subscription
as follows:
Name of Amount Total Paid-in

Subscriber Subscribed
(Modify Nos. 8 and 9 if shares are with no par value. In

case the corporation is non-stock, Nos. 7, 8 and 9 of the
above articles may be modified accordingly, and it is suf-
ficient if the articles state the amount of capital or money
contributed or donated by specified persons, stating the
names, nationalities and residences of the contributors or
donors and the respective amount given by each.)
TENTH: That has been
elected by the subscribers as Treasurer of the Corpora-
tion to act as such until his successor is duly elected and
qualified in accordance with the by-laws, and that as such
Treasurer, he has been authorized to receive for and in the
name and for the benefit of the corporation, all subscrip-
tions (or fees) or contributions or donations paid or given
by the subscribers or members.
ELEVENTH: Corporations which will engage in any
business or activity reserved for Filipino citizens shall pro-
vide the following:
"No transfer of stock or interest which will reduce the
ownership of Filipino citizens to less than the required
150
percentage of the capital stock as provided by existing

laws shall be allowed or permitted to be recorded in the
proper books of the corporation and this restriction shall
be indicated in all the stock certificates issued by the
corporation."
IN WITNESS WHEREOF, we have hereunto signed
these Articles of Incorporation, this day of
19 in the City/Municipality of Province
of Republic of the Philippines.
(Names and signatures of the incorporators)
Signed in the presence of:
(Notarial Acknowledgment)
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES)

CITY/MUNICIPALITY OF )S.S.
PROVINCE OF
I, , being
duly sworn, depose and say:
That I have been elected by the subscribers of the
corporation as Treasurer thereof, to act as such until
my successor has been duly elected and qualified in
accordance with the by-laws of the corporation, and that
as such Treasurer, I hereby certify under oath that at least
25% of the authorized capital stock of the corporation has
been subscribed and at least 25% of the total subscription
has been paid, and received by me, in cash or property, in
the amount of not less than P5.000.00, in accordance with
the Corporation Code.
(Signature of Treasurer)
Sees. 14-15 TITLE II. INCORPORATION AND ORGANIZATION 151
Subscribed and sworn to before me, a Notary Pub-

lic, for and in the City/Municipality of
Province of this day of "!"l9"!"!!j
by with Res. Cert. No issued
at on 19
NOTARY PUBLIC
My commission expires on
19
Doc. No
Page No
Book No
Series of 19.
(7a)
Meaning of articles of incorporation.

The articles of incorporation is the document prepared by the
persons establishing a corporation and filed with the Securities
and Exchange Commission containing the matters required by
the Code.
It has been described as one that defines the charter of the
corporation and the contractual relationships between the State
and the corporation, the stockholders and the State, and between
the corporation and the stockholders. (Government of the Phil.
Islands vs. Manila Railroad Co., 52 Phil. 699 [1929].)
A copy of the articles filed which is returned with the certificate
of incorporation issued by the Commission under its official seal
7
becomes its corporate charter enabling the corporation to exist
and function as such, (see Sec. 19.)
A corporation created by special law (see Sec. 4.) has no
articles of incorporation.
"The special law creating a government-owned or -controlled corporation (see Sec.

4.) is often referred to as "charter." The older word, charter, at one time referred to an
individual statute that through the first quarter of the 19th century was the only device
employed by American State Legislatures for permitting the establishment of a private
corporation. The corporation laws of the United States and foreign countries alike now
provide for the creation and licensing of a business corporation by action of administra-
tive authorities. (E.L. Kohler, op. cit., p. 36.)
THE CORPORATION CODE OF THE PHILIPPINES Sees. 14-15
152
Contents and form of articles of incorporation.

(1) Section 14 enumerates the matters (mandatory provi-
sions) that must be stated in the articles of incorporation of do-
mestic corporations, except as otherwise prescribed by the Code
or by special law.
(a) The incorporators may include such other matters
as are not inconsistent with law and which they may deem
necessary and convenient (No. 10.), such as the classes of
shares which the corporation may issue (Sec. 6.), provisions
on preemptive right (Sec. 39.), etc.
(b) The contents of the articles of incorporation may be
held valid as an agreement between the parties thereto, even
though the validity of such may be subject to question. (18
Am. Jur. 2d 585.)
(c) Under the last paragraph, the Securities and Exchange
Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn
statement of the treasurer elected by the subscribers showing
compliance with the requirement as to the niinimum amount
of the subscribed and paid-up capital stock.
(d) The articles of incorporations may provide other
matters or items (optional provisions) as long as they are not
contrary to any provision of the Code or special law.
(2) On the other hand, Section 15 provides the form of the
articles of incorporation of all domestic corporations, unless
otherwise prescribed by special law.
(a) It must include the affidavit of the treasurer of
the corporation concerning the amount of capital stock
subscribed and paid. The matter required to be stated by
Section 14(8) is the actual "amount subscribed and paid" by
each subscriber on his subscription. It is not to be confused
with the matter required to be certified in the affidavit of the
treasurer, i.e., that at least 25% of the authorized capital stock
has been subscribed and at least 25% of the total subscription
has been paid.
The Securities and Exchange Commission may reject
the articles of incorporation or any amendment thereto if
the same is not substantially in accordance with the forms

prescribed above (see Sec. 17[1].), or the treasurer's affidavit
is false, (see Sec. 17[3].)
(b) The articles of incorporation must be written in any
of the official languages, i.e., English or Filipino duly signed 18
and acknowledged by all of the incorporators. It is, therefore,

a public instrument.
(c) While under the Corporation Code, there is no
general requirement of Philippine citizenship, there are some
areas of business and industry where ownership is reserved,
wholly or partially, in favor of Filipino citizens by virtue of
the Constitution and special laws. In order to safeguard the
interest of transferees of stock who may not be aware of the
citizenship requirement and in order to secure compliance
with the limitation on alien ownership, Section 15(11) requires
the articles of incorporation to provide the restriction stated.
Such restriction serves as notice to all persons who may be
dealing with the stock of the corporation, and is intended
to deter the issue or transfer of shares in favor of aliens in
violation thereof. (SEC Opinion, Aug. 14,1990.)
An incorporator may delegate to an attorney-in-fact the sign-
ing of the articles of incorporation in a special power of attorney
to such effect. However, the acknowledgment (see Sec. 15.) must
reflect this fact so that the same must be prepared in the follow-
ing tenor: "x x x, that Mr. A (agent) is signing for and in behalf of
B (incorporator) as his attorney-in-fact after due presentation of
his power of attorney." (SEC Opinion, Dec. 26, 1972.)
18
The Constitution provides that "the official languages of the Philippines are Fili-
pino and until otherwise provided by law, English." (Art. XIV, Sec. 7 thereof.) Under
Presidential Decree No. 155 (issued March 15, 1973), however, it is provided that "the
Spanish language shall continue to be recognized as an official language in the Philip-
pines while important documents in government files are in the Spanish language and
not translated either in English or Filipino." This will make Spanish an official language
for an indefinite length of time, for nobody can know when these "important documents"
will be translated in English or Filipino. It is clear from the Constitution that Spanish is
no longer an official language.
154
Filing of the articles of incorporation.

(1) Actual filing or registration with SEC required. — The mere
recording of the articles of incorporation without the intention
or the fact of allowing the same to remain in the office of the
Securities and Exchange Commission is not a sufficient filing to
complete the organization of the corporation or vest it with cor-
porate powers. Literal filing of the papers is necessary because it
is so written in the law. The term "filing" and the verb "to file,"
as related to this subject, include the idea that the papers are to
remain in their proper order on file in said office. (18 Am. Jur. 2d
586.)
(2) Rule where corporation created by special law. — A corpora-
tion created by special law or charter does not have to file with
the Securities and Exchange Commission its articles of incorpo-
ration and by-laws since the grantee of such a special charter
draws its life not from compliance with a general law, but from a
direct act of Congress. (SEC Opinion, May 28,1970.)
(3) Rule with respect to a joint venture. — The Commission has
ruled that two or more corporations may enter into a joint venture
through a contract if the nature of the venture is in line with the
business authorized by their charters, which contract need not be
registered with it, provided that the joint venture will not result
in the formation of a new partnership or corporation. However,
if the parties to the agreement want the joint venture to be treated
as a separate entity or have a separate personality because they
intend to secure for the joint venture project a TIN (Taxpayer's
Identification Number) of its own from the BIR, registration with
the SEC is necessary in order to have a legal personality to obtain
a separate TIN. (SEC Opinion, March 30,1995.)
Power of Securities a n d E x c h a n g e C o m m i s s i o n
to reject articles of incorporation.
(1) Compliance with statute. — The duty of the Securities and
Exchange Commission, on presentation of articles of incorpora-
tion and tender of proper fees, to file the articles, and to issue a
certificate of incorporation, is controlled by the provisions of the
statute. If the articles of incorporation substantially comply with
the statute, the Commission has no discretion, but may be com-
pelled by mandamus to file them. The discretion to be exercised

by the Commission does not extend to the merits of an applica-
tion for incorporation, although it may be exercised as to matters
of form. On the other hand, it is under no duty to file articles of
incorporation not entitled to be filed for any reason, and hence, it
will not be compelled by mandamus to act in such a case.
Stated in another way, the duty of the Securities and Exchange
Commission to file and record incorporation papers exists
only when they are in the form in compliance with the statute.
Furthermore, it should refuse to file for record incorporation
papers not complying with the statute.
(2) Truthfulness of matters stated. — Generally, the officer
concerned has no discretionary power to look beyond the face
of the incorporation papers and to determine from matters
outside of such papers whether or not to file the papers. He
19
cannot consider extraneous matters. Thus, he is not required
to make inquiry outside the articles of incorporation filed with
him, to determine whether the matters stated therein are in
fact true, or whether all conditions precedent have in fact been
performed. Ordinarily, if the association has complied with all
the pre-requisite requirements, and its purpose is a lawful and
authorized one, conditions cannot be imposed on granting the
certificate, (see 1 Fletcher, pp. 511-515; see also 14 C.J. 147-148.)
In fine, although the Securities and Exchange Commission
must exercise some judgment in the performance of its duty to
determine whether articles of incorporation are in the proper
form and entitled to be filed, it is not clothed with judicial discre-
tion or arbitrary power. (18 Am. Jur. 2d 587.)
(3) Lawfulness of object or purpose. — But simply because the
duties of the Commission happen to be ministerial, it does not
"Exception: In order to effectively exercise its jurisdiction over all corporations, part-
nerships, and other forms of associations, the Securities and Exchange Commission is
given the power "to pass upon, refuse or deny after consultation with the Board of In-
vestments, Department of Industry (now Department of Trade and Industry), National
Economic and Development Authority or any other appropriate government agency, the
application for registration of any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establishment, organization or opera-
tion will not be consistent with the declared national policies." (Pres. Decree No. 902-A,
Sec. 6[k].)
156
necessarily follow that it has no authority to pass upon the law-

fulness of the object or purpose of the corporation as expressed
in the articles of incorporation. (Asuncion vs. De Yriarte, 28 Phil.
67 [1914].) Its duties are ministerial and it has no authority to
exercise discretion in receiving and registering articles of incor-
poration, but it may exercise judgment, that is, the judicial func-
tion, in the determination of the question of law whether or not
the objects of a proposed corporation are lawful. If it errs in the
determination of the question and refuses to file the articles of
incorporation, its decision is subject to review and correction by
the court. (Asuncion vs. De Yriarte, supra.)
Name of the corporation.

(1) Importance. — The corporation acquires juridical person-
ality under the name stated in the certificate of incorporation.
(Sec. 18.) A corporation has the power of succession by its cor-
porate name. (Sec. 36[2].) It is the name of the corporation which
identifies and distinguishes it from other corporations, firms or
entities in the same manner as the name of an individual desig-
nates the person and distinguishes him from other persons. By
20
its name, a corporation is authorized to transact business.
The name of a corporation is, therefore, peculiarly essential
to its existence and to its identity.
(2) Nature. — A corporate name is regarded as of the nature
of a trademark even though composed of individual names, and
its simulation may be restrained. After adoption, it follows the
corporation. (9-A Words and Phrases 391-392; see Sec. 18.)
A corporation's right to use its corporate and trade name is
a property right, a right in rem which it may assert and protect
against the whole world in the same manner as it may protect
its tangible property against trespass or conversion. It cannot be
impaired or defeated by subsequent appropriation by another
corporation in the same field. (Philips Export B.V. vs. Court of
Appeals, 206 SCRA 457 [1992].)
20
A corporation need not register with the Department of Trade and Industry (DTI)
if it does not have the intention to use another business name other than the corporate
name registered with the Securities and Exchange Commission. (SEC Opinion No. 04-21,
April 2, 2004.)
(3) Part of name. — It is customary to use as part of the name

the word "corporation" or "incorporated" or an abbreviation of
11
either of them to distinguish it from a partnership and other
22
business organizations. But the character of a corporation is not
necessarily controlled by its name.
P u r p o s e or p u r p o s e s of t h e corporation.
The clause in the articles of incorporation which states the
specific purpose or purposes for which the corporation is being
incorporated is called the purpose clause. The Code allows corpo-
rations to have more than one stated purpose.
(1) The statement of the purpose or purposes operates as
an authorization to the management to enter into contracts and
transactions which may be considered as included within or inci-
dental to the attainment of said purposes. It also imposes implied
limitations on the powers of the corporation by the exclusion of
23
lines of activity which are not covered.
(2) Where the purpose clause of the articles of incorporation
embodies a variety of different purposes, the corporation may be
allowed to have separate "modus operandi" for each of the stated
corporate purposes. (SEC Opinion, Sept. 9,1993.)
(3) There is no legal need to repeat in the articles of incor-
poration the powers granted by the law upon the corporation.
(Ballantine, p. 55 [1946 ed.].)
(4) A non-stock corporation may not include a purpose
which would change or contradict its nature as such. Section 88
enumerates the allowable purposes for which a non-stock corpo-
ration may be organized.
21
A person doing business in his personal capacity cannot use the word "corpora-
tion"; otherwise, he may be held criminally liable under Article 315(2, a) of the Revised
Penal Code if another person was deceived and defrauded. (SEC Opinion, Jan. 5, 1976.)
^"If the proposed name contains a word similar to a word already used as part of
the firm name of a registered company, the proposed name must contain two other words
different from the name of the company already registered." (see Letter [c], SEC Guide-
lines in the Approval of Corporate and Partnership Names.)
"DE LEON, The Corporation Code of the Philippines Annotated, 1989 ed., p. 120,
cited by the Supreme Court in Philippines Statehood U.S.A., Inc. vs. Securities and Ex-
change Commission, L-82493, Jan. 24, 1990.
158
Purpose or purposes must be lawful.

(1) Effect in case unlawful. — A corporation may be organized
only for "any lawful purpose or purposes." (see Sec. 10.) A
corporation the primary object of which is without statutory
authority can have no lawful existence, even though some
of its declared purposes may be lawful. (13 Am. Jur. 2d 580.)
"That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government
rules and regulations" is one of the grounds for the rejection or
disapproval by the Securities and Exchange Commission of the
articles of incorporation. (Sec. 17[2].)
(a) A corporation was held incorporated for an illegal
purpose, where the object of the incorporators is to organize
a pueblo or barrio in a municipality into a separate corporation
because it seeks to deprive the municipality in which the
pueblo or barrio is situated of its property and its citizens
of the right of enjoying the same and would, if permitted,
disrupt and destroy the government of municipalities of the
country and abrogate the laws relating to the formation and
government of municipalities. (Asuncion vs. De Yriarte, 28
Phil. 67 [1914].)
(b) Where the number one purpose of the proposed cor-
poration as contained in its articles of incorporation is "to
study the possibility of the Philippines becoming a member.
. . of the American Union and, for this purpose, to undertake
surveys, polls, researches and hold seminars, and publish
and disseminate the results of these undertakings by way
of helping promote and enhance the incorporation of the Philip-
pines as an American State...," this portion of the purpose for
registration was held objectionable because the intention to
promote the statehood of the Philippines "shall adversely af-
fect the independence and sovereignty of the country." The
denial of registration is not violative of the freedom of as-
sociation and expression guaranteed under the Constitution
which freedom can be exercised without a group of individu-
als incorporating themselves to acquire juridical personality.
But the purpose to conduct a study, survey, research
and subsequently publish or disseminate the results there-
of as a corporation is not objectionable. (Philippines State-

hood U.S.A., Inc. vs. Securities and Exchange Commission,
L-82493, Jan. 24,1990.)
(2) Where powers merely unauthorized by law. — In authoriz-
ing the formation of corporations for "any lawful purpose," the
word "unlawful," as applied in this connection, is not used by
the Code exclusively in the sense of malum in se or malum prohi-
bitum. It is also used to designate powers which corporations are
not authorized to exercise, or contracts which they are not autho-
rized to make, or acts which they are not authorized to do — in
other words, such acts, powers, and contracts as are ultra vires.
(18 Am. Jur. 2d 582; see Sec. 45.)
Thus, a corporation cannot be formed for the practice of law,
medicine, or other learned professions in the absence of express
authority in the corporation law. (1 Fletcher, p. 339.) In the
Philippines, there is no legislation authorizing the formation
of professional corporations. The practice of a profession is
not a business and is open only to persons with the necessary
qualifications. In corporations, the profit motive is the principal
24
factor. Human personal qualifications for such learned
professions cannot be possessed by a corporation which has a
distinct and separate personality from the individual stockholders
or members. Thus, it cannot have the power to obtain a license
which only the individual stockholders or members can obtain. As
a corporation cannot carry on the work of learned professionals,
it cannot indirectly do so, by employing, say, lawyers to practice
25
for it.
24
To accommodate professionals, most States in the United States have enacted pro-
fessional incorporation laws that give lawyers, accountants, doctors, and other profes-
sionals the right to practice their profession through a corporation. Under the proposed
American Bar Association Model Professional Corporation Act (MPCA), the professional
corporation may practice only one profession and may not mix professional services with
non-professional services and only licensed professionals may perform the services of the
corporation. Non-licensed employees of the corporation may not assume a position of
control over the acts of licensed professionals when they perform their services to clients.
B
" x x x Congress has not adopted a unanimous position on the matter of prohibition
on indirect practice of optometry by corporations, specifically on the hiring and employ-
ment of licensed optometrists by optical corporations. It is clear that Congress left the res-
olution of such issue for judicial determination, and it is therefore proper for this Court to
resolve the issue, x x x In analogy, it is noteworthy that private hospitals are maintained
by corporations incorporated for the purpose of furnishing medical and surgical treat-
ment. In the course of providing such treatments, these corporations employ physicians,
160
The law, however, permits the formation of a partnership for

the exercise of a profession (Arts. 1767, 1783, Civil Code.) for in
such case, it is the individual partner and not the partnership
firm who exercises the profession and is responsible for his acts
as such.
(3) Determination of question of lawfulness. — As a general rule,
the question as to whether the purposes for which a given cor-
poration has been formed are lawful is to be determined by the
description of those purposes as stated in the articles of incorpo-
ration.
(a) A corporation is not illegal unless it is shown that the
end it has in view is illegal, or the means by which it pro-
poses to attain that end are illegal.
(b) If, as expressed on the face of the instrument of incor-
poration, the purpose for which the corporation is formed is
not necessarily unlawful, it will be presumed that it was for
a purpose for which a corporation might lawfully be formed;
and this presumption holds in case of a foreign corporation.
(c) Where the object of a corporation as expressed in the
articles of incorporation is not illegal, the fact that such cor-
poration afterwards entered upon illegal projects does not
make it an illegal corporation and such illegal acts cannot be
urged as a defense, in an action to recover unpaid subscrip-
tion to the capital stock. (14 C.J.S. 427-428.)
(4) Inquiry into purposes other than those stated. — The
best proof of the purpose of a corporation is its articles of
incorporation (supra.) and by-laws, (see Sec. 46.) The articles of
incorporation must state the primary and secondary purposes
of the corporation, while the by-laws outline the administrative
organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purposes. If the
surgeons and medical practitioners, in the same way that in the course of manufacturing
and selling eyeglasses, eye frames and optical lenses, optical shops hire licensed optom-
etrists to examine, prescribe and dispense ophthalmic lenses. No one has ever charged
that these corporations are engaged in the practice of medicine. There is indeed no valid
basis for treating corporations engaged in the business of running optical shops differ-
ently." (Acebedo Optical Company vs. Court of Appeals, 329 SCRA 314 [2000].)
corporate purpose as stated in the articles of incorporation is

lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation. (Gala
vs. Ellice Agro-Industrial Corp., 418 SCRA 431 [2003].)
Purpose or purposes must be stated

with sufficient clarity.
(1) May be stated in broad terms. — The purpose or purpos-
es stated in the articles of incorporation need not set out with
particularity the multitude of activities in which the corporation
may engage. The effect of broad purposes or objects is to confer
wide discretionary authority upon the directors and manage-
ment of the corporation as to the kinds of business in which it
may engage. Dealings which are entirely irrelevant to the pur-
poses are unauthorized and called ultra vires, (see Sec. 45.) It is,
therefore, important that the corporation's purposes be specified
in the articles of incorporation with sufficient clarity to define
with certainty the scope of its business.
However, the articles of incorporation of a manufacturing
corporation need not state the particular kind of manufacturing
in which it is proposed to engage, unless it is required by statute.
And in forming a charitable corporation, it is not necessary to
specify with exactness who are to be the ultimate recipients of
the charity, (see 1 Fletcher, pp. 372-386, 400-406; 14 C.J.S. 435-
436.)
(2) May not be indefinitely stated. — While the purposes
may be stated in broad and general terms, they should not be
so stated ^definitely; otherwise, the articles of incorporation
may be rejected. Thus, an articles of incorporation authorizing
the corporation "to carry on any lawful business or purpose" (1
Fletcher, p. 367.) or one, after stating certain distinct purposes,
adding "and for such other purposes as may be agreed upon
by the corporation in the future," will be rejected because the
purpose or purposes are not definitely stated. (In re Chapter of
Journalists Fund of Philadelphia, 8 Pa. 272.)
It is not also sufficient to state that the purpose is to carry
on any business which may be deemed profitable. Such all-
162
embracing proviso cannot be stretched to include purposes

not incidental, implied or necessary for the furtherance of the
purposes stated in the articles of incorporation.
Primary purpose must be stated.

The purposes for which a corporation is organized, where
it has more than one stated purpose, shall state which is the
primary or main purpose and which is/are the secondary or
subsidiary purpose or purposes. (Sec. 14[2].) The main purpose
must be specified. The law allows a corporation to have secondary
purposes because the primary purpose may not turn out to be
profitable, and in such case, all it has to do is invest its funds
in any such purposes instead of organizing a new corporation.
Evidently, a corporation may have only one primary purpose.
Under Section 42, a corporation is prohibited from investing
its funds "for any purpose other than the primary purpose for
which it was organized" unless it is approved by both its board
of directors or trustees and its stockholders or members. No such
disclosure is required in the case of a partnership. (SEC Opinion,
March 28,1985.)
Purposes m u s t be c a p a b l e of being
lawfully c o m b i n e d .
Although Section 10 allows the formation of corporations
"for any lawful purpose or purposes," the purposes, where there
are more than one, must be capable of being lawfully combined.
Thus, banks which are governed by the General Banking
Law (R.A. No. 8791.) are prohibited from directly engaging in
26
insurance business as the insurer. (Sec. 54 thereof.) Similarly,
2<
The Act prohibits banks from engaging as principals in the insurance business or
through fully-owned subsidiaries but not investing in insurance companies themselves.
The Monetary Board of the BSP has classified investments in insurance companies as
investments in allied undertakings, allowing universal banks to increase their equity par-
ticipation in these firms up to 51%. Through "bancassurance," an insurer utilizes bank
branches to distribute insurance policies. Presently, the BSP allows banks to sell insur-
ance product at their branches. To comply with the ownership rules, a major insurance
company may set-up a subsidiary and sells 5% equity to a bank. Under present rules,
only commercial and universal banks are authorized to enter into a bank assurance tie-up
with insurers.
insurance companies which are governed by the Insurance Code

(Pres. Decree No. 1460.) are not allowed to engage in banking
operations. The business of banking or insurance or other forms
of business affected with a public interest must be had pursuant
to the general laws applicable to those particular classes of
business. The manifest purpose of excepting such corporations
from the general incorporation law is that they should be
restrained by strict requirements securing the safe conduct and
correct administration of their affairs. (18 Am. Jur. 2d 580.)
Subject to the limitation mentioned, the secondary pur-
poses need not be allied to each other or to the primary pur-
pose provided they are not contrary to law. But a non-stock
corporation, including educational and religious corporations,
may not include a purpose which would change or contradict its
nature as such (Sec. 14[2]; see Titles XI, XIII.), although it may be
organized for any combination of purposes mentioned in Section
88. The Securities and Exchange Commission may reject the
articles of incorporation of a non-stock corporation if its purpose
is to engage in election campaign or partisan political activity.
(SEC Opinion, April 10,1983.)
R e a s o n s for s t a t e m e n t of p u r p o s e
or p u r p o s e s .
"The law requires the statement of the purpose or the pur-
poses for which a corporation is formed in order that:
(1) A person who intends to invest his money in the business
corporation will know where and in what kind of business or
activity his money will be invested;
(2) The directors and the officers of the corporation will
know within what scope of business they are authorized to act;
and lastly;
(3) A third person who has dealings with the corporation
may know by perusal of the articles whether the transaction or
dealing he has with the corporation is within the authority of the
corporation or not.
In other words, the main reason for stating the purpose of
the corporation is to deteirnine whether the acts performed by
164
the corporation are authorized or beyond its powers. In the latter

case, they will be known as ultra vires acts." (C.G. Alvendia, op.
cit., p. 80.) Thus, the purpose clause of the articles of incorpora-
tion indicates the extent as well as the limitations of the powers
which a corporation may exercise, (see Sees. 2, 36[11], 45.)
Effect where primary purpose/secondary

purposes unauthorized.
(1) If the primary purpose of the corporation as stated in the
articles of incorporation is an unauthorized one, the corporation
has no legal existence even though other secondary lawful pur-
poses are included.
(2) If, on the other hand, a principal lawful purpose is speci-
fied, but the articles or certificate assumes for the corporation the
existence of powers which it is not permitted to exercise, then
this additional and unauthorized assumption may be treated as
surplusage and the corporation regarded as entitled to exercise
the lawful powers only. (18 Am. Jur. 2d 585.)
Effect w h e r e corporation e n g a g e s in its s e c o n d a r y

instead of its primary p u r p o s e .
Generally, the primary purpose of a corporation as indicated
in the articles of incorporation determines its classification.
However, where the corporation actually engages in one of
its secondary purposes instead of its primary purpose, the same
may be classified in accordance with said secondary purpose.
Thus, a corporation organized for the primary purpose of engag-
ing in mining and whose secondary purpose is agriculture is a
mining corporation. In case such corporation engages in agricul-
ture instead of mining, the same may be classified as organized
for the purpose of engaging in agriculture. (SEC Opinions, Nov.
8,1972 and March 22,1974.)
Place w h e r e principal office

of corporation located.
(1) City or municipality within the Philippines. — The articles
of incorporation must state the "place where the principal office
of the corporation is to be established or located, which place

must be within the Philippines." (Sec. 14[3].) The purpose of the
requirement is to fix the residence of a corporation in a definite
place, instead of allowing it to be ambulatory (Young Auto Sup-
ply Co. vs. Court of Appeals, 223 SCRA 670 [1993].) for effective
regulation and supervision of the corporation. The place to be
designated is the city or municipality (not merely the province)
where the principal office is to be located.
It is now required by the Securities and Exchange Commis-
sion that all corporations and partnerships applying for regis-
tration should state in their Articles of Incorporation or Articles
of Partnership the "(i) specific address of their principal office,
which shall include, if feasible, the strict number, street name,
barangay, city or municipality; and (ii) specific residence address
of each incorporator, stockholder, director, trustee, or partner,"
in line with the "full disclosure" requirement of existing laws.
"Metro Manila" is no longer allowed as address of the principal
office. (SEC Circ. No. 3, Series of 2006.)
(2) Place where its books and records are ordinarily kept and meet-
ings held. — The "place of the principal office" does not neces-
sarily mean the place where the business of the corporation is
transacted but the place where its books and records are ordinar-
ily kept and its officers usually meet for the purpose of manag-
ing the affairs and transacting the business of the corporation. (1
Fletcher, p. 478, citing Harris vs. McGregor, 20 Cal. 124; Sec. 74.)
Therefore, the principal office may be located at one place and
the place of business at another.
(3) Residence at place where its principal office is located. — A
corporation has no residence in the same sense in which this
term is applied to a natural person. But for practical purposes,
a corporation is in a metaphysical sense a resident of the place
where its principal office is located as stated in its articles of in-
corporation (Ibid.; Cohen vs. Benguet Commercial Co., Ltd., 34
Phil. 526 [1916]; Clavecilla Radio System vs. Antillon, 19 SCRA
379 [1967].) filed with the Securities and Exchange Commission.
The place where the principal office of the corporation is located
determines its residence and the venue in an action by or against
it.
166
A corporation has only one residence at a time. The fact that

it maintains branch offices in some parts of the country does
not mean it can be sued in any of these places, for to allow such
action to be instituted would create confusion and work untold
inconvenience to the corporation. (Clavecilla Radio System vs.
Antillon, supra.) By the same token, a corporation cannot be
allowed to file personal actions in a place other than its principal
place of business unless such place is also the residence of a co-
plaintiff or a defendant. (Young Auto Supply Co. vs. Court of
Appeals, supra.)
(4) Change of address. — In case of change of address involv-
ing a change of city or municipality, an amended articles of
incorporation stating the new address must be filed with the
Securities and Exchange Commission. (Sec. 16.) If the new
address is located within the same city or municipality, no
corporate document is required to be filed with the Securities
and Exchange Commission except a notice regarding the change
of address. (SEC Opinion, Feb. 16,1973.)
Incorporating directors or t r u s t e e s .
The incorporating directors or trustees are those chosen by
the incorporators (Sec. 5.) and named in the articles of incorpora-
tion. The term "trustees" is used to refer to members of the board
of a non-stock corporation.
(1) Matters to be specified in articles of incorporation. — The
articles of incorporation must specify the names, nationalities,
and residences of the incorporators and must show that at least
a majority of the incorporators are residents of the Philippines.
(Sees. 14[15], 10, 23, par. 2.) The statement of the nationalities of
the incorporators will enable the Securities and Exchange Com-
mission to determine prima facie compliance with constitutional
or legal requirements regarding ownership by Filipino citizens
of certain percentage of the capital stock of certain corporations.
It is also necessary that the articles of incorporation specify the
names, nationalities, and residences of the persons who will be
the first directors or trustees of the corporation, (see Sec. 6, par. 4;
Sec. 14[5, 7]; Sec. 15[4th, 5th, 11th]; Sec. 17[4].)
(2) Number. — Under Section 14(6), the number of the incor-

porating directors or trustees is determined by the incorporators
but such number "shall not be less than five (5) nor more than the
fifteen (15)." (see Sec. 10.) Section 92, however, provides that the
board of trustees of a non-stock corporation "may be more than
fifteen (15) in number as may be fixed in their articles of incor-
poration or by-laws." There is an irreconcilable conflict between
the two (2) provisions. Being the subsequent provision, Section
92 must prevail on the theory that it is the latest expression of the
legislative will.
(3) Term of office. — The incorporating directors or trustees
shall hold office until their successors are duly elected and quali-
fied. (Ibid., [7].) They are intended to be replaced by the regularly
elected directors or trustees (see Sec. 24.) who shall hold office
for one (1) year (Sees. 23,24.), when the corporation is organized
by the adoption of by-laws (see Sec. 46.) at the first meeting of
stockholders or members, (see Sec. 50.)
(4) Subscribers to stock. — Under Section 23 (par. 2.), "every
director must own at least one (1) share of the capital stock of the
corporation of which he is director." This requirement applies to
the directors elected after incorporation, as well as to incorporat-
ing directors who must "be a subscriber to at least one (1) share
of the capital stock of the corporation." (see Sec. 10.) It follows
that in a stock corporation, there must be at least five (5) stock-
holders.
Capital stock/capital a n d subscribers/

contributors.
(1) Stock corporations. — The articles of incorporation of a
stock corporation under Section 14(8) must state the following:
27
(a) The amount of its authorized capital stock in pesos;
(b) The number of shares into which it is divided;
^ . S . dollars representing the payment on subscription of a proposed corporation

should be duly converted in Philippine peso so that the same may be treated as "cash;"
otherwise, the U.S. dollars shall be considered payment by way of property, in which
event the payment shall be subject to the requirements of Section 62. (SEC Opinion, July
28,1986.)
168
(c) The par value in pesos of each share;

(d) The names, nationalities, and residences of the origi-
nal subscribers;
(e) The amount of capital stock subscribed and paid by
each on his subscription; and
(f) If some or all of the shares are without par value, such
fact.
(2) Non-stock corporations. — If the corporation is a non-stock
corporation, the articles of incorporation must state:
(a) The amount of its capital or money contributed or
donated by specified persons;
(b) The names, nationalities, and residences of the donors
or contributors; and
(c) The respective amount contributed by each. (Sec.
14[9].)
W h e r e shares with par value.

Where the shares issued by a corporation have only one
par value, the authorized capital stock would be the number of
shares multiplied by the par value. If a corporation is authorized
to issue different classes of shares with different par values, the
authorized capital stock would be the total of the products of
the number of shares in each class multiplied by the par value of
such class of shares.
Thus, where the number of shares authorized to be issued
is 1,000,000 with a par value of PI .00 per share, the authorized
capital stock is P1,000,000.00. If, for example, 600,000 of the
shares are classified into Class "A" with a par value of PI.00 and
400,000 of the shares, into Class " B " with a par value of PI.50, the
authorized capital stock is Pl,200,000.00, the total of the products
of 600,000 multiplied by PI.00, or P600,000.00, and of 400,000
multiplied by PI.50, or P600,000.00.
W h e r e shares without par value.

In case the capital stock consists of shares without par value,
the articles of incorporation need only state such fact, together
with the number of shares into which said capital stock is di-
vided. term use for "with no par value share"
If the shares have par value, the amount of the authorized
capital stock in pesos is specified in the articles, but if they
have no par value, no amount of capital stock is specified in the
articles which need only state the number of shares into which
said capital stock is divided, (see Sec. 14[seventh].) The reason is
that the price of no par value shares vary from time to time (see
Sec. 62, last par.) and, therefore, the total amount of the capital
stock cannot be known until all the shares are issued.
W h e r e s h a r e s with par v a l u e
a n d w i t h o u t par v a l u e .
In case some of the shares of the capital stock have par value
and some are without par value, the articles of incorporation
must state such fact, the number of shares into which the capital
stock is divided, the number of shares with par value and their
par value, and the number of shares without par value. (Sec.
15[seventh].)
W h e r e b u s i n e s s o f corporation reserved
for Filipino citizens.
Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide in their articles of
incorporation the restriction against the "transfer of stock or
interest which will reduce the ownership of Filipino citizens to
less than the required percentage of the capital stock as provided
by existing laws" x x x. (Ibid, [eleventh].)
If the required percentage of ownership has not been com-
plied with, the articles of incorporation will not be accepted by
the Securities and Exchange Commission. (Sec. 17[3].) In deter-
mining the nationality of corporations with foreign equity, the
Commission has adopted the "control test" rule, (see Sec. 123.)
A c k n o w l e d g m e n t , signature,
and verification.
In order to become a corporation de jure (see Sec. 20.), the pro-
visions requiring the incorporation papers to be acknowledged
170 THE CORPORATION CODE OF THE PHILIPPINES Sec. 16
as well as signed must be complied with. Each of the signatories

must acknowledge his signature to the articles and there is no
corporation de jure unless acknowledged by the minimum num-
ber required by law. However, unless otherwise provided by the
statute, the acknowledgment of the signatures of the incorpora-
tors is not a part of the articles of incorporation.
The purpose of the law in requiring acknowledgment under
oath is to secure the State and all concerned against the possibility
of any fictitious names being subscribed to the articles, and to
furnish proof of the genuineness of the signatures, (see 1 Fletcher,
p. 506; 18 C.J.S. 440.)
Sec. 16. Amendment of Articles of Incorporation. — Unless

otherwise prescribed by this Code or by special law, and
for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote
or written assent of two-thirds (2/3) of the members if it be
a non-stock corporation.
The original and amended articles together shall

contain all provisions required by law to be set out in
the articles of incorporation. Such articles, as amended,
shall be indicated by underscoring the change or changes
made, and a copy thereof duly certified under oath by
the corporate secretary and a majority of the directors
or trustees stating the fact that said amendment or
amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted
to the Securities and Exchange Commission.
The amendment shall take effect upon its approval
by the Securities and Exchange Commission or from the
date of filing with the said Commission if not acted upon
within six (6) months from the date of filing for a cause not
attributable to the corporation. (18a)
M e a n i n g of c o r p o r a t e charter.
A charter" is an instrument or authority from the sovereign
power bestowing the right or privilege to be and act as a corpora-
tion. (Humphrey and Peues, 16 Wall. [U.S.] 244, 21 L. ed. 326.)
With regard to corporations, the term is correctly used in its
limited sense only with reference to special incorporation by act
of the legislature. In the case of a corporation organized under a
general law, however, the corporation's charter is not limited to
its articles of incorporation, (see 18 Am. Jur. 2d 622.)
Distinguished f r o m f r a n c h i s e .
The term is sometimes loosely used in the sense of "franchise."
Properly speaking, corporate or primary franchise is the right
and privilege itself of being a corporation, (see Sec. 10.)
On the other hand, corporate charter applies to the instru-
ment bestowing such right and privilege.
C o m p o n e n t s of corporate charter.
A charter represents the complete grant of authority; hence,
the complete charter of a corporation does not rest only upon one
instrument.
(1) As to corporations formed under the general incorporation law,
the charter consists of:
(a) The law under which it is organized (B.P. Big. 68.);
(b) Articles of incorporation;
(c) By-laws; and
(d) All applicable provisions of the Constitution and the
general laws of the State in force at the time the corporation
is incorporated which are as much a part of its charter as
though expressly written therein. (7 Fletcher, pp. 760-761.)
(2) As to corporations created by special laws, the charter consists
of
(a) The special law which creates the corporation;
"See note 1 under Sees. 14-15.

172
15
(b) Executive Orders of the President;
(c) Rules and regulations applicable to such corpora-
tions; and
(d) All laws applicable thereto, including the Corpora-
tion Code the provisions of which apply suppletorily. (see
Sec. 4.)
Nature of corporate charter.

Frequently, a corporate charter is described as a contract of
a three-fold nature, that is, a contract between the State and the
corporation, a contract between the corporation and its stock-
holders (or members), and a contract between the stockholders
inter se. (18 Am. Jur. 2d 625-626.)
(1) A contract between the State and the corporation. — It is com-
monly said that corporations are created by an act of the sover-
eign — by an act of the Legislature — and in a sense, this is true.
But it is not to be understood from this that the Legislature can
bring a private corporation into existence of its own accord, and
without the consent of the members who compose it. The charter
of a private corporation has been regarded as a contract between
the corporation and the State. For this reason, courts apply to the
formation of a private corporation the principles governing offer
and acceptance in the formation of contracts. (Clark on Corpora-
tions, p. 55.)
The consideration for the grant of powers and privileges by
the State is found in the liabilities and duties which the incorpo-
rators assume by accepting the terms specified in the charter. (18
Am. Jur. 2d 626.)
(a) Acceptance of original charter. —
1) If persons apply to the Legislature for a charter,
this is sufficient evidence of consent on their part and
"E.g., the Uniform Charter for Government Corporations. (Executive Order No. 399,
Jan. 5,1951.) See Presidential Decree No. 2029 and Letter of Instructions No. 1520 which
apply to government-owned or -controlled corporations, whether chartered by special
law or organized under the Corporation Code, and Administrative Code of 1987 (Exec.
Order No. 292), Book IV, Chapter 9, Section 42.
when the charter is granted, no acceptance of it by them,

other than will be implied from their previous applica-
tion, need be shown. Indeed, they may be considered as
having made an offer, and the State as having accepted it.
2) If, however, without such application, the Legis-
lature offers a charter, either to particular persons by a
special act, or to persons or a class of persons generally
by a general law, an acceptance must be shown. Until
acceptance, the offer of a charter, either by a general or
a special law, can have no effect whatever. An act of the
Legislature authorizing persons to become a corporate
body by complying with certain terms and conditions is,
until accepted by the persons authorized, nothing but an
offer on the part of the State, which may be withdrawn
by it at any time; and it is withdrawn, so as to be no
longer open for acceptance, by a repeal of the act by
the Legislature, or by the adoption of a constitutional
provision rendering such an act void.
(b) Acceptance of amendment to existing charter. — The
rule that a charter must be accepted before it can have any
effect applies to acts amending existing charters under a
right reserved to the State when the charter was granted; for
though the State may reserve the right to amend the charter of
a private corporation, it cannot compel the members to accept
the charter as amended, any more than it could compel them
to accept the original charter. If they do not choose to adopt
the amendment, they may give up their charter altogether.
The acceptance of an amendment, like the acceptance of
an original charter, may be implied from the conduct of
the corporation or its members and it will be conclusively
presumed if the powers conferred by the amendatory act are
exercised. (Clark on Corporations, p. 55.)
(2) A contract between the corporation and the stockholders. — It
is generally held that a corporate charter constitutes a contract
between the corporation and its stockholders. The stockholders
are presumed to have entered into such a contract with knowl-
edge of the provisions thereof, are bound thereby, and their rights
as stockholders are defined and limited by the charter. (18 Am.
174
Jur. 2d 626.) The articles of incorporation or the corporate charter

being considered a contract, the corporation is bound to observe
all the provisions thereof. (SEC Opinion, Jan. 22,1986.)
(3) A contract between the stockholders inter se. — The charter of
a corporation constitutes a contract also between the stockhold-
ers which is entitled to protection as against attempted action
by the corporation, though authorized by law and the majority
of the stockholders, insofar as the interests of dissenting stock-
holders are concerned. Thus, there is contractual obligation on
the corporation with respect to its stockholders and on the stock-
holders with respect to each other that no fundamental, radical,
or material changes on the purposes of the corporation shall be
made, at least in the absence of express or implied consent of the
stockholders thereto. (Ibid.; see Sec. 81.)
Reserved power of State to a m e n d

corporate charter.
(1) Constitutional and statutory authority. — The certificate of
incorporation is a contract primarily between the State and the
corporation. (Dartmouth College vs. Woodward, 4 Wheat. [U.S.]
518.) Hence, it can be amended only by or under constitutional
or statutory authority.
(a) The constitutional authority of Congress to change or
amend the charter of a private corporation for the operation
of a public utility is expressly reserved by Section 11, Article
XII of the Constitution which provides that:
"Neither shall any such franchise or right [for the opera-
tion of a public utility] be granted except under the condition
that it shall be subject to amendment, alteration or repeal by
the Congress when the common good so requires."
(b) The statutory authority of Congress to alter or amend
the corporate charter is impliedly reserved by Section 145
of the Code subject to the limitation therein provided with
respect to vested rights that have accrued at the time of the
enactment of the amendatory law and the prohibition of the
Constitution (Art. Ill, Sec. 10 thereof.) against laws impairing
the obligation of contracts.
(c) Under the reserved power to repeal the corporate

charter, the legislature may terminate corporate existence
(18 Am. Jur. 2d 633.)
(2) Exercise of power. — The reservation of the power is an
incident of the contract between the State and the incorporators.
The dissolution of a corporation without cause is void as impair-
ing the obligation of a contract between the incorporators and
the State. Note, however, that with respect to the franchise of a
public utility, the only limitation is that the power can be exer-
cised only "when the common good requires."
Power of stockholders or members to

amend articles of incorporation.
(1) Power expressly granted. — The authority of stockholders
or members to amend the articles of incorporation which forms
part of the corporate charter is conferred by Sections 16, 37,
and 38. Section 37 refers to the extension or shortening of the
corporate term; Section 38, to increase or decrease of the capital
stock; and Section 16, to amendments in general, i.e., to matters
other than the foregoing, including a change in the corporate
name. (Sec. 18.) The power to amend is also expressly granted by
Section 36(4).
The amendment must also be approved by a majority of the
board of directors or trustees.
(2) Matters not subject to amendment. — Certain provisions or
matters stated in the articles of incorporation cannot be amend-
ed.
(a) The portion of the articles of incorporation stating
the names of the incorporators and the first set of directors/
trustees (see Sec. 15 [fifth and sixth].) cannot be amended by
substituting for the name of an incorporator the name of an-
other, for the reason that the same states an accomplished
fact, just as the place and date of the execution of the articles
and the original subscriptions of the incorporators cannot
be changed or amended. Furthermore, such an amendment
would go against the meaning and concept of the word "in-
corporators" as defined in Section 5 as those "mentioned in
176
the articles of incorporation as originally forming and com-

posing the corporation and who are signatories thereof."
(b) Similarly, the names, etc. of the subscribers, the trea-
surer of the corporation elected by the subscribers (Ibid.
[eighth, ninth, tenth].), and the witnesses cannot be amended
except to correct mistakes.
Necessity of stockholders' or m e m b e r s '

meeting for a m e n d m e n t .
It must be noted that under the first paragraph of Section
16, the amendment may also be effected by the "written assent"
of the stockholders representing at least 2 / 3 of the outstanding
capital stock of the corporation or 2 / 3 of its members, meaning
that such action need not be taken at a meeting and upon a vote.
Even holders of non-voting shares or non-voting members, as
the case may be, are entitled to vote on the amendment, (see Sec.
6, par. 6[1].)
(1) If the amendment consists in extending or shortening the
corporate term (Sec. 37.), or increasing or decreasing the capital
stock (Sec. 38.), a meeting of the stockholders or members is nec-
essary.
(2) In a close corporation, if the amendment of the articles of
incorporation refers to any of the matters mentioned in Section
103, the same shall not be valid or effective unless approved by
the required vote of the stockholders at a meeting duly called for
the purpose. A mere written assent would not also be sufficient.
In cases where written consent assent is allowed, the same
number of votes shall be observed, and nothing can be done by
proxy. (SEC Memo. Cir. No. 4, Series of 2004; see Art. 58.)
Limitations on p o w e r of corporation
to a m e n d .
Section 16 imposes limitations on the power of a corporation

to amend its articles of incorporation. They are as follows:
(1) The amendment of any provision or matters stated in the
articles of incorporation is not allowed when it will be contrary
to any provision or requirement prescribed by the Code or by
special law, or change any provision in the articles of incorpora-

tion stating an accomplished fact (supra.);
(2) It must be "for legitimate purposes." (see Sec. 81[1].) The
power of amendment must not be exercised in such a manner
as to work injustice. The majority stockholders owe a duty to
at least act fairly to the minority interest, and they cannot avoid
that duty merely because the amendment is legally authorized
(In the Matter of Ayala Corporation, SEC En Banc Decision, Sept.
1,1989.);
(3) It must be approved by the required vote of the board of
directors or trustees and the stockholders or members;
(4) The original articles and amended articles together must
contain all provisions required by law to be set out in the articles
of incorporation;
(5) Such articles, as amended, must be indicated by under-
scoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of
the directors or trustees stating that the amendment or amend-
ments have been duly approved by the required vote of the
stockholders or members must be submitted to the Securities
and Exchange Commission. Filing fees must be paid;
(6) The amendments shall take effect only upon their
approval by the Securities and Exchange Commission. They are
deemed approved by the Commission from the date of filing if not
acted upon within six (6) months from said date for a cause not
attributable to the corporation, assuming that the amendments
are not illegal. In other words, a subsequent approval is made
to relate back to the date of filing of the amendments with the
Commission. If the delay is attributable to the corporation, the
amendment cannot take effect without approval thereof by the
Commission. The provision on automatic approval in Section 16
does not apply to the dissolution of corporations in the light of
Section 120 (SEC Opinion, March 30,1982.); and
(7) If the corporation is governed by a special law such as
banks, banking and quasi-banking institutions, insurance com-
panies, etc., the amendments must be accompanied by a favor-
able recommendation of the appropriate government agency to
the effect that such amendments are in accordance with law. (Sec.
17, par. 2.)
In the case of foreign corporations authorized to transact
business in the Philippines, they are merely required to file, with-
in sixty (60) days after the amendment to the articles of incor-
poration (or by-laws) becomes effective, with the Securities and
Exchange Commission and in proper cases, with the appropriate
government agency, a duly authenticated copy of the articles of
incorporation (or by-laws) for record purposes. The filing there-
of, however, shall not of itself enlarge or alter the purpose or pur-
poses for which such corporation is authorized under its license
to transact business in the Philippines, (see Sees. 130,125.)
Such portion of the articles of incorporation which states an
established or accomplished fact at the time of incorporation,
e.g., the portion stating the names of the original subscribers or
incorporators (Sec. 5.), cannot be changed or amended.
Sec. 17. Grounds when articles of incorporation or amend-

ment may be rejected or disapproved. — The Securities and
Exchange Commission may reject the articles of incorpo-
ration or disapprove any amendment thereto if the same
is not in compliance with the requirements of this Code:
Provided, That the Commission shall give the incorpora-
tors reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
(1) That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
(2) That the purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
(3) That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or paid is false;
(4) That the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or
the Constitution.
No articles of incorporation or amendment to articles

of incorporation of banks, banking and quasi-banking
institutions, building and loan associations, trust com-
panies and other financial intermediaries, insurance com-
panies, public utilities, educational institutions, and other
corporation governed by special law shall be accepted or
approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law. (n)
Grounds for rejection of articles of incorporation

or amendment thereto.
Section 17 enumerates the grounds for the rejection of the
30
articles of incorporation or disapproval of any amendment
thereto. The grounds are not exclusive.
(1) The Securities and Exchange Commission is required to
give the incorporators reasonable time within which to correct
or modify the objectionable portions of the articles of incorpora-
tion or amendment when the same is rejected or disapproved for
non-compliance with the requirements of the Code, (see Sees. 14,
15 and 16.)
(2) Any decision of the Commission rejecting the articles
of incorporation or disapproving any amendment thereto is
appealable by petition for review in accordance with the pertinent
provisions of the Rules of Court. (Pres. Decree No. 902-A, Sec. 6,
last sentence.) rule 43 appeals from quasi judicial agencies
(3) In case of corporations governed by special laws such as
banks, insurance companies, and educational institutions, the
articles of incorporation or amendment shall not be accepted or
approved by the Securities and Exchange Commission unless
accompanied by a favorable recommendation of the appropriate
government agency (e.g., Monetary Board of the Central Bank,
with respect to banking institutions) that such articles or
amendments is in accordance with law. (see Sec. 107.)
"See note 3 under Sees. 14-15.

180
(4) Before a foreign corporation can lawfully transact

business in the Philippines, it must first obtain a license to
transact business in the country in accordance with the Code
and a certificate of authority from the appropriate government
authority. (Sec. 23.) These requirements insure compliance by
the registrant corporation, whether domestic or foreign, with the
policies or regulations of the government agency concerned.
(5) The Securities and Exchange Commission shall not also
accept the articles of incorporation of any stock corporation
unless accompanied by a sworn statement of the treasurer
elected by the subscribers showing the amount of the capital
stock subscribed and paid. (Sec. 14, last par.)
(6) The action of the Commission in approving or rejecting
the articles of incorporation or any amendment thereto is not a
ministerial function but involves the exercise of discretionary
power, (see Sees. 14-15.)
Suspension or revocation of certificate

of registration of corporations.
1. Grounds. — Under Presidential Decree No. 902-A, the 31
Securities and Exchange Commission may suspend or revoke,

after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships, or associations upon
any of the grounds provided by law, including the following:
(a) Fraud in procuring its certificate of incorporation
(such as making it appear that it has cash paid-up capital
when actually it has none, the money being in fact merely
borrowed and returned to the lender after the incorporation);
(b) Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of, or damage to, the
general public;
(c) Refusal to comply with or defiance of a lawful order
31
It reorganized the SEC with additional powers and placed the said agency under
the administrative supervision of the Office of the President. This Decree is superseded
by the Securities Regulation Code. (Appendix "A.") The grounds provided by Presiden-
tial Decree No. 902-A are still applicable, (see Sec. 5[m], SRC.)
of the Commission restraining the commission of acts which

would amount to a grave violation of its franchise;
(d) Continuous inoperation for a period of at least five (5)
years (see Sec. 22, infra.);
(e) Failure to file by-laws within the required period; and
(f) Failure to file required reports in appropriate forms
as determined by the Commission within the prescribed
period. (Pres. Decree No. 902-A, Sec. 6[1].)
The authority of the Commission to suspend, cancel or revoke
corporate franchise or registration also emanates from Sections
121 and 144*
(2) Ejfectivity. — A SEC order of revocation is immediately
effective. Once the revocation order is issued, the subject
corporation's existence is terminated at that very instant and is
deemed terminated until the particular revocation order is lifted.
It may not continue to operate its business (see Sec. 122.) and
issue shares. It may, however, sell its assets pursuant to Section
122 but it may only purchase property if such purchase will be
consistent with liquidation. It may sue for purposes of recovering
its property. (SEC Opinion No. 09-24, July 28,2009.) The capacity
of a corporation to institute an ejectment suit is not affected
by the subsequent suspension and revocation of certificate of
registration. (Paredes vs. Don Luis Dison Realty, Inc., 548 SCRA
273 [2008].)
A corporation whose existence is deemed terminated may
not allege in its complaint in court that it is a corporation duly
organized and existing under Philippine laws. (Clemente vs.
(3) Lifting of Order of Revocation. — The lifting restores the cor-
poration to its original status as if there was no revocation order
issued against it, with the capacity to exercise all the powers of
a duly registered corporation under the Corporation Code. (SEC
Opinion No. 09-29, Nov. 11, 2009.)
32
SEC Memo. Cir. No. 15 (Sept. 5, 2009) extends by one (1) year from the date of
revocation the period within which corporations whose certificates of registration were
revoked by non-compliance with reportorial requirements to file a petition to lift the or-
der of revocation.
182
Sec. 18. Corporate name. — No corporate name may be

allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the
amended name, (n)
Limitations upon use of corporate n a m e .

(1) Similarity with another trade name. — The incorporators
may choose and use any name they may see fit, provided it is one
not identical with or prejudicially similar to a name which was
previously adopted and which is being used by another existing
corporation or unincorporated association or a natural person
as trade name (Bender vs. Bendor Store, 178 III. App. 203.), or
33
is contrary to existing law. A corporation acquires its name by
choice and need not select a name identical with or similar to
one already appropriated by a senior corporation while an indi-
vidual's name is thrust upon him. It can no more use a corporate
Încorporation gives protection to the name of the corporation. Before the Securi-
ties and Exchange Commission registers any articles of incorporation, the records are
checked to make sure that the proposed name is not identical with or closely similar to
the name of an entity previously registered with it. Moreover, the registrant is required to
submit a written undertaking that the corporation will change its name in the event that
another person, firm or entity has acquired a prior right to the use of the same name or
one similar to it. (SEC Opinion, May 26, 1968.) Such entity may be a foreign corporation
whose trade name, being a property right, a right in rem, is entitled to protection even in
countries where it does not transact any business. (Western Equipment & Supply Co. vs.
Reyes, 51 Phil. 115 [1927].) A corporation need not register with the Department of Trade
and Industry the SEC-approved corporate name if it does not have any intention to use
another business name. (SEC Opinion No. 04-21, April 2, 2004.)
Neither the Corporation Code nor the Guidelines contains any provision restricting
the use of the words "United States" or the initials "U.S." as part of the corporate name.
Hence, for as long as they would not be deceptive in the light of the purposes for which
the corporation is organized, the use of such words may be allowed, without prejudice
to the provision of any existing international agreement to the contrary. (SEC Opinioa
April 12,1988.)
The Securities and Exchange Commission has prohibited domestic corporations
from using the names of multinational corporations unless they are set up as subsidia-
ries or affiliates of these multinational corporations to prevent misimpressions created by
new corporations organized by obscure investors.
name in violation of the rights of others than an individual can

use his name legally acquired so as to mislead the public and in-
jure another. (Philips Export B.V. vs. Court of Appeals, 206 SCRA
457 [1992].) For as long as a corporation is existing regardless of
whether or not it is in operation, its corporate name cannot be
used by any other group. (SEC Opinion, Sept. 2,1993.)
If any corporation could adopt at pleasure the name of
another corporation, the practice would cause confusion and
unfair and fraudulent competitions, open the door to frauds upon
the public, promote the evasion of legal obligations and duties,
and result in difficulties of administration and supervision over
corporations. (Wycott vs. Howe Scale Co., 122 Fed. 348; Red Line
Transportation vs. Rural Transit, 30 Phil. 549 [1915]; Industrial
Refractories Corporation of the Philippines vs. Court of Appeals,
390 SCRA 252 [2002].)
(2) Test of infringement. — The right to the exlusive use of a
corporate name with freedom from infringement is determined
by priority of adoption. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is
such as to mislead a person using ordinary care and discrimina-
tion and the court must look to the record as well as the names
themselves. It is settled, however, that proof of actual confusion
need not be shown. It suffices that confusion is probably or likely
to occur. (Philips Export B.V. vs. Court of Appeals, supra.)
(3) Part of name. — The corporate name shall contain the
word "Corporation" or "Incorporated," or the abbreviations
"Corp." or "Inc.," respectively. The corporate name of a founda-
tion shall use the word "Foundation." (SEC Memo. Circ. No. 5,
Series of 2008.)
At the time of registration, the corporation through its
authorized representative must submit an affidavit containing
an unqualified undertaking to change the corporate name in the
event that another person, firm or entity has acquired a prior right
to the use of said name or one similar to it, signed by at least two
(2) incorporators. In case of amendment of the corporate name of
an existing company, the affidavit shall be signed by any of the
directors. (Ibid.)
184
ILLUSTRATIONS:
(1) "House of Investments, Inc.," a corporation engaged
in investments, protested the adoption of the name "House of
Insurance, Inc." by a proposed corporation which shall engage
in insurance. Is there a similarity between the two names as
to cause confusion in the minds of the public regarding the
identities of said corporations?
None. The two corporations have different main objectives
and both cater generally to people of means who, as a rule,
exercise careful scrutiny of the identity of the corporation with
which they deal and are interested not only in the entity but
in the officials thereof as well. Furthermore, only the word
"House" appears in both names but as this word is generic or
one of general application, it cannot be exclusively appropriated
as a corporate name. (SEC Opinion, May 24,1960.)
(2) A proposed corporation seeks to adopt "Garcia &
Co., Inc." as its corporate name. May the proposed name be
permitted?
No. The reason for the rule against the adoption of a name
similar to the name of an existing entity is to avoid confusion
in the minds of the general public. For the same reason, the
proposed name should not be approved.
A different rule would apply if persons with the surname
"Garcia" registered a corporation under the name "Garcia &
Co., Inc." and subsequent to said registration, transferred their
shares to others, none of whom bear the surname "Garcia." In
such event, the transferees of the shares of stock may continue
the business of the corporation under its registered corporate
name. (SEC Opinion, Aug. 22,1960.)
(3) "Universal Textile Mills, Inc." petitioned to have the
"Universal Mills Corporation" change its name on the ground
that such name is "confusingly and deceptively similar" to
that of the former. The Securities and Exchange Commission
granted the petition which order was affirmed by the Supreme
Court.
Though not identical, the names are so similar to cause
confusion to the general public, particularly where the latter
included the manufacture, dyeing and selling of fabrics of all
kinds in which the former had been engaged for more than a
decade ahead of the latter, enjoying well-earned patronage and

goodwill. (Universal Mills Corporation vs. Textile Mills, Inc.,
77 SCRA 62 [1977]; see Ang mga Kaanib sa Iglesia ng Dios Kay
Kristo Jesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng
Dios kay Cristo Jesus, 372 SCRA 173 [2001].)
(4) Is the corporate name "Tropiflora, Inc." confusingly
similar to "Tropical Flora (Philippines)" considering that the
two entities are engaged in the same line of business?
Yes. "Tropiflora" is derived from the words "tropical
flora," meaning "of, in or characteristic of the tropics, very
hot." Tropic is either of two circles of the celestial sphere
parallel to the equator. Flora refers to the plants of a specified
region or time. "Tropiflora" is nothing but a contraction of the
words "Tropical Flora." The former is merely a combination
of the latter. The similarity between the two names is too
obvious to be overlooked. (Benedict Investment Realty Corp.
vs. Tropiflora, Inc., SEC Case No. 2570, Jan. 10,1985.)
(5) There is a basic similarity between the trade names
"Universal Converse and Device" and "Converse Rubber
Corporation" as in both names, "Converse" is the dominant
word which identified the latter from corporations engaged in
similar business. Appropriation by another of the dominant
part of a corporate name is an infringement. (Converse Rubber
Corp. vs. Universal Rubber Product, Inc., 147 SCRA 154 [1987].)
(6) The corporate names of private respondent educational
entities all carry the word "Lyceum" but it has been held
that confusion and deception are effectively precluded by
the appending of geographic names to the word "Lyceum."
Thus, we do not believe that the "Lyceum of Aparri" cannot
be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word
for the Greek lykeion which, in turn, referred to a locality on
the river Illisius in ancient Athens "comprising an enclosure
dedicated to Apollo adorned with fountains and buildings
erected by Pisistratus, Pericles and Lycurgus frequented by
the youth for exercise and by the philosopher Aristotle and his
followers for teaching." In time, the word "Lyceum" became
associated with schools and other institutions providing public
lectures and concerts and public discussions. Thus, today, the
186
word "Lyceum" generally refers to a school or an institution of

learning. While the Latin word "lyceum" has been incorporated
into the English language, the word is also found in Spanish
(liceo) and in French (lycee).
Roman Catholic schools frequently use the term, e.g.,
"Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate),
"Liceo de Masbate," "Liceo de Albay." "Lyceum" is in fact as
generic in character as the word "university." In other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes
a secondary school or a college. It may be that the use of the
word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number
of educational institutions have adopted "Lyceum" or "Liceo"
as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural
to use this word to designate an entity which is organized
and operating as an educational institution. (Lyceum of the
Philippines, Inc. vs. Court of Appeals, 219 SCRA 610 [1993].)
(7) Respondent RCP was incorporated on October 13,
1976 and since then has been using the corporate name
"Refractories Corp. of the Philippines." Meanwhile, petitioner
was incorporated on August 23,1979 originally under the name
"Synclaire Manufacturing Corporation." It only started using
the name "Industrial Refractories Corp. of the Philippines"
when it amended its Articles of Incorporation on August 23,
1985, or nine (9) years after respondent RCP started using its
name. Thus, being the prior registrant, respondent RCP has
acquired the right to use the word "Refractories" as part of its
corporate name.
Petitioner's corporate name is "Industrial Refractories
Corp. of the Phils." while respondent's is "Refractories Corp of
the Phils." Obviously, both names contain the identical words
"Refractories," "Corporation" and "Philippines." The only
word that distinguishes petitioner from respondent RCP is
the word "Industrial" which merely identifies a corporation's
general field of activities or operations. These two corporate
names are patently similar that even with reasonable care and
observation, confusion might arise. Furthermore, both cater to
the same clientele, i.e., the steel industry. (Industrial Refractories
Corporation of the Philippines vs. Court of Appeals, 390 SCRA
252 [2002].)
(4) Prohibited use of certain words. — In addition to the limi-

tation provided by Section 18, special laws prohibit the use of
certain words as part of the corporate name such as those which
imply that a corporation is engaged in an activity in which it is
not allowed by law to engage in. Thus:
(a) It shall be unlawful for any person, association or cor-
poration to use whether directly or indirectly, the emblem,
official seal, and name of the United Nations, both in its full
or abbreviated form, for commercial or business purpose.
(Sec. 1, R.A. No. 226.)
(b) It shall be unlawful to use the word "bonded," in part
or in whole, as a trade name or business name, or business
name of those operating or maintaining any warehouse not
licensed under Act No. 3893 (General Bonded Warehouse
Act.) or established under Sections 1302 and 1304 of the
Revised Administrative Code. (Sec. 3, R.A. No. 247.)
(c) No person, association or corporation unless duly
authorized to engage in the business of a bank, quasi-bank,
trust entity, or savings or loan association, shall advertise or
hold itself out as being engaged in the business of such bank,
etc., or use in connection with its business title the word or
words "bank," "banking," "banker," "quasi-bank," "quasi-
banking," "quasi-banker," "savings and loan association,"
"trust corporation" "trust company," or words of similar im-
port or transact in any manner the business of any such bank,
corporation or association. (Sec. 64, R.A. No. 8791.)
(d) No bank, person, association, or corporation doing
the business of banking but not authorized under the Rural
Banks Act, shall use the words "Rural Bank," as part of its
name or title. (Sec. 28, R.A. No. 7353.)
(e) It shall be unlawful for any person, association,
partnership, or corporation to use the term "savings and
loan association" unless it is organized under the Savings
and Loan Association Act (Sec. 7, R.A. No. 3779.), or the term
"development bank" unless it is organized under the Private
Development Banks Act. (Sec. 16, R.A. No. 4093.)
(f) All banks other than the Philippine National Bank
and such other banks now licensed to do business in the Phil-
188
ippines whose name already includes the word "National"

are prohibited from using the word "National" as a portion
of their name or title. (Sec. 35, Pres. Decree No. 694, The 1975
Revised Charter of the Philippine National Bank.)
(g) The use of "UN," "Olympic," and "Bureau" in full
or abbreviated form for commercial or business purposes is
prohibited. (Sec. 1, R.A. No. 226.)
(h) The use of "Financing Company," or "Finance Com-
pany," or "Finance and Leasing Company" "Investment
Company" or "Investment Risk" unless organized as a fi-
nancing investment company is prohibited. (Sec. 14, R.A. No.
5980, as amended by R.A. No. 8556.)
(i) The use of "Lending Company" and "Lending In-
vestor" except by lending companies. (Sec. 12[2, c], R.A. No.
9474.), or "Pawnshop" except by entities authorized to oper-
ate pawnshop. (Sec. 11, Pres. Decree No. 114.)
(j) The practice of a profession regulated by special law
which among others, provides for the permissible use of the
profession name in a firm, partnership or association shall
govern the use of the same, e.g., "Engineer" or "Engineering"
(Sec. 24, R.A. No. 544, as amended by R.A. No. 1582.), "Archi-
tect" (Sec. 25, R.A. No. 9266.) or "Geodetic Engineer" (Sec. 24,
R.A. No. 8560.)
(k) The corporation which is a subsidiary of a foreign
firm may carry the name of the principal company with the
word "(Phil.)" or "(Philippines)" affixed to the firm name.
The written consent of the mother company as regards the
use of the firm name must be submitted.
(1) The name of an internationally known foreign cor-
poration or one similar to it may not be used by a domestic
corporation unless it is a subsidiary and the parent company
has consented to such use.
(m) If the full name of a person forms part of the corpo-
rate name, the consent of such person or his heir(s) must be
obtained.
(n) Unless otherwise authorized by the Commission,
"National," "Bureau," "Commission," "State," and other
words, acronyms, and abbreviations that have been given

acceptance in the Philippines as being used only by entities
that perform governmental functions. (SEC Memo. Circ. No.
5, Series of 2008.)
(5) Use of generic, geographical, and descriptive terms and
names. — Certain words, terms, or names are regarded by law
as incapable of exclusive appropriation. Of this class are generic
terms and geographical names and terms which are merely
descriptive of the goods, services, places where made, the
character of the business, or the name of the maker. (Columbia
Mill Co. vs. Alcorn, 150 U.S. 460.)
The general rule is that a corporation cannot acquire such a
right in such names, words or terms as to have their use by others
enjoined (General Industries Co. vs. Wacker Drive Building Corp.,
57 F. Sup 573.) unless such words have acquired a secondary
meaning or have become distinctive so as to distinguish not only
the product of a particular service and its quality but also the
name of the producer of the service. (Wyoming National Bank of
Casper vs. Security Bank & Trust Co., 472 2d 1120.) Thus, the use,
for example, of the words "La Union" which is a geographical
name, and "provincial" which is merely descriptive as business
trade names including the use of the same in the transportation
business, may not be enjoined. (SEC Opinion, July 16,1991.)
(6) Use of trade name of another corporation. — The SEC Guide-
34
lines, specifically requires that: (a) a corporate name shall not be
identical, misleading or confusingly similar to one already reg-
istered by another corporation with the Commission; and (b) if
the name applied for is similar to the name of a registered firm,
the applicant shall at least contain one or more distinctive words
to the proposed name to remove the similarity or differentiate it
35
from the registered name. This guideline does not apply where
"SEC Memo. Cir. No. 5, Series of 2008.

^However, the addition of one or more distinctive words shall not be allowed if the
registered name is coined or unique unless the board of directors of the subject corpora-
tion gives its consent to the applied name. Production marks, spaces, signs, symbols,
and other similar characters shall be acceptable for purposes of differentiating a proposal
name from a registered name. A name that consist solely of special symbols, punctuation
marks or specially designed characters shall not be registered. A tradename or trademark
190
the questioned word happens to be the valid trademark or trade

name of another corporation, in which case, the latter shall have
the exclusive right to its use as registered owner. (Philips Export
B.V. vs. Court of Appeals,* 206 SCRA 457 [1992].)
(7) Use of a person 'sfull name or surname. — It may be used in a
corporate name if he/she is a stockholder of the corporation and
has consented to such use. If the person is already deceased, the
consent shall be given by his/her estate. The Commission may
require a registrant to explain to its satisfaction the reason for the
use of a person's name. The meaning of initials used in a name
shall be stated by the registration the articles of incorporation or
in a separate document signed by an incorporator or director.
(SEC Memo. Circ. No. 5, Series of 2008.)
(8) Doctrine of secondary meaning. — This doctrine originated
in the field of trademark law. Its application has, however, been
extended to corporate names since the right to use a corporate
name to the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or trade
name. In Philippine Nut Industry, Inc. vs. Standard Brands, Inc. (65
SCRA 575 [1975].), the doctrine of secondary meaning was elabo-
rated in the following terms: "x x x a word or phrase originally
incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to
mean that the article was his product."
In Lyceum of the Philippines vs. Court of Appeals (supra.), the
question which arose was whether or not the use by petitioner
registered with the Intellectual Property Office may be used as part of the corporate name
of a party other than its owner if the latter gives its consent to such use. (Ibid.)
In case a company has more than one business or trade name, the SEC requires that
business or trade name which is different from corporate or partnership name should be
indicated in the Articles of Incorporation. (Ibid.; as amended by SEC Memo. Circ. No. 12.)
*In this case, the SEC, in allowing private respondent the continued use of its cor-
porate name "Standard Philips Corporation," maintains that the corporate names of pe-
titioners "Philips Electrical Lamps, Inc. and "Philips Industrial Development, Inc." con-
tains at least two words different from that of the corporate name of respondent.
OF PRTVATE CORPORATIONS
of "Lyceum" in its corporate name has been for such length of time
and with such exclusivity as to have become associated or iden-
tified with the petitioner institution in the mind of the general
public (or at least that portion of the general public which has to
do with schools). The Supreme Court ruled:
"The number alone of the private respondents in the case

at bar suggests strongly that petitioner's use of the word
'Lyceum' has not been attended with the exclusivity essential
for applicability of the doctrine of secondary meaning. It may
be noted also that at least one of the private respondents, i.e.,
the Western Pangasinan Lyceum, Inc., used the term 'Lyceum'
seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word
'Lyceum.' It follows that if any institution had acquired an
exclusive right to the word Lyceum, that institution would
have been the Western Pangasinan Lyceum, Inc. rather than
the petitioner institution, x x x We conclude and so hold that
petitioner institution is not entitled to a legally enforceable
exclusive right to use the word 'Lyceum' in its corporate
name and that other institutions may use 'Lyceum' as part
of their own corporate names. To determine whether a given
corporate name is 'identical' or 'confusingly or deceptively
similar' with another entity's corporate name, it is not
enough to ascertain the presence of 'Lyceum' or 'Liceo' in
both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with
the names of private respondents, they are not reasonably
regarded as 'identical' or 'confusingly or deceptively similar'
with each other."
(8) Where business of junior corporation different or noncompet-
ing. — The protection to which the prior user of a corporate name
is entitled is not limited to guarding its goods or business from
actual market competition with identical or similar products of
the parties but extends to all cases in which the use by the junior
appropriator of the name is likely to lead to a confusion of source,
as where prospective purchasers would be misled into thinking
that the complaining corporation has extended its business into
192
the field, or is in any way connected with the activities of the

infringer; or when it forestalls the normal potential expansion of
its business, (see Sta. Ana vs. Maluwat, 24 SCRA 1018 [1968].)
Remedy of corporation w h o s e n a m e
has been adopted by another.
(1) Injunction. — A corporation has an exclusive right to the
use of its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected in the
37
use of trademarks and trade names.
(a) Fraud upon the aggrieved corporation. — The use of a
name similar to one adopted by another corporation, whether
a business or a non-profit organization, if misleading or likely
to injure in the exercise of its corporate functions, regardless
of intent, may be prevented by the corporation having a prior
right, by a suit for injunction against the new corporation to
prevent the use of the name. (Philips Export B.V. vs. Court of
Appeals, 206 SCRA 457 [1992]; Ang mga Kaanib sa Iglesia ng
Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs.
Iglesia ng Dios Kay Crista Jesus, 372 SCRA 171 [2001].)
Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name
and perhaps carried on its business thereunder, that another
should attempt to use the same name, or the same name with
slight variation in such a way as to induce persons to deal
with it in the belief that they are dealing with the corporation
which has given a reputation to the name. (Philips Export
B.V. vs. Court of Appeals, supra.)
(b) Interference with its business. — Broadly speaking, the
general rule is that the right of one corporation to enjoin the
use of the name of a similar name by another depends upon
whether such use has interfered with the former's business
whatever it may be and without regard to whether it is com-
37
A trade name is any individual name or surname, firm name, device or work used
by manufacturers, industrialists, merchants and others to identify their businesses, voca-
tions, or occupations. It refers to the business and its goodwill while trademark refers to
the goods. (Converse Rubber Corp. vs. Universal Rubber Products, supra.)
mercial, trading or otherwise. Thus, not only are corporations

organized for pecuniary profit entitled to protect their names
by injunction, but it has also been held that an injunction may
issue to protect the name of a benevolent fraternal society,
a patriotic society, a social club, or a charitable religious soci-
ety, (see 6 Fletcher, pp. 26-47; 18 C.J.S. 579-580.)
(2) De-registration. — To restrain the wrongful assumption
of a name by a corporation is not to annul the corporation by
depriving it of a name. If restrained from using a name chosen,
it may choose another name. (18 Am. Jur. 2d 684.) Section 18 em-
powers the Securities and Exchange Commission to de-register
a corporate name deceptively similar to that already used by an
existing corporation not only for the protection of the complain-
ing corporation but more so for the protection of the public. (Ang
mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Ban-
sang Pilipinas, Inc. vs. Iglesia ng Dios Kay Cristo Jesus, supra.)
Change of corporate name.

(1) Compliance with formalities. — A corporate name is an ar-
tificial name and is selected with an object, and may be changed
and a new one taken. (9-A Words and Phrases 391.)
A corporation can change the name originally selected by it
after complying with the formalities prescribed by law, to wit:
amendment of the articles of incorporation and filing of the
amendment with the Securities and Exchange Commission. (Sec.
16.) Hence, the mere approval by the stockholders of the amend-
ment of the articles of incorporation changing the corporate
name does not automatically change the name of the corporation
as of that date. (Phil. First Ins. Co., Inc. vs. Hartigan, 34 SCRA 252
[1970].)
(2) Effectivity. — When a change of name is approved, it is
required that the Commission must issue an amended certificate
of incorporation under the amended name. (Sec. 18.)
The change of name is deemed effective as of the date of
the Commission's approval of the amended articles or from the
date of filing with it if not acted upon within six (6) months from
the date of filing for a cause not attributable to the corporation.
194
(Sec. 16, last par.) Said change impliedly amends the corporate
name as appearing in the by-laws; hence, the corporation need
not amend its by-laws in order to reflect its new corporate name.
(SEC Opinion, Oct. 2,1986.)
(3) Effect. — An authorized change in the name of the cor-
poration, whether effected by a special act or under a general
law, has no more effect upon its identity as a corporation than a
change of name of natural person upon his identity.
The change of name does not affect the property, rights, or
liabilities of the corporation, nor lessen or add to its obligations.
After a corporation has effected a change in its name, it should
sue and be sued in its new name. (18 Am. Jur. 2d 682-683.) It is
in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name
and its character is in no respect changed. As a general rule,
officers and directors who acted in their capacity as agents of
the corporation under the old corporate name, bear no personal
liability for acts done or contracts entered into by them, if duly
authorized. (Republic Planters Bank vs. Court of Appeals, 216
SCRA 738 [1992]; PC. Javier & Sons, Inc. vs. Court of Appeals,
462 SCRA 36 [2005].)
Use of c h a n g e d or a b a n d o n e d
corporate n a m e s .
(1) Former name of same corporation. — The mere fact that the
former name is indicated in the certificate of filing of amended
articles of incorporation would militate against anyone using
said name and, therefore, said previous name cannot be appro-
priated or used by any other person for a certain period {e.g., 5
years) to avoid confusion, not to mention infringement of good-
will, where said name has continued to be associated with the
corporation. (SEC Opinion, Aug. 3,1988.)
(2) Name(s) of merged or consolidated corporations. — In case
the change of the corporate name is due to merger or consolida-
tion, the corporate name(s) of the merged or consolidated cor-
porations may not be used by another corporation, without the
consent of the surviving corporation although there is a dissolu-
tion of the absorbed corporation in view of Section 80(4).
(3) Name of dissolved corporation or whose registration has been

revoked. — It shall not be used by another corporation within
three (3) years from the approval of the dissolution or six (6)
years from the date of revocation unless its use has been allowed
at the time of the dissolution or revocation by the stockholders
or members who represent a majority of the outstanding capital
stock or membership of the corporation. (SEC Memo. Circ. No. 5,
Series of 2008.)
(4) Name of dissolved corporation acquired by new corporation. —
A new corporation which has acquired the property and name
of a dissolved corporation is in the same position as the original
corporation would have been had it continued to exist and may,
therefore, in a proper case, enjoin the use of such name by an-
other. (SEC Opinion, Aug. 22,1985, citing 6 Fletcher, pp. 10, 52.)
(5) Name of corporation dissolved through expiration of term. —
But when the corporate name is abandoned due to the dissolu-
tion of the corporation through expiration of its corporate life,
such corporate name may be used by another corporation. (Ibid.)
Misnomer of a corporation.
The general rule is that the mere misnomer of a corporation
in a bond, note, or other deed or contract does not render the
same invalid or inoperative but the corporation may sue or be
sued thereon in its true name with proper allegation and proof
that it is the corporation intended; and its identity may be estab-
lished by parol evidence. Nor will a grant or conveyance to or
by a corporation be avoided because of a misnomer. (18 C.J.S.
572-574; 1 Fletcher, pp. 742-743.) This rule has also been applied
in case of subscription to the stock of a corporation. (18 Am. Jur.
2d 680.)
Generally speaking, a corporation if sued by the wrong
name is bound if duly served. (21 R.C.L. 599.) If there is enough
expressed to show that there is such an artificial being and to
distinguish it from all others, the body corporate is well named
although there is a variation of words and syllables. (Moultrie
Country vs. Fairfield, 105 U.S. 370, 26 L. ed. 945.)
196
Sec. 19. Commencement of corporate existence. — A

private corporation formed or organized under this Code
commences to have corporate existence and juridical
personality and is deemed incorporate from the date the
Securities and Exchange Commission issues a certificate
of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their succes-
sors shall constitute a body politic and corporate under the
name stated in the articles of incorporation for the period
of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with
law. (11)
Acquisition of juridical personality.

(1) Issuance of certificate of incorporation. — A corporation
commences to have juridical personality and legal existence
only from the moment the Securities and Exchange Commission
issues to the incorporators a certificate of incorporation under its
39
official seal.
(a) Such certificate is a final determination of the corpora-
tion's right and competence to transact business or enter into
contracts in its name, (see, however, Sec. 61.) An entity with-
out the necessary corporate legal personality has the status of
an "unregistered" association and the members themselves
shall be held personally liable for their acts or contracts, and
not the association.
(b) It is the certificate of incorporation that not only gives
juridical personality to a corporation but places it under
the jurisdiction of the Commission. This jurisdiction is not
affected even if the authority to operate a certain specialized
activity is withdrawn by the appropriate regulatory body
other than the Commission. (Filipinas Loan Company, Inc.
vs. Securities and Exchange Commission, 356 SCRA 193
[2001].)
39
An unregistered organization cannot exercise the powers, rights and privileges
expressly granted by the Corporation Code to registered corporations. Its status is that of
an ordinary association which has no separate juridical personality. (SEC Opinion, Aug.
(c) The issuance of the certificate calls the corporation

into being but it is not really ready to do business until it is
organized. The corporation must formally organize and com-
mence the transaction of its business or the construction of its
works within two (2) years from the date of its incorporation
or, otherwise, its corporate powers shall cease and it shall be
deemed dissolved. (Sec. 22.) The law under which the corpo-
ration is organized may require a separate permit or license
to operate from other government agencies.
(2) Filing of articles of incorporation. — In the case of religious
corporations, the Code does not require the Securities and
Exchange Commission to issue a certificate of incorporation, (see
Sees. 112,117.) In fact, Section 112 clearly states that from and after
the filing with the Commission of the articles of incorporation,
the chief archbishop, etc. shall become a corporation sole. (par.
2.)
(3) Registration of cooperative. — A cooperative acquires
juridical personality upon registration with the Cooperatives
Development Authority. (R.A. No. 6938, Sec. 16.) It need not be
registered again with the Securities and Exchange Commission.
The methods or causes of dissolution of corporations are dis-
cussed under Title XIV.
Sec. 20. De facto corporations. — The due incorporation

of any corporation claiming in good faith to be a corporation
under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto
proceeding, (n)
De jure corporation/de facto

corporation defined.
(1) A de jure* corporation is one created in strict or substantial
conformity with the mandatory statutory requirements for incor-
'According to law.'
198
poration and the right of which to exist as a corporation cannot

be successfully attacked or questioned by any party even in a
direct proceeding for that purpose by the State.
40
(2) A de facto corporation is one which actually exists for all
practical purposes as a corporation but which has no legal right
to corporate existence as against the State. (8 Fletcher, pp. 62-63.)
It is a corporation from the fact of its acting as such, though not
in law or right a corporation. (18 Am. Jur. 2d 593-594.)
It is one which has not complied with all the requirements
necessary to be a dejure corporation but has complied sufficiently
to be accorded corporate status as against third parties although
not against the State.
Requisites of a de facto corporation.

It is essential to the existence of a de facto corporation that
there be:
(1) A valid law under which a corporation with powers
assumed might be incorporated;
(2) A bona fide attempt to organize a corporation under such
law; and
(3) Actual user or exercise in good faith of corporate powers
conferred upon it by law.
Stockholders of a de facto corporation enjoy exemption from
personal liability for corporate obligations as do stockholders of
de jure corporations.
Existence of law.
In order that there can be a de facto corporation, there must be
a law authorizing it to be a corporation de jure for there cannot
be a corporation de facto when there cannot be one de jure, even
though there may have been an assumption of corporate powers.
(1) Accordingly, there cannot be a corporation de facto under
an unconstitutional statute for such statute is void and a void law
is no law. (Clark vs. American Cannal Coal Co., 73 N.E. 1083.) A
"Tn fact.
statute, however, is presumed valid until it has been judicially

declared otherwise.
(2) Similarly, a corporation cannot be recognized as having a
de facto existence when its purpose is prohibited by law or con-
trary to public policy. (Art. 1409, Civil Code.)
(3) Neither can there be a corporation for the practice of a
learned profession in the absence of a law expressly permitting
the organization of such corporations. (1 Fletcher, p. 339.)
B o n a fide a t t e m p t to incorporate.
When there has been no attempt in good faith to create a
corporation de jure, there can be no de facto corporation. Any
other rule might well open the door to fraud upon the public.
Mere intent is not sufficient. In addition, there must be a bona fide
attempt to comply with the requirements of the law (8 Fletcher,
pp. 102-103.), which goes far enough to amount to "colorable
compliance" with the law. (Ballantine, p. 77.)
(1) Creation of corporation precluded. — The following are
examples of defects which will preclude the creation of even a de
facto corporation:
(a) Absence of articles of incorporation;
(b) Failure to file articles of incorporation with the Secu-
rities and Exchange Commission (Cagayan Fishing Dev. Co.
vs. Sandiko, 60 Phil. 223 [1934].); and
(c) Lack of certificate of incorporation from the Securities
and Exchange Commission.
In all the above cases, the omissions would be fatal to de facto
corporate existence for even its stockholders may not probably
claim good faith in being a corporation. The filing of articles of
incorporation and the issuance of certificate of incorporation
may, therefore, be considered essential for the existence of a de
facto corporation. (Hall vs. Piccio, 86 Phil. 603 [1950]; see Albert
vs. University Publishing Co., Inc., 13 SCRA 84 [1965].)
(2) Creation of de facto corporation results. — The following are
examples of defects which do not preclude the creation of a de
facto corporation:
200
(a) The articles of incorporation fails to state all the

matters required by the Code to be stated, or state some of
them incorrectly;
(b) The name of the corporation closely resembles that
of a pre-existing corporation that it will tend to deceive the
public;
(c) The incorporators or a certain number of them are not
residents of the Philippines;
(d) The acknowledgment of the articles of incorporation
or certificate of incorporation is insufficient or defective in
form, or it was acknowledged before the wrong officer (see 8
Fletcher, pp. 108-113.);
(e) The percentage of Filipino ownership of the capital
stock required for the business is less than that prescribed by
law;
(f) The minimum paid-up capital stock has not been
paid to and received by the corporate treasurer contrary to
his affidavit; and
(g) The failure to submit its by-laws on time. (Sawadjaen
vs. Court of Appeals, 459 SCRA 516 [2005].)
The above may be considered as inadvertent or minor defects
or errors which can be excused to prevent injustice.
Colorable compliance with the law.

To constitute a corporation de facto, there must be, it is true,
a colorable compliance with the statute, but there need not be
a substantial compliance. A substantial compliance makes the
body a corporation de jure. (Clark on Corporations, p. 107.)
There is no fixed rule on how far the proceedings must go or
what steps are sufficient to amount to this colorable compliance.
It will depend on the situation and knowledge of the parties.
The mere naked claim and assumption of corporate name and
capacity will not be sufficient to give a pretended corporation the
de facto status. It is not enough to show that the associates have
intended to incorporate and have agreed among themselves to
act and have acted as if they were a corporation. The efforts to
incorporate must give an appearance of sufficiency of compliance

with statutory requirements, so that the associates may in good
faith suppose that they have actually become incorporated.
(Ballantine, pp. 77-78.)
User of corporate powers in good

faith.
To create a corporation de facto, it is not sufficient to show the
existence of a law under which a corporation might be formed
and an honest attempt to comply with the requirements thereof,
but it is also necessary to show an actual user or exercise of cor-
porate powers or franchise.
(1) User contemplated. — In substance, user consists in an
enjoyment and exercise (although not rightful) of such corporate
franchises and powers as would be given by the law to an
41
association if the attempted organization had been perfected.
The acts relied upon as showing user must be corporate acts as
distinguished from acts which might as well be performed by
an incorporated association, or from acts of individuals which
would not be corporate acts if there were a charter. But if the
42
business is such that it can only be carried on by a corporation,
then the carrying on of such business is enough since its members
must of necessity act as a corporation, if they act at all. (8 Fletcher,
pp. 149-159.)
(2) Duty to correct defect if discovered. — Furthermore, it is
essential that the corporation must act in good faith in claiming
to be a corporation and exercising corporate powers. (Sec. 20.)
Therefore, if after incorporation, the incorporators discovered
that they have not complied substantially with the law and still
continued transacting business as a corporation, without doing
"This element seems to be a factor of minor significance. (Ballantine, p. 77.)

t a k i n g subscriptions to and issuing shares of stock, electing directors and officers,
adopting by-laws and buying a lot and constructing and leasing a building upon it, are
sufficient acts of user of corporate powers to constitute a corporation de facto. It is doubt-
ful, however, whether the mere organization of a corporation by the election of officers
and adoption of a board resolution authorizing a contract preliminary to the actual doing
of business with third parties will constitute "acts of user." (Ballantine, pp. 81-82.)
202
anything to correct the defect, the privilege of de facto existence

can no longer be invoked.
Basis of de facto doctrine.

The recognition of de facto existence has been found necessary
to promote the security of business transactions and to eliminate
quibbling over irregularities.
(1) A third person dealing with a corporation will rarely be
prejudiced if the company is recognized as a corporation in spite
of minor defects in its formation.
(2) Seldom would it be just to allow a wrongdoer to quibble
over such objections to escape liability for wrongdoing.
(3) Equally, it would be unjust to allow a claimant against a
supposed company to assert the individual liability of innocent
passive investors on the ground of flaws in the formal steps of
incorporation, when they have attempted in good faith to com-
ply with statutory requirements and the objecting party is not
prejudiced. (Ballantine, p. 87.)
Questioning validity of c o r p o r a t e
existence.
The well-settled rule is that assuming that a de facto corporation
actually exists, its existence as a corporation cannot be collaterally
attacked either by the State or by private individuals.
(1) The State must bring a direct proceeding (quo warranto)
against the corporation to oust it from the exercise of corporate
powers usurped by it and to have it dissolved. So far as the State
is concerned, the distinction between a corporation de jure and a
corporation de facto is that one can successfully resist a suit by the
State, brought directly to test the rightfulness of its existence, and
the other cannot.
(2) As to individuals dealing with it as a corporation, there
is no essential distinction. The stockholders or members of both
are alike protected from individual liability for debts except to
the extent provided by the charter or act of incorporation. (9-A
Direct attack/collateral attack of corporate

existence defined.
(1) Direct attack is one whereby the State, in a proceeding
brought for that purpose, attacks the existence of an association
claiming to be a corporation. A direct attack can only be insti-
tuted by the government through the Solicitor General by quo
warranto proceedings. (Sec. 20; see Sec. 121.)
(2) A collateral attack is one whereby corporate existence is

questioned in some incidental proceedings not provided by law
for the express purpose of attacking the corporate existence.
ILLUSTRATION:
Upon failure of A to pay his debt, X Corporation sued A.
Can A interpose the defense that X, being a de facto corporation,
has no right to exist as a corporation and, therefore, has
no capacity to enter into any contract and to sue in its own
name?
No, because A is attacking the existence of X collaterally.
The defense of A is merely an incident to the main action or
principal case the purpose of which is to enforce the contract
of X with A. The right of X to exist as a corporation can only
be inquired into directly in a quo warranto proceeding which is
brought precisely for the purpose and this proceeding can only
be instituted by the Government through the Solicitor General
(Sec. 20.) and not by A.
Rule against collateral attack.

(1) Rationale. — The general rule against collateral attack
upon corporate existence is based upon the ground, not of
equitable estoppel (see Sec. 21.), but of public policy.
(a) Individual right is not invaded; it is the State's right
and authority which are invaded and usurped. If the State,
which alone grants the authority to incorporate, remains
silent, an individual would not be allowed and permitted to
raise the inquiry.
(b) It would produce endless confusion and hardship
and probably destroy the corporation if the legality of its
existence could be questioned in every suit to which it is a
204
party, for then no judgment could be rendered which would

finally settle the question. (18 Am. Jur. 2d 606.)
(c) Likewise, the rule is in the interest of the public and is
essential to the validity of business transactions with corpo-
rations. (Ibid., 594.)
(2) When rule not applicable. — The rule that collateral attack
on the organic entity or existence of a corporation will not be
permitted does not apply, however, when the lack of right or the
wrongdoing of the corporation is in issue because in violation
of public policy or of express or implied statutory requirement,
such as denial of its right to enforce contracts entered into with-
out compliance with prohibitions of express or implied statutory
or public policy. (Ibid., 605.) Thus, the defendant may question
the personality of a foreign corporation transacting business in
the Philippines to maintain a suit on the ground that it is not
duly licensed to do business in our country, (see Sec. 133.)
W h e r e organization not e v e n a de f a c t o
corporation.
If there has been a bona fide attempt to incorporate, under
a law authorizing incorporation, and the law has been so far
complied with as to make the association what is called a
corporation de facto, the only way in which its corporate existence
can be questioned is in a direct proceeding by the State, brought
for that purpose. Private individuals cannot raise the objection in
such a case, either directly or indirectly, and nobody can raise the
objection collaterally.
(1) Direct or collateral attack. — If failure to comply with
conditions precedent prevents the coming into existence of any
corporation either de jure or de facto, then, on principle and in
reason, the question may be raised collaterally as well as directly,
and by private individuals as well as by the State, unless there is
something to operate as an estoppel. When a private individual,
therefore, raises the objection that conditions precedent have not
been complied with, the question, in the absence of elements of
estoppel, is whether or not there is a corporation de facto. If there
is, he cannot object; otherwise, he can.
(2) Capacity to sue or be sued. — If a party is not either dejure or

de facto, it has no legal capacity to sue or be sued. And it follows
that where the corporate existence of the plaintiff suing as a
corporation is defined, the burden is on it to prove its corporate
existence either de jure or de facto, or at least to show an estoppel
on the part of the defendant to deny such existence.
(3) Liability as partners. — If neither a de jure nor a de facto
corporation results, the incorporators should be held liable as
partners together with stockholders who subscribed to stocks
knowing the failure of the attempted incorporation of the
business. (Sec. 21.) It is the regular courts, not the Securities and
Exchange Commission, that have jurisdiction over disputes or
controversies among them.
(4) Es toppel as a defense. — Where there is not even a corporation
de facto, a private person may, according to many cases, be barred
from raising the objection on the ground that he is estopped by
his conduct, as by having dealt with the pretended corporation
as a corporation, or by having held it out to the public as a legally
constituted corporation. (Ibid.; Clark on Corporations, pp. 65-66.)
Proof of corporate existence.

(1) Proof of de jure existence. — The sufficiency of the proof of
corporate existence will depend to a great extent upon the nature
of the proceeding in which the question is raised and the circum-
stances of the particular case. In quo warranto proceedings by the
State to test the right of an alleged corporation to exercise cor-
porate powers, corporate existence de jure must be shown; and
to show this, it must be made to appear that there is a valid law
creating or authorizing such a corporation, that there was a valid
organization under it and a substantial compliance with all con-
ditions precedent.
(2) Proof of de facto existence. — On the other hand, as has
been stated, if the question of corporate existence is raised
collaterally, it is sufficient if a de facto existence be shown. Such
proof is admissible whenever the question comes up collaterally
as in a criminal prosecution for forgery or any other crime
against an alleged corporation, or in any civil proceeding, other
206
than proceedings by the State to test the existence of the alleged

corporation. It is only necessary, in order to prove de facto corporate
existence, to show a law under which the alleged corporation
might have been formed, a colorable bona fide compliance with
that law, and an assumption or user of corporate powers.
(3) Proof of facts operating as an estoppel. — Again, there are
many cases in which a party may, by his conduct, as by deal-
ing with or holding out a body as a corporation, be estopped to
deny its existence as a corporate body. Here, it is not necessary to
prove even a de facto corporate existence. All that is necessary is
to show the facts that will operate as an estoppel, (see Sec. 21.)
Where a person has contracted or dealt with an association
as a corporation, proof of that fact alone is prima facie evidence of
the corporate existence of the body as against him, as in action
by the alleged corporation on a subscription to its stock. (Clark
on Corporations, Sec. 40.) Thus, an indorsee for a note payable to
a corporation need not prove the corporate capacity of the payee
since the maker "engages that he will pay it according to its tenor,
and admits the existence of the payee and his then capacity to
indorse." (Act No. 2031 [Negotiable Instruments Law], Sec. 60.)
Powers a n d liabilities of a de facto

corporation.
(1) In general. — Such a corporation is practically as good as
a de jure corporation. It is deemed to have a substantial legal ex-
istence and ordinarily, in its relation with all persons except the
State, has the same powers and is subject to the same liabilities,
duties and responsibilities, as a corporation dejure, and is bound
by all such acts as it might rightfully perform if it were a corpora-
tion de jure.
In other words, so long as the State acquiesces in its existence

and its exercise of corporate functions, it is under the protection
of the same law and governed by the same legal principles as de
jure corporations, and may legally do and perform every act and
thing which the same entity could do or perform were it a dejure
corporation. As to all the world except the paramount author-
ity under which it acts and from which it receives its charter, it
occupies the same position as though in all respects valid, and

even as against the State, except in direct proceedings to arrest its
usurpation of power, its acts are to be treated as efficacious.
(2) Liability to taxation. — So, the property of a de facto corpo-
ration is subject to taxation in the same manner as though it were
a de jure corporation and under the statutes relative to the taxa-
tion of corporations of the latter class. (1 Fletcher, pp. 627-628.)
(3) Binding effect of contracts. — Similarly, a transfer of prop-
erty to or by a corporation de facto is valid and binding against all
persons except the State; bonds, deeds, and mortgage executed
by such a corporation are valid, not only as against the corpora-
tion itself, but also as against anyone making a claim against its
assets, whether as a creditor directly of the corporation or as a
creditor of its creditors or stockholders.
(4) Protection against unauthorized acts. — Whether a corpora-
tion is de facto or dejure, it is entitled to protect itself from unau-
thorized acts. (26 Am. Jur. 2d 583-584.)
Liabilities of officers a n d m e m b e r s
of a de facto c o r p o r a t i o n .
(1) In general. — The officers and directors (or trustees) of a

de facto corporation are subject to all the liabilities and penalties
attending to officers and directors duly chosen by a corporation
de jure, including liability under the criminal law, and their acts
are binding when such acts would be within the power of such
officers if the corporation were one de jure. (Ibid., p. 655.)
(2) Liability as partners to third persons. — The members of a de
facto corporation cannot be held liable as partners by third per-
sons who deal with them in their supposed corporate capacity,
merely on account of a technical defect in the formation of the
corporation. This is especially true where the stockholders had
no knowledge of the defects and had no intent to become part-
ners and the ostensible corporation is apparent to third persons.
On the other hand, where an attempt to organize a corporation
fails by omission of some substantial step or proceeding required
by the law, its members or stockholders are liable as partners.
208
The decisive question is always whether what has been done

toward incorporation and organization is sufficient to constitute
a corporation dejure or de facto. (Ibid., 600-601.)
(3) Liability among themselves. — In actions among the mem-
bers themselves, however, for advances, commissions, etc., the
test of whether the corporation is de jure or de facto has been dis-
regarded. When persons associate together and do business as a
corporation and the latter is defectively organized, their rights,
duties, and liabilities, as between themselves, should be deter-
mined and governed by the express or implied terms, condi-
tions, and limitations contemplated by their agreement. They are
not partners unless they have agreed to be such.
The result thus obtained is the same as that reached on the
theory of estoppel. (Ibid., 601.)
Sec. 21. Corporation by estoppel. — All persons who

assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for
all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation, (n)
Estoppel to deny corporate existence.

An unincorporated association which represented itself to
be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality
to be sued to evade its responsibility for a contract it entered into
and by virtue of which it received advantages and benefits. (Lim
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA
728 [1999].)
(1) Principles as to de facto corporation not applicable. — In cer-
tain circumstances, an organization may not be a corporation de
jure — or perhaps not even de facto — may, so far as the par-

ties to a given transaction are concerned, be regarded practically
as a corporation, being recognized as such by the parties them-
selves. Actually, an organization which has not complied with
the conditions precedent to even de facto existence is not, for any
purpose, a corporation. Nevertheless, the incidents of a corpo-
rate existence may exist as between the parties by virtue of an
estoppel. Thus, besides corporation de jure and de facto, there is
sometimes a recognition of a third class known as corporation by
estoppel, also known as ostensible corporation.
It is generally conceded that corporations by estoppel are

not based upon the same principles as are corporations de facto.
The doctrine of de facto corporation has nothing to do with the
principle of estoppel. A corporation de facto cannot be created
by estoppel, the only effect of an estoppel being to prevent the
raising of the question as to the existence of a corporation. (18
Am. Jur. 2d 615.)
(2) Jurisdictional requirements not subject to estoppel. — The
doctrine of corporation by estoppel cannot override jurisdiction-
al requirements. Jurisdiction is fixed by law and is not subject to
agreement of the parties. Thus, it cannot be acquired through,
or waived, enlarged or diminished by any act or omission of the
parties; neither can it be conferred by the acquiescence of the
court or SEC. (Lozano vs. De los Santos, 274 SCRA 452 [1997].)
(3) Foundation of and reason behind doctrine. — Corporation by
estoppel is founded on principles of equity and is designed to
prevent injustice and unfairness. It applies when persons assume
to form a corporation and exercise corporate functions and enter
into business relations with third persons. Where there is no
third person involved and the conflict arises only among those
assuming the form of a corporation who, therefore, know that
it has not been registered, there is no corporation by estoppel.
(Ibid.) The application of the doctrine applies to a third party only
when he tries to escape liability on a contract from which he has
benefited on the irrelevant ground of defective incorporation.
(International Express Travel & Tour Services, Inc. vs. Court of
Appeals, 343 SCRA 674 [2000].)
210
The reason behind this doctrine is obvious — an unincorpo-

rated association has no personality and would be incompetent
to act and appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or con-
fer authority on another to act in its behalf; thus, those who act
or purport to act as its representatives or agents do so without
authority and at their own risk. And as it is an elementary prin-
ciple of law that a person who acts as an agent without authority
or without a principal is himself regarded as the principal, pos-
sessed of all the right and subject to all the liabilities of a princi-
pal, a person acting or purporting to act on behalf of a corpora-
tion which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent. (Lim Tong Lim
vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 [1999];
International Express Travel & Tour Services, Inc. vs. Court of
Appeals, supra.)
Corporation by estoppel w i t h o u t
de facto existence.
In some jurisdictions, the rule is that a corporation must have
at least a de facto existence before there can be an estoppel to deny
its existence; but this is not the universal rule. (Ibid.)
The better doctrine seems to be that the estoppel prevails,
notwithstanding that not all the three requisites necessary to
constitute as association of persons a de facto corporation are
present. In other words, corporation by estoppel may arise even
if no de facto corporation exists. 43
A corporation by estoppel has no real existence in law. It is

neither a de jure nor a de facto corporation, but is a "mere fiction
existing for the particular case, and vanishing where the element
of estoppel is absent." (8 Fletcher, p. 219.) It exists only between
the persons who misrepresented their status and the parties who
43
The doctrine of estoppel supplements the de facto doctrine in case of serious defects
and applies to the third party as well as to the purported corporation. (Ballantine, p.
88.) Thus, if a party deals with a corporation as though it were validly formed, he may
later be estopped from questioning the validity of the formation or the existence of the
enterprises.
relied on the misrepresentation. Its existence may be attacked by

any third party except where the attacking party is estopped to
treat the entity other than as a corporation.
ILLUSTRATION:
Where a group of persons represented that their
organization called X & Co. is a corporation, when it is not,
to Y who recognized it as such, and on this representation,
entered into a contract with Y, and without assuming to act
as a corporation entered into another contract with Z, in an
action against them on such contracts, they are estopped from
denying the corporate existence of X & Co. as against Y but not
as against Z. Neither is Y allowed to question or challenge the
validity of the organization or formation of X & Co. in an action
by the latter against the former.
If not all the associates participated or consented to the
representation, as to them, the doctrine of estoppel will not
apply.
If the group of persons (would-be corporation) does not
qualify as a corporation, whether dejure, de facto, or by estoppel,
there is no corporation and the stockholders are individually
liable.
Estoppel of persons dealing

with a corporation.
Even if the ostensible corporation is proven to be legally non-
existent, a party may be estopped from denying its corporate
existence.
(1) The stockholders or members of a pretended or ostensible
corporation who participated in holding it out as a corporation
are generally estopped or precluded to deny its existence against
creditors for the purpose of escaping liability for corporate debts
or for unpaid part of a subscription to stock. (8 Fletcher, pp.
275-278.) A corporation which continues its business instead of
liquidating its affairs after the expiration of its corporate term,
is a corporation by estoppel for the purpose of being sued on its
contracts, not a corporation de facto because it no longer exists in
fact and in law as a body corporate, except only for purposes of
liquidating its affairs, (see Sec. 122.)
212
The doctrine of estoppel to deny corporate existence applies

to domestic as well as to foreign corporations.
(2) So, also are the third persons who deal with such a cor-
poration recognizing it as such and the pretended corporation
itself, estopped from denying its corporate existence and raising
the defense of its lack of corporate personality for the purpose
of defeating a liability growing out of the contractual relation
between them and such entity (Compania Agricola de Ultramar
vs. Reyes, 4 Phil. 2 [1904].), or any tort committed by it as such
(Sec. 21.), or later taking advantage of their non-compliance with
the law, chiefly in cases where such persons have received the
benefits of the contract. (Merrill Lynch Futures, Inc. vs. Court of
Appeals, 211 SCRA 824 [1992].) Thus, where a mortgage, promis-
sory note, or other instrument is given to a corporation, as such,
the party giving it in effect admits and is thereby estopped to
deny its existence as a corporate body involving such contract
or dealing unless its existence is attacked for causes which have
arisen, since making the contract or dealing relied on as an estop-
pel. (Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil.
222 [1909]; Asia Banking Corporation vs. Standard Products Co.,
46 Phil. 145 [1924].)
In order for one to be estopped to deny the corporate
existence of an organization, he must have contracted or dealt
with it as a corporation. Thus, if one deals with the members of a
corporation as a partnership, he is not estopped to show this fact
or hold such individuals liable as partners. (18 Am. Jur. 2d 618.)
But one who is induced to deal with an apparent corporation by
fraud will not be estopped to deny the corporate existence. (Ibid.,
617-618.)
(3) All persons not stockholders or members who assume to act
as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities, and damages
44
incurred or arising as a result thereof.
"The pertinent provisions of the Civil Code are:

Art. 1816. All partners, including industrial ones, shall be liable pro rata with all
their property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract, (n)
P e r s o n s liable as g e n e r a l partners.
The Code makes liable as general partners "all persons who

assume to act as a corporation," and they include persons who
attempt, but fail, to form a corporation and who carry on busi-
ness under the corporate name. A de facto partnership among
them is created.
Are both active and inactive members of an unsuccessfully
attempted corporation, neither de facto nor de jure, liable as part-
ners?
Art. 1817. Any stipulation against the liability laid down in the preceding article
shall be void, except as among the partners, (n)
Art. 1822. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same extent as the partner so
acting or omitting to act. (n)
Art. 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property
of a third person and the money or property so received is misapplied by any partner
while it is in the custody of the partnership, (n)
Art. 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823. (n)
Art. 1825. When a person, by words spoken or written or by conduct, represents
himself, or consents to another representing him to anyone, as a partner in an existing
partnership or with one or more persons not actual partners, he is liable to any such
persons to whom such representation has been made, who has, on the faith of such rep-
resentation, given credit to the actual or apparent partnership, and if he has made such
representation or consented to its being made in a public manner he is liable to such
person, whether the representation has or has not been made or communicated to such
person so giving credit by or with the knowledge of the apparent partner making the
representation or consenting to its being made.
(1) When a partnership liability results, he is liable as though he were an actual
member of the partnership;
(2) When no partnership liability results, he is liable pro rata with the other per-
sons, if any, so consenting to the contract or representation as to incur liability, otherwise
separately.
When a person has been thus represented to be a partner in an existing partnership,
or with one or more persons not actual partners, he is an agent of the persons consenting
to such representation to bind them to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who rely upon the representation. When
all the members of the existing partnership consent to the representation, a partnership
act or obligation results; but in all other cases, it is the joint act or obligation of the person
acting and the persons consenting to the representation, (n)
214
The general rule under American law is that active managerial

stockholders are liable personally as partners, upon failure of the
attempted incorporation, both de jure and de facto, (see Bacon vs.
Christian, 184 Ind. 517.) Thus, it has been held that the managing
stockholders were personally liable as partners, but that the
subscribers to the stock of the supposed corporation were not
personally liable. (Baker vs. Bates Street Shirt Co., 7 Fed. [2d] 854.)
The creditors of the supposed corporation could recover from
subscribers to stock and inactive members of the corporation
to the extent only of their unpaid subscription. (Stevens vs.
Episcopal Church History Co., 140 N.Y. Appl. Div. 570.)
This rule is criticized. The emphasis, it is said, should be laid
upon the reaping of profits by the owners of a business, rather
upon the management of the business, (see L. Teller, Law of Part-
nership, 1949 ed., pp. 18-19.)
In a local case, the Supreme Court ruled that while
"stockholders" of a defectively incorporated association become,
in legal effect, partners inter se, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose
is that no partnership shall exist; it should be implied only when
necessary to do justice between the parties. Thus, one who takes
no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the
pretended corporation, as to be liable as such in an action for
settlement of the alleged partnership and contribution. (Pioneer
Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668
[1989], citing American cases.)
On the other hand, a third party who, knowing an association to
he unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all
those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage
of. It is immaterial that a party did not directly act on behalf of a
non-existent corporation and his name did not appear on any of
the contracts entered by it. Under the law on estoppel, those act-
ing in behalf of a corporation and those benefited by it, knowing
it to be without valid existence, are held liable as partners. (Lim
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA
728 [1999].)
Sec. 22. Effects of non-use of corporate charter and con-

tinuous inoperation of a corporation. — If a corporation does
not formally organize and commence the transaction of its
business or the construction of its works within two (2)
years from the date of its incorporation, its corporate pow-
ers cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction
of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same
shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to organize

and commence the transaction of its business or the
construction of its works, or to continuously operate is due
to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Statutory requirements before

and after incorporation.
The right of exemption from personal liability resulting from
incorporation, being entirely statutory, can be acquired only
on the terms specified by the statute. (18 Am. Jur. 2d 578.) Our
corporation law contains various requirements and conditions
which must be complied with in order that persons desiring to
be so may become a body corporate. The courts have established
between mandatory and directory conditions.
The rule is that as to provisions of the statute which are man-
datory, non-compliance with its terms will prevent the creation
of a de jure corporation but as to those provisions which are mere-
ly directory, a departure will not have this consequence. Strict
compliance with the terms of the statute is not required. The law
requires only substantial compliance, (see Sec. 14, par. 1; Sec. 15,
par. 1; Sec. 17[i].)
Of course, what constitutes substantial compliance is a ques-

tion to be determined in each case. It does not follow, however,
that because a substantial compliance is sufficient, any positive
statutory requirement may be omitted on the ground that it is
unimportant. There are conditions that cannot be dispensed
with, (see 18 Am. Jur. 2d 578.)
Mandatory and directory provisions

explained.
Whether a particular provision is mandatory or merely
directory must be determined by ascertaining the intention of
the legislature, to be gathered from the statute and its purpose.
(Clark on Corporations, p. 62.)
Generally, mandatory provisions prescribe formalities for
incorporation which are designed to protect the public. When
a provision is construed as directory, it is regarded as relatively
inconsequential so that failure to comply with a directory
provision will not be fatal to a valid incorporation. (Stevens on
Corporations, pp. 112-114.)
Mandatory conditions may be either conditions precedent or
conditions subsequent.
Conditions precedent e x p l a i n e d .
Conditions precedent are those conditions non-compliance
with which will prevent the legal existence of a corporation.
Examples are:
(1) Filing of the articles of incorporation with the Securities
and Exchange Commission as required by Section 14;
(2) The issuance of the certificate of incorporation by the
Securities and Exchange Commission under Section 19;
(3) The minimum number of five (5) incorporators required
by Section 10; and
(4) The legal requirements under Section 13 that 25% of the
authorized capital stock must be subscribed and 25% thereof
paid.
Conditions s u b s e q u e n t e x p l a i n e d .
Conditions subsequent are conditions to be complied with after
acquiring corporate existence in order that a corporation may
legally continue as such.
(1) Under Section 22, the two required acts of organization
and commencement of its business operations are conditions
subsequent, failure to comply with which, it has been held, will
result in the automatic cessation of corporate powers and the dis-
solution of the corporation. (Perez vs. Balmaceda, [C.A.] 40 O.G.
No. 9, Suppl. 194, Aug. 30,1941.) Such a corporation is not even
a de facto corporation and, therefore, its legal existence may be
collaterally attacked. (Sec. 20.) Any attempted organization and
commencement of business after the expiration of the period
fixed will not give it even a de facto existence. The corporation
may be treated as a corporation by estoppel (Sec. 21.) for the pro-
tection of those with whom it contracted.
The Securities and Exchange Commission has opined,
however, that the dissolution contemplated by Section 22 is
not automatic. The corporation continues to exist as such,
notwithstanding its non-operational status until dissolution
or revocation has been lawfully declared by the Commission
after due notice and hearing. (SEC Opinion, Oct. 4, 1989.) The
Commission will take action on the non-operational status of
a corporation only after the lapse of the two (2)-year period as
prescribed under Section 22. (SEC Opinion, May 22,1998.) Note
that under the second paragraph of Section 22, which provision
is not found in Section 19 of the former Corporation Law, the
corporation is given a chance to show that its failure to organize
and commence business is due to causes beyond its control.
(2) Non-compliance with a condition subsequent which is
mandatory may not affect corporate existence although it can be
a ground for proceedings by the State to forfeit its charter. An ex-
ample is the keeping of books and records required by Section 74.
Formal organization a n d c o m m e n c e m e n t
of business.
A corporation achieves legal existence from the date the Se-
curities and Exchange Commission issues a certificate of incor-
218
poration under its official seal (Sec. 19.) but formal organization
brings the corporation to life.
(1) Acts constituting formal organization. — Formal organi-
zation of a corporation is the process of structuring the
corporation so that it can carry out the purposes for which it
has been incorporated. It would include the adoption of by-
laws, the filing of the same with the Securities and Exchange
Commission (Sec. 46.), the election of the board of directors (or
trustees) and of the officers by the board pursuant to the by-laws
(Sec. 25.), establishment of the principal office, providing for the
subscription and payment of the capital stock, and the taking of
such other steps as are necessary to enable the corporation to
transact the legitimate business or accomplish the purpose for
which it was created, (see Benguet Consolidated Mining Co. vs.
Pineda, 98 Phil. 711 [1956]; SEC Rules, Dec. 29,1992.)
(2) Substantial compliance sufficient. — Strict compliance with
this condition subsequent is not required. Thus, in a case, a cor-
poration was deemed to have formally organized, it appearing
that from the very day of its formation, the corporation had a
governing board which directed its affairs, as well as a treasurer
and a clerk, and that through these instrumentalities, it actually
functioned and engaged in the business for which it was orga-
nized, and, therefore, it could not be held to have forfeited its
charter simply because it had not specifically shown that it also
had a president and a secretary. (Perez vs. Balmaceda, supra.)
(3) Acts constituting commencement of business. — Acorporation
shall be considered to have commenced the transaction of its
business when it has performed preparatory acts geared toward
the fulfillment of the purposes for which it was established such
as but not limited to the following: entering into contracts or
negotiation for lease or sale of properties to be used as business or
factory site; making plans for and the construction of the factory;
and taking steps to expedite the construction of the corporation's
working equipment. (SEC Rules, Dec. 29,1992.)
(4) Effect of subsequent continuous inoperation. — Where the
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period
of at least five (5) years, such continuous inoperation shall be a
ground for the suspension or revocation of its corporate franchise

or certificate of incorporation but notice and hearing in such
case are required as provided in Presidential Decree No. 902-A.
(supra.) The corporation continues to exist, notwithstanding its
non-operational status, until the revocation or cancellation of its
certificate of registration has been lawfully declared by the Secu-
rities and Exchange Commission or it is dissolved in accordance
with law. CSEC Opinion, May 22,1998.)
If the non-use of corporate charter or continuous inoperation
of a corporation is due to causes beyond its control as found
by the Commission, the effects mentioned shall not take place.
(Sec. 22.) Thus, where a corporation after its registration or
incorporation elected its board of directors and its officers, and in
accordance with its corporate purpose and in order to commence
business operations made presentations to prospective investors
but due to the shift in the government's privatization policy,
failed to entice investors and was not able to continue with its
business although it still intends to pursue its business when
the conditions are appropriate, there is no ground, given these
conditions, to revoke or suspends its registration and, therefore,
it cannot be deemed dissolved. (SEC Opinion No. 07-23, Dec. 4,
2007.)
— oOo —
Title III
BOARD OF DIRECTORS/TRUSTEES/
OFFICERS
Sec. 23. The board of directors or trustees. — Unless

otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be
exercised, all business conducted and all property of such
corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year and
until their successors are elected and qualified. (28a, 29a)
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all
corporations organized under this Code must be residents
of the Philippines. (30a)
Structure of the corporate

organization.
(1) Binding effects of acts or contracts. — Action proposed to be
taken by a corporation involves two basic questions:
First, in order to bind the corporation, who within the organi-
zation must act on its behalf?
Second, what is the result if the statutory requirements are not
complied with and the proper parties do not act?
220
Sec. 23 TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 221
(2) Tri-level structure. — The standard operating procedure

for corporations, frequently referred to as a corporate norm,
might be described as pyramidal in form.
At the base are the shareholders (or members) whose
vote is required to elect the board of directors (or trustees)
and to pass on other major corporate actions.
The next level is represented by directors who constitute
the policy-making body of the corporation and select the
officers annually, as a rule. The keystone of corporate
procedure is the provision common to most corporate laws
that the business of a corporation shall be managed by its
board of directors.
Finally, at the top of the pyramid are the officers who
have some discretion but in general deemed to execute poli-
cies formulated by the board.
The board of directors and corporate officers are frequently
referred to as management. In its strict sense, the term refers to the
corporate officers given the authority to implement the policies
determined by the board of directors as the governing body of
1
the corporation.
(3) Respective powers and functions. — In the light of this tri-
level structure, the question then arises: What are the respective
functions and powers of officers, directors, and shareholders
within the corporate organization? (WL. Cary, Cases and
Materials on Corporations, 1969 ed., pp. 151-152.) Corporate
powers may be directly conferred upon corporate officers or
agents by statute, the articles of incorporation, the by-laws, or by
resolution or other act of the board of directors. (Citibank, N.A.
vs. Chua, 220 SCRA 75 [1993].)
•The Bangko Sentral ng Pilipinas (BSP), the Insurance Commission, and the Securi-
ties and Exchange Commission have all issued circulars and/or memoranda requiring
corporations to have at least two (2) independent directors, i.e., BSP Circular No. 296, IC
Circular Letter 31-2005, and SEC Memorandum Circular No. 6, respectively, over which
they exercise supervision. SEC Memorandum Circular No. 6 (June 29, 2009) is the Re-
vised Code of Corporate Governance. (Appendix "K.") It superseded SEC Memorandum
Circular No. 2 (April 5, 2002).
222
Corporate powers exercised by board

of directors or trustees.
All corporations being invisible, existing only in contempla-
tion of law, can only act and contract through the aid and by
means of individuals. Such individuals may be those holding
corporate offices or agents properly appointed by such officers.
The same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation in respect to his power or authority to act for the
corporation.
(1) Governing body of the corporation. — It is well established
in corporation law that the corporation can act only through its
board of directors in the case of stock corporations, or board of
trustees in the case of non-stock corporations.
Section 23 provides that "unless otherwise provided in this
Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property
of such corporations controlled and held by the board of directors
or trustees." The board of directors or trustees, therefore, is the
governing body of the corporation chosen by the stockholders or
2
members. Thus, contracts or acts of a corporation must be made
either by the board of directors or trustees or by a corporate
officer duly authorized by the board. The general rule is that in
the absence of authority or valid delegation from the board of
directors or trustees, no person, not even its officers, can validly
bind a corporation.
(2) Binding effect of stockholders'action. — The stockholders or
members elect a board of directors (or trustees) to oversee the
management and operation of the corporation. They are not the
agents of the corporation and cannot bind it by their acts. They
have only indirect control of the corporation through their votes.
With the exception only of some powers reserved by law to
stockholders (or members), the directors (or trustees) have sole
impliedly, it is not necessary for the stockholders (or members) to ratify the acts
of the board save the instances wherein the Corporation Code or the by-laws provides
otherwise, e.g., investment of corporate funds (Sec. 42.), declaration of stock dividends
(Sec. 43.), and other acts where approval or consent of stockholders (or members) is
necessary. (SEC Opinion, May 21,1982.)
Sec. 23 TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 223
authority to determine policy, enter into contracts, and conduct

the ordinary business of the corporation (in all matters which do
not require the consent or approval of the stockholders) within
the scope of its charter, i.e., its articles of incorporation, by-laws,
and relevant provisions of law.
(a) The law is settled that contracts between a corporation
and third persons must be made by or under the authority of
its board of directors (or trustees) and not by its stockholders
(or members). Hence, the action of the stockholders in such
matters is only advisory or recommendatory and not in any
3
wise binding on the corporation. (Barreto vs. La Previsora
Filipina, 57 Phil. 649 [1932].)
(b) For the same reason that a corporation can act only
through the board of directors, a resolution adopted at a
meeting of stockholders refusing to recognize a corporate
contract effected with the approval of the board of directors
4
or repudiating it, is without effect. (Ramirez vs. Orientalist,
38 Phil. 634 [1918].)
(c) Stockholders entrust their investments in the
corporate business to the management of the board of
directors, thus establishing a fiduciary relationship between
them. Accordingly, it is the prerogative and discretion of the
board of directors of a parent or holding corporation to choose
its nominees in the board of directors of its subsidiaries.
The stockholders of the parent or holding company cannot
demand proportionate representation in the board of
directors of its subsidiaries. (SEC Opinion, Aug. 8,1995.)
(3) Extent of judicial review. — As long as the directors (or
trustees) act honestly and their acts or contracts do not disregard
the rights of the minority, the courts will not interfere. They are
not liable for losses if the cause is merely error in business judg-
ment, not amounting to bad faith or negligence.
3
Visayan vs. National Labor Relations Commission, 196 SCRA 410 (1991), citing DE
LEON, The Corporation Code of the Philippines, 1989 ed., p. 168.
4
It may weU be recognized, however, that where the stockholders unanimously vote
that certain actions be taken, this should control the discretion of the directors. Directors
have no personal interest as such in their official acts. If the real parties in interest unani-
mously agree on lawful corporate acts, their voice should control. (Ballantine, p. 123.)
224
except on ultra vires acts.
5
(a) The well-known "business judgment" rule is that
courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which
they have the legitimate power of action, and contracts intra
vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount
to a wanton destruction of the rights of the minority. As
long as it acts in good faith, its orders are not reviewable by
the courts. (Gov't, vs. El Hogar Filipino, 50 Phil. 399 [1927];
Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ingersoll vs.
Malabon Sugar Co., 53 Phil. 745 [1929]; Estacio vs. Pampanga
Electric Cooperative, Inc., 596 SCRA 542 [2009].)
(b) Whether the business of a corporation should be
operated at a loss during depression, or closed down at
a smaller loss, is a purely business and economic problem
to be determined by the directors and not by the court. A
corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with a
distinct legal personality. As to its corporate and management
decisions, the State will generally not interfere with the same.
Questions of policy or of management are left solely to the
honest decision of the board as the business manager of the
corporation, and the court is without authority to substitute
its judgment for that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the interest of
6
the corporation, its orders are not reviewable by the courts.
'This rule must be qualified with respect to the power to declare dividends since its
exercise is governed by specific rules provided by law. (see Sec. 43.)
'The reason for the rule is aptly explained thus: "Courts and other tribunals are
wont to override the business judgment of the board mainly because courts are not in
the business of business, and the laissez faire rule or the free enterprise system prevailing
in our social and economic set-up dictates that it is better for the State and its organs to
leave business to the businessmen; especially so, when courts are ill-equipped to make
business decisions. More importantly, the social contract in the corporate family to decide
the course of the corporate business has been vested in the board and not with courts."
(Ong Yong vs. Tiu, 405 SCRA 1 [2003], citing Cesar L. Villanueva, Philippine Corporate
Law, 1998, Ed., p. 228.) It has been held that while the Securities and Exchange Commis-
sion is without authority to substitute its judgment for that of the corporations board of
directors on business matters so long as the board acts in good faith, it has the power to
enjoin an association of stock transfer agents' plan to increase the transfer processing fees
Sec. 23 TITLE ffl. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 225
(see Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA

36 [1962]; Sales vs. Securities and Exchange Commission, 169
SCRA 109 [1989]; Philippine Stock Exchange, Inc. vs. Court of
Appeals, 281 SCRA 232 [1997]; Filipinas Port Services, Inc. vs.
Go, 518 SCRA 453 [2007].) Its acts or contracts are presumed
to be valid and regular.
(c) Any corporate act which does not fall under any
of the transactions requiring stockholders' or members'
approval (see note 5.) can be carried out by mere board reso-
lution although the activities or transactions involved may
span beyond the term of the directors or trustees and entail
obligations to be borne by succeeding boards as long as the
action was done in good faith and for the best interest of the
corporation. (SEC Opinion, Feb. 21,1994.)
(d) The minority directors or stockholders cannot come
into court upon allegations of a want of judgment or lack of
efficiency on the part of the majority and change the course of
administration. Corporate elections furnish the only remedy
for internal dissensions, as the majority must rule so long as it
keeps within the powers conferred by the corporate charter.
(Flynn vs. Brooklyn City R. Co., 53 N.E. 520.)
Reason for the rule.

The theory of every corporate organization is that the stock-
holders may have all the profits but shall turn over to a small and
compact body — the board of directors — the exclusive authority
to manage and control the transaction of its business and the use
of its assets, the power of the stockholders being limited to a few
specified matters concerning its internal affairs.
This concentration of the power of control of the business
and of appointing of officers and managers in the board of direc-
tors (or trustees) is deemed necessary to efficiency especially in a
large organization. It is clearly impractical and unwise to entrust
the administration of corporate management. Stockholders are
too numerous and scattered and unfamiliar with the business of
after it had determined that such act if pursued may cause grave or irreparable injury
prejudice to the investing public. (Phil. Assoc. of Transfer and Registry Agencies, Inc. i
226
a corporation to conduct its business directly. It is accordingly

the plan of corporate organization that the stockholders shall
choose the directors who shall control and supervise the conduct
of the corporate business, (see Ballantine, pp. 121-122; Ramirez
vs. Orientalist, 38 Phil. 634 [1918]; Filipinas Port Services, Inc. vs.
Go, 518 SCRA 483 [2007].) If they are not satisfied with the poli-
cies or management of the board of directors, the remedy of the
stockholders is to replace them, (see Sec. 28.)
In a close corporation, however, the articles of incorpora-
tion may provide that the business of the corporation shall be
managed by the stockholders of the corporation rather than by a
board of directors. (Sec. 97, par. 2.)
Nature of powers of board of directors

or trustees.
(1) The powers of the board of directors or trustees are, in a
very important sense, original and undelegated. The stockholders
or members do not confer, nor can they revoke, those powers.
They are derivative only in the sense of being received from the
State in the act of incorporation. Obviously, they cannot exercise
powers which the corporation does not possess, nor is their action
valid when inconsistent with valid by-laws. Neither can they
perform constituent acts, that is, acts which involve fundamental
changes in the constitution of the corporation, and which can be
done only by the stockholders or members as constituting the
corporation. (14-A C.J. 82.)
In other words, acts of management pertain to the board, and
those of ownership to the stockholders or members. In the latter
case, the board cannot act alone, but must seek approval of the
stockholders or members. (Tan vs. Sycip, 499 SCRA 216 [2006],
citing J. Campos, Jr. & M.C. Campos, The Corporation Code,
1990, Vol. 1, p. 490.)
(2) The other view favors the delegation theory, which holds
that the directors are the officers and agents of the corporation,
representing the interests of that abstract legal entity and of those
who own shares of stock (see Mead vs. McCullough, 21 Phil. 95
[1911]; Angeles vs. Santos, 64 Phil. 697 [1937].), and as such, they
can bind the corporation provided they act within the scope of
their authority.
(3) Actually, the powers of the board of directors or

trustees are directly conferred by statute and, as a general rule, the
stockholders or members cannot control their actions or exercise
of judgment vested in them by virtue of their office. Once the
directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board as provided by law. In
certain corporate acts, however, the approval or authorization of
the stockholders or members is necessary for their validity.
Limitations o n p o w e r s o f b o a r d
of directors or t r u s t e e s .
Broad as it is, the managerial authority of the board of direc-
tors or trustees is thus subject to Sections 31-34 of the Corpora-
tion Code and to at least three (3) limitations. They are as follows:
(1) Limitations or restrictions imposed by the Constitution,
statutes, articles of incorporation, or by-laws of the corporation;
(2) It cannot perform constituent acts, that is, acts involv-
ing fundamental or major changes in the corporation (such
as amendment of the articles of incorporation under Sec. 16.),
which require the approval or ratification of the stockholders or
7
members; and
(3) It cannot exercise powers not possessed by the corpora-
tion, (see Clark on Corporations, Sec. 192.)
The corporate powers conferred upon the board of directors
usually refer only to the ordinary business transactions of the
corporation and does not extend beyond the management of
ordinary corporate affairs nor beyond the limits of its authority.
(SEC Opinion, May 2, 1994.) There are powers which are
reserved to the stockholders/members and, therefore, cannot be
exercised solely by the directors/trustees until they are ratified
or approved by the stockholders/members. It has been held that
the power of the board of directors to control the corporation's
property and business does not empower them to provide
themselves compensation. The law is well-settled that directors
of a corporation presumptively serve without compensation
and in the absence of express agreement or resolution in relation
7
See "Matters in which the law requires specific number of votes/' under Section
228
thereto, no claim can be asserted therefor. (Central Cooperative

Exchange Co., Inc. vs. Tibe, Jr., 33 SCRA 593 [1970]; see Sec. 30.)
Powers exercised by board of directors

or trustees as a board.
The board of directors or trustees must act together as a body
in a lawful meeting, not individually or separately, in order to
bind the corporation by their acts. In other words, to exercise
their powers, they must meet as directors or trustees and act "at
a meeting at which there is quorum." (see Sec. 25 as to requisites
for board meetings.) If they act or give their consent separately or
if they act at a meeting which is not a legal meeting, their action
is not that of the corporation, although all may consent, and the
corporation is not bound.
There are recognized exceptions to the rule that a corporation
cannot act except by authority of the board of directors or trustees
in a meeting duly convened, (infra.)
Reasons for the rule.

The general rule that the directors or trustees can bind the
corporation only by action taken at a board meeting seems to rest
upon two reasons:
(1) A meeting is necessary in order that any action may be
deliberately adopted, after opportunity for discussion and an
interchange of views; and
(2) As agents of the corporation managing its affairs,
directors (or trustees) have no power to act other than as a board.
(Ballantine, p. 124.)
Unlike its officers (Sec. 25.), directors are not the agents of the
corporation per se and they have no power acting individually to
bind the corporation.
Exceptions to the rule.

The requirement that the directors or trustees must act as a
body and personally (see Sec. 25.) to bind the corporation is not
without any exception. This is true where there are extraordinary
situations or conditions to justify the act of stockholders or cor-
Sec. 23 TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
porate officers as to make a board action as nothing more than a

mere formality.
(1) It has been held that a contract entered into by the
directors without a meeting of the board is binding upon the
corporation where the directors happen to be the sole stockholders.
(Zamboanga Transportation Co. vs. Bachrach Motor Co., 52 Phil.
244 [1928].)
(2) The corporation is similarly bound by a contract entered
into by a corporate officer such as the general manager, authorized
by the board of directors either expressly or impliedly, to bind it by
contract. (Acufia vs. Batac Producers Cooperative Assoc., Inc., 20
SCRA 526 [1967].) Settled jurisprudence has it that where similar
acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the
company without formal authorization of the board of directors.
In varying language, existence of such authority is established
by proof of the course of business, the usages and practices of
the company, and by the knowledge which the board of direc-
tors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. (Board
of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)
(3) The corporation is also bound by a particular transaction
ratified in a subsequent board meeting (Ramirez vs. Orientalist Co.,
38 Phil. 634 [1918].); the ratification may be express by a formal
affirmative vote or resolution of the board or it may be implied
and if implied, it may take diverse forms such as by silence or
acquiescence, by acts showing approval or adoption of the con-
tract or by acceptance and retention of benefits flowing there-
from (Acufia vs. Batac Producers Cooperative Assoc., Inc., supra.)
and such ratification relates back to the time of the contract and is
equivalent to original authority. (Board of Liquidators vs. Heirs
of Maximo Kalaw, supra.)
(4) The corporation is likewise bound by the acts of one of its
directors or agents held out by the corporation to the public as possess-
ing power to do those acts. (Yu Chuck vs. Kong Li Po, 46 Phil. 608
[1924].) The authority to act for and bind the corporation may be
presumed from acts of recognition in other instances, wherein
the power was in fact exercised without any objection from its
230
board or stockholders. (People's Aircargo & Warehousing, Co.,

Inc. vs. Court of Appeals, 297 SCRA 170 [1998].) The rule that the
members of the board have authority to act only when convened
in a board meeting, is for the benefit of the shareholders which
they are authorized to waive. The stockholders are the residuary
owners, and the rule requiring directors' meetings to authorize
acts is for their benefit. (Merchants & F. Bank vs. Harris Lumber
Co., 103 Ark. 283.)
(5) Where the stockholders, by acquiescence, invest the
executive officers of the corporation with powers of the directors
as the usual method of doing business, the board being inactive, the
acts of such officers will bind the corporation according to some
courts although not authorized by any vote either of stockholders
or directors. (Ballantine, p. 126.)
(6) The stockholders may waive the necessity for a meeting of
the board of directors, and without such meeting may authorize
acts to be done by agents of the corporation or ratify acts already
done and bind the corporation. Again, the shareholders are the
residuary owners, and the rule requiring directors' meetings to
authorize acts is for their benefit. (Ballantine, pp. 125-126.)
(7) Under exceptional situations, stockholders' agreement though
it provides for the exercise of management ordinarily delegated
to the board, is valid and enforceable, where no creditors,
minority stockholders, or other persons of the public are affected.
However, mere lack of quorum in the board alone where the
body is not inactive would not justify stockholders' action. (SEC
Opinion, Dec. 15,1987; March 21,1990.)
(8) The by-laws of a corporation may create an executive com-
mittee with authority to act on such specific matters within the
competence of the board, as may be delegated to it in the by-laws
of the corporation, or on a majority vote of the board, except on
certain matters specified in Section 35.
(9) A corporation is expressly allowed, subject to certain
limitations provided in Section 44, to enter into a management
contract under which it delegates the management of its affairs to
another corporation for a certain period of time.
(10) In a close corporation, any action by the directors without
a meeting or at a meeting improperly held, shall, unless the by-
Sec. 23 TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 231
laws otherwise provide, be deemed valid or ratified in the cases

mentioned in Section 101.
P o w e r of directors or trustees
to delegate authority.
(1) General rule. — The general rule is that, in the absence of
authority from the board of directors, no persons, not even its of-
ficers, can validly bind a corporation.
The power to bind the corporation by contracts rests in its
board of directors or trustees, but the power may be delegated
either expressly or impliedly to other officers or agents of the
corporation appointed by it. (Yu Chuck vs. Kong Li Po, 46 Phil.
608 [1924]; Visayan vs. National Labor Relations Commission,
196 SCRA 410 [1991].) The authority of such individuals to bind
the corporation is generally derived from laws, the by-laws,
or authorization from the board impliedly by habit, custom
or acquiescence in the general course of business. (People's
Aircargo & Warehousing Co., Inc. vs. Court of Appeals, 287
SCRA 170 [1998]; Associated Bank vs. Pronstroller, 558 SCRA
113 [2008]; Cebu Mactan Members Center, Inc. vs. Tsukahara,
593 SCRA 172 [2009].) Although it cannot completely abdicate
its power and responsibility to act for the juridical entity, the
board may expressly delegate specific powers to the President or
any of its officers (Prime White Cement Corp. vs. Intermediate
Appellate Court, 220 SCRA 103 [1993].), particularly with respect
to employment of lower level personnel.
The directors or trustees do not themselves exercise delegat-
ed authority so as to be precluded from delegating power by the
maxim, delegata potestas non potest delegare.
(a) It is stated broadly that they may delegate to agents of
their own appointment the performance of any act what they
themselves can legally perform. Certainly, as the governing
body of the corporation vested with the management of its
corporate affairs (Sec. 23.), it has the power and authority
to adopt a resolution appointing one of its members, or an
executive committee, or a particular officer or agent the
power to perform purely ministerial acts. (19 C.J.S. 100.)
(b) The same is true even in matters involving the exercise
of judgment and discretion. Their authority in the matter, to a
232
large extent, must be implied from necessity and usage for the
directors or trustees cannot attend to the details and current
business of the corporation. (2 Fletcher, p. 495.) Whatever
authority the officers or agents of a corporation may have is
derived from the board of directors or other governing body,
unless conferred by the charter of the corporation. (Vicente
vs. Geraldez, 52 SCRA 210 [1973].)
(c) The delegation of corporate powers, except for the
executive committee, must be for specific purposes. Such
delegation to officers make the latter agents of the corporation;
accordingly, the general rules of agency as to the binding
effects of their act would apply. (ABS-CBN Broadcasting vs.
(2) Exceptions. — The rule recognizing the power of the board
to delegate authority is not without limitations.
(a) It has been held that discretionary powers which, by
provisions of law (e.g., to declare dividends, Sec. 43.) or the
by-laws or by the vote of the stockholders, are vested exclu-
sively in the board of directors or are especially delegated to
them, cannot be delegated to subordinate officers and agents.
(Bliss vs. Kaweah Canal, etc., 65 Cal. 502; see Sec. 25, re other
officers and agents.)
(b) There is a limit, even to the power of the directors or
trustees to delegate authority. As their authority to delegate
is implied from the necessities in the management of the
corporation and from the usage, so also, it is limited by the
same considerations. They cannot delegate entire supervision
and control of the corporation to others for this is not only
unnecessary and contrary to usage, but it is inconsistent with
Section 23, which requires that "the corporate powers x x x
shall be exercised, all business conducted and all property of
such corporation controlled and held by its board of directors
or trustees." (see 2 Fletcher, pp. 378-379.)
(c) Neither can the board delegate special powers espe-
cially conferred upon it by a resolution of the stockholders or
members of the corporation. Unquestionably, it may delegate
purely ministerial duties. (2 Fletcher, p. 537.) It is quite clear
that the power of the board to delegate authority is subject to
restrictions as may be provided in the by-laws.
Term of office of directors

or trustees.
(1) One year. — As a general rule, the directors or trustees/
officers of a corporation shall serve only for the term as fixed
in the by-laws. The word "term," in a legal sense, means the
fixed and definite period of time which the law prescribes that
an officer may hold office and a hold-over does not change the
length of the term but results in shortening the period served
8
by his successor. It is now expressly provided that the board of
directors or trustees to be elected "shall hold office for one (1)
year (i.e., term expires one year after election to the office) and
until their successors are elected and qualified." (Sec. 23, par. 1;
see Sec. 25, par. 1.)
(2) Hold-over. — This principle is sanctioned by the above
provision of Section 23. Upon failure of a quorum at any
meeting of the stockholders or members called for an election,
the directorate naturally holds over and continues to function
until another directorate is chosen and qualified, (see Sec. 24, last
sentence.) The failure to elect does not terminate the terms of
incumbent officers nor dissolve the corporation.
(a) To "hold over" when applied to an office implies
that the office has a fixed term which has expired, and the
9
incumbent is holding the succeeding term. (19 Words and
Phrases 576.) Although the members of the board are hold-
over directors or trustees, they still possess the powers of
bona fide members until their successors are duly elected and
'Being a fixed period, it cannot be split into two or more terms so as to consider the
remaining period as another term. Thus, a director (previously elected in the immediately
preceding election) who merely served the remaining period of the original term of a
resigned director (subsequently elected) is not covered by the prohibition in the by-laws
against serving more than two consecutive terms unless the clear intention is to cover
such a situation. (SEC Opinion, Feb. 8, 1993.) Term is distinguished from tenure in that
the latter represents the period during which the incumbent actually holds office. Thus,
tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent. The holder-over period — that time from the lapse
of one year from a member's election to the board and until his successor's election and
qualification — is not part of the director's original term of office, nor is it a new term.
(Valle Verde Country Club, Inc. vs. Africa, 598 SCRA 200 [2009].)
""'Election" is the choice of one man among a number to fill a certain office. In a hold-
over, an officer is merely allowed to continue functioning as such. He is not chosen over
other contenders for the position he occupies.
234
qualified. Thus, a hold-over board has the power to declare

the position of the President vacant and elect another. (SEC
Opinion, Aug. 3,1976.)
(b) The rule that where the articles of incorporation or
by-laws of a corporation provide for the annual election of
directors and no election is held, the former directors hold
over until their successors are elected and qualified, applies
to a going concern where there is no break in the exercise of
duties of directors. (2 Fletcher Cy Corp., p. 138 [1982 ed.].)
(c) It must be noted that hold-over is a situation that aris-
es when no successor is elected due to valid and justifiable
reason (e.g., pending election protest on the outcome of the
annual election), in which case the incumbent holds over and
continues to function until another officer is chosen and qual-
ified. (SEC Opinion, June 24, 1998.) The corporation should,
as soon as possible, call a special meeting for such purpose
with proper notice given to all stockholders or members.
(d) The hold over doctrine has a purpose which is at
once legal as it is practical. It accords validity to what would
otherwise be deemed as dubious corporate acts and gives
continuity to a corporate enterprise in its relation to outsiders.
The old holdover officer is a de facto officer and by fiction
of law, his acts as such are considered valid and effective.
(Seneres vs. Commission on Elections, 585 SCRA 557 [2009].)
(e) Where the reason for hold-over is not for failure to
elect but to give the incumbents more time to learn, or for
reasons of economy and the uncertainty that a quorum can
be secured, the hold-over is in violation of the provision re-
quiring an annual election of the directors or trustees (SEC
Opinions, July 3, 1989 and May 18, 1993.), and this is espe-
cially true where the hold-over extends beyond the one-year
term. (SEC Opinion, March 1, 1988.) The regular election of
directors as stated in the by-laws cannot be dispensed with
by the board in order to extend the term of the incumbents.
(SEC Opinion, Feb. 3,1994.)
(3) Modification of term. — Unlike in the case of non-stock
corporations (see Sec. 92.) and educational corporations (see Sec.
108.), stock corporations under the general provisions of Title III
are not authorized to divide the members of its board of directors
Sec. 23 TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 235
into groups with each group having a different term of office

Their term of office being fixed by law, the same cannot be
shortened or extended by agreement of the parties or by those
interested in the position. (SEC Opinion, Jan. 15, 1975.) "An
annual meeting required and stated for each year cannot be
dispensed with and the directors cannot so change the date of the
annual election so as to continue themselves in office for more
than a year," unless the reason is justifiable and proper notice of
the postponement is given. (SEC Opinion, Jan. 5, 1981, citing 5
Fletcher, p. 22.)
Number of directors or trustees

to be elected.
(1) Under the Code, the number of directors in a stock
corporation must "not be less than five (5) nor more than fifteen
(15)" (Sec. 14[6].), except as otherwise provided by the Code
or by special law. Since the members of the board are required
to be stockholders of record of the corporation, it follows that
there must be at least five (5) stockholders in a corporation. (SEC
Opinion, Jan. 28,1985.)
(2) In ordinary non-stock corporations, the boards of trustees,
unless otherwise provided in the articles of incorporation or the
by-laws, "may be more than fifteen (15) in number," with the
term of office of 1 / 3 of their number expiring every year (see Sec.
92, par. 1.) but the number must not be less than five (5).
(3) In a close corporation, the articles of incorporation may
provide that the business of the corporation shall be managed by
its stockholders rather than by a board of directors in which case
no meeting of stockholders need be held to elect directors, (see
Sec. 97, par. 2.)
(4) Trustees of non-stock educational corporation "shall not be
less than five (5) nor more than fifteen (15)," provided that the
number "shall be in multiples of five (5)," with the term of office
of 1/5 of their number expiring every year, (see Sec. 108, pars. 1,
2.)
(5) In a corporation sole, there is no board of directors or
trustees as it consists of one member or corporator only.
236
(6) The board of trustees of religious societies shall also "be not
less than five (5) nor more than fifteen (15)." (see Sec. 116[6].)
Election of less than the required number.

The limitation as to the number of directors or trustees seeks
to give ample representation to stockholders or members of a
corporation to its board while at the same time avoiding that it
will be too unwieldy.
The failure of the stockholders or members to elect the
required number of directors or trustees provided for by statute
or its articles of incorporation does not invalidate the title of
those elected as long as they constitute a quorum. An election of
less number of directors than the number which the meeting was
called to elect is valid. Thus, the stockholders of a corporation
may opt to elect only three (3) directors instead of five (5) at
the annual stockholders' meeting. Such act would not violate
the provisions of the Corporation Code, specifically Section
14(6), for such situation merely gives rise to vacancies of two
(2) seats in the board which may be filled up in a subsequent
special stockholders' meeting duly called for the purpose. (SEC
Opinions, Feb. 2,1987 and June 10,1992.)
Qualifications of directors
or trustees.
(1) Stock corporations. — The qualifications 10
of directors of
stock corporations are as follows:
10
The Code does not state whether or not the members of the board of a corporation,
whether stock or non-stock, must be of legal age at the time of their election as such. In the
light of Articles 18 and 339 of the Civil Code, emancipated minors may become members
of the board. However, their vote will not be counted in approving any act or contract in-
volving the borrowing of money, or the alienation or encumbrance of real property of the
corporation, or the filing of suits by the company. The powers of a corporate officer who
is an emancipated minor will be similarly restricted. Since the management of corporate
affairs is vested in the board of directors or trustees which as a body will enter into legal
relations with third persons, it is extremely unwise and not in keeping with sound corpo-
rate practice for the board to have as members, persons whose capacity to act is restricted.
Be that as it may, Article 18 of the Civil Code expressly provides that "in matters
which are governed by the Code of Commerce and special laws, the deficiency shall be
supplied by the provisions of the Code." Both Articles 38 and 39 of the Civil Code provide
that minority restricts or limits the capacity to act while Article 1327 states that uneman-
cipated minors cannot give consent to a contract. (SEC Opinions, May 17, 1967, Dec. 28,
1967 and Feb. 2, 1981.)
But a minor cannot be an incorporator, (see Sec. 10.) Article 339 of the Civil Code is
now Article 236 of the Family Code, (see note 4 under Title II.)
(a) Every director (including an incorporating director)

must own at least one share of the capital stock (see Detective
& Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968].);
(b) The share of stock held by the director must be regis-
tered in his name on the books of the corporation;"
(c) Every director must continuously own at least a share
of stock during his term; otherwise, he shall automatically
cease to be a director; and
(d) A majority of the directors must be residents of the
Philippines.
(2) Non-stock corporations. — Trustees of non-stock corpo-
rations must be members in good standing thereof and like
in stock corporations, a majority of them must be residents of
the Philippines. The phrase "residents of the Philippines," as
contemplated in Section 23 (and Section 25.), refers to "legal
residence (animus manendi) from which a person could or might
depart or be absent temporarily for a certain purpose and to
which he always intended to return" (King vs. Republic, 89 Phil.
12
4 [1951].), not merely the place.
A person who has the disqualification mentioned in Section
27 is not qualified to hold the position of director or trustee.
Natural p e r s o n s c o n t e m p l a t e d by law.
It is clearly deducible from Section 23 that only natural persons
can be elected as directors or trustees (infra.) and they must be
elected from among the stockholders or members.
However, a corporation which owns shares of stock or is
a corporate member in another corporation can designate by
"The election of a person to the board of directors of a corporation does not

necessarily mean that he has paid for the shares recorded in his name. In most cases,
nominee directors do not pay for the qualifying shares assigned to them. (Baguio vs.
,2
It is, however, difficult to define in precise language what constitutes a residence or
what makes one a resident of a place. Much depends upon the circumstances surround-
ing the person, upon the character of the work to be performed, upon whether he has a
family or a home in another place, and largely upon his present intention. Suffice it to
say that the term "resident," as used in the law, imports more than a temporary stay in
a place for the performance of a single piece of job or work. (37 Words and Phrases 424.)
238
board resolution its officer or representative to sit in the latter's

board and thus qualifying him to be elected as director or trustee.
A contrary rule would create a situation where there would be no
board as where all the stockholders or members are corporations
or juridical persons. The appointment must be recorded in the
corporate books. (SEC Opinion No. 05-06, June 8, 2005.)
Citizenship requirement.
There is no citizenship requirement demanded of the mem-
bers of the board of directors.
(1) In corporations not organized under the Code, citizen-
ship requirements are established. Thus, in case of domestic
banks, the General Banking Law of 2000 allows non-Filipino citi-
zens to become members of the board of directors to the extent
of the foreign participation in the equity of said bank. (Sec. 15,
R.A. No. 8791.) For rural banks (Sec. 5, R.A. No. 7353.), registered
investment companies (Sec. 15, R.A. No. 2029.), and private de-
velopment banks (Sec. 4, R.A. No. 4093.), all the members of the
board of directors must be citizens of the Philippines.
(2) Under the Constitution, aliens may not be elected as
directors or officers of corporations engaged in business or
industries which are totally or partially nationalized business or
industries, (see Sec. 12.)
Stock ownership requirement.

(1) Holder of legal title. — The general rule is that the person
who holds the legal title to the stock as shown by the books of the
corporation is qualified although some other person may be the
beneficial owner of the stock recorded in his name, (see Sec. 63.)
The old Corporation Code required that "every director must
own in his own right at least one share of the capital stock of the
corporation." (Sec. 30 thereof.) Thus, under the former law, the
eligibility of director, strictly speaking, could not be adversely
affected by the simple act of such a director being a party to a
voting trust agreement (see Sec. 59.) inasmuch as he remained
owner (although beneficial or equitable only) of the shares sub-
ject of the agreement. (Lee vs. Court of Appeals, 205 SCRA 752
[1992].) The phrase "in his own right" is deleted in Section 23. A
mere proxy who is not a stockholder cannot be elected as a mem-

ber of a corporation's board of directors or trustees.
(2) Voting trustee. — Whatever doubt may have existed
before, a voting trustee may now be considered as the legal
owner of the shares transferred to him by virtue of a voting trust
agreement and, therefore, eligible to office of director. With the
omission of the phrase "in his own right," the election of trustees
and other persons who, in fact, are not the beneficial owners of the
shares registered in their names on the books of the corporations
becomes formally legalized. Consequently, the transferors who
cease to own at least one (1) share standing in their names on the
books of the corporation as required under Section 23 also cease
to be directors. (Lee vs. Court of Appeals, supra.)
(3) Transferee of qualifying share. — A person to whom one
share of stock has been transferred for the express purpose of
qualifying him as a director is eligible. Ownership of the qualify-
ing share need only be in a nominal capacity, with the beneficial
title remaining in the transferor who or which actually owns the
share. It is sufficient that the title to the stock, as it appears in the
books of the corporation, is in the director. (SEC Opinion, Jan. 25,
1985.) The transfer need not comply with the restrictions in the
articles of incorporation such as giving the corporation the right
of first refusal thereon or prohibiting the transfer of founders'
shares. To rule otherwise would create an injustice to corporate
stockholders who, under the law, have the right to be represented
in the Board." (SEC Opinions, Dec. 15,1987 and March 2,1988.)
(4) Pledgee/pledgor of shares. — The legal title is what counts.
Hence, a person to whom shares have been transferred on the
books of the corporations as pledgee is not qualified to be a
director because he holds the shares merely as security and not as
13
The transfer is not violative of the transfer restriction clause in the articles of incor-
poration, as it would be more of a "trust" and not a transfer of "ownership." The trans-
feree should be described in the deed of assignment, corporate books, and certificate of
stock merely as a qualifying stockholder or nominee of the transferor or assignor. Such
description serves as notice to the corporation and third parties that the holder thereof
does not hold the share in his own right, but only as nominee for the benefit of the real
owner. Any unpaid balance of the subscription to the qualifying share transferred would
remain the liability of the transferor-beneficial owner. (SEC Opinion, Aug. 4, 1995.)
240
owner. Upon like principle, a director is not disqualified when he

merely pledged his shares or entered into an executory contract
to sell the same.
(5) Subscriber of shares held in escrow. — A subscriber to shares
held in escrow cannot be eligible as a director since the holder
does not become the owner of said shares until the conditions for
their release are fully met. (see comments under Sec. 6.)
(6) Transferee of shares he previously sold. — Where a director
makes a valid and effective transfer of all his stockholdings, he
ceases to be a director and the subsequent purchase by him of
shares does not reinvest him with title to his former position.
(SEC Opinion, June 6,1971.)
(7) Transferee at time of assumption of office. — It is not essential
to the validity of the election of one as a director that he be a
legal owner of stock at the time of the election. His subsequent
acquisition of stock before entering the duties of his office has the
effect of validating his election as director. (SEC Opinion, April 5,
1990.)
(8) Co-owners of shares. — Where the system of absolute
community governs the property relations between husband
and wife, the provisions on co-ownership shall apply to the
community of property, (see Arts. 75, 90, Family Code.) Accord-
ingly, the husband or wife who desires to be elected as a member
of the board must secure standing by having their shares recorded
in the corporate books as co-owned by them, in which case either
of them, not both, may be voted for as director for purposes of
voting said shares. Section 56 of the Corporation Code shall
apply. As co-owners of the shares, the husband and wife shall be
considered as one stockholder. (SEC Opinion, Sept. 4,1990.)
Reason for the requirement.

The reason for requiring a director to own stock in the cor-
poration is simple enough. It is commonly felt that a man with a
financial interest at stake will devote more attention to the busi-
ness.
Today, however, management is chosen for its professional
competence rather than its financial contribution. In any event,
Sec. 23 TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
if the financial contribution of management is very small, it is

hardly an incentive to the individual director to be more careful
or a deterrent to carelessness. On the other hand, to require a
director that he invest substantially all of his fortune to the com-
pany of which he is a director would mean losing many valuable
men. (Bonneville, Dewey, and Kelley, Organizing and Financing
Business, 6th ed., p. 85.)
A d d i t i o n a l qualifications in t h e by-laws.
The qualifications of directors or trustees of the corporation,
i.e., qualifications in addition to those specified in Section 23 (par.
1.), may be prescribed by the by-laws (Sec. 47[5].) but their quali-
fications may not be modified if such modification would be in
conflict with the requirements prescribed by the corporation law.
(1) For instance, the by-laws may not provide that a director
need not be owner of stock. Such provision in the by-laws would
be invalid. But the by-laws may provide that no person may be
elected as director unless he owns two or more shares of stock.
This is not inconsistent with the law because "at least one share"
means one or more shares. The requirement, while in the form of
disqualification, is really a qualification expressed in a negative
way.
(2) A provision in the corporate by-law requiring that
persons elected to the board of directors must be holders of shares
of the paid-up value of a specified amount which shall be held
as security for their action, was held valid on the ground that
Section 21 (now Sec. 47.) of the Corporation Law expressly gives
the power to the corporation to provide in its by-laws for the
qualifications of directors and such provision "is highly prudent
and in conformity with good practice." (Gov't, vs. El Hogar, 50
Phil. 399 [1927].)
(3) Similarly, an amendment to the by-laws to the effect "that
no person shall qualify or be eligible for nomination or election
to the Board of Directors if he is engaged in any business (as an
officer, manager, or controlling person of, or the owner of at least
10% of any of the outstanding class of shares of a competing
corporation) which competes with or is antagonistic to that of
the corporation" was sustained as valid, upon the principle that
242
where the director is so employed in the service of a rival com-

pany, he cannot serve both but must betray one or the other.
"Sound principles of corporate management counsel
against sharing sensitive information with a director whose
fiduciary duty to loyalty may well require that he disclose
this information to a competitive rival. These dangers are
enhanced considerably where the common director is a
controlling stockholder of two of the competing corporations.
It would seem manifest that in such situations, the director
has an economic incentive to appropriate for the benefit of
his own corporation the corporate plans and policies of the
corporation where he sits as director." (Gokongwei, Jr. vs.
Securities and Exchange Commission, 89 SCRA 336 [1979].)
Additional qualifications of directors or trustees cannot be
enforced unless approved by the stockholders or members and
contained in the by-laws of the corporation. (SEC Opinion, July
13,1966.)
Effect of want of eligibility.

Votes cast for a person who is not eligible as a director can-
not elect him. In any event, one not eligible as director because
not owning any stock is not a de facto director where he never
accepted the office, nor performed any act as director, nor ever
held himself out as director in any way.
It does not follow, however, that ineligibility of a person who
has been elected as an officer will invalidate his acts as such.
Persons dealing with a corporation are not required to ascertain
whether the directors or other officers of the corporation have
the qualifications prescribed by the by-laws. Acts of a director
or other officers are, therefore, valid so far as third persons
are concerned, although he may not possess the qualifications
prescribed, if he has been elected or appointed by the corporation
and permitted to act for it. (2 Fletcher, p. 98.)
Sec. 24. Election of directors or trustees. — At all elections

of directors or trustees, there must be present, either in
person or by representative authorized to act by written
proxy, the owners of the majority of the capital stock, or if
there be no capital stock a majority of the members entitled

to vote. The election must be by ballot if requested by any
voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to
vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws
are silent, at the time of the election; and said stockholder
may vote such number of shares for as many persons
as there are directors to be elected or he may cumulate
said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number
of his shares shall equal, or he may distribute them on the
same principle among as many candidates as he shall see
fit: Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him as
shown in the books of the corporation multiplied by the
whole number of directors to be elected: Provided, however,
That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws,
members of corporation which have no capital stock may
cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall
be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to
day or from time to time but not sine die or indefinitely if, for
any reason, no election is held, or if there are not present
or represented by proxy, at the meeting, the owners of a
majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
(31a)
Election of directors or trustees.

The following limitations or conditions are imposed in the
14
election of directors or trustees:
14
The Securities and Exchange Commission has "original and exclusive jurisdiction
to hear and decide cases involving x x x controversies in the election or appointment of
directors, trustees, officers, or managers of such corporations, partnerships, or associa-
tions." (Pres. Decree No. 902-A, Sec. 5[a].) Thus, in a labor case, the claim for unpaid sala-
ries filed with the Ministry (now Department) of Labor and Employment by complainant
244
(1) At any meeting of stockholders or members called for the

election of directors or trustees, there must be present in person or
15
by representative authorized to act by written proxy, the owners
of the majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
(a) In determining the presence of stockholders repre-
senting "the majority of the outstanding capital stock" (see
Sec. 137.), non-voting stocks are to be taken into account
although they are not entitled to vote.
(b) Voting is on the bases of the number of shares (one
share-one vote) and not on the number of stockholders pres-
ent in the stockholders' meeting.
(c) The law prescribes who shall be entitled to vote for
directors or trustees of corporation. Hence, creditors of the
corporation cannot be given the right to vote at the meetings
for election of directors or trustees, or on other questions
either by a by-law of the corporation or by contract, even
with the consent of all the stockholders or members;
(2) The election must be by ballot if requested by any voting
stockholder or member. This means that voting by ballot is the
exception rather than the rule. Hence, voting by viva voce or roll
call (raising of hands) is valid except when there is a request that
the election be by ballot in which case such voting is mandatory;
(3) A stockholder cannot be deprived in the articles of incor-
poration or in the by-laws of his statutory right to use any of the
methods of voting in the election of directors;
(4) No stock delinquent for unpaid subscription shall be
voted. A delinquent stock is not entitled to vote or be represented
for any corporate purpose whatsoever;
who was one of the controlling stockholders and the general manager of a corporation
who was suspended by its board of directors was properly dismissed, as this question
should be left to the Securities and Exchange Commission to decide in conjunction with
the case pending with the SEC brought by complainant assailing the validity of his sus-
pension. (Palma vs. Cost Plus Furniture, Inc., NLRC Case No. RB-PV 20858-78, 3rd Divi-
sion, June 30,1980; see Phil. School of Business Administration vs. Leano, 127 SCRA 778
[1984].)
15
The election can only be held at a meeting of stockholders or members because Sec-
tion 24 requires presence either in person or proxy, (see, however, Sec. 89, last par.)
(5) If a quorum is present, the candidates receiving the high-

1
est number of votes shall be declared elected. ' The law requires
only plurality, and not majority of the votes cast at the election.
Delinquent stock is not included in determining the existence of
the required quorum;
(6) In case of failure to hold an election for any reason, the
meeting may be adjourned from day to day or time to time but it
cannot be adjourned sine die or ^definitely; and
(7) The requisite notice must be given, (see Sec. 50, par. 1.)
For one to be elected as director/trusteee or officer, it is not
required that he must be physically present at the meeting at
the time of his nomination and election, unless it is otherwise
provided by the by-laws, (see Sec. 47[5].) But a director or trustee
cannot attend or vote by proxy at board meetings. (Sec. 25, last
par.)
Where directors or trustees

merely designated.
Section 23 is very clear that the corporate powers of all corpo-
rations shall be exercised by the elected members of the board of
directors or trustees.
Therefore, mere designation by the stockholders or by
a corporate officer empowered by the stockholders without
election of the directors in the manner as provided in the by-laws
or applicable provisions of the Corporation Code will not be
sufficient. Election of directors cannot be the subject of a contract
or agreement among the stockholders. (SEC Opinions, March 18,
1981 and March 28, 1985.)
•'Deadlock in corporate elections may be decided by the drawing of lots (which is

a common practice) among the candidates concerned in the absence of any provision in
the by-laws on the matter. If they do not agree on drawing of lots, the stockholders or
members may vote again and elect among them the remaining members of the board.
This matter cannot be left for decision to the old board or to the newly elected directors.
Pending resolution of the deadlock, it is proper for the elected directors to convene and
organize and elect the officers of the corporation provided that the vote requirements of
Section 25 are complied with. (SEC Opinion, April 14,1981.)
246
Time of annual election.

Since Section 23 fixes the tenure of directors or trustees at one
(1) year, their election must be held substantially once in each
year. The Code does not provide when the first election of direc-
tors or trustees shall be held. It, however, authorizes the corpora-
tion to provide in its by-laws "the time for holding the annual
election of directors or trustees." (Sec. 47[6].)
Incidentally, the Code deleted Section 29 of the former Cor-
poration Law providing, among others, that the first election of
directors shall be held "at the meeting for the adoption of the
original by-laws, or at such subsequent meeting as may be then
determined."
Postponement of the election.

The board of directors cannot change the date of the annual
meeting prescribed in the by-laws of the corporation so as to
lengthen their terms of office unless the reason is justifiable {e.g.,
lack of quorum) and proper notice of the postponement is given
to the stockholders or members. (SEC Opinion, April 23,1987.)
The meeting must be held within a reasonable time from the
date it has been postponed, with proper notice of the change of
date given to all the stockholders of record. (SEC Opinion, April
17,1986.)
Methods of voting.
Every stockholder entitled to vote shall have the right to vote
in person or by proxy the numbers of shares of stock standing,
at the time fixed in the by-laws (e.g., as of 10 days before the
17
election), in his own name on the stock books of the corporation
(see Sec. 55.) or, where the by-laws are silent, at the time of the
election, and said stockholders may vote his shares in any of the
ways mentioned below.
•The stockholder of record (as of the cut-off date fixed in the by-laws, or where the
by-laws are silent, as of the day of the election) entitled to vote may no longer be a share-
holder at the time of the election by reason of the transfer of his shares before the meeting,
(see Sec. 63.) The buyer, however, has the right to compel the record owner to give him
proxy to vote the stock sold.
Sec. 24 TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 247
(1) Straight voting. — By this voting method, every stock-

holder "may vote such number of shares for as many persons as
there are directors" to be elected.
ILLUSTRATION:
A owns 100 shares of stock in a corporation. If there are
five directors to be chosen, A is entitled to 500 votes obtained
by multiplying 100 by 5. He may give to the five candidates he
wants to be elected 100 votes each.
Under this method, the votes are distributed equally
among the five candidates without preference.
(2) Cumulative voting for one candidate. — By this method, a

stockholder is allowed to concentrate his votes and "give one
candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal." Needless to
say, straight voting does not benefit minority stockholders for
they would not be able to elect any director over the objection
of the stockholder or stockholders who own at least 51% of the
capital stock.
(a) The privilege of cumulative voting is accorded for the
purpose of giving minority stockholders representation in
the board of directors by electing one or more directors but
such a provision has been held not to insure minority stock-
holders of proportional representation or of representation in
that board of directors under all circumstances.
(b) The effectiveness of cumulative voting varies with
the number of directors to be chosen, the number of shares
represented at the meeting, their distribution among minor-
ity stockholders (19 Am. Jur. 2d 169.), and the number of
shares held by the minority stockholders. Indeed, it is pos-
sible for minority stockholders to obtain greater representa-
tion than it is entitled to if the group controlling the majority
of the shares does not cumulate its votes or cumulates them
improperly.
(c) A director elected because of the vote of minority
stockholders who united in cumulative voting cannot be
removed without cause. (Sec. 28, last sentence.)
248
(d) Minority stockholders cannot demand as a matter of

right for proportionate representation in the board of directors
of its subsidiaries. It is the sole prerogative and discretion of
the board of directors of a parent or holding corporation to
choose its nominees in the board of directors of its subsidiary.
However, the dealings of the parent company and its directors
with the subsidiary will be subjected to vigorous scrutiny,
and where their interests are adverse, they must be under
a burden to prove not only the good faith of the transaction
but also its fairness. The fiduciary obligation is designed not
only for the protection of the minority stockholders but for
the creditors as well. But the fiduciary thereof will not be
employed merely to enable a minority to dictate corporate
policies. (SEC Opinion, March 1 3 , 1 9 9 1 , citing Ballantine, pp.
326-328.)
ILLUSTRATIONS:
(1) If A owns 200 shares of stock and there are five directors
to be elected, he is entitled to 1,000 votes all of which he may
cast in favor of any one candidate.
(2) Suppose that out of a total of 1,000 shares, A and B
(representing a group of stockholders) own 800 shares while C,
D, E and F (representing another group of stockholders) own
200 shares.
If there are five directors to be elected, A and B are entitled
to 4,000 votes and C, D, E and F, to 1,000 votes. The highest
number of votes that A and B can give each of their four
candidates is 1,000. Hence, by cumulating their 1,000 votes in
favor of a candidate, C, stockholders D, E and F would be able
to secure representation in the board of directors.
(3) If the majority group owns 501 shares and the minority
group, 499 shares, the former would have a total of 2,505 (501
x 5) votes, and the latter 2,495 (499 x 5) votes. By cumulating
its votes, the minority could elect two (2) candidates (one
receiving 1,248 and the other, 1,247 votes). Under straight
voting, the majority could always elect all its five candidates,
giving them 501 votes each, since the minority group could cast
only a maximum of 499 for each of its candidates.
Now assume that the majority group cast 501 votes each
for five candidates, and the minority group distributes its votes
Sec. 24 TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
249
(infra.) to four candidates (e.g., one receiving 623 votes, and the
other three, 624 votes), the minority would have control of the
board. The same is true if the minority group concentrates its
votes, 831, 832, and 832 respectively, while the majority group
cumulates its votes also on three candidates, giving them 830,
835, and 840 votes, respectively, the minority will have three
candidates elected to the board.
(3) Cumulative voting by distribution. — By this method, a

stockholder may cumulate his shares by multiplying also the
number of his shares by the number of directors to be elected
and distribute the same among as many candidates as he shall
see fit.
In electing directors by cumulative voting, "the total number
of votes cast by a [stockholder] shall not exceed the number of
shares owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected."
ILLUSTRATIONS:
(1) With 100 shares of stock, A is entitled to 500 votes if there
are five directors to be elected. A may distribute his votes to can-
didates W, X, and Y, giving W, 100 votes, X, 150 and Y, 250. A may
cast his votes in any combination desired by him provided that
the total number of votes cast by him does not exceed 500, which
is the number of shares owned by him multiplied by the total
number of directors to be elected.
(2) Suppose the total number of outstanding shares entitled
to vote in a corporation is 50,000 and the total number of direc-
tors to be elected is 11. The total number of votes that can be cast
for the 11 directors is 550,000 (50,000 x 11). What is the minimum
number of shares necessary to elect six directors? What is the
minimum number of votes required to elect six directors?
Under the cumulative voting system, the number may be
calculated by using the following formula:
250
Where:
A = Total number of outstanding shares entitled to vote (at
meeting);
B = Number of directors desired to be elected;
C = Total number of directors to be elected;
D = Number of shares necessary to elect desired number of
directors; and
E = Number of votes required to elect desired number of
directors.
Thus:
A. Total no. of outstanding shares
entitled to vote — 50,000
Multiplied by:
B. No. of directors desired
to be elected — x6
Divided by: Sum of: 300,000
C. Total no. of directors
to be elected +1(11 + 1) — +12
25,000
Plus 1 — +1
D. = No. of shares necessary to
elect desired no. of directors — 25,001
Multiplied by:
C. = Total no. of directors
to be elected — x 11
E. = No. of votes required to
elect desired no. of directors — 275,011
Thus, the 275,011 votes may be distributed equally to six
candidates for directors, five of whom will receive 45,835 votes
and the sixth, 45,836 votes. If the remaining 24,999 shares are
controlled by another group, it can only elect a maximum
of five directors with its 274,989 (24,999 x 11) votes which, if
distributed equally to six candidates, will give each of them
only less than 45,835 votes.
(3) X, a stockholder, is a candidate to a nine-man board.
He expects that out of 3,000 outstanding shares, only 2,000
shares will be represented at the meeting. How many of the

2,000 shares does X need to get elected?
By applying the formula, X will need 200 of the 2,000
shares to be elected. Now, if X seeks control of the corporation
and desires to elect five directors, then, he will need 1,001 (or
simply 5 / 1 0 [ B / C + 1] A + 1) shares to elect the five.
(4) Assume: 18,825 — total outstanding shares; 13 —
numbers of directors to be elected; all shares (244,725) will vote.
(a) to elect 13 directors:
1) 18,825(A) x 13(B) = 244,725 + 1 4 (13 + 1) = 17,480.35
+ 1 = 17,482 (D; rounded off) x 13(C) = 227,266(E)
2) 17,481 x 13 = 227,253. This number of shares is
sufficient.
3) 244,725 - 227,266 = 17,459. This number of shares
cannot elect one (1) director.
cannot also elect one (1) director.
(b) to elect 12 directors:
1) 18,825 x 12(B) = 225,900 - 14 = 16,135.71 + 1 =
16,137 (rounded off) x 13 = 209,781
2) 244,725 - 209,781 = 34,944 -H 2 = 17,472
34,944 shares cannot elect two (2) directors, only one (1).
3) 209,781^-12 = 17,481
(c) to elect 11 directors:
1) 18,825 x 11 = 207,075 + 14 = 14,791 + 1 = 14,792 x 13 =
192,296
cannot elect three (3) directors, only two (2).
192,296 H- 11 = 17,481
52,429 + 3 = 17,476
(d) to elect 10 directors:
1) 18,825 x 10 = 188,250 + 14 = 13,446 + 1 = 13,447 x 13
= 174,811
cannot elect four (4) directors, only three (3).
252
174,811 + 10 = 17,481
69,914 + 4 = 17,478
(e) to elect three (3) directors:
1) 18,825 x 3 = 56,475 - 14 = 4,034 + 1 = 4,035 x 13 =
52,445
cannot elect 11 directors, only 10.
192,280 -s-11 = 17,480
52,445 + 3 = 17,481
(f) to elect two (2) directors:
1) 18,825 x 2 = 37,650 + 14 = 2,689 + 1 = 2,690 x 13 =
34,970
209,755 + 12 = 17,479
34,970 T 2 = 17,485
(g) to elect one (1) director:
1) 18,825 x 1 = 18,825 * 14 = 1,345 + 1 = 1,346 x 13 =
17,498
227,227 -s-13 = 17,479
17,498 + 1 = 17,498
Right of stockholder to use

cumulative voting.
Cumulative voting being a statutory right, a corporation
is without power to deprive the stockholders of its use (SEC
Opinion, Oct. 2 0 , 1 9 6 4 . ) or even to restrict the right to vote to only
one way or method. A stockholder may or may not exercise the
right as "he shall see fit." (Sec. 24.) He may contract with other
stockholders with reference to his stock or such right, (see Sees.
59, 100.)
Cumulative voting may not be used as a device to achieve

stealthily or indirectly what the law does not allow such as to
Sec. 24 TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 253
undermine the local majority "ownership in industries where

constitutional and legal requirements reserve controlling owner-
ship to Filipino citizens by the election, through the combined
cumulative votes of a group of foreign investors, of more than
the number of directors which the group is entitled to elect under
a joint venture agreement." (Aurbach vs. Sanitary Wares Manu-
facturing Corp., 180 SCRA 130 [1989].)
Situations involving cumulative voting.

In a study of proxy fights, situations involving cumulative
voting were found to be generally of six (6) types:
(1) Cases growing out of conspicuous management or board
failures;
(2) Situations grounded in conflicts of important business
interests among stockholders, or between stockholders and
management;
(3) Where stockholders became convinced on rather general
grounds that the board of directors was unrepresentative of, and
generally insensitive to, stockholders' interest;
(4) Instances involving clashes of strong personalities;
(5) Struggles for control of the corporation in which
representation through cumulative voting was an intermediate
objective; and
(6) Cases of "anglers" — opposition leaders who appeared
to seek board membership in order to push narrow and selfish
interests of their own. (W.L. Cary, Cases and Materials on
Corporations, 1969 ed., p. 285, citing C M . Williams, Cumulative
Voting, 33 Harv. Bus. Rev. 108, at 113 [May-June, 1955].)
Arguments for cumulative voting.

They have been summarized as follows:
(1) Perhaps, foremost of the varied arguments made by
proponents of cumulative voting is that it is basically fair. They
argue that it is only equitable that stockholders with a large stake
in the corporation have the opportunity to gain representation
on the board of directors, in proportion to their holdings;
254
(2) Minority representation under cumulative voting does

not constitute a breakdown of the principle of majority rule since
the number of directors elected by each group will vary with its
18
proportions of ownership;
(3) Significant conflicts of interest can develop between the
stockholder groups (or the stockholders in general) and manage-
ment and the board of directors. Unless minority groups can gain
representation on the board, they may fail to get an adequate
voice in policy (Illustration of conflict: dividend policy or major-
ity shareholders taking out profits in salaries);
(4) In the case of many larger corporations, proponents of
cumulative voting argue that the management virtually controls
the typical board of directors — the stockholders merely ratify
the selections. Thus, cumulative voting represents potential
power to assert stockholders' points of view;
(5) The position of the management and the controlling
interests is generally very strong; the balance of power lies
heavily with the "ins" who hold great advantages in the event of
a proxy fight; and
(6) Minority representation on the board can be helpful
in protecting or advancing the interests of minority groups. If
boards are composed of men who think essentially alike, and
operations are conducted in a private club atmosphere — as does
happen too often — an intelligent gadfly can prove useful. (Ibid.,
pp. 287-288.)
A r g u m e n t s against cumulative v o t i n g .
They have been summarized as follows:
(1) A basic argument against cumulative voting is that it
means the election of directors who are, by their nature, parti-
sans of particular interest groups; and the role of a partisan on
the board of directors is inherently inconsistent with the proper
function of a director, which is to represent all interest groups in
the corporation;
'Thus, cumulative voting cannot be considered undemocratic.

(2) The board of directors is an integral part of the manage-

ment team;
(3) Disharmony in the board can dissipate and destroy the
energy of management and lead to an atmosphere of uncertainty
and inaction at the top level. Officers susceptible to unfriendly
criticism are likely to avoid action which might result in failure
and hostility, even when such drastic and risky action is appro-
priate and necessary;
(4) A director who cannot be trusted may leak such informa-
tion to the harm of the corporation;
(5) Too frequently, cumulative voting tends to be used in
practice by persons who are motivated by narrow selfish interests
rather than by the broader interests of the stockholders (which
they may profess to represent); and
(6) Not infrequently, opposition groups use cumulative vot-
ing to secure a toe-hold in a long-run fight for control of the com-
pany. The result is that each board meeting becomes a skirmish
in a continuing battle. Each group keeps trying to get something
on the other group that can be used in the next proxy fight. The
board neglects its real functions, top management is demora-
lized, and serious harm is done to the corporation. (Ibid., p. 288.)
Voting in a non-stock corporation.

Members of non-stock corporations may cast as many votes
as there are trustees to be elected but may not cast more than one
vote for one candidate. This is the manner of voting in non-stock
corporations unless otherwise provided in the articles of incor-
poration or in the by-laws, (see Sec. 89.)
ILLUSTRATION:
If A is a member of a non-stock corporation and there are
five directors to be elected, he is entitled only to five votes. He
may give one vote to each of the five candidates he wants to be
elected.
If he has only one candidate, he can cast only one vote
for said candidate unless cumulative voting is authorized in
the articles of incorporation or in the by-laws. Thus, where
256
cumulative voting exists, and there are nine trustees to be

elected, a member is entitled to cast nine votes for one candidate
or to distribute the same among as many candidates as he shall
see fit.
Separate voting by zones or regions

not allowed.
It is clear from Section 24 that in the election of the trustees of
a non-stock corporation, it is necessary that at least "a majority
of the members entitled to vote" must be present at the meeting
held for the purpose. It follows that trustees cannot be elected by
zones or regions, each zone or region electing independently and
separately a member of the board of trustees of the corporation,
such method being violative of Section 24. (SEC Opinions, Jan.
30, 1969 andApril 1,1981.)
This opinion applies as well to the election of directors of
stock corporations where there must be present the owners of at
least "the majority of the outstanding capital stock." However,
the by-laws of a non-stock corporation can validly provide in its
by-laws for the election of trustees by category (e.g., age bracket,
regional area), a practice followed by most corporations with
nationwide membership. (SEC Opinion, Feb. 22,1972.)
For purposes of electing directors or trustees, the by-laws
may divide the members into groups, with each group entitled
to nominate qualified members coming from said group, but
the nominated members shall be elected not by the group itself
but by the entire members of the corporation in accordance with
Sections 23 and 24. (see SEC Opinion, Sept. 4,1989.)
Sec. 25. Corporate officers, quorum. — Immediately after

their election, the directors of a corporation must formally
organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director,
a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that no one
shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected

shall perform the duties enjoined on them by law and
by the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for
the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present
at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which
shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at

board meetings. (33a)
Corporate officers.
The board of directors or trustees, as we have seen, formulates
the broad policy of the corporation and directs the conduct of its
business operations. (Sec. 23.) But the task of actual management
and carrying on the details of business operations and corporate
policy are delegated to the officers elected by it and over whom
it exercises supervision.
The only officers of a corporation are those who are given
that character either by the Code (Sees. 24, 25.) or the charter or
by-laws; the rest can be considered merely as employees or sub-
ordinate officials. (Gurrea vs. Lezama, 103 Phil. 553 [1958].)
In most cases the "by-laws may and usually do provide for
such other officers" and that where a corporate office is not spe-
cifically indicated in the roster of corporate offices in the by-laws
of a corporation, the board of directors may also be empowered
under the by-laws to create additional officers as may be neces-
sary. (Nacpil vs. Intercontinental Broadcasting Corporation, 379
SCRA 653 [2002].) Thus:
(1) Although the intention of the board of trustees of a cor-
poration is to make the "General Financial Secretary" an officer
thereof, he cannot be classified as such where the by-laws of the
corporation discloses that the position is not one of the offices
provided therein. (SEC Opinion, May 15, 1969.) The by-laws
must first be amended.
258
(2) The scope of the term "officers" in the phrase "and such
other officers as may be provided for in the by-laws" (Sec. 25,
par. 1.), would naturally depend much on the provisions of the
by-laws of the corporation. (SEC Opinion, Dec. 4, 1991.) The
president, vice-president, treasurer and secretary are commonly
regarded as the principal or executive officers of a corporation.
(Tabang vs. National Labor Relations Commission, 266 SCRA
462 [1997].) However, if the by-laws enumerate the officers to be
elected by the board, the provision is conclusive, and the board
is without power to create new offices without amending the by-
laws (SEC Opinion, Oct. 19,1971.) except where it is empowered
by the by-laws to create additional officers as may be necessary.
(3) The board may create appointive positions other than
positions of corporate officers but the persons occupying such
positions are not considered as corporate officers within the
meaning of Section 25 and are not empowered to exercise the
functions of the corporate officers, except those functions
lawfully delegated to them. Their functions and duties are to
be determined by the board. (SEC Opinion, Nov. 25, 1993.) If,
for example, the general manager of a corporation is not listed
as an officer, he is to be classified as an employee although he
has always been considered as one of the principal officers of
a corporation. But a Superintendent /Administrator /Manager/
Assistant to the President who is included in the by-laws of an
association in its roster of corporate officers is an officer of said
corporation and not a mere employee. (Ongkingco vs. National
Labor Relations Commission, 270 SCRA 613 [1997]; Union
Motors Corporation vs. National Labor Relations Commission,
314 SCRA 531 [1999].)
(4) Where the by-laws of the corporation provides "and for
such other officers as the board of directors may from time to
time does fit to provide for" and "said officers shall be elected by
majority vote of the board of directors," a comptroller appointed
by the general manager which appointment was subsequently
approved by the board of directors, said comptroller is a corporate
officer, not an employee, although the position is not expressly
mentioned among the officers of the corporation in the by-laws.
(Nacpil vs. Intercontinental Broadcasting Corporation, supra.)
Sec. 25 TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 259
Corporate e m p l o y e e s .
Actually, all officers of the corporation are its employees,
although in common usage the term "officers" is meant to refer to
those elected by the board or stockholders/members, occupying
positions involving the exercise of authority and power in the
management of corporate affairs, while the term "employees,"
to those whose duties are of a clerical or manual nature.
(1) An "office" has been defined as a creation of the charter
of a corporation. An employee is appointed, not elected, unless
he is also a corporate officer. He usually occupies no office and
is generally employed not by the action of the directors or stock-
holders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee. (All-
dritt vs. Kansas Central Global Exposition, Inc., 371 P 2d 818;
Nacpil vs. Intercontinental Broadcasting Corporation, 379 SCRA
653 [2002]; Uy vs. Villanueva, 526 SCRA 73 [2007].)
(2) When the President, for example, acts only as such, per-
forming its regular executive duties pertaining to his office, he is
not considered an employee. However, a corporation may hire
its President to perform services under circumstances which
will make him an employee. (SEC Opinion, May 9,1989, citing 2
Fletcher, Chap. II, Sec. 266.1.)
Election of officers by the b o a r d .

The directors or trustees of the corporation are elected to
their office by the stockholders or members to represent them
in the affairs of the corporation at the stockholders' or members'
meeting. (Sec. 24.)
(1) The election of the administrative officers, such as the
president, treasurer, secretary, and "such other officers as may be
provided for in the by-laws" is, in turn, entrusted to the board of
directors or trustees." Thus, pursuant to the by-laws, the board
"See note 5; Where W Corporation obtained a loan from X Corporation and Y

Corporation, guaranteed by Z Corporation, the condition in the guaranty agreement
between W and X requiring all appointments to executive positions in W should be made
only with the approval of X's management, though intended to protect the interest of
X, denies W's board of directors of prerogative to elect corporate officers and violates
Section 25. The appointment of officers by the directors cannot be the subject of a valid
contract between the directors and persons seeking such appointment. (SEC Opinion,
March 18,1981.)
260
by a vote of majority of all or entire number of its members

may elect a vice-president, a general manager, an auditor, and
such other officers as the needs and nature of the business may
demand.
In a case, the board of directors, at its regular meeting declared
vacant all corporate positions in order to effect a reorganization,
and at the ensuing election of officers, the respondent was not
re-elected as Executive Vice-President. It was held that the
controversy was fundamentally intra-corporate in nature and not
a case of dismissal. An intra-corporate controversy would call for
SEC (now regional trial court) jurisdiction; a labor dispute, that of
the National Labor Relations Commission. The matter of whom
to elect is a prerogative that belongs to the board, and involves
the exercise of deliberate choice and the faculty of discriminative
selection. Generally speaking, the relationship of a person to a
corporation, whether as officer or as agent or employee, is not
determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. (Phil. School
of Business Administration vs. Leafio, 127 SCRA 778 [1984].)
(2) The articles of incorporation of a close corporation may
provide, however, that all officers or employees or that speci-
fied officers or employees shall be elected by the stockholders,
instead of the board of directors. (Sec. 97, last par.)
(3) In a non-stock corporation, the officers may be directly
elected by the members unless otherwise provided for in the
articles of incorporation or the by-laws. (Sec. 92, last par.)
(4) In firms engaged in wholly or partially nationalized
activities, aliens are banned from being appointed to management
positions such as president, vice-president, treasurer, auditor,
etc. although they can be elected directors in proportion to their
allowable participation or share in the capital of such activities in
accordance with the Anti-Dummy Law. (see Sec. 2, C.A. No. 108,
as amended by P.D. No. 715.)
(5) The Code requires that the President must be a director.
(Sec. 25, par. 1.) Other officers may be elected or appointed
although they do not own shares of stock of the corporation.
(6) Section 25 clearly requires an election of a new set of officers
immediately after the election of the newly elected members of
Sec. 25 TITLE III. BOARD OF DIRECTORS /TRUSTEES / OFFICERS 261
the board which is, therefore, not bound by the choice of the
previous board. Accordingly, a resolution of the stockholders
and the board of directors of a corporation amending the by-
laws of the corporation which would provide that the incumbent
vice-chairman of the board of directors shall automatically be the
chairman of the succeeding board if he is elected as a member
of the said board, is invalid as it would deny the newly elected
board the prerogative to elect the new chairman. (SEC Opinion,
Aug. 4,1995.)
(7) There is no prohibition as to the right of any elected board
member who is also a stockholder to participate in the election
of president or any other officer of a corporation. There is no
conflict of interest considering that a stockholder has the right to
vote and be voted upon in the corporate election process. (SEC
Opinion No. 04-37, June 28, 2004.)
Compensation, terms of office, and removal.

(1) It is within the power of the board to fix the salaries of
corporate officers whom it appoints, for the power to employ
must necessarily include the power to grant compensation. It
may likewise grant bonuses to them subject to the test of reason-
ableness.
(2) The terms of office of these officers may be fixed in the
by-laws; otherwise, they shall be deemed for one (1) year and
until their successors shall have been elected by the board.
(a) It would seem that under Section 25 (par. 1.), the term
of the officers of the corporation cannot extend beyond that
of the directors which under Section 23 is only one (1) year
(par. 1 thereof.), since they shall be elected immediately after
the election of the board of directors. Section 47(7), however,
permits a corporation to provide in its by-laws a term longer
than one (1) year for its corporate officers, other than direc-
tors or trustees.
(b) In the case of the President, since he must also be a
director, his term of office as such would necessarily be co-
terminous with his term as director.
(c) It has been a long standing policy of the SEC not to
allow a provision in the articles of incorporation or by-laws
262
providing for a lifetime term of office of corporate officers

to avoid possible abuse of persons in power. Contracts of
employment for life or indefinite period of officers and other
key personnel are generally invalid because they bind the
hands of future board of directors. They also deprive other
members of the corporation of the opportunity to become
officers of the corporation. (SEC Opinion, Dec. 16,1991.)
(d) The Securities and Exchange Commission has ruled
on several occasions that hold over of incumbent corporate
officers whose term has already expired is allowable when
no successors are elected due to justifiable or valid reasons.
(SEC Opinion, April 5, 1995.) Non-holding of the annual
meeting for the election of the board of directors/trustees
and officers without justifiable reason is subject to the SEC
Rules Governing the Filing of Information Sheet by Domestic
Corporations. (Appendix " E " ) Violations of said rules carry
with it the corresponding penalty prescribed therein. (SEC
Opinion, Oct. 16,1995.)
(3) The power to remove an officer for cause inheres in every
corporation as part of its existence. The power to elect or appoint
corporate officers being vested with the board, the power of
removal must necessarily be exercised by it as an incident to its
power of appointment. However, in non-stock corporations, if
the officers are elected by the members, as allowed under Section
92, the power to remove them is also vested directly in the latter.
(a) In instances where the term of an officer is not fixed
by contract or in the by-laws, he may be removed at any time
with or without cause at the pleasure of said body. But the
power must not be exercised in bad faith or in such a manner
as to work injustice.
(b) Where the term of an officer as fixed in the by-laws
or in a contract of employment is for more than one (1) year,
he has to be re-elected by the board until the expiration of
the term; otherwise, the corporation may be held liable for
damages.
(c) The election of successors to corporate officers after
the expiration of their term does not constitute their dismiss-
al. The matter of whom to elect is a prerogative that belongs
Sec. 25 TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS
to the board and involves the exercise of deliberate choice

and the faculty of discriminate selection. Generally speak-
ing, the relationship of a person to a corporation, whether
as officer or as agent or employee, is not determined by the
nature of the services performed, but by the incidents of the
relationship as they actually exist. (Phil. School of Business
Administration vs. Leafio, 127 SCRA 778 [1984].)
Positions c o n c u r r e n t l y held
by same person.
The directors or trustees and officers elected shall perform
the duties enjoined on them by law and by the by-laws of the
corporation. Any two (2) or more positions may be held concur-
20
rently by the same person except as provided in Section 25. The
positions of president and secretary or treasurer are considered
by law as incompatible with each other due to the very nature
appertaining to each office. The rationale behind the provision is
to ensure the effective monitoring of each officer's separate func-
tions. (Ong Yong vs. Tiu, 401 SCRA 1 [2003].)
There is no prohibition in the law against a stockholder being
a director or officer of two or more corporations.
The Corporation Code does not prohibit a corporate officer
from occupying the same position in another corporation orga-
nized for the same purpose. However, such a situation may be
prohibited by special law, the articles of corporation, or the by-
laws of the corporation.
A c c e p t a n c e of office a n d taking
of oath of office.
(1) To make one an officer of a corporation, his consent, as
well as an appointment or election, is necessary.
(a) A person who is appointed/elected without his
knowledge, and who does not accept the office, or act as an
"In American law, directors who are also officers of a corporation are called inside
directors. Too many inside directors create the danger of the board being under the control
of officers.
264
officer, is not an officer, although he may have received stock

after his election.
(b) No formal acceptance is necessary. If a person enters
upon the duties of an office after his election or appointment,
it is a sufficient acceptance or, rather, efficient ground for
implying acceptance, in the absence of proof to the contrary.
Indeed, acceptance of an office may be presumed without
any act, in the absence of evidence to the contrary. (2 Fletcher,
pp. 99-100; 19 C.J.S. 64.)
(2) There is no provision in the Corporation Code which
requires the taking of an oath of office to qualify the elected
directors and officers. Oath of office constitutes no part of the
office itself. Acceptance of the office will suffice unless the taking
of an oath is required by the corporate by-laws in which case
they are not de jure but de facto officers (infra.) until they have
taken the oath. (SEC Opinion, Jan. 21,1986.)
Sources of p o w e r s or authority
of corporate officers.
An officer's authority to act for the corporation in a parti-
cular matter is determined by his actual office and not by the
description he may use in acting for the corporation.
This authority may be derived from (1) some provision of
statute or (2) the articles or incorporation. It may be contained in
(3) a by-law, assuming that the by-law is deemed not to violate
some rules of law such as the provision of the Code vesting
powers of management in the board of directors or trustees.
Authority may also be conferred on an officer by (4) a resolution
of the board of directors or trustees, provided that the resolution
does not attempt to delegate non-delegable powers. (W.L. Cary,
op. ext., pp. 190-191.)
Corporate officers shall perform the duties and functions
enjoined by them by law and the by-laws of the corporation.
However, powers of corporate officers under the by-laws are
always subject to the rule in Section 23 that the board of directors
or trustees is the governing body of the corporation. By virtue of
Section 23, the board may in its best judgment and for the best
interest of the corporation, appoint or authorize the President or
Sec. 25 TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS 265
another officer or agent to act for and in behalf of the corporation,

but in all cases such officers shall be under the ultimate direction
of the board. (SEC Opinion, Jan. 18,1995.) One may be an agent
of a private domestic corporation although he is not an officer
thereof. (Aboitiz International Forwarders, Inc. vs. Court of
Appeals, 488 SCRA492 [2006].) It has been held that where the real
party-in-interest is a body corporate, neither the administrator of
the agency or a project manager could sign the certificate against
forum shopping without being duly authorized by resolution of
the board of the corporation. (Eslaban, Jr. vs. Onorio, 360 SCRA
230 [2001].)
Extent of p o w e r s or authority
of c o r p o r a t e officers.
(1) Determination of authority. — The full extent of the
powers or authority of any particular officer of a corporation is
to be determined by inquiring into: (a) the authority which he
has by virtue of his office; (b) the authority which is expressly
conferred upon him or is incidental to the effecrualness of such
express authority; and (c) as to third persons dealing with him
without notice of any restriction thereof, the authority which the
corporation holds the officer out as possessing or is estopped
to deny. In the determination of the authority which certain
officers may exercise by virtue of their office, (d) the nature of
the corporate business must also be taken into consideration.
In addition to the foregoing, (e) the act of an officer though
originally unauthorized, may become binding upon the corpora-
tion by a subsequent ratification. (13 Am. Jur. 875.)
(2) Exemption from liability. — Officers of a corporation who
acted for and in behalf of the corporation within the scope of
their authority and in good faith do not become liable with the
corporation, whether civilly or otherwise, for the consequences
of their acts. Those acts are properly attributed to the corporation
alone and no personal liability is incurred by such officers.
(Benguet Electric Cooperative, Inc. vs. National Labor Relations
Commission, 209 SCRA 55 [1992]; Mindanao Motor Line, Inc.
vs. Court of Industrial Relations, 6 SCRA 710 [1962].) When they
exceed their authority, the corporation is not bound unless it has
266
ratified them expressly or tacitly, (see Art. 1910, Civil Code.) or it

may be held in estoppel, (infra.)
(3) Authority to bind by contract. — The lack of authority of a
corporate officer to bind the corporation by contract executed in
its name, is a defense which should be especially pleaded by the
corporation. (Lao vs. Court of Appeals, 325 SCRA 694 [2000].)
It should first prove by clear evidence that its corporate officer
is not in fact authorized to act in its behalf before the burden of
evidence shifts to the other party to prove, for example, that, by
previous specific acts, an officer was cloaked by the corporation
with apparent authority. (Westmont Bank vs. Inland Construc-
tion and Development Corp., 582 SCRA 230 [2009].)
The general rule is that a contract, to be binding on the par-
ties thereto, need not be in writing, unless the law requires that
such contract be in some form in order that it may be valid or
enforceable or that it be executed in a certain form, (see Art. 1356,
Civil Code.) Indeed, corporate policies need not be in writing.
But a verbal promise made by the corporation, through its chair-
man and president, obligating itself, as a matter of policy, to
grant petitioner (who retired as general manager, after 36 years
of service) the cash value of his vacation and sick leave credits
cannot bind the corporation in the absence of a board resolution
to that effect. (Kuok vs. Phil. Carpet Manufacturing Corp., 457
SCRA 465 [2005].)
Classification of p o w e r s or authority
of corporate officers.
The general principles of agency applicable to agents of indi-
viduals govern the relation between the corporation and its offi-
cers or agents, subject to the articles of incorporation, by-laws, or
21
relevant provisions of law. (San Juan Structural & Steel Fabrica-
2I
The elements of agency are: (a) consent of the parties to establish the relationship;
(b) the object is execution of a juridical act in relation to a third person; (c) the agent acts
as a representative and not for himself; and (d) the agent acts within the scope of his
authority. (Yu Eng Cho vs. Pan American World Airways, Inc., 308 SCRA 7175 [2005].)
The mere fact that an entity may be a 100% subsidiary corporation of another corporation
does not necessarily mean that the former is a duly authorized agent of the latter, because
for a contract of agency to exist, it is essential that the principal consents that the other
party, the agent, shall act on its behalf and the agent consents so as to act. (Apex Mining
Co., Inc. vs. Southeast Mindanao Gold Mining Corp., 492 SCRA 355 [2006].)
tors, Inc. vs. Court of Appeals, 293 SCRA 631 [1998]; Litonjua, Jr.
vs. Eternal Corporation, 490 SCRA 204 [2006]; Philippine Rabbit
Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006].)
(1) The inherent authority or power of an officer or agent is
taken to mean that authority to act and bind the corporation
which the officer has by reason of his office, although it may not
be sanctioned by express authority. (Ibid.)
(2) The express authority of an officer or agent includes every
power or authority expressly conferred upon him by law and the
by-laws of the corporation.
(3) The implied authority of an officer or agent of a corpora-
tion includes all such incidental authority as is necessary, usual,
and proper to effectuate the main authority expressly conferred.
(a) A corporate officer entrusted with the general
management and control of the corporate business has the
implied authority to act or contract for the corporation which
may be necessary or appropriate to conduct the ordinary
business. If the act or contract comes within corporate powers
but it is done without any express or implied authority
therefor from the by-laws, board resolution or corporate
practices, such unauthorized act or contract does not bind
the corporation unless ratified by the board of directors or the
corporation may be held in estoppel (infra.) from denying as
against innocent third persons the authority of the corporate
officer. (Rural Bank of Milaos vs. Ocfemia, 325 SCRA 99
[2000].)
(b) An officer of a corporation who is authorized to
purchase the stock of another corporation has the implied
power to perform all other obligations arising therefrom such
as payment of the shares of stock. (Inter-Asia Investments
Industries, Inc. vs. Court of Appeals, 403 SCRA 452 [2003].)
(4) When in the usual course of business of the corporation,
an officer or agent is held out by such corporation, or has been
permitted to act for it in such way as to justify third persons who
deal with him in assuming that he is doing an act or making
a contract within the scope of his authority, the corporation is
bound thereby even though such officer or agent does not have
268
the actual authority to do such act or make such contract. This

authority is known as apparent or ostensible authority. It is essen-
tially a question of fact.
(5) Apparent authority is naturally the same as and based
upon the same principle as authority by estoppel.
(a) Stating the rule in terms of estoppel, a corporation,
which by its voluntary act, places an officer or agent in such
a position or situation that persons of ordinary prudence are
justified in assuming that he has authority to perform the act
in question, is estopped as against such persons from denying
the officer's or agent's authority. (13 Am. Jur. 869-871; BPI
Family Savings Bank, Inc. vs. First Metro Investment Corp.,
429 SCRA 30 [2004]; Hydro Resources Corp. vs. National
Irrigation Administration, 441 SCRA 614 [2004]; Development
Bank of the Phils, vs. Ong, 460 SCRA 170 [2005].)
Thus, in a case where the board secretary sent to VF a
telegram purportedly signed by the general manager of
the GSIS accepting VF's offer to liquidate his daughter's
mortgage indebtedness and pursuant to such telegram VF
paid P30,000.00 for which a receipt was issued by the GSIS
and subsequently, GSIS claimed that the telegram should be
disregarded in view of its failure to express accurately the
contents of the board's resolution due to the error of its minor
employees and that the board secretary sent the telegram
without the knowledge of the general manager, it was held
that GSIS could not evade the binding effect produced by the
telegram which was within the general manager's apparent
authority. Corporate transactions would speedily come to
a standstill where every person dealing with a corporation
held duty bound to disbelieve every act of its responsible
officers no matter how regular they should appear on their
face. (Francisco vs. GSIS, 7 SCRA 577 [1963]; see Maharlika
Publishing Corporation vs. Tagle, 142 SCRA 553 [1986]; First
Phil. International Bank vs. Court of Appeals, 252 SCRA 257,
259 [1996].)
(b) The authority of a corporate officer to act for and bind

the corporation may be presumed from acts of recognition
in other instances where the power was in fact exercised. It
Sec. 25 TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 269
is well-settled in jurisprudence that where similar acts have

even approved by the board of directors as a matter of general
practice, custom, and policy, a corporate officer may bind the
company without formal authorization of the board.
Thus, where the practice of the corporation had been to
allow its general manager to negotiate and execute contracts
in its copra trading activities for and in the corporation's
behalf without prior board approval, it was held that the
board itself, by its acts and through acquiescence, practically
laid aside the by-laws' requirement of prior approval. (Board
of Liquidators vs. Heirs of Maximo M. Kalaw, 20 SCRA 987
[1967]; see Lipat vs. Pacific Banking Corporation, 402 SCRA
399 [2003].)
(c) Apparent authority is derived not merely from
corporate practice (defined as frequent or customary action).
Its existence may be ascertained through: 1) the general
manner in which the corporation holds out an officer or agent
as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or 2) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond
the scope of his ordinary powers. It requires presentation of
similar act(s) executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which establishes
apparent authority but the vesting of a corporate officer with
the power to bind the corporation. (People's Aircargo &
Warehousing, Co., Inc. vs. Court of Appeals, 297 SCRA 170
[1998].)
(d) Where a power is one which would otherwise be
possessed by an officer, it is generally held that a by-law
(or a board resolution or articles of incorporation provision)
restricting his authority is not effective against an outsider
who has no actual notice. Thus, a corporation was held
bound by a note signed by the president and secretary where
they had signed numerous other notes which had been paid,
although there was no evidence that the plaintiff knew of this
fact, notwithstanding a provision of its by-laws requiring
checks or notes to be signed by the president and treasurer.
270
(Ibid., citing Produce Exchange Trust Co. vs. Bierberbach, 176

Mass'. 58 N.E. 167 [1900].)
Extent of authority of particular officers.

(1) Chairman of the Board. — The concept of board chairman
and his functions as an executive vary so widely in different
companies as to be indefinable. There is no settled practice. (2
Fletcher, p. 541; Ballantine, p. 142 [1946 ed.].)
(a) The typical pattern of executive duties is that the
president or the chairman of the board is designated usually
by the by-laws but sometimes, in board resolutions, as the
general manager or chief executive officer of the corporation.
If the chairman of the board is so designated, the president
is frequently designated the chief administrative or chief
operating officer, or may simply be the officer who succeeds
to the chairman's executive duties in his absence or disability.
(Ballantine & Sterling, p. 42 [1982 ed.].) In such a given
situation, an alien cannot qualify as chairman of the board
of directors in enterprises where aliens are banned by law or
the Constitution from management positions. (SEC Opinion,
May 15,1985.)
(b) Where the president is the chief executive officer,
typically, the duties of the chairman relate to presiding at
meetings of the board and of committees of which he is a
member, and of stockholders or members, and carrying out
such other duties as the board shall assign. The duty of the
chairman of the board as presiding officer is not an executive
one. Thus, where the functions of the chairman of the board
as provided in the by-laws consists merely of presiding at
the meetings of the board or of committees of which he is
a member, an alien may qualify as chairman of the board
in such enterprises. (SEC Opinion, May 15, 1985, citing 2
Fletcher, p. 542 and Ballantine & Sterling, supra.)
(c) If a vice-chairman is appointed, he presides at the
meetings in the absence of the chairman. He shall exercise
such powers and perform such duties and functions as the
board may, from time to time, assign to him.
Sec. 25 TITLE ni. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 271
(2) President. — The president of a corporation must be a

director or trustee (see Sec. 87, par. 2.) of the corporation, but
he cannot act as president and secretary or as president and
treasurer at the same time. (Sec. 25.) The president is the only
officer required by law to be a member of the board of directors.
Upon the expiration of his term as member of the board, he
automatically ceases to be president for lack of qualification.
(Sec. 23, par. 2.)
(a) The powers of the president of the corporation are
such only as are conferred upon him by the board of directors
or trustees or vested in him by the by-laws. If there is nothing
in the by-laws conferring any particular authority upon him,
he has from his office and alone no more power over the
corporate property and business than has any other director.
(Fisher, op. cit., p. 357.) It is the board of directors or trustees,
not the President, that exercises corporate powers. (Safic
Alcan & Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA
559 [2001].) However, according to the view taken by many
authorities, regard must be had to the fact that presidents of
corporations are often given general supervision and control
of the business as chief executive officers from which is to be
inferred that contracts or acts made or done by the president
in the ordinary course of business are presumed to be duly
authorized unless the contrary appears. (2 Fletcher, p. 443.)
Even in the absence of express delegation by the board
or implied authority by ratification, unless there is a charter
or by-law provision to the contrary, the President, as such,
may, as a general rule, bind the corporation by a contract
in the ordinary course of business, provided that the same
is reasonable under the circumstances, (see Prime White
Cement Corp. vs. Intermediate Appellate Court, 220 SCRA
103 [1993].) Furthermore, a person dealing with the President
of a corporation is entitled to assume that he has the authority
to enter, on behalf of the corporation, into contracts that are
within the scope of the powers of the corporation. (People's
Aircargo & Warehousing, Co., Inc. vs. Court of Appeals, 297
SCRA 170 [1998].)
(b) On the other hand, where the president acts in matters
not within the scope of his authority although they may
272
relate to the company's business as where he acts in matters

within the exclusive province of the board of directors, the
corporation cannot be bound; or where he performs an act
not incidental to the business of the corporation, it must, as
a general rule, be shown that he was duly authorized by the
board of directors. (19 C.J.S. 1001.) In the absence of a special
power in favor or a president of a corporation, no valid
mortgage on the corporation's property can be executed by
him. Such a mortgage is void and cannot be ratified. (Yasuma
vs. Heirs of C.S. de Villa, 499 SCRA 466 [2006]; see Art. 1878,
Civil Code.)
A contract entered into by the president who was also
the chairman of the Board, in behalf of the corporation, was
held void in the absence of any provision in the by-laws con-
ferring upon him the authority to enter into such contracts
independently of the Board of Directors, particularly in view
of the fact that the corporation had a general manager who,
under its by-laws, was given the active management of the
corporation, there being no evidence adduced to show that
the corporation clothed him with apparent power to act for
it. (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763
[1992].)
(c) In the absence of specific provisions governing the
situation and where circumstances of an emergency nature
arise which necessitate the exercise of discretion, the rule on
agency may be applied. (SEC Opinion, June 11,1974.) Article
1881 provides: "The agent must act within the scope of the
agency. He may do such acts as may be conducive to the
accomplishment of the purpose of the agency."
The unauthorized act of an agent is subject to ratification.
(Art. 1910.) Such ratification is implied from the acceptance
of benefits as where a corporation deposited in its current
account the proceeds of a loan obtained by its president,
allegedly without authority, retained and disbursed the same
for corporate purposes. Indeed, such use may be taken as
evidence to belie the claim of lack of authority. (De Asis &
Co. vs. Court of Appeals, 136 SCRA 599 [1985].)
(d) By law, the president shall preside at all meetings

of the directors or trustees as well as of the stockholders or
members, unless the by-laws provide otherwise (Sec. 54.) or
in the absence of the chairman or vice-chairman.
(e) The president of a corporation, by the authority of his
office alone, has no power to delegate the powers and duties
of his position as president to any member of the board of
directors or trustees. Should he become incapacitated to per-
form his functions, what should be done, in the absence of a
vice-president or any specific provision in the by-laws on the
matter, is for the board to temporarily elect an acting presi-
dent. Nevertheless, if the director, who was allowed to dis-
charge the duties of president, performed his functions and
presided over board meetings without objection on the part
fifiof the other members of the board, it would seem that as
long as no irregularity has been committed by him, his past
actuations need not be the subject of further inquiry. (SEC
Opinion, May 21,1971.)
(f) In some corporations, the chairman is made the chief
executive officer with most of the important and substantial
powers and duties ordinarily given to the president, with the
latter as chief operating officer in charge of daily operations
and carrying out the policies and instructions laid down by
the board of directors.
(g) A public officer's effort to make a distinction between
his being the head of a government agency (Chairman of the
Securities and Exchange Commission) and the president of a
building condominium corporation (a sustantial portion of
the building being owned and occupied by SEC) is vacuous
where his being president is inseparable and completely
appendant to his title as head of the agency, that is, he cannot
be the president of the corporation unless he is the head or at
least an officer of the agency. Differently stated, his standing
as president of the corporation arises from or is the necessary
effect of his being the head of the government agency and not
because of anything else, and therefore, his acts as president
must also be viewed in the light of his powers and functions
as head of the government agency. (Yasay, Jr. vs. Desierto, 300
SCRA 494 [1998].)
274
(3) Vice-President. — The vice-president has always been con-

sidered as an officer next-in-rank to the president.
(a) He is commonly referred to as a "fifth wheel," i.e.,
a conditional officer who acts as president in case of death,
absence, or inability of the president to act. "Prima facie, it
would seem that the only function of the vice-president, as
his title indicates, is to replace the president in case of the
latter's death, incapacity, etc." (SEC Opinion, May 20, 1975,
citing 2 Fletcher, p. 774.) He has no authority by virtue of his
office alone to enter into contracts in behalf of the corporation.
However, it is frequently the case that the vice-president of a
corporation is given certain executive duties by the board of
directors or by-laws of the corporation. (American Exh. Nat.
Bk. vs. Ward, III, F, 782, 55 L.R.A. 356.)
(b) Where the by-laws provide that it shall be the duty of
the vice-president to take the place of the president during
the absence of the latter, the vice-president should likewise
be a director. (SEC Opinion, Feb. 5, 1962.) If the vice-presi-
dent is also a secretary or a treasurer, he cannot act as presi-
dent at the same time. (Sec. 25.) There may be more than one
(1) vice-president, including an executive vice-president.
(4) Secretary. — The secretary must be a resident and a citizen
22
of the Philippines. The assumption is that the secretary, being
the custodian of corporate records, should at all times be avail-
able in the regular conduct and operations of the corporation.
He is not allowed to act as president and secretary at the same
time. (Sec. 25.) He need not be a director unless required by the
by-laws.
(a) It is generally the duty of the secretary of a corporation
to make and keep its records and to make proper entries of
2 2 N o
citizenship requirement is imposed by the Code with respect to other corporate
officers. However, in enterprises or industries which are totally or partially reserved for
Filipino citizens, the election of aliens as officers and/or members of the board of direc-
tors is prohibited or restricted under specific provisions of the Constitution and special
laws, (see Sec. 13.) Where an officer is required to be a Filipino citizen, a Filipino with
dual citizenship may be elected provided that prior to such election he/she shall have
complied with the requirements under the "Citizenship Retention and Re-Acquisition
Act of 2003 (R.A. No. 9225.) and its implementing rules and regulations."
the votes, resolutions and proceedings of the shareholders (or

members) and directors (or trustees) in the management of
the corporation and all other matters required to be entered
on the records. (Ballantine, p. 142.) As custodian of corporate
records, corollarily, he keeps the stock and transfer book and
makes proper and necessary entries therein. (Torres, Jr. vs.
(b) He issues notices of meetings and has custody of the
corporate seal which he uses when attesting the signatures
of the officers to important documents. The secretary may
perform other functions.
Where the corporate by-laws state, among others, that the
secretary shall also "send notices of all regular and special
meetings of the members and of the board of directors,"
this connotes that the principal signatory to such notices is
the corporate secretary. The term "to send" may be deemed
synonymous with "issuance" of the notices, in accordance
with sound corporate practices, supported by jurisprudence.
(SEC Opinion, Oct. 1,1981.)
(c) A secretary is not obligated to include everything that
is said in the minutes as long as he accurately transcribes
what has taken place. The minutes, however, should clearly
record the proceedings as they actually occurred and should
positively show what action was taken by the corporation. (5
Fletcher, Sec. 2190.)
(d) A corporate secretary's certification, when regular
on its face, is sufficient for a third party to rely on. It need
not investigate the truth of the facts contained in such
certification. Otherwise, business transactions of corporations
would become tortuously slow and unnecessarily hampered.
(Esguerra vs. Court of Appeals, 267 SCRA 380 [1997].)
(e) The secretary is a ministerial officer who cannot bind
the corporation unless he is especially authorized to do so.
(Ballantine, p. 142.) There may be an assistant secretary.
(5) Treasurer. — The treasurer may not hold at the same time
the position of president. Unlike with respect to the corporate
secretary, the law does not require that the treasurer shall be a
resident and a citizen of the Philippines. (Sec. 25, par. 1.)
276
(a) The treasurer of the corporation is the proper officer

entrusted with the authority to receive and keep the money
of the corporation and to disburse them as he may be autho-
rized.
(b) The view is taken that he has no inherent power to
bind the corporation by contracts or to borrow money in
behalf of the corporation. (Ballantine, p. 143; 13 Am. Jur. 886.)
There may be an assistant treasurer.
Except where otherwise provided by the Constitution or
existing laws, a corporate officer need not be a resident or
citizen. It has been opined, however, that there is all the more
reason for the treasurer to also possess the same qualifications
as the secretary. Being the holder of the purse, the treasurer
is entrusted with the authority to receive, keep, and disburse
funds of the corporation. Furthermore, there is a need to
provide to local investors ample protection from the danger
of getting victimized by foreign nationals. Thus, while the
Corporation Code does not impose Philippine residency
requirement, nevertheless, considering the nature of his
functions, good corporate practice dictates that the treasurer
must be a resident of the Philippines. (SEC Opinions, April
13, 1989 and Jan. 30,1990.)
The Securities and Exchange Commission has adopted as
a matter of policy to require the treasurer of a private corpo-
ration to be a resident of the Philippines. This policy would
prevent the possibility on the part of a non-resident treasurer
to effect the transfer of corporate funds out of the country, for,
in view of his status as a non-resident, he can easily leave the
country and escape. (SEC Opinion, May 27,1991.)
A comptroller is different from a treasurer. The former is
said to be an officer appointed to control accounts and to
check expenditures. By virtue of his office, the authority of
a comptroller is restricted to doing those things which are
usual and necessary in the performance of his duties. (19 Am.
Jur. 2d 599.)
(6) General Manager. — At the present time, the general busi-
ness of corporations is frequently entrusted to the management
of a general manager or managing officer who has power to bind

the corporation by acts within the scope of his apparent author-
ity. Accordingly the general manager or managing officer has
very broad powers, especially as far as third persons are con-
cerned.
(a) He has been deemed by numerous authorities to be
the principal officer of the corporation, having general charge
of those business matters for the carrying on of which the
company was incorporated, and he has the implied or osten-
sible power to do any act which is usual or necessary in the
ordinary transaction of the company's business. This power
has been broadly described as being co-extensive with the
powers of the corporation itself unless specifically restricted.
(b) He has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation, including the
authority to institute proceedings against all accountable
persons in order to protect and preserve the assets of the
corporation and to prevent their dissipation. This authority,
however, is generally qualified as not extending to matters
which are not properly incidental to the management of the
corporate business nor to matters over which the stockholders
alone have control, (see 19 Am. Jur. 2d 599-560; see Board of
Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967];
Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706
[1988].)
In a case, the general manager of a company terminated the
services of certain employees. There was no evidence on record
that he acted maliciously or in bad faith. It was held that he could
not be made personally liable for damages as his act was within
the scope of his authority and was a corporate act. (Sunio vs.
Requisites for board meeting.

Under Section 25, the validity of a corporate act is predicated
on the presence of the following requisites:
(1) Meeting of the directors or trustees duly assembled as a
board, i.e., as a body in a lawful meeting;
278
(2) Presence of the required quorum;

(3) Decision of the majority of the quorum or, in other cases,
a majority of the entire board; and
(4) Meeting at the place (see Sec. 51, par. 1.), time, and man-
ner provided in the by-laws, (see Sees. 47[12], 53,101.)
The board of directors or trustees may adopt its own internal
rules in the conduct of its meetings provided that the same
will not run counter to the provisions of the Code, the articles
of incorporation, and by-laws of the corporation. Whether an
individual director may have a lawyer, accountant, or adviser
present, a meeting of the board is a matter of internal corporate
management upon which the courts properly decline to rule.
(SEC Opinion, Jan. 25, 1990.)
Quorum.
Quorum is such number of the membership of a collective
body as is competent to transact its business or do any other cor-
porate act.
(1) Number required for presence of quorum. — Section 25
provides that "unless the articles of incorporation or the by-
laws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business."
The majority means the number greater than half or more than
half of any total. It would be at least one-half plus one of the
number of directors as fixed in the articles and such quorum
remains the same even though there may be vacancies.
A director who is disqualified by reason of personal interest
(see Sees. 32, 33.) in the matter before a director's meeting, loses,
pro hac vice, his capacity as a director and he cannot be counted
for the purpose of making a quorum, nor can the vote of such
director be counted for the purpose of determining whether
passed by a majority vote. (SEC Opinion, July 21,1994.)
(2) Number required for approval of corporate acts. — As a gen-
eral rule, a majority of the quorum of the board (as distinguished
from majority of the fuel board) will be sufficient to adopt a pro-
posal where the Code requires approval of certain corporate acts
Sec. 25 TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 279
such as the declaration of dividends (Sec. 43.), or entering into a

management contract (Sec. 44.) without stating that it shall be by
majority vote of the board, but if the word "majority" is used, the
number of votes required to approve such acts shall be at least
one-half plus one of the entire membership.
(3) Number provided greater than majority. — Unlike the old
law which sets the quorum at "a majority of directors" without
giving the corporation the power to provide otherwise, the Code
gives the corporation the power to require a number greater than
the majority of the board members to constitute the quorum nec-
essary to transact business. So that, given a corporation with nine
(9) directors, the presence of five (5) members will be sufficient
to hold a board meeting and a vote of three (3) will be enough to
pass a board resolution. However, the same corporation can pro-
vide in its articles of incorporation or by-laws, that the required
quorum shall be seven (7) members. In this case, a vote of at least
four (4) members is necessary for the approval of any board reso-
lution. But the vote of a majority of all the members of the board
or at least five (5) members of the board with nine (9) directors
shall be required for the election of officers, (see Sec. 97, par. 1[3].)
Less than the number to constitute the required quorum can-
not meet and bind the corporation by any act or resolution. All
that the directors or trustees present can do is to adjourn. (Bal-
lantine, p. 130.)
ILLUSTRATIONS:
(1) The by-laws of X Corporation provide for 11 directors.
Only nine directors were elected with two seats remaining
vacant. During a special meeting of the board where only
five directors were present (no quorum), the board passed a
resolution.
Under the law, the required quorum of the board is a
majority of the entire board as it would be constituted if all
the vacancies were rilled, i.e., six directors. Consequently, the
resolution is irregular.
Suppose the absent director subsequently signed the
minutes of the meeting. Will the signature cure the defect of
the first meeting? No.
260
But if the board subsequently met with six directors present

and all of them voted unanimously to approve and ratify said
resolution, such action would have the effect of curing the
defect and giving effect to the resolution.
(2) The by-laws of X Corporation provide for seven (7)
directors and that the required number of directors to constitute
a quorum as well as to carry a vote or approve any resolution in
all its meetings shall be at least 3/4 of all the directors.
Is the presence of five (5) directors sufficient compliance
with the by-laws?
Yes. By mathematical computation, 3/4 of all the directors
would require the presence and concurrent votes of at least 5.25
directors. Under the rule on rounding numbers, the decimal
figure or figures to the right are dropped after increasing the
final remaining figure by 1, if the first digit is 0.5 or greater, (see
Webster, 3rd Int. Dictionary, p. 1979 [1976].) Considering that
0.25 cannot be rounded off into one, the same should be treated
as negligible and need not be considered in the computation
of the required number to constitute a quorum. Hence, five (5)
directors would substantially comply with the by-laws, (see
SEC Opinion, Nov. 7,1989.)
In short, 0.5 or greater is considered 1, and 0.49 or less is
disregarded.
Proxy and constructive p r e s e n c e

not allowed.
(1) On account of their responsibility to the corporation (see
Sec. 23.) and their being voted into office presumably because of
their personal qualifications, directors or trustees cannot validly
act by proxy, (as to meaning of "proxy," see comments under Sec.
58.)
They must attend the meetings of the board of directors or
23
trustees and act in person (Sec. 25, last par.) and as a body. Each
23
A by-law provision allowing the director, who happens to be elected as the chair-
man of the board or presiding officer, to vote only in case of tie or to create one would
defeat the very purpose for which a director is elected. A director cannot be deprived of
the right to vote as he is elected as such purposely to participate in the management of
the corporation. He will not be able to participate in major corporate decisions unless he
is given the right to vote. (SEC Opinion, Aug. 4,1995.)
Sec. 25 TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 281
director or trustee is required by law to exercise his personal

judgment and discretion in running the affairs of the corporation
and he cannot delegate his powers or assign his duties to another
24
director, or to a corporate officer, or to any person.
(2) Section 25 says "every decision of at least a majority
of the directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act. x x x." (par. 2.)
Constructive or electronic presence (including telephone) is not
a substitute for actual presence required under Section 25, which
does not mention the same. Furthermore, participation or voting
by electronic presence is quite hard to prove by admissible
evidence because electronic voices and messages can easily be
dissimulated. (SEC Opinions, March 25,1981 and Sept. 10,1993.)
A n o t h e r corporation a s director
or trustee.
(1) General rule. — A corporation is not qualified to occupy
the position of director (or trustee) because, being a juridical per-
son, it cannot act by itself but only through its officers and agents
and such being the case, it cannot attend personally board meet-
ings as a director and whoever represents it as a director is doing
so in his capacity as the "proxy" of the director or trustee. (SEC
Opinion, June 26,1969, citing 19 C.J.S. 96.)
(2) Through a receiver. — Where the corporation is under
receivership, the appointment of a receiver for a corporation
"The members of the board of directors are required to exercise their judgment
and discretion in running the affairs of the corporation and they cannot be substituted
by others. No one can be elected to take the place of an incumbent director, even as an
alternate in the absence of any vacancy. To allow such alternate would be to have two
directors for the same position, one permanent and the other temporary, a situation that
the law does not permit. (SEC Opinion, May 27,1970.)
Unless allowed by statute, the by-laws cannot provide for the position of "ex-officio
director." The term means a person who becomes a director of the corporation because of
his title to an office, and not because of an election by the stockholders or members. The
Corporation Code does not provide for the office. Since an "ex-officio director" will have
the rights and privileges of a director except the manner of coming to office, such position
cannot be provided for in the by-laws. (SEC Opinioa Sept. 1, 1987.) The Commission,
however, allows as an exception, a provision in the by-laws appointing an "ex-officio"
member of the board, provided there is an express provision that the appointee shall have
no voting right. The status of an "ex-officio" member of the board, therefore, is only for
an honorary member whose role would be to act as adviser during board meetings. (SEC
Opinion, Dec. 19,1994.)
282
terminates at least, for the most part, the powers of the corporate
officers as to the property in possession of the receiver where the
receivership is a general one, and not merely for the preservation
of the company's property pending a suit in reference to it.
A general receiver succeeds to all the rights of the board of
directors and officers of the corporation. Where a corporation is
under a general receivership, it may be represented in the board
of directors/trustees of another corporation through its receiver.
(3) Through an authorized representative. — Only members of a
non-stock corporation can be elected to sit in its board. (Sec. 23,
par. 2; Sec. 92, par. 2.) A candidate should meet the qualification
for membership of the corporation as prescribed in its by-laws.
While a corporation is not qualified to occupy the position
of a trustee, its authorized representative may be elected as a
member of the board if, under the by-laws, such representative
is also considered as a member of the corporation for purposes of
qualifying him as a trustee. (SEC Opinion, Sept. 2,1991.) In such
case, the trustee is not the corporation but the representative.
Sec. 26. Report of election of directors, trustees and

officers. — Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors,
trustees and officers elected. Should a director, trustee or
officer die, resign or in any manner cease to hold office,
his heirs in case of his death, the secretary, or any other
officer of the corporation or the director, trustee or officer
himself, shall immediately report such fact to the Securities
and Exchange Commission, (n)
Report of elections a n d v a c a n c i e s .
25
Section 2D requires the following:
25
The Securities and Exchange Commission has issued the following rules:
(1) All domestic corporations shall keep proper books of the minutes of the elec-
tions of the members of the board of directors and officers showing the date of the elec-
tion, the names of the stockholders or members present and the number of shares owned
or represented who have voted therein, and in case of the election of officers, the names
of the directors who were present and have voted.
Sec. 26 TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 283
(1) The secretary or any other officer of the corporation shall

submit to the Securities and Exchange Commission the names,
nationalities, and residences of the directors /trustees (see Sec.
14[7].) and officers elected, which must be done within 30 days
after the meeting in which they were elected; and
(2) The heirs of the director /trustee or officer in case of the
latter's death, the secretary, or any other officer of the corpora-
tion, or the director/trustee or officer himself, shall immediately
report to the Commission any death, resignation, or cessation in
any manner of holding office of a director/trustee or officer.
The objective sought to be achieved by Section 26 is to give
the public information, under sanction of oath of responsible
officers, of the nature of the business, financial condition, and
operational status of the corporation together with information
on its key officers or managers so that those dealing with it and
those who intend to do business with it may know or have the
means of knowing facts concerning the corporation's financial
resources and business responsibility. (Premium Marble
Resources, Inc. vs. Court of Appeals, 264 SCRA 1 [1996]; Monfort
Hermanos Agricultural Development Corp. vs. Monfort III, 434
SCRA27 [2004].)
(2) A general information sheet shall be filed with the Commission within thirty
(30) days following the date of the annual stockholders' meeting. No extension of said
period shall be allowed, except for very justifiable reasons stated in writing by the presi-
dent, secretary, treasurer or other officers, upon which the Commission may grant an
extension for not more than ten (10) days.
The general information sheet shall state, among others, the names of the elected
directors and officers, together with their corresponding position, title, and capital struc-
ture of the corporation, its line of business, business address and telephone number, if
any, and such other data as the Commission, in a form, may prescribe.
(3) Should a director, trustee or officer die, resign or in any manner, cease to hold
office, the corporation shall report such fact to the Commission within fifteen (15) days
after such death, resignation or cessation of office.
(4) If for any justifiable reason the annual meeting has to be postponed, the com-
pany should notify the Commission in writing of such postponement within ten (10)
days from date of such postponement.
Corporations which have ceased to operate although still existing, are (likewise)
not required to comply with these rules provided that a signed resolution of the board of
directors stating the cessation of business has been previously filed with the Commission.
If there be no board of directors in office, a statement as to the cessation of business signed
and swom to by the president, manager, secretary, treasurer or duly authorized repre-
sentative of the corporation shall be filed in lieu of the resolution of the board of directors.
284
The filling of vacancies in the office of director or trustee is

governed by Section 29.
Sec. 27. Disqualification of directors, trustees or officers.

— No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code, committed within five (5)
years prior to the date of his election or appointment, shall
qualify as a director, trustee or officer of any corporation,
(n)
Disqualification of directors/trustees
or officers.
The above provision disqualifies any one convicted by final
judgment of an offense punishable by imprisonment for a period
exceeding six (6) years or a violation of the Code, as a director/
trustee or officer of any corporation. The obvious purpose is to
avoid the election or appointment of unworthy officers in view
of the fiduciary character of their positions.
26
The offense need not involve moral turpitude. The rule
applies regardless of the nature or classification of the offense as
long as it is punishable by imprisonment for a period exceeding
six (6) years. If the disqualification is based on a violation of
the Code (see Sec. 144.), the duration of the imprisonment is
immaterial, but the commission (not conviction) of the violation
must have taken place within the five (5) years prior to the date
of the election or appointment.
De facto directors/trustees
or officers.
A person is an officer or director de facto where he is in
possession of the office and is exercising the duties thereof under
color or appearance of right, but is not an officer or director de
jure on account of irregularity in his election; or ineligibility; or
In the exercise of its power of suspension, regulation and control over all corpora-
tions, the Securities and Exchange Commission may require certificates of good moral
character for directors/trustees and officers of corporations.
disqualification resulting from a non-residence or not being a

stockholder; or failure to take an oath of office or file a written
acceptance of the trust when required by statute or charter (19
C.J.S. 78.) or corporate by-laws.
(1) Where, for example, the directors are elected before the
amendment increasing the number of directors had become
effective upon its approval by the Securities and Exchange
Commission (see Sec. 16.) and they act as such without objection,
they are de facto directors, (see SEC Opinion, Oct. 21,1974.)
(2) Directors elected through voting by the government of
shares sequestered by it and who in good faith assumed their
duties as such are de facto officers. Only the owners of the shares
or their duly authorized representatives or proxies may vote the
sequestered shares. Sequestration does not divest the owners
of their ownership of said shares, and the election of the board
of directors is distinctly and unqualifiedly an act of ownership.
(Cojuangco, Jr. vs. Roxas, 195 SCRA 797 [1991].)
(3) Conversely, a person is not a de facto officer or director
where he is not holding office under some appearance or color
of right, or where he is not in actual possession of the office,
or where he is not exercising the functions and performing the
duties thereof generally as distinguished from the single instance
in which his authority is questioned.
While the term "de facto officer" is commonly applied to
directors and officers of a private corporation, yet, technically
speaking, it applies to a public officer only. Generally, there
cannot be a de facto office, nor can there be a de facto officer, where
there is no corresponding legally constituted office. (19 C.J.S. 78.)
Powers and rights of de facto officers,

in general.
(1) All powers of dejure official. — De facto directors and officers
may exercise all powers of dejure officials so as to bind all persons
who acquiesce in their management and direction, and they may
continue to exercise these powers in such binding manner until
they are, through proper legal steps, removed from office and
replaced by other legally constituted directors and officers. (In re
286
Pearl Coal Co., 30 F. Supp. 964 aff'd. 115 F [2d] 158; 2 Fletcher, p.
214, cited in SEC Opinions, Oct. 21,1974 and July 4,1975.)
(2) Powers or acts within the scope of corporate business. — A de
facto board of directors may legally perform such acts as are within
the scope of the business of the corporation; and a de facto president
may do such acts pending a determination of who are the lawful
officers of the company, as are necessary to keep its machinery
in motion. Thus, a de facto board of directors may call a special
meeting of the stockholders to consider and act upon any matter
pertaining to the corporation, as to which, under the law, the
stockholders may act at a special meeting. If stock is registered
in one's name on the books of the corporation, de facto directors
have power to issue a certificate of such stock to the owner. A de
facto board of directors may, by the weight of authority, make a
call on unpaid subscriptions on capital stock.
(3) Right to possess office and to salary. — While de facto officers
have the same powers as de jure officers, they do not have the
same rights since they may be ousted from office in a proper
proceeding and they cannot recover the salary of the office. In
the Cojuangco case (supra.), however, the Supreme Court held
that the private respondents who were declared de facto officers
in good faith "are thereby legally entitled to the emoluments of
the office including salary, fees and other compensation attached
to the office until they vacate the same" (2 Fletcher, pp. 213-214.)
or are removed in an action for quo warranto or replaced by the
election of other persons.
Validity of contracts a n d acts

of de facto officers.
(1) As to third persons. — In general, the contracts and acts of
de facto officers, when acting within the scope of their authority,
are just as binding as the acts of the officers de jure, at least so far
as third persons are concerned. (Consumers Alt. Co. vs. Riggings,
208 Cal. 537, 282 Pac. 954; 2 Fletcher, p. 214.)
(a) Inasmuch as de facto officers are held out to the world
by the corporation as its representatives and the corporation
has it within its power to oust a de facto officer and prevents
him from acting as its officer, it is unquestionably the rule

that a corporation is bound by the acts of its de facto officers.
(b) Furthermore, so far as third persons are concerned, the
rule that the acts of de facto officers are binding in their favor is
ordinarily merely another way of stating that the corporation
is bound; and if a contract between de facto officers and third
persons is binding on the latter, then, of course, it cannot be
attacked by the corporation as the act of de facto officers. This
rule seems to be based on the principle of estoppel. Thus, it is
no defense to the foreclosure of a corporate mortgage that the
directors authorizing the mortgage were not legally elected
as such, (see 2 Fletcher, pp. 217-220; 19 C.J.S. 76-78.)
(2) Where de facto officers ousted from office. — Acts of de facto
officers cannot be collaterally attacked for it is only through di-
rect attack (quo warranto proceedings) can the election or appoint-
ment of a de facto officer be questioned, (see Board of Directors of
the PCSO vs. Alandy, 109 Phil. 1058 [I960]; Silen vs. Vera, 64 Phil.
868 [1937]; see also Sec. 20.) And the fact that a de facto officer is
subsequently, in a direct attack, ousted from office, cannot be set
up as a defense by a corporation to escape liability for the acts of
its ostensible officer.
Sec. 28. Removal of directors or trustees. — Any director

or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing two-thirds
(2/3) of the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of two-thirds (2/3)
of the members entitled to vote: Provided, That such
removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose,
and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose
of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on
the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written demand
288
of a majority of the members entitled to vote. Should

the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or
if there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as
well as of the intention to propose such removal, must be
given by publication or by written notice as prescribed in
this Code. The vacancy resulting from removal pursuant to
this section may be filed by election at the same meeting
without further notice, or at any regular or at any special
meeting called for the purpose, after giving notice as
prescribed in this Code. Removal may be with or without
cause: Provided, That removal without cause may not be
used to deprive minority stockholders or members of the
right of representation to which they may be entitled under
Section 24 of this Code. (34a)
Power of stockholders or m e m b e r s
to remove directors or trustees.
(1) Generally. — The law does not specify cases for removal
of a director or trustee nor even require that removal should be
for sufficient cause or reason. The legislative policy is that the
stockholders shall be the ultimate masters, not the directors, "to
make the corporate government responsible to the owners." If
the directors have a right to continue in office to the completion
of their term, in spite of a change in controlling stockholders,
those who acquire control will have to wait or else make some
bargain with the existing directors to resign in order that they
may put in office a new board of directors representing their
views or policy. (Ballantine, pp. 434-435.)
The non-election of a director or trustee after serving for one
(1) year is not a case of dismissal or removal but expiration of his
term.
(2) Where director or trustee elected by cumulative voting. — A
director or trustee may be removed by the prescribed vote without
cause subject to the limitation that a director or trustee cannot be
removed without cause if the effect of such removal is to deprive
Sec. 28 TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 289
minority stockholders or members who united in cumulative

voting to elect such director, of right of representation to which
they may be entitled under Section 24. This proviso is necessary
to protect the minority against any abuse by the majority since
there is no cumulative voting in the removal of directors.
The rule does not apply where the removal is initiated by the
minority stockholders or members themselves.
(3) Where removal done by electing replacement. — The incum-
bent directors or trustees cannot be removed merely by electing
a new set of directors or trustees.
The reason is that the directors or trustees can only be
removed by at least 2 / 3 of the outstanding capital stock or of the
members entitled to vote (Sec. 28.), while vacancies in the board,
when they exist, can be filled by mere majority (or plurality) vote.
(Sec. 24.) Furthermore, the Code requires that the removal "shall
take place either at a regular or special meeting called for the
purpose," and "after previous notice to stockholders or members
of the corporation of the intention to propose such removal at the
meeting." (Sec. 28; Roxas vs. De la Rosa, 49 Phil. 609 [1926].)
(4) Where removal done for disqualification. — A director or
trustee can be removed by following the procedure set forth in
Section 28. In case of disqualification by operation of law, there is
no need to follow the said procedure. A mere declaration of such
disqualification is sufficient to remove him from office. (SEC
(5) Where replacement elected not qualified. — It has been held
that a director who has been removed by the stockholders who
elected another person in his place cannot be compelled to vacate
his office, where it is shown that the successor is not qualified
not being the owner of any share in the corporation and because
under the by-laws of said corporation, "directors shall serve until
the election and qualification of their duly qualified successors."
(Detective and Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255
[1968]; see Sec. 23.)
Under the clear provisions of Section 28, however, the
removal of a director does not depend upon the qualification of
his successors as long as the removal has been duly made.
290
Power of the board to remove

a member.
The board of directors (or trustees) has no power to remove
one of its members as director (or trustee). (Bruch vs. National
Guarantee Credit Corp., 116 A. 738.) Neither can it replace the
vacancy caused by removal effected by the stockholders or
members of the corporation.
The reason is that as officers deriving their title from the
stockholders (or members), they can be removed only by the
power that appointed them. (Ibid.) Since the law expressly
confers the authority to stockholders or members, the board
cannot indirectly usurp or disregard the same. (SEC Opinion,
May 23, 1985.)
Power of court to r e m o v e directors

or trustees.
(1) General rule. — The Corporation Code does not confer
expressly upon the courts the power to remove a director or
trustee or any appointed officer of a corporation on the ground of
mismanagement of its affairs, neglect, or other cause. The power
of removal is in the corporation itself. (2 Fletcher, p. 166.) "The
reason for this rule is that if the courts were given such power
then there should be no reason why the courts should not also
be given the power to designate the one to fill the office, which
should be substituting the judgment of the court for that of the
stockholders" or members. (C.G. Alvendia, op. cit, p. 307.)
(2) Appointment of receiver. — There are abundant authorities,
however, which hold that if the court has acquired jurisdiction to
appoint a receiver (see Sec. 122.) because of the mismanagement
of the directors (or trustees), these may thereafter be removed
and others appointed in their place by the court in the exercise
of its equity jurisdiction. (2 Fletcher, pp. 189-190.) But where the
properties and assets of the corporation are amply protected by
the appointment of a receiver, such removal is unnecessary and
unwarranted in view of the provisions of Section 28 prescribing
the manner of removal of directors or trustees, (see Angeles vs.
Santos, 64 Phil. 697 [1937].)
(3) Institution of quo warranto proceedings. — Under the Rules

of Court, a quo warranto proceeding may be brought against "a
person who usurps, intrudes into, or unlawfully holds or exer-
cises x x x an office in a corporation created by authority of law."
(Rule 66, Sec. 1 thereof; see also Rule 66, Sec. 11.)
Requisites for r e m o v a l of directors

or trustees.
Section 28 specifies the following requisites for the removal
of directors or trustees:
(1) The removal must "take place either at a regular meeting
of the corporation or at a special meeting called for the purpose";
(2) There must be "previous notice to the stockholders or
members of the corporation of the intention to propose such
removal at the meeting"; and
(3) The removal must be "by a vote of the stockholders hold-
ing or representing two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote
of two-thirds ( 2 / 3) of the members entitled to vote."
While a director or trustee can be removed from office as pro-
vided in Section 28, he cannot be removed as stockholder of the
corporation, depriving him of his ownership of shares of stock
therein, without due process of law.
Requirement of notice of m e e t i n g .
(1) For removal. — Section 28 requires that the notice of the
meeting called for the removal of any director or trustee must
expressly state "the intention to propose such removal." A notice
of a special meeting to consider amendments of the by-laws and
"reorganization of the board of directors" cannot be considered
as a notice contemplated under Section 28 as it is couched in
general terms and, therefore, the action of the members which
passed a resolution declaring vacant all the seats in the board
and thereupon nominated and elected a new set of directors, is
not proper and may be questioned by the directors who did not
attend the meeting as this is tantamount to their unjust removal
from office. (SEC Opinion, Dec. 3,1971.)
292
"Previous notice x x x of the intention to propose such

removal" is not required where the meeting is a regular annual
meeting. There is no removal involved when a director or trustee
is re-elected, (supra.)
(2) For choosing replacements. — In case of removal on the vote
of stockholders or members, as the case may be, the vacancy so
created may be filled by election at the same meeting without
further notice, or at any regular or at any special meeting called
for the purpose after giving the prescribed notice. (Sec. 28.) Thus,
the stockholders or members who have removed a director or
trustee are also given the power to choose his replacement at the
same meeting.
Resignation of directors or trustees.

(1) Right to resign at any time. — The fact that the law requires
directors or trustees unless removed to continue in office until
their successors are elected and qualified (Sec. 23.) does not
prevent a director or trustee from resigning at any time. A
corporation, however, continues to exist despite the resignation
of the directors or trustees. It can be dissolved only in the manner
provided for by the Corporation Code, particularly under Title
XIV thereof.
(2) Liability for wrongful resignation. — By reason, however, of
the fiduciary nature of the position they occupy, a director cannot
resign, as part of fraudulent scheme to prejudice the corporation
or its stockholders and make profit to his own advantage or at
an unreasonable time if the immediate consequence would be
to leave the interest of the corporation without proper care and
protection. (Ballantine, p. 217.) If a director quits under circum-
stances which occasioned a deprivation of profits to the corpora-
tion, it is but right that he should repair and make good such
loss.
(3) Form and report of resignation. — In the absence of express
provision, a resignation need not be in any particular form. It
may be either oral or in writing, but it must clearly show an
intent to resign. (2 Fletcher, p. 140.)
The Code requires the resignation of a director or trustee to
Sec. 28 TITLE ID. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 293
be immediately reported to the Securities and Exchange Com-

mission. (Sec. 26.)
(4) Effectivity of resignation. — As a general rule, unless a
future date of acceptance by the corporation is required by the
by-laws, the resignation of a corporate official becomes complete
and his office becomes vacant the moment the resignation is
made to the proper officer or body, and it is not necessary that
the resignation be accepted, or that someone be elected to take
his place, in order to make the resignation effective. This is the
rule, notwithstanding a provision in the statute, charter, or by-
laws that the officers shall hold office until their successors are
duly elected.
The basis of the rule is that where a director (or trustee) thus
resigns, the inaction or refusal of the board of directors should
not impose upon him a future liability or responsibility which he
does not undertake. (SEC Opinion, Jan. 23,1963, citing 2 Fletcher,
pp. 105-106.)
Abandonment of office and failure

to attend meetings.
(1) Acceptance of incompatible office. — Where a director (or
trustee) in a corporation accepts a position in which his duties
are incompatible with those as such director (or trustee), it is
presumed that he has abandoned his office as director (or trustee)
of the corporation. (Mead vs. McCullough, 21 Phil. 95 [1991].)
(2) Absence for an unreasonable length of time. — Similarly,
where a director absented himself from all meetings for nearly
a year and announced his refusal to act as an officer and
stockholder, there is an abandonment of his position as director.
(Dodge vs. Kenwood Ice Co., 204 Fed. 577.) Abandonment by a
director of all his duties for a number of years must be regarded
as an implied resignation of his office as director. (Bartholomew
vs. Bentley, 1 Ohio St. 37.)
(3) Mere absence or continued failure to attend meetings. —
However, mere absence of a director from the country, or
continued failure to attend meetings, etc. where there has been
no resignation, does not have the effect of vacating his seat or
294
terminating his term of office unless there is some express

provision to such effect. (2 Fletcher, p. 132.)
(4) Specified number of unjustified absences as ground for auto-
matic disqualification. — Where the general authority to remove
directors or trustees rests with the stockholders or members, a
corporation, to protect its interests, is empowered to prescribe
in the by-laws (see Sec. 47[5].) attendance in board meetings as a
qualification device, such that a specified number of unjustified
absences may be a ground for automatic disqualification which
need not be approved again by the stockholders or members as
required under Section 28. The by-laws are, in effect, written into
the charter of the corporation and the corporation, directors/
trustees, officers, and stockholders/members are bound by and
must comply with them. (SEC Opinion, May 19,1992.)
Sec. 29. Vacancies in the office of director or trustee. —

Any vacancy occurring in the board of directors or trustees
other than by removal by the stockholders or members or
by expiration of term, may be filled by the vote of at least
a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be
27
filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to
fill a vacancy shall be elected only for the unexpired term
of his predecessor in office.
Any directorship or trusteeship to be filled by reason
of an increase in the number of directors or trustees shall
be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the
meeting, (n)
Vacancies in the office of director

or trustee.
(1) Grounds for replacement during term. — A director or

trustee can only be replaced during his term upon his resignation
or removal (see Sec. 28.) or when his position is otherwise law-
27
or members.
fully vacated. Temporary absence does not result in vacancy as

contemplated in Section 29. (SEC Opinion, April 25,1985.)
(2) Tenure of successor. — The person elected to fill a vacancy
holds office only for the unexpired term of his predecessor. (SEC
(3) Prohibition against election of alternate in case of temporary
vacancy. — In the absence of a vacancy, no one can be elected,
even as an alternate, to take the place of an incumbent director
who is temporarily absent only. To allow such an alternate would
be to have two directors for the same position, one permanent
and the other temporary, a situation that finds no sanction in the
law and is irregular. (Ibid.)
Filling of v a c a n c i e s .
(1) By the stockholders or members. — In a vacancy in the office
of director or trustee may be filled by the stockholders or members
in any of the following cases:
(a) If the vacancy results from the removal by the stock-
holders or members or the expiration of term;
(b) If the vacancy occurs other than by removal or by
expiration of term (see Sec. 23, par. 1.), such as death, resign-
ation, abandonment, or disqualification, if the remaining
directors or trustees do not constitute a quorum for the
purpose of filling the vacancy;
(c) If the vacancy may be filled by the remaining direc-
tors or trustees (infra.) but the board refers the matter to the
stockholders or members; or
(d) If the vacancy is created by reason of an increase in
the number of directors or trustees.
(2) By the members of the board. — If still constituting a
quorum, at least a majority of the members are empowered to fill
any vacancy occurring in the board other than by removal by the
stockholders or members or by expiration of term.
(a) Allowing the remaining directors or trustees to fill up
vacancies avoid the expenses and inconveniences attending
the calling of stockholders' or members' meeting, especially
where there are many of them. (SEC Opinion Jan. 3,1986.)
(b) The power of the board of directors or trustees is not

suspended by vacancies in the board unless the number is
reduced below a quorum.
(c) The board has no power to fill any directorship or
trusteeship by reason of an increase in the number of direc-
tors or trustees. The amendment increasing the number of di-
rectors or trustees which results in a vacancy becomes effec-
tive upon its approval. This is deducible from the last clause
of Section 29 which authorizes the filling of the vacancy "in
the same meeting authorizing the increase of directors or
trustees in the notice of meeting."
ILLUSTRATION:
If four (4) of nine (9) directors died, the remaining five (5)
directors still constitute a quorum, and a majority of the five
28
(5) or three (3) may fill the four (4) vacancies. But if five (5) of
the directors died, the vacancies will have to be filled by the
stockholders in a regular or special meeting duly called for the
purpose.
(d) The phrase "may be filled" in Section 29 indicates that

the filling of vacancies in the board by the remaining direc-
tors constituting a quorum is merely permissive. Corpora-
tions may choose how vacancies in their boards may be filled
up, either by the remaining directors or trustees constituting
a quorum or by all stockholderes or members in a meeting
called for the purpose. However, if the by-laws prescribe the
specific mode of filling up existing vacancies, the provisions
of the by-laws should be followed. It is well-settled that the
by-laws are part of the fundamental law of the corporation
and its directors, officers, and members are bound to comply
with them, (see Sec. 46.)
(3) Where vacancy caused by resignation of a holdover director. —
The stockholders, and not the remaining members of the board,
have the power to elect a director to fill the vacancy. The hold-
Note that the election of corporate officers other than directors or trustees requires
the vote of majority of all the members of the board. (Sec. 25, par. 2.) Such election may be
made after the vacancies in the board have been filled.
over period — that time from the lapse of one year after a mem-
ber's election to the board and until his successor's election and
qualification — is not a part of the director's original term of of-
fice, nor is it a new term.
The theory of delegated power of the board of directors
explains why, under Section 29, in cases where the vacancy in the
corporation's board of directors is caused not by the expiration
of a member's term, the successor so elected to fill a vacancy
shall be elected only for the unexpired term of his predecessor
in office. The law has authorized the remaining members of the
board to fill a vacancy only in specified instances, so as not to
retard or impair the corporation's operations; yet, in recognition
of the stockholders' right to elect the members of the board, it
limited the period during which the successor shall serve only to
the unexpired term of his predecessor in office.
The vacancy referred to in Section 29 contemplates a vacancy
occurring within the director's term of office. When a vacancy is
created by the expiration of a term, there is no more unexpired
term to speak of. Hence, Section 29 declares that it shall be the
corporation's stockholders who shall possess the authority to fill
a vacancy caused by the expiration of a member's term. (Valle
Verde Country Club, Inc. vs. Africa, 598 SCRA 202 [2009].)
Sec. 30. Compensation of directors. — In the absence

of any provision in the by-laws fixing their compensation,
the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided,
however, That any such compensation (otherthan perdiems)
may be granted to directors by the vote of the stockholder
representing at least a majority of the outstanding capital
stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as
such directors, exceed ten percent (10%) of the net income
before income tax of the corporation during the preceding
year, (n)
Compensation of directors or trustees.

Under the law, a private corporation is authorized to provide
in its by-laws for the compensation of directors or trustees. (Sec.
298
47[5].) In the absence of any provision in the by-laws fixing

their compensation, the directors or trustees, as such, shall not
receive any compensation, unless authorized by a vote of the
stockholders representing at least a majority of the outstanding
capital stock or a majority of the members entitled to vote. Any
compensation to the officers of a corporation without proper
authorization in the by-laws or by the vote of the stockholders
may be recovered in a stockholders' suit.
The amount of compensation of directors must be fixed either
in the by-laws or in the resolution of the stockholders; hence,
the stockholders cannot delegate to the board of directors the
authority to fix the amount of their own compensation.
Section 30 also applies to non-stock corporations, (see Sec. 87,
par. 2.)
Directors without authority to grant

themselves c o m p e n s a t i o n .
(1) The directors have no authority to grant compensation to
29
themselves.
(a) For usual and ordinary services as such. — As a general
rule, when directors perform nothing more than the usual
and ordinary duties of their office, they are not entitled to
salary or other compensation. The reason is that directors
render services gratuitously and that the return upon their
shares adequately furnishes the motives for services without
compensation. (SEC Opinion, Sept. 8,1975.)
(b) For services outside their regular duties. — In view of the
clear wording of Section 30, it is doubtful whether a direc-
"There is a radical difference when a stockholder is voting strictly as a stockholder

and when voting as a director. When voting as a stockholder he has the legal right to vote
with a view of his own benefits and is representing himself only; but a director represents
all the stockholders in the capacity of trustee for them and he cannot use his office as a
director for his personal benefit at the expense of the stockholders. (Haldeman vs. Hal-
deman, 176 Ky. 635,197 S.W. 376 [1917], cited in Sulpicio Guevara, The Phil. Corp. Law,
1967 ed., p. 145.)
A stockholder attending a corporate meeting as such is not entitled to per diems for
such attendance; he is acting for himself as an owner of stocks of the corporation. (SEC
Opinion, September 1971.)
tor may be entitled to compensation even when they render

extraordinary or unusual services, i.e., services which are not
properly incidental to their office and are rendered outside
of their regular duties, (see SEC Opinion, June 10, 1974.) Cor-
porate directors presumptively serve without compensation.
While they may assign themselves additional duties, they are
without power to vote for themselves compensation for such
additional duties. (Central Cooperative Exchange, Inc. vs.
Enciso, 162 SCRA 706 [1978].)
(2) A stockholders' resolution or agreement for the payment
of compensation for such services would be valid. (SEC Opinion,
Dec. 29, 1975.) But the stockholders cannot ratify a board of
directors' action fixing their own salaries. Such action being
contrary to law, cannot be ratified. The stockholders themselves,
by the requisite vote, must fix the compensation, (supra.)
Limit to c o m p e n s a t i o n .
Where compensation is granted either in the by-laws or by
the vote of stockholders, the total yearly compensation of direc-
tors, as such, shall in no case exceed 10% of the net income before
income tax of the corporation during the preceding year. This
limitation seeks to curb the practice particularly of close corpora-
tions to grant excessive bonuses to their directors to reduce the
taxable income of such corporations. It is also intended for the
protection of the stockholders as well as the corporate creditors
and prospective investors.
The Insurance Code (Pres. Decree No. 1460.) does not contain
any prohibition as against the board of directors of a corporation
securing insurance policy on the life of its members and making
the directors the beneficiaries instead of the corporation.
However, the premium paid thereon is analogous to a continuing
bonus and gift and thus falls within the context of additional
compensation. A corporation may not be used by its officers or
stockholders as a means of diverting profits or proceeds to the
payment of premium on insurance policies to the enrichment
of its beneficiaries at the expense of, or to the detriment of, its
creditors. (SEC Opinion, Dec. 8,1987.)
300
Per diems of directors.

The power of the board of directors to fix per diems*> for them-
selves is conferred by the law itself.
(1) Whether or not authorized by the by-laws or by the stock-
holders, directors are entitled to receive reasonable per diems. In
view of the real distinction between per diems and compensation, 31
the per diems granted to directors should not be included in their

total yearly compensation for purposes of the 10% limitation.
(2) The phrase "as such directors" in Section 30 is not without
significance for it delimits the scope of the prohibition to com-
pensation given to them for services performed purely in their
capacity as directors or trustees. The implication is that members
of the board may receive compensation in addition to reason-
able per diems, when they render services to the corporation in a
capacity other than as directors or trustees. (Western Institute of
Technology vs. Salas, 278 SCRA 216 [1997].)
(3) Section 30 does not specify, however, who is to set the
amount of the per diems and what amounts shall be considered
"reasonable" under the circumstances. If normal corporate
practice were to be followed, the matter shall be decided by
the directors themselves. Thus, they may easily circumvent the
10% limitation. The stockholders, however, may review a board
resolution fixing or increasing the per diems of its members to
inquire into its reasonableness.
(4) Per diems received without proper authorization or found
to be unreasonably excessive may ordinarily be recoverable in a
stockholders' or members' suit.
w
I t is a daily allowance "given for each day an officer or employee was away from his
home base or permanent station." (Lexal Laboratories vs. National Industries Workers'
Union-PAFLU, 25 SCRA 668 [1968].) It is limited to pay for a day's service. (32 Words
and Phrases 17.) Per diems are paid per attendance in board meetings. Other benefits and
emoluments of directors fall within the term "compensation."
It is any remuneration given for services rendered, like salary which is a com-
pensation paid regularly, as by the month. It does not imply an immediate payment, or
direct return, nor the payment of cash fare or its equivalent. (15 C.J.S. 652.) Compensation
and salary are used interchangeably. While salary connotes a fixed compensation, per
diem relates to expense reimbursement. (SEC Opinion, June 13,1991.) Fare refers to money
paid for transportation of persons or goods.
C o m p e n s a t i o n of corporate officers.
(1) Corporate officers who are not directors. — The reason for
the general rule that directors of a corporation are not entitled to
compensation does not apply to corporate officers who are not
directors. Such officers, not being directors and having no control
over the funds and property of the corporation, even though
they may be stockholders, do not occupy the relation of trustees
to the corporation. (Cheeney vs. Lafayette, B.O.R. Co., 61 111. 570.)
Accordingly, if they are elected or appointed to perform valuable
services for the corporation under circumstances indicating an
intention and expectation of payment, there arises an implied
promise on the part of the corporation to pay a reasonable
compensation for services rendered, even in the absence of an
express contract. (5 Fletcher, p. 378.)
This principle applies as well to employees hired by the cor-
poration.
(2) Corporate officers who are directors. — Directors who are
also corporate officers are entitled, in addition to reasonable per
diems as directors, to compensation as such corporate officers,
and the amount thereof may be fixed by mere board resolution
in the absence of provision to the contrary in the by-laws and
subject to the provision of Section 32. (infra.) It must appear that
the intention is to give them salaries as such officers. Considering
that the board of directors and officers have different functions,
the 10% limitation excludes salaries for services rendered by
officers. (SEC Opinion, Aug. 19,1992.)
Compensation may take the form of salary and fringe
benefits, such as housing, membership in clubs, company cars,
stock options, etc. Needless to say, the compensation must not be
excessive.
ILLUSTRATION:
The by-laws of the corporation are silent as to the salary
of the president. While resolutions of the incorporators and
stockholders provide salaries for the general manager, secretary,
treasurer, and other employees, there was no provision for the
President's salary.
On the other hand, other resolutions provide for per diems
to be paid to the President and the directors for each meeting
attended. This leads to the conclusion that the president and the
302
board of directors were expected to serve without salary, and

that the per diems paid to them were sufficient compensation
for their services. (Lingayen Gulf Electric Power Co., Inc. vs.
Baltazar, 93 Phil. 404 [1953].)
Sec. 31. Liability of directors, trustees, or officers. —

Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such direc-
tors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.
When a director, trustee, or officer attempts to acquire
or acquires, in violation of his duty, any interest adverse
to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes
a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the
corporation, (n)
Nature of directors'/trustees' position.

(1) Agents or trustees for the corporation. — The directors of
a corporation are its agents. They also occupy a fiduciary rela-
tion to the corporation. By numerous authorities they have been
called "trustees" (McEwen vs. Kelly, 79 S.E. 777.), with certain
powers and subject to certain duties in the management of its
property, and each stockholder a cestui que trust according to his
interest and shares. In the performance of their official duties,
they are under obligations of trust and confidence to the corporation
and its stockholders and must act in good faith and for the interest
of the corporation or its stockholders with due care and diligence
32
and within the scope of their authority. (Jackson vs. Ludeling,
21 Wall. [U.S.] 616.) It is settled that in the absence of malice, bad
32
Art. 1173. x x x If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good father of a family shall be
required.
Art. 1887. In the execution of the agency, the agent shall act in accordance with the
instructions of the principal.
In default thereof, he shall do all that a good father of a family would do, as required
by the nature of the business. (Civil Code)
faith, or specific provision of law, a director or officer of a corpo-

ration cannot be made personally liable for corporate liabilities.
(Lowe, Inc. vs. Court of Appeals, 596 SCRA 140 [2009].)
The ordinary trust relationship of directors of a corporation
and stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and guid-
ance of corporate affairs and property and, hence, of the property
interest of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interest and are ultimately
the only beneficiaries thereof. (Gokongwei, Jr. vs. Securities and
Exchange Commission, 89 SCRA 336 [1979], citing Ashaman vs.
Miller, 101 Fed. 2d 85.)
The standard of fiduciary obligation of the directors of corpo-
rations has been emphatically restated, thus:
"A director is a fiduciary, x x x Their powers are powers in
trust. He who is in such fiduciary position cannot serve himself
first and his cestuis second, x x x He cannot manipulate the
affairs of his corporation to their detriment and in disregard
of the standards of common decency. He cannot by the
intervention of a corporate entity violate the ancient precept
against serving two masters, x x x He cannot utilize his inside
information and strategic position for his own preferment.
He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of
the cestuis." (Ibid., citing Pepper vs. Litton, 308 U.S. 309, 84 L.
ed. 281, 289-291.)
"The law will not tolerate the passive attitude . . . without
active and conscientious participation in the managerial functions
of the company. As directors, it is their duty to control and
supervise the day-to-day business activities of the company
or to promulgate definite policies and rules of guidance with
304
vigilant eye toward seeing to it that these policies are carried

out. It is only then that directors may be said to have fulfilled
their duty of fealty to the corporation." (Gokongwei, Jr. vs.
Securities and Exchange Commission, supra, citing Olek,
Modern Corp. Law, Vol. 2, Sec. 960.)
Thus, in the cited case, the Supreme Court held that "the of-
fer and assurance of petitioner," a candidate for board member-
ship in San Miguel Corporation, under whose by-laws he was
disqualified for being engaged in any business which competes
with or is antagonistic to that of the corporation, "that to avoid
any possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed,
would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that
would ensue from such arrangement, it would be inconsistent
with petitioner's primary motive in running for board member-
ship — which is to protect his investments in San Miguel Corpo-
ration. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of
fidelity to the corporation, for the policy of the law is to encour-
age and enforce responsible corporate management."
(2) Agents or trustees for the stockholders or members/creditors.
— So long as a purely private corporation remain solvent, its di-
rectors are agents or trustees for the stockholders or members.
They owe no duties to others. But the moment such a corpora-
tion becomes insolvent, its directors are trustees of all the credi-
tors, whether they are members of the corporation or not, and
must manage its property and assets with strict regard to their
interest and if they are themselves creditors while the insolvent
corporation is under their management, they will not be permit-
ted to secure to themselves by purchasing the corporate property
or otherwise acquiring any personal advantage over other credi-
tors. (Mead vs. McCullough, 21 Phil. 952 [1911].)
Cases w h e n directors/trustees or officers

liable for d a m a g e s .
The general rule is that officers of a corporation are not per-
sonally liable for their official acts unless it is shown that they
Sec. 31 TITLE m. BOARD OF DIRECTORS /TRUSTEES / OFFICERS 305
exceeded their authority. Section 31 enumerates the occasions

when a director or trustee may be held liable for damages and
thus, the veil of corporate fiction may be pierced, as follows:
(1) He willfully and knowingly votes or assents to patently
unlawful acts of the corporation;
(2) He is guilty of gross negligence (not mere "want of or-
dinary prudence" as held in Steinberg vs. Veloso, supra.) or bad
faith in directing the affairs of the corporation; and
(3) He acquires any personal or pecuniary interest in conflict
with his duty as such director or trustee.
In the above instances, the erring board members or officers
33
shall be held jointly and severally (or solidarily) liable for all
damages resulting therefrom suffered by the corporation, its
stockholders or members, or other persons, (see Sec. 65.)
Personal liability of a corporate director/trustee or offi-
cer along (although not necessarily) with the corporation may
also validly attach, as a rule, when he consents to the issuance
of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection
thereto (see Sec. 65.); when he is made, by a specific provision of
law, to personally answer for his corporate action (see Sec. 144;
Pres. Decree No. 115 [Trust Receipts Law], Sec. 13.); and when
he agrees to hold himself personally and solidarily liable with
the corporation. (Tramat Mercantile, Inc. vs. Court of Appeals,
238 SCRA 14 [1994]; Santos vs. National Labor Relations Com-
mission, 20 SCRA 987 [1967]; National Food Authority vs. Court
of Appeals, 311 SCRA 700 [1999]; FCY Corporation Group, Inc.
vs. Court of Appeals, 323 SCRA 270 [2000]; Malayang Samahan
vs. Ramos, 357 SCRA 77 [2001]; Doroton Conglomerate, Inc. vs.
Agcolicol, 400 SCRA 523 [2003].)
In a case, the treasurer of a corporation who was authorized
to issue checks for the corporation was held negligent for signing
"Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not be
an obstacle to those which may subsequently be directed against the others, so long as the
debt has not been fully collected. (Civil Code)
306
the confirmations letter requested by the indorsee and the payee

(indorser) of four (4) crossed checks issued by said treasurer in
favor of the payee for the rediscounting of the crossed checks
when the treasurer was aware that the checks were strictly en-
dorsed for deposit only to the payee's account and not to be
further negotiated, and made personally liable to the resulting
damage to the corporation. (Atrium Management Corporation
Liability of directors/trustees or officers

for bad faith or gross negligence.
(1) Directors or trustees are personally liable for any wrong-
ful disposition of corporate assets and for any loss or injury to
the corporation arising from their gross negligence or unauthor-
ized acts or violation of their duties, (see Steinberg vs. Velasco,
52 Phil. 953 [1929].) But they are not liable for business losses
incurred because of honest bad judgment not amounting to bad
faith or gross negligence, (see Ballantine, p. 160; see also Board
of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)
No one can guarantee the success of a business because there is
always that element of risk. The officers of a corporation are not
insurers of its success.
(2) Neither can a corporate officer be made personally liable
for the money claims of discharged corporate employees where
no malice or bad faith can be attributed to him in terminating
their employment. (Midas Touch Food Corp. vs. National Labor
Relations Commission, 259 SCRA 652 [1996].) Corporate direc-
tors and officers are solidarily liable with the corporation for the
termination of employment of employees if the termination is
done with malice or in bad faith. (Progress Homes vs. National
Labor Relations Commission, 269 SCRA 274 [1997]; Mandaue
Dinghow Dimsum House Co., Inc. vs. National Labor Relations
Commission, 547 SCRA 402 [2008].)
Bad faith or negligence is, of course, a question of fact. It has
been said that "bad faith does not simply mean bad judgment or
negligence; it imparts a dishonest purpose or some moral obli-
quity and conscious doing of wrong. It means breach of a known
duty through some motive or interest or ill-will; it partakes of the

nature of fraud." (Ibid.) It is never presumed. In order to pierce
the veil of corporate fiction, for reasons of negligence by the di-
rector, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be gross. (Magalang vs. Ong,
562 SCRA 152 [2008].)
Liability of directors/trustees or officers

for secret profits.
Furthermore, in the case mentioned in the second paragraph,
the director /trustee or officer guilty of violation of duty shall be
held accountable for the profits which otherwise would have ac-
crued to the corporation. Private or secret profits obtained must
be accounted for, even though the transaction on which they are
made is advantageous or is not harmful to the corporation, or
even though the director/trustee or officer acted without intent
to injure the corporation. The fact that the agreement whereby
a person is to receive a secret profit is made prior to the time he
becomes an officer does not change the rule. And the fact that the
profits were derived from transactions ultra vires (see Sec. 45.)
does not relieve the director/trustee or officer from liability. (19
Am. Jur. 2d 688-689.)
Similarly, a director guilty of disloyal act against the corpora-
tion is required by Section 34 to account to the corporation for
the profits obtained by him from a business opportunity which
should belong to the corporation.
valid until declared void
Sec. 32. Dealings of directors, trustees or officers with the
corporation. — A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following
conditions are present: valid
1. That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
308
3. That the contract is fair and reasonable under the

circumstances; and
4. That in the case of an officer, the contract with the
officer has been previously authorized by the board of
34
directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified
by the vote of the stockholders representing at least two-
thirds (273) of the outstanding capital stock or of two-thirds
(2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable
under the circumstances, (n)
Self-dealing directors/trustees
or officers.
(1) Generally, contract void. — Section 32 renders voidable

at the option of the corporation a contract of such corporation
with one or more of its directors/trustees or officers. Being its
agents and entrusted with the management of its affairs, the
directors or trustees and other officers of a corporation occupy a
fiduciary relation towards it, and cannot be allowed to contract
with the corporation, directly or indirectly, or to sell property
to it, or purchase property from it, where they act both for the
corporation and for themselves. (3 Fletcher, p. 387.)
Section 32 does not require that the corporation suffers injury
or damage as a result of the contract.
(2) Exceptions. — In any of the following cases, the contract
shall be valid and cannot be set aside merely because of the rela-
tionship of the parties:
(a) All the conditions enumerated in Section 32 are pre-
sent;
"or trustees.
(b) Not all the conditions set forth are present but the
corporation (through the board) elects not to question the
validity of the contract without prejudice to the liability of the
consenting directors or trustees for damages under Section
31. In such case, a dissenting stockholder or member may file
a derivative suit in behalf of the corporation (see comments
under Sec. 64.); or
(c) In the case of a contract with a director or trustee,
only the third condition is present, i.e., the contract is fair and
reasonable under the circumstances, if the contract is rati-
fied by the required vote of the stockholders or members in a
meeting called for the purpose, provided that full disclosure
of the adverse interest of the directors or trustees involved is
made at such meeting. If the contract is with an officer of the
corporation, it must have been previously authorized by the
board, i.e., there is a prior board resolution authorizing the
contract.
Section 32 fails to specify whether the vote of the self-dealing
director or trustee shall be counted in the meeting for the ratifica-
tion of the contract.
valid
Sec. 33. Contracts between corporations with interlocking
directors. — Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances,
a contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the inter-
locking director in one corporation or corporations is
merely nominal, he shall be subject to the provisions of
the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial
for purposes of interlocking directors, (n)
Contracts between corporations

with interlocking directors.
(1) Section 33 recognizes as valid a contract between two or
more corporations which have interlocking directors (i.e., one,
310
some, or all of the directors in one corporation is / are also director /

directors in another corporation) as long as there is no fraud and
the contract is fair and reasonable under the circumstances, (see
Sec. 44.) However, if the interest of the interlocking director in
one corporation is substantial, i.e., his stockholdings exceed 20%
of the outstanding capital stock and in the other merely nominal,
i.e., his stockholdings do not exceed 20%, the rules of Section 32 on
self-dealing directors shall apply insofar as the latter corporation
is concerned.
(2) Section 32 pertains to transactions between corporations
with interlocking directors resulting in the prejudice to one of the
corporations. It does not apply where the corporation allegedly
prejudiced is a third party, not one of the corporations with
interlocking directors. (Development Bank of the Phils, vs. Court
of Appeals, 363 SCRA 307 [2001].)
ILLUSTRATION:
X Corporation sold a parcel of land worth P500,000.00 to Y
Corporation for only P300,000.00. Z is a board member of both
corporations.
Evidently, the contract is not fair and reasonable and is,
therefore, voidable on that ground. But if the contract is fair
and reasonable under the circumstances and Z's interest
in X Corporation is merely nominal and in Y Corporation
substantial, the conditions in Section 32 must be present insofar
as X Corporation is concerned, on the theory that the contract
of X Corporation is with Z.
However, if Z's interest in both corporations is nominal or
is substantial, the provisions of Section 32 do not apply but the
contract shall be valid only if there is no fraud and the contract
is fair and reasonable under the circumstances. The corporation
which seeks to uphold the contract has the burden to show that
it is fair and reasonable.
Evils of interlocking directorates.

(1) Validity of by-laws prohibiting interlocking directorates. —
By-laws which prohibit a director of a corporation from serving
at the same time as a director of a competing corporation, have
been upheld as valid and reasonable. (Gokongwei, Jr. vs. Securi-

ties and Exchange Commission, 89 SCRA 336 [1979].) The reason
has been aptly explained, thus:
"The argument for prohibiting competing corporations
from sharing even one director is that the interlock permits
the coordination of policies between nominally independent
firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is
to be faithful to both corporations, some accommodation
may result. Suppose X is a director of both Corporation A
and Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B; at
the same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do
compete — in the sense of vying for economic advantage at
the expense of the other — there can hardly be any reason for
an interlock between competitors other than the suppression
of competition." (Ibid., citing Travers, Interlock in Corporate
Management and the Anti-Trust Law, 46 L. Rev., 819, 840
[1968].)
According to the Report of the House Judiciary Committee

of the U.S. Congress on Section 9 of the Clayton Act, it was
established that "By means of the interlocking directorates one
man or group of men have been able to dominate and control a
great number of corporations . . . to the detriment of the small
ones dependent upon them and to the injury of the public." (Ibid.,
citing 51 Cong. Rec. 9091.) Where two competing firms control a
substantial segment of the market, this could lead to collusion and
combination in restraint of trade. Reason and experience show
that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out
ways of compromising opposing interests, and thus, eliminate
competition. (Ibid.)
(2) No absolute prohibition of interlocking directorates. — Be it
noted that under Section 33, contracts between corporations hav-
ing directors in common are not rendered void or voidable on
312
35
that ground alone. The law recognizes that interlocking direc-
torates are very common in today's business world and to abso-
lutely prohibit such contracts would be impractical and unwise.
But transactions between such corporations should be "subject-
ed to close judicial scrutiny to determine the absence or presence
of fraud or unfairness." For example, where the circumstances
show that the transaction would be of great advantage to one
corporation at the expense of the other, especially where, in addi-
tion to this, the personal interests of the directors or any of them
would be enhanced at the expense of the stockholders, the trans-
action is voidable by the stockholders within a reasonable time
after discovery of the fraud. (19 Am. Jur. 2d 714.)
An individual may be a stockholder in different corporations
and it is not unusual to find a director or corporate officer
occupying the same position in another corporation not only
because he has investments therein but also because his services
may have been proven to be valuable. However, while such
situation is allowable, dealings of interlocking directors are
subject to Sections 31, 33, and 34. (SEC Opinion, May 4,1994.)
disloyal director is excempt from liability.
Sec. 34. Disloyalty of a director. — Where a director,
by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director
risked his own funds in the venture, (n)
Doctrine of "corporate opportunity."

Under this doctrine, a director who, by virtue of his office,
acquires for himself a business opportunity which should belong
35
These transactions usually occur in a parent-subsidiary relationship between cor-
porations. Hence, in some cases, the contract between two corporations may require
representatives of one corporation to sit in the board of the other. To prohibit business
transactions of one corporation with another corporation controlled by the former would
discourage formation of business subsidiaries and investments and thus, hamper capital
market formation in the country. (SEC Opinion, Dec. 21,1992.)
to the corporation, thereby obtaining profits to the prejudice of

such corporation, is guilty of disloyalty and should, therefore,
account to the latter for all such profits by refunding the same,
notwithstanding that he risked his funds in the venture. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. (Paulman vs. Kritzer, 291
N.E. 2d 541.) And, if, in such circumstances, the interests of the
corporation are betrayed, the corporation may elect to claim all of
the benefits of the transaction for itself and the law will impress
a trust in favor of the corporation upon the property interest and
profits acquired. (Guth vs. Loft, Inc., 23 Del. Ch. 255; Ontjes vs.
MacNilan, 5 N.W. 2d 860.)
(1) In a case where the directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products and after establishing a rival business the directors
entered into a new contract themselves with the foreign firm
for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion
of his principal." (Gokongwei, Jr. vs. Securities and Exchange
Commission, 89 SCRA 336 [1979], citing Silakot Importing Corp.
vs. Berlin, 68 N.E. 2d 501, 503.)
(2) An amendment to the by-laws of a corporation requiring
that a director shall not be an officer, manager or controlling
person of, or the owner (either of record or beneficially) of
10% or more of any outstanding class of shares, of any other
corporation or entity engaged in any line of business competitive
or antagonistic to that of the former, was sustained as valid
and reasonable, as "it is obviously to prevent the creation of an
opportunity for an officer or director of San Miguel Corporation,
who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director
to promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders. Certainly, where
two corporations are competitive in a substantial sense, it would
314
seem improbable, if not impossible, for the director, if he were

to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties
above his personal concerns." (Gokongwei, Jr. vs. Securities and
Exchange Commission, supra.)
Section 34 applies to directors. If the disloyalty is committed
by an officer, he is liable under the second paragraph of Section
31.
When doctrine not applicable.

A "corporate opportunity" of which corporate directors
cannot take advantage for their personal benefit is a business
opportunity which has an inherent aptitude of being integrated
into the existing business of the corporation.
(1) The doctrine which is but one phase of the rule of
undivided loyalty on the part of corporate fiduciaries does not
preclude a director from engaging in a distinct enterprise of the
same general class of business as that which his corporation is
engaged in, so long as he acts in good faith.
(2) Neither is the doctrine applicable where the opportunity
is one which is not essential to the corporation's business, or
where the director or officer does not exploit opportunity by
employment of company's resources, or where the director or
officer embracing opportunity personally is not brought into
direct competition with the corporation, (see 9-A Words and
Phrases 393-394.) Note that under Section 34, the profits must
have been obtained by the director to the prejudice of the
corporation.
(3) The doctrine is pursuant to jurisprudence which rules that
one who occupies a fiduciary relationship to a corporation may
not acquire, in opposition to the corporation, property in which
the corporation has an interest or tangible expectancy or which
is essential to its existence. (SEC Opinion, March 4,1982, citing 11
Fletcher, Cy. Corp. 227.) However, this property or business op-
portunity ceases to be a "corporate opportunity" and transforms
into a "personal opportunity" where the corporation is definitely
no longer able to avail itself of the opportunity, which may "arise
from financial insolvency, or from legal restrictions, or from any
TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS 315
other factor which prevents it from acting upon the opportunity

for its own advantage." (Ibid., citing 11 Fletcher, p. 241.)
Ratification by s t o c k h o l d e r s
of disloyal act.
Under Section 34, the guilty director will only be exempt from
liability to the corporation to account for the profits he realized if
his disloyal act is ratified by the vote of the stockholders owning
or representing at least 2 / 3 of the outstanding capital stock.
There is no similar provision in Section 31.
Section 34 is silent on whether the disloyal director shall be
allowed to vote his shares in ratification of his act.
ILLUSTRATIONS:
(1) A is a director of both X Corporation and Y Corporation
which have similar lines of business. If A delivers a "corporate
opportunity" to X and not to Y, considering that Y's chances of
gain from said business opportunity are dim, A cannot be said
guilty of disloyalty to Y. (Ibid.)
(2) In the same illustration above, suppose that a busi-
ness opportunity is presented to A, to whom does it belong? It
belongs to both X and Y, and if A takes advantage of that busi-
ness opportunity to the prejudice of either X or Y or to both,
then, he has to account to either one or both for the profits that
have been obtained by him to the prejudice of the corporation.
If A presents to X, he would be disloyal as far as Y is
concerned and vice versa. However, if A did not profit because
he gave it to either X or Y, he does not come under one or both
for the profits that have been obtained by him to the prejudice
of the corporation of which he is a director. Of course, A will
ultimately profit from the opportunity, being a director and
stockholder of the corporation to which it was given. But in
such case, it is not a profit that accrues to A as an individual
person who happens to be a director of both corporations. It is
a profit that accrues to the entire corporation.
Section 34 applies only where a business opportunity
belongs to the corporation and the director takes advantage
of that business opportunity for his own profit, (see Ibid.,
citing Proceedings of the Batasang Pambansa on the proposed
Corporation Code, Dec. 11,1979.)
316
Sec. 35. Executive committee. — The by-laws of a

corporation may create an executive committee, com-
posed of not less than three members of the board to
be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the board, exceptions.
except with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filling of
vacancies in the board; (3) the amendment or repeal of
by-laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
Executive committee.
(1) Need for an executive committee. — Section 35 recognizes
an already existing corporate practice in the Philippines dictated
by necessity owing to the growing complexities of modern
business, whereby the board of directors delegates to an executive
committee composed of some members of the board corporate
powers to assure prompt and speedy action and solution
to important matters without the need for a board meeting,
especially where such meetings cannot readily be held. Thus, the
committee directly manages the operations of the corporation
between meetings of the board, thereby reducing the work load
of the latter.
(2) Express provision in the by-laws. — Under Section 35, the
executive committee must be provided for in the by-laws and
composed of not less than three (3) members of the board. Where
the by-laws contain an express provision creating an executive
committee, the same may be properly vested by resolution of the
board of directors. (SEC Opinion, Aug. 19,1980.) The board can-
not create or appoint an "executive committee" to perform some
of its functions in the absence of authority in the by-laws. In such
case, the principle on de facto officers may be applied insofar as
third persons are concerned. However, insofar as the corporation
is concerned, the unauthorized act of appointment of an execu-
tive committee may be subject to Section 144, which provides for
penalties in case of violation of any of the provisions of the Code.

(SEC Opinion, Sept. 21,1993.)
(3) Committee contemplated. — The "executive committee"
referred to in Section 35 should be distinguished from other
committees which are within the competence of the board to
create at any time and whose actions require confirmation by the
board itself. It is as powerful as the board, as it actually performs
certain duties of the board, and, in effect, it is acting for the
board itself. And so, because of the nature of the functions of the
executive committee, the authority to appoint such body should
be expressly provided in the by-laws, and a provision in the
by-laws which states that "authorizing the board to create such
committees as the board may deem necessary," is not a sufficient
36
reason for its creation and appointment. (SEC Opinion, Sept. 27,
1993; Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007].)
(4) Matters excepted from delegation by board. — The committee
may act on specific matters within the competence of the board,
as may be delegated to it by the board or in the by-laws, including
those involving the exercise of judgment and discretion, except
those matters enumerated with respect to which only the
board duly called and assembled as such can act upon. Thus,
the executive committee can function as the board itself in
all matters delegated to it other than the excepted matters.
However, the board cannot validly delegate to the executive
committee blanket or general authority to act for the board if the
delegation constitutes in effect an abdication of the corporate
powers and duties vested in it by law. The board cannot delegate
entire supervision and control of the corporation to an executive
committee for this will be violative of Section 23.
(5) Enlargement by board of restrictions. — The restrictions on
the power of the executive committee as provided in Section 35
may be enlarged by the board to cover other matters. Note that
"The board of directors may create an advisory committee under a provision of

the corporate by-laws authorizing it "from time to time to create special committees for
special purposes" but the functions thereof should be purely advisory and should not
in any manner be granted authority to participate in the management and control of
the affairs of the corporation since these powers belong exclusively to the board. (SEC
Opinion, July 7, 1988.)
318
under No. (4), the executive committee may amend or repeal any
resolution of the board unless "by its express terms [it] is not so
amendable or repealable."
(6) Authority to function as the board itself — As a matter of
business practice, the use of an executive committee in many
companies may reduce the directors to little more than a
supervising and ratifying body. (SEC Opinion, July 29, 1985, citing
Ballantine, p. 135.) Subject to the statutory limitations, a properly
constituted committee composed of directors has all the authority
of the board to the extent provided in the resolution of the board
or by-laws. (SEC Opinion, Sept. 16, 1986.)
(7) Membership. — Non-members of the board may be
appointed as members of the executive committee provided
that there are at least three (3) members of the board who are
members of the committee. (Ibid.)
An earlier opinion of the Securities and Exchange Com-
mission states that all members of an executive committee must
be directors of the corporation. However, if all the acts of the
committee will be merely recommendatory in nature and shall
not be carried out without the formal approval of the board of
directors acting through a majority of the quorum, alternate
representation may be allowed in the committee such that some
members thereof may not be directors of the corporation. (SEC
Opinion, July 5,1974.)
(8) Ultimate control by the board. — Where the committee
is made up of, or includes persons who are not directors,
such committee shall be subject to the normal restrictions and
requirements relating to undue abdication of authority by the
board. Thus, while the executive committee may manage the day
to day operation of the business of the corporation, the business
affairs thereof shall be controlled and all corporate powers
shall be exercised under the ultimate discretion of the board as
provided in Section 23. (SEC Opinion, Aug. 29,1988.)
(9) Quorum and voting. — The general rule for quorum
requirements is the same as that for board of directors. A majority
of the committee members (regardless of the classification
of membership into directors/members or non-directors/
members) constitute a quorum.
To bind the corporation, it is essential that the executive com-

mittee acts "by a majority vote of all its members." From this, it
can be inferred that the committee cannot delegate its authority
even to one of its number, (see 18 Am. Jur. 2d 588.)
(10) Membership of a foreigner. — While "foreigners" are dis-
qualified from being elected / appointed as "corporate officers"
in wholly or partially nationalized business activities, they are
allowed representation in the "board of directors" or "governing
body" of said entities in proportion to their shareholdings. (Sec.
2-A, Anti-Dummy Law; Sec. 11, Art. XII, Constitution.)
The reason for the exception is that the board of directors/
governing body performs specific duties as a "body." Unlike
corporate officers, each member of the board of directors/gov-
erning body has no individual power or authority to perform
management functions. The powers delegated to the board of
directors/governing body can only be exercised by it acting as a
body when a quorum is present. Hence, there can be no interven-
tion in the management, operation, administration, and control
of the corporation by the members thereof in their individual ca-
pacity.
An "Executive Committee" is a "governing body" which
functions as the board itself. Thus, membership therein shall be
governed by the same law/rules applicable to the board of direc-
tors as provided in Section 35. (SEC Opinion, June 3,1998.)
— oOo —
Title IV
POWERS OF CORPORATION
Sec. 36. Corporate powers and capacity. — Every cor-

poration incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the cer-
tificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in accord-
ance with this Code;
1
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful busi-
ness of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and
the Constitution;
8. To enter into with other corporations merger or
consolidation as provided In this Code;
9. To make reasonable donations, including those
for the public welfare or for hospital, charitable, cultural,
'See Section 60.
320
Sec. 36 TITLE IV. POWERS OF CORPORATION 321
scientific, civic, or similar purposes: Provided, That no

corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and em-
ployees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated
in its articles of incorporation. (13a)
M e a n i n g of p o w e r s of a c o r p o r a t i o n .
The term powers of a corporation has reference to the corpora-
tion's capacity or right under its charter and laws to do certain
things. (6 Fletcher, p. 230.)
Distinguished f r o m its franchise

a n d objects.
(1) The powers of a corporation must be distinguished from
its primary franchise, which is its right to exist as an entity for
the purpose of doing the things embraced within its powers and
from its secondary franchise, which is the right granted to an
existing corporation to use public property for a public use, but
with private profit. (6-A Fletcher, p. 431.)
(2) Neither must its powers be confused with its objects or
business. A corporation exercises its powers for the purpose
of attaining its objects. Thus, for example, the power to issue
promissory notes, being obviously consistent with and reasonably
conducive to the furtherance of the objects of the corporation, is
a mere power and not an object or business of the corporation. (6
Fletcher, p. 231.)
Relative powers of natural persons/partnerships

and corporations.
(1) Any act not prohibited. — An individual has absolute right
to fully use, enjoy and dispose of his properties, to perform all
acts and to make all contracts without any control except when
they are forbidden by the law. The same is true of an ordinary
partnership. Since a natural person and an ordinary partnership
322
do not owe their existence to the State, they can perform any act
not prohibited by law.
(2) Only powers granted. — On the other hand, the civil rights
of a corporation are widely different. Under the doctrine of limited
capacity adopted by our corporation law (Sec. 2.), a corporation
has only such powers as are expressly granted and those that
are necessarily implied from those expressly granted or those
which are incidental to its existence. It is, therefore, not correct to
say that a corporation has the power to do all acts not expressly
or impliedly prohibited. In other words, the enumeration of
corporate powers implies the exclusion of all other powers
except when they are incidental or implied in conformity with the
generally accepted principle of statutory construction "expressio
unius est exclusio alterius."
The reason for the doctrine is that a corporation owes its

existence to the State and, therefore, it has only such powers as
are expressly and impliedly granted by law. A corporation, as an
artificial person, created by or under authority of law, is without
natural rights, (see also Sees. 36[1], 45.)
Classification of corporate p o w e r s .
The three classes of powers of a corporation are:
(1) Those expressly granted or authorized by law (Sec. 2.),
i.e., those conferred by the Corporation Code and its articles of
incorporation (Sec. 45.);
(2) Those that are necessary to the exercise of the express or
incidental powers (Sees. 236[11], 45.); and
(3) Those incidental to its existence. (Sees. 2, 45.)
The powers of a corporation, however, frequently cut across
lines of the above classification.
A corporation exercises its powers through its board of direc-
tors (or trustees) and /or its duly authorized officers and agents.
Physical acts, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by cor-
porate by-laws or by a specific act of the board of directors. The
certificate of non-forum shopping may be signed for and on behalf
of a corporation by a lawyer who must be "specifically autho-
Sec. 36 TITLE TV. POWERS OF CORPORATION 323
rized" by the board of directors in order to validly sign the cer-

tification. (BA Savings Bank vs. Sia, 336 SCRA 484 [2000]; Ship-
side Incorporated vs. Court of Appeals, 352 SCRA 334 [2001];
BPI Leasing Corp. vs. Court of Appeals, 416 SCRA 4 [2003]; San
Pablo Manufacturing Corp. vs. Comm. of Internal Revenue, 492
SCRA 192 [2006]; Athena Computers, Inc. vs. Reyes, 532 SCRA
343 [2007].) The requirement for signing the certificate applies
even to corporations. The mandatory directions of the Rules of
Court make no distinction between natural and juridical persons.
(Zulueta vs. Asia Brewery, Inc., 354 SCRA 100 [2001].) Note that
Section 36 speaks of "every corporation incorporated under this
Code." Acts or contracts of a corporation outside the scope of its
express, implied, and incidental powers are ultra vires, (see Sec.
45.) An ordinary association cannot exercise the powers, rights,
and privileges granted by the Corporation Code to organizations
registered with the Securities and Exchange Commission.
D e t e r m i n i n g w h e t h e r an act or contract
within s c o p e of corporate p o w e r s .
(1) Sources of powers. — In determining whether a corpora-

tion has power to do an act, it is necessary to:
(a) first, refer to its special charter or its articles of incor-
poration to see whether it is within the express, implied, or
incidental powers conferred;
(b) then, to examine the statutes relating to corporations
to see if the act is prohibited (see Sec. 16.); and
(c) then, in some cases, to consult the general statutes to
see if the act is illegal even in case of natural persons, (see 6
Fletcher, pp. 233-246; also Clark on Corporations, p. 412.)
(2) Express or implied grant of powers. — Unless the power to
carry on a particular business is either expressly or impliedly
conferred thereby, it does not exist. It is illegal for a corporation
to apply either its capital or profits to business for purposes not
contemplated by its charter. (SEC Opinions, Jan. 13 and 25,1988.)
Thus, it is important that the corporation's intended purposes
are stated with sufficient clarity in the articles of incorporation so
as to define with certainty the scope of its business.
324
Express powers explained.

Express powers are the powers expressly conferred upon the
corporation by law. These powers can be ascertained from the
special law creating the corporation, or in case the corporation
is formed under the general incorporation law, from such law,
the general laws of the land applicable to corporations, and its
Section 36 contains an enumeration of powers expressly given
to corporations created under the general incorporation law. The
express powers may be exercised by the corporation whether or
not any such powers are stated in the articles of incorporation
or by-laws, for they are deemed vested in any corporation
organized under the Code. Unless otherwise provided by the
Code, the general powers conferred by Section 36 are to be
exercised by the board of directors, (see Sec. 23.) Other express
powers of the corporation are specifically provided in Sections
37 to 44, which also lay down the conditions under which they
are to be exercised.
The express powers mentioned in Nos. (2), (4), (5), (6), and (8)
of Section 36 are discussed under Sections 11 and 37, 16, 46-48,
62, and 76-81, respectively.
Implied powers explained.

Implied powers are those powers which are reasonably neces-
sary to execute the express powers and to accomplish or carry
out the purposes for which the corporation was formed. These
implied powers are expressly recognized by Section 36(11).
Powers merely convenient or useful (e.g., giving of interest-
free loans) are not implied if they are not essential, having in
view the purposes or objects of the corporation. The purpose or
purposes for which the corporation was created, as stated in its
articles of incorporation, by defining the scope of corporate busi-
ness or enterprise, in effect, delimit its implied powers.
Implied powers classified.

Sometimes it is difficult to determine whether a certain acti-
vity is an implied power or not. However, the following rough
classification embraces most of the implied powers:
(1) Acts in the usual course of business. — This includes such

acts as borrowing money; making ordinary contracts; executing
promissory notes, checks or bills of exchange; taking notes or
other securities; acquiring personal property for use in connec-
tion with the business; acquiring lands and buildings to be used
as places of business or in connection therewith; and selling, leas-
ing, mortgaging or other transfers of property of the corporation
in connection with the mnning of the business. It is evident that
all of such acts, under ordinary circumstances, are necessary in
order to run a business;
(2) Acts to protect debts owing to a corporation. — If a corpora-
tion is a creditor, it may do such acts as may be necessary to pro-
tect its right as such creditor. Thus, a corporation may purchase
property, act as a guarantor or sometimes even run a business
temporarily to collect a debt, where otherwise it would have no
power to do so;
(3) Embarking in different business. — A corporation may not
engage in a business different from that for which it was created
as a regular and a permanent part of its business, (see, however,
Sec. 42.) This is especially true with respect to those particular
kinds of corporate activities which are governed by special laws,
(see comments under Sec. 14[2].) Thus, a corporation not orga-
nized for that purpose cannot go into the banking or insurance
business but it may do any isolated act of banking or insurance
in connection with some express power. So, it is generally held
that a corporation may temporarily conduct an outside business
2
to collect a debt out of its profits;
(4) Acts in part or wholly to protect or aid employees. — While
the cases are divided, the better view favors such acts as build-
ing homes, places of amusement, hospitals, etc. for employees, as
within the corporate powers, (see Sec. 36[10].)
2
Under Section 36(11), a corporation, when necessary in the pursuit of its business,
may borrow money. In corporations other than those formed to engage in the business of
loaning money, this activity is but incidental, and cannot be extended to purposes foreign
to the business and objects for which the corporation was related. However, they may
temporarily loan corporate funds provided certain conditions are complied with. (SEC
Opinion, Jan. 22,1991; see note 2 under Sec. 42.)
In a case where the opening of a post office branch of

the Bureau of Posts at a mining camp of a corporation was
undertaken at the request of the corporation to promote the
convenience and benefit of its employees and their families who
have settled at the mining camp, and after a resolution of the
board of directors was passed wherein the corporation assumed
full responsibility for all cash received by the Postmaster, it was
held that the resolution adopted by the board is not an ultra vires
act (see Sec. 45.), although it is outside the object for which the
corporation was created since the resolution covers a subject
which concerns the benefit, convenience, and welfare of the
corporation's employees and their families (Republic vs. Acoje
Mining Co., Inc., 7 SCRA 361 [1963].); and
(5) Acts to increase business. — Thus, a corporation may con-
duct contests or sponsor radio or television programs, or pro-
mote fairs and other gatherings to advertise and increase its busi-
ness, (see 6 Fletcher, pp. 276-277.)
No fixed rules, however, can be laid down which could be
applied mechanically in determining cases of implied powers.
The question must necessarily depend upon the facts and cir-
cumstances of each case.
For other illustrations of implied powers, see Section 2.
Express powers distinguished

from implied p o w e r s .
(1) The express powers have to do largely with the main
business, objects and purposes of the corporation; the implied
powers, largely with the means and methods of attaining those
objects and purposes.
(2) The former are determined once and for all by the
language of the corporate charter and the applicable law; the
latter may change according to time, place, and surrounding
circumstances.
(3) The test of the former is whether they are found in the
words of the charter or the law; the test of the latter is whether
they are fairly incidental to the former and reasonably necessary
to carry them out (6 Fletcher, p. 234.) in furtherance of the corpo-

ration's business.
Incidental or inherent p o w e r s e x p l a i n e d .
Incidental or inherent powers are powers which a corporation
can exercise by the mere fact of its being a corporation or
powers which are necessary to corporate existence and are,
therefore, impliedly granted. (Sec. 36[11].) As powers inherent
in the corporation as a legal entity, they exist independently of
the express powers, (see Sec. 45.) These incidental powers are
expressly recognized by Sections 2 and 45.
Some of the powers enumerated in Section 36 are incidental
powers which can be exercised by a corporation even in the
absence of an express grant.
Examples of incidental powers are: the power of succession;
to sue and be sued; to have a corporate name; to purchase and
hold real and personal property; to adopt and use a corporate
seal; to contract; to make by-laws; etc. Every corporation has the
implied or incidental power to establish branch offices here or
abroad as the need or exigency of the business of the corporation
may require. (SEC Opinion, May 17, 1990.) If "fund raising
activity" is not embodied among the corporation's authorized
purposes in its articles of incorporation or is neither necessary
nor incidental in the furtherance of its corporate objectives, the
same cannot legally be undertaken by the corporation. (SEC
Opinion, Jan. 17,1995.)
Construction of powers granted.

(1) In construing charters to determine the powers of corpo-
rations, it is well-settled, as in other cases of legislative grants,
that they are to be construed strictly; any ambiguity in the terms of
the corporate charter must operate against the corporation and
in favor of the public.
(2) In the determination of what powers have been conferred,
the whole instrument is to be taken together, including provisos as
expressing the final intention and purposes of the parties.
(3) On the other hand, since grants of corporate franchises
are intended not only for the purposes of private gain but also
328
to subserve public interest, they should be so construed as not

to defeat the purpose of their creation. The intention of the legisla-
ture should always control, it being the general rule that a thing
which is within the intention of the legislature is as much within
the statute as if it were within the letter.
(4) Charters are also to be construed in view of the circumstanc-
es, usages, and practices existing at the time they were granted and it
is not the province of the court to enlarge the powers of a corpo-
ration beyond its charter limitations because circumstances have
changed.
(5) If the charter is susceptible of two meanings, the one
restricting and the other extending the powers of the corporation,
that construction is to he adopted which works the least harm to the
State.
(6) The provisions of a general incorporation law may apply to
corporations operating under special statutes with respect to the
conduct or government of such corporations as to which no spe-
cific provision has been made. (19 Am. Jur. 2d 433-434.)
Ratification of corporate acts.

(1) By stockholders (or members). — They may ratify and ren-
der valid acts done or authorized by the board of directors (or
trustees) but which were beyond the powers of the directors, or
acts done or authorized by the directors at an illegal meeting, or
unauthorized acts of others than the directors, provided the acts
done are such as may be done or authorized by the stockholders.
(2 Fletcher, p. 1103.)
(2) By board of directors (or trustees). — Similarly, a transaction,
if within the powers of a corporation, may be consented to,
ratified, or acquiesced in by the board of directors (or trustees)
if it could be authorized by them. If it is consented to or ratified
with full knowledge of the facts, it is finally and absolutely
binding, and neither the corporation nor individual stockholders
(or members) nor strangers can afterwards sue to set it aside or
otherwise attack its validity. (3 Fletcher, p. 361.)
Donations for political purposes are beyond the power of a
corporation and cannot be ratified, as they are expressly prohi-
bited by the law. (Sec. 36[9]; see Sec. 92[c], National Internal
Revenue Code [R.A. No. 1158, as amended].)
Effect of ratification retroactive.

Except as to intervening rights of strangers, ratification by a
corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and
is equivalent to original authority. Omnis ratihabitio retrotrahitur
(2 Fletcher, pp. 1185-1188.)
Thus, assuming that a corporation has been empowered, as a
secondary purpose, to purchase stocks in other corporations by
its articles of incorporation, although the investment was made
sans the prior consent and imprimatur of the stockholders pursu-
ant to Section 42 of the Code, this legal infirmity is cured by the
subsequent ratification of the required vote of the board of direc-
tors and stockholders. (SEC Opinion, Dec. 5,1963.)
M o d e o f exercising p o w e r s .
(1) No particular mode prescribed by charter. — If the charter
of a corporation prescribes no particular mode for the exercise
of its powers, they may be exercised in any mode, provided it is
not contrary to law, which the stockholders or officers may deem
best. So it has been well said that corporations "may exercise all
the powers within the fair intent and purpose of their creation,
which are reasonably proper to give effect to powers expressly
granted. In doing this, they must have a choice of means adapted
to ends, and are not to be confined to any one mode of opera-
tion."
(2) Particular mode prescribed by charter. — It the charter
requires its powers to be exercised in any particular way by
officers or agents, they cannot be properly exercised in any other
way, for the powers of a corporation are measured by its charter,
not only as to the things which it may lawfully do, but also as to
the mode of doing them. However, as will be noticed in treating
of the effect of ultra vires transactions, the fact that a corporation
exercises a power in a mode different from that prescribed by
its charter will not necessarily prevent it from acquiring rights
or incurring liabilities by reason thereof, (see 6 Fletcher, pp. 284-
286.)
(3) Corporation organized under a special law. — Where a cor-

poration is organized under a special law, the rules governing
corporations organized under the general law have no applica-
tion where the special statutes provide methods for the regula-
tion and control of said corporation. (19 Am. Jur. 2d 439.)
Power to sue and be s u e d .

This power (Sec. 36[1].) is an incident to corporate existence.
As a rule, suits are to be brought by or against the corporation in
its own name.
(1) Dissolved corporation. — Corporations de facto (Sec. 20.)
may sue or be sued but a corporation which has been dissolved
after the expiration of the three (3)-year winding-up period (Sec.
122.) ceases to exist de jure or de facto.
(2) Unregistered corporation. — A corporation not duly regis-
tered in accordance with law has no legal capacity to sue as such.
(3) Foreign corporation. — Neither can a foreign corporation
which transacts business in the Philippines without the neces-
sary license from the Securities and Exchange Commission sue
in the Philippine courts. (Sec. 133.)
(4) Right to claim moral damages. — Obviously, an artificial
person like a corporation cannot experience physical suffer-
ing, mental anguish, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury, (see Art. 2217,
Civil Code.) Nevertheless, a corporation may have a good rep-
utation or business standing which, if besmirched or debased,
may be a ground for the award of moral damages (Mambulao vs.
Phil. National Bank, 22 SCRA 359 [1968].) under the Civil Code.
(Art. 2217 thereof.) But in such case, it is imperative for the claim-
ant to present proof to justisfy the award by showing the exis-
tence of the factual basis of the damage and its causal relation to
the defendant's acts. (Development Bank of the Phils, vs. Court
of Appeals, 403 SCRA 460 [2005]; Manila Electric Co. vs. TEAM
Electronics Corp., 540 SCRA 62 [2007].)
(5) Real party in interest. - As a general rule, the right and
power of a corporation to sue in any court must be brought by
the board of directors or trustees that exercises its corporate
powers (Sec. 23.) on behalf of the corporation or by any of its duly

3
authorized officer or agent. (see Premium Marble Resources, Inc.
vs. Court of Appeals, 264 SCRA 11 [1996]; Shipside Incorporated
vs. Court of Appeals, 352 SCRA 334 [2001]; Philippine Rabbit
Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006];
Munoz vs. People, 548 SCRA 473 [2008].)
(a) Under Section 36(1), read in relation to Section 23,
it is clear that where a corporation is the injured party, its
power to sue is lodged with its board of directors or trustees.
A minority stockholder and member of the board of directors
has no such power or authority to sue on the corporations
behalf. (Tana Wing Tak vs. Makasiar, 350 SCRA 475 [2001].)
(b) Under Section 3, Rule 46 of the Rules of Court, a
petitioner is required to submit together with the petition,
a sworn certification of non-forum shopping and failure to
comply with the requirement is sufficient ground for dis-
missal of the petition. The requirement applies even to cor-
porations, the Rules of Court making no distinction between
natural and juridical persons. A certification not signed by a
person not duly authorized by board resolution renders the
petition subject to dismissal. (Gonzales vs. Climax Mining
Ltd., 452 SCRA 607 [2005]; MC Engineering, Inc. vs. National
(c) Since the signing of verifications and certifications
against forum shopping is not integral to the act of filing cases
in behalf of a corporation, the signing may not be deemed as
necessarily included in an authorization merely to file cases.
There must be a specific authorization to sign the verification
and certification in behalf of the corporation. (Metropolitan
Cebu Water District vs. Adala, 562 SCRA 465 [2007].) The
Supreme Court, however, has held that the following officials
3
In a case, the corporate officer initially failed to show that she had the capacity to
sign the verification and institute the ejectment case on behalf of the lessor company. It
was held that "her act of immediately presenting the Secretary's Certificate confirming
her authority to represent the company may be considered as substantial compliance
and call for the relaxation of the rules of procedure in the interest of justice. (Parichia vs.
Don Luis Dison Realty, Inc., 548 SCRA 273 [2008]; see Asean Pacific Planners vs. City of
Urdaneta, 566 SCRA 219 [2008].)
332
or employees of the company can sign the verification

and certification without need of a board resolution: 1)
Chairperson of the Board of Directors; 2) President of the
Corporation; 3) General Manager or Acting General Manager;
4) Personnel Officer; and 5) an Employment Specialist in a
labor case. The above cases do not provide a complete listing,
the determination of the sufficiency of the authority being on
a case to case basis. The rationale for justifying the authority
of the above corporate officers or representatives to sign the
verification or certificate against forum shopping is that they
are "in a position to verify the truthfulness and correctness of
the allegations in the petition." (Cagayan Valley Drug Corp.
vs. Comm. of Internal Revenue, 545 SCRA 10 [2008].)
(d) A government-owned or -controlled corporation, can
act only through its duly authorized representatives. In a
case in view of the absence of a board resolution authorizing
petitioner's Officer-in-Charge to represent it in the petition
for review, the Supreme Court ruled the verification of non-
forum shopping executed by said officer failed to satisfy the
requirement of the Rules of Court. (Public Estates Authority
vs. Uy, 372 SCRA 180 [2001].) Where the corporate officer's
power as an agent of the corporation did not derive from
such a resolution, it would nonetheless be necessary to show
a clear source of authority from the charter, the by-laws, or
the implied acts of the governing body. (Premium Marble
Resources vs. Court of Appeals, supra; Social Security System
vs. Commission on Audit, 384 SCRA 548 [2002].)
(e) Applying the rule that every action must be brought
or defended in the name of the real party-in-interest (Rules
of Court, Rule 3, Sec. 2.), where a voting trust agreement was
executed by certain stockholders of a corporation which was
not a signatory thereto, the corporation is not the real party-
in-interest in the suit to enforce the agreement. The action
should be filed by the stockholders. (National Investment &
Development Corporation vs. Aquino, 163 SCRA 153 [1988].)
(f) In a derivative suit, however, the minority stockhold-
er or stockholders may bring an action against erring corpo-
rate officers in the name of the corporation with the corpora-
tion as the real party in interest, (see Comments under Sec.

64.)
(g) While it is true that a criminal case can only be filed
against the officers of a corporation and not against the cor-
poration itself, it does not follow from this, however, that the
corporation cannot be a real party-in-interest for the purpose
of bringing a civil action for malicious prosecution. (Cometa
(h) While the power to sue and be sued is lodged with the
board of directors, the physical acts of the corporation like
the signing of documents can be performed only by natural
persons duly authorized for the purpose by corporate by-
laws or by a specific act of the board of directors. (Shipside
Incorporated vs. Court of Appeals, supra.; United Paragon
Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006].)
A resolution of the board of directors may authorize a par-
ticular officer to represent the corporation in all suits brought
for or against it. (Grand Boulevard Hotel vs. Genuine Labor
Organization, 406 SCRA 688 [2003].)
The Supreme Court has ruled that the subsequent sub-
mission of proof of authority to act on behalf a corporation
justifies the relaxation of the Rules for the purpose of allowing
its petition for review on certiorari to be given due course.
(Pascual and Santos, Inc. vs. Members of Tramo Wakas
Neighborhood Assoc., Inc., 442 SCRA 438 [2004].)
(i) Where piercing the veil of corporate entity is justified,
a stockholder or corporate officer may be sued along with the
corporation, (see Comments under Sec. 2.)
(6) Right of shareholders to intervene. — Shareholders are, in
no legal sense, the owners of corporate property which is owned
by the corporation as a distinct legal person, their interest being
inchoate or beneficial in nature, not direct and immediate in
character (see Rules of Court, Rule 12, Sec. 2.); hence, they have
no right to intervene in an action for or against a corporation.
(Saw vs. Court of Appeals, 195 SCRA 740 [1991].)
In a case, however, a stockholder who was one of the largest
individual stockholders of the corporation and was, until it was
334
placed under receivership, exercising control of the company, and

was the one who asked for the appointment of the receiver and
pledged his own property to the extent of P4,000,000 (in 1927)
to assist in the rehabilitation of the corporation was allowed to
intervene in an action by a creditor to foreclose the mortgage
executed by its officers, for "he is injuriously affected by the
mortgage" and "is more virtually interested in the outcome of
this case than [the corporation]." (Phil. National Bank vs. Phil.
Vegetable Oil Co., 49 Phil. 857 [1927].)
(7) Service of summons. — The rationale of all rules with
respect to service of summons on a corporation is that such
service must be to an agent or a representative, in contemplation
of Rule 14, Rules of Court, so integrated with the corporation
sued as to make it, a priori supposable that he will realize his
responsibilities and know what he should do with any legal
papers served on him; one who performs vital functions in the
corporation that it would be reasonable to presume that he would
be able to discuss the importance of paper delivered to him, and
be responsible enough to transmit the same to the corporation.
(Villa Rey Transit, Inc. vs. Rapacon, 81 SCRA 298 [1978]; Vlason
Enterprises Corp. vs. Court of Appeals, 310 SCRA 26 [1999].)
The job of a bookkeeper is so integrated with the corporation
that his regular recording of the corporations' "business accounts"
and "essential facts about the transaction of a business or enter-
prise" safeguards the corporation from possible fraud being
committed adverse to its own corporate interest. The rules on
service of process make service on an "agent" sufficient whether
the agent be general or special. As such, it does not necessarily
connote an officer of the corporation and may include employees
but not those whose duties are not so integrated to the business
that their absence or presence will not toll the entire operation of
the business. Thus, service of summons was held properly made
to a corporation through a bookkeeper or a clerk who was not
even authorized to receive the same on behalf of the corporation,
since what is of paramount importance is that the purpose of
the rule on summons has been attained, thereby, the interest of
speedy justice has been sub-served. (Pabon vs. National Labor
Similarly, summons was held properly served on a corpora-

tion through a claim employee who does not belong to the mana-
gerial staff, but whose role in the corporation is that of a repre-
sentative in relation to cases involving it, i.e., regularly indorsing
summons and complaints against the corporation, following-up,
and attending cases filed by and against it. (Weena Express, Inc.
vs. Rapacon, 534 SCRA 288 [2007].)
P o w e r to a d o p t a n d u s e a corporate s e a l .
A seal is a device (as an emblem, symbol, or word) used to
4
identify or replace the signature of an individual or organization
and to authenticate (as under common law) written matter pur-
portedly emanating from such individual or organization. It may
refer also to the impression of such a device on documents like
certificates of stocks, (see Webster's 3rd New Int. Diet., p. 2046.)
(1) Any seal adopted and used by the corporation (Sec. 36[4].)
may be altered by it at pleasure. Where a corporation adopts a
seal for a special occasion, different from its corporate seal, the
seal adopted is the corporate seal only for that time and occasion.
(9-A Words and Phrases 407.)
(2) A seal is not required for the validity of any corporate act.
Under Section 63, certificates of stock issued by corporations are
required to be sealed with the seal of the corporation. Neverthe-
less, the use of a corporate seal in certificates of stock must be
deemed merely directory rather than mandatory, (see Sec. 22.) A
corporation may exist even without a seal.
(3) At common law, the rule prevailed for sometime that a
corporation could not make a parol contract and could speak and
act only by its common seal. This technical rule of the common
law soon gave way, however, and today in the transaction of its
business, a seal is no more necessary to render valid the acts and
contracts of a purely business corporation than of an individual,
4
But a "corporate seal" is not the same thing as a signature nor is it equivalent to a
signature, but the seal forms a part of the formality of execution, and where an affidavit
is filed on behalf of a corporation denying its signature on a note, under seal, the execu-
tion of the note is not admitted and the plaintiff is put to formal proof of execution. (9-A
and in all such cases where a natural person will be bound with-
out a seal, a corporation will also be bound.
But although it may not be necessary, the reason it is desir-
able to attest all contracts and other acts of the corporation with
its seal, when this is possible, is that the presence of such seal
establishes, prima facie, that the instrument to which it is affixed
is the act of the corporation. (18 Am. Jur. 2d 689-698.)
Power to acquire a n d c o n v e y property.

(1) As an incident to every corporation. — This power (Sec.
36[7].) which is also expressly conferred under the law has always
been regarded as an incident to every corporation. A corporation
needs properties or assets to carry on its business.
While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final
say will have to be with the board of directors whose approval
will finalize the transaction. (Firme vs. Bukal Enterprises & Dev.
Corp., 414 SCRA 190 [2003].)
It has been held by the Supreme Court: "The owning of a
business lot upon which to construct and maintain its offices is
reasonably necessary to a corporation which has developed to
such an extent that its prospects of the future are such as to justi-
fy its directors in making such acquisition. A different rule would
compel important enterprises to conduct their business exclu-
sively in leased offices — a result which would retard industrial
growth and be inimical to the best interests of society. The cor-
poration acquiring such property is entitled to the full beneficial
use thereof. Thus, a corporation whose business may acquire an
appropriate lot and construct thereon an edifice with facilities in
excess of its own immediate requirement. If it has the power to
acquire such lot, construct an edifice and hold it beneficially, the
beneficial administration by it of such parts of the building as
are let to others must necessarily be lawful." (Government vs. El
Hogar Filipino, 50 Phil. 399 [1927].)
(2) As necessary to the transaction of its lawful business. — The
power under Section 36(7) is qualified by the phrase "as the
transaction of the lawful business of the corporation may reason-
ably and necessarily require."
(a) Property obtained by a corporation which is foreign

to the purposes for which it was organized is an unlaw-
ful acquisition. For example, it is not within the power of a
corporation engaged in general shipping business to buy a
provincial parcel of land purposely for redistribution to its
stockholders, as the acquisition is neither necessary nor inci-
dental to the furtherance of its business. (SEC Opinion, Aug.
1,1989.) A corporation may not validly purchase, sell, mort-
gage, etc. assets if it is not in the legitimate furtherance of its
purposes. Accordingly, the exercise of such power cannot be
validated thru the inclusion of such purpose in the articles of
incorporation if the corporation has no interest whatsoever
in the subject transaction. (SEC Opinion, Sept. 25,1991.)
(b) A corporation can legally enter into or form a joint
5
venture corporation to be owned by it and others as stock-
holders. An act is held within corporate powers, if possible,
where it is clearly beneficial to the company, as where the act
leads to increase its business. (SEC Opinion, Nov. 11,1987.)
(c) The transfer or sale of shares owned by a corpora-
tion in another corporation requires approval by the board
of directors of the seller corporation (Sec. 25.) and while a
corporation is expressly empowered by Section 36(7) to dis-
pose corporate assets, such power is subject to the provisions
of Section 40. (SEC Opinion, Aug. 21, 1995.) In the ordinary
course of business, a corporation can borrow funds or dispose
of assets of the corporation only on authority of the board of
directors which normally designates one or more corporate
officers to sign loan documents or deeds of assignment for
the corporation. (Great Asian Sales Center Corporation vs.
(d) To enable a corporation to engage in any of its sec-
ondary purposes, Section 42 must be complied with. Similar-
ly, if the act has the effect of incurring, creating, or increasing
bonded indebtedness under Section 38, or involves the sell-
ing or disposition of all or substantially all the property and
5
See note 8 under Section 2.
338
assets of the corporation under Section 40, the corporation

must comply with the requirements prescribed.
(3) As subject to limitations or restrictions. — The right or
power of private corporations to deal in real as well as personal
property is also subject to limitations or restrictions prescribed
by special laws and the Constitution. Thus:
(a) Under the Constitution, no private corporation or
association may hold alienable lands of the public domain
except by lease for a period not exceeding 25 years, renewable
for not more than 25 years, and not to exceed 1,000 hectares
in area, (see Art. XII, Sec. 3 thereof.) Natural resources such
as coal, petroleum and other mineral oils belong to the State
and cannot be alienated. Their exploration, development and
utilization shall be under the full control and supervision of
the State. (Ibid., Sec. 2 thereof.)
(b) Under the General Banking Law of 2000, any real
property acquired by a bank by way of satisfaction of claims
under the circumstances enumerated in the law shall be dis-
posed of by it within a period of five (5) years or as may be
prescribed by the Monetary Board. The bank may, after said
period, continue to hold the property for its own use, subject
to limitations with respect to ceiling on investments in cer-
tain assets, (see Sees. 51, 52, R.A. No. 8791.)
Power to acquire shares

or securities.
(1) Shares of other corporations. — Section 36(7) authorizes a
private corporation to acquire shares or securities of other corpo-
rations.
(a) Such an act does not need the approval of the stock-
holders if done in pursuance of the purpose or purposes of
the corporation as stated in its articles of incorporation but
when the purpose is done solely for investment, the approv-
al of the stockholders as required by Section 42 is necessary.
(De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247
[1969].) The prevailing view is that a corporation has no pow-
er to purchase or hold stock in another corporation unless it
is one of the activities permitted by its articles of incorpo-

ration. (7 R.C.L. Corp., par. 535; see SEC Opinion, Nov. 20,
1961.)
(b) In any case, the power to acquire shares in other cor-
porations is subject to specific limitations established by the
Code, special laws, and the Constitution. The shares must be
limited to shares of existing corporations because only natu-
ral persons can be incorporators. (Sec. 10.) The exercise of the
power is also subject to the provisions of Section 140. Under
the new Civil Code (Art. 2112.), the pledgee may appropriate
the thing pledged only if, after the second auction, the thing
pledged is not sold.
(c) When a corporation subscribes to the capital stock of
another corporation, it is required, as a rule, to pay its sub-
scription in full. This is based upon the fact that while a cor-
poration has an unlimited capacity to contract obligations,
it has only a limited capacity to pay. (SEC Opinion, July 13,
1961.)
(2) Shares of the acquiring corporation. — The Corporation
Code expressly authorizes a corporation subject to limitations
stated therein to acquire its own stocks, (see Sees. 40, 41, 42, 68,
last par., 77, 81,105.) A corporation may purchase its own stock,
however, only when it has "unrestricted retained earnings" to
cover the shares to be purchased or acquired, (see Sec. 41.)
Corporation as stockholder or member.

The Corporation Code contains no express provision prohi-
biting the organization of a corporation composed of other cor-
porations. Our statutes are silent on this point and our courts
have not as yet passed upon the matter. However, the decided
weight of authority in the United States supports the view that a
corporation may become a member of another corporation. (SEC
(1) A private corporation may, either by original subscription
or by purchase, become a stockholder and member of another
corporation with all the rights and liabilities attaching to such
relation, either when it is expressly authorized by statute or its
charter to do so, or when such subscription or purchase is within
340
its implied powers as a necessary or proper means of exercising

the other powers conferred on it. (Ibid., citing 18 C.J.S., Sec. 35.)
(2) Under the older statutes, corporations were composed
entirely of persons, but it is true now in most States that a
corporation need not be composed entirely of natural persons,
but other corporations may be either incorporators (in practical
effect) or stockholders. The most notable examples are the great
universities of Oxford and Cambridge which are themselves
distinct and separate corporations. (Ibid., citing Oleck, Modern
Corporation Law, Sec. 226.)
Thus, it is legally feasible to organize an incorporated national
federation of distinct corporations or associations. (SEC Opinion,
Oct. 23,1970.)
Power to contribute to charity.

(1) Existence of power formerly unsettled. — Section 36(9)
expressly vests in business corporations the authority to
contribute for purely charitable purposes. Before, the existence
6
of such authority was not settled. While donations to charities
by business corporations have been sustained by various courts
in the United States, they were justified by the presence of some
benefit or advantage accruing to the corporations. The reason
for this judicial attitude against such power is most strongly
'The uncertainty resulted from the absence of any provision in the former Corpora-
tion Law vesting the power, although such authority was impliedly recognized by the
National Internal Revenue Code of 1939 (C.A. No. 466, as amended.) in Section 30(h),
thereof which provision is also found in the National Internal Revenue Code of 1986.
(Pres. Decree No. 1158, as amended.) Said Section 30(h) allows deduction of: "Charitable
and other contributions. — Contributions or gifts actually paid or made within the taxable
year to or for the use of the Government of the Philippines or any political subdivision
thereof for exclusively public purposes, or to domestic corporations or associations or-
ganized and operated exclusively for religious, charitable, scientific, athletic, cultural, or
educational purposes or for the rehabilitation of veterans, or to societies for the preven-
tion of cruelty to children or animals, no part of the net income of which inures to the
benefit of any private stockholder or individual to an amount not in excess of six per
centum in the case of an individual and three per centum in the case of a corporation, of
the taxpayer's taxable income as computed without the benefit of this paragraph, x x x."
Still, it was not clear whether purely charitable gifts, unconnected with the corpora-
tion's business, could be considered valid as constituting a proper use of corporate funds
if made without stockholders' authorization. Section 30(h) is now Section 34(H) of the
National Internal Revenue Code of 1997. (Pres. Decree No. 1158, as amended by R.A.
No. 8424.)
expressed in a case as follows: "A business corporation is

organized and carried on primarily for the profit of stockholders.
The powers of the directors are to be employed for that end. The
discretion of directors is to be exercised in the choice of means to
attain that end and does not extend to a change in the end itself,
to the reduction of or to the non-distribution of profits among
stockholders in order to devote them to other purposes." (Dodge
vs. Ford Motor Co., 204 Mich. 459, 507, cited by Emiliano R.
Navarro, "Corporate authority to contribute to charity," 26 Phil.
Law Journal 188-189 [Oct. 1951].)
(2) Basis of power now expressly granted. — Section 36(9) gives
recognition to the growing tendency to regard charitable gifts as
within the scope of corporate authority. It is based on the modern
view that business corporations are not organized solely as profit-
making enterprises but also as economic and social institutions
with corresponding public responsibility to aid in the betterment
of economic and social conditions in the community in which
such corporations are doing business. As has been better stated:
"Many business have advocated social responsibility
of business corporations. This is important if business cor-
porations and capitalistic society are to survive, x x x. The
inability of business corporations to contribute to purely
charitable purposes may not only impair their public patron-
age, but may create an unfavorable reaction against private
enterprise. In the last analysis, corporate donations, unless
amounting to piracy of the corporate treasury, redound to the
benefit of the corporation, the shareholder, the creditors, and
the public." (E.R. Navarro, op. cit, supra, pp. 191-192.)
"As business is chiefly conducted through the medium of
corporations, it is the corporation, its shareholders, directors,
and officers, who are being made to realize their social
obligations to employees and customers. Consistent with
this development is the changing attitude toward corporate
contributions to charities In times when so much wealth
is concentrated in the hands of incorporated associations, it
is clearly in the public interest to permit such associations to
make contributions to charity." (Ibid., p. 191, citing Stevens
on Corporations [1949], p. 252.)
342
(3) Limitations on power. — Under the Code, the only

limitations imposed on the authority of a corporation to make
donations are: (a) the amount thereof must be reasonable; and
(b) the donations must not be in aid of any political party or
candidate or for purposes of partisan political activity, (see Sec.
95, B.P. Big. 881 [Omnibus Election Code].) It is not required by
law that the donation should inure to the direct financial benefit
of the corporation, nor that the donation be taken from corporate
earnings as long as it is "reasonable" under the circumstances,
taking into account the corporation's financial condition; hence,
it may be paid out of capital, although stockholders and creditors
who may feel aggrieved are not denied the right to question the
exercise of the power, and if found excessive, to seek adequate
relief therefrom.
The limitation that the donations must be "reasonable" pro-
vides a check against scheming directors and officers who may
use the authority as a screen to appropriate corporate funds for
personal ends.
Power to establish p e n s i o n , retirement

and other plans.
(1) Such plans promote corporate purpose or purposes. — The

authority granted to every corporation by Section 36(10) to
establish pension, retirement, and other plans for the benefit
of its officers and employees is a statutory recognition that
disbursement of corporate funds in pursuance of such plans
likewise promotes the purpose or purposes for which the
corporation was formed. Courts have been liberal in finding as a
responsibility of business the comfort, health, and well-being of
its employees. Thus, it has been repeatedly held that the granting
of bonus, gratuity, and incentive compensation to employees as
a reward for work is within the implied powers of a corporation.
Indeed, it is a well-established practice of corporations. The
implied power to build houses, schools, churches, and libraries
for the use of employees has also been sustained, (see Wyatt &
Wyatt, Business Law: Principles and Cases [1963], p. 708; Lopez
Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].)
(2) Such plans promote better relations with corporate employees.

— For a corporation, like an individual employer, is not limited
to payment of wages to its employees but may extend to them
other benefits, such as paid vacations, sick benefits and medi-
cal treatment, and pensions, which are not necessarily charitable
acts but actually part of the employment contract. Contributions
by a corporation to programs directly benefiting employees apart
from the benefits granted under the Social Security Act (R.A. No.
1161, as amended.) are expressly permitted by the Code on the
theory that such activities promote better relations between the
corporation and its employees. (19 Am. Jur. 2d 508-509.)
Under the National Internal Revenue Code (Pres. Decree
No. 1158, as amended.), such contributions to pension trusts are
deductible from gross income (Sec. 34Q] thereof.) and all income
of the funds of such trusts are exempt from income tax, including
the retirement benefits granted thereunder. (Sec. 60[B] thereof.)
Power to act as guarantor.

(1) Power generally withheld. — The general rule is that no
corporation has the power, by any form of contract or endor-
sement, to become a guarantor or surety or otherwise lend its
credit to another person or corporation. A corporation is without
implied power to guarantee for accommodation the contract
of its customers with third persons on the ground that it may
thus stimulate its own business. Such use of its credit is clearly
beyond the power of an ordinary business corporation. (Brinson
vs. Mill Supply Co., Inc., 14 S.E. 2d 505.)
(2) Where corporate business will be advanced. — However,
the general rule will not apply and the court will allow an
accommodation indorsement under an implied authorization
where the guarantee "tends directly to promote the business
authorized by its articles" or "is an appropriate means by which
it may reasonably be expected that the business in which the
corporation is engaged will be advanced." (Woods Lumber Co.
vs. Moore, 191 P. 905.) Thus, a corporation which acquired the
bonds of another corporation in the legitimate transaction of its
business (i.e., payment of debt due it) may sell them, and to make
them more readily marketable, guarantee their payment. (Carlos
vs. Mindoro Sugar Co., 57 Phil. 343 [1932].)
344
(3) Where risk considerable and benefit remote or disproportionate.

Xhe issue is whether the legitimate business activities of the
corporation guarantor were so enhanced as to create an implied
7
power under the charter. But even where there is a possible
benefit to the corporation (e.g., a guarantee to third persons of
the raw material commitments of the corporate guarantor's
supplier), the risk can be considerable and the benefit can be
remote, intangible, and difficult to evaluate. Where they have
been sufficiently remote and incidental or disproportionate to
the risks, courts have held the guarantee unenforceable. (W.L.
Cary, Cases and Materials on Corporations, pp. 59-60 [1969 ed.].)
Sec. 37. Power to extend or shorten corporate term. —

A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by
a majority vote of the board of directors or trustees and
ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by
at least two-thirds (2/3) of the members in case of nonstock
corporations. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this
Code, (n)
'The SEC has allowed mortgage of corporate assets to secure obligations of another
corporation (a) when the mortgage is in furtherance of the interest of the corporation,
and in the usual and regular course of business, or (b) when it is made to secure the
debt of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage
does not fall under either of the two instances, the mortgage may be allowed, subject
to the strict observance of certain conditions, to wit: (a) there is no express restriction in
the articles of incorporation or by-laws; (b) the purpose of the mortgage is not illegal;
(c) the consent of all corporate creditors and stockholders has been secured; (d) the
transaction is not used as a scheme to defraud or prejudice corporate creditors or result
in the infringement of the Trust Fund Doctrine; (e) the mortgage will not hamper the
continuous business operations of the corporation; and (f) the accumulated third party
involved in the mortgage is financially solvent and capable of paying the mortgagee/
creditor. (SEC Opinion, Dec. 10,1991.)
P o w e r to e x t e n d or s h o r t e n corporate
term.
The corporate term of a private corporation may be extended

or shortened by an amendment of the articles of incorporation
approved by the majority vote of the board of directors or trust-
ees and ratified at a meeting of the stockholders representing at
least 2 / 3 of the outstanding capital stock or by at least 2 / 3 of the
members in case of non-stock corporations.
(1) Unlike in Section 16 which governs the amendment in
general of articles of incorporation, the amendment under Section
37 must be taken at a meeting of the stockholders or members
and upon a vote. "Mere written assent" would not be sufficient.
However, the formal requirements in the second paragraph of
Section 16 must be complied with.
(2) The provision on the taking effect of the amendment in
the third paragraph of Section 16 upon its approval by the Secu-
rities and Exchange Commission is not applicable because the
date of approval by the Commission may be before the effectiv-
ity date of the extension or reduction of the corporate term. The
effectivity of the amendment relates back to the date of its filing
with the Commission in case the latter fails to act within six (6)
months from such date for a cause not attributable to the corpo-
ration.
(3) A voluntary dissolution of a corporation may be effected
by amending the articles of incorporation to shorten the corpo-
rate term. (Sec. 120.)
(4) The extension of the corporate term as originally stated in
the articles of incorporation is subject to the limitations or condi-
tions provided in Section 11.
Appraisal right of dissenting stockholders.

Section 37 grants appraisal right to a dissenting stockholder
(right of stockholder in the cases provided by law to demand
payment of the fair value of his shares) "in case of extension of
corporate term." Such right should also be available to a dissent-
ing stockholder if the corporate term is shortened as it is express-
ly recognized in Section 81(1).
346
Note that the appraisal right applies only to a stockholder of

a stock corporation.
Sec. 38. Power to increase or decrease capital stock; incur,

create or increase bonded indebtedness. — No corporation
shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholders' meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the
time and place of the stockholders' meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to
be considered, must be addressed to each stockholder
at his place of residences as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority

of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders' meet-
ing, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and resi-
dences of the persons subscribing, the amount of capital
stock or number of shares of no-par stock subscribed by
each, and the amount paid by each on his subscription in
cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stockholder if
such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created

or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded indebted-
ness shall require prior approval of the Securities and
One of the duplicate certificates shall be kept on file
in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased
and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
showing that at least twenty-five percent (25%) of such
increased capital stock has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed
has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property
the valuation of which is equal to twenty-five percent (25%)
of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission, if
its effect shall prejudice the rights of corporate creditors.
Nonstock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered

with the Securities and Exchange Commission which shall
have the authority to determine the sufficiency of the terms
thereof. (17a)
Power to increase or decrease

capital stock.
An increase or reduction in the capital stock of the corpora-
tion is a fundamental change in the corporation. The authority of
the corporation to take such action is not to be implied but exists
only when expressly conferred. (Peck vs. Elliot, 79 F. 10; 38 L.R. A.
616; 44 A.L.R. 1315.) The power is expressly granted by Section
38.
Section 38 prescribes the procedure to be complied with to
effect a legal increase or decrease of the capital stock (not capital)
which is now subject to prior approval of the Securities and
6
Exchange Commission. (par. 4.) Even holders of non-voting
shares are entitled to vote on the matter, (see Sec. 6, par. 6[5].)
The notice requirement (par. 1.) is mandatory and is obviously
designed to protect the interests of minority stockholders.
The Corporation Code contains no prohibition for a corpora-
tion to increase its authorized capital stock even if the same has
not yet been fully subscribed.
Limitations on the power.

(1) As a general rale, a corporation cannot lawfully decrease
its capital stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for their
unpaid subscriptions without a valuable consideration for such
release, as such an act of the corporation constitutes an attempted
withdrawal of so much capital upon which corporate creditors
are entitled to rely. (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923].)
"An amended articles of incorporation is not required to be filed with the SEC to
reflect an increase in the contributed capital of a non-stock/non-profit corporation. Such
requirement applies only to stock corporations. It is sufficient for purposes of updating
the SEC records, that such fact is reflected in the financial statements. (SEC Opinion, April
V V
2,1998.)
The corporation must submit proof to the SEC that such decrease
will not prejudice the rights of creditors. (SEC Opinion No. 05-10
July 12, 2005.)
(2) A corporation cannot issue stock in excess of the amount
limited by its articles of incorporation; such issue is ultra vires
and the stock so issued is void even in the hands of a bona fide
purchaser for value; and
(3) A reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by law.
(see Sec. 38.)
The Corporation Code contains no prohibition for a corpora-
tion to increase its authorized capital stocks even if the same has
not yet been fully subscribed.
Necessity for increasing capital stock.

(1) Increase of corporate assets. — An increase of the amount of
the capital stock may be for the purpose of effecting an increase
in the corporate assets by authorizing:
(a) the creation of new shares to be offered and issued at
a fixed valuation; or
(b) the increase of the par value shares authorized to be
issued.
(2) Issuance of stock dividends. — The capital stock may also be
increased without any corresponding increase in the corporate
9
assets by the issuance of stock dividends. (18 Am. Jur. 2d 753-
755.)
I t is considered as a cardinal rule in accounting that any business entity has to

reflect at all times the actual business transactions and/or events in its books as they
happen. For this reason, the corporation can already enter the increase in its authorized
capital stock as well as the stock dividends declared in its books as soon as the same has
been approved by the stockholders of the corporation. As to the increase of its authorized
capital stock, however, such increase becomes effective only after its approval and issu-
ance of the certificate of filing of the increase by the Securities and Exchange Commission,
and it retroacts to the day of the approval of such increase by the Commission thereby
making valid the entries made in the books. The stock certificates corresponding to the
stock dividends should bear the date of actual issuance, which must be after the increase
in the authorized capital stock has been approved by the Commission. (SEC Opinion,
July 28,1972.)
350
Necessity of new subscription

for increase.
(1) An increase in the authorized capital stock cannot be
lawfully accomplished without an actual increase in the assets of
the corporation and additional subscriptions except when such
increase is for the purpose of effecting a stock dividend (Sec. 38, par.
2[3]; see Sec. 43.) previously authorized.
If the actual capital is increased by accumulated profits and
such profits are distributed to the stockholders in the form of
stock dividends, the capital stock is increased, for the profits are
reinvested in the corporation by transferring the same from sur-
plus account to a capital account. The amount corresponding to
the stock dividends declared may be used to cover the required
25% subscription to increase the authorized capital stock and, if
sufficient, will obviate the necessity of taking in new subscrip-
tion.
(2) If the increase of the authorized capital stock is not for the
purpose of making effective stock dividends previously authorized, the
law requires to be stated in the certificate the matters mentioned
in paragraph 2(3). It is, therefore, clear that stock dividends once
declared and issued are fully paid, and this rule admits of no
exception. (SEC Opinion, Sept. 9,1977.)
Effectivity of increase or d e c r e a s e .
(1) From and after approval by SEC. — Under Section 38
(par. 4.), the capital stock of a corporation stands increased or
decreased only from and after approval and the issuance by the
Securities and Exchange Commission of its certificate of filing of
increase or decrease of capital stock. Before the issuance of the
certificate of filing of increase of capital stock, the subscribers to
the proposed increase cannot be considered as stockholders and
be accorded the rights as such for the shares subscribed by each.
(2) Use of amount of increase during pendency of application.
— Where the corporation, however, is already a going concern,
"in need of steady supply of funds for its business operations,"
it is the policy of the Securities and Exchange Commission to
allow the use of the amount representing the paid-up capital
received on account of the proposed increase of capital stock so
as not to disrupt its operations even during the pendency of the
application for increase of the capital stock with the Commission.
(SEC Opinion, Jan. 30, 1975.) The funds must be utilized purely
for business operations and duly accounted for or recorded in the
books of the corporation, and further, no loans or cash advances
must be extended to any of the subscribers to the proposed
increase in the capital stock. (SEC Opinion, Dec. 9,1981.)
O v e r - i s s u e of s h a r e s .
(1) An issue of stock by a corporation in excess of the amount
prescribed or limited by its articles of incorporation is ultra vires
and the stock so issued is void even in the hands of a bona fide
purchaser for value. (18 Am. Jur. 2d 757.) An over-issued stock is
also known as spurious stock.
(2) An over-issue of stock does not avoid the original issue.
Moreover, where the corporation is permitted by law to increase
its capital stock, mere irregularities in effecting such increase will
not necessarily invalidate the increased issue. (Ibid., 758.)
(3) There is no over-issue where shares have been surren-
dered and new shares issued in their stead. The new issue in
such case merely takes the place of the shares surrendered nor
is there an over-issue where the corporate structure provides for
conversion of one class of stock into another at the option of a
stockholder, or where stock is issued to replace certificates which
have been lost. (Ibid.)
Unauthorized increase of capital

stock.
An attempted unauthorized increase of capital stock amounts
to an over-issue and such stock is, therefore, absolutely void and
cannot be validated by application of the doctrine of estoppel.
The same is true, as a rule, of an increase which is, in effect,
wholly unauthorized because attempted under such conditions
or in such a manner that is not within statutory authority to make
the increase.
It necessarily follows that:
(1) Subscriptions for such stock are likewise void both on the
ground of illegality and for want of consideration;
352
(2) Subscribers for or purchasers of such stock acquire none

of the rights of stockholders, although bona fide purchasers
of certificates therefor may have a right of action against the
corporation for damages;
(3) Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on a winding up
as stockholders for unpaid subscriptions, and are not subject to a
statutory liability to creditors imposed upon stockholders; and
(4) Subscribers for or purchasers of such shares from the
corporation may recover from it money paid to it under their
subscription or purchase as upon a failure of consideration, or
breach of warranty of the existence of the thing sold, unless they
are precluded from such relief as parties in pari delicto.
Failure to make a specific offer to return dividends received
has no material bearing upon the subscriber's right of action.
Where the corporation cancels the illegal shares and repays to
the subscribers the money paid by them therefor, they are not
liable to or for creditors for the amount so repaid. (18 C.J.S. 750.)
Subscription r e q u i r e m e n t in case
of increase of capital stock.
(1) Subscriptions and payments based on capital stock as increased.
— A recognized authority gave the opinion that the proviso in
Section 17 (par. 4.) in the old law (now Sec. 38 [par. 4].) "requires
subscriptions and payments on account of subscriptions to the
increased capital of the corporation in the same proportion to the
new authorized capital or new non-par shares as such subscrip-
tions and payments must bear to the original authorized capital
or shares. So, before the Securities and Exchange Commission
files [accepts] any amendment increasing the capital stock, the
treasurer of the corporation must file an affidavit showing that at
least 20% [now 25%] of the increase in capital stock is subscribed
10
and 25% of the subscription is paid.
'"Where the stockholders authorized the increase of the capital stock of a corpora-
tion but the minimum legal requirement of 25% subscription and 25% payment could
not be met so that no certificate of increase in capital stock was filed with the Securities
and Exchange Commission, the board of directors, acting in good faith, may authorize
the refund to the subscribers of subscription payments to the proposed increase. (SEC
Opinion, Feb. 3,1971, p. 262.)
(a) New subscriptions necessary. — Thus, if the corporation
has an authorized capital stock of P20,000.00 and it is pro-
posed to increase it to P50,000.00, an increase of P30,000.00,
subscriptions must be obtained for not less than P6,000.00
[now P7,500.00] and payments in cash or in property amount-
ing to not less than Pl,500.00 [now Pl,875.00] must be made
on account of such subscriptions. (Fisher, op. cit, p. 61.) This
assumes that the total subscriptions and payments to the
original capital stock are in the same proportion.
(b) No new subscriptions necessary. — Without the proviso,
it is quite clear that the pre-incorporation subscription
requirements under Section 13 can easily be circumvented.
But where at the time of the increase, in the same example,
at least P12,500.00 worth of shares, which represent 25% of
P50,000.00, the amount of the capital stock as increased, had
already been subscribed and P3,125.00 (now minimum of
P5,000.00) or 25% thereof paid, it would seem that no new
subscriptions are necessary. In such case, the reason for
requiring new subscriptions no longer exists. It is to be noted
that Section 38 (par. 4.) requires "at least twenty-five percent
(25%) of such increased capital stock has been subscribed x x x,"
or, in other words, "such capital stock as increased," and not
"such increase in capital stock."
(2) Subscriptions and payments based on additional amount
by which capital stock is increased. — The SEC has construed the
phrase to mean the additional amount by which the capital stock
is increased. A contrary rule may defeat the intention to infuse
capital. Furthermore, the proceedings of the Batasang Pambansa
[now Congress] show that the intention is to require at least 25%
11
of the proposed increase. (SEC Opinion, July 29, 1993.) Sub-
sequently, it opined that the phrase "of such increased capital
stock" refers to the total subscription (not to individual subscrip-
tions) and regardless of class. Thus, when the corporation has
several classes of shares, the 25% subscription requirement may
"Where the increase in capital stock consists of two (2) or more classes of shares, the
SEC allows either of the following ways of applying the 25%-25% rule: to be applied on
each of the classes of shares representing the increase in capital stock; or to be applied on
the total amount representing the increase in capital stock. (SEC Opinion, Aug. 4,1992.)
354
be applied only to one class of shares or it may distribute it to all

classes of shares, equally or unevenly. (SEC Opinion, April 11,
1995.)
No treasurer's affidavit is required to be attached in case of
decrease of capital stock.
Ways of increasing (decreasing)

authorized capital stock.
There are at least three (3) ways by which the authorized
capital stock may be increased (decreased):
(1) By increasing (decreasing) the number of shares autho-
rized to be issued without increasing (decreasing) the par value
thereof;
(2) By increasing (decreasing) the par value of each share
without increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares
authorized to be issued and the par value thereof.
ILLUSTRATION:
Assume that the authorized capital stock of X Corporation
is fixed at P1,000,000.00 divided into 100,000 shares with a par
value of P10.00 per share. The capital stock may be increased
(or decreased) as follows:
The number of shares is increased (decreased) to 150,000
(75,000) shares with the same par value of P10.00 each share; or
the par value per share is increased (decreased) to P15.00 (P5.00)
without increasing (decreasing) the number of authorized
shares; or the number of shares is increased (decreased) to
150,000 (75,000) and at the same time increasing (decreasing)
the par value of each share to P15.00 (P5.00).
Increase by w a y of stock d i v i d e n d s .
Stock dividends (see Sec. 43.) are ordinarily declared out of
the authorized but unissued shares of the corporation.
A corporation, however, may also increase its capital stock
by way of stock dividends without touching its unissued
shares as long as there are sufficient retained earnings to cover
the increase, (see Sec. 62[5].) If the proposed stock dividend

would result in the issuance of shares of stock in excess of the
corporation's authorized capital stock, the over-issue is null and
void. Such dividend declaration may be validly done provided
that the corporation simultaneously increases its capital stock
and applies the proposed stock dividends as full payment of the
subscriptions to the capital stock increase. (SEC Opinion, July 30,
1969.)
Par v a l u e or no par v a l u e s h a r e s
for t h e authorized increase.
Under the authority granted under Section 38 and under
Section 6, the increased capital stock may be divided into par
value shares and no par value shares. In other words, the increase
in capital stock could belong to any of these two classes of shares
or to both.
The issue of no par value shares for the authorized increase
affords a means by which the corporation may attract investors.
In the course of its business, the corporation may meet reverses.
Its assets are thereby reduced and the true money value of the
issued shares may be below their par value. Under the prohibi-
tion contained in Section 62 (par. 1.), the unissued shares cannot
be sold for less than their par value. Buyers, however, will be
reluctant to pay par value because the outstanding shares have a
book value or actual value which is below par. All the while the
corporation is in need of more capital. So in this particular case,
it may decide to issue no-par value shares, the selling price of
which may be fixed in the manner provided for in Section 62 (last
par.) of the Code. (C.G. Alvendia, op. ext., p. 199.)
Reduction of capital stock.

(1) By decrease of number of authorized shares. — When a corpo-
ration is authorized to reduce its capital stock, it may do so also
by redeeming redeemable shares (see Sec. 8.) or purchasing its
snares (see Sec. 41.) and cancelling or retiring the same, includ-
ing treasury shares, (see Sec. 9.) Or it may accept a surrender of
shares and give the holders in exchange therefor a proportionate
amount of its assets, provided no rights of creditors are involved,
or issue bonds for that purpose or exchange another class of stock

for that retired, or exchange its outstanding shares for a smaller
number of shares. Or it may do so by cancelling shares which
have not yet been issued.
A statute providing that a corporation, "at any meeting called
for the purpose, may increase or reduce its capital stock and the
number of shares therein," does not authorize a corporation to
reduce its capital stock by purchasing the shares of a particular
stockholder, unless all consent. In order that such reduction may
operate justly to all the stockholders, each stockholder should be
allowed to surrender such proportion of his stock as the amount
of the proposed reduction bears to the whole amount of the capi-
tal stock. (6-A Fletcher, p. 385.)
(2) By decrease of par value of authorized shares. — When a
corporation lawfully reduces its capital stock pursuant to Section
38, the shares which are retired or reduced no longer exist for any
purpose. If the shares acquired are not retired or cancelled, no
decrease in capital stock is effected, for the shares exist as treasury
shares, (see Sec. 9.) The capital stock may be decreased, however,
without decreasing the number of authorized shares into which
it is divided as indicated in the articles of incorporation by
decreasing the par value of such shares. The par value of shares
of stocks of a corporation may be reduced for the purpose of
eliminating its deficit.
The reduction or decrease surplus or surplus arising from the
reduction of capital stock pursuant to Section 38 in excess of the
deficit may only be declared as stock dividends since it partakes
of the nature of paid-in capital in excess of par value, (see SEC
Opinion, Aug. 8,1991; see Sec. 122.)
Effect of reduction on liability

for unpaid subscription.
(1) As against corporate creditors. — A corporation has no
power to release an original subscriber to its capital stock
from the obligation of paying for his shares without a valuable
consideration for such release, and as against creditors, a
reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute. (18 C.J.S.
746, 873-874.) Under Section 38 (par. 4.), it is expressly provided

"that no decrease of the capital stock shall be approved by the
Commission, if its effect shall prejudice the rights of corporate
creditors."
Hence, "a resolution adopted at a meeting of stockholders
to the effect that the capital should be reduced by 50% and the
subscribers released from their obligation to pay the unpaid
balance of their subscription in excess of 50% of the same, was
an attempted withdrawal of so much capital from the fund
which the company's creditors were entitled ultimately to rely
and having been effected without complying with the statutory
requirements, was wholly ineffective." (Phil. Trust Co. vs. Rivera,
44 Phil. 470 [1925].)
(2) As between the corporation and the stockholders. — One object
of requiring capital stock to be diminished only at corporate
meetings formally called is to insure publicity and to warn the
public dealing with the corporation of the intended change.
This is incompatible with secret arrangements and contrivances
reducing capital stock by buying in the shares or by other devices,
so as to release stockholders from their obligations to creditors.
But failure to give the prescribed notice will not invalidate the
reduction, if it is otherwise valid as between the corporation and
the stockholders where all the stockholders consent (18 C.J.S.
747.), subject to the rights of corporate creditors.
Distribution of surplus on reduction.

(1) Where there is no impairment of capital. — Upon a reduction
of capital stock, if capital has not been impaired by losses, there
necessarily occurs a surplus of assets to the extent of the reduc-
tion. Unless the rights of creditors will be affected or the capital
impaired, the directors may make an equitable distribution of
such surplus or so much thereof as may not be required in carry-
ing on the business for the best interests of the stockholders.
(2) Where reduction is made to meet impairment. — In other
words, there can be a distribution of only those assets over and
above the amount equal to the par value of the outstanding
reduced capital and the amount necessary to discharge the
existing corporate indebtedness. Thus, as a general rule, where
capital stock is impaired and a reduction is made merely to meet
358
that impairment, there will be no distribution of assets among

the shareholders. (18 Am. Jur. 2d 764-765.)
(3) Distribution not mandatory. — The distribution to stock-
holders of surplus remaining after a reduction of capital stock is
authorized by the Code (Sec. 122, last par.) but cannot be com-
pelled. It must be borne in mind that the funds resulting from
such reduction represent capital and not profits.
ILLUSTRATIONS:
(1) X Corporation has an authorized capital stock of
P1,000,000.00 divided into 100,000 shares with a par value of
P10.00 each. Only 60,000 shares with a par value of P600,000.00
were subscribed and fully paid for. X Corporation can reduce
its authorized capital stock only after complying with the
formalities prescribed by Section 38.
If X Corporation reduces its authorized capital stock to
P600,000.00, the unissued 40,000 shares are considered retired
and no longer exist for any purpose. Here, there is no reduction
12
of the legal capital of P600,000.00.
(2) If, in the same example, there is an unpaid subscription
of P100,000.00 representing 10,000 shares, X Corporation can
reduce its authorized capital stock provided that it does not
work to prejudice the right of corporate creditors, (par. 4.)
The reduction of capital stock to, say, P500,000.00 will, in
effect, release the subscribers from liability on their unpaid
subscriptions. It will also reduce the legal capital by P100,000.00.
If the net assets of X Corporation are less than P500,000.00, the
corporation cannot reduce its capital stock to said amount if it
will adversely affect corporate creditors.
(3) Suppose all the 100,000 shares were subscribed and
fully paid for. If the authorized capital stock is reduced to
P600,000.00, the surplus of P400,000.00 may be distributed
unless the rights of corporate creditors are affected. Thus, if at
the time of reduction, the net assets of the corporation amount
only to P700,000.00, then only the reduction surplus of P100,000.00
may be distributed. It is in the nature of a liquidating dividend.
(4) Suppose, in the preceding example, the authorized
capital stock was reduced to P700,000.00 or to 70,000 shares
,2
See definition under Section 6.
merely to meet the impairment of the corporation's capital.

In this case, no distribution of assets can be made among the
stockholders.
P e r s o n s entitled to q u e s t i o n increase
or d e c r e a s e of capital stock.
(1) An unauthorized increase or reduction of capital
stock may be attacked and avoided by the corporation itself
or by dissenting stockholders in the absence of an estoppel;
or by creditors of the corporation, or by a receiver or assignee
representing them, insofar as the transaction affects their rights.
(2) And, as we have seen, an unauthorized increase of stock
may be attacked by subscribers for or purchasers of such stock in
avoidance of their subscriptions, or for the purpose of recover-
ing what they have paid, unless precluded as being in pari delicto.
(18 C.J.S. 753; see National Exchange Co. vs. Dexter, 51 Phil. 610
[1928]; Salmon Dexter Co. vs. Unson, 47 Phil. 649 [1925].)
P o w e r to incur, create, or increase

bonded indebtedness.
A corporate bond is an obligation to pay a definite sum of mon-
ey at a future time at fixed rate of interest.
The power of a corporation to incur, create, or increase bond-
ed indebtedness or indebtedness secured by its notes or bonds is
likewise expressly conferred by Section 38. But it is also a power
implied from the express powers.
(1) Stock and non-stock corporation. — A business corporation,
in the absence of restriction, may borrow money whenever the
necessity of its business so requires and issue security or custom-
ary evidence of debt such as notes, bonds or mortgages. (19 Am.
Jur. 2d 496.) Under Section 38 (par. 5.), non-stock corporations
are now expressly authorized to incur, create, or increase bonded
indebtedness.
(2) Procedure and formalities. — The procedure prescribed in
Section 38 for incurring bonded indebtedness is the same as the
procedure for increasing or decreasing the capital stock except
that the certificate need not state the matters set forth in Nos. (2)
and (3) and is not required to be accompanied by the sworn state-
ment of the treasurer of the corporation concerning the amount

of the increased capital stock subscribed and paid. The prescrip-
tion of the formalities with respect to "bonded indebtedness"
only, implies of necessity a distinction between debts which are
"bonded" and all other debts. (Fisher, op. cit., p. 312.)
(3) Shares and members entitled to vote. — Even holders of non-
voting shares or non-voting members, as the case may be, are
entitled to vote on the matter. (Sec. 6, par. 6[4].)
(4) Prior approval of, and registration of bonds with, SEC. — Any
incurring, creating, or increasing by the corporation of any bond-
ed indebtedness is subject to prior approval of the Securities and
Exchange Commission. (Sec. 38, par. 4.) The bonds issued by the
corporation have to be registered with the Commission which
is given the authority to determine the sufficiency of the terms
thereof. (Ibid., last par.) The same considerations for stocks as
provided in Section 62 insofar as they may be applicable may be
used for the issuance of bonds by a corporation. (Sec. 62, par. 3.)
W h e n obligations constitute b o n d e d
indebtedness.
(1) Notes and bonds. — When a corporation borrows money,
its indebtedness may be evidenced by notes or bonds as its pri-
mary security.
(a) If the amount borrowed is small and if it is borrowed
in a single sum, or from a few persons, or for a short time,
notes are usually given.
(b) If, however, the amount is large and obtained from
a number of people and extends over a period of years, the
corporate obligation is preferably and usually evidenced by
bonds.
(2) Distinctions. — The difference between a corporate note
and a bond is not always clearly marked. Both are promises to
pay money.
(a) The phrasing of the bond is usually more formal than
that of the note.
(b) Also, payment of bonds is usually, though not in-
variably, secured as to both principal and interest by certain
specified property held for the purpose under a formal deed

or trust.
(c) A bond issue consists of a number of bonds which,
while they may vary as to denomination, some may be regis-
tered and some unregistered, are all of like general tenor and,
if secured, are all secured.
(3) Other characteristics of bonds. — The two principal
elements of distinction are time duration and the division of
the whole debt into like aliquot part units of round number
denominations, represented by negotiable or assignable
certificates of indebtedness.
(a) Such certificates are generally called "bonds," the
purpose being to enable the corporation to make use of the
borrowed money for long period of years, to obtain it from
a large number of people, and to facilitate the transfer of the
certificate of indebtedness from hand to hand during the
term of the collective obligation.
(b) Such bond issues are usually secured by the transfer
to a trustee of specific property to secure payment of the debt.
(c) The bonds usually, but not necessarily, run to bearer
and are transferable by delivery.
(d) The effect of the creation and issuance of such obliga-
tions is a borrowing from the general public.
Whenever a corporation resorts to this method of borrowing
funds, the resulting obligations constitute a "bonded indebted-
ness," subject to the requirements of Section 38 of the Corpora-
tion Code as to creation or increase. (H.C. Bentley, Corporation
Finance and Accounting, cited in Fisher, pp. 315-316.) Other
bonds issued by a corporation against its general credit are not
covered by the provisions of Section 38, but the SEC Rules re-
quire their submission to the Commission for approval before
they can be issued to the public. (SEC Opinion, April 6,1990.)
ILLUSTRATIONS:
(1) A Mortgage Trust Indenture was executed by X Cor-
poration under the following facts: X Corporation will obtain
credit/loan accommodations from three of four creditors, each
evidenced by a promissory note. As security for the payment of
the promissory note, X Corporation constituted a mortgage on

its fixed assets. Instead of constituting individual mortgage in
favor of each creditor, Z, a bank, was appointed by X Corpora-
tion with the consent of the creditors as common Trustee-Mort-
gagee. The mortgage is covered by an agreement denominated
as Mortgage Trust Indenture executed by X Corporation to Z.
In addition to the mortgage contract, Mortgage Participation
Certificates (MPC) were issued by Z to creditors to evidence
the extent of their interest in the mortgaged property. As each
promissory note or amortization is paid, the corresponding
MPC covering the same is cancelled. This process enables X
Corporation to borrow again, using the same mortgaged
property via MPC as security with the same or a new creditor
protected by a first lien on the mortgaged property to the extent
of his interest.
Is the issuance of the MPC subject to the requirements of
bonded indebtedness under Section 38?
No. When a corporation secures its indebtedness whether
by notes or bonds, such notes or bonds, being the primary
security on the principal obligations, are created under Section
38. From the features of the MPC, it is clear, however, that they
are issued by Z (trustee-mortgagee) merely to evidence the
undivided interests of the creditors in the mortgaged property
covered by the Mortgage Trust Indenture. They strengthen the
claim of the creditors to the mortgaged property and in case of
default of X Corporation (debtor-trustor), the creditor will have
recourse to the mortgaged property in the hands of Z. (SEC
Opinion, Sept. 6,1977.)
(2) X Corporation will borrow from a few lenders the
amount of P50 million to be evidenced by interest-bearing
promissory notes, for the purpose of financing its subdivision/
housing development projects. The credit transaction will be for
a term of ten (10) years payable in periodic installments and the
principal, interest and premium due on outstanding balance,
will be secured by a guaranty to be executed by Y Corporation,
in its capacity as parent company of X Corporation, and a real
estate mortgage over certain properties of Y Corporation.
Z Corporation, an affiliate of X Corporation, will underwrite
the mortgage note issue for X Corporation.
Is the mortgage note issue an ordinary term loan or a bond
issue?
The features of the transaction characterize a term loan, as

distinguished from a bond issue. (SEC Opinion, Nov. 18,1977.)
T h e corporate b o n d contract.
(1) Parties. — There are three (3) parties to a corporation
bond contract: the borrowing corporation, the bondholders, and
the trustee. The trustee is a bank or trust company, which is cho-
sen and paid by the corporation but serves mainly to protect the
bondholders.
(2) Trustee's functions. — They usually include:
(a) countersigning the bonds to assure authenticity;
(b) collecting interest and principal payments from the
debtor-corporation and distributing them to those entitled;
(c) acting as mortgagee or collateral holder if the bonds
are secured;
(d) verifying the performance of the debtor corporation's
promises on behalf of the bondholders; and
(e) taking legal action on behalf of the bondholders if
necessary.
Obviously, the bondholders cannot usually be parties to the
framing of the bond contract, but they adopt its provisions when
they choose to acquire bonds.
(3) Bond indenture. — The contract itself, known as the "bond
indenture," is a complete, lengthy legal document which consti-
tutes the agreement between the parties. The bonds themselves
are certificates of participation in their contract. In the indenture,
the corporation promises to pay principal and interest, promises
to pay the trustee, promises to pay its taxes and other debts, and
promises to maintain its property and conduct its business pru-
dently.
(4) Usual provisions. — The bond indenture will contain
many other provisions, including:
(a) the total amount of the bonds authorized to be
issued under the indenture or a statement that the amount is
unlimited;
(b) a statement that additional bonds may be issued in

the future (open indenture) or that the first issue will be the
only one permitted (closed indenture);
(c) statement of the purposes for which additional bonds
may be issued, such as for construction or acquisition of
property;
(d) stipulation that all bonds must be identical in terms
or that a series of issues, possibly having different interest
rates, maturity dates, and call prices, may be sold under the
basic indenture (in the latter case, each series would have a
supplemental indenture detailing its special features);
(e) details of the collateral or mortgage security to be
provided;
(f) mechanics of interest payments, registration of bonds,
and principal repayments; and
(g) terms of special features such as sinking funds, call
provisions, and conversion options. (G.A. Christy & J.C.
Clendenin, "Introduction to Investments," 7th ed. [1978], pp.
138-139.)
Bond terminology.
Corporate bond issues are commonly given titles which un-
dertake to describe the terms of the contract. Thus:
(1) Promissory instruments running five (5) years or longer
13
are "bonds" or "debentures"; shorter maturities are "notes."
(2) An equipment obligation (Philadelphia plan) may be a
"trust certificate."
(3) To identify the type of lien, the word "mortgage," "lease-
hold mortgage," "collateral trust," and "secured" are used.
(4) For further clarification, adjectives such as "first," "sec-
13
The normal distinction between a corporate "bond" (bonded indebtedness) and
a corporate "debenture" or "note" is that the former is usually secured by a mortgage
on corporate property while the latter usually is not. (5-A Words and Phrases, p. 128.)
Debentures are serial obligations or notes issued on the basis of the general credit of the
corporation and since they are not secured by corporate property, they are not bonded
indebtedness as contemplated in Section 38.
ond," "refunding," "consolidated," "general," "divisional," "pri-

or," and "adjustment" may be used singly or in combination.
(5) To describe the pledged property, such words as "bridge,"
"terminal," or "equipment" may be included.
(6) Additionally, such descriptive terms as "income sinking
fund," "purchase money," "extended," "series," "serial," "par-
ticipating," and "convertible," are used. (Ibid., op. cit., p. 154.)
Types of b o n d s .
(1) Common types. — They may be secured or unsecured.
The major types of secured bonds are:
(a) Mortgage bonds or debt instruments of financing
secured by a lien on specifically named property. Land,
building, equipment, and other fixed assets are the kinds of
property most commonly pledged as security;
(b) Collateral trust bonds or debt instruments secured by a
pledge of either stocks or bonds, or both which are deposited
with a trustee; and
(c) Equipment obligations or debt instruments to secure
financing loans on locomotives, railway cars, buses, large
trucks, and similar equipment. The most outstanding charac-
teristics of an equipment obligation is the railroad equipment
trust certificate secured by title to rolling stock, such as cars
and locomotives.
Under the Philadelphia (or equipment lease) plan, a manufactur-
er builds equipment to a railroad's specifications and then sells
the equipment to the trustee who leases the equipment to the
railroad. Equipment trust certificates are sold by the trustee to
investors to pay the manufacturer. The annual installment pay-
ments over a period of 15 years or less are at rates calculated to
be well within the economic life of the equipment, and there is
a substantial downpayment as further protection. (Soldofsky &
Olive, "Financial Management," 1974 ed., pp. 62-65.)
Under the New York (conditional sale) plan, the trustee receives
the equipment from the manufacturer and sells it to the purchas-
ing corporation in return for a series of equipment trust notes.
These notes are interest-bearing and of serial maturities; when

sold to investors, they provide the money to pay the manufac-
turer. When the notes are paid off by the purchasing corpora-
tion, the conditional sale becomes final and complete. (Christy &
Clendenin, op. cit., p. 144.)
Examples of unsecured bonds are:
(a) Straight debenture bonds or general credit bonds not
secured by any specific property. The earning of the issuing
corporation provides the protection to the debenture bond-
holders;
(b) Guaranteed bonds or that type for which one or more
individuals or corporations other than the issuer guarantees
the payment of interest or principal or both; and
(c) Subordinated debenture bonds or debt instruments
specifying that the holder's rights are inferior in the event of
liquidation or reorganization to any existing and future debt
defined in the indenture as senior debt. (Soldofsky & Olive,
op. cit., pp. 64-65.)
(2) Special types. — Besides the common types of bonds, there
are hybrid securities or bonds which have features similar to
those characteristics of common stock or preferred stock. These
are:
(a) Convertible debentures or bonds which may be
exchanged for the common stock of the issuing corporation
at a fixed price by a predetermined redemption rate at the
option of the bondholder;
(b) Income bonds, sometimes referred to as adjustment
bonds, or debt instruments with a fixed rate of interest pay-
able only if earned and declared by the board of directors.
They are hybrid securities combining some of the character-
istics of preferred and straight bonds; and
(c) Bonds with warrant or stock purchase warrant, or an
option or a right, exercisable by its holder, to purchase stock
at a stated price during a stipulated period of time. Bond
warrant issues are usually debentures, and the warrants
are detachable or non-detachable. Detachable warrants are
preferred by investors because such warrants may be sold

or exercised apart from the bond, whereas non-detachable
warrants cannot be sold or exercised separately from the
bond. {Ibid., op. cit., 65-69.)
Sec. 39. Power to deny pre-emptive right. — All stock-

holders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings,
unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock own-
ership by the public; or to shares to be issued in good faith
with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange
for property needed for corporate purposes or in payment
of a previously contracted debt.
Right of p r e - e m p t i o n of stockholders.
Whenever the capital stock of a corporation is increased and
new shares of stock are issued, the new issue must be offered
first to the stockholders who are such at the time the increase
14
was made in proportion to their existing shareholdings and on
equal terms with other holders of the original stocks before sub-
scriptions are received from the general public. For example, if a
stockholder with pre-emptive right owns 20% of the outstanding
shares of the corporation, he may subscribe 20% of any shares of
stock issued by the corporation. This principle is known as the
right of pre-emption or pre-emptive right of stockholders. 15
14
The mere fact that the subscriber is entitled by right of pre-emption to only a por-
tion of the total shares subscribed for does not militate against nor vitiate the validity of
a subscription contract (see Sec. 60.) partially paid for and duly recorded in the books of
the corporation. (SEC Opinion, Dec. 14,1964.)
The corporation may still allow its stockholders who failed to exercise their pre-
emptive rights within the prescribed period, to subscribe at a later time especially when
fault is not attributable to the latter and provided all previous non-subscribing stockhold-
ers are given the opportunity again. (SEC Opinion, Oct. 9,1990.)
""Pre-emptive rights" to subscribe to shares are considered "securities" within the
contemplation of Section 2(a) of the Revised Securities Act. (SEC Opinion, April 19,1994.)
(1) Availability of right to new issues of shares and unissued

shares. — The right extends only to new issues of shares arising
from any increase of capital stock effected under Section 38, but
may also be available with respect to "issues or disposition" of
unissued shares belonging to the original stock of the corpora-
tion, (infra.) Hence, it extends to the unsubscribed portion of the
capital stock and even to treasury shares.
(2) Acquisition by transferor of right. — When shares of stock
are sold by the holder after an increase of the capital stock has
been voted, the purchaser acquires, as an incident to the stock,
the same right of preference in subscribing for or purchasing
the new stock as was possessed by the transferor. (Hogg vs.
Eckhardt, 175 N.E. 382.) This principle, however, does not apply
to transfers where the assignors have previously exercised their
pre-emptive rights to subscribe to new issues. To rule otherwise
would allow the pre-emptive right attached to the original stock
to be exercised twice. (SEC Opinion, Nov. 28,1990.)
(3) Right subject to exceptions. — The application of the right
of pre-emption in a stock corporation depends on a consider-
ation of all the surrounding circumstances of each case. In other
words, the right is not absolute as it admits of certain exceptions.
Reason for the grant of right.

The rule aims to safeguard the right of a stockholder to pre-
serve unaltered and unimpaired his proportionate influence and
interest in the corporation and the relative value of his holdings.
In other words, the purpose of the right is to protect from
impairment and dilution the basic rights of the existing stock-
holders in the corporation, i.e., to voting control, to dividend
payments, and to the net assets of the corporation. However, a
stockholder may waive such right. The waiver should be given
individually by the stockholder concerned or by another by way
of a special power of attorney. Being a personal right, the waiver
cannot be made by the corporation itself through a stockholders'
resolution. (SEC Opinion, Dec. 12,1994.) A stockholder cannot be
forced to waive the right even if majority of the other stockhold-
ers opt to waive it. (SEC Opinion No. 08-08, Mar. 31, 2008.)
ILLUSTRATION:
X Corporation has an original capital stock of P100,000.00
divided into 1,000 shares with a par value of P100.00 per share.
A owns 500 shares. Subsequently, the capital stock is increased
to P200,000.00 (to 1,000 more shares). Both the old and new
shares are voting shares.
(1) Right to vote. — A must be given a right to subscribe to
500 of the new shares before they are offered to others. If A is
allowed to subscribe to only 100 shares of the increased stock,
his voting control would be reduced from 50% (500/1,000) to
only 30% (600/2,000).
(2) Right to net earnings as dividends. — Suppose the
corporation made a net earnings of P50,000.00. Had this entire
amount been distributed as cash dividends before the increase,
each stockholder, including A, would have received P50.00
(P50,000.00/1,000) per share. After the increase, the dividend
would be reduced to P25.00 (P50,000.00/2,000) per share.
(3) Right to net corporate assets after liquidation. — Assume
now that the total assets of the corporation amount to PI70,000.00,
with liabilities of P20,000.00 and surplus of P50,000.00. Thus,
its net assets or net worth is P150,000.00. Therefore, the actual
value per share is P150.00 (P150,000.00/1,000). If the new
shares were to be issued at their par value of P100.00, the
actual value of the original shares would be reduced to P125.00
(P250,000.00/2,000).
If the rule of pre-emption will not be observed, it is evident
that existing stockholders who are allowed to subscribe to more
than their pro rata shares in the increase of the capital stock and
new stockholders will unjustly benefit by P25.00 per share at
the expense of the stockholders whose pre-emptive right is
violated. In the event of liquidation, each stockholder, old and
new, will participate in the net assets of the corporation at the
rate of P125.00 per share.
Power to deny pre-emptive right.

The pre-emptive right of stockholders of a stock corporation
"to subscribe to all issues or disposition of shares of any class
in proportion to their respective shareholdings" may be "denied
by the articles of incorporation or an amendment thereto"
370
or may fall under any of the exceptions." (Sec. 39.) Unless so

denied or excepted, the right should be granted to a holder of
shares although they are of a class different from those issued
or disposed of. For example, holders of Common "A" shares are
entitled to subscribe to Common " B " shares in proportion to their
interest, but they cannot be required to subscribe to the Common
" B " shares, especially since the latter are of a class different from
17
the class they are holding.
A stockholder whose pre-emptive right is violated may main-
tain an action to compel the corporation to give him that right. If
the denial is by an amendment to the articles of incorporation, he
may exercise his appraisal right under Section 81(1).
Shares to w h i c h right not available.

Under Section 39, the pre-emptive right of stockholders to
subscribe to all issues or disposition of shares in proportion to
their respective shareholdings extends "to all issues or disposition
of shares of any class" (such as treasury shares) unless denied by
18
the articles of incorporation or an amendment thereto (in which
case they are deemed to have waived the right), and except to the
following:
(1) Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public;
(2) Shares to be issued in good faith with the approval of
stockholders representing 2 / 3 of the outstanding capital stock in
exchange for property needed for corporate purposes; and
(3) Shares to be issued in good faith with the approval of the
stockholders representing 2 / 3 of the outstanding capital stock in
payment of previously contracted debt.
The pre-emptive right does not extend to the issue of shares
in No. (1) in view of the need to comply with a legal requirement
16
The SEC requires an explicit written waiver of the right of pre-emption from the
non-subscribing stockholders every time it processes an application for increase in capital
stock.
17
It is not clear whether common stockholders have a pre-emptive right to acquire
preferred shares and preferred stockholders to acquire common shares. But if the pre-
ferred stock is convertible to common, holders of common shares must be given the right.
18
As commonly the practice in an initial public offering of new issues in the stock
exchange.
which is paramount to the exercise of the right; and in Nos.

(2) and (3) for reasons based upon practical convenience and
necessity and the exercise of discretion of the board of directors
in making new issues of shares to enable the corporation to carry
on the corporate business.
Offering of r e m a i n i n g u n s u b s c r i b e d
shares.
(1) To public or any person acceptable to corporation. — If the
unissued shares, whether from the original or increased capital
stock, corresponding to one stockholder are not subscribed or
purchased by him within the period fixed for the exercise of his
pre-emptive right, he is deemed to have impliedly waived his
right to subscribe to the same or to the balance if he subscribes
only to a portion. It does not follow that said shares should again
be offered on a pro rata basis to stockholders who took advantage
of their right of pre-emption. This is because as long as they
exercise their pre-emptive rights, their relative and proportionate
voting strength in the corporation will not be affected adversely.
(SEC Opinion, Sept. 24, 1974, citing C.G. Alvendia, The Law
of Private Corporations, pp. 172-173.) Thus, the remaining
unsubscribed shares may be offered to the public on first-come,
first-served basis or to any person acceptable to the corporation
without violating the pre-emptive rights of such stockholders.
(2) To stockholders of record. — As a matter of policy, the Secu-
rities and Exchange Commission considers it a sound corporate
practice to offer always the remaining shares to the stockholders
of record whenever practical and feasible before offering them
to the public (Ibid.; May 14, 1990, Dec. 6, 1994, March 23, 1998.),
although this "right of first refusal" is not provided for in the
ILLUSTRATION:
A owns 20% of the capital stock of Corporation X. He
exercised his pre-emptive right to new shares issued by the
corporation. B, another stockholder, did not exercise his right
with respect to the shares corresponding to him. His shares
were offered to and purchased by stockholder C.
372
In this case, A still maintains his 20% interest in the

corporation although C's proportionate holdings increased. A
has no cause for complaint as long as his 20% interest is not
reduced.
Time within which the right may

be exercised.
The time within which a stockholder must exercise his pre-
emptive right is generally fixed in the resolution authorizing the
increase of capital stock.
A majority of the stockholders have a right to fix the time
to suit themselves and the interests of the corporation. The
only limitation upon the exercise of the prerogative is that
every stockholder shall be treated alike and shall be afforded a
reasonable opportunity to subscribe. (Hayt vs. Great American
Ins. Co., 200 Pa. 516, 50 A. 154.) Parenthetically, such resolution
may also require the stockholders desiring to exercise his pre-
emptive right to pay a deposit on the new stock at the time of
subscribing. (SEC Opinion, Dec. 29,1976.)
Pre-emptive right as to treasury s h a r e s .

(1) In close corporations, the pre-emptive right of stockholders
extends to all stock to be issued (i.e., old or new) including re-
issuance of treasury shares, whether for money or for property
or personal services, or in payment of corporate debts, unless the
articles of incorporation provide otherwise. (Sec. 102.)
(2) In widely held corporations, it would seem that existing
stockholders have also a pre-emptive right as to treasury shares
(Sec. 9.) in view of the use of the phrase "disposition of shares of
any class" in Section 39. Note, however, that sale or disposition
of the treasury stock is not considered a new issue.
Furthermore, since the funds used in reacquiring the treasury
shares come from the surplus profits of the corporation, which
could have been declared instead as dividends, it is a desirable
policy to recognize the pre-emptive rights of stockholders over
treasury shares.
Price of new stock offerings.

(1) Interests of the corporation and all stockholders to be consid-
ered. — The concept of pre-emptive rights is given by law to safe-
guard two distinct interests of stockholders — protection against
dilution of their equity in the corporation and protection against
dilution of their proportionate voting control. The law, however,
gives no indication regarding the price that a corporation must
receive for new shares. Obviously, the power to determine the
price must be exercised for the benefit of the corporation and in
the interests of all stockholders.
(2) Where price far below fair market value. — When new shares
are issued at prices far below their fair value in a corporation
with only a limited market for its shares, existing stockholders
who do not want to invest or do not have the capacity to invest
additional funds can have their equity interest in the corporation
diluted to the vanishing point.
(3) Right of stockholders to maintain proportionate equity and at
the same time not to acquire additional shares. — One part of the
stockholders' right to maintain proportionate equity in a corpo-
ration by purchasing additional shares is the right not to acquire
additional shares without being confronted with dilution of his
existing equity if there is no valid business justification for the
dilution. This right not to acquire is seriously undermined if the
stock offered is worth substantially more than the offering price.
Any share subscribed or purchased at this price dilutes his inter-
est and impairs the value of his original holdings.
(4) Right of stockholders to insist on legally adequate price. —
A corporation is not permitted to dispose its stock for a legally
inadequate price at least where there is objection. While a
stockholder has no right to block a disposition of new shares for
a fair price merely because he disagreed with the wisdom of the
plan, he has the right to insist that the price be fixed in accord-
ance with legal requirements. (Katzowitz vs. Sidler, 249 N.E. 2d
359 [Ct. Apps. N.Y. 1969].)
Availability of right to additional issue

of originally authorized shares.
A shareholder's pre-emptive right is his option to subscribe to
allotment of shares, in proportion to his holdings of outstanding
shares, before new shares are offered to others. This doctrine
applies when a corporation increases its capital stock by declaring

a stock dividend, in which case it cannot discriminate between
stockholders.
The shareholders' pre-emptive rights do not generally apply
where the shares belong to the original (or increased) capital stock
of the corporation unsubscribed or undisposed of, inasmuch as
such shares constitute a part of the assets, and may be sold either
to stockholders or to strangers as the corporation may deem best
even without notice to stockholders." They are not new issues.
(1) All originally authorized shares initially offered for subs-
cription. — When one subscribes for shares in a corporation, he
realizes that his position is fixed on the basis of the proportion
between the number of shares subscribed by him and the total
number of shares which the corporation is authorized to issue.
This presupposes, however, that the corporation at its inception
offered all its originally authorized shares, although such should
be the presumption, (see Datu Tagoranao Benito vs. Securities
and Exchange Commission, 123 SCRA 722 [1983]; Dee vs.
Securities and Exchange Commission, 199 SCRA 238 [1991].) The
subscriber cannot claim dilution of interest in case additional
issues of originally authorized shares are purchased by others.
(2) Number of such shares initially offered specified. — Where the
number of shares initially offered for subscription was specified,
such that the original subscribers could not have insisted on sub-
scribing for more, the corporation must first offer the additional
issue of shares from the unsubscribed portion of the authorized
capital stock pre-emptively to stockholders before the same is
offered to third parties. In this case, the original subscriber is
deemed to have taken his shares in relation to the number of
shares then initially alloted for subscription rather than to the
total number of authorized shares at the time of his subscrip-
tion. The subscriber cannot claim a dilution of interest in case
additional issues of originally authorized shares are purchased
by others.
"The issuance of shares out of the unsubscribed shares of the authorized capital
stock of the corporation may be authorized by the board of directors thru a board resolu-
tion without need of stockholders' approval. (SEC Opinion No. 05-03, April 27, 2005.)
ILLUSTRATION:
X, Inc. has an original capital stock of P1,000,000.00
divided into 100,000 shares with a par value of P10.00 each.
At its inception, Corporation X offered for subscription all the
100,000 shares but only 40,000 shares were subscribed and fully
paid. Z's subscription covers 4,000 shares.
In this case, Z is not entitled to pre-emption with respect to
the remaining unissued 60,000 shares if they are later reoffered.
He cannot claim a dilution of interest.
Where the number of shares initially offered for subscription
was only 40,000, then Z may exercise his pre-emptive right in
case the remaining 60,000 shares are subsequently offered for
subscription to the extent of 1 /10, or 6,000 snares.
Sec. 40. Sale or other disposition of assets. — Subject

to the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority
vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all
or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds
or other instruments for the payment of money or other
property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the
vote of the stockholders or representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-
stock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholders' or members' meeting
duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place
of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
376
After such authorization or approval by the stock-

holders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties
under any contract relating thereto, without further action
or approval by the stockholders or members.
Nothing in this section is intended to restrict the
power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange,
mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual
and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations, where there are no mem-
bers with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by
this section. (28 1/2a)
Power to sell, lease, etc. all or substantially

all corporate assets.
(1) Requisites. — A corporation by the action of its board of
directors or trustees supported by the vote of shareholders or
members may sell, lease, exchange, mortgage, pledge, or other-
wise dispose of all or substantially all of its property, and assets
including its goodwill, (see Title IX [Merger and Consolidation].)
The requisites for the validity of such sale, etc. are as follows:
(a) The sale, etc., must be approved by the board of direc-
tors or trustees;
(b) The action of the board of directors or trustees must
be authorized by the vote of stockholders representing 2 / 3
of the outstanding capital stock including holders of non-
voting shares (see Sec. 6, par. 6[3].) or 2 / 3 of the members, as
the case may be; and
(c) The authorization must be done at a stockholders' or
members' meeting duly called for that purpose after written
notice.
(2) Other legal limitations. — As a safeguard against abuse

of power, Section 40 provides that the sale, etc., shall be subject
to the provisions of existing laws on illegal combinations and
monopolies, (see Sec. 140.) Furthermore, under the Bulk Sales Law
(Act No. 3952, Sees. 3, 4, 5.), the sale, etc. of all or any portion of
a stock of goods, merchandise, provisions or materials otherwise
than in the ordinary course of business is declared fraudulent
and void as to creditors of the vendor unless specified formalities
are observed such as the giving by the vendor to the vendee of a
list of creditors to whom said vendor may be indebted.
(3) Sale of all assets without dissolution. — Subject to the above
legal limitations, a corporation may sell all its assets without
necessarily dissolving or terminating its existence. If such sale is
made to another corporation and there is no intent to combine,
the selling corporation may continue in a state of suspended
animation (Ballantine, p. 666.), subject to the effect of non-use
of corporate powers and continued inoperation of a corporation
provided in Section 22. (SEC Opinion, July 8,191387.) The rights
of creditors must not be overlooked or disregarded when a
corporation sells its entire assets and turns over its business
to another. (Ballantine, p. 676.) The only way the transfer can
proceed without prejudice to the creditor is to make the assignee
assume the liabilities of the assignor, unless the creditors who
did not consent to the transfer choose to rescind the transfer on
the ground of fraud. (Caltex [Phils.], Inc. vs. PNOC Shipping
Transport Corp., 498 SCRA 400 [2006].)
(4) Liability of purchasing corporation. — Generally, where one
corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of
the transferor, provided the latter acted in good faith and paid
adequate consideration for such assets, except where any of the
following circumstances is present:
(a) Where the purchaser expressly or impliedly agrees to
assume such debts;
(b) Where the transaction amounts to a consolidation or
merger of the corporations;
(c) Where the purchasing corporation is merely a con-
tinuation of the selling corporation (see Caliguia vs. National
Labor Relations Commission, 264 SCRA 110 [1996].); and
378
(d) Where the transaction is entered into fraudulently in

order to escape liability for such debts. (Edward J. Nell Co.
. vs. Pacific Farms, Inc., 15 SCRA 415 [1965], citing 15 Fletcher
160-161; McLeod vs. National Labor Relations Commission,
512 SCRA 222 [2007].)
Where the requirements of the Bulk Sales Law (supra.) have
not been complied with, both the selling and buying corpora-
tions may be held solidarily liable to the creditor of the selling
corporation.
Authority of the board.

(1) Stock corporations. — Section 40 covers not only sale but
also lease, exchange, mortgage, pledge or other disposition of its
properties.
(a) The board is given the right to decide upon the terms
and conditions of the transaction including the consideration
for the property disposed of, for, at any rate, the transaction
is still subject to approval by the stockholders or members.
(b) After such approval, the board may nevertheless, in
its discretion, abandon the transaction, without further action
or approval by the stockholders or members but subject to
the rights of third parties under any contract relating thereto,
(par. 3.)
(c) If the property to be sold constitutes merely a part
of the assets of the corporation, even if substantial, and the
sale thereof will not render the corporation incapable of con-
tinuing its business (par. 4.), the board of directors or trustees
may dispose of the same as it may deem convenient without
need of approval of the stockholders or members of the cor-
poration. (SEC Opinion, Dec. 4, 1990.) Under paragraph 4,
the authorization by the stockholders or members is not re-
quired. It is understood, however, that the transaction is not
tainted with fraud or bad faith or prejudicial to the interest of
the corporation.
(2) Non-stock corporations. — Under the last paragraph, the
vote of the majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction
authorized by Section 40 in the case of non-stock corporations
where there are no members with voting rights.
Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisal right of any
dissenting stockholder (par. 1; see Sec. 81 [2].) is predicated on
the "sale or other disposition of all or substantially all" of the
corporate assets, the phrase being defined as such which would
render the corporation "incapable of continuing the business or
accomplishing the purpose for which it was incorporated." (Sec.
40, par. 2.)
Conversely, any disposition which does not involve all or
substantially all of the corporate assets as defined above, made
in the ordinary course of business, does not require the approval
of the stockholders or members as set forth in Section 40 and
would not entitle any dissenting stockholder to exercise his
appraisal right. (Ibid., par. 4.) To determine if the sale is made
in the ordinary course of business, the test is not the amount
involved but the nature of the transaction.
Liability of p u r c h a s i n g corporation for debts

of selling corporation.
As a rule, a corporation that purchases the assets of another
will not be liable for the debts of the selling corporation, provided
the former acted in good faith and paid adequate consideration
for such assets, except when any of the following circumstances
is present:
(1) where the purchaser expressly or impliedly agrees to
assume the debts,
(2) where the transaction amounts to a consolidation or
merger of the corporations,
(3) where the purchasing corporation is merely a continua-
tion of the selling corporation, and
(4) where the transaction is fraudulently entered into in
order to escape liability for those debts. (Philippine National
Bank vs. Andrada Electric & Engineering Company, 381 SCRA
244 [2002].)
Sec. 41. Power to acquire own shares. — A stock corpo-

ration shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes,
380
including but not limited to the following cases: Provided,

That the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired:
(1) To eliminate fractional shares arising out of stock
dividends;
(2) To collect or compromise an indebtedness to
the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
(3) To pay dissenting or withdrawing stockholders en-
titled to payment for their shares under the provisions of
this Code, (n)
Power to acquire o w n s h a r e s .
Section 41 expressly authorizes a stock corporation to pur-
20
chase or acquire its own shares subject to the limitation that
the acquisition is for a legitimate corporate purpose or purposes
and that there be unrestricted retained earnings (see Sec. 43.) in its
books to cover the shares acquired.
(1) Elimination of fractional shares. — A fractional share is
a share which is less than one (1) corporation share. Thus, if a
stockholder owns 250 shares and the corporation declares 25%
stock dividend, his total shares will be 312 and 1/2 shares.
Inasmuch as fractional shares cannot be represented at corporate
21
meetings (No. 1.), the corporation may purchase the same from
the stockholder concerned or issue fractional scrip certificates
20
Although shares thus purchased are, unless formally "retired," treated as "treasury
shares," and, under a discredited method of accounting, are carried on the corporation's
books as an asset or are applied to reduce "capital," "stated capital," or "capital stock"
issued, it is obvious that, although the selling shareholder has given up an asset, the cor-
poration has not acquired one. Its own shares are of no value to it unless and until they
are resold. What has actually happened is that the corporation's assets have been reduced
by the amount paid for the shares, while the proportionate interest of each of the other
shareholders in the diminished assets have been decreased by diminishing the number of
outstanding shares. Legal capital is not reduced by the transaction. Reduction of capital
(see Sec. 38.) may be made only by the methods prescribed in the statutes. Only a few
statutes include reacquisition of shares as such a method and then only in exceptional
circumstances. (W.L. Cary, Cases and Materials on Corporation Law, 1969 ed., p. 1592.)
21
Fractional shares standing in the name of a stockholder may not be used as a basis
of voting for directors at a shareholders' meeting, either cumulatively or otherwise. (Bal-
lantine, p. 401.)
to such stockholder who may negotiate for the sale thereof with
other stockholders also owning fractional shares so as to convert
them into full shares.
(2) Satisfaction of indebtedness to corporations. — No. 2 of Sec-
tion 41 does not authorize a corporation to arbitrarily purchase
the shares it issued to any of its stockholders indebted to it,
whether at the prevailing market price or at par value for the
purpose of applying the proceeds thereof to the satisfaction of its
claim against them, and this is particularly true where the con-
sent of such stockholders has not been secured. And even where
their consent has been secured, the corporation can buy their
shares only if the conditions for the purchase (infra.) are present,
(see SEC Opinion, Aug. 11,1961.)
A stockholder may avail of Section 63 which allows transfer
of shares to a third party.
(3) Payment of shares of dissenting or withdrawing stockholders.
— No. 3 of Section 41 refers to instances when a dissenting stock-
holder is given appraisal right (see Sec. 81.) and the right to with-
draw from the corporation as provided in Section 16 (Amend-
ment of articles of incorporation), Section 37 (Power to extend
or shorten corporate term), Section 40 (Sale or other disposition
of corporate assets), Section 42 (Power to invest corporate funds
in another corporation or business or for any other purpose),
Section 68 (Delinquency sale), Section 77 (Stockholders' or mem-
bers' approval [of plan of merger or consolidation]), and Section
105 (Withdrawal of stockholder or dissolution of [close] corpora-
tion).
Under the Civil Code (Art. 2112.), the pledgee (corporation)
may appropriate thing (stock certificates) pledged, if after the
second auction the thing pledged is not sold.
(4) Other cases. — This power of the corporation to acquire its
own shares is not limited to the cases enumerated in Section 41.
(a) It may also be exercised under Section 9 (treasury
shares).
(b) With respect to redeemable shares, they may be pur-
chased by the corporation regardless of the existence of
unrestricted retained earnings in the books of the corporation,
(see Sec. 8.)
382
(c) Shares may also be reacquired to effect a decrease

in the capital stock of a corporation, (see Sec. 38.) Where a
corporation reacquires its own shares, it does not thereby
become a subscriber thereof.
(d) In close corporation, where there is a deadlock
respecting the management of its business, the Securities
and Exchange Commission may order the purchase at their
fair value of shares of any stockholder by the corporation
regardless of the availability of unrestricted retained earnings
in its books. (Sec. 104, par. 1[4].)
Conditions for the exercise

of the power.
The right and power of a corporation to acquire or purchase
its own shares is not absolute, but depends upon the contingency
of the condition of its affairs and its relation to creditors at the
time of the purchase. (Fisher, op. cit., p. 287.)
Briefly, a corporation's right to purchase its shares according
to the weight of authority is subject to the following limitations:
(1) That its capital is not thereby impaired;
(2) That it be for a legitimate and proper corporate purpose;
(3) That there shall be unrestricted retained earnings (see Sec.
22
43.) to purchase the same and its capital is not thereby impaired;
(4) That the corporation acts in good faith and without preju-
dice to the rights of creditors and stockholders; and
(5) That the conditions of corporate affairs warrant it. (SEC
Opinions, Sept. 11, 1985, Oct. 12,1992, and April 11,1994.)
"No corporation shall redeem, repurchase or reacquire its own shares, or whatever
class, unless it has an adequate amount of unrestricted retained earnings to support the
cost of the said shares, except:
a. When the shares are reacquired in the redemption of redeemable shares of the
corporation or pursuant to the conversion right of convertible shares of the corporation,
in accordance with the provisions expressly provided for in its articles of incorporation
and certificates of stock representing said snares;
b. When the shares are reacquired to effect a decrease in the capital stock of the
corporation as approved by the Securities and Exchange Commission;
c. When the shares are reacquired by a close corporation pursuant to the order of
the Securities and Exchange Commission acting to arbitrate a deadlock as provided for
under Section 104 of the Corporation Code of the Philippines. (Sec. 111, CCP No. 1-Rules
Governing Redeemable and Treasury Shares, 1982; see Sec. 8.)
The SEC has exclusive supervision, control, and regulatory

jurisdiction to investigate whether the corporation has
unrestricted retained earnings to cover the payment for the shares,
and whether the purchase is for a legitimate corporate purpose
as provided in Sections 41 and 122. (Boman Environmental
Dev. Corp. vs. Court of Appeals, 167 SCRA 540 [1988].) Thus,
if the aforementioned conditions are present, a corporation
may acquire the shares of alien stockholders to comply with
constitutional or legal requirements prescribing the minimum
percentage of capital stock ownership of Filipino citizens in
certain corporations. (Ibid.; see Sec. 12.)
Although the existence of legitimate corporate purposes may
justify a corporation's acquisition of its shares under Section 41,
such purpose cannot excuse the stockholder from the effects of
taxation arising from the redemption of stocks by the corpora-
tion. If the issuance of stock dividends is part of a tax evasion
plan and thus, without legitimate business reasons, the pro-
23
ceeds of the redemption may be deemed as taxable dividends.
(Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152
[1999].)
Trust f u n d doctrine.
This doctrine, first enunciated by the Supreme Court in the
case of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].), holds
that the assets of the corporation as represented by its capital
stock are "trust funds" to be maintained unimpaired and to be
used to pay corporate creditors in the sense that there can be no
distribution of such assets among the stockholders without pro-
vision being first made for the payment of corporate debts and
that any such disposition of it is a fraud on the creditors of the
corporation who extend credit to the corporation on the faith of
its outstanding capital stock and, therefore, void.
(1) Corporation generally without power to purchase its own
shares. — It could be inferred from our law that a corporation
has generally no power to purchase its own shares of stock
except otherwise provided in the Code. This rule is dictated by
the necessity of protecting the interests of existing creditors who
23
See "Tax treatment of stock dividends," under Section 43.
384
might be adversely affected by the stock purchase which, in effect,

may operate to reduce its capital stock to the extent of the shares
purchased without complying with the formalities required by
Section 38. A stockholder has no right to demand refund of his
investment without complying with the requirements of Section
41 since this will constitute acquisition by the corporation of its
own shares. (SEC Opinion, Jan. 3,1985.)
(2) Repayment to stockholders a fraud on corporate creditors. —
The purchase, in effect, constitutes fraud on corporate creditors as
it amounts to repayment to the stockholder of his proportionate
share from the corporate assets and hence, an impairment of the
capital available for the benefit and protection of creditors who are
preferred over the stockholders in the distribution of corporate
assets, (see Sec. 122, last par.) A corporation have unrestricted
retained earnings before it may acquire its own shares, based on
the trust fund doctrine that the capital stock, property and other
assets of a corporation are regarded as equally in trust for the
payment of corporate creditors.
The prohibition against the distribution of the capital of a
corporation as cash dividend is also based on the same doctrine,
(see Sec. 43.)
Note that under the doctrine, the corporation is not prohi-
bited to use its assets for purposes of its business.
Effects of purchase on corporate

creditors.
If at the time the purchase is made, the corporation does not
have a unrestricted retained earnings or has negative earnings,
or if the amount paid for the shares exceeds the surplus, the pur-
chase necessarily operates as a distribution to the selling share-
holders of a part of the capital, and to that extent impairs capital.
(1) The impairment may be intentionally permanent, as
where the corporation thereafter treats the purchased shares as
retired but does not formally reduce capital, or merely refrains
from reselling the shares.
(2) The impairment may be unintentionally permanent to
the full amount paid, as where the corporation finds itself unable
Sec. 41 "TITLE IV. POWERS OF CORPORATION 385
to resell the shares at all, or to the extent of part of the amount

paid, as where it is unable to resell except at a lower price.
These consequences affect creditors. But there may be a
difference between current creditors and long-term creditors. If
the corporation is solvent, the former can enforce their claims.
But the latter take the risk of future insolvency as they await
maturity of their claims, (see W.L. Cary, Cases and Materials on
Corporations, p. 1592 [1969 ed.].)
Effects of purchase on remaining

stockholders.
In addition to diminishing assets and thereby reducing the
creditors' margin of safety, the purchase of shares by a corpora-
tion is objectionable also in that it injures remaining sharehold-
ers' rights, although it may be advantageous also to those who
do not sell.
(1) In general. — The impact of this purchase on the rights of
remaining shareholders was fully discussed as follows:
"A reduction of capital must be an all around affair;
that is, where capital is to be paid off or to be cancelled as
lost or unrepresented by any available assets, or where the
liability of unpaid capital is to be reduced or extinguished,
the same percentage should be reduced in each share. This
ratable reduction would leave each shareholder the same
proportionate interest and rights which he had before. Any
other scheme would disturb or alter the relative positions of
the members.
The purchase by a corporation of its own shares with-
draws part of the original capital from the venture and re-
distributes and changes the relative rights of the remaining
members. Shareholders should have the right to insist on
the preservation of all the contributed capital for the prose-
cution of the venture, except in case of legitimate reduction
of capital which statutes authorize and which shareholders
are presumed to have made part of their contracts with the
corporation. The capital subscribed is considered to be per-
manently devoted to the enterprise by the shareholders and
it constitutes a basic business fund which must not be paid

back except in entire or partial liquidation of the corporation.
It might be said that when a corporation purchases its
own stock, a situation is created which is analogous to the
non-issuance of authorized stock. Non-issue of authorized
stock is one thing, retirement of issued, another thing. Issued
capital has contributed to the growth of the corporation on
which the public in giving credit, by purchasing or loaning
on shares or bonds or in many other ways, may rely." (Jose
S. Campos, Jr., "The Purchase by a Corporation of its Own
Shares," Phil. Law Journal, Oct. 1952, p. 707, quoting Prof.
Nussbaum, "Acquisition by a Corporation of its Own Stock,"
35 Col. L. Rev. 976, 982.)
(2) Share in dividends. — The shareholders would also be
adversely affected in the field of dividends. How a purchase
of shares by a corporation affects the rights to dividends of the
remaining stockholders was very well explained as follows:
"If the shares are purchased at a price above the actual
value of the shares, the remaining members' share in the
undivided surplus is impaired and money is actually being
taken from the pockets of the remaining members for the
benefit of the retiring shareholders. If the purchase is made
at a price commensurate with the actual value of the shares,
the surplus which would ordinarily be devoted to dividends
is instead tied up to effect either an indirect and unauthor-
ized reduction in capital, or else the possibility of dividends
is postponed until such time as the treasury stock can be and
is resold at an adequate price. And even when the price paid
is less than their intrinsic value and a profit is later realized
when they are reissued at a higher price, the distribution of
the surplus as dividends has still been postponed." (Ibid.,
quoting Levy, "Purchase by a Corporation of its Own Stock"
[1930], 15 Minn. L. Rev. 1.)
(3) Share in possible losses. — The diminution of the number
of shareholders may entail still other dangers. As treasury stock
does not share in the profits, it may be contended that the remain-
ing shareholders would as a result get a bigger individual share
therein by way of increased dividends per share. On the other
hand, their share of possible losses is increased, inasmuch as part

of the working capital disappears. With this decrease in working
capital, the chances are, the profits will be less and, therefore, the
proportionate share of the remaining shareholders would also be
decreased. (Ibid.)
(4) Others. — The purchase has or may have a variety of
other consequences with respect to shareholders.
(a) On the one hand, it diminishes the number of shares,
so that each shareholder who does not sell has a larger interest
in a smaller total of assets. By reducing the number of shares,
it affects voting control, if the shares purchased are voting
shares.
(b) If the shares are purchased at less than their value, it
benefits those who do not sell, and on the other hand, if the
price is unduly high, it enables the selling shareholders to
retire from the enterprise with corresponding disadvantage
to other shareholders.
(c) It enables the management to use corporate funds to
rid themselves of shareholders whose activities are believed
by them to be detrimental to the enterprise or inconvenient
to the management. (W.L. Cary, op. cit., p. 1592.)
Sec. 42. Power to invest corporate funds in another

corporation or business or for any other purpose. — Subject
to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for
any purpose other than the primary purpose for which it
was organized when approved by a majority of the board
of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the members
in the case of non-stock corporations, at a stockholders'
or members' meeting duly called for the purpose. Written
notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right
as provided in this Code: Provided, however, That where the
388
investment by the corporation is reasonably necessary to

accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or
members shall not be necessary. (171 1/2a)
Power to invest funds in other corporations

or for other purposes.
(1) In order that a corporation may invest its funds in any
other corporation or business or for any purpose other than
the primary purpose, compliance with the requirements of
24
Section 42 is necessary (see De la Rosa vs. Mao Sugar Central
Co., Inc., 27 SCRA corporation [1969].) and, of course, subject to
the prohibition against certain corporations (e.g., insurance and
banking corporations) from having more than one purpose.
(2) Where the purpose clause of the articles of incorporation
of a company embodies different and related purposes, the
corporation may intend to carry them out simultaneously or to
prosecute first the primary business in which it is most interested
and then embark later in any one of the other purposes, as the
need for expansion of the enterprise may warrant or the necessity
of a change of business may demand. (SEC Opinion, Jan. 2,1973.)
By virtue of the provisions of Section 42, a corporation may be
organized with multiple lawful purposes so long as the primary
purpose is indicated in the articles of incorporation. However,
the investment of its funds is limited to the primary purpose.
(3) The term "funds" in Section 42 includes any corporate
property to be used in furtherance of the business. Thus, idle cor-
porate property may be temporarily leased to make it productive
in the absence of express restrictions in the articles of incorpora-
tion or by-laws and the leasing is not used as a scheme to preju-
24
In accounting, investments refer to assets not directly identified with the primary
activities of a company, as distinguished from inventories, receivables, plant and equip-
ment, and assets used in the sale of goods or services. Investments occupy a supple-
mentary relationship to a corporation's primary revenue-producing activities. They are
expected to contribute to the objectives of the company either through direct returns (div-
idends or interest) or value appreciation, or through enhancing the long-run operations
of the company by providing some business advantage, or, as in the case of special funds,
by enabling the company to meet certain business requirements, (see PICPA Bulletin No.
12[1], Nov., 1977.)
dice corporate creditors, subject to the requirements of Section

42. (SEC Opinion No. 54, Nov. 3, 2003.)
(4) A non-stock, non-profit foundation may invest its funds in
or subscribe to shares of another domestic corporation. The term
"funds," as used in Section 42, include "donations" received by
the corporation from other entities. However, its power to invest
is limited by its articles of incorporation. (Ibid.)
Purpose other than the primary purpose.

(1) A secondary purpose. — The other purposes for which
the funds may be invested without amending the articles of
incorporation must be among those enumerated in the articles of
incorporation. In order to legally engage in any of its secondary
purposes, the corporation must comply with Section 42.
(2) Not among the secondary purposes. — A corporation is not
allowed to engage in a business distinct from those enumerated
in the articles of incorporation without amending the purpose
25
clause of said articles (see Sees. 14[2], 16.) to include the desired
business activity among its secondary purposes.
Pawnshops organized as corporations and partnerships may
be allowed the ancillary activity of directly purchasing or sell-
ing goods and articles. Presidential Decree No. 114, otherwise
"Under General Order No. 47, which was issued during the period of martial law,
private and public firms with 500 or more employees were required to provide for their
own and their immediate families rice consumption needs either through importation
of or by directly engaging in rice production. Since General Order No. 47 is not merely
advisory but imperative, being a rule having the force of law (until revoked or repealed),
firms affected can engaged in rice production without the need of amending their articles
of incorporation. (SEC Opinion, Sept. 12, 1975.) Accordingly, shareholders' consent to a
corporation's investment of funds in another corporation to comply with the requirement
of General Order No. 47 is not required, considering that the investment is made pursu-
ant to a statutory obligation. (SEC Opinion, Jan. 19, 1976.) General Order No. 47 was
repealed by Executive Order No. 176 (May 28,1987).
Corporate funds may be temporarily loaned even to stockholders, provided the fol-
lowing conditions are observed: (1) The funds are not presently used by the corporation
and the loaning is not made on a regular basis; (2) By lending the funds, the corporation
will make them productive instead of allowing them to remain idle; (3) There is no ex-
press restrictions in the articles of incorporation or by-laws; (4) There must be a collateral
or assurance that the borrower is capable of paying them at maturity date; (5) The lending
is not used as a scheme to prejudice corporate creditors or result in the infringement of
the Trust Fund Doctrine; and (6) Section 42 is complied with. (SEC Opinion, Jan. 11,1991.)
known as the Pawnshop Regulation Act, contains no provision

limiting the business of pawnshops to such activity. By implica-
tion, their scope may be extended to other unrelated business
unless clearly prohibited by the language of the Act. The only
26
requirement is that the person or entity engaged at the same
time in other businesses not directly related or not incidental to
the business of pawnshop, shall keep such business distinct and
separate from his pawnshop operations. (SEC Opinion, March
28,1985.)
(3) Incident to primary purpose. — A corporation may invest
its funds in another business which is incident or auxiliary to
its primary purpose as stated in its articles of incorporation
without the approval of the stockholders or members as
required under Section 42. Even holders of non-voting shares
or non-voting members, as the case may be, are entitled to vote
on the matter, (see Sec. 6, par. 6[7].) In such case, a dissenting
stockholder shall have no appraisal right. Thus, the purchase
of beer manufacturing facilities by a corporation in a foreign
country for the manufacture and marketing of beer thereat was
held as an investment in the same business stated as its main
purpose in its articles of incorporation, which is to manufacture
and market beer and, therefore, does not need the approval of
the stockholders. (Gokongwei, Jr. vs. Securities and Exchange
Ratification of defective investment.

A corporate transaction or contract which is within the cor-
porate powers, but which is defective from a purported failure
to observe in its execution the requirement of Section 42 that the
investment must be authorized by the affirmative vote of the
stockholders (or members), may be ratified. The requirement is
for the benefit of the stockholders who may ratify the investment
and its ratification obliterates any defect which it may have had
at the outset. (Ibid.)
Mere ultra vires acts (see Sec. 45.) or those which are not illegal
and void ab initio, but are not merely within the scope of the
Ûnder Section 4175(P), Book IV, of the Central Bank Manual of Regulations for
Banks and other Financial Intermediaries.
articles of incorporation, are merely voidable and may become

binding and enforceable when ratified by the stockholders.
(Pirovano vs. De La Rama Steamship Co., 96 Phil. 335 [1954].)
Sec. 43. Power to declare dividends. — The board of

directors of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders
on the basis of outstanding stock held by them; Provided,
That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his
unpaid subscription is fully paid; Provided, further, That
no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining

surplus profits in excess of one hundred percent (100%)
of their paid-in capital stock, except: (1) when justified
by definite corporate expansion projects or programs
approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign
from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be
clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such
as when there is a need for special reserve for probable
contingencies, (n)
Concept of dividends.
A stock corporation exists to make a profit and to distribute a
portion of the profits to its stockholders.
(1) A dividend is that part or portion of the profits of a corpo-
ration set aside, declared and ordered by the directors to be paid
ratably to the stockholders on demand or at a fixed time. (Fisher
vs. Trinidad, 43 Phil. 480 [1922]; Nielson & Co., Inc. vs. Lepanto
Consolidated Mining Co., 26 SCRA 540 [1968].) It is a payment to
the stockholders of a corporation as a return upon their invest-
ment. (Cojuangco vs. Sandiganbayan, 586 SCRA 790 [2009].)* It

is a characteristic of a dividend that all stockholders of the same
class share in it in proportion to the respective amounts of stock
which they hold. (18 Am. Jur. 2d 281-283.)
(2) A dividend is a sum which can be divided among stock-
holders without touching the capital stock. (Lockhart vs. Van
Aestyne, 31 Mich. 76.) The term has been regarded as indicating
that there must be a surplus or profits to be divided. However,
the word has also been used with no reference to surplus or net
profits, e.g., to describe distributions made to stockholders on liq-
uidation of the corporation, and to a distribution of assets upon a
reduction of the capital stock. (19 Am. Jur. 2d 283.)
Dividends, regardless of the form these are declared, that
is, cash, property, or stocks, are valued at the amount of the de-
clared dividend taken from the unrestricted retained earnings of
the corporation. (PLDT vs. National Telecommunications Com-
mission, 539 SCRA 365 [2007].)
Concept of profits.
In its usual and ordinary meaning, the term profit means the
"return to capital rather than earnings from labor performed or
services rendered." (U.S. Employees Association Employees As-
sociation [USEAEA] vs. U.S. Employees Association [USEA], 107
SCRA 87 [1981], citing Ballantine's Law Diet., 3rd ed.) It has also
been defined as "the excess of return over expenditure in a trans-
action or series of transactions," or the "excess of an amount re-
ceived over the amount paid for goods and services" (Nicolas vs.
Court of Appeals, 288 SCRA 307 [1998].), citing Webster's Third
New Int. Diet., p. 1986 and Barron's Law Dictionary, p. 1991.)
As applied to a corporation, the term has a larger meaning
than dividends and covers benefits of any kind, the excess
of value over cost, acquisition beyond expenditures, gain or
advance. {Ibid., citing Booth vs. Gross, Kelly & Co., 238 P. 289,
831, 41 A.L.R. 868.) It is the excess of receipts over expenditures,
that is, net earnings. (Ibid., citing American cases.)
"Citing DE LEON, The Corporation Code of the Philippines Annotated, p. 384, 2002
Dividends distinguished f r o m profits

or e a r n i n g s .
(1) A dividend, as applied to corporate stock, is that portion
of the profits or net earnings which the corporation has set aside
for ratable distribution among the stockholders. Thus, dividends
come from profits, while profits are the source of dividends.
(2) Profits are not dividends until so declared or set aside
by the corporation. In the meantime, all profits are a part of the
assets of the corporation and do not belong to the stockholders
individually. (19 Am. Jur. 2d 284.) They may be in cash as well as
in kind.
Dividends received by a company which is a stockholder in
another corporation are corporate earnings arising from corpo-
rate investment. The right to a share in such dividends, by way
of salary increases, may not be denied its employees when they
are entitled thereto. It is not a case of a corporation distributing
dividends in favor of its stockholders, in which case, such divi-
dends would be the absolute property of the stockholders and
hence, out of reach by creditors of the corporation. (Madrigal &
Company, Inc. vs. Zamora, 151 SCRA 355 [1987].)
P o w e r t o declare d i v i d e n d s .
The board of directors of a stock corporation has the power
to declare dividends out of the "unrestricted retained earnings"
which shall be payable in cash, in property, or in stock to all
stockholders "on the basis of the outstanding shares held by
28
them."
(1) Sfodt dividends. — In the case of stock dividend, it shall
not be issued without the approval of stockholders represent-
ing at least 2 / 3 of the capital stock then outstanding at a regular
meeting of the corporation or at a special meeting duly called for
the purpose. (Sec. 43, par. 1.)
If the requisite vote for the declaration of stock dividends has
been secured, the stockholders who are opposed cannot legally
"Dividends cannot be declared and paid on the basis of the paid-up stock. The basis
is the number of shares held by the stockholders, not the amount paid in consideration
thereof, (see Sec. 137.)
refuse to receive their participation in the stock dividends. How-

ever, before stock dividends represented by one class of shares
may be given to holders of another class of shares, it is necessary
that the consent of such holders be first secured, they being given
a class of shares different from the class they are holding. (SEC
Opinion, March 1, 1973.) Thus, a corporation may declare stock
dividends to both holders of founders and common shares, since
there is no prohibition on the matter either in the Code or juris-
prudence, provided the stockholders affected will agree to such
declaration. (SEC Opinion, Sept. 15,1972.)
(2) Other dividends. — A mere majority of the quorum of the
board of directors is sufficient to declare other dividends. The
board may declare, other dividends other than stock without
need of stockholders' approval. (Sec. 43, par. 1.)
The dividends are paid to the registered owners of stock as
of a record date (infra.), usually a date different from the date of
declaration. They are stated either at a given percent or a fixed
amount for each share. The record date determines the time
when the stockholders of record shall be ascertained.
Dividends payable out of unrestricted

retained e a r n i n g s .
Under the law, dividends other than liquidating dividends
(which are not really dividends as they are from capital) may
be declared and paid out of "the unrestricted retained earnings"
of the corporation. (Ibid.) A corporation cannot make a valid
29
29
The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may be considered a more
precise term, in place of "surplus profits arising from its business," in the former law.
"Surplus profits" was used in the past to mean "retained earnings" as presently under-
stood. Indeed, the Code still speaks of "surplus profits" in the second paragraph of Sec-
tion's in fixing the maximum earnings which may be retained by a corporation and in
Section 3 in defining stock corporations. The Code deleted the phrase "arising from its
business."
It may be argued that the term "unrestricted retained earnings," as used in the Code,
refers to all the excess of assets of the corporation over its liabilities including the amount
of the legal or stated capital. Hence, it is not limited to accumulated net profits of the cor-
poration "arising from its business" but may now comprehend also other gains such as
those derived from the sale of fixed assets. But the term does not include the unrealized
increase in value of fixed assets, (infra.)
contract to pay dividends other than from retained earnings or

profits and an agreement to pay such dividends out of capital
is unlawful and void. The power of a corporation to acquire
its own shares is likewise subject to the condition that there be
unrestricted retained earnings in its books to cover the shares to
be purchased. (Sec. 41.)
For purposes of the general rule, the capital or capital stock
which may not be impaired or depleted by dividends is not the
30
entire net assets of the corporation; rather, it is the legal capital
of the corporation in the strict sense, referring to that portion of
the net assets directly or indirectly contributed by the stockhold-
ers as consideration for the stocks issued to them upon the basis
of their par or issued value.
R e a s o n s for t h e rule.
(1) The main reason for the rule is that the outstanding capi-
tal stock of a corporation, including unpaid subscriptions, is a
trust fund (supra.) for the security of creditors and cannot be dis-
tributed to their prejudice to the stockholders as dividends, the
creditors being precluded from holding the stockholders person-
ally liable of their claims.
(2) Moreover, each stockholder is entitled as a matter of right
to have the capital of the corporation unimpaired in order to carry
out the purpose for which the corporation has been created. The
rationale is that stockholders should only receive dividends from
their investment, and not from the investment itself.
(3) The reason has also been stated to be that the capital stock
of a corporation cannot be diverted or withdrawn to the preju-
dice of its creditors and stockholders. This latter statement of the
reason for the rule, however, has been criticized, for although a
court will treat the assets of an insolvent corporation as a trust
fund for its creditors and stockholders, a corporation cannot be
said to hold any of its property subject to a trust while it is a sol-
vent and going concern. (18 C.J.S. 1097.)
"For definition of "legal capital/' see comments under Section 6.

396
Rule as to no par value stock.

The Code makes it clear that with respect to no par value
shares, the entire consideration (including paid-in surplus, infra.)
received from the same shall be treated as capital and shall not be
available for distribution as dividends. (Sec. 6, par. 3.)
The theory is that the stockholders intended that all such
consideration shall constitute the basic business fund of the cor-
poration to be permanently devoted in the prosecution of the
corporate business.
Dividends f r o m property in w h i c h
capital is invested.
(1) To engage in "wasting business." — In the case of corpo-
rations engaged in "wasting business," such as mining or
timber-cutting, sometimes capital consumed in the regular
course of operation, is treated as earnings. According to the so-
called "wasting assets" doctrine, which is based on an English
case, such a "wasting assets" corporation, the capital of which is
necessarily exhausted in the carrying on of its operations, may
rightfully declare and pay dividends out of net income without
making up for the loss of its capital which is thus being constantly
diminished. (19 Am. Jur. 2d 298.)
In other words, when a corporation is created for the purpose
of investing its capital in property which will necessarily be
consumed or exhausted in the ordinary course of its operations,
so that the depreciation in the value of the property cannot be
repaired, it is not subject to the same rules as other corporations.
A mining company, for example, is not formed for the purpose of
permanently using the property in which its capital is invested,
but for the purpose of investing in property which, in the nature
of things, will be gradually consumed in making profits, and,
in estimating the profits of such a corporation for the purpose
of determining whether it may lawfully declare a dividend, no
deduction is to be made for depreciation in the value of its mine
by reason of its use and consumption in taking out the ore or
other minerals. Dividends may be lawfully declared out of the
net proceeds of its operations after deducting expenses and debts
and a reasonable fund for contingencies.
Each dividend payment represents a liquidation of capital

assets.
(2) To utilize a lease or patent. — The same is true of a corpo-
ration created for the purpose of utilizing a lease for a term of
years, or a patent.
(3) To liquidate a business. — Similarly, where a corporation is
formed for the purpose of liquidating the business of a partnership,
and selling all of its property and dividing the proceeds among
its stockholders such property is, in no proper sense, its capital
stock within the meaning of the rule prohibiting a corporation
from distributing its capital in the form of dividends, but is rather
to be regarded as property held by the corporation in trust for the
benefit of its stockholders, and which may be distributed by it to
them in the manner prescribed in the articles of incorporation, at
least where the rights of creditors are not involved. (11 Fletcher,
pp. 1079-1083.)
Unrestricted retained earnings explained.

31
(1) The retained earnings of a corporation is "the difference
between the total present value of its assets after deducting losses
and liabilities and the amount of its capital stock." (11 Fletcher,
p. 1041.) Capital stock, in this instance, should be understood to
refer to outstanding stock (see Sec. 137.), and not the stated or
nominal (authorized) capital stock, (see Sees. 12,13,14[8].)
Stated otherwise, the ordinary way of determining whether
a corporation has retained earnings or not is to compute the
value of all its assets and deduct therefrom all of its debts and
liabilities, including legal capital, and thus ascertain whether the
balance exceeds the amount of its outstanding shares of capital
stock. This may be expressed in the following equation:
Retained earnings - Assets - liabilities and legal capital
31
In accounting, the term has been denned as "the accumulated net income of a cor-
poration from the date of incorporation (or from the latest when a deficit was eliminated
in a quasi-reorganization), after deducting therefrom distributions to stockholders and
transfer to capital stock or other accounts." (PICPA Bulletin No. 10[4, b], Nov., 1975.) The
captions "retained income" and "accumulated earnings retained for use in the business
are also used in preference to the term "earned surplus." (Ibid., No. 28.)
The difference between the total assets and liabilities of a cor-

poration represents its net worth or net assets or the stockholders'
32
equity consisting of the capital invested and the retained earn-
ings. Thus, the retained earnings will be the balance of the net
worth or net assets after deducting the value of the corporation's
outstanding capital stock. They refer to the accumulated undis-
tributed earnings or profits realized by a corporation arising
from the transaction of its business and the management of its
33
affairs, out of current and prior years.
Section 43 does not categorically state that the retained earn-
ings of a corporation from which dividends may be declared
should arise from its business as required by Section 16 of the
former Corporation Law. However, sound accounting principles
dictate that dividends may be declared only out of actual earn-
ings or profits realized from the business of the corporation.
(2) Such retained earnings or portion thereof are said to
be unrestricted and, therefore, free for dividend distribution
to stockholders, if they have not been reserved or set aside
by the board of directors for some corporate purpose or for
some other purpose in accordance with managerial, legal, or
contractual requirements, (see Sec. 43, par. 2.) For instance,
under the Insurance Code (Pres. Decree No. 1460, Sees. 210-214.),
insurance companies are required to maintain reserves to assure
the payment of losses covered by their policies and the return
of unearned premiums. The restrictions may be imposed by the
Securities and Exchange Commission in pursuance of authority
given by law. In any event, no legal obligation exists on the part
of the board to distribute all the unrestricted retained earnings as
dividends, (infra.)
Section 3 provides that stock corporations may distribute

dividends out of "surplus profits." For purposes of dividend dec-
laration, the term "surplus profits" may be used synonymously
with unrestricted retained earnings.
32
In accounting, the term has been denned as "the residual interest of owners in the
assets of a corporate business entity, measured by the excess of assets over liabilities."
(PICPA Bulletin No. 10[1], Nov. 1975.)
"Dividends from profits may come from the current net profits, i.e., those earned in
the preceding year, or from the undistributed profits or earned surplus, i.e., the accumulated
profits realized during all prior years.
I t e m s affecting unrestricted retained e a r n i n g s .

SEC Memorandum Circular No. 11 (Dec. 5, 2008) prescribes
the guidelines in determining availability of retained earnings
for cash, property and stock dividend declarations of stock cor-
porations. It enumerates the items affecting the unrestricted
retained earnings account from an accounting purview, as
follows:
(1) Nominal or temporary or income statement accounts
closed to income and expense summary at the end of the period
to determine actual results of operations during the period and
further closed to retained earnings account;
(2) Effects of changes in accounting policy;
(3) Foreign exchange gains and losses;
(4) Actuarial gains or losses;
(5) Share in the net income of associates /joint ventures ac-
counted for under equity method of accounting;
(6) Dividend declarations during the period;
(7) Appropriations of retained earnings during the period;
(8) Reversals of appropriations;
(9) Effects of prior period adjustments; and
(10) Treasury shares.
Existence of actual profits or e a r n i n g s .

To justify the declaration of dividends, there must be an ac-
tual bona fide surplus profits or earned surplus over and above all
34
debts and liabilities of the corporation. (Steinberg vs. Velasco, 52
34
The SEC has explicitly reiterated its original policy that dividends (cash or stock),
shall be declared only out of unrestricted retained earnings of the corporation. A corpo-
ration cannot declare dividends when it has zero or negative retained earnings (defi-
cit). The surplus profits or income must be (1) bona fide income founded upon actual
earnings or profits. The existence of surplus profits arising from business operations is
a condition precedent to the declaration of dividends;. (2) Actual earnings or profits shall
mean net income for the year based on the audited financial statements, adjusted for
unrealized items enumerated below, which are not available for dividend declaration:
(a) Share /equity in net income of the associate or joint venture accounted for under the
equity method, as the same is not yet actually earned or realized; (b) Unrealized for-
eign exchange gains, except those attributable to cash and cash equivalents; (c) Unreal-
ized actuarial gains which result when the company opts to recognize actuarial gains or
400
Phil. 953 [1929].) Hence:

(1) Earnings of the corporation which have not yet been re-
ceived even though they consist in money which is due cannot
35
be included in the profits out of which dividends may be paid.
(11 Fletcher, p. 1064.)
(2) As a rule, dividends cannot be declared out of borrowed
money, for borrowed money is not profit; but money may be
borrowed temporarily for the purpose of paying dividends, if the
corporation has used its surplus assets to make improvements
for which it might have borrowed money. (18 C.J.S. 1102.)
(3) A corporation may properly pay dividends from accumu-
lated surplus out of previous years although realizing no profit
from current earnings.
(4) On the other hand, it cannot pay dividends although it
has realized actual profits for the year in which dividends are
declared until it has ehminated a deficit resulting from its opera-
losses directly to profit or loss statement; (d) Fair value adjustment or gains arising from
market-to-market valuation, which are not yet realized; (e) The amount of recognized
deferred tax asset that reduced the amount of income tax expense and increased the net
income and retained earnings, until realized; (f) Adjustment due to deviation from Phil-
ippine Financial Reporting Standards/generally accepted accounting principles (PFRS/
GAAP), which results to gain; (g) Other unrealized gains or adjustments to the retained
earnings brought about by certain transactions accounted for under the PFRS such as
accretion income under International Accounting Standards 39, Day 1 gains on initial rec-
ognition of financial instruments, reversal of revaluation increment to retained earnings,
and negative goodwill on investments in associate; and (h) Other adjustments that the
SEC may prescribe. (3) Additional paid-in capital shall neither be declared as dividends
nor reclassified to absorb deficiency except through an organizational restructuring duly
approved by the Commission. (SEC Memo. Circ. No. 11, Dec. 5, 2008.)
A "reconciliation of retained earnings" is required by the Circular to be submit-
ted by listed companies, corporations with securities reconstructed under the Securities
Regulation Code (SRC) and by public companies. For other corporations, the reconcilia-
tion shall be required only in two (2) instances.
35
Corporation X owns more than 20% of the voting common shares of Corporation
Y. Under the Equity Method of Accounting, Corporation X is required to book its share
in the net earnings or loss of Corporation Y. Can Corporation X declare cash or stock
dividend or both from its recorded equity earnings in Corporation Y which are not yet
received in cash? No. Retained earnings or surplus profits referred to under Section 43
from which dividends can be legally declared do not include participation or share of a
corporation in the profits of its subsidiaries and affiliates, unless and until such profits
are actually received in the form of cash or property dividends. Thus, while for purposes
of management accounting, Corporation X can recognize as income its equity in the net
earnings in Corporation Y, the same cannot be declared as dividends since it is not yet
actually realized as income inasmuch as Corporation Y has not yet declared the same as
dividends. (SEC Opinion, Oct. 6,1995.)
Sec. 43 T I T L E rv. P O W E R S O F C O R P O R A T I O N
401
tions of preceding years. (William vs. Western Union Tel. Co., 93

N.Y. 162.) In other words, dividends may not be declared so long
as a deficit exists, (infra.)
(5) Treasury shares (see Sec. 9.), not being part of earned or
surplus profits, are not distributable as dividends but if there are
retained earnings previously held to support their acquisition,
they may be declared as property dividend out of said earnings,
(see infra.)
Deduction of expenses.
In addition to deducting the amount of the capital stock from
the value of the assets of the corporation, deduction must also,
as a rule, be made for all expenses incurred in the conduct of the
business of the company.
(1) Generally speaking, net earnings are what remains of
gross receipts after deducting the expenses of producing them.
The Supreme Court of the United States has said: "The term
'profits,' out of which dividends alone can properly be declared,
denotes what remains after defraying every expense, including
loans falling due, as well as the interest on such loans."
(2) Depreciation in the value of the corporation's plant is a
proper expense charge and the same is true of expenditures for
maintenance and upkeep. And a reserve fund may be accumu-
lated for the purpose of making repairs and renewals.
(3) Taxes are properly treated as a part of the company's
operating expenses, to be paid out of the earnings, and this is
true even though they are founded upon an erroneous valuation
of the property upon which they are assessed.
Only such expenditures as have actually been made can
properly be claimed as a deduction from earnings. (11 Fletcher,
pp. 1056-1060; see also 18 C.J.S. 1100-1102.)
Distribution of paid-in surplus

as c a s h dividends.
Under the pertinent provision of Section 16 (now Sec. 43.) of
the former Corporation Law, which reads as follows: "No corpo-
ration shall make or declare dividends except from the surplus
profits arising from its business, or divide or distribute its capi-
402
tal stock or property other than actual profits x x x," dividends,

whether cash or stocks, must be declared only out of surplus
profits arising from corporate business.
The Securities and Exchange Commission has expressed
the view that paid-in or premium surplus (difference between the
par value and the higher price for which stock is sold by the
corporation) cannot be declared as cash dividends under Section
16 above (SEC Opinion, May 7,1968.), or even as stock dividends
because Section 43 of the Corporation Code provides that
dividends can be declared only from the unrestricted retained
36
earnings. (SEC Opinion, April 16,1988.) The reason given is that
"the entire proceeds of sales of a corporation of its own stock,
even when sold for more than par value, are part of its capital
stock (i.e., to be regarded as paid-in capital, rather than as retained
earnings) and, therefore, cannot be profits earned through the
conduct of its business out of which dividends may be paid."
(Merchants and Insurance Reporting Co. vs. Youtz, 178 R 540.) It
also said that to permit this capital surplus to be distributed as
cash dividend is a "fraud upon creditors who extend credit on
the faith of its capital stock." (14 C.J. Sec. 1210, p. 801.)
Whether dividends can now be declared out of premium sur-
plus under Section 43 of the new Corporation Code is a legal
question and, consequently, is not to be resolved by whatever
may be the present accounting practice on the matter. The fol-
lowing support the proposition that the distribution of paid-in
37
surplus as cash dividends may be legally permitted under the
present law:
36
The SEC has allowed the declaration of dividends from paid-in surplus subject to
the following conditions: (1) They shall be declared only as stock dividends; (2) No credi-
tors shall be prejudiced therefrom; and (3) There shall be no resulting impairment of capi-
tal. (SEC Opinion, Oct. 19,1989.) The reason is that when a corporation converts the pre-
mium or contributed surplus into capital by issuing to its stockholders stock dividends, it
actually parts with nothing but merely transfers the surplus to capital account and issues
shares of stock to represent the same. (SEC Opinions, Aug. 16,1993 and March 27,1955.)
Reduction surplus or surplus realized by the reduction of the capital stock effected
under Section 38 by decreasing the par value of authorized shares may be declared only
as stock dividend. (SEC Opinion, Aug. 8, 1991; see Sec. 38.)
37
"The preferred terminology is 'capital in excess of par (or stated) value,' 'addi-
tional paid-in capital,' 'additional contributed capital,' or similar descriptive phrases. Use
of the captions 'surplus,' 'capital surplus,' or 'paid-in surplus' should be discontinued."
(PICPA Bulletin No. 10[28], Nov. 1975.)
(1) Dividends from other gains not arising from business.

Unlike Section 16 of the old law, Section 43 does not require that
dividends distributable by a corporation be "from the surplus
profits arising from its business," the quoted phrase having been
deleted, indicating a legislative intent to do away with the idea
of profits earned in the business as the only source of dividends.
38
Hence, "unrestricted retained earnings" from which divi-
dends may be declared are not limited to the accumulated earned
surplus of the corporation but may also include other gains not
"arising from its business."
(2) Absence of provision on treatment of paid-in surplus from issue
of par value shares. — There is no provision in the Code which
specifically treats paid-in surplus from the issue of par value
shares as part of the capital stock.
On the contrary, while Section 6 (par. 3.) explicitly requires
"that the entire consideration received by a corporation for its no
par value shares shall be treated as capital and shall not be avail-
able for distribution as dividends," there is no similar provision
with respect to par value shares. It is true that there was also
no similar provision even under the old corporation law but the
same would be a surplusage since Section 16 of said law already
restricted the distribution by a corporation of dividends only to
"surplus profits arising from its business."
(3) Credit of paid-in surplus to profit and loss. — At the start of
the operation of a corporation, the actual value of its shares is
the same as their par value. The premium on stock issued after
the corporation has accumulated profits is justified by the need
to equalize as between the new and the old stockholders their
respective rights in such profits which are distributable in cash
38
According to the SEC, the term "retained earnings" as defined under the generally
accepted accounting principles is understood to mean "the accumulated profits realized
out of normal and continuous operations of the business after deducting therefrom distri-
butions to stockholders and transfers to capital stock or other accounts." Profits realized
from the sale of treasury shares are treated as part of "capital" or "paid-in surplus" and
cannot, therefore, be declared as stock or cash dividend. They are not ordinary profits
which would form part of retained earnings. (SEC Opinion, April 14, 1988.)
Corporations usually get additional funding from existing shareholders via loans
or advances which are later converted into additional paid-in capital (APIC) in the nature
of additional capital investment or debt-to-equity conversion. Per SEC Memorandum
Circular No. 11, APIC shall not be declared as dividend.
404
dividends. While such premium may be considered as part of the

capital contributed or invested by a stockholder for accounting
purposes, it is really, from the legal standpoint, in the nature of
profit or surplus realized by the corporation resulting from the
profitable operation of the corporate business.
Hence, such premium should be credited to profit and loss
and not to capital.
(4) Treatment of paid-in surplus as premium for privilege of
subscribing. — The authorized capital stock limits the amount or
number of shares that may be issued by a corporation at a speci-
fied par value. In other words, the amount which the corporation
is authorized to raise by the issue of shares should not exceed
the authorized capital stock which can only be increased by
complying with the formalities prescribed by Section 38.
It follows that when shares are issued above par, the excess
is not to be treated as capital, i.e., not as part of the consideration
for the shares but merely as a premium given for the privilege of
subscribing to such shares, and hence, not as a part of the trust
fund for the benefit of creditors who have no cause for complaint,
provided the corporation is solvent and sufficient assets remain
to pay their claims.
It is significant to note that holders of par value shares par-
ticipate in dividends, and in case of liquidation of the corpora-
tion, in the corporate assets, on the basis of the par value of their
shares, irrespective of the amount of the consideration paid for
by them, indicating that any excess is not to be considered part
of their invested capital for purposes of dividend declarations.
(5) Treatment of capital stock as referring to legal capital. — Except
by decrease of capital stock (Sec. 38.) and as otherwise allowed,
the Code prohibits the distribution of corporate assets or property
prior to dissolution (see Sec. 122, last par.) conformably to the
general rule that the capital stock of a corporation constitutes a
trust fund for the benefit of corporate creditors. For purposes of
this rule, the capital stock contemplated by law should refer to
the aggregate par value (or issued value in case of no par value
shares) of the outstanding shares of stock, for creditors extend
credit to a corporation on the faith of its capital stock represented
by its outstanding shares and not necessarily on the basis of the
actual consideration paid for each of the shares which may be

unknown to them.
Under the trust fund doctrine, it is only the assets of the corpo-
ration, as represented by the subscribed or outstanding capital
stock, that constitute a fund to which creditors have a right to
look for the satisfaction of their claims and which the corporation
is not allowed to impair to their prejudice. (Phil. Trust Co. vs.
Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil. 746 [1934].)
In other words, the capital stock which must not be reduced by
the payment of the dividends means the legal capital, i.e., the
portion of the corporate assets equivalent to the total par value
of all the outstanding par value shares (or the total consideration
39
received for no par value shares) of the corporation.
(6) Increase of capital account without issuance of additional
shares. — Furthermore, it is the law, not the corporation, that
must necessarily determine what assets shall form part of the
capital stock which the corporation is not allowed to impair for
the protection of its creditors. However, following the opinion of
the Commission, it now depends entirely on the board of direc-
tors whether or not to create premium surplus and, therefore,
whether or not the increase in the value of the stock is to be treat-
ed as part of the corporation's capital stock. The rule will make
possible an increase in the capital account without issuing addi-
tional shares for the amount capitalized.
The corporation, of course, may declare stock dividends from
premium surplus, but as a stock dividend involves a transfer of
surplus to capital account, it is valid only when corresponding
shares are issued to the stockholders for the amount transferred.
If a corporation can declare cash dividends out of actual earnings
even to the extent of reducing the market value of stocks to their
par value, why not out of premium surplus?
(7) Issuance of stock at par value but less than market value. —
Lastly, Section 62 prohibits a corporation from issuing stock for a
39
Accordingly, the term "legal capital" has been defined as follows: "That part of
the paid-in capital of a corporation which by law, agreement, or resolution of directors
become the par or stated value of the capital stock; the portion of the assets restricted as to
withdrawal under corporation law." (E.L. Kohler, A Dictionary for Accountants, 1975 ed., p.
289.) It does not include paid-in surplus.
406
consideration less than the par value but it is not required by law
to issue stock which has increased in value, at a price above par.
If the difference or premium must be treated as part of the capital
stock for the benefit of the creditors, then a corporation should
not be permitted to issue stock for a consideration less than its
market value, although it may be above the par value. However,
such issuance is not prohibited by Section 62.
Thus, shares with a par value of P10.00 but with a market
value of P15.00 may be legally issued for a price less than P15.00
provided it is not less than P10.00. It will depend, therefore, sole-
ly on the board of directors of the corporation whether the excess
value should become part of the capital stock by issuing the stock
at market price or be given free to stockholders by issuing stocks
at par value. If the difference can be distributed gratuitously to
the stockholders without diminishing the capital stock, why not
as cash dividends?
Distribution of revaluation surplus

as dividends.
A corporation can have its fixed assets like real estate revalu-
ated for the purpose of determining its current market value. The
excess increment on the property over the stated cost is credited
to an account called revaluation or appraisal surplus to show that
such is the result of an estimated increase in the value of the
property, (see SEC Opinion, May 14,1970.)
(1) General rule. — An increase in the value of fixed assets
such as land as a result of mere valuation cannot be counted in
the computation of a surplus as basis for a dividend declaration.
The reason why purely conjectured increase in valuation
cannot be considered for purposes of dividend declaration is
because such appraisal, however justified for the time being,
is subject to market fluctuations, is merely anticipatory of
future profits and may never be actually realized as an asset of
the corporation by the sale of the property at the value it was
appraised. The surplus of a corporation which may be used for
the payment of dividend must be a bona fide and not an artificial
or fictitious one and not be dependent for its existence upon
a theoretical estimate of an appreciation in the value of the

corporation's assets. (SEC Opinion, Oct. 15, 1973, citing Berkes
Broadcasting Co. vs. Crawmer, 356 Ph. 620.)
Sound accounting requires that such unrealized appreciation
shall not be confused with a paid-in surplus or an earned surplus
due to accumulated profits arising from the successful conduct
of the business. (SEC Opinion, Dec. 7, 1971, citing Ballantine, p.
541.)
(2) Exceptions. — The above ruling is not absolute as the Se-
curities and Exchange Commission allows certain exceptions
making revaluation increment or reappraisal surplus available
for cash and stock dividend. Thus, where a fixed asset is being
depreciated based on its appraisal value, and the depreciation on
the appraisal increment is charged against operations, the earn-
ing from operations in that period are diminished by the amount
of such depreciation which amount, therefore, is actual income
shifted to and lodged in another account. Whether such amount
is restituted to retained earnings or not is of no consequence. In
such event, the portion of increase in the value of fixed assets
as a result of revaluation thereof may be declared as dividends,
provided the following conditions exist:
(a) The corporation has sufficient income from opera-
tions from which the depreciation on the appraisal increase
was charged;
(b) It has no deficit at the time the depreciation on the ap-
praisal increase was charged to operations; and
(c) Such depreciation on appraisal increase previously
charged to operations has not been erased or impaired by
subsequent losses; otherwise, only that portion not impaired
by subsequent losses is available for dividend. (SEC Opin-
ions, Oct. 2,1981 and March 19,1992.)
Declaration of dividends.
(1) Conditions. — A dividend declaration ordinarily requires
the concurrence of two things, namely:
(a) The existence of "unrestricted retained earnings" out
of which the dividends may be declared and paid; and
408
(b) A corporate resolution of the board of directors

declaring the payment of a portion or all of such earnings to
the stockholders.
(2) Additional requirements for stock dividends. — Cash divi-
dends require only approval of the board of directors. Stock
dividends are issued by resolution of the board of directors and
approval of the resolution by the stockholders. For the declara-
tion of stock dividends, a corporation must have also a sufficient
number of authorized unissued shares for distribution to stock-
holders; otherwise, it must increase its capital stock to the extent
of the corporate earnings to be declared and distributed as stock
dividends, (see Sec. 38.)
The distribution of dividends will, of course, reduce the
retained earnings of the corporation by exactly the amount paid
out to stockholders in the case of cash dividend, or transferred to
capital account in the case of stock dividend, (infra.)
Discretion of the board of directors

to declare dividends.
The board of directors has the responsibility to declare divi-
dends and determine the timing as well as their amount.
(1) The fact that profits or earnings have accrued in the
prosecution of the corporate business does not necessarily
impose upon the directors the duty to declare them as dividends.
(Wabask R. Co. vs. Barclay, 280 U.S. 197.)
(2) If in their honest judgment the directors reasonably
determine that the profits should be kept in the business, no
court has the power to compel them to make the distribution
40
in the absence of bad faith or clear abuse of discretion, or such
^There are no infallible distinguishing earmarks of bad faith. The following facts
are relevant to the issue of bad faith and are admissible in evidence: intense hostility of
the controlling faction against the majority; exclusion of the minority from employment
by the corporation; high salaries or bonuses, or corporate loans made to the officers in
control; the fact that the majority group may be subject to high personal income taxes if
substantial dividends are paid; the existence of a desire by the controlling directors to
acquire the minority stock as cheaply as possible. But if they are not motivating causes
they do not constitute bad faith as a matter of law.
The essential test of bad faith is to determine whether the policy of the directors
is directed by their personal interests rather than the corporate welfare. Directors are
arbitrary or unreasonable conduct as amounts to a breach of

trust. The apportionment of the net earnings to the payment
of dividends is largely a question of policy entrusted to the
discretion of the board of directors. If there is any doubt about
the propriety of declaring dividends, the directors are justified in
resolving the doubt against such action. (19 Am. Jur. 2d 322-323.)
(3) So long as the board of directors acts in good faith, it is
at liberty to distribute or not to distribute at all any dividend
41
subject to the prohibition in the second paragraph of Section 43.
(infra.)
(4) The stockholders may sue the directors to compel them
to declare and pay a dividend if they unreasonably accumulate
profits of the corporation but they have the burden of proving
the justification of declaring dividends.
Limit on retained e a r n i n g s .
(1) Under the Corporation Code. — Stock corporations are
prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock except when justified by any of the
42
reasons mentioned. (Sec. 43, par. 2.) If the requirement which is

mandatory is violated, the corporation may be compelled by the
Securities and Exchange Commission to declare dividends to its
43
stockholders. The prohibition on retention of profits provided in
fiduciaries. Their cestui que trusts are the corporation and the stockholders as a body. Cir-
cumstances such as those above mentioned and any other significant factors, appraised
in the light of the financial condition and requirements of the corporation, will determine
the conclusion as to whether the directors have or have not been animated by personal,
distinct from corporate, considerations. (Gottfried vs. Gottfried, 73 N.Y.S. 2d 696.)
41
In view of the restrictions imposed by Section 43, the "business judgment" rule
which upholds judicial non-interference in corporate management (see Sec. 23.) has lim-
ited application with regard to dividend declarations.
42
The SEC has resolved as a matter of policy to construe paid-in capital stock as used
in the second paragraph of Section 43, to include payment on subscription in excess of
par. (SEC Opinion No. 47, Sept. 30, 2003.)
4J
The SEC has issued the following rules governing the excess profits of corpora-
tions:
(1) All corporations which have surplus profits in excess of necessary require-
ments for capital expansion and reserves shall declare and distribute the excess profits as
dividends to stockholders.
(2) Where the financial statements of the corporation show surplus profits in ex-
cess of 100% paid-up capital, it shall explain by footnotes why the same has not been
declared as dividends. If the explanation is not satisfactory, the Commission shall direct
the corporation to distribute the excess as dividends.
410
Section 43 is applicable to all stock corporations, including wholly

owned subsidiaries. Section 43 does not make any qualification
in using the words "stock corporations." (SEC Opinion, July 22,
1993.)
There may be some question as to whether or not the reten-
tion of profits is justified by the "reasonable needs of the busi-
ness." Suffice it to say that the policy of the law to encourage
and force the distribution of dividends curtails the discretionary
power of directors to retain corporate earnings."
The Commission will consider as sufficient justification for non-distribution of divi-

dends the following: A. The corporation has definite expansion plans approved by the
board of directors and stockholders, and whenever necessary, by the proper government
authority. The amounts appropriated for such purpose shall be segregated from the free
surplus. Upon completion of the expansion program, reserves established shall be de-
clared as stock dividends. B. The corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from declaring divi-
dends without its/his consent, and such consent has not been secured. C. The non-distri-
bution of dividends is consistent with the policy or requirement of a government office.
Should an examination of the affairs of the corporation be necessary to determine
the validity of the explanation given, an examination fee of not exceeding five hundred
pesos (P500) shall be charged to and collected from the company.
(3) It shall be the policy of all corporations whose securities are listed in any op-
erating stock exchanges or registered and licensed under the Securities Act to maintain
and distribute equitable balance of cash and stock dividends, consistent with the needs
of stockholders and the demands for growth or expansion of the business.
Any declaration of dividend, whether cash or stock, shall be reported to the Com-
mission within fifteen (15) days from the declaration: Provided, That in the case of cor-
porations whose securities are listed in any operating stock exchange or registered and
licensed under the Securities Act, the report shall be filed with the Commission before or
simultaneously with the release or publication of the notice of declaration of dividends
to stockholders.
Any and all appropriations out of surplus profits for reserves shall have prior ap-
proval of the board of directors and stockholders. The specific purpose arid justification
for each reservation shall be clearly stated in the financial statements by footnotes.
44
Section 43 supersedes Presidential Decree No. 270 which also requires all corpora-
tions which have surplus profits in excess of necessary requirements for capital expan-
sion and reserves to declare and distribute the excess profits as dividends to stockhold-
ers, pursuant to such rules and regulations which under the Decree the Securities and
Exchange Commission is authorized to promulgate. According to the Decree, "a more
favorable and healthier climate for investments would be promoted if stockholders are
able to share in the profits of corporations whenever possible, the same not being subject
to the absolute or arbitrary action of management on the matter." The Decree applies
only to publicly held corporations or those having stockholders in excess of twenty. (SEC
Opinion, Sept. 14, 1973.) It does not apply to wholly owned subsidiaries of foreign cor-
porations. (SEC Opinion, Jan. 8,1974.) The term "surplus profits," as used in the Decree,
is synonymous to "retained earnings," as used in accounting. (SEC Opinion, Nov. 14,
1973.) Unlike Section 43, the Decree does not fix the limit of the surplus profits that may
be retained.
Sec. 43 TITLE rV. POWERS OF CORPORATION 411
(2) Under the National Internal Revenue Code. — Section 29 of

the Tax Code imposes a 10% surtax on corporations improperly
accumulating profits or surplus, in addition to other income taxes
imposed on corporations. The purpose is to prevent individual
taxpayers from avoiding the progressive rates of income tax by
employing the corporate form for the accumulation of taxable
45
income. (De Leon & De Leon, Jr., The National Internal Revenue
The Commission has opined that the scheme adopted by a corporation with sub-
stantial surplus profits whereby the stated value of each share of its outstanding no-par
value shares was revalued by increasing the same from, say, P1,000 per share to P7,000,
the payment to which would come from its retained earnings, instead of declaring stock
dividends because the existing unissued shares of the corporation were not sufficient for
distribution to its stockholders, was violative of Pres. Decree No. 270, as it deprived them
of their right to participate in the surplus profits according to their respective interests.
(SEC Opinion, July 31,1979.)
45
"Sec. 29. Imposition of Improperly Accumulated Earnings Tax. —
(A) In General. — In addition to other taxes imposed by this Tide, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of each
corporation described in Subsection B hereof, an improperly accumulated earnings tax
equal to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. —
(1) In General. — The improperly accumulated earnings tax imposed in the pre-
ceding Section 1 shall apply to every corporation formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation by penriitting earnings and profits to accumulate instead of being divided or
distributed.
(2) Exceptions. — The improperly accumulated earnings tax as provided for under
this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. —
(1) Prima Facie Evidence. — The fact that any corporation is a mere holding com-
pany or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. — The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence, shall prove to the con-
trary.
(D) Improperly Accumulated Taxable Income. — For purposes of this Section, the term
"improperly accumulated taxable income" means taxable income adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
412
Code Annotated, 2003 ed., Vol. 1, pp. 230-231.)
Action to enforce declaration

of dividends.
Since a stockholder has no individual interest in the profits
of a corporation until a dividend has been declared, the general
rule is that, prior to the declaration of a dividend, a stockholder
cannot maintain an action at law to recover his share of the accu-
mulated profits. Mandamus is not a proper remedy in such a case.
However, an action at law may be maintained where it is al-
leged that sufficient net profits have been earned to obligate the
corporation to pay the amount agreed. Before an action to compel
the declaration and payment of a dividend can be maintained, it
must appear that the complaining stockholder has made appli-
cation to the directors of the corporation for the relief sought.
Where, however, it appears that the directors of a corporation
have wantonly violated their duty, and that an application by a
stockholder to them for relief would be inefficacious, such ap-
plication need not be made. In such an action, the corporation is
a necessary party defendant. (18 C.J.S. 1142.)
Time for declaration of d i v i d e n d s .

(1) At the end of the year. — A corporation has a fiscal year in
order to determine the results of its operation during the year
— whether it earned profits or incurred losses. Of course, such
results may also be computed monthly, quarterly, or semi-annu-
ally, but a summary is always made at the end of the year to
determine the performance of the company for the whole year.
(a) If the company earned profits during the past year,
it may declare the same as dividends, but if it does not, the
Provided, however, That for corporations using the calendar year basis, the accumu-
lated earnings tax shall not apply on improperly accumulated income as of December 31,
1997. In the case of corporations adopting the fiscal year accounting period, the improp-
erly accumulated income not subject to this tax shall be reckoned, as of the end of the
month comprising the twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. — For purposes of this Section, the term "rea-
sonable needs of the business" includes the reasonably anticipated needs of the business.
(NIRC.)
profits are carried over to the next fiscal year. Conversely, if

the company incurred losses during the past year, its books
will record such loss and no profits, unless it accumulated
earnings during the previous years which have not been dis-
tributed as dividends. It follows from this that a corporation
may incur losses during one fiscal year or any portion thereof
and still be able to declare dividends, that is, if such losses do
not affect profits that the company has accumulated. On the
other hand, a corporation may earn profits in one fiscal year
but because of losses suffered during the previous years, it
may not be able to declare dividends.
(b) From the foregoing, it is clear that what is material
is the existence of earned profits on the date of declaration,
taking into account the results of the entire operations of the
company. Since the financial statements are generally pre-
pared after the end of the fiscal year, dividends are declared,
as a general rule, after the fiscal period has ended, when re-
tained earnings are shown to exist. Of course, the determina-
tion of the existence of retained earnings may be made even
before the end of the fiscal year, but this is merely to enable
the management to map out its dividend policy for the next
fiscal year.
(2) Before the end of the year. — Therefore, a corporation should
not declare dividends out of profits earned during an interim pe-
riod or before the end of the fiscal year, considering that profits
earned during say, the first half of the year may be wiped out
by losses incurred during the latter part of the same year. (SEC
Opinion, July 16, 1971.) However, a corporation may declare
dividends even before the end of the fiscal year, provided it has
sufficiently earned surplus for the purpose which will not be im-
paired by losses, whether expected or not, during the remaining
period of the fiscal year." (SEC Opinion, Oct. 22,1974.)
"The SEC requires the submission of the projected income statement of the corpora-
tion for the remaining period of the year as well as the basis and assumption used therein
for the valuation of the Commission showing that the corporation will not sustain losses
that would impair the existing earnings to be declared as dividends. Should the corpora-
tion sustain losses during the year, cash distributed to the stockholders of record must be
refunded to the corporation. (SEC Opinion, Nov. 12,1990.)
414
The Securities and Exchange Commission requires that the

projected income statement of the corporation for the remain-
ing period of the year as well as the basis and assumptions used
therein shall be submitted to the Commission. Should the corpo-
ration sustain losses during the year, cash dividends distributed
to the stockholder of record must be correspondingly refunded
to the corporation. (SEC Opinion, July 24,1991.)
Validity of dividend determined

at time of declaration.
(1) Effect of subsequent insolvency of corporation. — In deter-
mining whether dividends were lawfully made, the transaction
must be viewed in the light of the time of its occurrence, and if
net or surplus profits existed at that time, the payment of the
dividend is not rendered unlawful by the subsequent insolvency
of the corporation, and if the assets of a corporation are valued
honestly and fairly in view of all the facts known at the time of
the declaration, a dividend is not rendered unlawful by the fact
that such assets subsequently prove to be worthless than the val-
uation placed upon them.
(2) Effect of good faith in making payment out of capital. — How-
ever, mere ignorance of facts showing the true condition of the
assets of a corporation which could have been ascertained by
reasonable inquiry and examination is not sufficient to validate
a dividend which has been paid out of capital. And whether the
assets of a corporation were so valued is not a question to be
determined by the board of directors of a corporation, nor by a
majority of its stockholders; hence, a finding by the directors of
a corporation that certain dividends, although in fact paid out
of capital, were declared fairly and in good faith, in the light of
what was known and believed at the time they were declared,
and a subsequent ratification of such finding by a majority of the
stockholders, do not validate the payment of such dividends. (18
C.J.S. 1102.)
Payment of subscription f r o m d i v i d e n d s .
(1) From dividends to be declared. — It has been held that a
stipulation to the effect that the subscription is "payable from
the first dividends declared on any and all shares of said com-
party owned by me at the time dividends are declared until the

full amount of the subscription has been paid" is illegal for it
"obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock." In the contingency that
dividends are not paid, there is no liability at all. (National Ex-
change Co. vs. Dexter, 51 Phil. 601 [1928].)
(2) From cash dividends. — Where payment has been made on
stock subscription, the rule depends on whether the stockholder
is delinquent or not.
(a) The stockholder is still entitled to receive cash divi-
dends due on delinquent stock but the dividends "shall first
be applied to the unpaid balance on the subscription, plus
costs and expenses." (Sec. 43, par. 1.) The cash dividends may
be applied as payment for the unpaid subscription of all de-
linquent shares. (See Sec. 71.)
(b) Cash dividends cannot be withheld from the sub-
scribers who have not fully paid their subscriptions unless
they are delinquent on their unpaid subscriptions. The cor-
poration may use the cash dividends to pay off stockholders'
subscriptions but which have not been declared delinquent
only if the stockholders concerned give their consent thereto.
(SEC Opinion, March 18,1991.)
(3) From stock dividends. — A stockholder's indebtedness to
a corporation under a subscription agreement cannot be com-
pensated with the amount of his shares in the same corpora-
tion, there being no relation of creditor and debtor with regard
to such shares, (see Art. 1249, Civil Code.) Under Section 43
(par. 1.), "stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid." In other
words, under the provision, it is not allowed to apply stock divi-
47
dend to unpaid subscription.
(a) A stockholder, as such, is not a creditor of the cor-
poration for his shares although the latter is creditor of the
48
former for the unpaid balance of his subscription. It is the
47
Note that stock dividend can be withheld only from a delinquent stockholder.
Stock dividends may be declared out of retained earnings even if there are still unpaid
subscriptions.
"A subscription contract (see Sec. 60.) creates a creditor-debtor relationship between
the corporation and the subscriber.
prevailing doctrine that the capital stock of a corporation is

a trust fund to be used more particularly for the security of
creditors of the corporation who presumably deal with it on
the credit of its capital stock. (18 C.J.S. 618.) In view of the
foregoing, a stockholder's liability for unpaid subscriptions
(although not yet delinquent) may not be offset by the issu-
ance and distribution of stock dividends, (supra.)
(b) A stock dividend requires a transfer of surplus to
capital account and it cannot be made without issuing new
shares. Since the retained earnings of the corporation are al-
ready applied as payment to the new issuance of shares, the
same cannot be reapplied to previous subscriptions which
are still unpaid as this would be, in effect, reacquiring its own
shares, the proceeds of which will be applied to the unpaid
subscription, which case is not allowed under Section 41.
(c) Section 6 states that preferred shares may be given
preferential right in the distribution of dividends among oth-
ers, but it does not prohibit holders of preferred shares from
acquiring shares of whatever class by way of stock dividend.
As long as all the requirements for the declaration of stock
dividend are complied with, the issuance of common shares
in favor of stockholders holding preferred shares is valid.
(SEC Opinion No. 04-28, April 27,2004.)
Instead of stock dividends, the corporation may declare cash
dividends, and use the said dividends to pay off the stockhold-
er's unpaid subscriptions. (SEC Opinion, March 15,1968.)
Liability of stockholders and directors

for illegally received dividends.
(1) Liability of stockholders to refund them to corporation or its
creditors. — In case dividends are wrongfully or illegally declared
and paid, there is ample authority for the rule that the stockhold-
ers who received them can be held liable to refund them to the
corporation or its creditors. It is immaterial that the dividends
were mistakenly paid out or were received in good faith. Since
they do not act in a corporate capacity in receiving the dividends,
they do not thereby ratify the illegal act of the board as to pre-
elude a subsequent recovery. (Levington Life, F. & M. Ins. Co. vs.

Page, 66 Am. Dec. 165.)
(2) Where corporation insolvent at time of wrongful payment.
— The rule is especially true if the corporation is insolvent (Mc-
Donald vs. Williams, 174 U.S. 397.), although the authorities are
conflicting where the corporation was solvent at the time of the
wrongful payment.
(a) It seems to be an unfair and unreasonable burden to
require innocent stockholders to repay dividends, perhaps
years after they have been spent, when they were received in
good faith from a solvent corporation in the regular course of
business, even if it has later become bankrupt. If a wrong was
done to the security of creditors by the directors, they are the
ones to be held responsible. (Ballantine, p. 600.)
(b) In view, however, of the trust fund theory adopted in
our jurisdiction, the payment of dividends from capital may
be considered a wrongful diversion of a "trust fund" held for
the benefit of creditors, so that the fund may accordingly be
followed into the hands of stockholders, (see Phil. Trust Co.
vs. Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil.
746 [1934].) The innocent stockholders can recover damages
from the guilty directors.
(3) Liability of directors. — If the directors acted in good faith,
and without negligence, they are not liable to the corporation
or to creditors for declaring and paying dividends when they
should not have done so, and thereby diminishing the capital
stock. But if they have been guilty of a fraudulent breach of trust,
or of gross negligence, in paying dividends when they had no
right to pay them/they are personally liable to creditors.
Liability of directors for unlawfully paid dividends may be
enforced under Section 31.
Remedies of corporate creditors.

If dividends are improperly declared and paid when there
are no net earnings, they may be reclaimed by the corporate
creditors or by a receiver or assignee acting for the benefit of the
creditors.
418
(1) If the capital stock of a corporation is wrongfully paid

away by the directors, it may be pursued by creditors into the
hands of any one who is not an innocent purchaser or recipient
of the same for a valuable consideration.
(2) If such a wrong is threatened, a creditor may maintain a
suit for an injunction, since the fund to which the creditor looks
for security would thereby be impaired. (Clark on Corporations,
pp. 435-436; see Steinberg vs. Velasco, 52 Phil. 953 [1929].)
Persons entitled to dividends.

The right of one to receive dividends from a corporation on
its stock is, manifestly, justified only on the theory that he is a
stockholder. In other words, the right to dividends is an incident
to ownership of stock, and this applies to stock dividends as well
as to cash dividends. (19 Am. Jur. 2d 370.)
(1) Except where the dividend is payable to stockholders of
record on a specified date, the real owner of corporate stock at
the time the dividend is actually declared thereon is the person
entitled to the dividend (Ibid.), without regard to the time when
the dividends were earned or made payable. In other words, it
is only the stockholders of record as of the date of the declaration of
dividends or holders of record on a certain future date, as the case may
be, who are entitled to receive dividends unless the parties have
agreed otherwise. (SEC Opinion, Nov. 12, 1986; Cojuangco vs.
Sandiganbayan, 586 SCRA 790 [ 2 0 0 9 ] >
Naturally, the persons appearing as stockholders in the stock
and transfer book on the date fixed will be the ones entitled to
dividends, and the date for payment is only indicated for con-
venience of the company. The rule with respect to the payment
of dividends is that there must be no discrimination against any
stockholders (1 Fletcher, pp. 882-887.), so that the date for the
purpose must ordinarily apply to all stockholders.
(2) As between parties respectively entitled to capital and to
income of stock held in trust, the right to particular dividends is
generally dependent upon the creator of the trust, actual or pre-
sumed. (19 Am. Jur. 2d 371.)
^'Citing DE LEON, The Corporation Code of the Phils., Annotated, p. 410, 2002 Ed.
(3) A transfer of shares which is not recorded in the books

of the corporation is valid only as between the parties (Sec. 63.);
hence, the transferor has the right to dividends as against the cor-
poration without notice of the transfer but he is the trustee of
the real owner of the dividends subject to the contract between
the transferor and transferee as to who is entitled to receive the
dividends.
(4) If an unregistered pledge earns dividends, the pledgor is
entitled to the same as against the corporation, in the absence of
notice of the pledge; but if the pledge is recorded in the books of
the corporation, the pledgee has the right to receive the dividends,
with the obligation to compensate what he receives with the debt
of the pledgor, (see Art. 2102, Civil Code.)
(5) Share subscriptions not yet recorded in the stock and
transfer book on the date of dividend declaration, are not en-
titled to said dividend. Hence, subscribers to the increase of capi-
tal stock are considered stockholders of record only at the time of the
approval of said increase by the Securities and Exchange Commis-
sion (see Sec. 38, par. 3.) and not at the time of filing of the certifi-
cate of increase of the capital stock, (see SEC Opinion, Sept. 15,
1980.)
Right of s t o c k h o l d e r s after declaration

of d i v i d e n d s .
(1) Cash dividends. — As soon as cash dividends are publicly
declared, the stockholders have the right to their pro rata shares.
(1 Fletcher, pp. 780-789.)
50
(a) In the absence of a record date, the dividend belongs
50
A record date is the date fixed in the resolution declaring dividends, when the divi-
dend shall be payable to those who are stockholders of record on a specified future date
or as of the date of the meeting declaring said dividend, (see Ballantine, pp. 566-567.)
The date fixed determines the stockholders who are to receive the dividends. The usual
practice is for the corporation to provide for the closing of its transfer books on a certain
date such that only stockholders as of the given date are entitled to dividends. Usually,
several days elapse between the time a person buys stock and the time the corporation
records the sale. Thus, a seller of stock who is still the stockholder of record on a specified
date may receive a dividend after he has sold his stock to another person.
Because payments of stock dividends requiring an increase in the authorized capi-
tal stock are contingent upon SEC's approval (see Sec. 38.), record and payment dates
are ordinarily indicated as falling within a certain period following SEC's approval of
capital increase. All cash dividends declared by a corporation shall have a record date
to the person who is the owner of the shares of stock at the

time of declaration, and not to the owner of the shares at the
time of payment. The reason is that when a dividend declara-
tion is made, the corporation becomes debtor and the right of
the shareholder to distribution, unless a record date is speci-
fied, becomes fixed by the declaration. (Ballantine, p. 566; see
Barretto vs. Sta. Maria, 26 Phil. 200 [1914].)
(b) It is the declaration of the dividends which creates
both the dividends itself and the right of the stockholders to
demand and receive it. (SEC Opinion, Oct. 9, 1992.) So, one
who receives stock from a corporation immediately before a
dividend is declared has the same right as the other stock-
holders to share therein, unless he is excluded by the term of
his contract. (SEC Opinion, Aug. 6,1990, citing Fletcher, Sec.
5376.)
(c) When a cash dividend is duly declared, the amount
due a stockholder belongs to him and it cannot, without his
consent, be reverted to the surplus account of the corporation.
The company should exert real and sincere efforts to contact
51
and deliver the dividend to him, and only after the lapse
of the prescriptive period for claiming the dividend may the
same be reverted to the surplus account of the corporation.
(SEC Opinion, Jan. 29, 1971.) It is preposterous to say that a
debt can be cancelled by the action of the debtor without the
consent of the creditor. (McLaran vs. Crescent Planning Mill
Co., 93 SW 819.)
which shall not be less than 10 or more than 30 days from the said declaration. In case,
no record date is specified, the date shall be deemed fixed at 15 days from declaration.
Companies that are obliged to pay dividends may have a single declaration for several
cash dividends within a year subject to the condition, that their record and payment dates
are also explicitly provided. (SEC Memo. Ore. No. 2, April 17,2009; amending Amended
Rules governing Pre-Emptive and Other Subscription Rights and Declaration of Stock
and Cash Dividends.
The term ex dividends is used to indicate that the price of shares of a corporation
excludes the dividend payable on a certain future date to the stockholders of record on a
specified preceding date (E.L. Kohler, op. cit., p. 198.) or a previously declared dividend.
The buyer is entitled to the declared dividend when the stock is sold cum dividends or
dividends-on.
51
Check payments are mailed directly to the stockholder or his nominee by the com-
pany's stock transfer agent. For unissued stock certificates or those registered in street
name, checks are sent to the handling broker who, in rum, remits payment to the benefi-
cial owner of the shares.
(2) Stock dividends. — The above rule does not apply to stock
dividends as the declaration of such dividends may be rescinded
at any time before the actual issuance of the stock. (Staats vs. Bio-
graph Co., 236 Fed. 454.)
(a) Unlike a cash dividend, a stock dividend requires, as
a general rule, more than mere declaration to make it effec-
tive. The vote to increase stock is not per se an increase; and
until the stock is actually issued, or at least in some manner
especially set apart to the stockholder, its effect is not com-
plete. (19 Am. Jur. 2d 317.)
(b) The so-called stock dividend in shares of the kind
already held gives the shareholder nothing in the way of a
distribution of assets but merely divides his existing shares
into smaller units. There is no increase in his proportionate
claim upon the corporate assets or income by reason of such
a paper dividend. There is no obligation upon the corpora-
tion to declare stock dividends, which are not distributions
but only a change of the share and capital structure. (Ballan-
tine, p. 560.)
(c) Since the declaration of stock dividend gives the stock-
holder nothing until all the formalities necessary to a valid
increase of stock are complied with, its revocation, therefore,
takes away nothing. But unless rescinded, the shareholders
have absolute right to their respective shares in the stock div-
idends so declared and actual delivery of the corresponding
certificate is not essential to make the shareholder the owner
of the dividend.
Time for p a y m e n t of dividends.

(1) Frequency and intervals of declaration. — Dividends are
usually declared, one at a time, generally quarterly.
(a) Where the condition of the company is sound and the
earnings are regarded as constant, the directors may, at one
meeting, declare dividends in advance for succeeding quar-
ters, hardly even longer than a year altogether, the dividend
for each succeeding quarter being made payable as of a cer-
tain date in the same manner as the first dividend.
(b) Where the business of the corporation is running

along in good shape, with abundant revenues with which to
pay dividends, the payment of the regular dividends on the
various classes of stock becomes a more or less routine mat-
ter, called to the attention of the board of directors by the
treasurer at the directors' meeting prior to the expiration of
the quarter or the half year or the year for which the divi-
dends are to be payable. (19 Fletcher, pp. 220-221.)
(2) Date of payment. — There is no hard and fast rule describ-
ing the interval of time between the date for the declaration of
dividends, the date of record of stockholders entitled thereto,
and the date of payment, the same being left to the sound and ju-
dicious discretion of the directors. (SEC Opinion, April 11,1962.)
(a) It is customary for the directors to fix the time for pay-
ment of a dividend. But a corporation cannot discriminate
among the shareholders as to the time of payment of divi-
dends.
(b) If no time is fixed by the resolution declaring a divi-
dend, it is payable on demand, and if the resolution declares
that it shall be payable at such time as the board of directors
may direct and the board fixes no time, the law implies that it
shall be paid within a reasonable time. (19 Fletcher, pp. 887-
888.)
Equal participation in the distribution

of dividends.
As a rule, dividends among stockholders of the same class
must always be pro rata, equal and without discrimination and
regardless of the time when the shares were acquired.
(1) General on all the stocks. — The dividends must be general
on all the stocks, so that each stockholder will receive his
proportionate share. The directors have no authority to declare a
dividend on any other principle. They cannot exclude any other
portion of the stockholders from an equal participation in the
profits of the company. The rule against discrimination is equally
applicable to stock dividends. Each stockholder is entitled to
receive new shares in proportion to the stock held by him and
any discrimination is illegal. (11 Fletcher, pp. 1101-1104.)
(2) Fractional shares included in computation. — For the same

reason that a corporation cannot exclude stockholders owning
full shares from equal participation in the distribution of divi-
dends, it cannot deny stockholders to fractional shares (see Sec.
41[1].) from participation in the dividends to the extent of their
respective holdings. Thus, fractional shares resulting from a pre-
vious distribution of dividend by a corporation shall be included
in the computation of stock dividend subsequently declared.
Total subscription basis of s h a r e

in d i v i d e n d s .
As a general rule, and as applied to any form of dividend
declaration, the participation of each stockholder in the earnings
or profits of the corporation is based on his total subscription
and not on the amount paid by him in account thereof. (Sees. 43
[par. 1], 72.) For example, if a person subscribes for 1,000 shares
of the par value of P10.00 per share and has paid P5,000.00 on
his subscription, he will participate in dividends on the basis of
1,000 shares, not 500 shares.
The reason is that a stockholder's entire subscription repre-
sents his holdings in the company for which he pays interest on
any unpaid portion, (see Sees. 64, 66.) Subscribers are considered
stockholders not from the time they are issued stock certificates
but from the time their subscriptions are accepted by the corpo-
ration because it is from this time that they are bound by their
subscriptions, subjecting them to all the liabilities and entitling
them to all the rights of stockholders. (SEC Opinion, June 28,
1966.)
Only in cases where a stockholder is delinquent in the pay-
ment of his unpaid subscription that he loses his privilege in a
corporation where he has holdings, as provided in Section 71,
except his right to receive cash dividends, which, however, shall
first be applied to his unpaid balance on the subscription plus
cost and expenses. (Sec. 43, par. 1.)
Other m o d e s of division of dividends.

The above rule is not absolute and is subject to the rule of
consent. Thus, it has been opined under the old Code that the
424
distribution of dividends on the basis of the paid-up shares or

any other mode which itself is lawful may be adopted by a cor-
poration, but the unanimous consent of the stockholders is indis-
pensable. (SEC Opinion, Dec. 7,1973.)
It is believed that the same scheme is still legally feasible
under Section 43 as it is not immoral nor against any public
policy. The Securities and Exchange Commission has rendered
an opinion to the contrary, (see note 1.)
Classes of dividends.
Dividends payable to shareholders may be classified as fol-
lows:
(1) Cash dividend. — It is dividend payable in cash. 52
(a) Dividends on par value shares are made at a stated

percentage (e.g., 10%) of the par value although they may
also be paid as a fixed amount per share.
(b) As to no par value shares, dividends are payable in
terms of so many pesos or centavos (e.g., P10.00, P0.01) per
share since there is no basis on which a percentage can be
stated. In other words, a stockholder participates in the divi-
dends on the basis of the par value in case of par value shares,
and the number of shares in case of no par value shares, and
52
"It is a generally accepted auditing principle that cash means 'cash on hand or in
bank.' Standard test in accounting defines 'cash' as consisting of those items that serve as
a medium of exchange and provide a basis for accounting measurement. To be reported
as 'cash/ an item must be readily available and not restricted for use in the payment of
current obligations. A general guideline is whether an item is acceptable" for deposit at
face value by a bank or other financial institution.
Items that are classified as cash include coin and currency on hand, and unrestricted
funds available on deposit in a bank, which are often called demand deposits since they
can be withdrawn upon demand. Petty cash funds or change funds and negotiable in-
struments, such as personal checks, travelers' checks, cashiers' check, bank drafts, and
money orders are also items commonly reported as cash. The total of these items plus
undeposited coin and currency is sometimes called cash on hand. Interest-bearing ac-
counts, or time deposits, also are usually classified as cash, even though a bank legally
can demand prior notification before a withdrawal can be made. In practice, banks gener-
ally do not exercise this legal right.
Deposits that are not immediately available due to withdrawal or other restrictions
require separate classification as 'restricted cash' or 'temporary investments.' They are
not 'cash'." (Rueda, Jr. vs. Sandiganbayan, 346 SCRA 341 [2000], citing Intermediate Ac-
counting Comprehensive Volume, Ninth Ed., by Smith, Jr. and Skousen, Brigham Young
University, Copyright 1987.)
not upon the amount of the consideration paid by him for his
shares.
(c) If gift certificates are given to stockholders as share
in the profits earned by the corporation, they may be treated
as dividend subject to the requirements of Section 43. (SEC
Cash and stock dividends are the more common forms of
dividends;
(2) Property dividend. — It is dividend distributed to the
stockholders in the form of property, real or personal, such as
warehouse receipts, or shares of stock of another corporation, (see
Ballantine, p. 564.)
(a) A dividend payable in property is actually a cash
dividend. The stockholder can take the property, sell it, and
realize the cash. A corporation may, therefore, pay declared
cash dividend in the form of a "property." The Securities and
Exchange Commission allows the distribution of property
dividend as liquidating dividend or where the distribution
of the same is practicable, specifically where the surplus is in
that form (property) and it is no longer intended to be used
in the operation of the business. (SEC Opinion, Feb. 5,1991.)
(b) If the property does not form part of the surplus or
retained earnings of the corporation, the same cannot be de-
clared as property dividends.
(c) SEC rules (June 9, 1992.) require, among others, that
the property to be distributed as dividends shall consist only
of property which are no longer intended to be used in the
operation of the business of the corporation and which are
practicable to be distributed as dividends. No actual distri-
bution of property dividends shall be made unless approved
by the Commission;
(3) Stock dividend. — It is dividend payable in unissued or
increased or additional shares of the corporation instead of in
cash or in property out of the unrestricted retained earnings of
the corporation. A stock dividend may be declared only to the
extent of the maximum number of shares authorized in the
(a) Shares of stock are given the special name "stock

dividends" only if they are issued in lieu of undistributed
profits. If they are issued in exchange for cash or property,
then they do not fall under the category of "stock dividends."
A corporation may legally issue shares of stock (not as stock
dividend) in consideration of services to it by a person not
a stockholder or in payment of its indebtedness. A share of
stock issued to pay for services rendered is equivalent to stock
issued in exchange of property, because services is equivalent
to property. Likewise, a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for
cash.
(b) Shares of stock may be issued to a non-stockholder or
to a person who is not a stockholder but shares of stock com-
ing from stock dividends are payable only to stockholders
of the corporation and not to strangers or non-stockholders
because only shareholders are entitled to dividends. (Nielsen
& Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA
540 [1968].)
(c) Stock dividends are in the nature of shares of stock,
the consideration for which is the amount of unrestricted
retained earnings converted into equity in the corporation's
books. It is actually two things: 1) a dividend; and 2) the
enforced use of the dividend money to purchase additional
shares of stock at par. (Lincoln Phil. Life Insurance Co., Inc.
vs. Court of Appeals, 293 SCRA 92 [1998], citing Nelson &
Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540
[1968].)
(d) A corporation may increase its authorized capital
stock by way of stock dividends without touching its un-
issued shares as long as there are retained earnings to justify
the declaration." (see SEC Opinion, Oct. 11,1972.)
(e) A stock dividend has the same effect as cash dividends
distributed to the stockholders who subsequently used said
"The procedure prescribed by Section 38 to effect an increase of capital stock must

be complied with. The increase will be to the extent of the retained earnings to be distrib-
uted as stock dividends.
cash dividends in purchasing shares of the corporation. Since

selling of shares at a premium is not prohibited (Sec. 62, par.
1.), stock dividends may be declared at a premium for such
declaration is in the nature of a sale of shares at a premium;
(f) As long as the requirements for the declaration of
stock dividends are complied with, the issuance of common
shares in favor of stockholders holding preferred shares is
valid (SEC Opinion No. 04-28, April 27, 2004.);
(4) Optional dividend. — It is dividend which gives the stock-
holder an option to receive cash or stock dividend;
(5) Composite dividend. — It is dividend which is partly in
cash and partly in stocks. Here, there is no option involved;
(6) Preferred or preferential dividend. — It is dividend which
is payable, by virtue of contract, to one class of stockholders in
priority to that to be paid to another class (19 Am. Jur. 2d 286.);
(7) Cumulative dividend. — It is dividend which is contracted
to be paid at a certain rate at stated times and, if net earnings
at any dividend period are insufficient to pay the contract divi-
dend, it is to be made out of subsequent net earnings (Ibid.);
(8) Scrip dividend. — It is dividend in the form of a writing or
certificate issued to a stockholder entitling him to the payment
of money, stock or other benefit at some future time inasmuch
as the corporation at the time such dividends are declared has
profits not in cash or has no sufficient cash, or has the cash but
wishes to reserve it for some corporate purposes. It is in the form
of a promissory note or a promise to pay and may be issued to
bear interest;
(9) Bond dividend. — It is dividend distributed in bonds of
the corporation to the stockholders. The bondholder becomes
a creditor of the corporation to the extent of the amount of the
bond. Thus, a corporation may use its retained earnings in
improvement of its plant, or purchasing machinery or other
property and issue its bonds in payment of dividends from such
earnings (see 11 Fletcher, p. 893.); and
(10) Liquidating dividends. — They are dividends which are
actually distributions of the assets of the corporation upon disso-
lution or winding up of the same. (Wise & Co. vs. Meer, 78 Phil.
655 [1947]) They are not paid on account of earnings or profits,
but as a return of capital invested. So, the assets of a dissolved
corporation are not distributed as dividends, as dividends are
commonly known. The term has also been used to describe a dis-
tribution of assets made upon a reduction of the capital stock. (19
Am. Jur. 2d 283-284.)
Dividends may also be participating and non-participating.
(see Sec. 6.)
Ordinary and extraordinary dividends.

Dividends may be divided into the ordinary or regular cur-
rent dividends payable by the corporation and extraordinary or
"extra" dividends, which may consist of cash, property, or stock
distributions.
(1) As usually understood, ordinary dividends are those paid
out of current earnings of a corporation according to some fixed
plan or scheme, usually at regular intervals and sometimes
limited to a substantially fixed rate of return to the shareholder.
Generally, they are cash dividends, stock dividends being
regarded as extraordinary dividends and not included within
the phrase "regular dividends," although a policy of regular
stock dividends is not unknown.
(2) Extraordinary dividends, whether cash or stock, usually
represent an accumulated excess of earnings over normal return
on capital invested and constitute a distribution or a capitaliza-
tion of surplus profits remaining after distribution of ordinary
dividends. (19 Am. Jur. 2d 287.)
Effect of declaration of c a s h d i v i d e n d .
(1) When a corporation issues cash dividends, the assets of
the corporation diminish by exactly the amount paid out and
correspondingly, the property of the individual stockholder
increases. (11 Fletcher, p. 1110.)
(2) The declaration itself of cash dividends is considered
effective to create a debt from the corporation to each of its
stockholders and segregate the amount thereof from the assets,
even though the resolution provides that the dividend is payable

of the stockholders in the corporate assets.
Effect of declaration of stock dividend.

(1) A stock dividend converts the surplus or profits of the
corporation covered by such dividend into the permanent
account, thereby placing it beyond the power of the board of
directors to withdraw from corporate use and to distribute to the
stockholders. (Eisner vs. Macomber, 252 U.S. 189.)
(2) It shows that the corporation's accumulated profits have
been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind,
should opportunity offer. For from being a realization of profits
for the stockholder, it tends rather to postpone said realization.
(Nielsen Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA
540 [1969].) The declaration of a stock dividend is akin to a forced
purchase of stocks. (PLDT vs. National Telecommunications
(3) Such a capitalization of surplus or transfer of such
surplus to the capital account of the corporation adds nothing to
and takes nothing from the corporation. The corporation merely
transfers the surplus to capital account and issues shares of stock
to represent the same. Such shares may be preferred as well as
common stock.
(4) The declaration likewise adds nothing to the interest
of the stockholders. After a declaration of stock dividends, the
stockholder receives no greater proportional interest in the assets
of the corporation than he had before. In this respect, it is identical
in substance with a splitting of original shares (infra.) in which
outstanding shares are exchanged for an increased number of
new shares of proportionally less par value than the old, leaving
the aggregate value of all his stock substantially the same. Such
an increase simply dilutes the shares as they existed before. (19
Am. Jur. 2d 288-289.) A stock dividend, therefore, is, in essence,
not a dividend at all in the ordinary sense of the term.
(5) When stocks dividends are distributed among the stock-
holders, the amount declared ceases to belong to the corpora-
tion. The unrestricted retained earnings of the corporation are
430
diminished by the amount of the declared dividends, while the

stockholder's equity is increased. The stockholders, by receiving
stock dividends, are forced to exchange the monetary value of
their dividends for capital stock, and the monetary value they
forego is considered the actual payment or consideration for the
original issuance of the stocks given as stock dividends. (PLDT
vs. National Telecommunications Commission, supra.)
(6) The declaration of stock dividend is advantageous to
existing creditors of the corporation to the extent that corporate
earnings are capitalized, unavailable for distribution to stock-
holders. At the same time, it improves the cash position of the
corporation with expansion projects or programs obviating the
necessity of borrowing and paying high interest rates.
Tax treatment of stock d i v i d e n d s .

Stock dividends are not taxable as income because they
represent merely an unrealized gain to the stockholder who
receives nothing from the corporation that answers the definition
54
of income under the National Internal Revenue Code.
Income, in tax law, is an amount of money or its equivalent
coming to a person within a specified time, whether as payment
for services, interest, or profit from investment. It is gain derived
and severed from capital, from labor or from both combined, so
that to tax a stock dividend would be to tax a capital increase
rather than the income. Capital is wealth or fund; whereas,
"Sec. 73. x x x (B) Stock dividends. — A stock dividend representing the transfer of
surplus to capital account shall not be subject to tax. However, if a corporation cancels
or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so distributed in redemption or cancel-
lation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. (Pres. Decree No. 1158, as amended.)
The exception is designed to prevent the issuance and cancellation or redemption
of stock dividends, which is fundamentally not taxable, from being made use of as a
devise for the actual distribution of cash dividends, which are taxable. Thus, "the provi-
sion had the obvious purpose of preventing a corporation from avoiding dividend tax
treatment by distributing earnings to its shareholders in two transactions — a pro rata
stock dividend followed by a pro rata redemption — that would have the same economic
consequences of a simple dividend." (Comm. of Internal Revenue vs. Court of Appeals,
301 SCRA 152 [1999].)
income is gain or profit or the flow of wealth. (Comm. of Internal

Revenue vs. Court of Appeals, 301 SCRA 152 [1999].)
ILLUSTRATION:
A, B, C, D, and E organized a stock corporation with an
authorized capital stock of P400,000.00 divided into 4,000 shares
with a par value of P100.00 per share. Each subscribed to and
paid for 400 shares. Hence, the actual asset of the corporation
at the beginning of the business was P200,000.00.
After a few years of profitable business, the assets of the
corporation amounted to P400,000.00, with no debts. Instead of
declaring cash dividends, it was agreed to increase the capital
stock and for that purpose, to issue 400 additional shares each
stockholder in the form of stock dividends with a total value of
P40,000.00 which amount represents the actual increase of his
share or interest in the business.
At the start of the year, each stockholder held 400 shares
with a total value of P40,000.00, which is 1/5 of the total
corporate capital of P200,000.00. At the close of the year, after
stock dividends are declared, each stockholder still holds 1/5
interest in the corporation with his 800 shares worth P80,000.00
in relation to the increased corporate capital of P400,000.00. But
the proportional interest of each share in the corporate assets is
decreased because of the increase in the number of shares, from
1/2,000 to 1/4,000.
The mere issuance of the stock dividends is not subject to
income tax as they do not constitute income to their recipients.
Effect of declaration of b o n d
or scrip dividend.
In the absence of statutory provision to the contrary, a cor-
poration may use its retained earnings, for example, in improve-
ments of its property or in purchasing machinery or other prop-
erty which it is authorized under its articles of incorporation to
acquire and hold, and issue its bonds in payment of dividend
from such earnings. Or, the corporation may issue a scrip divi-
dend. Such a dividend, when the obligation to pay is absolute, is
a debt absolutely due to the stockholders, although payment is
postponed to a future date. (11 Fletcher, pp. 1116-1117.)
432
(1) The declaration of a bond or scrip dividend makes the

stockholder a creditor of the corporation for the amount of the
bond or scrip issued as dividends, but the assets of the corpora-
tion remain the same as nothing passes out of the corporation to
the stockholder.
(2) It has the effect of deferring the payment of cash divi-
dends.
Distinctions between cash dividend

and stock dividend.
(1) A cash dividend involves a disbursement to the stock-
55
holder of accumulated earnings, while stock dividend does not
involve any disbursement;
(2) Cash dividend declared and paid becomes the absolute
property of the stockholder and cannot be reached by the
creditors of the corporation in the absence of fraud, while stock
dividend, being still part of corporate property, may be reached
by corporate creditors;
(3) Cash dividend is declared only by the board of directors, at
its discretion, while stock dividend is declared by the board with
the concurrence of the stockholders representing at least 2 / 3
of the outstanding capital stock at a regular or special meeting
called for the purpose (Sec. 43.);
(4) Cash dividend does not increase the corporate capital,
while it is increased by a stock dividend; and
(5) The declaration of cash dividend creates a debt from the
corporation to each of its stockholders who then hold such stock,
while no debt from the corporation to the stockholders is created
by the declaration of stock dividend, except in the sense that
capital stock constitutes a liability. (19 Am. Jur. 2d 317.)
55
Cash dividends and property dividends received from a domestic corporation and
the share of an individual partner in the distributable net income of a (business) part-
nership are subject to income tax at 6%/8%/10%, effective January 1, 1998/1999/2000,
respectively. The tax is 25% if the stockholder is a non-resident aliens individuals not
engaged in business. (Sees. 24[B, 2], 25[A, 2, B], National Internal Revenue Code.)
It is important to note that a dividend payable in stock is

not synonymous with, and is not always or necessarily, a stock
dividend. A dividend payable in stock may, under some circum-
stances, be a cash dividend (Ibid., 292.), as where the dividend
consists in treasury stocks or in stocks of another corporation.
(supra.)
(6) Cash dividend is taxable as income to the stockholder,
while stock dividend is generally not subject to income tax.
Stock dividend from issue

of additional shares.
Whenever an increase is made in the capital account of a
stock corporation, the increase is valid only when it represents
additional shares issued for which the equivalent consideration
is received by the corporation. The increase may be the result
of an issue of additional shares or the re-investment of retained
earnings effected by the distribution of shares as stock dividend.
Hence, a corporation with outstanding no-par value shares
originally issued at P5.00 per share cannot increase its capital
account by transferring its surplus to its capital account without
issuing additional shares for the amount transferred. Under such
method, stockholders who have already paid in full their no-par
value shares would in effect be made to pay additional amounts
for the same shares to increase their value. Section 6 (par. 3.)
provides that "shares of capital stock issued without par value
shall be deemed fully paid and non-assessable." Once no-par
value shares have been issued at their issued price, their value
can no longer be changed, (see Sec. 62, last par.) Accordingly,
such stock dividend by a transfer of the surplus to capital with
no shares to be issued cannot validly be made. (SEC Opinion,
March 28,1974.)
Distribution or re-issue
of treasury stocks.
The mere acquisition and distribution of previously issued
stock does not constitute a stock dividend. (11 Fletcher, p. 891.)
(1) As a re-issue of existing paid-up shares. — Treasury stocks
(see Sec. 9.), being property of the corporation, may not be dis-
tributed among stockholders as stock dividends, but would con-

stitute property or cash dividends. (SEC Opinion, June 13,1963.)
No increase of capital is involved, since there is merely a re-issue
of existing paid-up shares. Such a distribution of treasury stock
would not be a stock dividend within the ordinary meaning of
the term. (Comm. of Internal Revenue vs. Manning, 66 SCRA 14
[1975], citing Bass vs. Comm. of Internal Revenue, 129 F 2d 300.)
(2) As a distribution of earnings. — If the dividend in stock
consists not of stock created or issued therefor as evidence of
the transfer of surplus or undivided profits to fixed capital, but
of stock in which corporate earnings have been invested or for
which corporate assets have been exchanged or of stock received
from the stockholders in payment of debts to the corporation and
carried in treasury, it is a cash dividend whether such stock is
previously issued and outstanding of the same corporation or
stock of another corporation. (SEC Opinion, June 13,1963.)
It is the same as if the corporation had used accumulated
earnings to buy any other property — say, the stock of another
corporation — and had distributed such substituted property
in specie as a dividend to its shareholders. Thus, in a case,
where a company utilized a portion of its earnings "to buy" the
majority shares of a stockholder and distributed such shares to
the remaining stockholders, it was held that the distribution was
not a stock dividend but in effect a distribution of earnings to
stockholders and, therefore, subject to income tax. (Comm. of
Internal Revenue vs. Manning, supra.) Note: Dividends are no
longer subject to income tax.
(3) As representing a prior disbursement of purchase price to
a former stockholder. — The re-issue of treasury shares by a
corporation as a purported stock dividend cannot be approved,
since there is no capitalization of surplus. The stated capital was
not reduced when the treasury shares were acquired and is not
increased upon their re-issue. Such so-called stock dividend
is simply stock watering which does not represent net worth
or surplus, but only a prior disbursement of purchase price
to a former stockholder. (SEC Opinion, June 13, 1963, citing
Ballantine, p. 484.)
Stock splits.
(1) Distinguished from stock dividends. — The courts have
recognized a distinction between a "stock split" and a "stock
dividend." The essential distinction between a stock dividend
and a stock split is that in the former, there is a capitalization
of earnings or profits, together with a distribution of the added
shares which evidence the assets transferred to capital, while in
the latter, there is a mere increase in the number of shares which
evidence ownership without altering the amount of the capital,
surplus, or segregated earnings.
In brief, a stock split is merely a dividing up of the outstanding
shares of a corporation into a greater number of units, without
disturbing the stockholder's original proportional participating
interest in the corporation. A stock split is essentially one of form
and not of substance.
(2) Ways by which accomplished. — It is said that stock splits
are generally accomplished in two different ways:
(a) If the stock is of the par value type, then the original
certificate is exchanged and a new certificate substituted,
embodying the original shares, plus the new number of
shares authorized by the split.
(b) If it is no-par value stock to be split, then the stock-
holder retains his original certificate and receives additional
certificates for the additional shares. (19 Am. Jur. 2d 284-285.)
The reverse procedure is known as "reverse stock split."
ILLUSTRATION:
X Corporation has 100,000 outstanding shares of stock, with
a par value of P10.00 per share. Because the market price of the
shares is considered high, the board feels that a lower price will
improve marketability of the shares and attract more investors.
It may authorize that the 100,000 shares be replaced by 500,000
shares with a par value of P2.00. Thus, each stockholder will
receive 5 shares in exchange for each share owned. This increase
in the number of outstanding shares is referred to as stock split.
"Reverse stock split," on the other hand, involves the
reduction of the outstanding shares into a smaller number of
436
shares and this is done when it is felt that a higher price for the
shares will be advantageous to the corporation. Thus, in the
same example, the 100,000 outstanding shares may be called
in and replaced by 50,000 shares with a par value of P20.00
per share. There is an increase in the par value (also market
value per share) of outstanding shares of a specified class with
a corresponding reduction in the number of shares issued.*
In either case, the split merely changes the number of
outstanding shares without affecting the stockholders' equity
nor the capital stock. The receipt of shares as a result of the split
does not generate taxable income to either the stockholder or
the corporation.
Distinction between distribution in liquidation

and ordinary d i v i d e n d .
The distinction between a distribution in liquidation and an
ordinary dividend is factual, the result in each case depending
on the particular circumstances of the case and the intent of the
parties. If the distribution is in the nature of a recurring return on
stock, it is an ordinary dividend.
However, if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the distribution
may properly be treated as in complete or partial liquidation and
as payment by the corporation to the stockholder for his stock or
as return of the capital invested by him. The corporation is, in the
latter instances, wiping out all or that part of the stockholders'
C h a n g e s in par values of capital stock should be charged or credited to additional

paid-in-capital (APIC). If the increases in capital stock values exceed APIC, they should be
charged to retained earnings. The common sources of APIC are as follows: (1) excess of
par value paid for capital stock; (2) resale or retirement of treasury shares; (3) distribution
of stock dividends; (4) issuance of detachable stock purchase agreements; (5) changes in
par value; (6) donated assets; and (7) that created by corporate readjustment of quasi-
reorganization. (see annotation under Sec. 80.) APIC, however, shall not be used to
relieve income of the current or future years of charges chargeable against income except
in the case of reorganization wherein a recognized enterprise may be relieved of such
charges against income on condition that if the existing enterprise shall be continued
the same result may be attained even without reorganization, provided said facts are
fully disclosed and formally approved as in reorganization in which event the articles of
incorporation shall be amended accordingly to reflect the changes in the capital structure.
(SEC Opinion No. 05-01, Jan. 4, 2005, citing Statement of Financial Accounting Standard
No. 18 which lays down the generally accepted accounting standards in our jurisdiction.)
Sec. 44 TITLE IV. POWERS OF CORPORATION
437
interest in the company. (Wise & Co., Inc. vs. Meer, 78 Phil 655
[1947].)
For tax purposes, gains and losses from liquidating divi-
dends are considered as capital gains or losses, (see Sees. 33 [b],
66[a], 21[f], National Internal Revenue Code.)
Sec. 44. Power to enter into management contract. — No

corporation shall conclude a management contract with
another corporation unless such contract shall have been
57
approved by the board of directors and by stockholders
owning at least the majority of the outstanding capital
stock, or by at least the majority of the outstanding capital
stock, or by at least a majority of the members in the
case of a non-stock corporation, of both the managing
and managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the
managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors
of the managing corporation also constitute a majority
of the members of the board of directors of the managed
corporation, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation.
No management contract shall be entered into for a period
longer than five years for any one term.
The provisions of the next preceding paragraph shall

apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business
of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating
agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the
pertinent laws or regulations, (n)
'or trustees.
438
Power to enter into m a n a g e m e n t

contract.
(1) With another corporation. — Under Section 44, a corporation
is expressly allowed, without the need of amending its articles of
incorporation, to enter into a management contract with another
corporation, which refers "to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the
business of another corporation, whether such contracts are
called service contracts, operating agreements or otherwise."
Briefly stated, it is an agreement under which a corporation
delegates the management of its affairs to another corporation
for a certain period of time. Since the corporation can employ
officers and agents to manage its business, there can be no
objection to employing another corporation for the purpose.
A corporation under management is bound by the acts of the
managing corporation and is estopped to deny its authority, (see
National Bank vs. Producers' Warehouse Association, 42 Phil.
609 [1922].)
(2) With parent corporation. — Absent a finding of fraud or
bad faith, contracts entered into by a parent corporation with a
subsidiary or affiliate may be held legal where the purpose is
to provide more efficient operation and greater convenience to
both. Thus, a holding company may, in some cases, intervene in
the management and affairs of its subsidiaries or affiliates such
as the centralization of accounting and personnel functions, pro-
vided the management in those affairs will not affect the separate
and continuing existence of the managed corporation. However,
since this situation may, in effect, place the subsidiary or affiliate
to a certain extent within the control of the present company and
the latter, in turn, assumes responsibility for such management,
the same shall be subject to the provisions of Section 44 relative
to execution of management contracts. (SEC Opinion, Nov. 28,
1990.)
(3) With a natural person. — Section 44 refers only to a mana-
gement contract with another corporation. Hence, it does not
apply to management contracts entered into by a corporation
with natural persons.
Limitations on t h e power.
The following are the limitations for the exercise of the pow-
er:
(1) Ratification of the contract. — The contract must be
approved by a majority of the quorum of the board of directors
or trustees and ratified by the prescribed vote of the outstanding
capital stock entitled to vote (see Sec. 6, last par.) or of the
members, as the case may be, of both the managing and the
managed corporations, at a meeting duly called for the purpose.
In either of the two cases mentioned in Section 44 (par. 1.),
the management contract must be approved by the stockholders
of the managed corporation owning at least 2 / 3 , not merely a
majority, of the total outstanding capital stock entitled to vote, or
in case the managed corporation is a non-stock corporation, by at
least 2 / 3 , not merely a majority, of the members. Where the con-
tract is between two corporations having interlocking directors,
the contract must comply with the requirements of Section 33;
(2) Period of the contract. — The period must not be longer
than five (5) years for any one term except those contracts which
relate to the exploration, development, exploitation or utilization
of natural resources that may be entered into for such periods as
may be provided by pertinent laws or regulations; and
(3) Managerial power under the contract. — A management
contract cannot delegate entire supervision and control over the
officers and business of a corporation to another as this will con-
travene Section 23, which lays down the fundamental rule that
the corporate powers of all corporations shall be exercised by the
board. In general, the management contract must always be sub-
ject to the superior power of the board to give specific directions
from time to time or to recall the delegation of managerial power.
The board cannot surrender or abdicate its power and duty of
supervision and control for otherwise, it becomes a mere instru-
mentality of the management company. (Ballantine, p. 136.)
ILLUSTRATIONS:
(1) Interlocking stockholders. — If A, B, and C, stockholders
in both X Corporation and Y Corporation, the managing and
managed corporations, respectively, own 35% of the total
440
managed corporation.
outstanding capital stock entitled to vote of X Corporation, the
management contract must be approved by the prescribed 2 / 3
vote of the stockholders of Y Corporation. The same vote shall
apply where A is the only stockholder in both corporations
and he owns more than 1/3 of the total outstanding capital
stock entitled to vote of X Corporation. Only a majority vote is
required if the more than 1 / 3 ownership of A, B, and C, or of
A refers to the outstanding capital stock of Y Corporation, the
managed corporation.
(2) Interlocking directors. — If A, B, C, D, and E constitute
the majority of the members of the board of directors of X
Corporation and also of Y Corporation, the bigger 2 / 3 vote
by the stockholders of Y Corporation is necessary. This is a
case of a contract between two corporations with interlocking
directorates, (see Sec. 33.) The extent of the shareholdings of A,
B, C, D, and E in X Corporation is immaterial.
In both illustrations, the management contract need only
be approved by the majority of the outstanding capital stock of
X Corporation, or in illustration No. 2, of the members, in case
X Corporation is a non-stock corporation.
managing corporation
Sec. 45. Ultra vires acts of corporations. — No corporation
under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred.
(14a)
Ultra vires and intra vires acts

explained.
It is well-settled that a corporation is not restricted to the
exercise of powers expressly conferred u p o n it but has the
implied or incidental powers to do what is reasonably necessary
to carry out its express powers and to accomplish the purposes
for which it was formed. Sections 36(11) and 4 5 give express
recognition to these implied and incidental powers possessed by
private corporations.
According to the strict construction of the term, an ultra

vires act is one not within the express, implied, and incidental
powers of the corporation conferred by the Corporation Code
Sec. 45 TITLE rV. POWERS OF CORPORATION 441
or articles of incorporation. It is an act which is not positively

forbidden, but impliedly forbidden because not expressly or
impliedly authorized or necessary or incidental in the exercise of
the powers so conferred.
Acts or transactions within the legitimate powers of a corpo-
ration or are related to its purposes are said to be intra vires.
ILLUSTRATIONS:
(1) A corporation was organized for the purpose of
engaging in the buying and selling of home appliances. The
act of buying and selling motor vehicles would be ultra vires
although it is itself lawful because it is outside the object for
which the corporation is created and, therefore, beyond its
powers.
The buying and selling of refrigerators would be intra vires.
(2) A corporation was organized to engage in the business
of manufacturing a particular product. Marketing and selling
the product may be logically necessary to the business of
manufacturing, considering that there must be an end-user for
the goods manufactured or produced.
A seller, trader, dealer or importer of goods is not necessarily
or indispensably the manufacturer of the goods. Therefore,
manufacturing cannot be treated as reasonably necessary to the
business of the selling. (SEC Opinion No. 07-14, July 2007.)
Contracts intra vires entered into by the board of directors
are binding upon the corporation and courts should not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton violation to the rights of
the minority, as when a stockholder avers that the board of
directors has concluded a transaction that will result in serious
injury to him. (Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ong
Yong vs. Tiu, 401 SCRA 1 [2003].)
Ultra vires acts distinguished

f r o m other acts.
Although the term ultravires acthas been used mdiscriminately,
it is properly distinguishable from acts which are illegal, in excess
or abuse of power, or executed in an unauthorized manner, or acts
442
within corporate powers but outside the authority of particular

officers or agents. (19 C.J.S. 419.)
(1) From illegal act. — When properly used, an ultra vires act
means simply an act which is beyond the conferred powers of
a corporation or the purposes or objects for which it is created
58
as defined by the law of its organization. (Republic vs. Acoje
Mining Co., Inc., 7 SCRA 361 [1963]; Atrium Management Cor-
poration vs. Court of Appeals, 353 SCRA 23 [2001].) By itself, an
ultra vires act is not necessarily illegal. On the contrary, it may be
lawful, moral, and even praiseworthy. An illegal corporate act,
on other hand, is an act which is contrary to law, morals, good
customs, public order, or public policy (Art. 1306, Civil Code.)
and, therefore, per se illicit, (see Pirovano vs. De la Rama, 96 Phil.
335 [1954].) The buying and selling of contraband goods would
not only be illegal but also ultra vires.
The term ultra vires is distinguished from an illegal act for
the former is merely voidable which may be enforced by perfor-
mance, ratification or estoppel while the latter is void and cannot
be validated. (Ibid.)
(2) From act done without complying with certain conditions and
formalities. — Another class of corporate contracts which are
sometimes said to be ultra vires, although the phrase as applied
to them is inaccurate, is where the power exists to do what was
done, provided the corporation does it in a certain prescribed
way. Thus, informalities in connection with the consent of
stockholders (or members) to the contract are often incorrectly
referred to as ultra vires, using the term in its strict sense. The fact
that the required consent of stockholders is not obtained does not
make a contract ultra vires. (7 Fletcher, p. 567; also 14-A C.J., pp.
312-313.)
The general rule is that a corporation must act in the man-
ner and with the formalities, if any, prescribed by its charter or
by the general law. However, a corporate transaction or contract
5
*The only ground and policy upon which the defense of ultra vires, properly
defined, can have real basis is the interest of the stockholders, if any, to confine the
business activities of the corporation to the scope of the purposes specified in its articles
of incorporation. (Ballantine, p. 242.) Creditors cannot attack a contract or transfer
merely because it is ultra vires. The only ground for objection by creditors is its effect as a
fraudulent diversion of corporate assets from the payment of their claims. (Ibid., p. 258.)
which is within the powers of the corporation, which is neither

wrong in itself nor against public policy, but which is defective
from a failure to observe in its execution a requirement of the law
enacted for the benefit or protection of a certain class, is voidable
only and is valid until voided; the parties for whose benefit the
requirement was enacted may ratify it or be estopped to assert its
invalidity, and third persons acting in good faith are not usually
affected by an irregularity on the part of the corporation in the
exercise of its granted powers. (19 C.J.S. 432-444.)
(3) From act beyond powers of particular officers. — The expres-
sion ultra vires has also been applied to acts done by the directors
(or trustees) or other officers of a corporation in excess of the
powers conferred upon them by the stockholders (or members).
Such an act, however, is not necessarily ultra vires act of the cor-
poration. An act may be within the powers of a corporation and
not within the powers of the directors, for the powers of the latter
are derived, not from the legislature, like the powers of the cor-
poration, but from the stockholders in their corporate capacity.
A result of the above distinction is that the stockholders of a
corporation, while they cannot, by ratification, render valid an
act which is beyond the powers of the corporation, may ratify
an act which is within its powers, but beyond the powers of the
directors. The courts often refer to contracts as ultra vires where
all that is meant is that a particular officer had no power to make
the contract. In this class of cases, the question is merely one of
agency and, therefore, governed by old and well-settled rules of
law relating to agency. (11 Fletcher, pp. 566-567.)
(4) From act involving inexistent contract. — A contract may not
be illegal but inexistent and, therefore, void, when it lacks one or
some of the essential elements {i.e., consent, object, and cause) of
a contract, such as those which are absolutely simulated or ficti-
tious; those whose cause or object did not exist at the time of the
transaction; those whose object is outside the commerce of men;
those which contemplate an impossible service; and those where
the intention of the parties relative to the principal object of the
contract cannot be ascertained. (Art. 1409, Civil Code.)
Such contracts are not necessarily ultra vires. Neither party
has a right of action against the other who can always raise the
444
defense of the inexistence of the contract to defeat the claim of

the former.
Ratification of ultra vires acts.

(1) Where the contract or act is illegal per se, it is wholly void
or inexistent. It cannot be ratified or validated. {Ibid., par. 2.) Inex-
istent contracts (supra.) defined in Article 1409 of the Civil Code
cannot also be ratified. The doctrine of estoppel cannot operate
to give effect to an act which is null and void.
(2) Where the contract or act is not illegal per se but merely
beyond the power of a corporation, the same is merely voidable
and may be enforced by performance, ratification, or estoppel,
or on equitable grounds. (Republic vs. Acoje Mining Co., Inc.,
supra.)
(a) A corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers or other agents (Gokongwei, Jr. vs. Securities
and Exchange Commission, 89 SCRA 336 [1979].) and ultra
vires acts which are not illegal especially so if no creditors are
prejudiced thereby and no rights of the State or the public are
involved. (7 Fletcher, p. 585.)
(b) Ratification can never be made on the part of the cor-
poration by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by
the officer or governing body having authority to make the
contract. (Vicente vs. Geraldez, 22 SCRA 210 [1973]; Arguenza
vs. Metropolitan Bank & Trust Co., 271 SCRA 1 [1997].)
Effects of ultra vires acts w h i c h

are not illegal.
59
The following rules are recognized:
'The effects of illegal contracts of a corporation are governed by the following pro-
visions of the Civil Code:
"Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.
(1) An ultra vires contract, while executory on both sides, can-

not be enforced by either party thereto. (7 Fletcher, p. 607.) It is in
the public interest that corporations do not transcend the powers
granted to them by law and their assets be not subjected to risks
created by forbidden acts;
(2) When an ultra vires contract has been fully performed
on both sides, neither party can maintain an action to set aside
the transaction or to recover what has been parted with. The
well-settled doctrine is that the defense of ultra vires cannot be
set up or availed of in completed or consummated transaction.
(Ibid., p. 652.) Only the State may challenge the contract on ultra
vires grounds. No public interest is involved here since both par-
ties have already received to their advantage the benefits of the
contract voluntarily entered into; and
(3) When an ultra vires contract has been performed on one
side and the other has received benefits by reason of such perfor-
mance, recovery is permitted in most courts on behalf of the for-
mer (Ibid., p. 620.) on the ground that it would be unjust to sanc-
tion retention of benefits coupled with refusal to perform. Other
courts hold the contract unenforceable but compel the party who
has received the benefits of performance to return what he has
received or, failing to do that, to pay its reasonable value. (Ibid.,
p. 613.)
The doctrine of ultra vires cannot be invoked when it would
defeat the ends of justice or work a legal wrong. (Coleman vs.
Hotel de France, 29 Phil. 323 [1915].) It cannot be allowed to pre-
vail whether the plea is interposed for or against a corporation
when it will cause prejudice to a party who acted in good faith.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise."
"Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the other's
undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given without
any obligation to comply with his promise."
Thus, loans given to or by a corporation have to be repaid not-

withstanding that the transaction is ultra vires.
Contracts ultra vires in part only.

If the contract is separable, it may be sustained and enforced
as to the part not ultra vires, and held invalid as to the part ultra
vires.
By way of illustration:
(1) Securities taken by a corporation, though ultra vires as to
some of the debts secured, may be enforced as to those debts for
which the corporation was authorized to take them.
(2) Where a corporation issues bonds and executes a mort-
gage to secure the same, the bonds are valid if within the powers
of the corporation, though the mortgage may be ultra vires.
(3) The rule also applies where a corporation executes a
mortgage covering property which it has no power to mortgage,
as well as property which it may mortgage. The mortgage is val-
id as to the latter. (7 Fletcher, p. 587.)
Acts p r e s u m e d to be within corporate

powers.
(1) Where private rights only are involved. — It is the policy of
the law to look with disfavor upon the defense of ultra vires, where
private rights only are involved, especially when interposed by a
corporation to avoid an obligation which is otherwise legal and
equitable. (Ibid., p. 570.) Thus, "when a contract is not on its face
necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary,
be presumed to be valid. It is not seemly for a corporation, any
more for an individual, to make a contract and then break it, to
abide by it so long as it is advantageous, and repudiate it when
it becomes onerous." (Coleman vs. Hotel de France Co., 29 Phil.
323 [1915].)
The defense of ultra vires rests on violation of trust or duty to-
ward stockholders (or members), and should not be entertained
where its allowance will do greater wrong to innocent parties
dealing with the corporation. (19 C.J.S. 433.)
(2) Where act clearly beneficial to the corporation. — The ten-

dency of more recent decisions is to hold an act within corporate
powers, if possible, where it is clearly beneficial to the company
as where the act directly tends to increase its business. Thus, a
corporation, a financial institution, which owns and maintains a
computer to service its data processing needs may sell the com-
puter to other entities after servicing its needs. Whatever transac-
tions as are fairly incidental or auxiliary to the main business of a
corporation may be undertaken by the same. (SEC Opinion, May
3,1976.)
In any case, Section 36(11) is broad enough to cover a very
wide range of implied powers as to make difficult the avoidance
of corporate contracts on the ground of ultra vires.
Ultra vires acts as the acts

of the corporation.
The doctrine so often laid down by the courts — that a cor-
poration has such powers only as are conferred upon it by its
charter — if taken literally, would be equivalent to saying that
an act done by the officers of a corporation on its behalf and in
its name, but in excess of its powers, even though authorized by
the stockholders (or members) in their corporate capacity, is not
the act of the corporation, as distinguished from its officers and
stockholders.
The rule that a corporation has no powers except such as are
conferred by its charter cannot and does not mean that it cannot
exceed its powers.
(1) A corporation has no right or authority to do acts which
are not within the powers conferred upon it by the legislature,
but, as in the case of an individual, it is possible for it to do wrong.
It may exceed its powers and do an ultra vires act, and the act will
be, in contemplation of the law, not merely the act of the officers
or stockholders, but the act of the corporation itself. Thus, a con-
veyance or transfer of property to or by a corporation may transfer
the title, though the corporation has no power under its charter
to hold or transfer the property.
(2) When an ultra vires contract with a corporation is fully
executed by both parties (supra.), the court will not interfere at the
448
instance of either party to deprive the other of the rights acquired

under the contract.
(3) Actions quasi ex contractu may be maintained under some
circumstances, by or against a corporation, for money or prop-
erty loaned, paid or delivered under an ultra vires contract.
(4) When an ultra vires contract with a corporation has been
fully performed by one of the parties, and the other has received the
benefit of such performance (supra.), the latter is estopped to set
up the ultra vires character of the transaction to defeat an action
60
on the contract itself.
(5) Torts and crimes are always ultra vires, and yet it is well-
settled that a corporation may commit a tort and be liable in
damages therefor, and it may be guilty of a misdemeanor, and be
indirectly convicted and fined therefor. This is sufficient to show
beyond any doubt that a corporation may exceed its powers. (7
Fletcher, pp. 579-580; see Sec. 44.)
Who may invoke ultra vires.

(1) Generally. — The question as to the effect of ultra vires acts
often depends on who is invoking ultra vires. Thus, the State may
have the right to invoke it, although neither of the parties to the
contract may urge it, as in the case of an executed contract. So, a
party to the contract may, under some circumstances, urge ultra
vires in a case where a total stranger would not have that right.
Likewise, dissenting stockholders sometimes sue to enjoin the
execution or performance of an ultra vires contract where neither
party to the contract could set up the claim.
(2) State. — When the State creates a corporation, the grant of
the charter is on the implied condition that the corporation shall
act within the powers conferred upon it. Ultra vires acts, whether
otherwise wrong or not, are a breach of this condition. Such an act
does not of itself put an end to the existence of the corporation,
but it is, subject to certain qualifications, a ground for a direct
proceeding by the State to obtain a judgment of forfeiture. But
when a corporation is guilty of exercising powers not authorized
"See "Effects of ultra vires contracts which are not illegal," supra.
by its charter, the State instead of proceeding against it to obtain

a judgment forfeiting its charter may proceed by quo warranto, to
obtain a judgment merely ousting it from further exercise of the
unauthorized power. (7 Fletcher, pp. 604-605; see Sec. 121.)
The Securities and Exchange Commission may suspend or
revoke the certificate of registration of a corporation for commis-
sion of ultra vires acts, (see Pres. Decree No. 902-A, Sec. 6[1].)
(3) Stockholders. — The stockholders of a corporation have a
right to expect and to insist that its funds shall nofbe diverted by
giving them away or by employing them in an ultra vires business
or transaction, and any stockholder, therefore, has such an interest
that he may apply to a court for an injunction to prevent such a
diversion, even though all other stockholders may consent to the
ultra vires act. In like manner, he may sue to enjoin a corporation
from using its funds in the ultra vires purchase of shares of stock
in another corporation.
However, a stockholder may be precluded from attacking an
act as ultra vires, by his laches. In other words, if a stockholder
wants protection against the consequences of an ultra vires act, he
must ask for it with sufficient promptness to enable the court to
do justice to him without doing injustice to others. Furthermore,
it need hardly be stated that where the stockholder has himself
participated in the ultra vires act, or consented thereto, he will
be estopped from maintaining legal proceedings to secure the
annulment of the consequences thereof. So, also a stockholder
may be barred from asserting the invalidity of a transaction
whereby a corporation has borrowed money beyond the limit
of its authorized indebtedness where the money has been
expended for the benefit of the stockholders and the corporation.
(7 Fletcher, pp. 600-603.)
(4) Strangers. — Except where it is otherwise provided by
statute, it is a general rule that a plea of ultra vires cannot be
interposed by a stranger not a party to the contract, at least if he
is not injured by such act or contract.
For instance, although the act of a corporation in acquiring
a cause of action is ultra vires, yet the want of power to engage
in such business cannot be interposed as a defense when the
450
corporation seeks to enforce such cause of action. Thus, the

maker of a note cannot defend upon the ground that the contract
whereby the note was transferred was ultra vires, on the ground
that the payee had no power to indorse it for transfer. So, if a
person is in possession of real property and an action is brought
against him by a corporation to recover it or to quiet title or
the like, defendant cannot set up that the title of plaintiff was
acquired ultra vires, where defendant was a stranger to the
original transaction alleged to be ultra vires. (Ibid., pp. 594-596.)
(5) Competitors in business. — A stranger whose rights have
not been infringed by an ultra vires act of a competitor corporation
cannot urge ultra vires to prevent the latter from acting beyond
its powers, unless the right to do so is given by a statute. In other
words, a competitor cannot attack acts of a corporation as ultra
vires, merely on the ground of injurious competition, where such
acts are neither public nuisances or trespasses. The only injury
of which he can be heard in a judicial tribunal to complain is the
invasion of some legal or equitable right. (Ibid., p. 598.)
(6) Creditors. — Judgment creditors may impeach an ultra
vires contract as in fraud of creditors, the same as any other
contract. But creditors of the corporation, whose rights are not
infringed by the ultra vires contract, cannot attack it. They cannot
attack a corporate transaction as ultra vires unless its intent or
effect is fraudulently to divert the corporate assets from their
debts. It follows that ordinarily, a subsequent creditor cannot
object. (Ibid., p. 599.)
Estoppel to deny corporate p o w e r

to contract.
(1) General rule. — As provided in Section 21, an association
which assumes to exercise corporate powers and enters into a
contract as a corporation and persons who contract with it as a
corporation are estopped, in an action on the contract, to deny its
corporate existence.
(2) Where power to enter into contract in issue. — The general
principle does not apply where the question is whether a con-
tract is within the powers conferred upon a corporation by its
charter to make, and hence, since estoppels must be mutual, the

other party to the contract is not estopped to set up that the con-
tract was beyond the powers of the corporation.
(3) Where contract wholly executory. — In other words, the
mere act of entering into the contract does not estop either party
to show that the contract is ultra vires. If it did, ultra vires could
not be set up as against a contract wholly executory, whereas the
rule that wholly executory contract may be attacked as ultra vires
is one of the few rules as to which there is no contention. All this
does not mean that either party to the contract may not, by his
acts, be estopped from setting up ultra vires.
(4) Where contract apparently ultra vires. — It is held in some
States that a corporation may be estopped to deny its power to
enter into a particular contract, where the contract is apparently
within its powers, and is rendered ultra vires because of extra-
neous facts peculiarly within the knowledge of the corporation,
and not known to the other party.
(5) Where contract has been performed on one side. — And in
some States, although not in all, the contention that a contract
is ultra vires, either against the corporation or against the other
party, where the contract has been performed by one of the par-
ties and the other has received the benefit of such performance,
is said to be precluded on the theory of an estoppel. (7 Fletcher,
pp. 580-581.)
Corporate liability for torts, crimes,

a n d other violations.
(1) General rule. — A corporation, being a juridical entity, can
only act as such through its officers and agents. This being the
case, it is responsible for the tortious acts of the latter done with-
in the scope of their authority or in the course of employment to
the same extent that an unincorporated individual or association
would be. (see 1 Fletcher, pp. 27-28; Stevens on Corporations,
p. 355; see Art. 2180, Civil Code.)
(a) The authority may come from the stockholders or
members acting as a body, or generally, from the directors (or
trustees) as the governing body. (P.N.B. vs. Court of Appeals,
83 SCRA 237 [1978].)
(b) The act of the officer or agent must have been within
the scope of his authority or course of employment; but sub-
ject to this limitation, it may have been without orders, or
even in disregard of the instructions to the officer or agent or
may have been in excess of instructions, or may have been
malicious or willful. Nor, need the corporation have autho-
rized the doing of the particular act or ratified it after it was
done. (19 C.J.S. 946-949.)
(c) A corporation cannot, in order to escape liability for
damages for the wrongful acts of its agents or employees,
assert that such acts were beyond the scope of its corporate
power or that they occurred in connection with a transaction
beyond the scope of such power. It is to be kept in mind that
all torts are necessarily ultra vires, since if an act is legally au-
thorized, it is for that reason lawful and not a tort. (Ibid., 948.)
(d) In labor cases, the Supreme Court has held corporate
directors and officers solidarily liable with the corporation
for the termination of employment of employees done with
malice or in bad faith (Sunio vs. National Labor Relations
Commission, 127 SCRA 390 [1984]; General Bank & Trust
Co. vs. Court of Appeals, 135 SCRA 569 [1985]; MAM
Realty Development Corp. vs. National Labor Relations
Commission, 244 SCRA 797 [1995]; Uichico vs. National Labor
Relations Commission, 273 SCRA 35 [1997].) on the theory
that the legal fiction of separate corporate personality may
be disregarded whenever it is used as a means of conrrrtitting
an illegal act. (see Acesite Corporation vs. National Labor
Any decision against the employer corporation can be
enforced against the officers in their personal capacities for
acting on behalf of the corporation should the corporation
be unable to satisfy the judgment in favor of an employee
(as where it is no longer existing). (A.C. Ransom Labor
Union-CCLU vs. National Labor Relations Commission, 142
SCRA 269 [1986]; Camelcraft Corporation vs. National Labor
Relations Commission, 186 SCRA 393 [1990]; Valderrama vs.
(e) Under the Labor Code (Arts. 288, 289 thereof.), when
a corporation violates a provision declared to be penal in na-
ture, the penalty shall be imposed upon the guilty officer or

officers of the corporation, disregarding the fiction of corpo-
rate entity. (Reahs Corporation vs. National Labor Relations
(f) Even though a judgment or order is addressed to the
corporation, the officers as well as the corporation itself, may
be punished for contempt for disobedience to its terms, at
least if they knowingly disobey the court's mandate, since a
lawful judicial command to a corporation is, in effect, a com-
mand to the officers. (Heirs of T. De Leon Vda. De Roxas vs.
(g) If the drawer a check is an officer of a corporation, the
notice of dishonor to the said corporation is not notice to the
employee or officer who drew or issued the check for and in
its behalf. Responsibility under B.P. Big. 22 (Bouncing Checks
Law) is personal to the accused. The corporation has no obli-
gation to forward the notice addressed to it to the employee
concerned especially because the corporation itself incurs no
criminal liability under B.P. Big. 22. Personal knowledge of
the notice of dishonor is necessary. (Mangomen vs. People,
459 SCRA 169 [2005].)
(2) Imputation of criminal intent. — Although it has no mind,
an intention on the part of its agent to do wrong may be imputed
to the corporation. Accordingly, corporations may be held liable
for libel and malicious prosecution. But since a corporation as
a person is a mere legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime in which personal
violence or malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act amounting to a
crime and never against the corporation itself. (West Coast Life
Ins. Co. vs. V. Hurd, 27 Phil. 401 [1914]; Times, Inc. vs. Reyes,
39 SCRA 303 [1971].) The existence of the corporate entity does
not shield from prosecution the corporate agent who knowingly
and intentionally causes the corporation to commit a crime. (The
Executive Secretary vs. Court of Appeals, 429 SCRA 81 [2004].)
The above is true with respect to crimes punishable under
the Revised Penal Code. It is the responsible officer or officers
acting for the corporation who must of necessity be the ones to
assume the criminal liability; otherwise, this liability as created

by law would be illusory, and the deterrent effect of the law,
negated. The corporate officer or employee must have actually
participated in the commission of the criminal offense or violation
of law attributed to the corporation, to be himself individually
guilty of the crime, (see Sia vs. People, 121 SCRA 655 [1983].)
The principle applies to those corporate agents who, by
virtue of their managerial positions or other similar relation to
the corporation, could be deemed responsible for its commission,
if by virtue of their relationship to the corporation, they had the
power to prevent the act. Whether the officers or employees
are benefited by their delictual acts is not a touchstone of their
criminal liability. Benefit is not an operative act. (Ching vs.
Secretary of Justice, 481 SCRA 609 [2006].)
(3) Penalties imposable. — While a corporation cannot be
arrested, imprisoned, or executed, it may be summoned, fined, or
ousted by quo warranto from the unlawful exercise of its powers.
(10 Fletcher, p. 651.) The fine, however, is a mere consequence of
the conviction of the corporate agent found guilty of the violation
of law. For violations of any of the provisions of the Corporation
Code or, on grounds provided by existing laws, rules and
regulations, a corporation is subject to fine and/or dissolution
without prejudice to the institution of appropriate action against
the guilty director, trustee, or officer of the corporation, (see Sees.
121, 144; see also Pres. Decree No. 902-A, Sec. 6[i] thereof; see
also R.A. No. 8791 [The General Banking Law of 2000], Sees. 66,
70, 91.)
Again, the existence of the corporate entity does not shield
from prosecution the agent who knowingly and intentionally
commits a crime at the instance of a corporation. (Ong vs. Court
of Appeals, 401 SCRA 648 [2003].)
— oOo —
Title V
BY-LAWS
Sec. 46. Adoption of by-laws. — Every corporation

formed under this Code, must, within one (1) month after
receipt of official notice of the issuance of its certificate
of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government
not inconsistent with this Code. For the adoption of by-laws
by the corporation, the affirmative vote of the stockholders
stock, or of at least a majority of the members, in the
case of non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of
the corporation, subject to the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders
or members during office hours; and a copy thereof, duly
certified to by a majority of the directors or trustees and
counter-signed by the secretary of the corporation, shall be
filed with the Securities and Exchange Commission which
shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding para-
graph, by-laws may be adopted and filed prior to incor-
poration; in such case, such by-laws shall be approved
and signed by all the incorporators and submitted to the
Securities and Exchange Commission, together with the
In all cases, by-laws shall be effective only upon the
issuance by the Securities and Exchange Commission of a
certification that the by-laws are not inconsistent with this
Code.
The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment thereto
455
of any bank, banking institution, building and loan asso-

ciation, trust company, insurance company, public utility,
educational institution or other special corporations gov-
erned by special laws, unless accompanied by a certificate
of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law.
(20a)
Meaning of by-laws.
By-laws may be defined as the rules of action adopted by a
corporation (or association) for its internal government and for
the government of its stockholders or members and those having
the direction, management and control of its affairs in their rela-
tion to the corporation and as among themselves (see 18 C.J.S.
589, p. 344; 8 Fletcher, pp. 632-633.), including rules for routine
matters such as calling meetings and the like. (Ballantine Law
Dictionary [1990 Ed.], p. 201.)
Power to adopt by-laws.

The corporate power to adopt by-laws is expressly granted
by Section 36(5) and Section 46. The power is inherent in every
corporation as one of its necessary and inseparable legal inci-
dents. This power is regarded as of so much importance, being
essential to enable the corporation to accomplish the purposes of
its creation, that it is ordinarily conferred in express terms by the
law. (Supreme Comandery K.G.R. vs. Ainsworth, 71 Ala. 436, 46
Am. Rep. 332.)
Even holders of non-voting shares or non-voting members,
as the case may be, are entitled to vote on the adoption of by-
laws, (see Sec. 6, par. 6[2].)
It has been held that where the statute under which a corpo-
ration is formed authorizes it to make by-laws upon specifically
named subjects, there is an implied denial of authority to make
by-laws upon subjects not named. (Nicholson vs. Franklin Brew-
ing Co., 91 N.E. 991.)
Function of by-laws.
By-laws supplement the articles of incorporation. They pro-
vide the details not important enough to be stated in the articles.
Sec. 46 TITLE V. BY-LAWS 457
Until repealed or amended, a by-law is a continuing rule for the

government of the corporation and the individuals composing it.
The function of by-laws is to define the rights and duties of
corporate officers and directors or trustees, and of stockhold-
ers or members towards the corporation and among themselves
with reference to the management of corporate affairs and to reg-
ulate transaction of the business of the corporation in a particular
way. (see La Salle Country Form Bureau vs. Thompson, 245 111.
App. 413; Ireland vs. Globe Mill Co., 21 R.I. 9; 8 Fletcher, pp. 633-
634.) By-laws are a source of authority for corporate officers and
agents of the corporation. (Citibank, N. A. vs. Chua, 220 SCRA 75
[1993]; see Sees. 25,47.)
Primarily, by-laws look to the future. (8 Fletcher, p. 634.)
Necessity of adopting by-laws.

(1) A matter of practical and legal necessity. — Upon the
issuance of the certificate of incorporation, the corporation
comes into existence. (Sec. 19.) But it is not yet prepared to do
business. It must have the means or instrumentalities for the
accomplishment of its purposes. It must have executive officers
charged with the task of actual management, and rules governing
the management of its affairs. The corporation is in existence but
not yet organized. A code of by-laws for the government of the
corporation, its officers and members must be adopted.
It has been said that the by-laws of a corporation are the
rules of its life, and that until by-laws have been adopted, the
corporation may not be able to act for the purposes of its creation,
and that the first and most important duty of the members is to
adopt them. This would seem to follow as a matter of principle
from the office and function of by-laws. Viewed in this light, the
adoption of by-laws is a matter of practical, if not one of legal,
necessity. (8 Fletcher, p. 640.)
(2) In the case of corporation sole. — While an ordinary corpo-
ration is governed by its by-laws, a corporation sole is governed
by the Rules, Regulations and Discipline of its religious denom-
ination which already contain the provisions embodied in the
by-laws of ordinary corporations. Section 111 (par. 2.) expressly
allows corporations sole to include in their articles of incorpora-
458
tion any provision other than those required under said section
to regulate the affairs of corporations sole. Hence, a corporation
sole need not comply with Section 46 provided that the provi-
sions ordinarily embodied in the by-laws are already provided
for in the articles of incorporation or Rules, Regulations and
Discipline of its religious denomination. (SEC Opinion, Jan. 25,
1984.)
Time and procedure for the adoption

of by-laws.
(1) According to Section 46, the by-laws must be adopted
"within one month" after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission. Nevertheless, for the convenience of
the incorporators, by-laws may be adopted and filed, prior to
incorporation, with the articles of incorporation, (par. 2.) In
either case, by-laws shall be effective only upon issuance by the
Commission of a certification that they are not inconsistent with
1
the Code. (par. 3; see Sec. 48, last par.)
(2) The procedure for the adoption of by-laws is likewise set
forth in Section 46. With respect to special corporations governed
by special laws, the Securities and Exchange Commission shall
not accept their by-laws or any amendment thereto unless
accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments thereto
are in accordance with law. (last par.) The formal requisites such
as the filing of a certified copy of the entire by-laws for approval
with the Securities and Exchange Commission is only for record
purposes and in order that said copy be attached to the original
articles of incorporation. (SEC Opinion, Nov. 2,1977.)
The procedure for the amendment of by-laws or the adoption
of new by-laws is provided in Section 48.
'In addition to the by-laws, a corporation may adopt other rules and regulations
provided they are not contrary to the provisions of the by-laws, articles of incorporation,
and the Corporation Code. While corporate by-laws are subject to the approval of the
SEC, other rules and regulations of the corporation do not need such approval, unless
they involve matters where the law requires SEC approval. (SEC Opinion, Oct. 16,1995.)
Effect of failure to file by-laws.

Non-filing of the by-laws on time will not result in the au-
2
tomatic dissolution of the corporation. Such consequence is not
provided in the Corporation Code. Pursuant to Section 6(i, 5) of
Presidential Decree No. 902-A (see Sec. 19.), the failure to file a
code of by-laws within one (1) month from the date of its in-
corporation with the Securities and Exchange Commission shall
render the corporation liable to the revocation of its registration.
There must, first of all, be a hearing to determine the
existence of the ground, and assuming such finding, the penalty
is not necessarily revocation but may only be suspension. Under
the rules and regulations of the Commission, the failure may be
merely with the imposition of an administrative fine. (Chung Ka
Bio vs. Intermediate Appellate Court, 163 SCRA 534 [1988].)
C o n s t r u c t i o n , application, a n d effectivity
of b y - l a w s .
(1) By-laws of a corporation should be construed and given
effect according to the general rules governing the construction
of contracts. (18 Am. Jur. 2d 699; see Arts. 1370-1377.)
(2) Those providing for disenfranchisement of members of
a corporation are penal in character and must be strictly cons-
trued. Thus, under a provision in the by-laws that a member on
suspended accounts may not use facilities or avail of the privileges
of a non-stock, non-profit organization, such a member may
still exercise his right to vote. He does not lose his membership,
ipso facto, because of an act of default which is made a cause for
2
Section 46 uses the word "must." Ordinarily, the word connotes an imperative act
or operates to impose a duty which may be enforced. It is synonymous with "ought"
which connotes compulsion or mandatoriness, though the word "must" in a statute, like
"shall," is not always imperative and may be consistent with an exercise of discretion.
The second paragraph of Section 46 allows the filing of by-laws even prior to incorpora-
tion. This provision rules out mandatory compliance with the requirement of filing the
by-laws in the first paragraph. (Loyola Grand Villas Homeowners Assoc. vs. Court of
Appeals, 276 SCRA 681 [1997].)
By its failure to submit its by-laws within the prescribed period, a corporation may
be considered a de facto corporation, (see Sec. 20.) It does not ipso facto lose its powers as
such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Cor-
porations details the procedures and remedies that may be availed of before an order of
revocation can be issued. (Sawadjaan vs. Court of Appeals, 459 SCRA 516 [2005].)
expulsion or forfeiture unless it is expressly so provided, but

there must be a proper action by the corporation expelling him.
(SEC Opinion, March 10,1987.)
(3) By-laws should be made to apply prospectively, not
retroactively.
(4) By-laws become effective only upon the issuance by the
Securities and Exchange Commission of a certification that they
are not inconsistent with the Code. (Sec. 46, par. 3.) It is only upon
that time that the provisions of said by-laws should be followed
or observed. (SEC Opinion No. 05-07, June 24, 2005.)
(a) In view of the phrase "every corporation formed
under this Code," which can only refer to corporations
incorporated in the Philippines, Section 46, insofar as it refers
to the effectivity of corporate by-laws (par. 3.), applies only
to domestic corporations and not to foreign corporations.
(Citibank, N.A. vs. Chua, 220 SCRA 75 [1993].)
(b) In the case of foreign corporations licensed to transact
business in the Philippines (see Sec. 126.), matters relating to
their by-laws are governed by the law of their incorporation,
(see Sec. 129.) Since the Commission will grant a license
only when the foreign corporation has complied with all
the requirements of law, it follows that when it decides to
issue such license, it is satisfied that the applicant's by-laws,
among the other documents, meet the legal requirements.
This, in effect, is an approval of its by-laws although it may
not have been made in express terms. Therefore, a foreign
corporation's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines.
(Citibank, N.A. vs. Chua, supra.)
Validity of by-laws.
The following are considered as the elements of valid by-
laws:
(1) They must not be contrary to existing law and inconsis-
tent with the Code (Sec. 36[5]; Sec. 46.);
(2) They must not be contrary to morals and public policy
(Sec. 36[5]; see Fletcher vs. Botica Nolasco Co., Inc., 47 Phil. 583
[1925].);
(3) They must not impair obligations of contract (Ibid.);

(4) They must be general and uniform in their operation and
not directed against particular individuals (8 Fletcher, p. 734.),
i.e., not discriminatory;
(5) They must be consistent with the charter or articles of
incorporation; and
(6) They must be reasonable.
M u s t be consistent w i t h law.
By-laws must not be contrary to the general law, and, there-
fore, as a rule, a by-law is void if it is repugnant to the law of the
land, whether statutory or constitutional. This rule is declared by
the Code in empowering corporations in Section 36(5) "to adopt
by-laws not contrary to law," in Section 46 (par. 1.), "to adopt a
code of by-laws not inconsistent with this Code," and in Section
47, to provide in its by-laws the matters enumerated "subject to
the provisions of the Constitution, this Code, other special laws,
and the articles of incorporation."
The legislature cannot delegate the power to enact by-laws
contravening general law. As the legislative power cannot be
delegated, it is not competent for the legislature to confer upon a
corporation power to enact by-laws contravening, repealing, or
in any wise changing any provision of the law of the land. (14 C.J.
364-366.)
A by-law or provision thereof that is contrary to law can-
not attain validity through acquiescence or on the basis of long
practice, nor give rise to any vested right. (Grace Christian High
School vs. Court of Appeals, 281 SCRA 133 [1997].)
Must be consistent with public policy.

Public policy has been defined as "the governing policy
within a community as embodied in its legislative and judicial
enactments which serve as a basis for determining what acts are
to be regarded as contrary to the public good; the principle of
law by virtue of which acts contrary to the public good are held
invalid." (Webster's Third New Int. Diet., p. 1836.)
By-laws must also be consistent with the public policy and

not in conflict with public welfare. If they conflict with either,
they are invalid and will not be sustained. (8 Fletcher, pp. 704-
705.) Thus, by-laws operating in restraint of trade by imposing
unreasonable restrictions on the right of a stockholder to transfer
his stock are invalid.
Must not impair obligation of contracts.

The word "by-law" ordinarily signifies a rule for future
action, and the power of a corporation to adopt by-laws does not
extend to the adoption of such as impair the obligation of existing
contracts or destroy or impair rights, either of stockholders or
members or of third persons which have become vested by
virtue of the existing by-laws or otherwise, and by-laws which
have such effect will not be sustained, (see 8 Fletcher, pp. 715-
721.) A by-law may not operate retrospectively if it does thereby
disturb or impair any existing contract or vested right. (18 C.J.S.
328.) But there is no impairment:
(1) Where a contract with a corporation is expressly or
impliedly made subject, not only to existing by-laws but also to
future by-laws and changes in by-laws, for parties may contract
with corporations with reference to laws of future enactment,
and may engage to be bound and affected as they would be
bound and affected if such laws were existing and thus consent
that such laws shall enter into and form a part of their contracts,
modifying or varying them.
(2) Where the other party to the contract surrenders his
original contract and accepts a new one after an amendment of
the by-laws, for he thereby submits to the amended by-laws then
in force. (Ibid.)
(3) The right to amend the by-laws lies solely in the
discretion of the employer corporation, this being in the exercise
of management prerogative or business judgment. However,
this right, extensive as it may be, cannot impair the obligation
of existing contracts or rights, such as the right to security of
tenure as a regular employee guaranteed under the Labor Code.
(Silafranca vs. Philamlife Village Homeowners Assoc., Inc., 300
SCRA 469 [1998].)
M u s t be g e n e r a l a n d not directed against

particular individuals.
A by-law affecting stockholders or members must be general,
that is, it must affect alike, and operate equally as to all stock-
holders or members under the same circumstances, and not be
directed against particular stockholders or members.
It is plain that all corporation by-laws must stand on their
own validity, and not on any dispensation granted to members.
They cannot be subjected to any conditions which do not apply
to all alike, and cannot be compelled to receive, as a matter of
grace, anything which is a matter of right; neither, on the other
hand, should there be personal exemptions of a general nature
from any valid regulations that bind the mass of corporators.
(1) So, an order of certain directors that one of the members
of the board be denied the right to inspect the corporate books
cannot be sustained as a valid by-law.
(2) Not even a statute authorizing a corporation to pass by-
laws for the sale of delinquent stock for unpaid assessments
authorizes a by-law or resolution declaring a forfeiture of the
stock of a particular stockholder only, (see 8 Fletcher, pp. 734-
735.)
(3) But a by-law which disqualifies a person who is a direc-
tor in a corporation whose business is in competition with or is
antagonistic to another corporation, from election to the board
of directors of the latter corporation, is valid, it appearing that
the by-law, by its terms, applies to all stockholders. If the by-law
were to be applied in the case of one stockholder but waived in
the case of another, then it could be reasonably claimed that the
by-law was being applied in a discriminatory manner. (Gokon-
gwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336
[1979].)
Must be consistent with the charter

or articles of incorporation.
By-laws are subordinate to the charter of the corporation and
part of its charter is its articles of incorporation.
(1) In order for by-laws to be valid, they must be consistent
with the terms and spirit of the charter of the corporation — the
word "charter" being here used in its broadest sense and as hav-
ing reference to the statutory right to be a corporation without
regard to whether such right be obtained by special act or under
general statutes.
A by-law which is not thus consistent with the charter but is
in conflict with or repugnant to it, is void. Thus, where a corpo-
ration has been made one of a stock character by the articles of
incorporation, it cannot be made one of a mutual character by a
by-law. Further applying such rule, a corporation cannot by a by-
law vest the entire management of its business in an executive
committee, when the charter or enabling act vests the manage-
ment in the board of directors or trustees.
(2) A by-law can neither enlarge the rights and powers
conferred by the charter nor restrict the duties and liabilities
imposed thereby, and in case it attempts to do so, the charter will
prevail.
(3) A by-law prohibiting acts which are within the powers
conferred, expressly or impliedly, by its charter, affects the
authority of its officers, but does not render such acts ultra vires.
By-laws of a corporation are not enforced by avoiding contracts
made in violation of them.
(4) By-laws must be consistent with the nature, purposes,
and objects of the corporation; otherwise, they will be invalid.
Thus, where there is nothing in the articles of incorporation
which suggests power in the corporation to control, regulate, or
interfere with its stockholders in the conduct of their separate
individual business, by-laws which assume to do this are beyond
the scope of the corporate purpose and are void, (see 8 Fletcher,
pp. 722-727; see also 18 C.J.S. 604-605.)
Must be reasonable.
Reasonableness is another essential of a valid by-law. The
validity or reasonableness of a by-law of a particular corporation
— whether it is in conflict with the law of the land, or with the
charter of the corporation or is in a legal sense unreasonable and,
therefore, unlawful — is purely a question of law rather than one
of fact.
(1) The rule is subject to the limitation that where the

reasonableness of a by-law is a mere matter of judgment, and
upon which reasonable minds must necessarily differ, a court
would not be warranted in substituting its judgment instead
of the judgment of those who are authorized to make by-laws
and who have exercised their authority by adopting the one
attacked. Accordingly, a by-law which disqualifies a competitor
from election to the board of directors of another corporation has
been held as valid and reasonable. In the absence of any legal
prohibition or overriding public powers, wide latitude may
be accorded to a corporation in adopting measures to protect
legitimate corporate interests. (Gokongwei, Jr. vs. Securities and
Exchange Commission, 89 SCRA 336 [1979].)
(2) On the other hand, a provision in the by-laws granting
continuous compensation to directors even after the termination
of their employment for past services rendered gratuitously is
unreasonable for to permit such by-laws would be to create an
obligation unknown to law, and to countenance a misapplication
of the funds of the corporation to the prejudice of the stockhold-
ers. (Barretto vs. La Provisora Filipina, 57 Phil. 649 [1932]; 59 Phil.
212 [1933].)
(3) A by-law which the corporation was without power,
under the law, to adopt will not be validated, however, by the
fact that its provisions are reasonable. Furthermore, a by-law
may be reasonable as to the corporation and as to third persons
contracting subsequent to its adoption, with the corporation, and
yet be invalid as to third persons sustaining, at the time of its
adoption, contractual relations with the corporation.
(4) When the stockholders alone are affected by the unrea-
sonableness of the by-law, it can be attacked by them only and
not by a third person, (see 8 Fletcher, pp. 727-734.)
Binding effect of by-laws.

(1) As to the corporation and its officers. — By-laws, as the
self-imposed private laws of a corporation, have, when valid,
substantially the same force and effect as laws of the corporation
as have the provisions of its charter insofar as the corporation
and the persons within it are concerned. They are in effect
written into the charter and in this sense, they become a part of
the fundamental law of the corporation. And the corporation
and its directors (or trustees) and officers are bound by and must
comply with them (8 Fletcher, pp. 750-751.) unless and until they
are changed, amended, or repealed in accordance with Section
48. But subordinate employees without actual knowledge of the by-
laws are not bound.
(2) As to stockholders or members. — As a general rule, the
stockholders or members of a corporation are presumed to know
the provisions of the corporation's by-laws.
(a) This presumption is ordinarily regarded as a legal
one, and hence, conclusive and incapable of being rebutted
by evidence of want of actual knowledge. In other words, a
stockholder or member, by the very fact of his being such, is
charged with notice of the by-laws and if he remains actually
ignorant of their provisions, he does so at his peril. (8 Fletcher,
p. 753.)
(b) Under Section 46, it is required that the original by-
laws be approved by at least a majority of the outstanding
capital stock or of the members, signed by the stockholders
or members voting for them, and kept in the principal office
of the corporation, subject to their inspection during office
hours. Stockholders or members cannot, therefore, claim lack
of notice or knowledge.
(3) As to third persons. — The weight of authority is that they
are not bound by the by-laws of a corporation since the by-laws
operate merely as internal rules among the stockholders. The
exception is when the third person has knowledge of its provi-
sions either actually or constructively at the time the transaction
in question was entered into, (see China Banking Corporation vs.
(a) A person contracting with a corporation with actual
notice of a by-law affecting such a contract as he enters into
may, however, expressly exclude the by-laws, so that his con-
tract will not be affected thereby. But the by-law enters into
the contract and he is bound thereby, if it is not expressly
excluded.
(b) So also, when a by-law is intended to operate as to

certain third persons and is communicated to them for the
purpose of inducing action by them in reliance thereon,
the corporation cannot defeat claim by one of their number
under such by-law by asserting that by-laws are rules for the
internal government of the corporation and its stockholders
or members only and that third persons cannot claim rights
thereunder.
(c) If a person contracts with a corporation with
reference to a by-law, as, for example, a by-law by which the
stockholders or members bind themselves individually for
all debts that may be contracted by the corporation, the by-
law becomes a part of his contract and he may enforce the
same; but it is otherwise if he does not contract with reference
to or on the faith of the by-law. (Ibid., pp. 762-765; Fletcher vs.
Botica Nolasco Co., Inc., 47 Phil. 583 [1925].)
(d) A corporate contract cannot be held invalid just
because the signatory thereon was not the chairman of the
board which allegedly violated the corporation's by-laws.
Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons
who deal with the corporation unless they have knowledge
of the same. (PMI Colleges vs. National Labor Relations
Waiver of by-laws.
Knowledge of the facts rendering a by-law applicable is, of
course, essential to its waiver. In any event, the question whether
there has been a waiver of a by-law is ordinarily one of fact.
(1) By the corporation. — By-laws which are not required
by the charter or statute and which operate in favor of the
corporation are subject to waiver, both express and implied, by
the corporation, considered as an entity separate and apart and
having rights distinct from those of its stockholders or members.
It would certainly seem that the fact that a corporation does
waive its by-laws cannot be objected to by third persons.
(2) By the stockholders or members. — In like manner, a by-law
may be waived by a stockholder or member when it is he whose
individual rights are advanced or protected by its provisions.
468
(a) If the corporation acts or contracts in disregard of a

by-law with the consent or acquiescence of the stockholders
or members, there is a waiver of the by-law, at least pro hac
vice, whether it is afterwards sought to set up the by-law as
against strangers or as against its stockholders or members.
(b) A corporation will not be permitted to assert in an
action to enforce liability against it that the liability was
incurred in contravention of its by-laws where there has been
a continued disregard of such by-laws acquiesced in by the
stockholders or members.
(c) When the power to make by-laws is vested in the
stockholders or members, and they have made by-laws for
the protection of the corporation, they cannot be waived by
the directors or trustees or other officers of the corporation.
But the stockholders or members may permit the directors or
trustees or other officers to act in disregard to such a by-law,
or they may ratify their action, and in such a case, there is a
waiver of the by-law by the stockholders or members, (see 8
Fletcher, pp. 768-774; see also 18 C.J.S. 593-594.)
(d) It has been opined that a by-law provision which
allows the waiver of any provision of the by-laws by the vote
of a certain number of stockholders or members is not valid as
such waiver would be tantamount to an indirect amendment
of the by-laws, which can only be amended in accordance
with the procedure outlined in Section 48. (SEC Opinion, Oct.
19, 1989.)
Sec. 47. Contents of by-laws. — Subject to the provisions

of the Constitution, this Code, other special laws, and the
articles of incorporation, a private corporation may provide
in its by-laws for:
(1) The time, place and manner of calling and con-

ducting regular or special meetings of the directors or
trustees;
(2) The time and manner of calling and conducting

regular or special meetings of the stockholders or mem-
bers;
(3) The required quorum in meetings of stockholders

or members and the manner of voting therein;
(4) The form for proxies of stockholders and members
and the manner of voting them;
(5) The qualifications, duties and compensation of
directors or trustees, officers and employees;
(6) The time for holding the annual election of direc-
tors or 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 trust-
ees;
(8) The penalties for violation of the by-laws;
(9) In the case of stock corporations, the manner of
issuing certificates; and
(10) Such other matters as may be necessary for the
proper or convenient transaction of its corporate business
and affairs. (21a)
C o n t e n t s of b y - l a w s .
"Subject to the provisions of the Constitution, this Code,
other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for" the matters
enumerated in Section 47. This means that as to matters already
regulated by the Corporation Code, the by-laws cannot provide
otherwise. Thus:
(1) Place of meeting. — While the place of directors' or trust-
ees' meeting may be held at the place determined in the by-laws,
"anywhere in or outside of the Philippines" (Sec. 53, par. 3.), the
stockholders' or members' meeting must always "be held at the
city or municipality where the principal office of the corporation
is located or if practicable in the principal office of the corpora-
tion." (Sec. 51, par. 1; see, however, Sec. 93.)
(2) Quorum. — Section 47 permits corporations to determine
in their by-laws "the required quorum in meetings of stockhold-
ers or members x x x," that is, fix a specific number necessary
to constitute a quorum for the transaction of business, but such
by-laws cannot provide that a lesser number shall constitute a
470
quorum in those cases in which the law requires for the valid-
ity of certain corporate acts the approval of a minimum number
of votes, (see Sec. 52.) The Code gives the corporation also the
power to prescribe in the articles of incorporation or by-laws a
number greater than the majority of the members of the board of
directors or trustees to constitute a quorum, (see Sec. 25, par. 2.)
(3) Proxies. — With respect to proxies of stockholders and
members, the by-laws may provide for (a) the form of such
proxies and (b) the manner of voting them subject to the date
provisions of Section 58. Thus, the by-laws may validly provide
that proxies be notarized and filed with the corporate secretary,
at least, say, two days before the date of the meeting, but they
may not do away with the restrictions imposed by Section 58 on
voting by proxy.
(4) Qualifications of directors. — The qualifications of directors
may be fixed in the by-laws, but such by-laws cannot dispense
with the minimum legal requirements that a director must be a
registered owner of at least one (1) share of stock and that at least
two (2) of the directors must be residents of the Philippines. (Sec.
23.)
The amendment to a corporation's by-laws limits the term to
a maximum of three (3) consecutive years as director, after which
the director has to wait for one (1) consecutive year before he
can run again for election in the board. The amendment takes
prospective effect upon its approval by the SEC. Therefore, those
directors who at the time of the by-laws' effectivity have served
for more than three (3) years are not covered by the provision
and may seek re-election. (SEC Opinion, Aug. 7,1997.)
(5) Disqualification for position of director. — The by-laws may
validly provide for disqualification for the position of directors,
e.g., being engaged in any business which competes with or is
3
antagonistic to that of the corporation. (Gokongwei, Jr. vs. Secu-
rities and Exchange Commission, 89 SCRA 336 [1979].)
3
The desired qualifications or disqualifications must be specifically or clearly spelled
out in the by-laws without the necessity of being subject to the judgment or determina-
tion by the board. Such a requirement is dangerous and can cause possible future con-
flicts which may adversely affect the right of stockholders or members to participate in
the management of the corporation. (SEC Opinion, April 23,1993.)
(6) Compensation to stockholders or members. — Stockholders
or members as such do not render service for attendance at
corporate meetings but exercise rights personal to themselves
in the corporation. Hence, the by-laws may not provide
compensation to them, if they are not "directors or trustees,
officers and employees." (SEC Opinion, June 30,1971.)
(7) Election and term of office of directors or trustees. — Neither
can the corporation provide in the by-laws for the manner of
election and the term of office of directors or trustees which are
already provided by law. (Sees. 23 and 24.)
(8) Imposition of penalties or sanctions. — While a corpora-
tion has not an uncontrollable discretion in the enforcement of
its by-laws, its power to enforce its by-laws properly made, by
pecuniary penalties and corporate disabilities proportionate to
the violation, is not to be doubted. For instance, by-laws as to the
suspension or expulsion of members of a corporation for mis-
conduct or nonpayment of dues will be sustained. It has been
held, however, that by-laws cannot be enforced by a forfeiture of
property or stock of the defaulting member. (18 Am. Jur. 2d 703.)
In the absence of any provision in the by-laws authorizing
the imposition of penalties, a violation of by-laws would merely
constitute in appropriate cases an actionable wrong for which
the ultimate remedy resides in the courts. (SEC Opinion, March
10,1972.)
The remedy of mandamus is generally available to compel
officers of a corporation to perform the duties imposed on
them by the by-laws. The obligations imposed by the by-laws
of a corporation upon its officers are not such as rest wholly in
contract for the breach of which there is an adequate legal remedy
preventing the issuance of mandamus to compel compliance with
them. (18 Am. Jur. 2d 703.)
(9) Issuance of certificates of stock. — This matter is an internal
one which the law has left for the corporation to decide, (see Sec.
63.) However, the authority granted to a corporation to regulate
the transfer of its stock does not empower it to restrict the right
of a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be
472
followed in effecting transfer. (Thomson vs. Court of Appeals,

298 SCRA 280 [1998].)
"The enumeration contained in Section 47 is merely direc-
tory. Failure of the corporation to make provision for the matters
therein contained will not affect the validity of the by-laws nor
of the corporate act. This proposition is evidenced by the fact
that the Corporation Code itself contains particular provisions
on matters which may properly be contained in the by-laws."
(C.G. Alvendia, op. cit., p. 241.)
Sec. 48. Amendments to by-laws. — The board of direc-

tors or trustees, by a majority vote thereof, and the owners
of at least a majority of the outstanding capital stock, or
at least a majority of the members of a non-stock corpo-
ration, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new
by-laws. The owners of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the members in a non-
stock corporation may delegate to the board of directors
or trustees the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power delegated
to the board of directors or trustees to amend or repeal
any by-laws or adopt new by-laws shall be considered as
revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or a majority of
the members in a non-stock corporation, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws are adopted,

such amendment or new by-laws shall be attached to the
original by-laws in the office of the corporation, and a
copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall
be filed with the Securities and Exchange Commission, the
same to be attached to the original articles of incorporation
and original by-laws.
The amended or new by-laws shall only be effective

upon the issuance by the Securities and Exchange Com-
mission of a certification that the same are not inconsistent
with this Code. (22a and 23a)
A m e n d m e n t a n d repeal o f by-laws
a n d a d o p t i o n o f n e w by-laws.
(1) Power implied. — The power to make by-laws implies the
power to alter or repeal them and enact new ones, but the power
to alter by-laws or adopt new by-laws has the same limits as the
power to make them in the first instance.
(2) Formalities. — Section 48 provides the formalities to be
followed in making amendment or repeal of by-laws or in adopt-
ing new by-laws.' The by-laws may provide for a greater number
of votes. In all cases, the power can only be exercised at a regular
or special meeting duly called for the purpose. Even holders of
non-voting shares or non-voting members, as the case may be,
are entitled to vote on the matter, (see Sec. 6, par. 6[2].)
Amendments to or repeal of by-laws cannot be done in a
"referendum." The rationale for the requirement of a meeting
is to give the stockholders/members a chance to deliberate on
the amendments or repeal to be voted upon. The inability of
a stockholder/member to attend such meeting personally is
not a problem as he can execute a written proxy (see Sec. 58.)
authorizing another person to exercise his rights in the meeting
as if he were personally present. (SEC Opinion, Oct. 13, 1997.)
(3) Delegation of power. — The power may be exercised by
the stockholders or members directly, or indirectly by delegat-
5
ing said power to the board of directors or trustees. However, it
has been held that the authority given to the board of directors
to alter or amend by-laws must be so construed as to restrict it
from altering or annulling a by-law imposing a limitation on its
4
As a matter of procedure, it is not proper to indicate, in bold letters or otherwise,
the portions of a new code of by-laws that distinguishes it from the earlier by-laws of the
corporation. As the term implies, a new by-laws is considered an entirely new set of rules
that supersedes all preceding ones. (SEC Opinion, June 27,1966.)
T h e delegation to the board of directors (or trustees) of the power to amend, alter, or
repeal by-laws or adopt new by-laws should not be embodied in the by-laws, but merely
in a resolution adopted by 2 / 3 of the outstanding capital stock or of the members. This
is for the reason that the delegated authority is temporary in nature and may be revoked
any time by a majority vote. Accordingly, if the power is provided in the by-laws, the
power delegated may have been revoked already, but may still appear therein until the
corresponding amendment is made and filed with the Securities and Exchange Commis-
sion. (SEC Opinion, Oct. 25,1965.)
474
powers. (Stevens vs. Davison, 18 Gratt [Val.] 819; 18 Am. Jur. 2d

702.)
(4) Necessity of meeting. — Although there is no express
requirement of stockholders' or members' meeting for the "dele-
gation" of the power, such meeting is necessary. The legislative
intent appears to be that as the delegation of the power is an
unusual act, the law has properly made it more difficult to do so
than to revoke such a delegation which requires only a majority.
If the revocation of the delegated power requires a meeting, there
is no reason why a meeting is not also required in the delegation
of such power. If the rule were otherwise, it would be making the
delegation much easier than its revocation, which is inconsistent
with the intent of the provision to make the delegation more
difficult to obtain. (SEC Opinion, July 22,1992.)
(5) Implied repeal or amendment of by-law. — There may be an
implied repeal (or amendment) of a by-law in the same manner
and to the same extent as there may be an implied repeal of a
statute, although repeals by implication are no more favored in
the case of by-laws than in the case of statutes. So, a by-law is
impliedly repealed by a subsequent by-law inconsistent with it.
(see SEC Opinion, Feb. 4,1976, citing 8 Fletcher, p. 694.)
(6) Waiver of by-law provision. — A by-law may not be amend-
ed, however, otherwise than as provided in Section 48. To allow
the waiver of any provision in the by-laws would be tantamount
to an indirect amendment thereof, (see SEC Opinion, Oct. 10,
1989.) The corporation, its directors, officers and members are
bound by and must comply with the by-laws, (supra.)
(7) Non-delegable power. — The power to amend the articles of
incorporation lies with the stockholders or members and cannot
be delegated to the board of directors or trustees, (see Sec. 16.)
Neither can the power to adopt the original (not new) by-laws be
delegated.
Revocation of delegated p o w e r of board

of directors or trustees.
(1) Lesser number of vote required. — To revoke the delegated
power to amend or repeal the original by-laws or to adopt new
by-laws, the law merely requires the vote of stockholders repre-
senting a majority of the outstanding capital stock or a majority
of the members, as the case may be, while the vote for the delega-
tion is 2 / 3 . The evident purpose of the law is to make it easier
to revoke the delegated power as a safeguard against possible
abuse of the power by the board of directors or trustees.
Before, the vote for revocation was "majority of the stock-
holders." In other words, the basis of the vote was the num-
ber of stockholders themselves and not the shares held, which
is normally the mode of voting in stock corporations. This is,
however, the only instance of per capita voting by stockholders
provided for in the old law.
(2) Previous notice of proposed revocation at meeting not necessary.
— While the amendment or repeal of any by-laws or adoption
of new by-laws by the stockholders or members must be made
"at a regular or special meeting duly called for the purpose,"
the italicized phrase is omitted with reference to the revocation
by the stockholders or members of the delegated power of the
board of directors or trustees to amend, etc. This means that the
revocation is valid notwithstanding that no previous notice was
given to stockholders or members of the intention to propose
such revocation.
By-laws a n d resolutions distinguished.

In addition to the by-laws, a corporation may adopt other
rules and regulations for its government, which may be in the
form of a board resolution. (SEC Opinion, July 12,1993.)
Generally speaking, by-laws and resolutions are recognized
and treated by the courts as distinct and different, not merely in
name, but with regard to their respective offices, functions, and
operations.
(1) Nature and subject matter. — A resolution is merely a
declaration of the will of the corporation in a given matter and in
the nature of a ministerial act. (Evans vs. City of Jackson, 30 So.
2d 315, 317, 202 Miss. 9; 37-A Words and Phrases 3.) A by-law, on
the other hand, is a permanent rule of action (except only insofar
as it may be repealed or amended) of the conduct of corporate
affairs while a resolution is ordinarily limited in its operation,

applying usually to a single act or transaction of the corporation
or to some specific person, situation or occasion.
(a) So-called election laws adopted by a corporation as
mere rules on motion and not by the procedure specified in
the by-laws for adoption of a by-law, to meet a particular
situation then existing, without any intention to legislate for
similar future situations, partake of the nature of resolutions
and are not operative as by-laws. (Hornady vs. Goodman,
167 G.A. 555,146 S.E. 713; 8 Fletcher, p. 646.)
(b) While the power to amend the by-laws may be
delegated to the board of directors or trustees, such delegated
power is temporary in nature and may be revoked at any
time by the vote of the majority of the outstanding capital
stock or of the members; hence, it cannot be permanently
be embodied in the by-laws but merely in a stockholders' or
members' resolution. (SEC Opinion, Feb. 9,1994.)
(2) Rule in case of conflict. — The by-laws of a corporation are,
in effect, its constitution, and will prevail over a resolution of
the board of directors/trustees. (SEC Opinion, Jan. 4,1985, citing
Fletcher, 1st ed., Sec. 481.)
(3) Necessity of approval by SEC. — While corporate by-laws
are subject to the approval of the SEC, other rules and regula-
tions do not need its approval, unless they involve matters where
the law requires such approval. (SEC Opinion, July 13,1993.)
Resolution a d o p t e d as a by-law.
Although a by-law may be in the form of a resolution, and in
such case, repeal a previous by-law, a simple resolution in favor
of some object which is inconsistent with or forbidden by a by-
law does not repeal or override the by-law.
(1) By way of illustration, where the first resolution of the
members of a non-stock corporation disqualifies trustees who
have served for three (3) consecutive terms from mrming for re-
election and the second resolution provides "that not more than
ten (10) members of the outgoing board shall be reelected," the
first resolution which was not embodied as a provision in the by-
laws, does not have the force and effect of by-laws and cannot
be considered as an amendment to the same, and since the sec-
ond resolution was embodied in the by-laws, trustees who have
served for three (3) consecutive terms are eligible for reelection
so long as they are included in the first ten (10) re-electionists.
(SEC Opinion, Nov. 10,1976.)
(2) Similarly, the additional qualifications that a member of
a non-stock corporation would have before he could be elected
to the board should be provided for in the by-laws by amend-
ing the same pursuant to Section 48; otherwise, the same cannot
be enforced. (SEC Opinion, July 4, 1984.) But the resolution of
the stockholders or members of a corporation not inconsistent
with the by-laws should be given effect, (see SEC Opinion, Oct.
5,1976.)
Articles of incorporation a n d by-laws

distinguished.
A clear distinction exists between the two.
(1) The former constitutes the charter or fundamental law of
6
the corporation, while the latter are merely rules and regulations
adopted by the corporation;
(2) The former is executed before incorporation by the
incorporators, while the latter, usually after incorporation by the
stockholders or members; and
(3) The filing of the former is a condition precedent to corpo-
rate existence, while the filing of the latter is a condition subse-
quent.
T h e word "constitution" is sometimes used with reference to corporations in its true

sense, that is, descriptive of the fundamental or supreme laws of the corporation, or as a
synonym or equivalent for charter. More frequently, however, the constitution of a cor-
poration particularly one of a fraternal or mutual benefit charter, is considered nothing
more than a by-law or by-laws under an inappropriate name. A so-called "constitution"
adopted by a fraternal benefit corporation is of no higher dignity than by-laws adopted
by it; both are creations of the corporation and have, in large measure, a common purpose
or object, to wit: to regulate or govern in its internal affairs. (SEC Opruon, Oct. 5, 1984,
citing 8 Fletcher, Sec. 4167.)
Filing and effectivity of a m e n d e d

or new by-laws.
(1) Section 48 governs the filing of the amended or new
by-laws. Under Section 46, a certificate of the appropriate
government agency that the amendments are in accordance with
law is required in case of amended by-laws of any corporation
governed by special laws. Without such certificate, the Securities
and Exchange Commission shall not accept them for filing.
(2) As in the case of the original by-laws (Sec. 46, par. 3.),
the amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with the Code.
(Sec. 48, last par.) Therefore, a corporation cannot immediately
implement the amended or new by-laws without the certification
or approval of the Commission. The amendment or repeal takes
effect prospectively and not retroactively.
If the special corporation is governed by a special law, the
amended or new by-laws shall be effective only upon approval
by both the appropriate government agency and the Commis-
sion.
(3) The amended or new by-laws shall apply prospectively
and not retroactively.
(4) The rules applicable to the filing of the amended by-laws
of foreign corporations and the effectivity of the amendments are
found in Sections 129 and 130 of the Code.
— oOo —
Title VI
MEETINGS
Sec. 49. Kinds of meetings. — Meetings of directors,

trustees, stockholders, or members may be regular or spe-
cial, (n)
Sec. 50. Regular and special meetings of stockholders or
members. — Regular meetings of stockholders or mem-
bers shall be held annually on a date fixed in the by-laws,
or if not so fixed, on any date in April of every year as de-
termined by the board of directors or trustees: Provided,
That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks
prior to the meeting, unless a different period is required
by the by-laws.
Special meetings of stockholders or members shall be
held at any time deemed necessary or as provided in the
by-laws: Provided, however, That at least one (1) week writ-
ten notice shall be sent to all stockholders or members,
unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or im-
pliedly, by any stockholder or member. (24a)
Whenever, for any cause, there is no person authorized
to call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member, and on the
showing of good cause therefor, may issue an order to
the petitioning stockholder or member directing him to
call a meeting of the corporation by giving proper notice
required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least
a majority of the stockholders or members present have
chosen one of their number as presiding officer. (26a)
479
480
Kinds of meetings.
(1) Meetings of stockholders or members. — It may be:
(a) Regular or those held annually (see Sec. 24.) on a date
fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trust-
ees. It is held principally for the purpose of electing another
set of directors or trustees; or
(b) Special or those held at any time deemed necessary or
as provided in the by-laws. (Sees. 49, 50.)
(2) Meetings of directors or trustees. — It may be:
(a) Regular or those held by the board monthly, unless
the by-laws provide otherwise; or
(b) Special or those held by the board at any time upon
the call of the president or as provided in the by-laws. (Sees.
49, 53.)
Necessity of m e e t i n g s .
The corporate powers are vested in the board of directors or
trustees and/or the stockholders or members as a body and not
as individuals.
(1) Meetings of stockholders or members. — "It is a fundamental
rule of corporation law that unless the statute otherwise provides,
stockholders [or members] can act only in meetings properly
convened and assembled. The written assent of a majority of
the shareholders [or members] without a meeting to a matter
requiring action by them is not sufficient." (Fisher, op. cit., p. 191.)
The reason for the rule lies in the protection to the stockholders
(or members) by notice and the opportunity to attend, discuss,
and vote at a meeting. Individual assents, however, given by the
shareholders separately, may preclude or estop those who assent
from complaining of what they have consented to. (SEC Opinion,
Sept. 22,1972, citing Ballantine, p. 390.)
(2) Meetings of directors or trustees. — Similarly, as agents of
the corporation managing its affairs, the directors or trustees
can only exercise their powers as a board, not individually or
separately. The law proceeds upon the theory that directors or
trustees shall meet and counsel with each other, and that any
Sees. 49-50 TITLE VI. MEETINGS 481
deterrnination affecting the corporation shall only be arrived at

after a consultation at a meeting of the board upon notice to all,
attended by at least a quorum of its members. (SEC Opinion,
March 10,1972, citing Ballantine, p. 123.)
Exceptions to t h e rule.
The general rule is that where the law expressly requires a
meeting for a particular transaction, any action taken by the cor-
poration without a meeting properly held for such purpose is
void.
(1) Under Section 16, any corporation may amend its articles
of incorporation "by a majority vote of the board of directors or
trustees and the vote or written assent two-thirds of the stock-
holders representing at least two-thirds of the outstanding capi-
tal stock, x x x or x x x of the members x x x." Thus, a meeting of
stockholders or members is not necessary.
(2) It is evident that the corporation will be bound by the
unanimous act or agreement of its stockholders or members al-
though expressed elsewhere than at a formal meeting.
(3) In any of the cases mentioned in Section 101, any action
taken by the directors of a close corporation without a meeting
shall nevertheless be deemed valid, unless otherwise provided
1
in the by-laws.
Requisites for a valid meeting of stock-

holders or m e m b e r s .
The following requisites must be complied with in order that
there will be a valid meeting of stockholders or members:
(1) It must be held at the proper place (Sec. 51.);
(2) It must be held at the stated date and at the appointed
time or at a reasonable time thereafter (Ibid.);
2
(3) It must be called by the proper person (Sec. 50, last par.);
•For other exceptions to the requirement that the board must act as a body, see com-
ments under Section 23.
2
The Securities and Exchange Commission has the power "to compel the officers of
any corporation or association registered by it to call meetings of stockholders or mem-
bers thereof under its supervision." (Pres. Decree No. 902-A, Sec. 6[f].)
482
(4) There must be a previous notice (Sees. 50, 51.); and

(5) There must be a quorum. (Sec. 52.)
If the meeting is held at an unauthorized place or without
proper notice and not all the stockholders or members are pres-
ent, those who have a right to complain may take steps to set
aside any action taken at such meetings even though a majority
of the stockholders or members were present (Fisher, op. cit., p.
196.) in the absence of waiver, estoppel, or ratification. (5 Fletch-
er, p. 25.)
Sec. 51. Place and time of meetings of stockholders or

members. — Stockholders' or members' meetings, whether
regular or special, shall be held in the city or municipality
where the principal office of the corporation is located,
and if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for the purposes of this
section, be considered a city or municipality. Notice of
meetings shall be in writing, and the time and place thereof
stated therein. (24a)
All proceedings had and any business transacted at
any meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even
if the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or
duly represented at the meeting. (25a)
Place and time of m e e t i n g s of stock-

holders or m e m b e r s .
(1) The proper place for the holding of stockholders' or
members' meeting is that provided in Section 51. (par. 1.) This
is mandatory. Consequently, the by-laws cannot provide other-
wise, except as allowed by Section 93 with respect to meetings
of members of a non-stock corporation. Directors' or trustees'
meetings, on the other hand, may be held at any place fixed in
the by-laws even beyond the bounds of the State where the cor-
poration exists. (Sec. 53, last par.) The directors or trustees are not
a corporate body; they are, when acting as a board, but agents of
the corporation.
Sec. 51 TITLE VI. MEETINGS 483
The rule as to the place of meetings of stockholders or mem-

bers is subject to the exception provided in the second paragraph
of Section 51.
ILLUSTRATION:
The city or municipality where the principal office of
X Corporation, a stock corporation, is located is stated in its
articles of incorporation at Makati, Metro Manila, (see Sec.
15[third].) The principal office of the corporation is housed at a
building located at 1234 Ayala Avenue, Makati, Metro Manila.
Thus, the meeting of the stockholders of X Corporation
may be held anywhere in Metro Manila (presently composed
of 8 cities and 9 municipalities including Makati) which, for
purposes of Section 51, is considered a city or municipality,
but if practicable, at 1234 Ayala Avenue, Makati, Metro Manila.
However, failure to comply or observe the proper place for
holding the stockholders' or members' meeting will not render
the meeting illegal if all the stockholders or members are
present or duly represented at the meeting.
(2) Section 47(2) empowers corporations to provide in their

by-laws for the time and manner of calling and conducting regu-
lar and special meetings of stockholders or members. Regular
3
meetings shall be held on "a date fixed in the by-laws; or if not
so fixed, on any date in April of every year as determined by the
board of directors or trustees." (Sec. 50, par. 1.) Special meetings
may be held "at any time deemed necessary or as provided in the
by-laws." (Ibid., par. 2.)
The meeting should be held at the appointed time, or, if not
then held, at a reasonable time thereafter. Special meetings may
be held at any reasonable time. (5 Fletcher, p. 20.)
Proper person to call m e e t i n g .

The "call" for a meeting is exercised by the person who has
the power to call the meeting. It may consist of direction to the
T h e date should also indicate the day of the week, e.g., "Thursday, January 15, 2006
at 4:00 P.M." to avoid the inconvenience of the date falling on a non-working day.
secretary of the corporation to notify the stockholders or mem-

bers of the meeting.
(1) The person or persons designated in the by-laws have
authority to call stockholders' or members' meeting.
(2) In the absence of such provision in the by-laws, the meet-
ing may be called by a director or trustee or by an officer entrust-
ed with the management of the corporation unless otherwise
provided by law.
(3) Under Section 50 (last par.), a stockholder or member
may make the call on order of the Securities and Exchange
Commission whenever for any cause, there is no person
authorized to call a meeting. Presidential Decree No. 902-A
empowers the Securities and Exchange Commission, among
others, "to compel the officers of any corporation or association
registered by it to call meetings of stockholders or members
thereof under its supervision." (Sec. 6[f] thereof.) Section 50 (last
par.) applies only where there is no person authorized to call a
corporate meeting or the officers authorized fail or refuse to call
a meeting. Any interested stockholder or member may petition
the Commission to authorize him to call a meeting or to compel
the officers of the corporation to call a meeting.
(4) The special meeting for the removal of directors or trust-
ees may be called by the secretary of the corporation or by a
stockholder or member as provided by Section 28.
Notice of every meeting required.

As distinguished from "call," "notice" is the writing inform-
ing the stockholders or members of the meeting.
It is customary and convenient to provide in the by-laws for
notice of all meetings both regular and special but the prevail-
ing rule in other jurisdictions is that, as to regular meetings, no
notice need be given other than that contained in the by-laws
when the time and place of such meeting are specially designated
therein. (7 R.C.L. Corps, par. 314.) But if the meeting is a special
one, notice must be given. Whether regular or special, notice
must be given when required by the law or by the by-laws of the
corporation.
Under the present law, written notice even of regular meet-

ings must be sent to registered stockholders or members at least
two (2) weeks before the meeting, or at least one (1) week for
special meetings, unless a shorter or longer period is required by
the by-laws. In meetings ordered by the Securities and Exchange
Commission as in Section 50 (last par.), it is evident that notice
is necessary. However, notice of any meeting may be waived,
expressly or impliedly, by any stockholder or member. (Sec. 50,
pars. 2, 3.)
The corporate by-laws govern the procedure of sending
notices of meetings. (Sec. 47[67].) If the by-laws is silent, the
manner prescribed in Section 50 shall be followed. (SEC Opinion,
June 9,1994.)
Statement of purpose of meeting.

There are certain matters of importance which the law
requires to be taken up at meetings of stockholders or members
called expressly for the purpose. It is, therefore, necessary that
the notice should state the purpose for which the meeting is
called. These cases are provided in meetings called to consider
any of the following matters:
(1) Election of directors or trustees (see Sec. 24, last sen-
tence.);
(2) Removal of directors or trustees (Sec. 28.);
(3) Filling of vacancies in the office of director or trustee (Sec.
29, par. 2.);
(4) Ratification of contract of the corporation with a director
or trustee (Sec. 32, par. 2.);
(5) Extension or reduction of corporate term (Sec. 37.);
(6) Increase or decrease of capital stock (Sec. 38, par. 1.);
(7) Creation or increase of bonded indebtedness (Ibid.);
(8) Sale or other disposition of all or substantially all of the
corporate assets (Sec. 40, par. 1.);
(9) Investment of corporate funds in another corporation or
business or for any other purpose (Sec. 42.);
(10) Declaration of stock dividends (Sec. 43.);
486
(11) Entering into a management contract with another

corporation (Sec. 44.);
(12) Amendment to, or repeal of, any by-laws or adoption
of new by-laws (Sec. 48, par. 1.);
(13) Fixing the issued price of no par value shares (Sec. 62,
last par.);
(14) Plan of merger or consolidation (Sec. 77, par. 1.);
(15) Amendment of the articles of incorporation of a close
corporation (Sec. 103.);
(16) Voluntary dissolution of the corporation where no
creditors are affected (Sec. 118.);
(17) Voluntary dissolution of the corporation where credi-
tors are affected (Sec. 119.); and
(18) Dissolution by shortening corporate term. (Sec. 120.)
The above matters may be transacted during the annual
stockholders' or members' meeting of the corporation as long as
the required notice is complied with.
The objection that no notice was given or that the notice
given was defective, cannot be raised by third persons who have
not been injured. (5 Fletcher, pp. 68-69.)
Requisites of notice of m e e t i n g .
The requisites of proper notice may be enumerated as fol-
lows:
(1) It must be issued by one who has authority to issue it;
(2) It must be in writing (Sec. 50, par. 1, Sec. 51, par. 1, and
Sec. 53, par. 3.);
(3) It must state the date, time, and place of the meeting,
unless otherwise provided in the by-laws (Ibid.);
(4) It must state the business to be transacted thereat;
(5) It must be sent at a certain time before the scheduled
meeting as fixed by law, unless a different period is required by
the by-laws (Ibid.); and
(6) Further, the notice must comply with any other require-
ments prescribed by the law or by the by-laws of the corporation.
(a) For instance, Section 77 requires that the notice of

meeting for the approval of merger or consolidation "shall
state the purpose of the meeting and shall include a copy or
a summary of the plan of merger or consolidation, as the case
may be."
(b) Section 118 prescribes that the notice of meetings for
voluntary dissolution shall be made by publication, in addi-
tion to written notice which shall be sent by registered mail
or personal delivery.
A substantial compliance with the requirements as to notice
will be sufficient. If general and special statutory provisions
relating to notice are conflicting, the special statutes control for
matters covered by them. Notice should be stated in language
which may be readily understood and should be construed in a
sense in which businessmen to whom they are addressed should
understand them. (18 C.J.S. 1230.)
A special meeting may not consider business other than those
listed in the notice of meeting unless there is unanimous waiver.
Effect of failure to comply with requisites

for meeting.
Under Section 51 (par. 2.), all proceedings had and any busi-
ness transacted at any meeting of stockholders or members shall
be valid even if the meeting be improperly held or called, pro-
vided the following two requisites are present:
(1) That the proceedings had and the business transacted are
within the power or authority of the corporation, that is, they are
not ultra vires (see Sec. 45.); and
(2) That all the stockholders or members of the corporation
are present or duly represented at the meeting.
In other words, if the two requisites mentioned are not
present, any action taken at the meeting shall not be valid. Note
that Section 51 refers to "all proceedings had and any business
transacted."
Since the meeting is called for the benefit of stockholders or
members, they impliedly waive any irregularity of the meeting
by being present or represented at such meeting.
488
Without the signature of the secretary of the meeting, an

alleged minute taken by a mere clerk has neither probative value
nor credibility. (Union of Supervisors [R.B.]-NATU vs. Secretary
of Labor, 109 SCRA 139 [1981].)
Sec. 52. Quorum in meetings. — Unless otherwise

provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in
the case of non-stock corporations, (n)
Q u o r u m required in stockholders'
and m e m b e r s ' m e e t i n g s .
Section 47(2) permits corporations to determine in their by-
laws, "the required quorum (see Sec. 25.) in meetings of stock-
holders or members" for the transaction of business at such
meetings. In the absence of a quorum, no action can be taken
except to adjourn.
(1) Not less than number required by law. — In those cases, how-
ever, in which the law determines the number of shareholders
or members whose concurring votes are necessary to make their
action binding on the corporation, not less than such number is
necessary to constitute a quorum at a meeting called to transact
such business, (infra.) In such cases, the by-laws may provide for
a greater quorum, (see Sec. 97[3].)
(2) Any number but at least two. — In other cases, the by-
laws may validly provide for the holding of meetings with
the presence of any number of stockholders or members, even
less than a majority, provided that there are at least two. It is
customary, however, to provide in the by-laws that the presence
of the registered holders of a majority of the outstanding shares
is necessary to constitute a quorum, but that a smaller number
may meet and adjourn to a later date, and that at such adjourned
4
meeting the shareholders attending shall constitute a quorum.
'Where there is an unsuccessful attempt by the corporation or if it would be impos-

sible for the corporation to get the required quorum of stockholders necessary to transact
business, the corporation may petition the SEC for the appointment of a management
committee, board or body to undertake the management of the corporation pursuant to
Section 6(d) of Presidential Decree No. 902-A. (SEC Opinion, April 11,1994.)
(3) A majority of outstanding capital stock or members. — Under

Section 52, a majority of the outstanding capital stock as defined in
Section 137 or in case of non-stock corporations, a majority of the
members shall constitute a quorum "unless otherwise provided
in this Code or in the by-laws." For non-stock corporations,
the basis for determining the quorum is the total number of
registered members. Only those who are actual, living members
with voting rights shall be counted in determining the existence
of a quorum during members' meetings. Dead members shall
not be counted. (Tan vs. Sycip, 499 SCRA 216 [2006].)
The best evidence of who are the present members of a non-
stock corporation is the "membership book." In the case of a
stock corporation, it is the stock and transfer book. (Ibid., citing
R. Lopez, The Corporation Code of the Philippines, 1994, Vol. 1,
p. 973.)
Unlike Section 25, Section 52 does not base the quorum on the
meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation. (Tan vs. Sycip, supra.)
(4) Where withdrawal leaves less than a quorum previously
declared. — Once a quorum is present, the affirmative vote of the
majority in the absence of express provision in the by-laws to the
contrary and unless the vote of a greater number is required by
law, is sufficient to decide any question properly presented. All
the stockholders (or members) are bound by the result of such
a vote and, this, even notwithstanding the withdrawal (after
the existence of a quorum has been determined or declared) of
5
enough shareholders (or members) to leave less than a quorum.
(Hill vs. Town, 1722 Mich. 508; 138 N.W. 334, and other cases.) A
minority group cannot prevent corporate action by walking out.
(5) Effect of death of a stockholder or member. — In stock
corporations, shareholders may generally transfer their shares.
Thus, on the death of a shareholder, the executor or administrator
duly appointed by the Court is vested with the legal title to the
stock and entitled to vote it. Until a settlement and division of
'In case the stockholders remaining constitute less than a quorum, the meeting
should be adjourned unless the withdrawal was made purposely to break the quorum.
the estate is effected, the stocks of the decedent are held by the
administrator or executor. On the other hand, membership in
and all rights arising from a non-stock corporation are personal
and non-transferable, unless the articles of incorporation or the
by-laws of the corporation provide otherwise. In other words,
the determination of whether or not "dead members" are
entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or by-
laws. (Tan vs. Sycip, supra.)
Postponement of stockholders' or
m e m b e r s ' annual m e e t i n g .
(1) Change of date of meeting fixed in by-laws not allowed. —
The general rule is that where the date of the annual meeting
is fixed in the by-laws of the corporation, the board of directors
or trustees cannot change the date so as to lengthen their term
of office. "An annual meeting, required and slated for the year,
cannot be dispensed with by the corporate officers, and the
directors cannot by law or otherwise, so change the time of
annual election as to continue themselves in office more than a
year, against the wishes of the owners of a majority of the stock."
(2) Postponement of meeting to a later date when allowed. —
The rule, however, admits of exceptions as where the annual
meeting cannot be held on the date fixed by the by-laws for some
valid reason, such as an erroneous date for holding the meeting
stated in the notice sent out to members. In such case, the annual
meeting may be postponed to a date later than that fixed by the
by-laws, provided proper notice of the change of date is given to
the members. (SEC Opinion, March 8,1995.)
(3) Holding of meeting within a reasonable time after fixed date.
— It is the duty of the board of directors or trustees to call the
annual meeting without unnecessary delay or within a reason-
able time, particularly when a demand therefor is made on them
by the stockholders or members, because they can continue to
hold over only as long as their successors have not been elected;
hence, it is not within their power to delay such election as to
prolong their stay in office. (SEC Opinion, Feb. 21,1968.)
Payment of compensation for attendance at

stockholders' or members' meetings.
There is nothing in the Code which expressly or impliedly
authorizes the payment of per diems to stockholders or members
for their attendance at stockholders' or members' meetings.
The reason for this silence seems to be simple. The term per
diem, as used in connection with compensation, wages, or salary,
means pay for a day's services. (32 Words and Phrases, p. 17.) It
connotes payment for services rendered which cannot be ascribed
to the exercise of the right by a stockholder or member when he
attends a corporate meeting. As a matter of fact, Section 47(5)
of the Corporation Code, which authorizes by-laws to provide
"compensation of directors or trustees, officers, and employees,"
excludes stockholders and members in the enumeration, and
this simply underscores the fact that stockholders or members,
as such, do not render service but exercise rights personal to
themselves in the corporation. (SEC Opinion, June 30,1971.)
Matters in which the law requires minimum

number of votes.
Any matter or transaction must necessarily fail if the votes
attained are less than what the law requires for the particular
transaction. Hence, if there is a tie, the issue or proposition loses.
Hereunder are enumerated the corporate acts, together with
the corresponding minimum votes required for their approval:
(1) to amend the articles of incorporation — a majority of the
board of directors or trustees and vote or written assent of 2 / 3 of
the outstanding capital stock or of the members (Sec. 16; see Sec.
120.);
(2) to elect directors or trustees — a majority of the outstand-
ing capital stock or of the members entitled to vote (Sec. 24.);
(3) to remove directors or trustees — 2 / 3 of the outstanding
capital stock or of the members entitled to vote (Sec. 28.);
(4) to call a special meeting to remove directors or trustees
— a majority of the outstanding capital stock or of the members
entitled to vote (Sec. 28.);
492
(5) to ratify a contract of a director /trustee or officer with

the corporation — 2 / 3 of the outstanding capital stock or of the
members (Sec. 32.);
(6) to extend or shorten corporate term — a majority of the
board of directors or trustees and 2 / 3 of the outstanding capital
stock or of the members (Sec. 37.);
(7) to increase or decrease the capital stock — a majority of
the board of directors and 2 / 3 of the outstanding capital stock
(Sec. 38.);
(8) to incur, create or increase bonded indebtedness — a
majority of the board of directors and 2 / 3 of the outstanding
capital stock (Ibid.);
(9) to sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of the corporate assets — a
majority of the board of directors or trustees and 2 / 3 of the
outstanding capital stock or of the members (Sec. 40.);
(10) to invest corporate funds in another corporation or
business or for any purpose other than the primary purpose — a
majority of the board of directors or trustees and 2 / 3 of the out-
standing capital stock or of the members (Sec. 42.);
(11) to issue stock dividends — a majority of the quorum of
the board of directors and 2 / 3 of the outstanding capital stock.
(Sec. 43.) Note: The approval of the stockholders is not required
with respect to other dividends such as cash and bond dividends.
They may be declared by a majority of the quorum of the board;
(12) to enter into a management contract — a majority of the
quorum of the board of directors or trustees and a majority of the
outstanding capital stock or of the members of both the manag-
ing and the managed corporations, and in some cases, 2 / 3 of the
total outstanding capital stock entitled to vote or of the members
with respect to the managed corporation (Sec. 44.);
(13) to adopt by-laws — a majority of the outstanding capi-
tal stock or of the members (Sec. 46.);
(14) to amend or repeal the by-laws or adopt new by-laws
— a majority of the board of directors or trustees and of the out-
standing capital stock or of the members (Sec. 48.);
(15) to delegate to the board of directors or trustees the

power to amend or repeal the by-laws or adopt new by-laws —
2 / 3 of the outstanding capital stock or of the members (Ibid.);
(16) to revoke the preceding power delegated to the board
of directors or trustees — a majority of the outstanding capital
stock or of the members (Ibid.);
(17) to fix the issued price of no par value shares — a major-
ity of the quorum of the board of directors if authorized by the
articles of incorporation or in the absence of such authority, by a
majority of the outstanding capital stock (Sec. 62, last par.);
(18) to effect or amend a plan of merger or consolidation
— a majority of the board of directors or trustees and 2 / 3 of the
outstanding capital stock or of the members of the constituent
corporations (Sec. 77.);
(19) to dissolve the corporation — a majority vote of the
board of directors or trustees and 2 / 3 of the outstanding capital
stock or of the members (Sees. 118,119.); and
(20) to adopt a plan of distribution of assets of a non-stock
corporation — a majority vote of the board of trustees and 2 / 3 of
the members having voting rights. (Sec. 95, par. 2.)
Certain corporate acts require the approval or authorization
of the stockholders or members. It has been held that where,
except for one, the stockholders of a corporation also sit as
members of the board of directors, it will be illogical and
superfluous to require the stockholders' approval of subject
resolutions requiring the authorization of the stockholders on
record. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].) It
has been ruled that the approval by 2 / 3 of the outstanding capital
stock either prior to the voting of the board or by subsequent
ratification, is required for the temporary stoppage of operation
of a corporation. The cessation of business, though temporary,
is a fundamental concern of the stockholders who stand to be
primary affected by such event. It involves not a mere exercise
management prerogative. (SEC Opinion No. 04-43, Oct. 26, 2004.)
Greater voting requirement.

A corporation may prescribe a greater voting requirement for
the approval of any of the above corporate acts in its articles of
incorporation and/or by-laws in order to protect the rights of

minority stockholders or members. Such higher number is also
the number necessary to constitute a quorum. Note that in Nos.
(1), (6), (7), (8), (9), (10), (11), (12), (14), (18), (19), and (20), the acts
mentioned must be approved by both the board of directors or
trustees and the stockholders or members.
Any matter or transaction must necessarily fail if the number
of votes attained is less than what is prescribed for the particular
transaction. If an issue to be resolved requires a majority for it to
be passed and there is a tie, the issue or proposition simply loses.
There is, therefore, no need to break the deadlock. (SEC Opinion,
Aug. 23,1991.)
Sec. 53. Regular and special meetings of directors or trust-

ees. — Regular meetings of the board of directors or trust-
ees of every corporation shall be held monthly, unless the
by-laws provide otherwise.
Special meetings of the board of directors or trustees
may be held at any time upon the call of the president or as
provided in the by-laws.
Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines, unless
the by-laws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1)
day prior to the scheduled meeting, unless otherwise pro-
vided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly, (n)
Place a n d time of m e e t i n g s of directors

or trustees.
(1) Regular or special meetings of directors or trustees may
be held anywhere in or outside the Philippines, unless the by-
6
laws provide otherwise.
6
In our age of modem technology, the courts may take judicial notice that business
transactions may be made through teleconferencing among people in two or more loca-
tions through an electronic medium. A teleconference represents a unique alternative to
face-to-face (FTF) meetings. In the Philippines, teleconferencing and video conferencing
(2) Regular meetings "shall be held monthly, unless the by-

laws provide otherwise," while special meetings "may be held
at any time upon the call of the president or as provided in the
by-laws." (Sec. 53.)
Notice of every meeting required.

Section 53 requires that notice of every meeting, whether
regular or special, stating the date, time, and place of the same
must be sent to every director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise provided by the by-
laws. Nevertheless, notice of a regular meeting need not be given
if the articles of incorporation or by-laws specify the time of the
meeting (except when it is to be held at another place).
A meeting held in the absence of some of the directors (or
trustees) and without any notice to them is illegal, and the action
at such meeting although by a majority of the directors, is invalid
unless subsequently ratified or waived, expressly or impliedly,
by the absent directors or unless rights have been acquired by
innocent third persons, as against whom the corporation must
be held estopped to set up the failure to observe formalities.
(Ballantine, p. 127.) Of course, should a meeting without any
notice or without a quorum take place, whether notice thereof
has been given or not, all the resolutions and acts approved in
said meeting cannot be considered valid and may be questioned
by any objecting director or stockholder unless subsequently
ratified expressly by the board of directors (or trustees) in a duly
convened meeting or impliedly by the corporation's subsequent
course of conduct. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183
[1995].)
Sec. 54. Who shall preside at meetings. — The president

shall preside at all meetings of the directors or trustees
as well as of the stockholders or members, unless the by-
laws provide otherwise, (n)
of members of board of directors of private corporations is a reality, in light of R.A. No.

8792, otherwise known as the "Electronic Commerce Act." (Expertravel & Tours, Inc. vs.
Court of Appeals, 459 SCRA 147 [2005].) SEC Memo. Cir. No. 15 (Nov. 30, 2001) provides
the guidelines for board meetings done through tele- or video conferencing where the
participants who are not physically present are located in different places, both here and
abroad.
Presiding officer at meetings.

(1) President/Chairman/Vice-chairman. — The president shall
preside at all meetings of directors or trustees and of the stock-
holders or members, even where the chairman of the board is
present at such meeting, unless otherwise provided in the by-
laws (Sec. 54.) and subject to the provisions of Section 50. (last
par.) Thus, the by-laws may provide that the chairman, instead
of the president, shall preside at board meetings. Where there is
a vice-chairman provided in the by-laws, he presides in the ab-
sence of the chairman.
(2) Stockholder or member in a temporary capacity. — Where
the officer entitled to preside is not present at the time for a
meeting to convene, it has been recognized that a stockholder
or member who takes the floor may temporarily preside at the
meeting of stockholders or members pending the selection of
the presiding officer. Unless the contrary is provided by the by-
laws, the presiding officer may be selected by viva voce vote of the
stockholders or members present, (see 19 Am. Jur. 2d 138.)
(3) Stockholder or member chosen. — Where for any cause no
person is authorized to call a meeting, the petitioning stockhold-
er or member authorized by the Securities and Exchange Com-
mission to call a meeting of the corporation "shall preside thereat
until at least a majority of the stockholders or members present
have chosen one of their number as presiding officer." (Sec. 50,
last par.)
The fact that a director is at the same time the presiding officer
of the meeting does not deprive him of the right to vote as such
director. He cannot be deprived of the right by a majority vote of
its board without his consent. (SEC Opinion, Jan. 25,1990.)
Sec. 55. Right to vote of pledgors, mortgagors, and ad-

ministrators. — In case of pledged or mortgaged shares in
stock corporations, the pledgor or mortgagor shall have
the right to attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly given such
right in writing which is recorded on the appropriate cor-
porate books by the pledgor or mortgagor, (n)
Executors, administrators, receivers, and other legal

representatives duly appointed by the court may attend
and vote in behalf of the stockholders or members without
need of any written proxy. (27a)
Right to v o t e in s t o c k corporations.
7
(1) In general. — It is through the right to vote that the stock-
holder participates in the management of the corporation. The
right to vote, unlike the rights to receive dividends and liquidat-
ing distributions, is not a passive theory because management or
administration is, under the Code, vested in the board of direc-
tors (or trustees), with certain reserved powers residing in the
stockholders (or members) directly. (Cojuangco, Jr. vs. Roxas, 195
SCRA 794 [1991].)
(a) The right has been described as the stockholder's
"supreme right and main protection." (Stokes vs. Continen-
tal Trust Co., 78 N.E. 1090.)
(b) The right is inherent in, and incidental to, the owner-
ship or the property in the stock of which the stockholder
cannot be deprived without his consent, and he may vote it
as he chooses, whether it be with the minority or majority,
although not in the manner or for a purpose contrary to law
or public policy or fraudulently. (5 Fletcher, p. 99.)
(c) A court will not deprive a stockholder of his right
to vote his shares, except upon a clear showing of its lawful
denial under the articles of incorporation or by-laws of the
corporation, as it is a right inherent in stock ownership.
(Sales vs. Securities and Exchange Commission, 169 SCRA
109 [1989].) One who is actually a stockholder cannot be
denied his right to vote by the corporation merely because
the corporate officers failed to keep its records accurately.
A corporation's records are not the only evidence of the
TJnder the provisions of the old Corporation Law, voting privileges of the stock-
holders are always determined and based on their ownership of the subscribed capital
stock. In the new Corporation Code, the same rule applies. However, the word "out-
standing" is used in lieu of the word "subscribed" so as not to include treasury shares
in voting. In short, voting is based on the number of shares of stock standing at the time
fixed in the by-laws in the stockholder's name in the books of the corporation, otherwise
known as "outstanding capital stock." (SEC Opinion, May 21, 1982.)
ownership of stock in a corporation. (Lanuza vs. Court of

Appeals, 454 SCRA 54 [2005].)
(d) The right to vote stock imposes no legal duty on the
holder to vote it. (19 Am. Jur. 2d 149.)
(e) The vote is based on the number of shares represented
(Sec. 52.) and not on the number of stockholders present which
shares must always be a part of the outstanding capital stock
as defined in Section 137. It is not legally feasible to provide
that certain shares shall be entitled to more than one (1) vote
per share, (see Sees. 24,47[7].) Section 6 applies only in cases
where certain classes of shares, particularly shares classified
as preferred, are denied voting rights ordinarily enjoyed by a
stockholder.
(f) Owners of shares are under no disability to vote at a
stockholders' meeting from the fact that they are also direc-
tors of the corporation. They do not vote in their fiduciary
capacity, but like other stockholders, in the right of the shares
held by them. (19 Am. Jur. 2d 159.)
(2) Voting shares. — Ordinarily, only legal owners of shares in
a stock corporation have the right to be present and vote in any
corporate meeting. Their voting rights vary depending upon the
class of their stock. The control of the corporation, exercised by
the voting power of the stockholders, is in the hands of the hold-
ers of common stock.
(a) A corporation holding shares in another corporation
may, like any owner, vote said shares in all meetings of the
stockholders by the corporate officer duly authorized by the
board of directors and as directed by it.
(b) Except as provided in Section 55, one who does not
appear to be a stockholder upon the books of the corporation
is not eligible to vote a stock although he may be entitled to
the legal title to the stock voted. (Re Argust Printing Co., 48
N.W. 347.)
(c) A transferee of stock cannot vote upon it if his trans-
fer is not registered in the books of the corporation. (Sec. 63.)
A registered stockholder must be allowed to vote irrespective
of any question of bona fides. (SEC Opinion, April 11,1985.)
(d) The registered owners of shares sequestered by the

government (PCGG), or their duly authorized representatives
or proxies, may vote said shares. The government may
not vote the shares and elect the members of the board of
directors. It cannot perform acts of ownership of sequestered
property as it does not become the stockholder of record by
virtue of such sequestration. It is a mere conservator. The
only conceivable exceptions under which the government
is granted the authority to vote the shares are: 1) where
government shares are taken over by private persons or
entities w h o / which registered them in their own names; and
2) where the capitalization or shares that were acquired with
public funds somehow landed in private hands. (Cojuangco,
Jr. vs. Roxas, supra; see Republic vs. Sandiganbayan, 199 SCRA
39 [1991]; Trans Middle East [Phils.] vs. Sandiganbayan, 490
SCRA 455 [2006].)
This "two-tiered test" does not apply but the public character
of the acquisition of the sequestered shares where the shares have
been conclusively shown to have been purchased with public
funds, or funds that are prima facie public in character or, at the
very least, are clearly affected with public interest as in the case
of the coconut levy funds which partake of the nature of taxes.
8
(Republic vs. COCOFED, 372 SCRA 462 [2001]; see Republic vs.
Sandiganbayan, 402 SCRA 84 [2003].)
There is a "record date" fixed by the board of directors for
determination of stockholders entitled to vote; if it does not do
so, such date shall be the date of the notice of meeting.
(3) Non-voting shares. — They may vote in certain cases. Where
the law provides two-thirds or a majority of the outstanding
capital stock "entitled to vote" (see Sees. 24, 28, 44.), only shares
"'The right to vote sequestered shares of stock registered in the names of private
individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a
rule, be exercised by the registered owner. The PCGG may, however, be granted such vot-
ing right provided it can: (1) show prima facie evidence that the wealth and /or the shares
are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets,
thus necessitating their continued sequestration and voting by the government until a de-
cision, ruling with finality on their ownership, is promulgated by the proper court. (Ibid.)
In this case, the "public character" test was applied to the controversy.
with voting rights may participate and vote in the deliberation

of the corporation. (SEC Opinion, July 7,1949.) However, holders
of stock without voting rights may vote in the cases provided
in Section 6. (par. 6, Nos. 1-8.) In all other corporate acts, only
voting shares are entitled to be voted. (Ibid., last par.)
(4) Disqualified shares. — Whenever the law disqualifies
shares from voting on any matter, they are not considered out-
standing for the determination of a quorum at any meeting to act
upon, or the required vote to approve action upon that matter
under any other provision of the law or articles of incorporation
or by-laws of the corporation. Accordingly, treasury shares are
not so considered because they are denied voting rights by the
law. (SEC Opinion, April 11,1985.)
(5) Preferred and redeemable shares. — "Except as otherwise
provided by the articles of incorporation and stated in the
certificate of stock," holders of preferred shares have the right to
vote. Common shares may not be deprived of voting rights, but
preferred and redeemable shares may be deprived of the right to
vote, unless otherwise provided in the Code. (Sec. 6, pars. 1, 2,
Nos. 1-8; see Sec. 81 [1].)
(6) Delinquent shares. — Holders of stock declared delinquent
by the board of directors for unpaid subscriptions (Sec. 67.) are
not entitled to vote or to representation at any stockholders'
meeting. (Sec. 71.) But they may act as proxies for stockholders
whose shares are not delinquent.
(7) Treasury shares. — They have no voting rights. (Sec. 57.)
Fractional shares of stock (see Sec. 41.) cannot also be voted
unless they constitute at least one (1) full share.
(8) Shares not fully paid. — Holders of subscribed shares not
fully paid which are not delinquent are entitled to vote. (Sec. 72.)
Right to vote in non-stock

corporations.
"The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in
the articles of incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class, shall be
entitled to one vote." (Sec. 89, par. 1.) Thus, the general rule is
one vote to each member. In stock corporations, voting is based
on the number of shares owned and not on the number of stock-
holders or per capita.
Controversies involving the right to vote and "the election
or appointment of directors, trustees, officers or managers
of corporations, partnerships or associations" were formerly
under the original and exclusive jurisdiction of the Securities
and Exchange Commission. (Pres. Decree No. 902-A, Sec. 5[b,
c].) The Securities Regulation Code (R.A. No. 8799.) transferred
jurisdiction to decide intra-corporate disputes to the regional
trial courts. (Sec. 5.2 thereof.)
M a n n e r of v o t i n g .
A stockholder or member may vote:
(1) directly (in person), or
(2) indirectly, through a representative —
(a) by means of a proxy (Sees. 55, 56, 58, and 89, par. 2.),
or
(b) by a trustee under a voting trust agreement (Sec. 59.),
or
(c) by executors, administrators, receivers, or other legal
representatives duly appointed by the court. (Sec. 55, par. 2.)
Voting may be either straight or cumulative, (see Sec. 24.)
Representative voting.
A stockholder or member may vote, directly or indirectly,
through a representative as stated above.
(1) Legal representative of stockholder or member. — Section 55
authorizes executors, administrators, receivers, or other legal
representatives duly appointed by the court to attend and vote
in behalf of the stockholders or members on shares under their
administration without need of any written proxy (see Sec. 58.)
because they have legal title to the stock of the deceased owner
or their principal. This is an exception to the rule in Section 24
that only stockholders of record may vote.
502
Apart from the above statutory provision, however, it is clear

that by virtue of their position as legal representatives, they have
the power to vote the stocks in the name of the stockholders
(Schmidt vs. Mitchell, 101 Ky. 570.) and this even if the shares still
stand on the books of the corporation in the name of the stock-
holder, or without a formal transfer of the shares on the books
of the corporation to them. (Market St. RR. vs. Hellman, 109 Cal.
541; 42 R 225.) Their signature can create a legal and valid proxy.
(SEC Opinion, Jan. 28,1963.)
Under Article 225 of the Family Code (Exec. Order No. 209.),
the father and the mother shall jointly exercise legal guardianship
over the property of their unemancipated common child without
the necessity of a court appointment. In case of disagreement, the
father's decision shall prevail, unless there is a judicial order to
the contrary. The parents may, therefore, represent and vote for
their minor child in a stockholders' meeting inasmuch as said
acts are embraced in the administration of the child's property.
(2) Pledgee or mortgagee of stockholder's shares. — As to pledgees
or mortgagees of shares in stock corporations, they shall have
the right to attend and vote at meetings of stockholders only
when expressly given such right in writing by the pledgor or
mortgagor, as the latter remains the owner of the stock pledged
or mortgaged. The authorization is required by the Code to be
recorded on the appropriate corporate books by such pledgor or
mortgagor. (Sec. 55, par. 1.) However, if the pledgor or mortgagor
of the shares of stock is disqualified to vote it, the disqualification
extends as well to the pledgee or mortgagee. (19 Am. Jur. 2d 163.)
(3) Officer or agent of corporation owning shares. — Shares
standing in the name of another corporation, whether domestic
or foreign, may be voted by such officer, agent or proxy as the by-
laws of such other corporation may prescribe or, in the absence of a
provision in the by-laws, as its board of directors may determine,
or they may be voted by the chairman of the board, president, or
any vice-president but always under the ultimate direction of the
board. Thus, where the by-laws of the corporation do not contain
any provision on the matter, the board of directors may authorize
the stockholders of the company to vote for and in behalf of the
corporation but the authority granted would in no way qualify
any one of the stockholders as eligible for membership in the

board in view of the stock ownership requirement under Section
23. (SEC Opinions, July 26,1988 and March 13,1991.)
Voting rights for shares of stock

of a deceased stockholder.
(1) Where a legal representative has been appointed. — On the
death of a stockholder, his administrator or executor becomes
vested with the legal title to the stock and entitled to vote the same
at all meetings, and until a settlement and division of the estate is
effected, the stock of the decedent belongs to said administrator
or executor as his personal representative. This is true even if the
shares stand in the books of the corporation in the name of the
decedent, or without a formal transfer of the stock in the books
of the corporation. However, the administrator or executor
should present proof or evidence of his judicial appointment.
(SEC Opinion, May 12, 1988.) Thus, in the absence of a judicial
appointment, a person has no right to vote a proxy signed by his
mother in connection with the shares of his deceased father. (SEC
(2) Where no legal representative has been appointed. — Where
the estate of a deceased stockholder is still undivided and there is
no administrator or other legal representative duly appointed by
the court nor an executor designated in a will to administer said
estate, no person can vote the shares of the deceased since nobody
can legally represent his estate under the second paragraph of
Section 55. (SEC Opinions, Feb. 28,1967 and April 11,1988.)
(a) An heir of a deceased stockholder whose stock still
remains pro indiviso among the heirs, cannot be considered a
stockholder of a stock corporation in his own right until the
share is registered in his own name on the books of the cor-
poration. (SEC Opinion, March 1,1976.)
(b) To transfer the shares of stock in favor of the heirs of
the deceased stockholder, judicial or extrajudicial partition of
the estate is necessary if he died intestate; otherwise, it will
be necessary to wait for the termination of the testamentary
proceedings and the final adjudication of the shares of stock
in accordance with the will of the decedent. In the light of

the above, an agreement between a corporation and a stock-
holder which provides that the former shall provide a life in-
surance policy for the latter, whereby an insurance company
shall pay the insured stockholder, his heirs, and assigns, the
sum insured corresponding to the approximate value of his
shares upon his death, is not valid for purposes of transfer of
stocks of said deceased stockholder in favor of the corpora-
tion. Furthermore, this scheme, if allowed, would be tanta-
mount to reacquisition by the corporation of its own shares.
Under Section 41, a corporation cannot purchase its own
shares unless the conditions provided therein are complied
with. (SEC Opinion, Nov. 25,1991.)
(3) Where partition has been executed by the heirs. — Where a
judicial or extrajudicial settlement has been executed by the heirs
in accordance with law and registered in the proper register of
deeds, dividing among themselves the shares of the deceased,
the presentation thereof will entitle the heirs to vote the shares
alloted in their respective names at the meeting. (SEC Opinion,
Feb. 28,1967.)
Sec. 56. Voting in case of joint ownership of stock. — In case

of shares of stock owned jointly by two or more persons,
in order to vote the same, the consent of all the co-owners
shall be necessary, unless there is a written proxy, signed
by all the co-owners, authorizing one or some of them or
any other person to vote such share or shares: Provided,
That when the shares are owned in an "and/or" capacity by
the holders thereof, any one of the joint owners can vote
said shares or appoint a proxy therefor, (n)
Voting w h e r e share o w n e d by t w o
or more persons.
In case of shares of stock owned jointly by two or more
persons (i.e., "and" shares), Section 56 requires the consent of all
the co-owners in order to vote such stock. Such consent is not
necessary where:
(1) There is a written proxy executed by the joint-owners
authorizing one or some of them or any other person to vote for
all; and
Sees. 57-58 TITLE VI. MEETINGS 505
(2) The shares are owned in an "and/or" capacity by the

holders thereof, in which case any one of the joint-owners can
vote said shares or appoint a proxy therefor. (Sec. 58.)
Where the property relation between husband and wife is
governed by the system of absolute community of property, the
same shall be governed by the rules on co-ownership, (see Arts.
75, 90, Family Code.) Consequently, as co-owners of shares of
stock, they shall be considered as one stockholder.
Sec. 57. Voting right for treasury shares. — Treasury

shares shall have no voting right as long as such stock
remains in the Treasury, (n)
Voting right for treasury s h a r e s .

Section 57 expressly denies any voting rights to treasury
shares as long as such stock remains in the treasury (see Sec. 9.),
i.e., they are not formally cancelled, and are, therefore, subject to
reissue by the corporation at some future time. To give voting
rights to treasury shares could enable the directors to prolong
their stay in office against the wishes of the holders of the majority
of the stock. Such shares are also not entitled to dividends.
The only right which a corporation has over treasury shares
is to reissue the same for a valuable consideration. In case of sale
or reissue, treasury shares regain whatever voting rights and
dividends to which they were originally entitled.
Sec. 58. Proxies. — Stockholders and members may

vote in person or by proxy in all meetings of stockholders
or members. Proxies shall be in writing, signed by the
stockholder or member and filed before the scheduled
meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one
time, (n)
Meaning of proxy.
(1) A proxy, as the term is used, designates the formal written
authority given by the owner or holder of the stock, who has a
right to vote it, or by a member, as principal, to another person,
as agent, to exercise the voting rights of the former.
506
(2) It is also used to apply to the holder of the authority or

person authorized by an absent stockholder or member to vote
for him at a stockholders' or members' meeting.
(3) The term is also applied to refer to the instrument which
evidences the authority of the agent.
A proxy is thus a special form of agency. The proxy holder is
in the eye of the law an agent and as such a fiduciary. (Ballantine,
p. 412.)
Purpose and use of proxies.

The advantages derived from their use cannot be disregard-
ed.
(1) Presence of quorum in meetings. — The system of proxy
voting is not a mere convenience or favor to the distant and
indifferent shareholders. It also assures the presence of a
quorum in meetings of stockholders of larger corporations,
(see Ballantine, p. 411.) "Proxy voting is a development which
necessarily accompanied the increase in the size and geographical
dispersion of corporate membership. Without this device, the
inability of the stockholders [or members] to attend in person
might make it impossible to secure the quorum necessary to
take corporate action." (SEC Opinion, Feb. 6, 1976, citing III A.
Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Phils., p. 470.)
(2) Exercise of right to vote though absent. — At the same
time, proxy voting enables those who do not wish to attend a
stockholders' or members' meeting to protect their interest by
exercising their right to vote through a representative.
(3) Voting and management control. — The solicitation and use
of proxies is also one of the devices of securing voting control or
management control in the corporation. (SEC Opinion, Feb. 6,
1976.)
Voting by proxy.
(1) The right to vote by proxy is specifically recognized in the

election of the board of directors or trustees (Sec. 24.), in voting
in case of joint ownership of stock (Sec. 56.), and in voting by
trustee under voting trust agreements (Sec. 59, last par.), and in
voting by members in non-stock corporations. (Sec. 89, par. 2.)
(2) In considering other matters, voting by proxy is expressly
allowed by Sections 55 (par. 2.) and 58. Section 47(4) provides
that a corporation may provide in its by-laws the "form for
proxies of members or stockholders and the manner of voting
them." Voting by proxy is also recognized by implication under
Section 51 (par. 2.) when it speaks of stockholders or members of
the corporation present or "represented at the meeting."
(3) The right to vote by proxy may also be justified on prin-
ciples of agency. (Art. 1876, Civil Code.)
(4) The stockholder may deliver, in person or by mail, his
proxy vote directly to the corporation. (SEC Memo. Cir. No. 4,
Series of 2004.) The right to vote by proxy necessarily includes
the right to solicit proxies and, it goes without saying, the right to
have access to the list of the corporation's stockholders or mem-
bers needed in order to be able to solicit proxies, (see Sec. 74.)
Voting by proxy is not allowed in board meetings pursuant to
Section 25.
W h o m a y be a proxy.
Section 58 imposes no limitation as to the persons who may
be appointed as proxy. Hence, a stockholder or member may
appoint any person he sees fit to represent him, and by-laws
9
restricting his right in this respect are likewise void.
(1) Since a proxy acts for another, he may act as such although
he himself is disqualified to vote his shares. Thus, a stock-
holder disqualified to vote because his stock has been declared
delinquent (see Sec. 71.), may vote the stock of his principal
which is not delinquent. A stockholder or member who himself
is not entitled to vote cannot, of course, vote by proxy.
(2) The same person may act as proxy for one or several
stockholders or members.
'"Absent such designation, the chairman of the meeting shall be deemed authorized
and hereby directed to cast the vote as indicated by the voting stockholder or his proxy."
(SEC Memo. Cir. No. 4, Series of 2004.)
(3) Directors or trustees cannot attend or vote by proxy at

board meetings (Sec. 25, last par.) but they may act as proxies in
stockholders' meetings.
Nature of proxies.
Proxies shall be in writing, signed by the stockholder or
member. (Sec. 58.) The appointment of proxy is, therefore, purely
personal and to be valid, a proxy to vote stock must have been
given by the person who is the legal owner of the stock entitled
to vote the same at the time it is be voted. (SEC Opinion, Dec. 3,
1993, citing 5 Fletcher, Sec. 2053.)
It follows that unless the stockholder or member who exe-
cuted a proxy gives his consent in writing, a designated proxy
may not further re-designate another under the same proxy. An
alternate proxy can only act as proxy in case of non-attendance of
the other designated proxy.
Limitations on proxies of s t o c k h o l d e r s
or m e m b e r s .
Under Section 58, they are as follows:
(1) Proxies must be in writing signed by the stockholder or
member and filed before the scheduled meeting with the corpo-
rate secretary. Oral proxies are not, therefore, valid;
(2) Unless otherwise provided in the proxy, it is valid only
for the meeting for which it is intended. The authority may be
general or limited; and
(3) A continuing proxy must be for a period not exceeding
five (5) years at any one time; otherwise, it shall not be valid and
effective after such period.
Presidential Decree No. 902-A empowers the Securities and
Exchange Commission, among others, "to pass upon the validity
of the issuance and use of proxies and voting trust agreements
for absent stockholders or members." (Sec. 6[g] thereof.) A proxy
sold for a consideration is obviously contrary to public policy.
Form and execution of proxies.

(1) The Code does not contain express provisions, other than
that provided in Section 58, on the "form of proxies of stockhold-
ers and members and the manner of voting them," leaving the
matter to be provided in the corporate by-laws, (see Sec. 47[4].)
(a) In the absence of by-laws provision to the contrary, no
particular form or words are necessary to constitute a proxy
or extend the authority thereof. All that is necessary is that it
shall be in writing and signed by the stockholder or member
(Sec. 58.), and shall show an intention to empower the person
to whom it is given to act as agent in voting the stock so as
to enable the election officers to know who is authorized. (5
Fletcher, p. 176.)
(b) In the absence of a provision in the articles of incorpo-
ration or by-laws, the board of directors cannot prescribe the
form of proxies other than as provided for under Section 58.
(SEC Opinion, Oct. 4,1987.) Accordingly, unless expressly so
provided, a written proxy even if not notarized, or is without
10
documentary stamps, or is unattested by witnesses, will suf-
fice, as long as it authorizes the person to whom it is given to
act as agent for and in behalf of the stockholder or member
executing the same.
(c) The proxy should be dated. If a duly accomplished
and executed proxy is indicated, the postmark or date of dis-
patches indicated in the election mail, or if not mailed, its
actual date of presentation, shall be considered as the date of
the proxy. (SEC Memo. Cir. No. 41, Series of 2004.)
(d) Neither is a proxy instrument rendered invalid by the
fact that it is undated, or the holder's name is in blank," or the
"The only adyerse effect of the failure to affix the required documentary stamps is
that the proxy cannot be recorded as a public document and cannot be admitted or used
as evidence in court until such stamps are fixed and cancelled. (Sees. 241, 250, National
Internal Revenue Code.)
"If the name of the proxy is left blank, the corporation receiving the proxy is at
liberty to fill in any name it chooses. (SEC Opinion, Jan. 4, 1968, citing 1 Corporate Sec-
retary's Encyc, p. 84.) By returning the proxy form unfilled, a stockholder or member is
deemed to have constituted the corporation itself as proxy, and, therefore, the latter may
fill it up pursuant to the authority given by the stockholder or member. (SEC Opinion,
Jan. 11,1961.)
To insure the presence of a quorum, corporations usually provide in the proxy form
that in case of the non-attendance of the proxy named, the stockholder authorizes the
chairman or any officer of the corporation to exercise all the rights as the proxy of the
stockholder.
authority was written in ink of different color from that used

in the signature of the proxy. (SEC Opinion, July 9,1975.)
(e) For corporate members, a board resolution authoriz-
ing the signatory to the proxy should be submitted. Being a
juridical person, a corporation can only act through its board
of directors. In the case of a stock corporation, it would be
in order to adopt a resolution authorizing the proxy, and to
execute it in a formal corporate manner. (SEC Opinion No.
07-16,. Aug. 18, 2007.)
(2) There is a presumption of regularity in the execution of
proxies.
(a) As a rule, they should be accepted if they have the
appearance of prima facie authenticity in the absence of a
timely and valid challenge and are signed as the names
appear in the record of the corporation.
(b) Rules and procedure relating to execution of proxies
should be decided before each meeting and stockholders or
members should be informed of them for their guidance.
Better still, the same should be provided for in the by-laws.
Lacking extraordinary circumstances, the trend in court
decisions has been toward upholding the ruling of inspectors
of election. (SEC Opinion, Jan. 4, 1968, citing Black, Modern
Corp. Law, pp. 573-574.)
Extent of authority of proxy.

The proxy holder is an agent whose authority may be general
or limited.
(1) A general proxy confers a general discretionary power of
attorney to attend and vote at an annual meeting "with all the
powers the undersigned would possess if personally present,"
to vote for directors and all ordinary matters that may properly
come before a regular meeting. It is no authority, however, to
vote for a fundamental change in the corporate charter or other
unusual transactions such as a merger or consolidation. (Title
IX.)
(2) A limited proxy, as the name implies, limits the power
conferred. It may restrict the authority to vote to specified matters
only and may direct the manner in which the vote shall be cast.
(Ballantine, pp. 407-408.)
A customary form of general proxy may be as follows:
That I, the undersigned, a shareholder of ABC Corpo-
ration, do hereby nominate, constitute, and appoint Mr. D,
or in his absence, Mr. E or Mr. F as my proxy to represent
me and vote all shares registered in my name on the books
of said corporation or owned by me at any and all regular
and special meetings of stockholders of said corporation and
adjournments thereof, as fully to all intents and purposes as
I might do if present and acting in person.
In case of the non-attendance of my above-named proxy
at any particular meeting, I authorize and empower the
Chairman of the meeting to fully exercise all rights as my
proxy at such meeting. This proxy shall continue until such
time as the same is withdrawn by me through notice in writ-
ing delivered to the Secretary, but shall not apply in instances
where I personally attend the meeting.
In witness thereof, the undersigned stockholder has
executed this proxy this day of , 199 .
Signed in the presence of:
Witnesses Printed name and signature

of stockholder
Denial of right to vote by proxy

in the by-laws.
(1) In stock corporations, the appointment of proxy is purely
personal and an incident of ownership and, therefore, a by-laws
provision prohibiting the use of proxy by stockholders is con-
trary to law and hence, null and void.
(2) In non-stock corporations, however, the right to vote by
proxy, or even the right to vote itself may be denied to members
in the articles of incorporation or the by-laws (Sec. 89, pars. 1, 2.)
512
as long as the denial is not discriminatory. (SEC Opinion, Nov. 6,

1989.)
Restrictions on right to vote by proxy

in the by-laws.
The by-laws of a stock corporation (see Sec. 89, par. 1, as to
non-stock.) may impose reasonable restrictions on the right to
vote by proxy, so long as the restrictions do not conflict with the
law or deprive the stockholders of the right thereby given them.
Thus, the by-laws may provide a deadline for the submission
of proxies before the scheduled meeting (SEC Opinion, Nov. 13,
1972.), or that no proxy shall be valid or voted on after a certain
length of time from this date, or that no person shall vote at any
meeting by virtue of any proxy executed within a certain period
of time prior to such meeting, or that no such proxy shall be used
at more than one annual meeting of the corporation. (5 Fletcher,
p. 190; Sept. 4,1995.)
If there is no deadline for the submission of proxies provided
for in the by-laws, the corporation may not fix a deadline for
their submission; hence, they may be submitted any time before
the meeting. (SEC Opinion, July 3,1990.)
Restrictions on the right to vote by proxy shall be void only
where they operate unjustly, unreasonably, and oppressively
so as to work the disenfranchisement of a majority of the legal
voters. (SEC Opinion, July 16,1974, citing 5 Fletcher, p. 211.)
Proxy given to t w o or m o r e
persons.
(1) A proxy in favor of several persons is presumed by
the action of the majority to represent the giver's will, and the
dissenting minority of them cannot withdraw and break up the
quorum and meeting to effectuate their dissent. It is customary in
proxies to three or more persons to authorize a majority of those
who attend or, if only one attends, then that one, to exercise the
power given him. If it be given to two persons, they or either of
them are usually authorized to exercise the power. (SEC Opinion,
April 10,1987, citing 5 Fletcher, p. 232.)
Sec. 58 TITLE VI. MEETINGS
513
(2) Where a proxy is given to three persons in one instru-

ment, the three of them must agree upon the vote and in case of
conflict, the rule of the majority of the three governs. A proxy,
however, may be revoked when it runs to several proxies who
cannot agree on a vote. (Ibid., citing 5 Fletcher, p. 275.)
(3) Where the corporation receives more than one (1) proxy
from the same stockholder and they are all undated, the post-
mark or electronic dates shall be considered. If the proxies are
mailed on the same date, the one bearing the latest time of day
indicated in the postmark or latest time of dispatch appearing
in the electronic mail, shall prevail. If the proxies are not mailed,
then the time of their actual presentation is considered. That
which is presented last will be recognized.
(4) If the stockholder intends to designate several proxies, the
number of shares of stock to be represented by each proxy shall
be specifically indicated in the proxy form. If some of the proxy
forms do not indicate the number of shares, the total sharehold-
ing of the stockholder shall be tallied and the balance thereof,
if any, shall be allotted to the holder of the proxy form without
the number of shares. If all are in blank, the stocks shall be dis-
tributed equally among the proxies. The number of persons to
be designated as proxies may be limited by the by-laws. (SEC
Memo. Cir. No. 4, Series of 2004.)
Revocation of proxies.
Generally, proxies, even those with irrevocable terms, have
always been considered as revocable, unless coupled with an
interest (see infra.), and their revocation may be by formal notice,
orally, or by conduct as by the appearance of the stockholder or
member giving the proxy, or the issuance of a subsequent proxy,
or the sale of shares. (Ballantine, p. 409.)
(1) Last proxy given revokes all previous proxies. — The last
proxy given is deemed a revocation of all previous proxies. Con-
sequently, when two proxies are offered bearing the same name,
then the proxy that appears from the evidence to have been last
executed will be accepted and counted under the theory that the
latter, being the more recent proxy, constitutes a revocation of
the former (SEC Opinion, Oct. 14,1991; 5 Fletcher, p. 343.), with-
514
out the necessity of informing the former attorney-in-fact of the

revocation of his authority. However, to prevent embarrassment
on the part of the first appointee, the revocation should be com-
municated to him. (SEC Opinion, Feb. 7,1961.)
(2) Where proxies are undated. — Where a corporation receives
more than one proxy, from the same stockholders and they are
all undated, the postmark dates become important. If both were
mailed on the same date, the one bearing the latest time of day
of postmark is counted. If the proxies were not mailed, then the
time of their actual presentation is considered. That which is
presented latest is the one counted. However, should there be
no sufficient time to verify the proxies, the corporate secretary
must refer the matter to the presiding officer whose decisions
will be binding or to a special committee of inspectors which
is empowered to pass on the validity of proxies. (SEC Opinion,
Nov. 13,1972, citing 1 Corporate Secretary's Ency., pp. 85,88.)
Duration of proxy.
Proxies expire either by their own terms or at a statutory time
after date.
(1) Limited and specific proxy. — It cannot be exceeded or
extended if given, and a specific proxy, when required, cannot
be implied. (SEC Opinion, May 21, 1985, citing 5 Fletcher 1952
replacement Vol., p. 236, infra.) If the proxy is for a certain
meeting, it can only be used at such meeting, and if it is for a
time stated, it can be used at any meeting within the period fixed
not exceeding five (5) years at any one time. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for
which it is intended. (Sec. 58.)
(2) Continuing proxy. — It is one which authorizes the holder
thereof to vote for the absent stockholder or member at any
meeting of stockholders or members for a fixed or an indefinite
period of time. If the proxy authorizes the holder to vote "at any
and all regular and special meetings," without providing any
limitation with respect to the period of activity, it shall be valid
only for five (5) years from its date, whether or not it is coupled
with an interest. If the stockholder or member does not revoke
a continuing proxy, or does not appear at any meeting nor give
another proxy to another person, it shall continue to be effective

until its expiration. As a matter of policy, the Securities and
Exchange Commission is against the use of continuing proxies
without specific periods of time. (SEC Opinion, Nov. 17,1975.)
A proxy may be renewed for not more than five (5) years
for each renewal. It can be both specific and continuing. (SEC
Opinion, Feb. 26,1985.)
Sec. 59. Voting trusts. — One or more stockholders

of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares
for a period not exceeding five (5) years at any one time:
Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting
trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting
trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy
of such agreement shall be filed with the corporation and
with the Securities and Exchange Commission; otherwise,
said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver to the

transferors voting trust certificates, which shall be trans-
ferable in the same manner and with the same effect as
certificates of stock.
The voting trust agreement filed with the corporation
shall be subject to examination by any stockholder of the
corporation in the same manner as any other corporate
book or record: Provided, That both the transferor and the
trustee or trustees may exercise the right of inspection of
all corporate books and records in accordance with the
provisions of this Code.
516
Any other stockholder may transfer his shares to the

same trustee or trustees upon the terms and conditions
stated in the voting trust agreement, and thereupon shall
be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the
purposes of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for
purposes of fraud.
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificates
as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed cancelled and
new certificates of stock shall be reissued in the name of
the transferor.
The voting trustee or trustees may vote by proxy
unless the agreement provides otherwise. (36a)
Corporate control devices.

(1) Management control. — A corporation which is not affected
by control devices, such as a voting trust, has its management
determined by the votes of stockholders cast in person or by proxy
at the annual election. Very often the control may lie with the
management in office who can obtain proxies from the scattered
stockholders to vote for directors selected by management. This
results in what is sometimes called "management control."
(2) Control over management. — Various expedients have been
devised to obtain control with little or no investment. Among the
principal control devices by which groups may seek to gain or
retain control over the management by a combination of voting
power or otherwise are as follows:
(a) voting agreements;
(b) voting trusts;
(c) the classification of common shares into voting and
non-voting, with the voting power vested in a small class of
"management stock";
(d) management contracts, often with a parent or affili-
ated corporation; and
(e) pyramiding." (Ballantine, pp. 416-417.)
Combination and pooling agreements

among stockholders.
(1) Validity and legality. — It is not in violation of any rule or
principle of law nor contrary to public policy for stockholders
who own a majority of the stock of a corporation to cause its
affairs to be managed in such a way as they may think best
calculated to further the ends of the corporation, and for this
purpose, to appoint one or more proxies who shall vote in such
a way as will carry out their plan. Nor is it against public policy
or unlawful per se for stockholders to agree or combine for the
election of directors or other officers, so as to secure or retain
control of the corporation, at least where the object is to carry
out a particular policy with a view to promote the best interest
of all of the stockholders and the agreement is fair to all the
stockholders alike. And they may do this either by themselves or
through their proxies, or they may unite in the appointment of a
single proxy to effect their purpose.
(2) Test. — According to the weight of authority, the validity
and legality of such combinations and pooling agreements"
depend rather upon the objects thereby sought to be attained and
the acts which are done under them, and the other circumstances.
Of course, such combinations or agreements are invalid if in
contravention of statutes providing that no proxy shall be voted
^'Pyramiding is the use of holding companies or a series of holding companies piled

in tiers, one on top of another, with the former holding controlling shares of the latter. The
effect of such a series, each controlling a bare majority of the shares of the one preceding
it as a subsidiary, is to give to the holder of a majority of the shares of the last corporation,
having perhaps only a small capital investment, the control of the entire system or series
with a capital of many millions. (Ibid.)
"Pooling or voting agreements are agreements by which two or more stockhold-
ers agree that their shares shall be voted as a unit. They are usually concerned with the
election of directors to gain control of the management. In close corporations, the valid-
ity of stockholders' agreements is expressly recognized in the Corporation Code. (Sec.
100.) There is no reason, however, for denying stockholders of widely-held corporations
the right to enter into pooling or voting agreements if these are otherwise valid. In such
agreements, the parties thereto remain the legal owners of their stocks with the right to
vote them. In a voting trust agreement (infra.), the legal ownership of stock is transferred
to a trustee who exercises the voting rights of the beneficial owners for the duration of
the trust.
on after a certain length of time from its date, or if they operate as

an illegal restraint on the alienation of the stock, (see 5 Fletcher,
pp. 249-267; see also 18 C.J.S. 1255-1256.)
It is the duty of a stockholder of a corporation, in attendance
at meetings of stockholders, to act fairly and in good faith. He
is not justified in entering into any agreement to vote so as to
perpetrate a fraud upon any other stockholder. (Palmbaum vs.
Magulsky, 104 N.E. 746; see W.L. Cary, Cases and Materials on
Corporations, p. 380 [1969].)
(3) Where consideration for pooling agreement gives private benefit
to stockholder. — There is some authority for holding pooling
agreements to be invalid if the consideration for entering into
the same gives a private benefit to the stockholder. Typical cases
of this sort include:
(a) agreement by defendant to vote in certain manner in
consideration of promise to cancel his promissory note (Stott
vs. Stott, 242 N.W. 747.);
(b) agreement by creditor to give shareholder part of
amount he expected to receive as creditor after sale of corpo-
rate assets, if shareholder would withdraw his opposition to
the sale (Brady vs. Bean, 221 111. App. 279.);
(c) agreement by property owner to pay shareholder a
commission if by vote of himself and others he caused corpo-
ration to purchase the property (Dieckmann vs. Robyn, 141
S.W. 717.); and
(d) agreement to give defendants control of corporation
in consideration of their agreement to vote for directors who
would secure to one of plaintiffs a corporate office at a stated
salary. (Cone vs. Russel & Mason, 48 N.J. Eq. 208; see W.L.
Cary, supra, pp. 375-380.)
Voting a n d other rights u n d e r a v o t i n g

trust a g r e e m e n t .
(1) Control in one person or a few persons. — Sometimes, it is
desired to place the control of all or part of the stock in the hands
of one person or of a few persons. This may be done through a
voting trust agreement. It may be defined as an agreement in
writing whereby one or more stockholders of a stock corporation"

transfer their shares to any person or persons or to a corporation
having authority to act as a trustee for the purpose of vesting
in such person or persons or corporation as trustee or trustees
voting or other rights pertaining to the shares for a certain period
not exceeding that fixed by the Code and upon the terms and
conditions stated in the agreement. (Sec. 59, par. 1.)
(2) Status of voting trustee. — A voting trust agreement transfers
only voting or other rights pertaining to the shares subject of
the agreement, or control over the stock, not the properties or
assets of the corporation. (National Investment & Dev. Corp. vs.
Aquino, 163 SCRA 153 [1988].) Under such agreement, title to
the shares conveyed is transferred to the trustee on the books of
the corporation. The certificates of stock covering said shares are
surrendered and cancelled and new certificates are issued in the
name of the voting trustee in which new certificates as well as
in the entry of transfer on the books it shall appear that they are
issued pursuant to said agreement. (Ibid.)
(3) Status of transferring stockholder. — By its very nature, a
voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights. (Lee vs. Court of
Appeals, 205 SCRA 752 [1992].) In such agreement, the trans-
ferring stockholder of a stock corporation parts with the voting
power only but retains the equitable or beneficial ownership
of the stock. A voting trustee is only a share owner vested with
colorable and fictitious title for the sole purpose of voting upon
stocks that he does not own. (SEC Opinion, Aug. 17,1979, citing
cases.)
Consequently, the transferring stockholder, although he has
ceased to be a stockholder of record, retains the right of inspec-
tion of corporate books which he can exercise concurrently with
"It would seem that Section 59 applies only to stock corporations. As a matter of
policy, the Securities and Exchange Commission may allow members of a non-stock cor-
poration to execute and deliver a voting trust agreement in favor of one of its members.
(SEC Opinion, July 27, 1964.) The applicability of Section 59 to non-stock corporations
may be inferred from Section 6(g) of Presidential Decree No. 902-A, which empowers the
Commission "to pass upon the validity of the issuance and use of proxies and voting trust
agreement for absent stockholders or members."
the voting trustee, (see Sec. 74, par. 2.), to receive the dividends
when they are collected by the trustee, and to recover his stock
at the expiration of the trust, and other rights a stockholder may
be entitled until the liquidation of the corporation. But a stock-
holder whose shares are covered by a voting trust agreement is
disqualified from being elected as director unless he retains at
least one (1) share in his name on the books of the corporation,
(see Sec. 23, par. 2.)
Voting trust certificates.

(1) Execution and delivery. — In return for the certificates of
stock, the voting trustee executes and delivers to the stockholders
voting trust certificates to show that the latter are, in reality, the
owners of the shares held by the voting trustee. The owners are
thus enabled to claim their rights as stockholders. They continue
in their ownership of the stock transferred for all but voting
purposes.
(2) Transfer and effect thereof. — The voting trust certificates
are intended to be and are transferable in much the same way as
stock certificates, subject, however, to the trust agreement. (Sec.
59, par. 2.) In other words, a subsequent purchaser of stock with
full knowledge of the agreement takes it impressed with the trust
and is bound thereby. (Boyer vs. Nesbitt, 227 Pa. 398; 76 A. 103;
see Pairing vs. San Jose Petroleum, Inc., 18 SCRA 924 [1966].)
But a voting trust agreement made without complying with the
statutory requirements does not affect the right of a subsequent
transferee, to whom the stock has been transferred on the books
of the corporation, to vote the stock himself. (19 Am. Jur. 2d 197.)
(3) Cancellation. — Upon the expiration of the agreed period,
the voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed can-
celled and new certificates of stock shall be reissued in the name
of the transferors. (Sec. 59, par. 6.)
Powers or rights of voting trustees.

Under Section 59:
(1) The trustee or trustees shall possess the right to vote and
other rights pertaining to the shares so transferred and registered
in his or their names subject to the terms and conditions of and

for the period specified in the agreement (see par. 1.);
(2) The trustee or trustees may vote in person or by proxy
unless the agreement provides otherwise (last par.);
(3) They may exercise, like the transferor, the rights of
inspection of all corporate books and records (par. 3.); and
(4) The trustee is the legal title holder or owner of the shares
so transferred under the agreement, (see par. 1.) He is, therefore,
qualified to be a director. (Sec. 23.)
P u r p o s e o f v o t i n g trust a g r e e m e n t .
The ultimate control of a stock corporation depends upon the
vote of the stockholders. Voting trust agreements are a device
that may be used with the aim of controlling these votes.
(1) Principal purpose. — Such an agreement as that authorized
by our law makes possible a unified control of the affairs of the
corporation and a consistent policy by binding stockholders
to vote as a unit. It also makes it possible for a majority group
of shareholders who transferred their individual holdings to a
voting trustee to dispose of their shares and still retain control
of the corporation through the voting trustee (see Fletcher, op.
cit., pp. 209-210.) who shall have the power to vote as a unit the
shares thus pooled.
ILLUSTRATION:
Suppose a shareholder owns 51% of the voting share of a
corporation. By cumulative voting, he can elect three out of five
directors and so control its operation. He may be anxious to sell
some of his shares but he cannot do so without changing the
controlling vote.
Under Section 59, he can transfer all his shares first to a
trustee, subject to the condition that the voting power shall
at all times be exercised by the trustee in accordance with the
instructions of the holders of a majority of the trust certificates.
Then, he may sell 49% of the trust certificates and yet retain the
power to vote, through the trustee, the whole of the trust shares.
By this device, he may elect a majority of its directors and thus
control its affairs even after the sale of a large proportion of his
shares, (see Ibid.)
(2) Purposes held valid. — Under Section 59, a voting trust

agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares. But
the principal purpose of the grant of voting rights is to acquire
control of the corporation.
The following purposes of a voting trust have been sustain-
ed:
(a) to assure continuity of policy and management espe-
cially of a new corporation desirous of attracting investors;
(b) to enable the owners of the majority of the stock of the
corporation to control the corporation;
(c) to vest and retain the management of the corporation
in the persons originally promoting it;
(d) to prevent a rival concern from acquiring control of
the corporation;
(e) to carry out a proposed sale of the corporation's assets
and to facilitate its dissolution;
(f) to enable two holding companies to operate jointly a
corporation controlled by them;
(g) to effect a plan for reorganization of a corporation in
15
financial difficulty or in bankruptcy proceedings; and
(h) to aid a financially embarrassed corporation to obtain
a loan and protect its creditors. (19 Am. Jur. 2d 196.)
(3) Purposes held invalid. — Where the purpose of the voting
trust agreement was illegal or improper, it is invalid. Among
purposes which have been held to render voting trusts invalid
are:
(a) to make a profit for participating stockholders
through contracts with the corporation;
(b) to interrupt the harmonious conduct of the corporate
business;
(c) to secure employment and salaries for the contracting
parties; or
"See Ramos vs. Central Bank, 41 SCRA 565 (1971); Central Bank vs. Court of
Appeals, 106 SCRA 143 (1981).
(d) to force minority stockholders out of a corporation

unless they surrender their stock for voting trust certificates
which would result in depriving them of their substantial
rights in addition to the loss of their right to vote their stock.
(Ibid., 196-197.)
Limitations on voting trust a g r e e m e n t .

To prevent or minimize the commission of possible abuses
because of the transfer of the legal ownership of the shares to the
trustee, Section 59 imposes the following limitations:
(1) No voting trust agreement shall be entered into:
(a) For a period exceeding five (5) years at any one time
(i.e., for every voting trust) except in the case of a voting trust
specifically requiring a longer period as a condition in a loan
agreement, in which case, the period may exceed five (5)
years but shall automatically expire upon full payment of the
loan (par. 1.);
(b) For the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade
(par. 5.);
(2) The agreement must not be used for purposes of fraud
(Ibid.);
(3) The agreement must be in writing and notarized and
specify the terms and conditions thereof;
(4) A certified copy of said agreement must be filed with the
corporation and with the Securities and Exchange Commission;
otherwise, it is ineffective and unenforceable (par. 1.);
(5) The agreement shall be subject to examination by any
stockholder of the corporation in the same manner as any other
corporate book or record (par. 3.); and
(6) Unless expressly renewed, all rights granted in the agree-
ment shall automatically expire at the end of the agreed period
(par. 6.), but in the case of a voting trust required as a condition in
a loan agreement, it shall continue until full payment of the loan.
(supra.)
524
Presidential Decree No. 902-A empowers the Securities and

Exchange Commission, among others, "to pass upon the validity
of the issuance and use of proxies and voting trust agreements
for absent stockholders or members." (Sec. 6[g] thereof.)
Proxy and voting trust distinguished.

The following are the distinctions:
(1) A proxy has no legal title to the shares of the stockholder
giving the agency, while a trustee acquires legal title to the shares
16
of the transferring stockholder;
17
(2) A proxy, unless coupled with interest, is revocable at
18
anytime, while a voting trust agreement, if validly executed, is
intended to be irrevocable for a definite and limited period of
19
time;
(3) A proxy can only act at the specified stockholders' or
members' meeting (if the proxy is not continuing in nature),
while a trustee is not limited to any particular meeting;
(4) A proxy votes only in the absence of the owner of the
stock, while a trustee can vote and exercise all the rights of the
transferring stockholder even when the latter is present;
(5) A proxy is usually of shorter duration than a voting trust
agreement, although under the law the maximum duration of
both cannot exceed five (5) years at any one time;
"So, the proxy votes as a mere agent while the trustee, as owner.
17
An agency (proxy) is coupled with interest where the agent (proxy) has parted
with value or incurred liability at the principal's (stockholder's) request, looking to the
exercise of the power (proxy) as the means of reimbursement or indemnity. (Mechem on
Agency, p. 407.) Thus, where D borrows money from C and D pledges his certificates of
stock to C for the debt, giving C a written continuing proxy to attend and vote the shares
at meetings of stockholders (see Sec. 55.) until the debt is paid (see Sec. 58.), it is clear that
D cannot revoke the proxy unless he first pays C.
18
Even though it may in terms be irrevocable. Therefore, proxies constituting an
agreement between stockholders to vote their stock in a specified manner or for a speci-
fied purpose not supported by any consideration other than a mutual agreement of the
stockholders to vote as stated in the proxy would be revocable. (SEC Opinion, Oct. 17,
1988, citing 5 Fletcher [1976 ed.], p. 256.)
•The voting trust has been developed precisely to achieve irrevocable proxies. (C.
Rohrlich, Law and Practice in Corporate Control, p. 69.)
(6) A proxy need not be notarized nor a copy filed with the
Securities and Exchange Commission, while a voting trust must
be notarized and a certified copy filed with the Commission; and
(7) A proxy does not have a right of inspection of corporate
books, while a trustee has such right.
— oOo —
Title VII
STOCKS AND STOCKHOLDERS
Sec. 60. Subscription contract. — Any contract for the

acquisition of unissued stock in an existing corporation
or a corporation still to be formed shall be deemed a sub-
scription within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase or some
other contract, (n)
How participation in a corporation

acquired.
(1) In a stock corporation, a person may become a share-
holder:
(a) by subscription contract with an existing corporation
1
for the acquisition of unissued shares;
(b) by purchase from the corporation of treasury shares; or
(c) by transfer from a previous stockholder of the out-
standing shares or existing subscription to shares.
A corporator in a stock corporation must be a stockholder,
(see Sees. 5,10.) Honorary membership in a business corporation
is an incongruity and finds no sanction in law or custom. (Wolf-
son vs. Manila Stock Exchange, 72 Phil. 492 [1941].)
Warrant is a type of security which entitles the holder the right to subscribe to a pre-
determined number of the unissued capital stock of a corporation (subscription warrant)
or to purchase a pre-determined number of issued or existing shares in the future (covered
warrant). It is detachable if the warrant may be sold, transferred or assigned to any person
by the warrant holder separate from and independent of the corresponding beneficiary
securities. The latter are shares of stock or other securities of the issuer which form the
basis of the entitlement in a warrant. The warrant is non-detachable, if it may not be sold,
etc. (see SEC Rules, Sept. 15,1993.)
526
Sec. 60 TITLE VII. STOCKS AND STOCKHOLDERS 527
(2) In a non-stock corporation, membership is acquired by

contract with the corporation, the modes of entering into which
vary according to the charter and by-laws of the particular cor-
poration. (12 Fletcher, p. 978.)
Subscription contract.
Section 60 lays down the rule of what shall be deemed a
subscription.
(1) Subject matter. — There can be a subscription only with
reference to stock which has never been issued, i.e., to an original
issue of stock, or to an increase of capital stock. The subscription
in case of the former may be made before or after incorporation
but in case of the latter, it is always made after incorporation.
(2) Form. — The law does not require that the subscription
contract be in writing although it is usual and convenient for it
to be in writing.
(3) Absence of express contract. — A person who accepts a cer-
tificate of stock from a corporation or who acts as stockholder
by participating in stockholders' meetings, making payment, or
otherwise, thereby becomes a stockholder, and liable as such not
only to creditors, but also to the corporation although there may
have been no express contract of subscription. (Spielberger vs.
Nelson, 72 Phil. 396 [1941]; SEC Opinion, Aug. 19,1992.)
(4) Subscriptions under several contracts. — There is no law
prohibiting a person from subscribing to the capital stock of a
corporation under several subscription agreements. On the con-
trary, it is common practice for a person to enter into several
subscription contracts with the same corporation. (SEC Opinion,
Oct. 24,1963.)
(5) Subscription upon any special terms. — A corporation, under
its general power to contract, has the power to accept subscrip-
tions upon any special terms not prohibited by law or contrary
to public policy, provided they do not require the performance
of acts which are beyond the powers of the corporation and do
not constitute a fraud upon other subscribers or stockholders, or
upon persons who are or may become creditors of the corpora-
tion. (National Exchange Co., Inc. vs. Dexter, 51 Phil. 601 [1928].)
(6) Citizenship requirement. — Under R.A. No. 7353 (Sec. 4

thereof.), subject to exception, "the capital stock of any rural bank
shall be fully owned and held directly or indirectly by citizens
of the Philippines or corporations, associations or cooperatives
qualified under Philippine laws to own and hold such capital
stock." The naturalization of a stockholder as a citizen of another
country renders his subscription contract with a rural bank
automatically void by operation of law. If he fails to dispose of his
shares, the corporation may purchase/reacquire the same. The
reacquired shares shall become treasury shares. (SEC Opinion,
July 1,1993.)
A subscription contract is to be distinguished from a share
contract, (see comments under Sec. 62.)
Kinds of subscription.
Subscription is an offer to acquire a specified number of unis-
sued shares of an existing corporation or one still to be formed. It
may be:
(1) Pre-incorporation subscription or one entered into before
incorporation. It constitutes a binding contract among the sub-
scribers (Sec. 61.);
2
(2) Post incorporation subscription or one entered into after the
incorporation for the acquisition of unissued stock. It shall be
deemed a subscription notwithstanding the fact that the parties
refer to it as a purchase or some other contract. (Sec. 60.) The
subscriber becomes a stockholder upon acceptance by the corpo-
ration of the subscriber's offer or by the subscriber of the corpo-
ration's offer even though he has not paid for his shares unless
the subscription agreement otherwise provides, or when there is
a constitutional, statutory, or charter provision to the contrary, or
except in instances of increase in authorized capital stock (SEC
Opinion, Sept. 20,1988.);
(3) Conditional subscription or one which is subject to a con-
dition, which may be a past event unknown to the parties or a
2
A subsequent subscription should be distinguished from pre-incorporation sub-
scription (Sec. 13.) and subscription to an increase in capital stock (Sec. 38.) where initial
payment is explicitly required. Except in the two instances, the board of directors has the
authority to determine the amount as well as the time and manner of payment of such
subscription. (SEC Opinion, April 20, 1988.)
Sec. 60 TITLE VTI. STOCKS AND STOCKHOLDERS 529
future, uncertain event, that is, an event which may or may not
happen, (see Art. 1179, par. 1, Civil Code.) The subscriber does
not become a stockholder until the condition is fulfilled. The sub-
scription is void if the condition is void (Art. 1183, ibid.);
(4) Absolute subscription or one which is not subject to any
condition and, therefore, the subscriber becomes liable on the
subscription and acquires the rights of a stockholder from the
time it is accepted; and
(5) Subscription with a special term or one where the corpora-
tion agrees to do something, the fulfillment of which not being
a condition precedent to the accrual of liability of the subscriber
or the acquisition of the rights of a stockholder. It is an absolute
subscription. Thus, if X enters into a subscription contract with Y
Corporation subject to the special term that the corporation will
transfer its principal office at another place, the non-fulfillment
of the stipulation does not entitle X to rescind the subscription,
his remedy being an action for damages against the corporation.
However, if the term is intended by the parties as a resolutory
condition (see Art. 1179, ibid.), X has the right to rescind.
Subscription and purchase of stock.

Under the former law, if the acquisition of unissued shares
from a corporation is made after its incorporation, the contract is
either a subscription or a purchase of stock depending upon its
terms and the intention of the parties.
The Code, under Section 60 in denning subscription, abolished
3
the distinction between subscription and purchase of shares
3
A subscriber becomes a stockholder immediately upon acceptance of his subscrip-
tion even before full payment (except where the subscription contract is subject to a sus-
pensive condition) and may not legally be released by the corporation from the obligation
to pay for his shares. In a purchase of shares (under the former law), full payment is nec-
essary before a purchaser becomes a stockholder and the purchaser may be released by
the corporation from his obligation, corporate creditors not being a privy to the contract.
The corporation can enforce the contract or rescind it for non-payment of the purchase
price. These distinctions will now apply only to purchase of treasury shares.
It is generally held that a parol subscription for shares is not within the Statute of
Frauds as an agreement for the sale of goods or choses in action. It is submitted, however,
that oral subscription contracts are subject to the Statute of Frauds. Where the amount
involved is P500.00 or more and no partial performance has been made, an oral subscrip-
tion agreement, in the absence of some written note or memorandum thereof, will be un-
enforceable, (see Art. 1403[2, d], Civil Code.) For purposes of the civil law, a subscription
530
from an existing corporation by making all such acquisitions a

subscription notwithstanding that the parties denominate it as a
purchase or sale or some other contract. However, Section 36(6)
speaks of the power "to issue or sell stocks to subscribers" as one
of the powers of stock corporations. This will embrace the sale of
treasury shares.
Stock option.
A stock option is a privilege granted to a party to subscribe to
a certain portion of the unissued capital stock of a corporation
within a certain period and under the terms and conditions of
the grant exercisable by the grantee at any time within the period
granted. (SEC Rule BED No. 902-A-3, Sec. 1.)
The matter of giving certain persons options to subscribe at
par to the capital stock of a proposed corporation for a certain
period from date of incorporation is not governed by any express
provision of the Code. However, articles of incorporation have
given promoters and organizers of corporations options to
subscribe at par for a certain period to the capital stock thereof.
Before allowing such corporation to issue option stocks, however,
the Securities and Exchange Commission, as a matter of policy,
inquires into the reason or justification therefor and approves the
same only when it is satisfied that there is valuable consideration
in favor of the corporation for the grant of the right. Thus, in case
of promoters and organizers of a corporation, the grant to them
of an option to subscribe to its capital stock at par for a certain
contract for the acquisition of shares in a corporation is, in essence, a purchase which cre-
ates a creditor-debtor relationship between the corporation and the subscriber involving
the delivery of personal property and the payment of its price, although the effects of the
contract are governed by the Corporation Code. However, to constitute a sale, there must
be a transfer of actual ownership interests.
In a case, where X exchanged his real properties for original unissued shares of a
corporation as a result of which X became the majority stockholder of the said corpora-
tion, it was held that X became a stockholder by subscription. The deed of exchange
cannot be considered a contract of sale because there was no transfer of actual ownership
by X to a third party. X merely changed his ownership from one form to another, the
ownership remaining in the same hands. What X really did was to invest his properties
and change the nature of his ownership from unincorporated to incorporated form by
organizing the corporation to take control of his properties and at the same time save
on inheritance taxes. (Delpher Trades Corporation vs. Intermediate Appellate Court, 157
SCRA 349 [1988].) In other words, if there was a transfer of actual ownership interests to
a third party, the transaction can be considered a contract of sale.
period is approved on the basis of the reasonable value of their

efforts and services in conceiving, forming, and launching the
enterprise. The determination of what is reasonable compensation
for their efforts in this regard rests largely upon the facts relating
to the matter established after proper inquiry.
At present, the policy of the Commission on the matter is to
permit the grant of option shares at par for a period of three (3)
years only from the time the corporation starts commercial pro-
duction after which the options are required to pay a gradual
yearly increase in price of the shares, depending on what may be
considered reasonable. (SEC Opinion, Aug. 12,1964.)
Rules g o v e r n i n g grant of stock

options.
Before a corporation shall grant or issue any stock option,
it must first secure the approval thereof from the Securities and
Exchange Commission. (SEC Rule BED No. 902-A-3, Sec. 1.) The
application for authority to issue any stock option shall be in the
form of a petition under oath signed by the President of the cor-
poration or any other official thereof authorized by the board of
directors, stating the matters mentioned in the Rules. (Ibid., Sec.
2.)
In considering petitions for the issuance of stock options, the
Commission shall be guided by the following:
(1) Stock options granted to stockholders ratably in proportion
to their shareholdings may be allowed;
(2) Stock options granted to employees or officials who are not
members of the board may also be allowed after a review of the
scheme, since it would be in consonance with the policy of the
government to widen corporate base and to distribute corporate
profits wider and more equitably;
(3) Stock options granted to persons who are not stockholders
may be granted only upon a showing that the board has been
duly authorized to grant the same by its charter or by a resolu-
tion of the stockholders owning at least two-thirds of all the out-
standing capital stock, voting or non-voting, excluding treasury
stock;
532
(4) Stock options granted to directors or managing groups

and its officers must be approved in a stockholders' meeting by
stockholders owning at least two-thirds of all the outstanding
capital stock, voting or non-voting, excluding treasury stock.
Certification by the corporate secretary as to the number of shares
represented in said meeting and the number of votes cast for or
against the grant of optional rights to the directors or managing
groups and its officers shall be submitted.
(5) Exercise of options must be done within a period of three
(3) years from approval thereof unless sooner terminated by the
Commission. In meritorious cases, where exercise of options
could not be done within three (3) years, the same, upon approval
by the Commission, may be extended;
(6) No transfer of the right to an option shall be made without
the approval of the Commission; and
(7) In cases of grants under numbers (2), (3), and (4), the
Commission shall determine the reasonableness of the plan, scheme,
compensation, or consideration. (Ibid., Sec. 3.)
The approval by the Commission of stock options to interna-
tional development financing institutions shall not be required,
provided that the grant or issuance of said stock options shall be
approved by the stockholders owning or representing at least a
majority of the subscribed capital stock of the corporation, and
a certified copy of the stock option plan of agreement shall be
submitted to the Commission within thirty (30) calendar days
from the date of execution thereof. The notice of the meeting at
which the grant or issuance of said stock options shall be pre-
sented for consideration and approval by the stockholders shall
indicate briefly the name of the grantee of the stock option, the
consideration therefor, the duration of the option, and, if readily
determinable, the number of shares covered by the option, and
the exercise price thereof. (Ibid., Sec. 9.)
Liability of stockholders on u n p a i d
subscription to corporate creditors.
Corporations trade upon the credit of the fund created by the
issue of their shares and the accretions to that fund.
(1) Persons dealing with corporations are presumed to know

that they can have recourse only to the property of the corporation and
that if the corporation is unable to meet its obligations, its share-
holders cannot be compelled to make good the deficiency. But
this exemption depends upon the full discharge of the subscrip-
tion contract.
(2) In consonance with the trust fund doctrine (see Sec.
41.), stock subscriptions are in the nature of a trust fund in the sense
that they are to be maintained unimpaired for the protection of
corporate creditors. Subscribers who have not paid in full, unless
they have been validly released from their undertaking, are the
debtors of the corporation for the balance, and if the corporation
does not enforce the liability, its creditors may do so. (see
Edward A. Keller & Co., Ltd. vs. COB Group Marketing, Inc.,
141 SCRA 86 [1986]; Vda. de Salvatierra vs. Garlitos, 103 Phil. 757
[1958]; 18 C.J.S. 1311-1312.) But to have a cause of action against
a stockholder for his unpaid subscription, a corporate creditor
must first exhaust his legal remedies against the corporation
except where the corporation is insolvent for in such case recourse
against the corporation would be useless and a waste of time.
(3) The liability of a subscriber for unpaid subscription can-
not be compensated or set-off with the value of his shares nor can stock
dividends declared be applied as payment for the same. The reason
is that there is no relationship of debtor and creditor between
a stockholder and the corporation with respect to his shares of
stock. The corporation, however, may apply cash dividends due
on delinquent stock to the unpaid balance on the subscription
plus costs and expenses and withhold stock dividends from the
delinquent stockholder until his stock subscription is fully paid.
(Sec. 43, par. 1.)
Release of subscriber f r o m liability

for unpaid subscription.
An unpaid subscription is an asset to which corporate
creditors may look for payment and, as a rule, they are entitled
to insist that it be collected (7 R.C.L. Corp., par. 337.) since the
unpaid shares are as much a part of the capital stock as the sums
which have already been paid. (SEC Opinion, Sept. 1, 1971.)
(1) Trust fund doctrine. — A subscription contract is a contract

not only between the immediate parties — the subscriber and
corporation — but also among all the subscribers or stockholders
and the corporate creditors by reason of the nature of a subscrip-
tion contract as a trust fund, (supra.) The doctrine considers the
subscribed capital as a fund, which is held in trust as security for
satisfaction to creditors in case of corporate liquidation.
(a) Hence, a stock corporation has no power to release
an original subscriber from paying for his shares without
valuable consideration for such release (see P.N.B. vs. Bitulok
Sawmill, 23 SCRA 1366 [1968].) or without the unanimous
consent of the stockholders and except upon a showing
4
that creditors of the corporation would not be prejudiced
(Lingayen Gulf Electric Power Co. vs. Baltazar, 93 Phil. 504
[1953].) and any agreement to do so is void and will not
constitute a defense to an action to enforce liability. (Phil.
Trust Co. vs. Rivera, 44 Phil. 469 [1923].)
(b) A stock subscription is a subsisting liability from the
time it is made. The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. The right
of the corporation to demand payment is no less incontest-
able (Nava vs. Peer Marketing Corp., 74 SCRA 65 [1976].),
and this is true even in the absence of an express promise to
pay the amount subscribed. And the fact that another sub-
scriber fails to pay his subscription or that it is impossible to
collect from some of them is not a valid defense to discharge
a subscriber from his obligation. (Brown vs. Allebach, 166
Fed. 488.)
4
Where the rights of creditors are not involved, a contract of subscription is, at least,
in the sense which creates an estoppel, a contract among the several subscribers. For this
reason, a subscriber cannot withdraw from the contract without the consent of all the oth-
ers and thereby diminish without their consent the common fund in which all have ac-
quired an interest. (Lingayen Gulf Electric Power Co. vs. Baltazar case.) Be that as it may,
a corporation is now authorized under Section 41 to purchase its own snares with unpaid
subscriptions, including delinquent shares, provided they are paid out of its unrestricted
retained earnings, even without the consent of the stockholders.
The release of an unpaid subscription is very similar to a purchase by the corpora-
tion of its own shares, i.e., in both cases, the subscriber or stockholder surrenders his
interest in the corporation to the extent of the portion of the subscription released, or of
his shareholdings purchased.
(c) Until the liquidation of the corporation, no part of the

subscribed capital may be returned or released to the stock-
holder except in the redemption of redeemable shares (Sec.
8.) without violating the trust fund doctrine. Thus, dividends
must never impair the subscribed capital. Subscription com-
mitments cannot be condoned or remitted nor can the cor-
poration buy its own shares using the subscribed capital as
the consideration therefor. (Phil. Long Distance Telephone
Company vs. National Telecommunications Commission,
539 SCRA 365 [2007].)
(d) A subscription contract necessarily involves the cor-
poration as one of the contracting parties since the subject
matter of the transaction is property owned by the corpora-
tion — its shares of stock. An action for rescission for alleged
breach of contract is not one of the remedies or instances al-
lowed by the Corporation Code for the distribution of capital
assets and property of the corporation since it will violate the
Trust Fund Doctrine, (see Sec. 41.) and the procedures for the
valid distribution of assets of the corporation, (see Sec. 122.)
A contrary rule will allow just any stockholder, for just about
any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the
corporate assets to him without complying with the require-
ments of the Code. (Ong Yong vs. Tiu, 401 SCRA 1 [2003].)
(2) Release through reduction of capital stock. — The release of a
subscriber from the payment of his unpaid subscription may be
effected through a reduction of the capital stock, but as against
creditors, such reduction can take place only in the manner and
under the conditions prescribed by Section 38. (Sec. 122, par. 3.)
(3) Amount of liability deducted from value of shares of stockhold-
er with appraisal right. — A stockholder with appraisal right (see
Sec. 81.) may be relieved from liability to pay his unpaid sub-
scription the amount of which shall be deducted from the fair
value of his shares.
(4) Consent to subscription vitiated. — A subscriber who was
induced to take subscription through fraudulent misrepresenta-
tion as to vitiate his consent thereto is entitled to annul his sub-
scription (see Arts. 1390-1391, Civil Code.), as where, prior to
his subscription, the authorized capital stock has been increased
536
without notice to him for the increase would dilute his propor-
tionate interest and influence in the corporation without his
consent. (National Exchange Co. vs. Dexter, 51 Phil. 610 [1928];
Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 [1925].)
(5) Payment tocomefrom dividends not allowed. — Asubscription
agreement whereby the subscriber shall pay the shares subscribed
by him from the dividends that may be declared thereon until
the full amount of the subscription has been paid is invalid, as it
is contrary to the manner of payment prescribed by the Code (see
Sec. 62.), and because the agreement imposes no obligation on the
subscriber to pay for the shares except as dividends may accrue
upon the shares and in the contingency that no dividends are
paid, there is no liability at all. The stipulation is discriminatory
in favor of the subscriber. (National Exchange Co. vs. Dexter,
supra.)
Refund of subscription p a y m e n t s
in excess of that stated in call.
The general rule on subscription is that unpaid subscriptions
are debts owning to the corporation and constitute a portion of its
assets to which creditors have a right to look for the satisfaction
of their claims. A subscriber remains a debtor to the corporation
for the unpaid balance of his subscription and continues to be
charged with the obligation of remitting payment thereon, either
voluntarily or upon call (see Sec. 67.) until the full payment of his
subscription is satisfied.
Accordingly, a stockholder who voluntarily remits an amount
in excess of that stated in the call is estopped from claiming such
excess because once payment is accepted by the corporation, it
becomes a part of the assets of the corporation and any reduc-
tion thereof would necessarily constitute a violation of the third
paragraph of Section 122. Nor has the corporation the power to
grant such refund. (SEC Opinion, March 20,1972.)
Refund w h e r e p r o p o s e d increase
in capital stock a b a n d o n e d .
A stockholders' meeting authorizing the increase of the capi-
tal stock of a corporation is merely one step in the process of
legally effecting such increase. Other steps must be taken, such
as the securing of the minimum amounts of subscriptions and

payments to carry out the increase, and getting the government's
approval of the increase. Unless all such steps are accomplished,
there would be no valid increase in capital stock. Where only the
first step has been taken, and the board of directors manifests
that it cannot carry out the other steps necessary to effectuate
the proposed increase, and it appears that the corporation can-
not hold indefinitely or for an unreasonable period of time the
payment on subscriptions to the proposed increase, the board of
directors, acting in good faith, may authorize the refund of the
same to the subscribers.
In this case, board authorization would be sufficient to
make the refund since it is the board of directors and not the
body of stockholders that approves and authorizes the entering
into contracts, like subscription agreements, in behalf of the
corporation. All matters involving the contract, such as its
acceptance or rejection, modification or termination, are decided
by the board of directors, not by the stockholders, for it is the
former and not the latter that represents the corporation. (SEC
Sec. 6 1 . Pre-incorporation subscription. — A subscription

for shares of stock of a corporation still to be formed shall
be irrevocable for a period of at least six (6) months from
the date of subscription, unless all of the other subscribers
consent to the revocation, or unless the incorporation of
said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract
of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the
articles of incorporation to the Securities and Exchange
Commission, (n)
Pre-incorporation subscription mandatory.

Under Sections 13 and 14 (last par.), the Securities and
Exchange Commission shall not accept the articles of incorpora-
tion of any stock corporation unless at least 25% of the autho-
rized capital stock has been subscribed and at least 25% of the
total subscription has been fully paid.
Pre-incorporation subscriptions are, therefore, mandatory.
Revocability of pre-incorporation
subscription contract.
(1) Conditions for revocation. — Section 61 prescribes the con-
ditions for the revocation of a pre-incorporation subscription
contract either by the subscriber or the corporation.
(2) When irrevocable. — The subscription is irrevocable for a
period of at least six (6) months from the date of subscription,
notwithstanding any agreement to the contrary, except in the
two instances mentioned. In any case, it cannot be revoked after
the submission of the articles of incorporation to the Commis-
sion, although beyond the six (6)-month period.
(3) Reason for irrevocability. — The irrevocability of pre-
incorporation subscription contracts prevents a subscriber
from speculating on the stocks of a proposed corporation.
Furthermore, it is to the interest of each subscriber that the others
are bound by their subscriptions and the new corporation should
have, as operating capital, enforceable subscriptions. Thus, the
rule protects the corporation from financially irresponsible
subscribers, (see Sec. 13.)
Effect of filing of articles

of incorporation.
(1) The subscriber is not bound indefinitely, for the period
of irrevocability is limited. After submission of the articles of
incorporation to the Securities and Exchange Commission, a pre-
incorporation subscription may no longer be revoked although
the period of six (6) months has already elapsed.
(2) Upon incorporation of a corporation (see Sec. 19.), both
the incorporators (who are signatories of the articles of incorpo-
5
ration) and subscribers automatically become shareholders; the
subscription, which until that time was merely an offer, becomes
a binding contract from which the subscriber cannot withdraw,
except in the case of fraud or other matters which may operate to
5
It has been said that "the subscribers to the stock of a proposed corporation before
the incorporation is accomplished are partners in the business which they have in hand."
(31 Words and Phrases 271 [1957 ed.].) In view of the proviso in Section 61, acceptance
by the corporation (when it comes into existence) of a pre-incorporation subscription is
not necessary.
discharge him from liability on his subscription. (18 Am. Jur. 2d

826.)
Thus, a person who subscribes for a stock in a corporation
to be formed and who does not consent to any change in the
subscription is not liable if the corporation which is afterwards
formed, is a different corporation from that contemplated by the
subscription. Accordingly, where the authorized capital stock of
a corporation was increased (from P250,000.00 to P500,000.00)
after the subscription contract was entered into without the
knowledge and consent of the subscriber, it was held that the
subscriber (for 10 shares at the par value of P10.00 each) was
not liable thereon as the change would make him a member of
an association in which he never consented to become such. It
would change the relative influence and profit (from 1 / 2,500 to
1 / 5,000 part of the capital stock for the 10 shares) of each member.
(Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 [1925].)
Sec. 62. Consideration for stocks. — Stocks shall not be

issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
(1) Actual cash paid to the corporation;
(2) Property, tangible or intangible, actually received
by the corporation and necessary or convenient for its use
and lawful purposes at a fair valuation equal to the par or
issued value of the stock issued;
(3) Labor performed for or services actually rendered
to the corporation;
(4) Previously incurred indebtedness by the corpora-
tion;
(5) Amounts transferred from unrestricted retained
earnings to stated capital; and
(6) Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Where the consideration is other than actual cash, or
consists of intangible property such as patents or copy-
rights, the valuation thereof shall initially be determined
540
by the incorporators or the board of directors, subject to

approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for
promissory notes or future services.
The same consideration as provided for in this section,
insofar as they may be applicable, may be used for the
issuance of bonds by the corporation. (16a)
The issued price of no-par value shares may be fixed
in the articles of incorporation or by the board of directors
pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof by
the stockholders at a meeting duly called for the purpose
stock. (5a)
Sources of corporate capital.

(1) Funds furnished by shareholders. — Every corporation must
issue stock, also called equity securities, to persons who want to
invest capital in it, for money, property, or services. (Sec. 62.)
(a) Equity securities represent ownership rights which,
in varying degrees, depending upon the type of the stock,
entitle the holder to a right to participate in the earnings of the
corporation and upon dissolution, those assets which remain
after all corporate debts have been paid. (SEC Opinion, Sept.
12,1991, citing Fletcher, Sec. 2635.)
(b) The capital contributed by stockholders in exchange
for shares of stock is often referred to as equity capital.
(c) The value the corporation receives for stock issued
appears in the capital account section of the corporation's
balance sheet.
(2) Borrowings. — The capital of a corporation may be
derived not only from contributions of shareholders received by
it as consideration for the issuance of stock.
(a) The corporation may also raise capital to finance its
business from loans or advances by creditors (stockholders
and/or third persons) in return for which the latter get debt
securities called bonds for long-term debts. A corporate bond
may be defined as a written promise by a corporation to pay
a definite sum of money at some future date, at a fixed rate of

interest, given in return for money or its equivalent received
by the corporation, sometimes secured and sometimes not.
Bonds issued by a corporation are generally issued for money
borrowed, which is necessary, in addition to its capital stock,
to support the operations of the company. (9-A Words and
Phrases [1960] 381.)
The Code expressly empowers a corporation to incur,
create, or increase any bonded indebtedness. The corporation
can create numerous classes of debt securities giving different
creditors different rights depending on the agreement it
makes with its creditors, (see Sec. 38.)
(b) Debt securities are liabilities of the issuer. They re-
quire the issuer to pay the holders the principal amount
loaned to the corporation at a fixed maturity date and stated
rate of interest.
The option given to bondholders to convert their bonds
to equity is not an assurance that they will opt for conversion.
Hence, the convertibility feature of the bonds to shares of
stock does not make them equity securities. Unless actually
converted into shares, bonds cannot be classified as capital to
form part of the equity portion in the balance sheet. Further-
more, such conversion takes the nature of issuance of shares
by way of offset of liabilities which requires prior approval
of the Securities and Exchange Commission. (SEC Opinion,
Sept. 12,1991.)
(3) Profits and stock dividends. — A corporation also get
internal generated funds from its profits or earnings which are
reinvested in the business. Sometimes a corporation issues stock
to represent the reinvested earnings, that is, stock dividends are
declared by means of which the corporation retains part of the
corporate earnings.
(a) In the balance sheet of a corporation (see Sec. 75.), that
portion of the reinvested profits against which no stock has
been issued is represented by the "surplus item," while the
original investment of the stockholders and that portion of
the reinvested earnings against which stock dividends have
been declared are represented by the "capital stock item."
542
(b) The effect of the declaration of stock dividends is to

convert the surplus assets into a permanent account forming
part of its capital stock. (Sec. 62[5]; see Sec. 43.)
Power to issue stock.

Stock corporations have the express and inherent power to
issue or sell stocks. (Sec. 36[6].) The word "issue" is generally
6
employed to indicate the making of a share contract, that is,
transactions by which a person becomes the owner of shares
and by which new shares contracts are created. The word "issue"
is often associated with the execution and delivery of a share
certificate but the issue of the shares is not dependent on the
delivery of a certificate for the shares. (Ballantine, p. 467.) In
other words, one can be an owner of shares in a corporation even
without any certificate of shares being issued to him.
There is no provision in the Code which prohibits a corpo-
ration from issuing shares from the unsubscribed portion of its
capital stock before the original subscriptions are fully paid. (SEC
Opinion, Aug. 9,1984.)
Approval of stockholders for issue of s h a r e s .

The power to issue shares of stock in a corporation is not one
of those expressly granted to stockholders under the law. It is
lodged in the board of directors and no stockholders' meeting
or approval is necessary to consider the issuance of shares (see
Datu Tagoranao Benito vs. Securities and Exchange Commission,
123 SCRA 722 [1983].) including the unsubscribed portion of
7
the capital stock unless explicitly required under the by-laws.
It is only necessary that appropriate resolution of the board of
directors (see Sec. 23, par. 1.) approving the issuance be secured.
'The terms thereof are found in the articles of incorporation and in the certificate of
stock, (see Sec. 6, pars. 1, 5.) In the case of preferred shares, the terms and conditions of
the share contract may be fixed by resolution of the board of directors, where authorized
in the articles of incorporation. (Ibid., par. 2.)
'A corporation desiring "to issue or sell stocks" (see Sees. 36[6], 60.) out of its unis-
sued or unsubscribed shares of the original or increased capital stock must file with the
Securities and Exchange Commission certain documents or papers as per its regulations,
(see SEC Opinion, Oct. 27,1975.) The sale of treasury shares (see Sec. 9.) by the corpora-
tion is not subject to the requirements relative to the filing of application for registration
of securities or their exemption from registration and for its approval by the SEC under
Sections 8-10 of the Securities Regulation Code, (see App. "A.")
But the stockholders' approval is necessary to effect an in-

crease of the capital stock. (Sec. 38.)
A p p r o v a l o f Securities a n d E x c h a n g e C o m m i s s i o n
for issue of s h a r e s .
(1) Issuance taken out of an increase of capital stock. — A
corporation may issue shares out of the remaining unissued
shares provided that such shares have already been registered
with the Securities and Exchange Commission. If the issuance
will be taken out of an increase of the capital stock, prior
permit/license of the offering of stock must be secured from
the Commission. In all cases, unless denied in the articles of
incorporation, or the issuance falls under any of the exceptions
mentioned in Section 39, all the existing stockholders of record
are entitled to exercise their pre-emptive right to subscribe
to proposed issuance of shares in proportion to their existing
shareholdings. (SEC Opinion, Aug. 17,1991.)
(2) Issuance done in course of and as part of process of increasing
capital stock. — The issuance of shares of stock done in the course
of and as part of the process of increasing the authorized capital
stock is an exempt transaction not subject to the requirement of
registration under Section 6(a, 4) of the Revised Securities Act (Part
II.), there having been previous examination by the Commission
of the financial condition of the corporation when the proposed
increase was submitted to it for approval under Section 38.
Authorized and unissued shares must first be registered with
the Commission or declared exempt from registration by the
Commission before they can be issued. (Nestle Philippines, Inc.
Different m o d e s by w h i c h shares
may be issued.
Admittedly, there can be no issuance of stock in any physical
sense since as an incorporeal property, it is not capable of manual
delivery. The following are the modes by which a corporation
may issue shares of stock:
(1) By subscription before and after incorporation, to origi-
nal, unissued stock;
544
(2) By sale of treasury stock after incorporation for money,

property, or service;
8
(3) By subscription to new issues of stock, when all the origi-
nal stock has been issued and the amount of the capital stock
increased; and
(4) By making a stock dividend.
Original issue of stock c o n t e m p l a t e d .

The word "issue," as used in Section 62, refers to original
issue, that is, when the stock first passes from the corporation
to the hands of the stockholder. Thus, the stock cannot be sold
below par or issued price at the original issue.
Treasury shares may be sold for a reasonable price fixed by
the board of directors even for less than the par or issued value
thereof. (Sec. 9.)
Consideration for issue of s t o c k s .

Shares of stocks and bonds may be issued in exchange for
any or a combination of any two or more of the considerations
enumerated in Section 62.' The limitations must be noted.
(1) In view of Nos. (1) and (2), payment for shares of stocks
must be actually received by the corporation. Hence, receivables
cannot be treated as cash actually received since actual payment
has yet to take place in the future. They may, however, be consid-
ered as property payment subject to verification by the Securities
and Exchange Commission of its existence and collectibility and
"The term "new issues of stock" from the standpoint of the Corporation Code can
be construed to include any of the following: (1) original issue(s) to incorporators/sub-
scribers of a new corporation taken from the original authorized capital stock; (2) shares
issued from the balance (unissued) of an existing authorized capital stock; (3) shares is-
sued out of an increase in capital stock; and (4) shares issued by way of dividend. (SEC
Opinion, April 18,1988.)
T h e pricing of shares of stock is a highly specialized field that is better left for ex-
perts. It involves an inquiry into the earning potential, dividend history, business risks,
capital structure, management, and set values of the company, the prevailing business
climate, the political and economic conditions, and a myriad of other factors that bear
on the valuation of shares." (Bagatsing vs. Committee on Privatization, 246 SCRA 334
[1995], citing Tan Home, Financial Management and Policy, 652-653 [8th ed.]; Leffler and
Farwell, The Stock Market, 573-575 [3rd ed.].)
the condition that the same shall be held in escrow until actual
payment of the amount. (SEC Opinion, Dec. 17,1993.)
(2) Declaration of stock dividends involves issuance of
stocks directly paid from amounts transferred from unrestricted
retained earnings to stated capital. (Sec. 62[5].) Since the retained
earnings have already been applied as payment to the issuance
of shares covering the stock dividend declaration, the same can
no longer be reapplied as payment to subsequent subscription
rights. (SEC Opinion, Dec. 7,1989.)
(3) They shall not be issued in exchange for promissory notes
or future services.
(4) When the consideration is other than actual cash (Sec.
62[2-4].), or consists of intangible property, the value thereof
shall be initially determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange
Commission. This means that the payment of such subscription,
either at the time of incorporation or thereafter, shall be subject
to approval by the Commission. The law being clear and
unambiguous, no exception can be read into it. (SEC Opinion,
March 28,1985.)
(5) A corporation may reclassify its shares by amending its
articles of incorporation and exchange outstanding shares of
stockholders for stocks reclassified or converted from one class
to another.
(6) A corporation cannot issue its stock as a gratuity but
it is lawful for a corporation to issue bonus stock to officers or
employees as incentives or for services actually rendered to the
corporation for in such case, the stock cannot be considered
gratuitous, (see SEC Opinion, Dec. 1,1988; Sabalvaro vs. Erlanger
& Galinger, Inc., 64 Phil. 588 [1937].)
The issued price of no par value shares must be fixed as pro-
vided in the last paragraph of Section 62.
A m o u n t of consideration.
(1) Shares of stock shall not be issued for a consideration less
than the par or issued price thereof (see Sec. 65.), except treasury
shares so long as the price is reasonable, (see Sec. 9.)
(a) It is implied from Section 62 that a corporation may

issue shares of stock at a price above the par or issued value.
Such value does not necessarily reflect the true or actual value
of stock since book or market value normally fluctuates.
(b) Section 62 makes no distinction in respect to the
liability of the subscriber, between shares subscribed before
incorporation is effected and shares subscribed thereafter.
All alike are bound to pay full par or issued value in cash or
equivalent, and any attempt to discriminate in favor of one
subscriber by relieving him of his liability wholly or in part
is forbidden. (National Exchange Co., Inc. vs. Dexter, 51 Phil.
610 [1928].)
(c) Stocks issued for a consideration less than their par or
issued price are watered stocks, (see Sec. 65.)
(d) Where a corporation offered shares of stock to its
shareholders at one (1) share of stock for every two (2) shares
held at a price of P0.02 per share, but only a small portion
of the stock offered was subscribed, it has been opined that
the corporation may properly sell the remaining shares at
only P0.01, the amount being the par value of the shares, on
the theory that the price of P0.02 in the previous offer must
have been fixed, taking into account the then prevailing stock
market price of the shares but the corporation cannot legally
give one (1) free share to those who paid P0.02 per share as it
would violate Section 62. (SEC Opinion, Sept. 13,1972.)
(2) Generally, a new issue of capital stock may be issued at
a fixed price above par, provided the old stockholders are given
the right to purchase their proportionate part of the issue. Thus,
an agreement by subscribers to pay more than the par value of
their share is not ultra vires or an attempt to increase the par value
of the stock. (SEC Opinion, Sept. 23,1987, citing 11 Fletcher, Sec.
5138.)
Consideration other t h a n c a s h .
(1) Property; service; corporate indebtedness. — If the consider-

ation is other than actual cash (Sec. 62[2-4].), its value must be
10
worth the value of the stocks issued. Hence, the need of the
11
approval of the valuation by the Commission. (Sec. 62, par. 2.)
(a) U.S. dollars representing payment on subscription
of a proposed corporation should be duly converted into
Philippine peso; otherwise, they shall be considered payment
by way of property. (SEC Opinion, July 28,1986.)
(b) Financial instruments such as notes, shares of stocks
and bonds may be classified as personal property; hence,
they may be legally accepted as capital contribution. (SEC
Opinion, Jan. 25, 1995.) Negotiable instruments other than
promissory notes such as checks can be used in payment of
stocks but they "shall produce the effect of payment only
when they have been cashed, or when through the fault of the
creditor they have been impaired." (Art. 1249, Civil Code.)
(2) Stock dividends. — Section 62(5) refers to stock dividends.
When stock dividends are declared, amounts representing sur-
plus assets are "transferred from unrestricted retained earnings
to stated capital." In effect, the additional stocks are paid for by
"This is known as the "true value" rule. The other rule of which Colt vs. Cold Amal-
gating Co., 119 U.S. 343, 7 S. Ct. 231, 30 L. Ed. 420, is cited as the leading case, is known as
the "good faith" rule in which it is recognized that the value is a matter about which men
may honestly differ and in which the further questions of intention, good faith, and fraud
are submitted to the court. Under this rule, to be sure, no device is tolerated to avoid an
honest valuation, yet a margin is allowed for honest differences of opinion, and generally
the transaction will be upheld even as against subsequent creditors if the valuation was
honestly made, although it appears that there was an error of judgment and that the valu-
ation was in fact incorrect. Of course, the transaction is always impeachable for fraud,
and gross or intentional overvaluation is itself proof of fraud. (Clinton Mining & Mineral
Co. vs. Jamison, 256 F. 577 [3d Cir. 1919].)
Whether or not the "true value" rule has vitality today, serious doubt has been
expressed that in actual practice the stockholder receives any different treatment under
the "true value" rule than he receives under the New Jersey version of the "good faith"
rule. (W.L. Cary, Cases and Materials on Corporations, p. 1096 [1969 ed.], citing 2
Bonbright, Valuation of Property 799.)
"Stocks may be issued in consideration of previously incurred indebtedness of the
corporation (Sec. 62[4].), subject to the submission of the following requirements: (1)
Detailed schedule of liabilities being offset, showing all debts and credits to such liability
account, date, nature of account and amount; (2) Deed of assignment executed by the
creditor(s) assigning the amount due to him in payment for the unpaid subscription(s);
and (3) Company's books of accounts must be kept up to date and be made available for
examination by the SEC to determine that the liabilities represent valid and legitimate
claims against it. (SEC Opinion, Oct. 2,1992.)
548
the stockholders in cash or property out of the portion of the cor-

porate earnings so capitalized.
(3) Outstanding shares. — Under Section 62(6), a corporation
may issue its own stocks in exchange for outstanding shares in
case of reclassification or conversion. Thus, a holder of preferred
shares with conversion privilege may give his convertible
preferred shares as a consideration for the issuance of a certain
number of common shares.
(4) Receivables. — They may be accepted as payment for
shares subject to the following conditions: (a) the SEC is able to
verify the existence and collectibility of the receivables; and (b)
the shares to be issued will be held in escrow until actual pay-
ment or collection of the receivables. (SEC Opinion No. 05-11,
July 14, 2005.)
Nature of property w h i c h m a y
be taken for stock.
(1) Necessary or proper in carrying on the corporate business. —
The property which a corporation may accept in exchange for
its stock must be of a kind which the corporation may lawfully
acquire and hold in carrying out the purposes of its incorporation,
and which is necessary or proper for it to own in carrying on its
12
business. It cannot lawfully issue stock for property which its
charter does not authorize it to acquire, or for property acquired
13
for an unauthorized purpose. (11 Fletcher, pp. 542-543.)
12
Under the National Internal Revenue Code (Sec. 40[c, 2].), "no gain or loss shall
be recognized if property is transferred to a corporation in exchange ior stock in such
a corporation of which as a result of such exchange said person, alone or together with
others not exceeding four persons, gains control (at least 51% of the total voting power)
of said corporation."
1J
Where shares are issued for property, the accepted procedure would involve a
written offer to transfer it to the corporation in consideration of the issuance of a specified
number of shares. The minutes should read that the property is necessary to the corpora-
tion and its value at least equal to the amount of shares transferred therefor. Acceptance
should then be made formally by resolution of the board of directors with the further
authorization to the officers to issue the stock upon receipt of the property. (W.L. Cary, op.
cit., p. 44.) If the offeror is a director, see Section 32.
Under the guidelines of SEC, where the payment is made in the form of land, the
corresponding shares of stock to be issued thereon shall be held in escrow by the SEC and
shall be released only after proof of the transfer of the Certificate of Ownership thereon in
the name of the transferee corporation as submitted to the SEC within 90 days from the
date of approval of the application extendible for justifiable reasons.
Sec. 62 TITLE VH. STOCKS AND STOCKHOLDERS 549
(a) Thus, real property may be accepted as payment on

subscription to the capital stock only when the same can be
used in the business of the corporation, as in real estate devel-
opment, subdivision, agro-industrial business, and the like,
as well as for the establishment of offices. But a corporation
engaged in the import and export business which does not
need much real property, may not accept real properties lo-
cated in the Philippines in exchange for its stock except only
such property that it needs for its operation. (SEC Opinion,
Feb. 13,1975.)
(b) In view of the generality of Section 36(7) on corpo-
rate acquisition of real properties, implying that properties
located anywhere may be contributed to the capital of the
corporation, properties located abroad as may be needed
and necessary to pursue the legitimate corporate objectives
may be contributed. However, the place where the property
is located should be considered, specifically, as to whether
a foreign corporation may own realty in a given state. (SEC
Opinion, May 4,1990.)
(2) Possesses ascertainable pecuniary value. — The property
must be of substantial nature, having a pecuniary value capable
of ascertainment (at a fair valuation equal to the par or issued
value of the stock issued), and must be something real and tangi-
ble as distinguished from something constructive or speculative.
(3) Capable of being transferred and applied to payment of debts. —
Furthermore, it must be of such character that it can be delivered
to the corporation, instead of being merely communicated to its
officers or employees, and it must be actually transferred to the
corporation and capable of being transferred by the corporation.
It must also be such as is capable of being applied to the payment
of debts and of distribution among the stockholders, (see 11
Fletcher, pp. 544-546; see also 18 C.J.S. 673.)
(a) The goodwill of a business purchased by a corpora-
tion and paid for by stock is property and is to be taken into
consideration in determining the values paid for the stock,
and is to be valued on the basis of worth and never arbitrari-
ly. (SEC Opinion, June 20,1988.)
550
(b) Interest in a co-ownership of property (Art. 493, Civil

Code.) may be exchanged for shares of stock subject to the
above conditions and Articles 1620 and 1623 of the Civil
Code. (SEC Opinion, Nov. 6,1990.) The ownership of a pro in-
diviso interest in land or any other real property is a real right
and, it the same time, a real property which may be conveyed
by the co-owner. (SEC Opinion No. 08-02, Jan. 3, 2008.)
Services as consideration for stock.

(1) A corporation is allowed to receive as payment for its
stocks not only money and property but also labor performed
for or services actually rendered to the corporation provided the
transaction is in good faith and no fraud is perpetrated upon
other stockholders and creditors. (SEC Opinion, Jan. 7, 1982,
citing Sterling Varnish Co. vs. Svenson Co., 241 Miss. 810; 133 So.
2d 624.)
(a) Compensation payable for services actually rendered
to the corporation is credit which is property and whose value
is ascertainable. An agreement to issue stock for services
before the same is rendered is void and the corporation is
not estopped to deny the services constituted payment of the
stock subscription even though it has received the benefit
thereof." (SEC Opinion, April 2,1976.)
(b) It is legally feasible for a corporation to issue shares
from the unissued portion of the capital stock to a director or
stockholder for mortgaging his real estate as collateral for a
loan of the corporation. "A corporation finding it necessary
to borrow money for the purposes of its business may
"There seems to be no reason why a corporation may not make a substantial

advance payment of compensation to a prospective employee. At least under generally
accepted accounting principles, such an advance payment would properly be recorded
as an asset, reflecting the fact that the corporation has not yet received the benefit of the
promised future services. The asset could then be amortized over the period for which
the advance payment constituted additional compensation.
Admittedly, such advance payments of compensation would be rare. But it would
seem not uncommon to offer a cash bonus to a prospective employee in order to induce
him to leave other activity and undertake the preferred new employment. Since presum-
ably the corporation could issue stock to a prospective employee for cash and then pay
the same amount of cash to him as bonus, it would seem arbitrary to prohibit the corpo-
ration from taking the short-cut of issuing stock directly to the prospective employee in
consideration of his undertaking employment. (W.L. Cary, op. cit., p. 1068.)
issue stocks in payment for services in procuring it." (Town

Country Tractor Sales, Inc. vs. Goodwin, 344 S.W. 2d 338.)
The "accommodation" or "service" extended by the director
or stockholder for procuring the loan by offering his property
as collateral may be considered as a valid consideration
for the issuance of shares of stock similar to a guarantee fee
charged by banks, subject to certain conditions, such as that
the services rendered in exchange of the stocks be fairly and
adequately valued in relation to the par or issued value of the
stocks issued. (SEC Opinion, Jan. 2,1982.)
(2) The corporation must comply with the requirements pre-
scribed by the Securities and Exchange Commission for the issu-
ance of snares out of the unissued capital stock where payment is
in the form of labor or service, (see SEC Opinion, Aug. 23, 1990.)
Issuance of stock to offset corporation's

indebtedness.
(1) Section 62(4) expressly allows the set-off or satisfaction
of previously incurred indebtedness of a corporation by the issu-
ance of its shares of stock where conflicting rights of creditors are
not involved.
(a) Even when payment of the debt is in terms required
to be made by the corporation in money or cash, a set-off of
the debt without going through this unnecessary formality is
equivalent to a payment for the stock in cash. (18 C.J.S. 682-
683.)
(b) The set-off is in effect a payment by the creditor for
shares of stock of the debtor-corporation in the form of prop-
erty (Sec. 62[2].) in lieu of cash (Sec. 62[1].) at the option of the
corporation; and it is legally feasible to issue stock in favor of
a subscriber who paid the obligations of the corporation to a
third party. (SEC Opinion, Feb. 15,1974.) Credit in the hands
of the creditor is property (City of Manila vs. Gambe, 17 Phil.
677 [1910].), and as any property received for shares of stock,
it is subject to the same rule that it be taken at its fair valua-
tion.
(2) Should a corporation issue shares of stock in payment of
its indebtedness or claims against it, the Securities and Exchange
Commission requires, among others, that the corporation submit

a report on the matter indicating the total number of shares and
the total amount paid for each claim (SEC Opinion, June 5,1974.)
and a deed of assignment executed by the subscriber/creditor
applying his claim in consideration for the shares of stock of the
corporation. (SEC Opinion, Aug. 1,1990.)
Issuance of stocks in consideration

of profits.
If stocks are issued in consideration of profits earned by the
corporation, but not distributed among the stockholders, such
issue is called stock dividends. Such consideration is permitted
under Section 62(5). Once declared and issued, stock dividends
are fully paid; hence, any sale or transfer thereafter is no longer
an original issue and may be disposed of at a price below par
value, (see SEC Opinion, April 24,1968.)
For when stock has once been issued and fully paid for,
there is nothing to prevent a stockholder from returning the
whole or a part thereof to the corporation (see Sec. 9.), or to a
trustee for its sale, to be disposed of for its benefit. In such a case,
the corporation may dispose of the stock at less than its par or
issued value without violating Section 62 which regulates the
issue of stock and without rendering purchasers thereof liable to
creditors beyond the price which they agree to pay. (Ibid., citing
11 Fletcher, p. 719.)
Fixing of issued price of no par s h a r e s .

(1) Mode. — If the issued price of no par value shares is not
fixed in the articles of incorporation, the board of directors may
fix the same only if authorized by the articles of incorporation or
the by-laws, or in the absence thereof, by the stockholders. (Sec.
62, last par.) Thus, the issued price of no par shares may vary
from time to time as it is usually fixed on the basis of their book
value. But they may not be issued for a consideration less than
the value of P5.00 per share, (see Sec. 6, par. 3.)
(2) Change in value of issued shares. — The stated value of the
issued no par value shares cannot be changed anymore in view
of Section 6 (par. 3.) which provides that "shares of capital stock
issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto."
(3) Change in value of unissued shares. — Any change in value
of no par value shares shall apply only to the unissued portion of
the capital stock of the corporation. (SEC Opinion, July 31,1979.)
C o n s i d e r a t i o n for issue of b o n d s .
Any or a combination of the considerations as provided
for in Section 62 insofar as they may be applicable (Nos. 1 to 4
thereof.), may be used for the issuance of bonds by a corporation,
(par. 3.) The bonds are subject to approval of the Securities and
Exchange Commission which is given the authority to determine
the sufficiency of the terms thereof. (Sec. 38, last par.)
Some statutes prohibit a corporation from issuing bonds
except for money, labor done, or property received. Such a pro-
vision is an expression of public policy and is intended to pro-
tect creditors to prevent the distribution of worthless securities
and to protect the stockholders against spoliation. It is intended
to require every issue of bonds to represent substantial values
received by the corporation and to impose upon those charged
with the disposition of corporate securities the duty to procure a
fair and reasonable equivalent in money, labor, or property actu-
ally contributed to the corporation. (19 Am. Jur. 2d 515.)
Registration a n d sale of securities.

The Securities Regulation Code (SRC) (Appendix "A.")
prohibits the sale or offer for sale of any security except an
exempt security or one sold in an exempt transaction, unless
such security shall have been registered and permitted to be sold
by the Securities and Exchange Commission.
(1) Registration requirement. — Securities shall not be sold or
offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Com-
mission. Prior to such sale, information on the securities, in such
form and with such substance as the Commission may prescribe,
shall be made available to each prospective purchaser.
(a) The Commission may conditionally approve the

registration statement tmder such terms as it may deem
necessary.
(b) The Commission may specify the terms and condi-
tions under which any written communication, including
any summary prospectus, shall be deemed not to constitute
an offer for sale.
(c) A record of the registration of securities shall be kept
in a Register of Securities in which shall be recorded orders
entered by the Commission with respect to such securities.
Such register and all documents or information with respect
to the securities registered therein shall be open to public
inspection at reasonable hours on business days.
(d) The Commission may audit the financial statements,
assets and other information of a firm applying for registra-
tion of its securities whenever it deems the same necessary to
insure full disclosure or to protect the interest of the investors
and the public in general. (Sec. 8, ibid.)
(2) Exempt securities. — They are those which are exempt
from the provisions of the SRC and, therefore, need not as a
general rule, be registered in order to be issued or sold. Under
the SRC, the requirement of registration under Section 8 (supra.)
shall not apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Govern-
ment of the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government;
(b) Any security issued or guaranteed by the Govern-
ment of any country with which the Philippines maintains
diplomatic relations, or by any State, province or political
subdivision thereof on the basis of reciprocity. However, the
Commission may require compliance with the form and con-
tent of disclosures the Commission may prescribe;
(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory body;
(d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of the
Sec. 62 TITLE VII. STOCKS AND STOCKHOLDERS
555
Office of the Insurance Commission, Housing and Land Use

Regulatory Board, or the Bureau of Internal Revenue; and
(e) Any security issued by a bank except its own shares
of stock.
The Commission may, by rule or regulation after public
hearing, add to the foregoing any class of securities if it finds
that the enforcement of the SRC with respect to such securities
is not necessary in the public interest and for the protection of
investors. (Sec. 9, ibid.)
(3) Exempt transactions. — The requirement of registration
under Section 8 (infra.) shall not apply to the sale of any security
in any of the following transactions:
(a) At any judicial sale, or sale by an executor, adminis-
trator, guardian or receiver or trustee in insolvency or bank-
ruptcy;
(b) By or for the account of a pledge holder, or mortgagee
or any other similar lien holder selling or offering for sale or
delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of the SRC, to liquidate a
bona fide debt, a security pledged in good faith as security for
such debt;
(c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner there-
of, or by his representative for the owner's account, such sale
or offer for sale, subscription or delivery not being made in
the course of repeated and successive transactions of a like
character by such owner or on his account by such represen-
tative and-such owner or representative not being the under-
writer of such security;
(d) The distribution by a corporation, actively engaged
in the business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus;
(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in con-
nection with the sale of such capital stock;
(f) The issuance of bonds or notes secured by mortgage

upon real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale;
(g) The issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered in
exchange to make such conversion, provided, that the security
so surrendered has been registered under the SRC or was,
when sold, exempt from the provisions of the SRC, and that
the security issued and delivered in exchange, if sold at the
conversion price would, at the time of such conversion, fall
within the class of securities entitled to registration under
the SRC. Upon such conversion, the par value of the security
surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange
are sold;
(h) Broker's transactions, executed upon customer's
orders, on any registered exchange or other trading market;
(i) Subscriptions for shares of the capital stock of
a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock under
the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given
in connection with the sale or disposition of such securities,
and only when the purpose for soliciting, giving or taking of
such subscriptions is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation
which should be subscribed before it can be registered and
duly incorporated, or its authorized capital increased;
(j) The exchange of securities by the issuer with its
existing security holders exclusively, where no commission
or other remuneration is paid or given directly or indirectly
for soliciting such exchange;
(k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any twelve-
month period; and
(1) The sale of securities to any number of the following

qualified buyers:
1) Bank;
2) Registered investment house;
3) Insurance company;
4) Pension fund or retirement plan maintained
by the Government of the Philippines or any political
subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage in
trust functions;
5) Investment company; or
6) Such other person as the Commission may by rule
determine as qualified buyers, on the basis of such factors
as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount
of assets under management.
The Commission may exempt other transactions, if it finds
that the requirements of registration under this Code is not
necessary in the public interest or for the protection of the
investors such as by reason of the small amount involved or the
limited character of the public offering.
Any person applying for an exemption shall file with the
Commission a notice identifying the exemption relied upon
on such form and at such time as the Commission by rule may
prescribe, and with such notice shall pay to the Commission
a fee equivalent to one-tenth (1/10) of one percent (1%) of the
maximum aggregate price or issued value of the securities. (Sec.
10, ibid.)
Sec. 63. Certificate of stock and transfer of shares. — The

capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or
vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by
558
the owner or his attorney-in-fact or other person legally

authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer
is recorded in the books of the corporation so as to show
the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and
the number of shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the books
of the corporation. (35)
Nature of a certificate of stock.

(1) A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging that the
person named therein is the owner of a designated number of
shares of its stock. It indicates the name of the holder, the number,
kind and class of shares represented, and the date of issuance.
(2) The certificate is not stock in the corporation but is mere-
ly evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the
equivalent of such ownership. It expresses the contract between
the corporation and the stockholder. It is based on the number of
shares owned by a stockholder.
(3) It is not essential to the existence of a share of stock or the
creation of the relation of shareholder (13 Am. Jur. 2d 769; see
Tan vs. Securities and Exchange Commission, 206 SCRA 740
[1992].), or the exercise of the rights of a stockholder provided
the subscription contract to take stock or the transfer of stock has
been duly made and recorded. It is a prima facie evidence that the
holder is a shareholder in a corporation. In the absence of the
certificate, the ownership of stocks may be shown by the record
15
thereof in the corporate books. (see Sec. 74.)
15
The mere inclusion of a person as a shareholder in the General Information Sheet
(GIS) filed with the Commission is insufficient proof that one is a shareholder in corpora-
tion where there is no certificate of stock in his name, nor any written document such as a
assignment in his favor, duly registered in the stock and transfer book of the corporation.
The information in the GIS will still have to be correlated with the books of corporation.
As between the GIS and the corporate books, the latter controls. (Lao vs. Lao, 567 SCRA
588 [2008].)
(4) A certificate of stock, like the shares it represents, is prop-

erty, but it has a value separate and distinct from the value of the shares
represented. (Ibid.) It may be brought out of the domicile of the
corporation, being a personal property of the owner. (SEC Opin-
ion, July 29,1976; Fletcher, pp. 60-61; see Sec. 63.)
but is transferable.
16
(5) It is not a negotiable instrument. (see Sec. 1, Act No. 2031.)
Certificates of stock may be issued only to registered owners of
stock. The issuance of "bearer" stock certificates is not allowed
under the law. (SEC Opinion No. 05-02, Jan. 31, 2005.) Although
it is sometimes regarded as quasi-negotiable, in the sense that it
may be transferred by indorsement, coupled with delivery, it is
well-settled that it is non-negotiable, because the holder there-
of takes it without prejudice to such rights or defenses as the
registered owner's or transferor's creditor may have under the
law except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel. (De
los Santos vs. McGrath, 96 Phil. 577 [1957]; Tan vs. Securities and
Exchange Comission, 206 SCRA 740 [1992].)
Thus, where the owner of a street certificate of stock (one
which is indorsed in blank and, therefore, transferable by mere
delivery) delivered the certificate to a broker who pledged it to a
bank, which had no knowledge that the certificate did not belong
to the holder (broker), he is estopped from claiming title or inter-
est therein as against the pledgee bank. A bona fide pledgee or
transferee of a stock from the apparent owner is not chargeable
with notice of the limitations placed on it by the real owner, or
any secret agreement relating to the use which might be made of
the stock by the holder. (Santamaria vs. Hongkong and Shanghai
Banking Corp., 89 Phil. 780 [1951]; see Bachrach Motor Co. vs.
Ledesma, 64 Phil. 681 [1937].)
Issuance of certificate of stock.

Every certificate of stock "shall be signed by the president
or vice-president of the corporation, countersigned by the cor-
"Certificates of stocks are expressly declared to be negotiable instruments by the

U.S. Uniform Commercial Code. (Sees. 8-105[l] thereof.) Moreover, the Uniform Stock
Transfer Act is regarded as giving full negotiability to certificates of stock and it is said
that the purpose of such Act is to make the stock certificate, to the fullest extent possible,
the representative of the shares. (18 Am. Jur. 2d 887-888.)
porate secretary or assistant secretary, and sealed with the seal

of the corporation" and "shall be issued in accordance with the
by-laws." (Sec. 63; see Sec. 36[4].)
(1) Compliance with requirements. — All certificates of stock
should conform to the above provision of law. Other require-
ments may be made pursuant to the articles of incorporation or
valid by-laws. Accordingly, a typewritten statement advising a
stockholder of his ownership in a corporation cannot be a sub-
stitute to a formal stock certificate. (SEC Opinion, Oct. 20,1970.)
The most, perhaps, is to treat it as a temporary receipt for stock
subscription certifying the number of shares. (SEC Opinion, Sept.
21,1970.)
(2) Compliance with court order. — A corporation is not liable
to a stockholder for cancelling outstanding certificates and issu-
ing new ones in lieu thereof where it does so in compliance with
a lawful requirement. Thus, a corporation having notice is not
required to publish a court order for the nullification of shares
of stocks and the subsequent issuance of a new certificate in lieu
of the nullified one, as such order is binding against any subse-
quent purchaser of the outstanding certificate of stock without
notice of order. (SEC Opinion, March 3,1982.)
(3) An internal affair of the corporation. — A corporation does
not have to secure the prior consent of the Securities and Ex-
change Commission for the issuance of certificates of stock in-
asmuch as it is a matter which the law (Sec. 47[9].) has left for
the corporation to decide. (SEC Opinion, Sept. 29,1964.) It is an
internal matter which the corporation can resolve by itself.
Only stock corporations can issue stock certificates.
(4) Co-owners. — Certificates of stock may be issued with the
conjunctive "and/or" placed between the names of the parties
who, apparently, are co-owners. It is understood that the above
may be transferred upon the indorsement of both stockholders
or either of them, and the right to vote the share may also be
exercised by both, or all, or any of them. (SEC Opinion, March 14,
1989.)
(5) Husband and wife. — Where the property relation between
the husband and wife is governed by the system of absolute
community of property, the rules on co-ownership shall apply
17
to the community of property. Accordingly, the spouses, being
co-owners thereof, may request the corporate secretary to issue
the certificates of stock in the names of both of them. This is
true even if the certificates are still in their respective names.
However, if the shares are among the excluded properties
under Section 92 of the Family Code or where the spouses have
chosen a marriage settlement other than the system of absolute
community of property, the transfer of shares between the
husband and wife shall be recorded in the stock and transfer
book only upon compliance with Section 63. As co-owners, they
shall be considered as one stockholder. (SEC Opinions, Sept. 4,
1990 and Nov. 15,1991.)
Delivery essential to issuance

of certificate.
Delivery, actual or constructive, is essential to the issuance
of a certificate of stock. Making a certificate and mailing it to the
stockholder is an issue and delivery thereof.
(1) Stock sold through a public instrument. — It has been held
that "a formal contract of purchase and sale set in a notarial
document is equivalent to actual delivery of the certificates
themselves" (Uy Piaco vs. McMicking, 10 Phil. 286 [1908].), but
only as between the parties.
(2) Certificate retained by corporation. — There is no issuance of
stock certificate (therefore, no delivery) where it is never detached
from the stock books although blanks therein are properly filled
up, if the person whose name is inserted therein has no control
over the books of the corporation. But the issuance and delivery
is not essential where it appears that the persons sought to be
held as stockholders are officers of the corporation and have the
custody of the stock book and can detach the certificate at any
"Art. 75. The future spouses may, in the marriage settlements, agree upon the regime
of absolute community, conjugal partnership of gains, complete separation of property,
or any other regime. In the absence of a marriage settlement, or when the regime agreed
upon is void, the system of absolute community of property as established in this Code
shall govern. (119a)
Art. 90. The provisions on co-ownership shall apply to the absolute community of
property between the spouses in all matters not provided for in this Chapter. (Family
Code)
562
time. Where, however, the certificate made out in the name of

the subscriber has never been delivered to him but is retained by
the corporation as security for notes given by him for the unpaid
portion of his subscription, the certificate cannot be considered
as issued, and this is true even though the subscriber votes the
stock and though dividends are declared on it which are credited
on the notes, (see Tuazon vs. La Provisora Filipina, 67 Phil. 36
[1938], citing 11 Fletcher, pp. 324-325.)
(3) Certificate returned to transferee after cancellation and
issuance of certificate. — Where as a result of the sale of stock, the
corresponding certificate was cancelled and a new certificate
was subsequently issued in the name of the transferee, there was
already delivery notwithstanding the return of the cancelled
certificate to the transferor for his indorsement and his deliberate
non-indorsement. In such a case, there is no necessity for the
certificate to be indorsed. All the acts required for the transferee
to exercise his right over the acquired stock are present and even
the corporation is protected from other parties, considering
that the said transfer was earlier recorded or registered in the
corporate stock and transfer book. (Tan vs. Securities and
Remedies of stockholders w h e r e corporation

refuses to issue certificate.
A certificate of stock is not necessary to render one a stock-
holder in a corporation. Nevertheless, a certificate of stock is the
paper representative or tangible evidence of the stock itself and
of the various interests therein, and every stockholder has a right
to have a proper certificate issued to him as soon as he has com-
plied with the conditions which entitle him to one as by payment
for his shares or the like. (11 Fletcher, pp. 329-331.)
(1) A suit for specific performance of an express or implied
contract and (2) a petition for mandamus when appropriate are
the common remedies to compel the issuance of certificates of
stock. (3) A stockholder may, however, sue instead for damages
where specific performance cannot be granted, or (4) in some
instance, may rescind his contract of subscription and recover
the consideration paid. (11 Fletcher, p. 330.)
But one who has no subscription contract with a corporation

cannot compel the corporation to issue certificates of stock for
the shares paid for by him where certificates for the said shares
had already been issued in the name of an officer of the corpora-
tion with whom the plaintiff had agreed on a joint venture to be
conducted in the name of the corporation and to whom the pay-
ment was given, his remedy being against such officer. (British
American Engineering Corporation vs. Alto Surety & Insurance
Co., Inc., 18 SCRA 23 [1966].)
Effect of o v e r - i s s u a n c e of s h a r e s .
A corporation cannot issue shares whether in consideration
for cash or property, or as stock dividends, in excess of the maxi-
mum number authorized in its articles of incorporation for they
do not exist.
(1) The rule established by the decisions is that over-issued
stock is absolutely void. Consequently, the certificate of stock
which represents the over-issued stock is also void. The holder
of the certificate, whether he be the original holder or a bona
fide transferee, regardless of his good faith, does not become a
stockholder. He does not acquire any right nor does he incur the
liability of a stockholder.
(2) An action may be maintained by the corporation to cancel
over-issued shares. But the corporation may be held liable in
damages or for restitution to one who had innocently advanced
money in the belief that the shares were lawfully alloted. (W.L.
Cary, op. cit., p. 1129, citing Stevens on Corporations, p. 432.)
Unauthorized or forged certificates.

(1) Remedy of corporation. — Certificates of stock may be
cancelled where the stock represented was issued through
a mistake of fact or under such circumstances that they are
either void or voidable. The corporation may maintain a suit
to cancel the certificates and enjoin their transfer, or the voting
by the holders, or the payment of dividends on the shares. (SEC
Opinion, citing 11 Fletcher, pp. 336, 338.)
(2) Rights of holder. — The corporation may or may not be
bound to make good such certificates.
564
(a) One who acquires a stock certificate knowing that

it was fraudulently issued by officers of the corporation, or
with knowledge of facts sufficient to charge him with notice
of the fraud, is entitled to no rights as a stockholder.
(b) It is held, however, that if a fraudulently issued stock
has reached the hands of a bona fide holder for value and the
number of shares represented thereby will not cause an over-
issue, the corporation will be held bound to make good such
certificate to the extent of any shares owned by the compa-
ny, provided that the stock was issued by officers or agents
held out by the corporation as having the authority to do so.
Fraudulent stock certificates are not, however, certificates in
legal contemplation and give no rights of their own force.
The act of the corporation in issuing them, where they have
been accepted and acted upon in good faith by another, is
deemed merely to estop the corporation from denying their
validity.
(c) Under the U.S. Uniform Commercial Code (Sees.
8-206 thereof.), the lack of genuineness is a complete defense
even against a purchaser for value and without notice. How-
ever, a forged or unauthorized signature on the issue of a
stock certificate is effective in favor of a purchaser for value
without notice where the signing is done by persons entrust-
ed with the signing and handling of the certificates. (18 Am.
Jur. 2d 775-776.)
Requirements for transfer of stock.

Section 63 expressly authorizes the transfer of the shares
represented by the certificate by its indorsement by the owner
or his agent and delivery, so indorsed, to the transferee. Such
delivery is the operative act of transfer of title to the shares from
the lawful owner to the transferee. (Rural Bank of Lipa City, Inc.
vs. Court of Appeals, 366 SCRA 188 [2001]; Bitong vs. Court of
Appeals, 292 SCRA 503 [1998]; Rivera vs. Florendo, 144 SCRA 643
[1986].) The failure to deliver the stock certificates representing
the shares purchased amounts to a substantial breach of contract
which gives rise to a right to rescind the sale. (Raquel-Santos vs.
(1) Where no certificate has as yet been issued or where for

some reason it is not in the possession of the stockholder, fully
(or partially) paid shares may be transferred by means of a deed
of assignment duly recorded in the books of the corporation.
(2) Any sale or transfer of shares from stockholders of a cor-
poration to third parties need not be reported to nor require an
authority from the Securities and Exchange Commission, (see
Trueste, Sr. vs. Sandiganbayan, 145 SCRA 508 [1986].) However,
to be valid against the corporation and third parties, such trans-
fer must be recorded in the stock and transfer book of the corpo-
ration.
(3) The transferee must present the indorsed stock certificate
to the secretary of the corporation who shall effect the transfer in
the corporate books, issue a new stock certificate in favor of the
transferee, and cancel the former certificate. A corporation has no
authority to cancel a certificate which is not in its possession or to
which it has no right. It will be liable to a bona fide holder of the
old certificate if, without demanding of said certificate, it issues a
new one.
(4) While transfer of shares ordinarily does not require prior
approval of the Commission, the issuer corporation is required
to have its entire authorized capital stock registered pursuant
to Section 8 of the Securities Regulation Code (Appendix "A.")
where the outstanding shares are to be sold to the public, that
is, a number of persons indiscriminately (SEC Opinion, Dec. 14,
1994.) unless it can be shown that the transaction is expressly
exempt under Section 10 of the Code.
Right to transfer fully paid shares

of stock.
As a general rule, shares of stock can be transferred only by
the registered owner or an authorized person, (see Sec. 68.)
(1) Right inherent as an incident of ownership. — Shares of
stock are personal property and the owner, as in the case of
other personal property, has an absolute and inherent right as
an incident of his ownership, to sell and transfer the same at
will, except insofar as the right may be reasonably restricted by
566
the articles of incorporation, or by a valid by-law, or by a valid

agreement between him and the corporation. In the absence of
such restrictions, a bona fide transfer does not require the consent
of the corporation, and cannot be prevented by it or by its officers.
(12 Fletcher, pp. 206-207; see Remo, Jr. vs. Intermediate Appellate
Court, 172 SCRA 405 [1989].)
(2) Legal limitation. — The only limitation imposed by Sec-
tion 63 is when the corporation holds any unpaid claim against
the shares intended to be transferred. A corporation, either by
its board, its by-laws, or the act of its officers, cannot create re-
strictions in stock transfers because such restrictions must have
their source in the law as the corporation itself cannot create such
impediment. In the absence of such power, it cannot ordinarily
inquire into the legality of the transfer nor question the consid-
eration upon which the sale is based. (Rural Bank of Salinas, Inc.
Sale of subscription rights.

The rule is different where only the right to subscribe is
assigned by the subscriber to another.
(1) Consent of corporation. — Assuming there is no restriction
on the transfer of shares, a stockholder may transfer or assign
shares of stock forming part of his partially paid stockholdings.
(a) It is necessary, however, to secure the consent of the
corporation, by way of resolution of the board of directors, to
the transfer or assignment of shares which are not fully paid
so that the transfer may be recorded in the stock and transfer
book of the corporation (SEC Opinion, July 22, 1965.), since
the transfer constitutes a novation (i.e., substitution of debtor)
of the contract of subscription between the corporation and
the transferor which requires the consent of the creditor, (see
Art. 1293, Civil Code.) The corporation can accept or refuse
to accept the transferee. It alone is the judge of the financial
responsibility of the transferee. (SEC Opinion, Nov. 12,1976,
citing Butts vs. King, 125 Atl. 654.)
(b) The acceptance by the corporation of the transferee as
a subscriber in the place of the original subscriber need not
be by formal action of the corporation expressed by vote or
otherwise, but instead may be implied from acts and course

of conduct of the corporation. (12 Fletcher, p. 301.) Thus,
should the corporation record the assignment of subscribed
shares of stock in its stock and transfer book, it can be treated
as an implied consent to such assignment. (SEC Opinion,
Nov. 12,1976.)
(c) It is only upon full payment of the whole subscription
that a stockholder can transfer the same to several transferees.
However, the entire subscription, although not yet fully paid,
may be transferred with the consent of the corporation. The
Securities and Exchange Commission only allows transfer
to a single transferee provided that the transfer is approved
by the board of directors and accompanied by an affidavit
of assumption of the unpaid balance by the transferee. (SEC
Opinion, March 8, 1990 and Sept. 17, 1990.) It is only upon
full payment of the whole subscription that a stockholder can
transfer the same to several transferees. (SEC Opinion, June
3,1994.)
(2) Consent of creditors. — It is not necessary to secure the
actual consent of the creditors because transfers made and
accepted by the corporation in prejudice to the rights of the
creditors can be set aside on the ground of fraud. (Ibid., citing
Butts vs. King, 125 Atl. 654.)
Restrictions on transfer of stock.

(1) In general. — The law (Sec. 47[9].) grants to stock corpora-
tions the authority to determine in the by-laws "the manner of
issuing certificates" of shares of stock. However, the power to
regulate is not the power to prohibit, or to impose unreasonable
restrictions on the right of stockholders to transfer their shares,
(see Tan vs. Securities and Exchange Commission, 206 SCRA 740
[1992].) It merely authorizes the corporation to adopt regulations
as to the formalities and procedure to be followed in effecting
transfer.
Furthermore, the power to impose restrictions on transfer of
shares cannot be exercised unless conferred upon the corporation
by law or its articles of incorporation (see Nava vs. Peers
Marketing Corporation, 74 SCRA 65 [1976].), and the restrictions
must be stated in the certificate of stock to bind third persons,

(see Sec. 6, pars. 1, 5.) The reason is that such restrictions are
essentially contractual in nature between the stockholders and
the corporation and hence, must be embodied in their contract
— the articles of incorporation — and furthermore, the shares of
stock burdened with such restrictions may fall into the hands of
innocent purchasers. (SEC Opinion, Jan. 13,1994.)
(2) Where transfer subject to approval or prohibited. — A by-
law which prohibits a transfer of stock without the consent or
approval of all the stockholders or of the president or board of
directors is illegal as constituting undue limitation on the right of
ownership and in restraint of trade. (Fleishcer vs. Botica Nolasco
Co., Inc., 47 Phil. 583 [1925]; In re Klus, 67 Wis. 401.) A provision
in the certificate that it is transferable only to some person first
approved by the board of directors unreasonably restricts the
right of the stockholder to dispose of his shares. (Douglas vs.
Aurora Daily News Co., 160 111., A. 506.) For the same reason, the
condition "non-transferable" appearing on certificates of stock
is null and void. (Padget vs. Babcock & Templation, Inc., 59 Phil.
232 [1933].)
(3) Where transfer subject to "first refusal." — Provisions in
articles of incorporations requiring stockholders desiring to sell
their stocks to offer them first to the corporation or to the existing
stockholders at a given reasonable date before disposing of them
to third persons may be considered valid and enforceable. (SEC
Opinion, Feb. 23, 1993.)
(a) But where the purpose of the transfer is merely to
qualify the nominee as director without transferring the
beneficial ownership of the share, the transfer need not
comply with the "first refusal" provision in the articles of
incorporation (infra.), for to rule otherwise would create
an injustice to corporate stockholders who, under the law,
have the right to be represented in the board. Such transfer
would be more of a trust and not a transfer of ownership.
The transferee should be described in the corporate books
and the certificate to be issued merely as nominee or trustee
of the transferor. The notation shall serve as notice to both the
corporation and third parties that the transferee only holds
the share as nominee for the benefit of the real owner. (SEC
(b) It has been opined that a holder of stock as a mere
trustee for the real owner cannot exercise the option in his
own right. Thus, where eight (8) directors of X Corporation
were elected to their position upon transfer to them of one (1)
share each of X Corporation's stock in trust for Y Corporation
in order to qualify them as members of the board, said direc-
tors cannot exercise the option granted to the stockholders
(and the Corporation). The directors are trustees of the stock-
holders for the benefit of Y Corporation, the cestui que trust.
However, should the bona fide stockholders and the corpora-
tion fail to exercise their respective option to purchase the
offered stock within the period prescribed, then the directors
may so purchase in their own right. (SEC Opinion, June 13,
1985.)
(4) Where suspension of power for a certain period has a benefi-
cial purpose. — Where "the suspension of the power to sell has a
beneficial purpose, results in the protection of the corporation as
well as the individual parties to the contract, and is reasonable
as to the length of time of the suspension," the restriction is valid
and binding upon the stockholder.
Thus, in a case where two of the creditors who took over the
business of a company in financial distress and accepted stocks
therein in payment of their respective credits, entered into an
agreement, after becoming the two largest stockholders of the
new corporation, that, in view of the fact "that the success of said
corporation depends, now and for at least one year next follow-
ing, in the larger stockholders retaining their respective interests
in the business of said corporation," neither of the two would
"sell, transfer, or otherwise dispose of their present holdings of
stock" in said company, "till after one year from the date hereof,"
with a stipulation for the payment of liquidated damages by the
violator, the agreement suspending the power to sell the stocks
referred to was upheld as against the contention that it was il-
legal, was in restraint of trade, and, therefore, offended public
policy. (Lambert vs. Fox, 20 Phil. 588 [1911].)
(5) Where certain percentage of Filipino ownership prescribed.

— Corporations which will engage in any business or activity
reserved for Filipino citizens are required to indicate in the
articles of incorporation and in all the certificates the restriction
against the "transfer of stock or interest which will reduce the
ownership of Filipino citizens to less than the required percentage
of the capital stock as provided by existing laws x x x." (Sec. 15
[eleventh].)
(6) Where shares registered with the Revised Securities Act. —
Where the shares held by the public are registered under the
Revised Securities Act (Part II.), an investor wishing to acquire
said shares is subject to the provisions of said act relative to
"tender offers," particularly Section 33 thereof. (SEC Opinion,
Sept. 2,1991.)
(7) Where restrictions not clearly expressed. — Stock transfer
restrictions impair property rights of stockholders so that
any restriction to be valid and binding, should be clearly and
explicitly stated in the articles of incorporation, and in case of
doubt, the same should be construed in favor of the transferor.
Accordingly, a restriction expressed only as one on sale should
be construed as applicable only to transfer by sale and not to
other forms of transfer not expressly included therein. Thus, it
was held that a gift of corporate stock does not constitute sale
within the meaning of a corporation's right of first refusal in case
of sale of stock. (SEC Opinion, March 21,1991, citing 12 Fletcher,
Cyc. Corps., Sec. 5416.5.)
Option to purchase s h a r e s offered

for sale.
(1) Close corporations. — In such corporations, restrictions
reasonably protecting existing stockholders in their interests
by giving them or the corporation the option to purchase stock
offered for sale, or the right of first refusal in case of sale of stock
are lawful as promotive of good management and sound business
enterprise, (see Casper vs. Kaltz-Simmer, 150 N.W. 1101.) Such
restrictions must appear in the articles of incorporation and in
the by-laws as well as in the certificate of stock; otherwise, the
same shall not be binding on any purchaser in good faith. (Sec.
(2) Widely-held corporations. — Even in such corporations, the

same restriction is legally permitted provided it is stated in the
articles of incorporation (see Sec. 6, par. 1.) and the option period
is not too long. A period of one (1) month is sufficient for the
stockholders or the corporation to signify their or its desire to
buy the shares of stock being offered for sale by a stockholder.
(SEC Opinion, Oct. 13, 1964.) Considering that shares of stock
burdened with restrictions on transferability may fall into the
hands of innocent purchasers, the Securities and Exchange Com-
mission, as a matter of policy, also requires that the restrictions be
printed also on the corresponding stock certificate (SEC Opinion,
Oct. 13, 1964.); otherwise, the restriction is unavailing as against
a transferee in good faith and for a valuable consideration with-
out notice.
M o d e s of stock transfer.
(1) Indorsement and delivery of stock certificate. — Section 63
provides that shares of stock "may be transferred by delivery of
the certificate indorsed by the owner or his attorney-in-fact or
18
other person legally authorized to make the transfer."
(a) The law is clear that in order that a transfer of stock
certificate is to be effective, the certificate must be properly
indorsed and that title to such certificate of stock is vested
19
in the transferee by the delivery of the duly indorsed certifi-
cate (Razon vs. Intermediate Appellate Court, 207 SCRA 234
,8
Certificates of stock may be issued with the conjunctive "and/or" placed between
the names of the parties, who apparently, are co-owners of said shares. In the issuance of
the same, it is understood between the corporation and the stockholders whose names
appear on the certificate, that the shares of stock may be transferred upon the indorse-
ment of and the right to vote the share may also be exercised by both (or all) or either
(or any one) of them. (SEC Opinions, June 13, 1973 and Aug. 27, 1974.) The corporation,
however, may adopt a policy requiring the indorsements of all the persons whose names
appear on the certificates of stock issued with the conjunctive "and/or" provided such
policy applies prospectively not only in fairness to the stockholders who may be adverse-
ly affected but also on the ground of the implicit understanding between the corporation
and the stockholders that the former will honor the indorsement signed by only one of
the latter. (SEC Opinion, Nov. 15, 1974.)
•TJearer form of shares of stock transferable without indorsement by delivery is not
allowable under Section 63 and Section 74 (par. 4.). (SEC Opinion, Sept. 1, 1995.) In the
absence of delivery, the transferee as mere assignee, cannot enjoy the status of stock-
holder insofar as the assigned shares are concerned. (Republic vs. Estate of Hans Menzi,
476 SCRA 20 [2005].)
572
[1992].), even without executing a deed of assignment or sale

of the shares which is necessary only when no certificate of
stock has as yet been issued or where the same is not in the
possession for whatever reason of the transferor. The deliv-
ery of the stock certificate which represents the shares to be
alienated is essential for the protection of both the corpora-
tion and the stockholder concerned. (Nava vs. Peers Market-
ing Corp., 74 SCRA 65 [1969].)
A corporation is not bound to record in its books a trans-
fer of stock and to issue a new certificate unless the original
20
certificate is surrendered for cancellation or is clearly shown
to have been lost, stolen, or destroyed. (Sec. 73.)
(b) The usual practice is for the stockholder to sign the
form on the back of the stock certificate. The usual stock
certificate contains on its back a printed assignment or
endorsement and also a power of attorney in blank, like the
following: "For value received, I hereby assign the within
named shares to , and appoint my attorney
to make the transfer on the books of the company." The
certificate may thereafter be transferred from one person to
another. If the holder of the certificate desires to assume the
legal rights of a shareholder to enable him to vote at corporate
elections and to receive dividends, he fills up the blanks
in the form inserting his own name as transferee. Then he
delivers the certificate to the secretary of the corporation so
that the transfer may be entered in the corporation's books.
The certificate is then surrendered and a new one issued to
the transferee. (Hager vs. Bryan, 19 Phil. 138 [1911].)
This procedure cannot be followed with respect to shares not
covered by any certificate of stock or for which no certificate of
stock has as yet been been issued.
(2) Transfer made in a separate instrument. — The use of the
word "may" indicates that the transfer may be effected in a
^The matter of keeping and destroying cancelled stock certificates depends on the
internal policies of a corporation. There is no law requiring corporations to preserve can-
celled stock certificates within a certain period. After issuance of a new certificate and its
notation in the stock and transfer book, the old certificate becomes a worthless paper. The
corporation may microfilm certificates before destruction. (SEC Op inions, March 6, 1984
and Aug. 21,1985.)
manner different from that provided for in the law. (Chua vs.
Samahang Magsasaka, 62 Phil. 472 [1935]; Tan vs. Securities and
Exchange Commission, 206 SCRA 740 [1992].) While it is usual to
effect the transfer of shares by indorsement on the certificate, a
conveyance may be made by an assignment or sale in a separate
21
instrument (Uy Piaco vs. McMicking, 10 Phil. 286 [1907]; Rivera
vs. Florendo, 144 SCRA 643 [1986].) in lieu of the indorsement
of the certificate, unless the by-laws expressly provide that the
transfer shall be made exclusively in the manner authorized
by the statute. (Fisher, op. cit., p. 149.) The execution of such
instrument is equivalent to an indorsement of the certificate. A
registered owner of shares may dispose of the same even in the
absence of the stock certificate.
While an assignment may be valid and binding between the
parties despite non-compliance with the requisite endorsement
and delivery, it does not necessarily make the transfer effective,
for the assignee cannot enjoy the status of a stockholder, and the
assignor cannot, as yet, be deprived of his rights as stockholder,
until and unless the issue of ownership and transfer of the shares
in question is resolved with finality. (Rural Bank of Lipa City, Inc.
(3) judicial or extra-judicial settlement of the estate. — In case
the stockholder dies intestate, a judicial or extra-judicial partition
of his estate is necessary to transfer the shares of stock in favor of
his heirs; otherwise, it will be necessary to wait for the termina-
tion of the testamentary proceedings and the final adjudication
22
of the shares in accordance with the will of the decedent. (SEC
Opinions, Feb. 9,1961 and May 12, 1988.)
(a) Where the stockholder, before his death, requested in
a letter to the corporation to transfer his shares to his son,
and there is no indication that the certificates covering the
21
SEC Memo. Cir. No. 17 (Nov. 4, 2004) provides that deeds of assignment of shares
of stock shall no longer be accepted by SEC for acknowledgment and recording purposes
unless required by and/or submitted to the SEC as supporting documents for applica-
tions for registration.
^The National Internal Revenue Code requires a certification from the Commis-
sioner of Internal Revenue of actual payment of the corresponding estate tax by the heirs
before any transfer of stock in their favor can be recorded in the books of the corporation.
(Sec. 119[C] thereof.)
shares were indorsed to the latter, the transfer can no longer

be effected after his death on the basis of the letter because
on the death of a stockholder, his administrator or executor
becomes vested with the legal title to the stock, and until a
settlement and division of the estate is made, the stock of
the deceased belongs to said administrator or executor as his
personal representative. (SEC Opinion, June 24,1988.)
(b) Where the requirements for a judicial or extra-judicial
partition of a deceased stockholder's estate has been com-
plied with, it would be a ministerial duty on the part of the
corporation to register the transfer in the name of the legal
heir. If the corporation wrongfully refuses to do so, it may be
compelled by suit in equity for specific performance or man-
damus. (SEC Opinion, June 23,1993.)
(c) Where shares of stock are in the name of a deceased
person, no final determination can be had without his estate
being impleaded in the suit. His estate is an indispensable
party with respect to the cause of action dealing with the
registration of the shares in the names of the heirs. (Gochan
vs. Young, 354 SCRA 207 [2001].)
Validity of stock transfer.

(1) As between the parties, the requisite for a valid transfer is
merely the delivery of the certificate indorsed by the owner or
his attorney-in-fact or other person legally authorized to make
the transfer. (Sec. 63.)
(a) Registration is not necessary to enable the transferee
to acquire the right of a stockholder as against the transferor.
The law provides in effect that an unregistered transfer shall
not be valid "except as between the parties." The inference is
that, as between the parties, it is valid. It is the conveyance,
not the act of registration, which gives title to the transferee.
(Fisher, op. cit, p. 151.) As between the parties, the title pass-
es by contract, and not by record. (Scripture vs. Longmount
Supply Ditch Co., 50 N.H. 571.)
(b) The parties may agree that shares of stock sold would
be registered in the name of the seller until the price has been
fully paid. Such agreement is valid. (C.N. Hodges vs. Leza-
ma, 14 SCRA 1030 [1965].)
(2) In order to be valid as against third persons and the

corporation, the transfer of shares must be entered and noted
upon the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred. (Sec. 63.)
When the stock transfer is entered in the corporate books, the
buyer or transferee becomes a stockholder of record entitled to
enjoy all the privileges of a stockholder.
(a) A corporation is not required to secure the prior
approval of the Securities and Exchange Commission for the
transfer of shares of stock because the question of whether or
not such transfer should be recorded in its books is one that
the law has left for the corporation to decide. (SEC Opinion,
Sept. 29, 1964.) It is an internal affair which can be resolved
by the corporation itself. (SEC Opinion, July 6, 1988.)
(b) As far as the corporation is concerned, the stockhold-
er acquires voting and other rights only when the shares to
be voted are registered in his name in the stock and trans-
fer book (see Sec. 74, par. 4.) of the corporation. Thus, one
purpose of registration is "to inform the corporation of any
change in share ownership so that it can ascertain the per-
sons entitled to the rights and subject to the liabilities of a
stockholder." (De Erquiaga vs. Court of Appeals, 178 SCRA
1 [1989], citing Corporation Code, Comments, Notes and Se-
lected Cases, by Campos & Lopez-Campos, p. 838, 1981 ed.)
A non-recorded transfer is non-existent as far as the corpora-
tion is concerned.
(c) A bona fide transfer of shares of a corporation not reg-
istered or noted in the books of the corporation, is invalid as
against a subsequent lawful attachment or execution of said
shares regardless of whether the attaching creditor had actu-
al notice of said transfer or not; and indeed, as to all persons
interested, except the parties to such transfers. (Lim vs. Court
of Appeals, supra; Uson vs. Diosomito, 61 Phil. 535 [1935].)
(d) The transfer of title by means of succession though
valid and effective between the parties involved (i.e., be-
tween the decedent's estate and heirs) does not bind the cor-
poration and third parties. The transfer must be registered
576
in the books of the corporation to make the transferee-heir a

stockholder entitled to recognition as such both by the corpo-
ration and third parties. (Reyes vs. Regional Trial Court, 561
SCRA 553 [2008].)
(e) Section 63 strictly requires the recording of the trans-
fer in the books of the corporation, and not elsewhere, to be
valid against third parties. (Lim vs. Court of Appeals, supra.)
The transfer or disposition of shares of stock which constitute
part of the community property or conjugal partnership prop-
23
erty is subject to the pertinent provisions of the Family Code.
(Exec. Order No. 209.)
Reasons for requiring registration

of stock transfer.
The reasons for this requirement have been stated as follows:
(1) to enable the corporation to know at all times who its
actual stockholders are because mutual rights and obligations
exist between the corporation and its stockholders;
(2) to afford to the corporation an opportunity to object or
refuse its consent to the transfer in case it has any claim against
the stock sought to be transferred, or for any valid reason; and
(3) to avoid fictitious or fraudulent transfers. (Escano vs. Fili-
pinas Mining Corp., 74 Phil. 711 [1944].)
The purpose of registration, it has been said, is two-fold: to
enable the transferee to exercise all the rights of a stockholder,
including the right to vote and be voted for, and to inform the
^ n d e r Articles 96 and 125 of the Family Code, the administration and enjoyment
of the community property or conjugal partnership property shall belong to both spouses
jointly. "In case of disagreement, the husband's decision shall prevail, subject to recourse
to the court by the wife for a proper remedy, which must be availed of within five years
from the date of the contract implementing such decision.
"In the event that one spouse is incapacitated or otherwise unable to participate in
the administration of the common properties, the other spouse may assume sole pow-
ers of administration. These powers do not include disposition or encumbrance without
authority of the court or the written consent of the other spouse. In the absence of such
authority or consent, the disposition or encumbrance shall be void. However, the trans-
action shall be construed as a continuing offer on the part of the consenting spouse and
the third person, and may be perfected as a binding contract upon the acceptance by the
other spouse or authorization by the court before the offer is withdrawn by either or both
offerors."
corporation of any change in ownership so that it can ascertain

the person entitled to the rights and subject to the liabilities of a
stockholder. (Batangas Laguna Tayabas Bus Co. vs. Bitanga, 362
SCRA 635 [2001], citing Campos, The Corporation Code Com-
ments, Notes, Selected Cases, 1990 ed., Vol. 2, p. 301.)
It has also been said that such a requirement is intended for
the benefit and protection of persons who may deal with the cor-
poration and become its creditors so that they may know who
are its stockholders, and as such liable to them. (12 Fletcher, p.
307.)
Right of corporation to refuse

registration of transfer.
There is no doubt that the requirement for the registration of
transfers of shares in the corporate books is intended principally
for the benefit and protection of the corporation so that it may
know who are its stockholders to whom it must accord the right
granted to them by law and against whom it can enforce any
liability that may arise from ownership of stock. The registration
of transfers of shares of stock in the stock and transfer book of
the corporation is a function which usually pertains to that of
the corporation secretary or the transfer agent of the corporation.
(Tim Tay vs. Court of Appeals, 293 SCRA 634 [1998].)
(1) Validity of transferee's title. — The duty of the corporation
secretary to record transfer of stock is ministerial. However, he
cannot be compelled to do so when the transferee's title to said
shares has no prima facie validity or is uncertain. More specifi-
cally, a pledgee, prior to foreclosure and sale, does not acquire
ownership over the pledged shares and thus, cannot compel the
corporation secretary to record his alleged ownership of such
shares on the basis merely of the contract of pledge. (Ibid.)
(2) Breach of restriction on transfer. — The corporation may
refuse to record any transfer if there is a clear breach of reason-
able and valid restrictions on the power to transfer shares of
stock. But it waives the requirement of registration by failure
or refusal to register a valid transfer without legal or good
cause (see Salvador vs. Mencias, [CA] 55 O.G. 6405; Lorenzo
vs. Genato Commercial Corp., [CA] 45 O.G. 2972 [1958].), such
as existence of claim arising from unpaid subscriptions, failure

of transferee to present evidence of payment of corresponding
taxes or certificate of exemption therefrom, failure of transferee to
comply with registration requirements prescribed in the articles
of incorporation, and existence of conflicting claims as to the
right of the transferee in which case the corporation may legally
refuse to register until the right has been settled by interpleader
or otherwise. (SEC Opinion, Nov. 6,1987.)
(3) Legality or propriety of transfer. — Sections 35 and 52 (now
Sees. 63 and 72.) which require that all transfers to be valid as far
as the corporation is concerned must be entered and noted on the
books of the corporation, contemplate no restriction as to whom
the shares may be transferred. (C.N. Hodges vs. Lezama, 8 SCRA
717 [1963].) A corporation cannot inquire into the legality or pro-
priety of a transfer of its shares from one person to another. In
case of conflicting claims, the corporation, for its protection, may
demand security or require all known claimants to interplead,
(see Rules of Court, Rule 63, Sec. 1.)
Basis of transferee's right

to registration.
The right of a transferee/assignee of shares of stock of a cor-
poration to have the transfer/assignment to him registered in the
stock and transfer book in his name is a contractual one. It is like-
wise an inherent right flowing from his ownership of the shares.
Subject only to the limitation imposed by the second paragraph
of Section 63.
(1) The corporation, in effect, agrees to make the transfer to
a bona fide transferee on demand and presentation of the corre-
sponding certificate of stock; and having represented to its stock-
holders and to all who may desire to purchase its stocks that it
will invest the purchasers thereof with all the rights of stockhold-
ers by making a record on its books of the fact of each transfer
as made, it would be highly inequitable to permit it to repudiate
this representation to the prejudice of innocent purchasers.
(2) Without such right, the sale of stocks would be injurious-
ly hampered resulting in much commercial and industrial incon-
veniences and embarrassment, (see 12 Fletcher, pp. 392-394.)
(3) Even a corporation under receivership for tremendous

losses may not legally refuse to register transfer of shares. A trial
court has jurisdiction to order a receiver of a corporation under
receivership to do any act so as to protect and preserve its prop-
erties, and to that end, it may order the secretary of the corpora-
tion to do an act within the internal affairs of the corporation
aimed at protecting the interests of the stockholders. The obliga-
tion to register is a ministerial one, and if it refuses to make such
transfer, it may be compelled to do so by mandamus. (Rural Bank
of Salinas, Inc. vs. Court of Appeals, 210 SCRA 510 [1992].)
R e m e d y o f s t o c k h o l d e r w h e r e corporation
refuses to register transfer.
Transferees of shares of stock who desire to be recognized as
and accorded the rights of stockholders must secure a standing
as such by having the transfer recorded in the books of the
corporation. In case of wrongful refusal of the corporate secretary
to record the transfer, specific performance and mandamus are
the common remedies within the law that may be availed of to
compel the registration. (SEC Opinion, Feb. 12,1993.)
One cannot use the flimsy excuse for not complying with
the requirements of the law, for example, that it would have
been vain attempt to force the incumbent corporate secretary to
register the assignment or transfer in the stock and transfer book
because the latter belongs to the opposite faction. (Torres, Jr. vs.
(1) Mandamus generally not available. — By the weight of
authority, it is held that mandamus will not lie in ordinary cases to
compel a corporation or its officers to transfer stock on its books
and issue new certificates to the transferee.
(a) The writ (in such case) is purely a private one, and
there is generally an adequate remedy by an action against
the corporation for damages.
(b) Furthermore, to permit the writ of mandamus to issue
for the purpose of compelling the officers of a corporation
to transfer stock upon the books of the corporation might,
under certain circumstances, require such officers to transfer
stock against which the corporation holds unpaid claims.
(Sec. 63, par. 2.) These claims might easily arise between the
time of the issuance of the writ and the service of the same
upon such officers. There is no need of the extraordinary
remedy by mandamus in so ordinary a case. (Hager vs. Bryan,
21 Phil. 523 [1912].)
(c) Mandamus will not issue to establish a right but only
to enforce one that is already established. (TCL Sales Corpo-
ration vs. Court of Appeals, 349 SCRA 35 [2001]; Lim Tay vs.
(2) When remedy available. — The remedy of mandamus will lie
only if the following requisites are present:
(a) Due application therefor has been made;
(b) Said application has been denied;
(c) There are no unpaid claims against the stock by the
corporation;
(d) An ordinary action for damages against the corpora-
tion would be inadequate; and
(e) An action in the nature of a suit in equity to secure
a decree ordering the transfer would also be inadequate.
(Hager vs. Bryan, 19 Phil. 138 [1912].)
Mandamus will lie if the transferee seeking relief has
performed and complied with all the statutory requirements for
valid transfer of shares. (SEC Opinion, Feb. 12,1993.)
(3) Authority from registered owner to register transfer. — It has
been held that under the provisions of Sections 35 and 36 (now
Sees. 63 and 59.) of the Corporation Law, the mere indorsement
of stock certificates does not in itself give to the indorsee such
a right to have a transfer of the shares of stock on the books of
the corporation as will entitle him to the writ of mandamus to
compel the corporation and its officers to make such transfer at
his demand because, under such circumstances, the duty, the
legal obligation is not so clear, and indisputable as to justify the
issuance of the writ.
As a general rule, as between the corporation on the one
hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of
determining who its shareholders are, so that a mere indorsee of

a stock certificate claiming to be the owner, will not necessarily
be recognized by the corporation and its officers, in the absence
of express instructions of the registered owner to make such
transfer to the indorsee, or a power of attorney authorizing such
transfer. (Hager vs. Bryan, 19 Phil. 138 [1912].)
(4) Administrative mandamus. — The Securities and Exchange
Commission, by express mandate, has "jurisdiction and super-
vision over all corporations" (SRC, Sec. 5[a]; Pres. Decree No.
902-A, Sec. 3.) and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser's right
to secure the corresponding certificate in his name under Section
63. Any problem encountered in securing the certificate of stock
representing the investment made by the buyer must be expedi-
tiously dealt with through administrative mandamus proceed-
ings with the Commission rather than through the usual tedious
regular court procedure. A transfer or assignment of stock need
not, therefore, be registered first before the Commission may
take cognizance of a case seeking to enforce his rights as such
stockholder. (Abejo vs. De la Cruz, 149 SCRA 654 [1987]; TCL
Sales Corporation vs. Court of Appeals, supra.)
(5) Civil remedies. — In case the corporation is the transferor,
the stockholder may choose between two remedies: complaint for
specific performance (fulfillment) of the contract with damages,
or complaint for rescission of the contract, also with damages,
(see Art. 1191, Civil Code.)
Only absolute transfers need

be registered.
The requirement that the transfer shall be recorded in the
books of the corporation to be valid as against third persons has
reference only to absolute transfers or absolute conveyance of the
ownership or the title to a share.
Consequently, the entry or notation on the books of the cor-
poration of pledges, chattel mortgages, or attachments of shares
is not necessary to their validity (although it is advisable to do
so) since they do not involve absolute alienation of ownership of
582
stock. (Monserrat vs. Ceron, 58 Phil. 469 [1933]; Chua Guan vs.
Samahang Magsasaka, Inc., 62 Phil. 472 [1935]; Chemphil Export
& Import Corp. vs. Court of Appeals, 251 SCRA 257 [1996].) To
affect third persons, it is not enough that the date and description
of the shares pledged appear in a public instrument. (Art. 2096,
Civil Code.) With respect to a chattel mortgage constituted on
shares of stock, what is necessary is its registration in the Chattel
Mortgage Registry. (Act No. 1508 and Art. 2140, Civil Code.)
Effects of an unregistered transfer

of shares.
The following are the effects of the failure to register a trans-
fer of shares:
(1) It is valid and binding, as between the transferor (record
owner) and the transferee (beneficial owner) (Sec. 63; De los Santos
vs. McGrath, 96 Phil. 577 [1955].), where neither the corporation
nor third persons are involved, and the death of the transferor
before the transfer is recorded does not affect the transferee's
right to have the transfer recorded and to have a new certificate
issued to him. (12 Fletcher, p. 288; Navarro vs. Suntay, [CA] 48
O.G. 5335 [1952].) Unless the transfer is annulled, the rights of
the transferee under the contract must be respected and upheld.
(2) It is invalid or ineffective as to the corporation (Uson vs.
Diosomito, 61 Phil. 535 [1935]; Batangas Laguna Tayabas Bus
Co. vs. Bitanga, 362 SCRA 635 [2001].) except when notice is
given to the corporation for purposes of registration. (Lorenzo
vs. Genato Commercial Corp., [CA] 45 O.G. 2972 [1958].) Notice
given to the corporation of the sale of shares and presentation
of the certificates for transfer is equivalent to registration. There
is no requirement that a stockholder of a corporation must be
a registered one, i.e., the transfer or assignment of stocks must
first be registered, in order that the Securities and Exchange
Commission may take cognizance of a suit seeking to enforce his
rights as such stockholder. Any problem encountered in securing
certificates of stock representing the investment made by the
buyer must be expeditiously dealt with through administrative
mandamus proceedings with the SEC rather than through the
usual tedious regular court procedure. (Abejo vs. De la Cruz, 149
SCRA 654 [1987].)
(a) The transferor has the right to vote and be voted for,
and until challenged in a proper proceeding, he has the right
to participate in any meeting and, in the absence of fraud,
any action at such meeting cannot be collaterally attacked
by reason of such participation. (Price & Sulu Dev. Co. vs.
Martin, 58 Phil. 707 [1933]; see De Erquiraga vs. Court of
Appeals, 178 SCRA 1 [1989].)
(b) The transferor has the right to dividends as against
the corporation but the transferor, as the nominal owner of
the shares, is the trustee for the benefit of the real owner. As
between the pledgor and the pledgee where the pledge earns
dividends, the pledgee has no right to collect the dividends
as against the corporation (see Art. 2102, Civil Code.) with-
out notice of the pledge.
(c) A person who has purchased stock, and who desires
to be recognized as a stockholder for the purpose of voting,
must secure such a standing by having the transfer recorded
on the corporate books. Until the transfer is registered, the
transferee is not a stockholder but an outsider. (Batangas
Laguna Tayabas Bus Co. vs. Bitanga, supra; Rivera vs.
Florendo, 144 SCRA 652 [1986].)
(3) It is invalid as against corporate creditors, and the transferor
is still liable to the corporation. (Uson vs. Diosomito, supra.) The
transfer of stock by a shareholder does not relieve him from
liability to creditors of the corporation for unpaid subscription
until the transfer is perfected by being registered in the books of
the corporation. (12 Fletcher, p. 357.)
(4) It is invalid as to the attaching or executing creditors
of the transferor, as well as subsequent purchasers in good
faith without notice of the transfer, and indeed, as to all persons
interested, except the parties to such transfers. (Uson vs. Diosomito,
supra; see Lim vs. Court of Appeals, 323 SCRA 102 [2000].)
Non-transferability of unpaid stock

on corporate books.
Under Section 63, shares of stock against which the corpora-
tion holds any unpaid claim arising from any unpaid subscrip-
tion (not from any other indebtedness) shall not be transferable
584
on the books of the corporation. There are no unpaid claims

against the stock when there are no unpaid subscriptions due
and payable, (see Sec. 67, par. 2.)
(1) Consent of corporation to registration of transfer. — The
proviso in Section 63 does not mean that a stockholder cannot
transfer his unpaid shares. He can, but since such transfer shall
not be recorded in the books of the corporation by reason of being
delinquent in the payment of unpaid subscription (Ibid.), the
same is valid only between the transferor and the transferee but
not insofar as the corporation and third persons are concerned.
The transfer may be allowed provided it is approved by the board
of directors and accompanied by an affidavit of assumption of
obligation to pay the unpaid balance by the transferee. (SEC
(2) Sale of stock not covered by any certificate. — A corporation
cannot be compelled by mandamus on the petition of the pur-
chaser to register in its stock and transfer book (see Sec. 74.) a
sale made by a subscriber of shares (e.g., 20 shares forming part
of his subscription of 80 shares) where such shares were paid by
the seller without any certificate of stock issued to him and the
corporation has an unpaid claim for the balance (60 shares) due
on the whole subscription (80 shares). As a rule, the shares which
may be alienated are those covered by certificates of stock. (Nava
vs. Peers Marketing Corp., 74 SCRA 65 [1976].)
(3) Sale of stock burdened with other indebtedness. — For any in-
debtedness other than for unpaid subscriptions, the corporation
has no right to refuse registration of transfer. A corporation has
no lien upon stock for debt not arising from unpaid subscription.
Such lien may, however, be created in the articles of incorpora-
tion pursuant to Section 6, which provides that "shares of stock
corporations x x x may have such x x x restrictions as may be
stated in the articles of incorporation." (see SEC Opinion, April
13,1981.)
Sec. 64. Issuance of stock certificates. — No certificate of

stock shall be issued to a subscriber until the full amount
of his subscription together with interest and expenses (in
case of delinquent shares) if any due, has been paid. (37a)
Full p a y m e n t of subscription required

for issuance of certificate of stock.
The certificate of stocks may be issued to the subscriber or to
the duly appointed nominee of the subscriber upon the latter's
instruction.
(1) Pro rata application of partial payments not allowed. — Section
64 prohibits the issuance of certificate of stock to a subscriber
who has not paid "the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if any
is due." According to the SEC, the provision enunciates the
doctrine that a subscription is one, entire and indivisible contract
and, therefore, it cannot be divided into portions, so that the
stockholder shall not be entitled to certificate of stock until he has
paid the full amount of his subscription together with interest
24
and expenses, if any is due.
All partial payments on one subscription shall be deemed
applied proportionately among the number of shares. There-
fore, to permit the issuance of stock certificate for payment of
a subscription that does not cover the entire number and value
of the shares subscribed would be violative of the above provi-
sion. (SEC Opinions, Sept. 12,1989 and Nov. 12,1993.) Consistent
thereto, Section 67 prescribes that "failure to pay on such date
shall render the entire balance due and payable x x x. If within
thirty (30) days from the said date no payment is made, all the
stocks covered by such subscription shall thereupon become delin-
quent and be subject to sale x x x." (SEC Opinion, Feb. 23,1982.)
24
If the stockholder has not paid the full amount of his subscription, he cannot trans-
fer part of it, or the entire subscription to several transferees without the consent of the
corporation (SEC Opinion, Sept. 12,1989.) in view of the indivisible nature of a subscrip-
tion contract. The reason behind the principle disallowing transfer of not fully paid sub-
scription to several transferees is that it would be difficult to determine whether or not the
partial payments made should be applied as full payment for the corresponding number
of shares which can only be covered by such payment or as proportional payment to each
and all of the entire number of subscribed shares. Consequently, it would be difficult to
determine the unpaid balance to be assumed by each transferee. (SEC Opinions, March
8, 1990 and Oct. 9, 1995.) However, the entire subscription, although not yet fully paid,
may be transferred to a single transferee who must assume the unpaid balance. Again,
it is necessary to secure the consent of the corporation since the transfer of subscription
right contemplates a novation which under Article 1293 of the Civil Code cannot be made
without the consent of the creditor. (SEC Opinion, April 11, 1994.)
(2) Contrary view. — In case of partial payments on a

subscription, said payments should be deemed pro-rated among
all the shares subscribed and, therefore, no certificate of stock can
be issued showing any of the shares to be fully paid up until the
entire subscription is paid, (see Fua Cun vs. Summers, 44 Phil.
705 [1923].) But unless prohibited by its by-laws, certificates of
stock may be issued for less than the number of shares subscribed
provided the par value of each of the stocks represented by
said certificate has been fully paid. (Baltazar vs. Lingayen Gulf
Electric Co., 14 SCRA 522 [1965].)
In other words, in the absence of provisions in the by-laws
to the contrary, a corporation may apply payments made by
subscribers on account of their subscriptions, either as: (a) full
payment for the corresponding number of shares, the par value
of which is covered by such payment, or (b) as payment pro rata to
each and all the entire number of shares subscribed for. This rule
applies to all kinds and classes of stock corporations. Obviously,
the two (2) alternatives cannot be availed of by the corporation at
the same time. Once an alternative is chosen, it must be applied
uniformly to all stockholders similarly situated, and, therefore,
it cannot be changed without the consent of all the stockholders
who might be affected. (SEC Opinion, Feb. 7,1968.)
ILLUSTRATION:
Assume that S subscribed to 100 shares at par value of
P10.00 each share of X Corporation or a total subscription of
P1,000.00. S made an initial payment of P500.00.
In this case, the board of directors of X Corporation, at its
option, may either apply the P500.00 as full payment for 50
shares and issue a certificate of stock for the 50 shares, or as
payment pro rata for the entire 100 shares so that each share is
paid P5.00 in which case no certificate shall be issued until the
balance is fully paid.
The first alternative cannot be adopted when prohibited by
25
the by-laws.
A c t i o n 64 of the Code was taken from Section 37 of the former Corporation Law.
»e latter provision reads as follows: "Sec. 37. x x x. No certificate of stock shall be issued
a subcriber as fully paid up until the full par value thereof, or the full subscription in case
P u r p o s e of prohibition in Section 64.

The purpose of the prohibition is to prevent the partial dis-
position of a subscription which is not fully paid, because if it is
permitted, and the subscriber subsequently becomes delinquent
in the payment of his subscription, the corporation may not be
able to sell as many of his subscribed shares as would be neces-
sary to cover the total amount due from him, which is authorized
under Section 68.
Such partial disposition of the subscription would be possible
if the stock certificates are issued covering partial payments,
because the subscriber will not be restrained to sell the same as
the transfer can be recorded in the stock and transfer book of the
corporation. If no stock certificates are issued covering the partial
payments, the subscriber will have difficulty in selling his equity,
because the corporation may refuse to record the transfer in its
book unless the entire subscription is fully paid. (SEC Opinion,
Oct. 24,1963.)
Nature of relation of stockholder

to the corporation.
The relation of the stockholder to the corporation may be
described as follows:
(1) Relation based on contract. — The relation between the
corporation and its shareholders is contractual. This relation is
within the protection of the Constitution prohibiting legislation
impairing the obligation of contracts. (Art. Ill, Sec. 10 thereof.)
of no par stock has been paid by him to the corporation, x x x." Section 64 requires the
payment by the subscriber of the full amount of his subscription before a certificate of stock
shall be issued to him.
It would seem that Section 64 prohibits the issuance of certificate of stock where
the subscription is only partially paid notwithstanding that the payment fully covers the
shares for which the certificate is issued. According to the SEC, since subscription is one
indivisible whole contract, it cannot be divided into portions so that the stockholder shall
not be entitled to a certificate of stock until he has paid the full amount of his subscription.
(SEC Opinion, Sept. 12, 1989.) The deliberation on Section 64 shows that the legislative
intention is to abandon the ruling in Baltazar. (SEC Opinion, Nov. 12,1993.) Nonetheless,
there is nothing wrong or immoral nor is it prejudicial to corporate creditors or contrary
to any public policy to adopt the first alternative. Since the subscriber is still liable for his
unpaid subscription, no prejudice is caused to the corporation or to corporate creditors.
Therefore, it is believed that the ruling in the Baltazar case is still applicable but only if
allowed by the by-laws.
(2) Share not indebtedness to stockholder. — A share of stock or

the certificate of a share is not an indebtedness to the stockholder
nor evidence of indebtedness and, therefore, is not credit.
(a) In other words, the holder of stock, whether common
or preferred, in a corporation is not, by reason of his
ownership of the stock, a creditor of the corporation. He is a
risk taker who invests capital in the corporation and who can
look only to what is left after corporate debts and liabilities
are fully paid. Hence, shares cannot be issued entitling the
holders thereof to a fixed interest instead of dividends, to
insure the return of his investment, inasmuch as this will
constitute the contract of subscription as one of loan, making
the corporation a debtor of the subscriber. (SEC Opinion, Feb.
10,1969.) Neither has the stockholder the right to compel the
corporation to return his investment, (see Sec. 41.)
(b) There is, however, one sense in which stockholders,
common as well as preferred, are creditors. It is in the sense
that a corporation includes all its capital stock among its
liabilities, but it is a liability which is postponed to every other
liability. As such a creditor, a stockholder is subordinate to
every other creditor of the corporation. (18 Am. Jur. 2d 982.)
(c) While there is no relationship of debtor and creditor
between the corporation and the stockholder with respect to
his shares of stock, a subscriber becomes a debtor to the cor-
poration for the amount or price of the shares subscribed by
him.
(3) Corporation owns its property as a distinct entity. — A cor-
poration is a legal entity with a personality distinct and separate
from the body of its shareholders. (Sec. 2.) Properties registered
in the name of the corporation are owned by it as an entity sepa-
rate and distinct from stockholders or members. Consequently:
(a) The shareholders have no title, legal or equitable, to
the property which is owned by the entity known as the "cor-
poration" but the shares represent integral parts of the whole
and proportional shares of the dividends declared or to be
declared and of the net assets upon its dissolution. (Pascual
vs. Del Saz Orosco, 19 Phil. 83 [1911]; 13 Am. Jur. 465.)
(b) He is not a co-owner of the corporate property.

(c) Nor is he entitled to the possession of any definite
portion of its property or assets. (Stockholders of R Guanzon
& Sons, Inc. vs. Register of Deeds, 6 SCRA 373 [1962].)
(4) Where stockholder unknown. — For stocks where owners
cannot be located, a trust relation is impliedly created between
the corporation and the unknown stockholder. Such shares may
be entered in the corporate books and shall stand in the name
of the corporation as "trustee" or said holder may be described
as "trustee" in the certificate. The fact that a stock stands on the
corporate books in the name of a person as a trustee in the cer-
tificate is notice to both the corporation and to the persons who
may purchase such shares from the trustee that the latter does
not hold the shares in his own right. (SEC Opinion, Dec. 1,1988.)
It is the duty of the corporation to exhaust all available means
in locating the whereabouts of owners of its subscribed/issued
shares and if the search proves futile, it is nonetheless the fidu-
ciary duty of the corporation to continuously hold said shares
as trustee for the owners thereof, unless otherwise escheated in
accordance with law. (SEC Opinion, July 10,1990.)
Rights a n d r e m e d i e s of stockholders
in general.
The theory of a corporation is that the stockholders may have
all the profits but shall turn over the complete management of
the enterprises to their representatives or agents called directors.
(Ramirez vs. Orientalist, 38 Phil. 634 [1918]; Wolfson vs. Araneta
Stock Exchange, 72 Phil. 492 [1941].) The stockholders, however,
as part owners of the corporation, are given certain rights by the
corporation law so that they can protect themselves from the
possibility of misuse of corporate funds and mismanagement by
26
those directly involved in corporate affairs. These rights may be
^ i n c e the stockholder has no title, legal or equitable, to the corporate property, it is

evident that what he does have with respect to the corporation and his fellow stockhold-
ers, are certain rights sui generis. These rights are generally enumerated as being, first, to
have a certificate or other evidence of his status as stockholder issued to him; second, to
vote at meetings of the corporation; third, to receive his proportionate share of the profits
of the corporation; and lastly, to participate in the distribution of corporate assets upon
the dissolution or winding up. (Pascual vs. Del Saz Orosco, 19 Phil. 82 [1911].)
summarized as follows:
(1) Right to attend and vote in person or by proxy at stock-
holder's meetings (comments under Sees. 50, 58.);
(2) Right to elect and remove directors (Sees. 24, 28.);
(3) Right to approve certain corporate acts (see comments
under Sec. 52.);
(4) Right to adopt and amend or repeal the by-laws or adopt
new by-laws (Sees. 46,48.);
(5) Right to compel the calling of meetings of stockholders
when for any cause there is no person authorized to call a meet-
ing (Sec. 50, last par.);
(6) Right to issuance of certificate of stock or other evidence
of stock ownership and be registered as shareholder (see com-
ments under Sec. 63.);
(7) Right to receive dividends when declared (see comments
under Sec. 43.);
(8) Right to participate in the distribution of corporate assets
upon dissolution (see comments under Sees. 118-119.);
(9) Right to transfer of stock on the corporate books (see
comments under Sec. 63.);
(10) Right to pre-emption in the issue of shares (see com-
ments under Sec. 39.);
(11) Right to inspect corporate books and records (Sec. 74.);
(12) Right to be furnished the most recent financial state-
ment upon request and to receive a financial report of the corpo-
ration's operations (Sec. 75.);
Stockholders who are not corporate officers do not have a fiduciary duty to the cor-
poration as they are not in a position to misuse corporate property. They may, therefore,
compete with the corporation (which has a separate legal existence) and transact business
with it.
The rights of the stockholders have been classified as follows: (1) rights as to control
and management (Nos. 1-5, 15, 17); (2) proprietary rights (Nos. 6-10); and (3) remedial
rights. (Nos. 11-14, 16) Included in proprietary rights is the privilege of immunity from
personal liability for corporate debts, subject to judicial limitations against abuse of this
privilege, (see Ballantine, p. 375.)
(13) Right to bring individual and representative or deriva-

tive suits (infra.);
(14) Right to recover stock unlawfully sold for delinquency
(Sec. 69.);
(15) Right to enter into a voting trust agreement (Sec. 59.);
(16) Right to demand payment of the value of his shares and
withdraw from the corporation in certain cases (see comments
under Sees. 41 and 81.); and
(17) Right to have the corporation voluntarily dissolved,
(see comments under Sees. 118-119.)
Most of these rights have already been discussed in the pre-
ceding chapters while the others (Nos. 8, 11, 1 2 , 1 4 , 1 6 , and 17.)
are discussed subsequently. Only the right to bring representa-
tive or derivative suits (No. 13.) will be discussed here.
Rights of heirs of deceased stockholders.

Upon the death of a stockholder, the heirs do not automatically
become stockholders of the corporation and acquire the rights and
privileges of the deceased as stockholder of the corporation. The
shares must be distributed first to the heirs in estate proceedings,
and the transfer of the shares must be recorded in the books of
the corporation. Section 63 provides that no transfer shall be
valid, except as between the parties, until the transfer is recorded
in the books of the corporation. During such interim period, the
heirs stand as equitable owners of the shares, the executor or
administrator duly appointed by the court being vested with the
legal title to the shares. Until a settlement and division of the
estate is effected, the shares of stock of the decedent are held by
the administrator or executor. Consequently, during such time,
it is the administrator or executor who is entitled to exercise the
rights and privileges of the deceased stockholder.
Section 74 enumerates the persons who are entitled to the
inspection of corporate books. The stockholder's rights of
inspection of the corporation's books and records is based upon
his ownership of shares in the corporation and the necessity for
self-protection. Similarly, only stockholders of record are entitled
to receive dividends declared by the corporation (Sec. 43.), a
right inherent in the ownership of the shares. In the absence of

transfer of the shares of the deceased stockholder to the heir/s in
the corporation's transfer book, the said heir/s would have no
right to inspect its books and receive dividends. (Musni vs. Puno,
599 SCRA 585 [2009].)
Rights of stockholders may be c h a n g e d

or restricted.
(1) Rule of majority governs. — Any person "who buys stock
in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he im-
pliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully
enacted by-laws and not forbidden by law." To this extent, there-
fore, the stockholders may have considered to have "parted with
his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corpo-
ration and surrendered it to the will of the majority of his fellow
incorporators, x x x It cannot, therefore, be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed x x x by any act of the former which is
authorized by the majority x x x." (Gokongwei, Jr. vs. Securities
and Exchange Commission, 89 SCRA 336 [1979], citing 6 Thomp-
son 369, Sec. 4490.)
(a) Pursuant to Section 16, any corporation may amend
its articles of incorporation. If the amendment changes or re-
stricts the rights of existing stockholders, then the dissenting
minority under Section 81 has only one right, viz.: to demand
payment of the fair value of his shares.
(b) Under Section 48 (par. 1.), the corporation may amend
or repeal any by-law or adopt new by-laws by the prescribed
vote of the board of directors and the stockholders.
(2) Ownership of stock confers no vested right. — In fine, a
stockholder does not acquire any vested right by his ownership
of stock. It cannot be said, therefore, that a stockholder who
claims that prior to the amendment of the by-laws he had all
the qualifications to be a director of a corporation, has a vested
right to be elected director and that the amendment deprived

him of such right, in the face of the fact that the law at the time
he became a stockholder "contained the prescription that the
corporate charter and the by-law shall be subject to amendment,
alteration, and modification." (Ibid.)
Rights of dissenting minority.

Minority stockholders (or members), however, are required
to submit to the will of the majority only so long as the majority
act in good faith and within the limitations of the law.
(1) In some instances, minority stockholders objecting to
certain corporate action may demand appraisal and payment of
their stock (see Sec. 81.), and thus terminate their relation with
the corporation. (18 Am. Jur. 2d 991.)
(2) In other instances, they may bring actions at law (e.g., for
damages, injunction) in their names to preserve and protect their
interests or in the name of the corporation to redress wrongs
committed solely against the corporation, (infra.)
The majority stockholders (members) owe the minority
stockholders the duty to exercise good faith, care, and diligence
to protect the interest of the minority in the corporation. They
have a fiduciary duty to minority stockholders to use their con-
trol of the corporation in the best interests of all stockholders.
A c t i o n s by stockholders or m e m b e r s .
Actions by stockholders (or members) may be divided into
three general categories: (1) derivative actions; (2) individual
actions; and (3) representative actions. (19 Am. Jur. 2d 60.)
(1) Action in behalf of corporation generally brought through board
of directors/trustees. — Corporations represent their stockholders
(or members) in all matters within the scope of their corporate
powers. This is true respecting litigations as well as in other
matters. As a result of the separate identities of the corporation
and its stockholders, it follows that any wrong or injury done
directly against the corporation gives rise to a cause of action
on the part of the corporation through the board of directors (or
trustees) and not primarily of an individual stockholder.
594
Furthermore, to allow stockholders to directly recover

damages for themselves for wrongs committed against the corpo-
ration would result in the distribution among them of part of the
assets of the corporation before its dissolution which, as a rule, is
prohibited to protect the prior rights of corporate creditors, (see
Sec. 122, last par.)
(2) Derivative suit brought by stockholder in behalf of corporation.
— But, whenever the officials of a corporation refuse to bring
suit to redress the wrong, such as when they are the ones to be
sued, a stockholder may maintain a derivative suit to enforce the
corporate right of action in behalf of himself, the other stockhold-
ers, and for the benefit of the corporation. And the fact that no
other stockholder has made common cause with the suing stock-
holder is irrelevant because the smallness of his stockholding is
no ground for denying relief. (Republic Bank vs. Cuaderno, 19
SCRA 671 [1967].) In such a suit, the corporation is the real party-
in-interest while the suing stockholder, on behalf of the corpora-
tion, is only a nominal party. (Filipinas Port Services, Inc. vs. Go,
518 SCRA 453 [2007]; Hi-Yield Realty, Inc. vs. Court of Appeals,
590 SCRA 548 [2009].)
Derivative suit e x p l a i n e d .
A derivative suit is thus defined as one brought by one or more
stockholders or members in the name and on behalf of the cor-
poration to redress wrongs committed against it or to protect or
vindicate corporate rights, whenever the officials of the corpora-
tion refuse to sue, or are the ones to be sued, or hold control of
the corporation. It is a remedy designed by equity for those situ-
ations where the management through fraud, neglect of duty, or
other cause, declines to take the proper and necessary steps to
assert the corporation's rights. (Commart [Phils.], Inc. vs. Securi-
ties and Exchange Commission, 198 SCRA 73 [1991].)
(1) Stockholder, a nominal party with corporation real party in
interest. — The right of a stockholder to bring derivative suits is
impliedly recognized by Sections 31, 34, and 65. In such action,
the suing stockholder who actually instituted it is regarded
as a nominal party with the corporation as the real party-in-
interest, and the fact that the plaintiff was not authorized by
the corporation to sue is of no moment as any such authority

could not be expected since the suit is aimed at nullifying the
action taken by the officials of the corporation. (Republic Bank
vs. Cuaderno, supra; Gamboa vs. Victoriano, 90 SCRA 40 [1979];
Yu vs. Yukayguan, 589 SCRA 588 [2009].)
(2) Corporation, joined either as plaintiff or defendant. — In a de-
rivative suit filed by a stockholder, it is not important whether
the corporation should be joined as a plaintiff or defendant, (see
Rule 3, Sec. 3, Rules of Court.) What is important is that the cor-
poration should be made a party in order to make the court's
judgment binding upon it and thus bar future litigations of the
issues. (Republic Bank vs. Cuaderno, supra.) It is a condition
sine qua non that the corporation be impleaded as a party. (Asset
Privatization Trust vs. Court of Appeals, 300 SCRA 579 [1998].)
It has been held that a suit against corporate officers in their
official capacity is considered a suit against the corporation. (E.
Cano Enterprises, Inc. vs. Court of Industrial Relations, 13 SCRA
290 [1965].) A derivative suit has been the principal defense of a
minority shareholder against abuses of the majority. (Commart
[Phils.], Inc. vs. Securities and Exchange Commission, supra.;
Western Institute of Technology, Inc. vs. Salas, 278 SCRA 216
[1997]; Lim vs. Lim-Yu, 352 SCRA 216 [2001].)
Nature of derivative suit.

(1) A derivative suit is in the nature of a representative action
(infra.), the stockholder (or member) bringing the action in the
name and in behalf of the corporation, for a wrong done to the
corporation, and not one done to himself, being in fact its repre-
sentative and any relief obtained belongs to the corporation and
not to the stockholders, individually or collectively (13 Fletcher,
pp. 422,440-441.) but the plaintiff is entitled to reimbursement at
least of legal expenses. It is a suit by a stockholder to enforce a
corporate cause of action.
(2) The cause of action when a stockholder brings a deri-
vative suit is dual in composition. It consists of a basic cause of
action, which pertains to the corporation and on which it might
have sued, and the derivative cause of action, which pertains to the
596
stockholder consisting in the fact that the corporation will not or

cannot sue for its own protection. (Ibid., p. 429.) Hence, the name
of the remedy because he derives his right from the corporation.
(3) A derivative suit is fundamentally distinct and independent
from liquidation proceedings under Section 122. (Yu vs. Yukayguan,
589 SCRA 588 [2009].)
(4) A stockholder's right to institute a derivative suit is not
based on any express provision of the Corporation Code, or
even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable
for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. Hence, a stockholder may
sue for mismanagement, waste or dissipation of corporate assets
because of a special injury to him for which he is otherwise without
redress. In effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to assist
its rights of action when the corporation has been put in default
by the wrongful refusal of the directors or management to make
suitable measures for its protection. The basis of a stockholder's
suit is always one in equity. However, it cannot prosper without
first complying with the legal requisites for its institution.
(Ibid.)
Importance of derivative suits.

If the duties of care and loyalty which directors (or trustees)
owe to their corporation could be enforced only in suits by the
corporation, many wrongs done by directors would never be
remedied.
Where the majority of the shareholders (or members) benefit
by the directors' breach of duty, they will normally continue to
elect the same directors or others who can be relied on not to
institute litigation designed to remedy the wrong. Even where
the shareholders do not benefit by the directors' wrongdoings,
the difficulty of so organizing the majority shareholders to cause
them to oust the wrongdoing directors from office and elect new
directors who will institute litigations against their predecessors
is often insuperable. The minority shareholders' suit is a proce-
dural device designed to facilitate holding wrongdoing directors
Sec. 64 T I T L E VII. S T O C K S A N D S T O C K H O L D E R S 597
and majority shareholders to account, and also to enforce corpo-

rate claims against third persons. (W.L. Cary, op. cit., p. 868.)
Type of w r o n g c o n t e m p l a t e d .
It is obvious that the wrongful act by directors or other man-
agers may result in direct injuries to individual shareholders
entitling the latter to sue in their own right and for their own
benefit. Of such wrongful character are the wrongful failure to
permit a shareholder to vote and to permit a transaction of shares
on the corporation's books.
On the other hand, many wrongful acts or omissions
of directors or other managers injure the shareholders only
indirectly through depleting the corporate assets or using
them in a manner contrary to the provisions of the articles of
incorporation. Shareholders' derivative suits are concerned with
this latter type of wrong (Ibid.), allowing a stockholder to enforce
rights which are derivative or secondary in nature. It requires
that the injury alleged be indirect as far as the stockholders are
concerned and direct only insofar as the corporation is concerned.
(R.N. Symaco Trading Corporation vs. Santos, 467 SCRA 312
[2005].) However, the removal of a stockholder (particularly a
majority stockholder) from the management of the corporation
and / or the dissolution of a corporation in a derivative suit filed
by a minority stockholder is a drastic measure which should be
resorted only when the necessity is clear. (Chase vs. Buencamino,
Sr., 136 SCRA 385 [1985].)
Requisites for bringing derivative suit.

Before a stockholder or member may sue in behalf of the
corporation, the following requisites must exist:
(1) There must be an existing cause of action in favor of the
corporation, as where the board of directors (or trustees) wastes
or dissipates the funds of the corporation, fraudulently disposes
of its property, or perform ultra vires acts (Angeles vs. Santos, 64
Phil. 697 [1927].) and not in favor of the particular stockholder
bringing the suit;
(2) The stockholder or member must first make a demand
upon the corporation or the management to sue, unless such a
598
demand would be futile or useless (Reyes vs. Tan, 3 SCRA 198

[1961]; Pascual vs. Del Saz Orosco, 19 Phil. 82 [1911].), and the
corporation refuses or fails to sue notwithstanding such demand.
This is known as exhausting intra-corporate remedies;
(3) The stockholder or member must have been such at the
time of the objectionable acts or transactions, as well as at the
time the action was filed and during the pendency of the action
(Gochan vs. Young, 354 SCRA 207 [2001].), "unless such transac-
tions continue and are injurious to him or affect him especially
or specifically in some other way" (Pascual vs. Del Saz Orosco,
supra.); and
(4) The action must be brought by the stockholder or mem-
ber in the name and for the benefit of the corporation. (Evange-
lista vs. Santos, 86 Phil. 388 [1950].)
The bona fide ownership by a stockholder of stock in his own
right suffices to invest him with a standing to bring a derivative
suit for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the pro-
tection or vindication of his own particular right, or the redress
of a wrong committed against him, individually, but in behalf
and for the benefit of the corporation. (San Miguel Corporation
vs. Kahn, 176 SCRA 447 [1989]; Reyes vs. Regional Trial Court of
Makati, 561 SCRA 593 [2008].)
The personal injury suffered by the stockholder cannot
disqualify him from filing a derivative suit in behalf of the
corporation. It merely gives rise to an additional cause of action
for damages against the erring corporate officers. In short, the
allegations of injury to the stockholder in the complaint can
co-exist with those pertaining to the corporation. (Gochan vs.
Young, supra.)
Among the basic requirements for a derivative suit to prosper

is that the minority stockholder must allege in his complaint
that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who
wish to join him in the suit. A case which is merely an appeal
on the civil aspect of a criminal case for estafa and falsification
of public documents filed against the majority and controlling
members of the board is not a derivative suit. (Western Institute

of Technology vs. Salas, 278 SCRA 216 [1997]; Tarn Wong Tek vs.
Makasiar, 350 SCRA 475 [2001].)
The Interim Rules of Procedure Governing Intra-Corporate
Controversies (Appendix "C".), include the following require-
ments: (1) the plaintiff must be a stockholder or member at the
time the acts or transactions subject of the action occurred; (2) he
exerted all reasonable efforts, and alleges the same with particu-
larity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires; (3)
No appraisal rights are available for the act or acts complained
of; and (4) The suit is not a nuisance or harassment suit. (Sec. 1,
Rule 8 thereof.)
Exhaustion of intra-corporate remedies.

In addition to the existence of grievances which call for this
kind of relief, it is equally important that before the shareholder
(or member) is permitted, in his own name to institute and con-
duct a litigation which usually belongs to the corporation, he
should show to the satisfaction of the court that he has exhausted
all the means within his reach to attain within the corporation
itself, the redress of his grievances, or action in conformity to his
wishes.
(1) He must make an earnest, not simulated, effort, with the
managing body of the corporation, to induce remedial action on
their part. He must show, if he fails with the directors (or trust-
ees), that he has made an honest effort to obtain action by the
27
stockholders as a body in the matter of which he complains.
(Pascual vs. Del Saz Orozco, supra, citing Hawes vs. Oakland, 14
Otto, 104 U.S. 450, 456.)
(2) A request upon the stockholders as a body to bring suit
has been required:
''Under the new Rules of Procedure in the SEC, it seems that this requirement in
previous Supreme Court rulings is not mandatory as exhaustion of intra-corporate rem-
edies is not included in the grounds for motion to dismiss an action or suit before it. (see
Sec. 1, Rule VI thereof.)
600
(a) where demand upon the directors or officers is

excused as where it would be unavailing to protect the rights
of the stockholders because the officers of whose management
or misconduct a plaintiff stockholder complains of, are in
28
control of the corporation; or
(b) where the subject matter of his complaint is within
the immediate control of the stockholders.
(3) A stockholder need not seek action by the stockholders
as a body, where under the facts he cannot do so or it would
be unreasonable or useless to require it. Thus, if the body of
stockholders has no adequate power or authority to remedy the
wrong asserted by the individual stockholders, an application to
it to redress the wrong before bringing a representative action is
unnecessary. (19 Am. Jur. 2d 77-79.)
Reasons given for not allowing

direct individual suit.
The reasons given are:
(1) The universally recognized doctrine that a stockholder
in a corporation has no title, legal or equitable, to the corporate
property; that both of these are in the corporation itself for the
benefit of the stockholders. In other words, to allow sharehold-
ers to sue separately would conflict with the separate corporate
entity principle;
(2) The prior rights of the creditors may be prejudiced. Thus,
our Supreme Court held in the case of Evangelista vs. Santos,
that "the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before
the dissolution of the corporation and the liquidation of its debts
and liabilities, something which cannot be legally done";
a
l n a case, the Supreme Court ruled out laches, holding "that the Board of Directors
under the by-laws of the corporation, had the control of the affairs of the corporation
and it is not to be expected that the board would sue its members to recover the sums of
money voted by and for themselves (as compensation). Thus, under the circumstances,
where the corporation was virtually immobilized from commencing suit against its direc-
tors, laches does not begin to attach against the corporation until the directors cease to be
such." (Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706 [1988].)
(3) The filing of such suits would conflict with the duty of
the management to sue for the protection of all concerned;
(4) It would produce wasteful multiplicity of suits; and
(5) It would involve confusion in ascertaining the effect of
partial recovery by an individual on the damages recoverable
by the corporation for the same act. (Asset Privatization Trust
vs. Court of Appeals, 300 SCRA 579 [1998], citing Agbayani,
Commercial Law of the Phils., Vol. Ill, p. 566, citing Ballantine,
pp. 366-367.)
Individual suit e x p l a i n e d .
When a wrong is directly inflicted against a shareholder, the
latter can maintain an individual or direct suit in his own name
against the corporation. Stockholder's individual suit is, therefore,
an action brought by a stockholder against the corporation for
direct violation of his contractual rights as such individual stock-
holder, such as the right to vote, the right to share in the declared
dividends, the right to inspect corporate books and records and
similar other examples. In a derivative suit, the wrong is inflicted
directly on the corporation and indirectly upon the stockholders.
(Republic vs. Cuaderno, supra; Gamboa vs. Victoriano, supra.)
Individual suits have likewise been permitted upon a wrong
which although against the corporation, also violates a duty
owing directly to the stockholder or member. (General Rubber
Co. vs. Benedict, 125 N.Y. 18.) Any recovery by a stockholder in
an individual suit belongs to him.
Authorization from the board of directors of a corporation is
not necessary where a stockholder is not acting in behalf of the
corporation but in his own personal capacity. (CMH Agricultural
Corporation vs. Court of Appeals, 378 SCRA 545 [2002].)
Derivative suit a n d individual suit

distinguished.
If the injury is one to the plaintiff as a stockholder (or member)
and to him individually, and not to the corporation, as where the
action is based on a contract to which he is a party, or on a right
belonging severally to him, or on a fraud affecting him directly, it
is an individual action.
602
On the other hand, if the wrong is primarily against the corpo-

ration, the redress for it must be sought by the corporation, except
where a derivative action by a stockholder is allowable, and the
stockholder cannot sue as an individual. The action is derivative,
i.e., in the corporate right, if the gravamen of the complaint is
injury to the corporation or to the whole body of its stock or
property without any severance or distribution among individual
holders, or if it seeks to recover assets for the corporation or to
prevent the dissipation of its assets. (13 Fletcher, pp. 367-373.) If
the action is successful, the judgment rendered shall be in favor
of the corporation.
Representative suit explained.

When a wrong is committed against a group of stockholders,
a stockholder may bring a suit in behalf of himself and all other
stockholders who are similarly situated. This is called a share-
holder's representative suit which is a kind of class action. It saves
the persons involved in the action substantial time and money.
Thus, suppose a group of stockholders has been denied the
right to vote. On the ground of economy, a stockholder may
file a suit in behalf of himself and all the others because (1) the
questions of law and fact involved are common to all of them
and (2) the parties are so numerous that it is impracticable to
bring them all before the court. (Rule 12, Sec. 13, Rules of
Court.) But the right of pre-emption (see Sec. 39.), it has been
said, is personal to each stockholder; and while a stockholder
may maintain a suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that he may not
maintain a representative action on behalf of other stockholders
who are similarly situated. No stockholder has any right to, or
any interest in, the stock to which another is entitled. (Mathay vs.
Consolidated Bank and Trust Co., 58 SCRA 559 [1974].)
A representative suit is also the method used by minority
stockholders to compel the declaration of dividends.
Derivative suit a n d representative suit

distinguished.
A representative suit, strictly speaking, is one brought by a
person in his own behalf and on behalf of all similarly situated.
A derivative suit, on the other hand, is one brought by a person

as a representative of another.
A suit by a stockholder (or member) as a representative of the
corporation is a derivative action, although often, and properly,
referred to as a representative suit in the sense that he sues as a
representative of the corporation. However, an action by a stock-
holder may be representative and yet not derivative as where an
action is brought by a stockholder as an individual in his own
right but in behalf of himself and other stockholders similarly
situated. (13 Fletcher, pp. 364-365.)
Jurisdiction over intra-corporate

controversies.
Under Section 5(a, b, c) of Presidential Decree No. 902-A,
as amended, the Securities and Exchange Commission is given
original and exclusive jurisdiction to hear and decide cases in-
volving intra-corporate controversies.
(1) Meaning of an intra-corporate controversy. — It is one which
arises between a stockholder and the corporation or among the
stockholders involving internal affairs of the corporation. Thus,
the issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely between
the stockholder and the corporation, belonging exclusively to
the jurisdiction of the Commission even if there is a claim for
damages for refusal of the corporation to issue a replacement
certificate. The question of damages raised is merely incidental
to the main issue.
(2) Intent of the law. — The intent is to segregate from the
general jurisdiction of the regular courts controversies involving
corporations and stockholders and to bring them to the SEC for
exclusive resolution, in much the same way that labor disputes
are now brought to the Department of Labor and Employment
and the National Labor Relations Commission and not to the
courts. (Philex Mining Corporation vs. Reyes, 118 SCRA 602
[1982].)
(3) Controversies covered. — The provision of the law is broad
and covers all kinds of controversies between stockholders
and corporations. There is no distinction, qualification, nor
604
any exemption whatsoever. (Ibid.) However, if the controversy

involves a violation of any of the provisions of the Corporation
Code and the action is criminal in nature the purpose of which
is the imposition of the penalty prescribed by the Code, it is the
regular courts that have jurisdiction, (see Sec. 144.)
Section 3 of Presidential Decree No. 902-A gives the
Commission jurisdiction, supervision, and control over all
corporations, partnerships or associations, which are the
grantees of primary franchise and/or a license or permit issued
by the Government to operate in the Philippines. In the light of
the nature and function of the Commission, its regulatory and
adjudicatory functions insofar as intra-corporate controversies
are concerned, come into play only if a corporation exists. Thus,
where the corporation whose properties are being contested
no longer exists, it having been completely dissolved, the
supervisory authority of the Commission over the corporation
has likewise come to an end. (Pascual vs. Court of Appeals, 339
SCRA 117 [2000].)
(4) Transfer of jurisdiction. — Pursuant to the Securities
Regulation Code (R.A. No. 8799.) which took effect on August
8, 2000, the jurisdiction of the SEC to decide cases involving
intra-corporate disputes was transferred to courts of general
jurisdiction and in accordance therewith, all cases of this nature
with the exception only of those submitted for decision, were
29
transferred to the regular courts.
Liabilities of stockholder.
Stock ownership in a corporation results in certain rights.
Assuredly, it also places certain liabilities upon the stockholder.
These liabilities which are discussed under the corresponding
sections indicated, may be grouped into the following:
M
"The Commission's jurisdiction over all cases enumerated under Section 5 of Presi-
dential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution which should be resolved within
one (1) year from the enactment of this Code. The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until
finally disposed." (Sec. 5.2 thereof.)
(1) Liability to the corporation for unpaid subscription (Sees.

60, 67-70.);
(2) Liability to the corporation for interest on unpaid sub-
scription (Sec. 66.);
(3) Liability to creditors of the corporation on unpaid sub-
scription (Sec. 60.);
(4) Liability for watered stock (Sec. 65.);
(5) Liability for dividends unlawfully paid (Sec. 43.); and
(6) Liability for failure to create corporation. (Sec. 10.)
While a stockholder has no personal liability for the debts
of the corporation beyond the amount of his capital investment,
he is personally liable for the above obligations. In addition, he
may become personally liable for damages or otherwise for any
wrongful disposition of corporate assets, breaches of fiduciary
duties, fraud, gross negligence, unauthorized acts, violations of
law, or improper use (e.g., to defraud his creditors to escape per-
sonal debts) of the corporate form.
Sec. 65. Liability of directors for watered stocks. — Any

director or officer of a corporation consenting to the
issuance of stocks for a consideration less than its par
or issued value or for a consideration in any form other
than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate
secretary, shall be solidarily liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time of
issuance of the stock and the par or issued value of the
same. (16, 2nd par.)
Watered stock defined.

Watered stock is stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or services, (see
Sec. 62.) It includes stock:
(1) issued without consideration (bonus share); or
(2) issued as fully paid when the corporation has received a
lesser sum of money than its par or issued value (discount share);
or
606
(3) issued for a consideration other than actual cash, such as

property or services, the fair valuation of which is less than its
par or issued value; or
(4) issued as stock dividend when there are no sufficient
retained earnings or surplus (see Sec. 43.) to justify it.
ILLUSTRATION:
Where the par value of par value shares or the issued value
of no par value shares is P100.00 and only P80.00 is paid to the
corporation but the share is issued as fully paid, the share is
considered "watered" or "fictitiously paid up" to the extent of
P20.00, which is the difference between the consideration paid
and the par value or issued value of the share taken. In such
case, the subscriber is liable for the difference of P20.00.
The issue itself is not void, but the agreement that the
shares shall be paid for less than its par or issued value is illegal
and void and cannot be enforced. (Phil. Trust and Company vs.
Rivera, 44 Phil. 470 [1923].)
Issue of watered stock prohibited.

Section 65 prohibits the issuance of watered stock to
protect persons who may acquire stock and the creditors of the
corporation particularly those who may become such on the faith
of its outstanding capital stock being fully paid. The prohibition
secures equality among subscribers and prevents discriminations
against those who have paid in full the par or issued value of
their shares.
(1) As to the corporation, the issuance of watered stock is not
merely ultra vires but is illegal per se as it is a violation of Section
62.
(2) As to creditors, the law makes no distinction between
those who became such prior and subsequent to the issuance
of watered stock. The liability attaches whether or not creditors
have relied on an over-valuation of corporate capital.
(3) As to the Securities and Exchange Commission, whether
or not an issuance would amount to an issue of watered stock
is well within its authority to inquire into in view of its power
and duty to enforce all laws affecting corporations, (see Securi-
ties and Exchange Commission vs. Pimentel, 90 Phil. 702 [1951].)
Basis or t h e o r y of liability.
Apart from statute, the view has been taken that one who
acquires stock from a corporation in exchange for property or
services at an over-valuation or at a discount is liable to respond
to creditors, upon the principle that one giving credit to a corpo-
ration is entitled to rely upon its ostensible capitalization as the
basis for the credit given.
Where the corporation issues watered stock and thereby
assumes an ostensible capitalization in excess of its real assets,
the transaction necessarily involves the misleading of subsequent
creditors, and whether done with that purpose actually in
mind or not, is at least a constructive fraud upon creditors.
Hence, it is held that recovery may be had by a creditor in such
case, even though the corporation itself has no cause of action
against the stockholders. Some of the earlier decisions put the
right of recovery in such a case upon the so-called "trust fund
doctrine." In any view of the matter, however, the creditors' right
of action to compel the making good of the representation as to
the corporation's capital is based on fraud, and the trust fund
doctrine is only another way of expressing the same underlying
idea. (19 Am. Jur. 2d 250.)
Prohibition refers to original issue.

The prohibition to issue "watered stock" refers only to
the original issue of stocks but not to a subsequent transfer of
such stocks by the corporation, for then it would no longer be
an "issue" but a sale thereof. (Rochelle Roofing Co. vs. Burley,
[Mass.] 115 N.E. 478.)
Hence, treasury shares may be sold for less than their par
or issued value for they have already been issued and paid for,
provided the price is reasonable. (Sec. 9.) They may be given out
in the form of bonuses as additional compensation for satisfactory
service rendered by the grantee. (SEC Opinion, July 13, 1993.)
Liability for watered stock.

Under Section 65, not only the corporate creditors but also
the corporation itself or any dissenting stockholder, for and
in behalf of the corporation in case the corporation refuses to
608
claim the difference not received, can set up the inadequacy of

the consideration for the issuance of stocks. (Pascual vs. Del Saz
Orosco, 19 Phil. 83 [1911]; Everett vs. Asia Banking Corp., 49 Phil.
512 [1926].)
(1) Consenting director or officer. — The liability of the consent-
ing director or officer for the "water" in the stock is solidary (see
Arts. 1207, 1208, Civil Code.) with the participating stockholder.
Note that the fair value of the stock is determined at the time of
its issuance so that the subsequent increase in value of property
given as consideration will not eliminate the "water" in the stock
and relieve the director or officer and stockholder from liability.
(Sec. 65.)
(2) Subscriber. — In view of the provision of Section 62 that
"stocks shall not be issued for a consideration less than the par or
issued price thereof," persons to whom watered stock is issued
are not only liable to be called upon to contribute, if necessary,
for the benefit of creditors to the extent of the difference between
the amount paid and the par or issued value of the shares but
are also liable for the purpose of adjusting the rights of the
stockholders inter se. (see 11 Fletcher, pp. 679-681.) The holder of
watered stock cannot escape liability by transferring the same to
an irresponsible person or to a bona fide purchaser.
A creditor cannot, however, recover against a holder of
watered stock fraudulently represented as having been fully paid
unless and until he has been actually injured. He is interested
only in the collection of his debt when due; if it is paid in full at
maturity, he is not injured by any misrepresentation made with
respect to watered stock and, therefore, has no right of action
against those to whom such stock was issued. (19 Am. Jur. 2d
250.)
(3) Subsequent transferee. — A transferee of stock in a corpora-
tion occupies the same position as his transferor with respect to
the right to complain of an issue of watered stock, and is, there-
fore, estopped to complain if his transferor was estopped. This
is true notwithstanding the fact that he purchased the stock in
good faith and in ignorance of the fraudulent or unlawful issue.
(U Fletcher, p. 687.)
There is a contrary view. It holds that a transferee is not liable

unless he either was a party to the transaction in the first instance
or has in effect in some manner made himself a party since. The
liability of a holder of watered stock to pay to creditors the differ-
ence between the par value and the amount actually paid is not
based upon his relationship to the corporation as a stockholder
but upon a fraudulent transaction. So, a purchaser in the open
market of stock purporting to be fully paid who has no notice
that it is in fact not fully paid, is not liable for the unpaid amount.
He cannot be compelled to make good the false representation as
to the capital of the corporation, which he had no part in making
and the responsibility for which he has done nothing to assume.
(19 Am. Jur. 2d 254.)
(4) Transferor or party to the fraud. — In any event, a purchaser
without notice may maintain an action to recover damages sus-
tained by him, either against the transferor, if the latter knew the
character of the stock, or against the directors or other officers
who issued the same, or against the corporation itself if it can be
regarded as a party to the fraud. (11 Fletcher, pp. 687-688.)
Suit by t h e State.
(1) Quo warrranto. — When a corporation is guilty of ultra
vires or illegal acts which constitute an injury to or fraud upon
the public or which will tend to injure or defraud the public, the
State may institute quo warranto proceedings to forfeit its charter
for the misuse or abuse of its franchises. The Solicitor General,
therefore, may institute such proceedings to enforce a forfeiture
of the charter of a corporation for an ultra vires, or illegal issue of
watered or fictitiously paid-up stock, and the court will decree
forfeiture if the circumstances are such as to bring the case within
the general principles governing the forfeiture of charters.
(2) Injunction. — If a threatened act of a corporation will
constitute a public nuisance, and prompt action is necessary to
prevent injury to the public therefrom, the Solicitor General may
proceed for an injunction. It is perhaps safe to say, however, that
this principle does not authorize a suit by the Solicitor General
to enjoin the issue of watered stock. The State cannot maintain a
suit to enjoin or cancel an issue of watered or fictitiously paid-up
610
stock, where private rights only will be affected. (11 Fletcher, pp.
670-672; 14 C.J. 457-459.)
Sec. 66. Interest on unpaid subscriptions. — Subscribers

for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required
by, and at the rate of interest fixed in, the by-laws. If no
rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
Liability of stockholder for interest

on unpaid subscriptions.
(1) When liable. — In the meantime that the entire amount on
stock subscription has not been paid, subscribers for stock shall be
liable to the corporation for interest from the date of subscription,
but only if so required by the by-laws or subscription contract.
Under Section 66, a subscriber is liable to pay interest only "if
so required by the by-laws." A mere resolution of the board of
directors to that effect would not make the subscribers liable
unless the board is empowered by the by-laws to charge interest
on unpaid subscriptions. But even if not so required by the by-
laws, a delinquent stockholder shall be liable to pay interest from
date of delinquency, (see Sec. 68.)
(2) Rate of interest. — If the rate of interest is fixed in the by-
laws, then such rate shall be paid; otherwise, such rate shall be
deemed to be the legal rate. By virtue of Central Bank Circular
No. 416 (July 29,1974.), the legal rate is now 12% per annum, (see
Sec. 3, Act No. 2655 [the Usury Law], as amended by Pres. Decree
No. 116.)
(3) Waiver of interest. — The corporation may waive the right
to collect interest on the unpaid subscriptions, if it so desires,
because it is a right which could be waived (SEC Opinion,
March 11, 1969.) provided, of course, that no corporate creditors
are prejudiced by such waiver. But if the payment of interest is
required by the by-laws, waiver may only be done by amending
the by-laws. (SEC Opinion, March 20,1980.)
Sec. 67. Payment of balance of subscription. — Subject to

the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare

due and payable to the corporation unpaid subscriptions
to the capital stock and may collect the same or such per-
centage of said unpaid subscriptions, in either case with
interest accrued, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage
thereof, together with the interest accrued, if any, shall be
made on the date specified in the contract of subscription
or on the date stated in the call made by the board. Failure
to pay on such date shall render the entire balance due
and payable and shall make the stockholder liable for in-
terest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days from
the said date no payment is made, all stocks covered by
said subscription shall thereupon become delinquent and
shall be subject to sale as hereinafter provided, unless the
board of directors orders otherwise. (38a)
R e m e d i e s t o enforce p a y m e n t
of stock subscription.
Section 67 applies to a stock corporation's recourse on un-
paid subscription. The remedies are:
(1) Extra-judicial sale at public auction. — This is the first and
most special remedy and it consists in permitting the corporation
to put up unpaid stock for sale and dispose of it for the account
of the delinquent subscribers. In this case, the provisions of Sec-
tions 67 to 69, inclusive, are applicable and must be followed,
(see Velasco vs. Poizat, 37 Phil. 302 [1917].)
A stock becomes delinquent and shall be subject to extra-judicial
sale at public auction, unless the board of directors orders other-
wise, upon failure of the stockholder to pay the unpaid subscrip-
tion or balance thereof within the grace period of 30 days from
the date specified in the contract of subscription (without need of
prior call or board action demanding payment) or in the absence
of a date fixed in the contract of subscription, from the date stat-
ed in the call made by the board of directors. The delinquency
takes place automatically after such failure (Sec. 67, par. 2.); and
(2) Judicial action. — This other remedy is by court action
under Section 70. The statutory right to sell the subscriber's stock
612
is merely a remedy in addition to that which proceeds by action

in court. (Ibid.)
Sections 67 to 70 provide ample remedies for the payment
of stock subscriptions. Hence, reversion of the stock to the
corporation in case of non-payment thereof is contrary to said
provisions. (SEC Opinion, Dec. 29,1976.) The corporation may, at
its discretion, pursue either remedy (sale of the unpaid stock or
action in court), though not both (4 Fletcher, p. 651; see De Silva
vs. Aboitiz & Co., 44 Phil. 755 [1923].); and
(3) Collection from cash dividends and withholding of stock divi-
dends. — This is authorized by Section 43. (infra.)
Statutory sanctions on stock delinquency.

(1) Rights denied to stockholder. — Under Section 71, a stock
delinquent for unpaid subscription shall not be voted or be
entitled to vote or to representation at any stockholders' meeting,
nor entitle the holder thereof to any of the rights of a stockholder
except the right to dividends subject to the provisions of Section
43. At all elections of directors, it is expressly declared by Section
24 "that no delinquent stock shall be voted."
(2) Right given to corporation. — Under Section 43, the
corporation has the right to first apply cash dividends due on
delinquent stock to the unpaid balance on the subscription plus
cost and expenses, while as to stock dividends, to withhold
the same from the delinquent stockholder until his unpaid
subscription is fully paid. This right may be exercised by the
corporation although it is not provided in its by-laws.
Remedies limited to delinquent s u b s c r i p t i o n .

The power or right of corporations to sell shares for the pay-
ment of stockholders' debts should be considered subject to the
procedure laid down in Sections 67 to 69, or enforceable by judi-
cial action as provided in Section 70. This being so, such power
or right is limited to delinquent subscription and does not extend
to any other debt of stockholders to corporations.
(1) Obligations other than unpaid subscriptions. — To hold that
under said sections, corporations may sell shares of stockhold-
ers for the satisfaction of the latter's debt to the former, would
in effect make corporations the sole judges of the merits of their
claims against stockholders and would deprive the latter of the
opportunity to pay the debt before the sale of stock and of the
right to defend themselves and be heard, and to have the sale of
stock made to the highest bidder, substantial and fundamental
proprietary rights that cannot be ignored and set aside for the
advantage and benefit of corporations.
(2) Lien upon stock for said obligations. — A lien upon stock
in favor of corporations for debt or liability of stockholders
other than unpaid subscription due and payable would be an
obstacle to the trading of shares. Before accepting a transfer of
corporate shares, a prospective transferee would have to inquire
into unregistered claims against said shares in favor of the
corporation. (Bank of P.I. vs. Caridad Estates, C.A.-G.R. No. 16,
Aug. 22,1939.)
A provision creating a lien upon shares of stock for unpaid
debts, liabilities, or assessment of stockholders to the corporation
should be embodied in the articles of incorporation, and not
merely in the by-laws, because Section 6 (par. 1.) prescribes that the
shares of stock of a corporation "may have such rights, privileges
or restrictions as may be stated in the articles of incorporation." (SEC
Opinion, April 13,1981.) Section 91, dealing with termination of
membership in a non-stock corporation, specifically states that
the manner and causes for such termination shall be provided in
the articles of incorporation or the by-laws.
P a y m e n t of unpaid subscription
or percentage thereof.
(1) When to be made. — Under Section 67 (par. 2.), the payment
of any unpaid subscription or any percentage thereof, together
with interest, if any, shall be made:
(a) on the date specified in the contract of subscription;
or
(b) in the absence of any specified date in the contract of
subscription, on the date stated in the call made by the board
of directors.
614
The contract of subscription or the call by the board of direc-

tors, as the case may be, may require the payment of the entire
unpaid subscription or only a certain percentage thereof on the
date specified for payment.
(2) Effect of failure. — Failure to pay on such date shall render
the entire balance due and payable and make all the stocks cov-
ered by the said subscription delinquent and subject to sale at
public auction. This means that the delinquent shares shall cover
not only the unpaid portion of the stockholder's subscription but
his entire subscription consistently with the doctrine that a sub-
scription is one, entire, indivisible, whole contract, (see Sec. 64.)
The stockholder shall also be liable for interest at the legal
rate (see Sec. 66.) on such balance, unless a different rate of inter-
est is provided in the by-laws, computed from such date until
full payment. (Sec. 67, par. 2.)
Call and a s s e s s m e n t defined

and distinguished.
(1) A call is a declaration officially made by a corporation
usually expressed in the form of a resolution of the board of
directors requiring the payment of all or a certain prescribed
portion of a subscriber's stock subscription.
(2) The term assessment is used with reference to both paid
and unpaid subscriptions.
(a) As to paid subscriptions, it means a levy made upon the
stock of a corporation, generally for the purpose of correcting
an impairment of the capital and indicates the proportionate
amount required to be paid by each stockholder.
(b) With reference to unpaid subscriptions, the term is
used interchangeably with "call" or "installment." (18 Am.
Jur. 2d 861.) In the absence of statutory authority, a corpora-
tion does not possess the power to assess fully paid stock. As
a rule, stockholders are not liable beyond the extent of their
unpaid subscriptions. (Ibid., 495.)
Requisites for a valid call.

The requisites for a valid call are intended to safeguard
the rights of stockholders and subject them only to equality of

assessments. (SEC Opinion, July 21,1976.) These requisites are:
(1) It must be made in the manner prescribed by law;
(2) It must be made by the board of directors; and
(3) It must operate uniformly upon all the shareholders.
(Clark on Corporations, Sec. 123.)
It has been held that a call made upon some of the subscribers
is void (Seybreth vs. American Commander Min. & Mill. Co.,
Idaho 254.) or which requires some to pay a higher rate than the
others. (Great Western Peleg. Co. vs. Burnham, 79 Wis. 47.) A call
cannot be of such a character as to permit the directors to practice
favoritism or act oppressively. (North Milwaukee Town Site Co.
vs. Bishop, 103 Wis. 492.)
The call cannot operate on stock which has not been
subscribed at the time the call is made. Hence, a subscriber is not
liable for calls made prior to his subscription. It is not, however,
a defense that the corporate liability which necessitates the call
was incurred prior to the subscriber becoming the owner of the
stock. (18 Am. Jur. 2d 867.)
Power of board of directors

to make call.
(1) As to date of payment. — The board of directors may at any
time declare due and payable unpaid subscriptions. (Sec. 67, par.
1.) This power of the directors is no longer absolute as it can be
limited by the subscription contract (Ibid.), such that the directors
may not disregard the amount to be paid and the period for pay-
ment fixed in the subscription contract and make a call earlier.
The board of directors may make a call "anytime" only where
no date is specified in the contract of subscription; otherwise, the
balance shall be payable on a date or dates fixed in the contract
without need of call, (see Sec. 13.)
(2) As to necessity, wisdom, or advisability of call. — Such
question arising in any particular case of a call, if within the
power of the board of directors to make, is to be determined by
the directors and their motive or judgment is not open to attack
by the stockholders if it is in good faith and for the purpose of
616
the corporation, (see Nashua Savings Bank vs. Anglo-American

Land Mortgage & Agency Co., 189 U.S. 240.) The directors need
not even show that the call is made for a corporate purpose or
that the business of the corporation requires it to be made and
paid. (18 Am. Jur. 2d 864-865.)
Unless expressly required by the articles of incorporation,
a call by the board of directors does not need stockholders'
approval.
Necessity a n d purpose
of call.
(1) The necessity for calls depends upon the provisions of
the contract of subscription, (see Sec. 67, par. 1.) Call is necessary
when required by the subscription agreement. If no time is fixed
for payment in the agreement, the subscription is payable only
upon call by the board of directors which may be made "at any
time" as the board may decide. The date specified in the board
resolution is the date of the call for payment of unpaid subscrip-
30
tion, not the date approving the resolution.
(2) The amount that may be called also depends upon the
terms of the contract. In the absence of provisions as to the per-
centage of the unpaid subscription that shall be paid, the board
may call for payment in full or at one time, or in such amounts
as it may see fit to call. The purpose, therefore, of a call is to fix
the time of payment of unpaid subscription and the percentage
thereof to be paid when they are not fixed in the subscription
contract.
W h e n call not necessary.

(1) When insolvency supervenes upon a corporation, the
payment of stock subscription may be enforced without the
necessity of a prior call.
(2) The same is true where the subscriber becomes insolvent.
(4 Fletcher, p. 689; Velasco vs. Poizat, 37 Phil. 802 [1917].)
^The word "call," according to an English case, is capable of three (3) meanings. It
may either mean the resolution, or its notification, or the time when it becomes payable.
(3) Also, no call is necessary to fix the subscriber's liability

when the subscription is payable not upon call or demand by
the directors but immediately or on a specified day on or before
a specified day, or when it is payable in installments at specified
times. In any such case, it is the duty of the subscriber to pay the
subscription or installment thereof as soon as it is due, without
any call or demand, and if he fails to do so, an action may be
brought at any time (Miranda vs. Tarlac Rice Mill Co., 57 Phil.
619 [1932].) after the expiration of the 30-day grace period from
the specified date for payment, (see Sec. 67, par. 2.)
P a y m e n t w i t h o u t call.
A stockholder can pay his subscribed shares of stock even if
31
there is no call for their payment.
The subscription contract creates a creditor-debtor relation-
ship between the corporation and the subscriber. As such debtor,
the subscriber can pay his unpaid subscription any time as to
discharge his obligation. The corporation, as creditor, cannot
refuse a valid tender of payment offered to it. (SEC Opinion,
Sept. 12,1989.)
Necessity of notice of call.

Where call is necessary, notice must be given to the stock-
holder concerned. A call without notice to the subscriber is
practically no call at all. (Pike vs. Dangar Co., Short Line R.R., 68
Me. 445.)
The notice is regarded as a condition precedent to the right
of recovery. It must, therefore, be alleged and proved to maintain
an action for the call. (Baltazar vs. Lingayen Gulf Electric Power
Co., Inc., 14 SCRA 522 [1965].) Thus, an obligation arising from
non-payment of stock subscriptions to a corporation cannot be
set-off against the money claim (i.e., wages and other benefits)
31
A stockholder who voluntarily remits an amount in excess of the percentage called
by the board of directors cannot ask for a refund of such excess payment because once
payment is accepted by the corporation, it becomes part of the assets of the corporation
and any reduction thereof violates Section 16 (now Sec. 43, part of Sees. 14, 62, and 65.) of
the Corporation Law. (SEC Opinion, April 7,1972, SEC Bulletin, Oct. 1982, p. 89.)
618
due an employee against the corporation-employer. Such set-off

is without lawful basis. In the absence of notice of call for the
payment of unpaid subscriptions, the same is not yet due and
payable. Furthermore, such deduction is not allowed by Section
113 of the Labor Code which allows a deduction from wages
of the employee only in three instances mentioned therein.
(Apodaca vs. National Labor Relations Commission, 172 SCRA
442 [1989].)
The right to notice of call, however, may be waived by the
subscriber.
Sec. 68. Delinquency sale. — The board of directors

may, by resolution, order the sale of delinquent stock and
shall specifically state the amount due on each subscrip-
tion plus all accrued interest, and the date, time and place
of the sale which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks become
delinquent.
Notice of said sale, with a copy of the resolution, shall
be sent to every delinquent stockholder either person-
ally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in
a newspaper of general circulation in the province or city
where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the
corporation, on or before the date specified for the sale of
the delinquent stock, the balance due on his subscription,
plus accrued interest, cost of advertisement and expenses
of sale, or unless the board of directors otherwise orders,
said delinquent stock shall be sold at public auction to such
bidder who shall offer to pay the full amount of the balance
on the subscription together with accrued interest, cost
of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the
books of the corporation and a certificate for such stock
shall be issued in his favor. The remaining shares, if any,
shall be credited in favor of the delinquent stockholder who
shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the public auction

who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the
same, and the total amount due shall be credited as paid
in full in the books of the corporation. Title to all the shares
of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by
said corporation in accordance with the provisions of this
Code. (39-46a)
P r o c e d u r e for t h e sale of delinquent

stocks.
Briefly, the procedure is as follows:
(1) Resolution declaring unpaid subscriptions payable. — The
board of directors passes a resolution declaring payable the
whole or a certain percentage of the unpaid subscriptions, stating
the date fixed for payment. If the date for payment is specified in
the contract of subscription, no call is necessary, (see Sec. 67, par.
1.)
(2) Notice to stockholders of resolution. — The stockholders are
given notice of the resolution by the secretary of the corporation
either personally or by registered mail. (Sec. 68, par. 1.) The
publication of the notice of call is not required. If the stockholders
do not pay within 30 days from the date specified in the contract
of subscription or on the date stated in the call made by the board,
all the stocks covered by the subscription shall thereupon become
delinquent and be subject to sale. (Sec. 67, par. 2.) Conversely,
unpaid shares which are not delinquent are not subject to sale,
(see Sec. 72.) In view of the proviso "unless the board of directors
orders otherwise," in Section 67 (par. 2.), the board may order the
removal of the delinquent status of unpaid subscription.
The moment the unpaid subscription becomes delinquent, its
delinquent status remains for as long as the stockholder does not
pay in full his subscription, unless the board orders otherwise.
Hence, subsequent call is not necessary. But if the stock, after a
postponement of its sale, will again be subjected to delinquency
620
sale, the manner required by Section 68 for the notice of delin-

quency sale must be observed. (SEC Opinion, Sept. 30,1991.)
(3) Resolution ordering sale of delinquent stocks. — The board of
directors, by resolution, orders the sale of the delinquent stocks,
stating the amount due and the date, time, and place of sale with
notice to the delinquent stockholders which notice of sale shall
be published. (Sec. 68, pars. 1, 2.) This means that it is the board
of directors that has the authority to fix and determine the sell-
ing price of the delinquent stocks. (SEC Opinion, Feb. 23, 1982.)
The requirements as regards personal notice and publication are
mandatory, not only to assure notice to all subscribers, but also to
assure equality and uniformity of assessments on stockholders.
(Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil. 404
[1953].)
(4) Notice and publication of delinquent sale. — The phrase "un-
less the board of directors otherwise orders" (par. 2.) means that
the board of directors may order the extension of the time and
date of sale. However, if the prescribed 60-day period shall be
extended, notice of such extension must be again served and
published in the same manner required by law for the notice of
delinquency sale. (SEC Opinion, Sept. 30,1991.)
(5) Sale of delinquent stocks. — On the date of the sale, so many
shares of the stock as may be necessary to pay the amount due
on subscription, with the accrued interest, costs of advertisement
and expenses of sale, will be sold at public auction to the highest
bidder for cash. (Sec. 68, par. 3.) Unless there was an agreement
beforehand that the dividends earned by the delinquent stock
before the delinquency sale was effected shall inure to the win-
ning bidder, the same belong to the delinquent stockholder. (SEC
Opinion, Nov. 12,1980; see Sec. 43.)
Strict compliance with the formalities of sale is necessary,
the power to make the sale being merely granted by law and
an extraordinary one. (4 Fletcher, p. 670.) Unless the delinquent
shares are sold in accordance with Section 68, the stockholder
remains the owner of the same.
Meaning of highest bidder.

The highest bidder is the person offering at the sale to pay the
full amount of the balance on the subscription together with accrued
interest, if any (see Sees. 66, 67.), cost of advertisement and 32
expenses of sale, for the smallest number of shares or fraction

of a share. (Sec. 68, par. 3.) Thus, the subscriber cannot incur any
deficiency liability because the highest bid must not be less than
the full amount due.
Only the number of shares which the bidder is willing to buy
shall be transferred to the highest bidder.
ILLUSTRATION:
Suppose X subscribed 5 shares of stock with a par value
of P100.00 each, paying P300.00 as his initial payment. The
balance of P200.00 was called in. X failed to pay; hence, his
stock was declared delinquent. The interest, expenses, and cost
of sale amount to P50.00, thereby making a total of P250.00. A,
B, and C are the bidders.
A offers to pay P250.00 for 2 shares, B, P250.00 for 3 shares
and C, P250.00 for 4 shares. In this case, A is the highest bidder;
X retains 3 shares and A will own 2 shares. All the 5 shares will
be deemed fully paid. A is entitled to issuance, after payment
of his bid, of a certificate of stock for 2 shares and X, for the
remaining 3 shares.
But B is the highest bidder if the bids are as follows: A,
P200 for 2 shares; B, P250 for 4 shares; and C, P240 for 3 shares.
In this case, X retains 1 share. B is still the highest bidder if his
bid is P250.00 for 5 shares because he is the only one who offers
to pay the full amount due. In this case, all payments made by
X on his subscription are deemed forfeited.
Right of corporation to reject highest

bid.
Under Section 68 (par. 2.), the delinquent stock shall be sold
to the highest bidder "unless the board of directors otherwise
orders." This means that the board is not bound to accept the
highest bid unless the contrary appears. The reason is that in a
public sale, the corporation is not making the offer to sell. In real-
ity, the bidder is the one making the offer to purchase which the
corporation is free to accept or reject.
32
Art. 1325. Unless it appears otherwise, business advertisements of things for
are not definite offers, but mere invitations to make an offer, (n)
622
Under Article 1326 of the Civil Code, it is expressly provided

that "advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest
or lowest bidder, unless the contrary appears."
Purchase by the corporation of delinquent Stock.

In the absence of bidders (or the highest bidder), the corpora-
tion may purchase for itself the delinquent stock. In such case, the
delinquent subscriber shall also be released from liability with
regard to his subscription which is deemed fully paid, for "the
total amount due shall be credited as paid in full in the books of
the corporation." (Ibid., last par.) Of course, the purchase by the
corporation must be made out of net earnings in view of the trust
fund doctrine, (see Sec. 41 [2].)
Title to all the shares purchased shall be vested in the corpo-
ration as treasury shares and may be disposed of for a reasonable
price fixed by the board of directors. (Sec. 68, last par., 9.)
Forfeiture of delinquent stock not a u t h o r i z e d .

Forfeiture of delinquent stock, without the corporation pay-
ing for it under Section 68, is not authorized under the Code.
Accordingly, in case there is no bidder after complying with all
legal requirements in the sale of delinquent shares under Section
68, the corporation cannot forfeit in its favor delinquent shares to
be taken up in the corporation's books as treasury shares.
However, the corporation can bring an action in court to
recover unpaid subscriptions under Section 70.
Shares to be sold in c a s e of delinquency.

The unpaid subscription must be paid by the subscriber pur-
suant to the terms and conditions of the subscription contract
with the corporation. Where the subscription contract fails to fix
the time and amount to be paid, the same may be fixed in the
notice of call pursuant to a resolution of the board of directors.
The corporation is allowed two alternatives in applying pay-
ments made by subscribers on their subscriptions, (see Sec. 64.)
(1) If it applies the partial payments pro rata to each and all the
entire number of shares subscribed for, all the shares are unpaid
and are covered by a declaration of delinquency; hence, can be

sold at public auction. Even if the partial payment is applied to
some of the shares but for which no certificates of stocks have
been issued, the entire subscription (i.e., all the shares subscribed)
shall become delinquent and shall be subject to sale at public
auction. (Sec. 67, par. 2.) The reason is that a subscription is "one,
entire and indivisible whole contract" as set forth in Section 64.
Thus, where the stockholder subscribed 100 shares at P10.00 par
value, and paid P200.00, in case of delinquency, all the 100 shares
covered by his subscription shall be subject to sale.
(2) Nevertheless, if allowed by its by-laws, a corporation
may issue certificates of stock corresponding to partial payments
made on account subscriptions. If the unpaid portion for which
no certificates of stock have been issued is declared delinquent,
only the unpaid shares covered by the declaration can be sold at
public auction. (Baltazar vs. Lingayen Gulf Electric Co., 14 SCRA
522 [1965]; see, however, Sec. 64.)
Sec. 69. When sale may be questioned. — No action to

recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock, unless the party
seeking to maintain such action first pays or tenders to
the party holding the stock the sum for which the same
was sold, with interest from the date of sale at the legal
rate; and no such action shall be maintained unless it
is commenced by the filing of a complaint within six (6)
months from the date of sale. (47a)
Recovery of stock unlawfully sold.

The grounds for the recovery of stock unlawfully sold for
delinquency are:
(1) irregularity or defect in the notice of sale; and
(2) irregularity or defect in the sale itself of the delinquent
stock.
Irregularity or defect in the call for unpaid subscription or
in the notice of delinquency is no longer included among the
grounds for questioning the sale.
624
Note that under Section 69, the action for the recovery of stock
unlawfully sold may be maintained, provided: (1) "the party
seeking to maintain such action first pays or tenders to the party
holding the stock, the sum for which the same was sold, with
interest from the date of sale at the legal rate"; and (2) such action
"is commenced by the filing of a complaint within six (6) months
from the date of sale." The owner of stock lawfully sold at public
auction for delinquency is not given the right of redemption.
Section 69 refers to unpaid subscription to capital stock, the
sale of which is governed by Section 68. These provisions cannot
be applied where the stock was fully paid. Instead, Article 1140
of the Civil Code on filing within eight (8) years of action to re-
cover movables (in this case share of stock) applies. (Calatagan
Golf Club, Inc. vs. Clemente, Jr., 585 SCRA 300 [2009].)
Sec. 70. Court action to recover unpaid subscription. —

Nothing in this Code shall prevent the corporation from
collecting by action in a court of proper jurisdiction the
amount due on any unpaid subscription, with accrued
interest, costs and expenses. (49a)
Judicial r e m e d y to recover
unpaid subscription.
(1) Necessity of prior call. — The statutory authority for the
recovery of unpaid subscription including pre-incorporation
subscription (see Sec. 61.) through judicial action is found in the
above provision. As a general rule, a corporation may not main-
tain a suit for the enforcement of unpaid subscription without
first making a call as provided by law. (see Sec. 67; see Art. 1169,
Civil Code.)
(2) Prescriptive period. — The judicial action to recover unpaid
subscription based on a written subscription contract must be
brought within ten (10) years from the time the right of action
accrues (Art. 1144[1], Civil Code.); or within six (6) years if based
on a verbal subscription contract. (Art. 1145[1], Ibid.) Generally,
the prescriptive period begins from the date demand is made
of the subscriber by the corporation to pay the balance of the
subscription, (see Garcia vs. Suarez, 67 Phil. 441 [1959]; see also
Art. 1169, Civil Code.)
(3) Amount recoverable. — The judicial remedy is limited

to "the amount due on any unpaid subscription with accrued
interest, costs and expenses." Therefore, the corporation cannot
recover any other claim against the subscriber. The foregoing
is also true in case of the extra-judicial sale at public auction of
delinquent shares. (Sec. 68, par. 3.)
(4) Nature of controversy. — Section 70 qualifies Section 5(b)
of Presidential Decree No. 902-A which confers on the Securities
and Exchange Commission original and exclusive jurisdiction
over controversies arising out of intra-corporate relations
between the corporation and the stockholders. An action against
a delinquent stockholder to collect the amount due on unpaid
subscription involves an intra-corporate dispute, (see Sec. 141.)
The Corporation Code was enacted later than Presidential Decree
33
No. 902-A and the amendments thereto.
Sec. 7 1 . Effects of delinquency. — No delinquent stock

shall be voted for or be entitled to vote or to representation
at any stockholders' meeting, nor shall the holder thereof
be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of
this Code, until and unless he pays the amount due on
his subscription with accrued interest, and the costs and
expenses of advertisement, if any. (50a)
Effects of stock delinquency.

(1) Stock delinquency shall deprive the stockholder the
right to be voted for or be entitled to vote or to representation
at any stockholders' meeting as provided above and in Section
24. Section 67 (par. 2.) expressly provides that the delinquent
stockholder loses his rights pertaining to a stockholder the
moment the unpaid subscription becomes delinquent. Thus, the
prohibition to vote applies even if the delinquent status of the
unpaid subscription occurs after the record date has been fixed.
To rule otherwise would, in effect, allow delinquent shares to
33
The question is now only of academic interest. The Securities Regulation Code
(Sec. 5.2, R.A. No. 8799.) has transferred jurisdiction to decide cases involving intra-cor-
porate disputes to courts of general jurisdiction.
626
vote and would tolerate continuance of the delinquency status

of the subscription since the delinquent stockholder would have
no more interest in paying the unpaid balance. (SEC Opinion,
March 13, 1998.)
(2) Delinquent stock is not to be included in determining the
existence of a quorum.
(3) Quo warranto proceedings may be instituted against
directors elected by delinquent stockholders. (SEC Opinion, Jan.
8,1976.)
(4) A delinquent stockholder shall not be entitled to any of
the rights of a stockholder but he shall still be entitled to receive
dividends, subject to the provision of Section 43 which restricts
the right to dividends by requiring that the cash dividends due
shall first be applied to the unpaid balance while stock dividends
shall be withheld until the unpaid balance is fully paid.
(5) Delinquent stocks shall be subject to delinquency sale as
provided by Section 68.
Upon full payment by the delinquent stockholder of his
unpaid subscription together with accrued interest, cost,
and other expenses, he shall be restored to all the rights of a
stockholder including the right to be issued other certificates of
stock evidencing his subscription.
Denial of voting rights.

Delinquent stock is denied voting rights because, if it shall
be allowed to have the same rights as non-delinquent stock,
stockholders of good standing will cease to have interest in
paying their subscriptions promptly, and that will be inimical to
the best interest of the corporation. The same observation applies
with respect to payment of dues by members of non-stock
corporations, (see SEC Opinion, June 14, 1972.) But delinquent
members may still be allowed to vote depending upon the
34
provisions of their by-laws. (SEC Opinion, April 8,1976.)
In a case, the corporation refused to count the votes by a
stockholder in a stockholders' meeting maintaining that she
*See SEC Opinion, March 10,1987 under Section 46.

had forfeited her right to vote because she had mismanaged the
corporation, had attempted to sell her stock in violation of the
corporate charter, and the sheriff had seized her stock for non-
payment of debts. The court held that none of these matters were
sufficient grounds to deny her of the right to vote her shares. The
other stockholders had recourse against her in other ways such
as a suit for violation of her duties to the corporation and to the
stockholders. (Foreman vs. Hines, 314 So. 2d 460 [Ct. App. La.
1975].)
Sec. 72. Rights of unpaid shares. — Holders of subscribed

shares not fully paid which are not delinquent shall have
all the rights of a stockholder, (n)
Rights of unpaid shares.

(1) Before delinquency. — Before unpaid shares become
delinquent, the holder thereof is not considered to have violated
any contract with the corporation and, as a general rule, he has all
the rights of a stockholder, which rights include the right to vote
and to participate in dividends based on his total subscription.
Such rights commence from the time his subscription is accepted
by the corporation or if the offer to subscribe is made by the
corporation, from the time such offer is accepted by the subscriber.
However, he is liable for interest on his unpaid subscription if so
required by the by-laws. (Sec. 66.)
(a) Under Section 72, full payment of subscription is
not required to make one a stockholder. It should not be
construed, however, to preclude the implementation of
the policy of the Central Bank relative to the registration
of foreign investments for purposes of repatriation and/
or remittances of earnings. It is the Central Bank's position
that foreign investors' subscriptions are not entitled to any
dividends prior to actual remittance of the full payment of
their subscriptions. (SEC Opinion, Dec. 14,1989.)
(b) Where the subscription contract is subject to a sus-
pensive condition of full payment, a subscriber is not entitled
to the rights of a regular stockholder before the fulfillment of
the condition.
628
(c) Where the consideration for the shares subscribed

is other than cash, the valuation thereof shall be subject to
approval by the Securities and Exchange Commission, (see
Sec. 62.) This means that before such approval, the subscriber
cannot exercise the rights of a stockholder.
(2) After delinquency. — The moment the unpaid subscription
becomes delinquent, the holder loses the right to vote the shares
covering the entire subscription, (see Sec. 64.) Section 67 (par. 2.)
states when an unpaid subscription is considered delinquent. In
non-stock corporations, whether or not a delinquent member is
still entitled to exercise his voting rights is to be determined by
the provisions of the articles of incorporation and the by-laws.
Where partial payment on a subscription is applied as full
payment for the corresponding number of shares for which the
subscriber is issued certificates of stock, a call for payment of the
unpaid portion of the subscription and its subsequent declara-
tion of delinquency will not affect the fully paid-up stock but
only the unpaid shares for which no certificates of stock have
been issued. (Baltazar vs. Lingayen Gulf Electric Co., 14 SCRA
522 [1965]; see, however, Sec. 64.)
Sec. 73. Lost or destroyed certificates. — The following

procedure shall be followed for the issuance by a corpo-
ration of new certificate(s) of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of certificate(s) of stock in
a corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate(s)
were lost, stolen or destroyed, the number of shares
represented by each certificate, the serial number(s) of the
certificate(s) and the name of the corporation which issued
the same. He shall also submit such other information and
evidence which he may deem necessary;
2. After verifying the affidavit and other information

and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of
general circulation published in the place where the
corporation has its principal office, once a week for three
Sec. 73 TITLE VII. STOCKS AND STOCKHOLDERS
629
(3) consecutive weeks at the expense of the registered

owner of the certificate(s) of stock which have been lost,
stolen or destroyed. The notice shall state the name of
said corporation, the name of the registered owner and
the serial number(s) of said certificate(s), and the number
of shares represented by such certificate(s), and that
after the expiration of one (1) year from the date of the
last publication, if no contest has been presented to said
corporation regarding said certificate(s) of stock, the right
to make such contest shall be barred and said corporation
shall cancel in its books the certificate(s) of stock which
have been lost, stolen or destroyed and issue in lieu
thereof new certificate(s) of stock, unless the registered
owner files a bond or other security in lieu thereof, as
may be required, running for a period of one (1) year for
a sum and in such form and with such sureties as may
be satisfactory to the board of directors, in which case a
new certificate may be issued even before the expiration
of the one (1)-year period provided herein: Provided, That
if a contest has been presented to said corporation or if
an action is pending in court regarding the ownership of
said certificate(s) of stock which have been lost, stolen or
destroyed, the issuance of the new certificate(s) of stock
in lieu thereof shall be suspended until the final decision
by the court regarding the ownership of said certificate(s)
of stock which have been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the

part of the corporation and its officers, no action may be
brought against any corporation which shall have issued
certificate(s) of stock in lieu of those lost, stolen or de-
stroyed pursuant to the procedure above-described. (R.A.
No. 201a.)
Lost, stolen, or destroyed stock

certificates.
Section 73 prescribes the procedure to be followed for the
issuance by a corporation of new certificate(s) in lieu of those
which have been lost, stolen, or destroyed.
(1) The provision of Section 73(2) with respect to notice of loss
is mandatory in nature. Thus, all the facts required to be stated
should be included in the notice. However, a corporation may
630
adopt a "notice of loss" which need not follow the exact letters
of the law as long as substantial compliance of the required facts
are included in the notice. (SEC Opinion, July 12,1993.)
(2) The board of directors is given the power to determine
the amount of the bond to be filed by the owner of lost, stolen,
or destroyed certificate of stock so that a new certificate may be
issued before the expiration of the one (l)-year period provided
in said bond.
(a) Considering the nature of a bond, which is to protect
the corporation against loss or damage from any source
growing out of the issuance of the duplicate certificate
including liability to the holder of the original certificate
or to innocent holders of certificates based on the duplicate
(11 Fletcher, p. 510.), it is the board of directors that can best
determine the form and the identity of the surety, the kind of
surety bond and the amount sufficient for the protection of
the corporation. (SEC Opinion, April 1,1987.)
(b) It has been said that the amount will depend upon the
rights sought to be exercised by the stockholder who seeks
issuance of a new stock certificate. The bond posted should
be in an amount adequate to protect the corporation against
any loss sustained thereby. (18 Am. Jur. 2d 796.)
(3) The corporation is not liable to any person prejudiced
by the issuance of new certificate(s) of stock pursuant to the
procedure described except in case of fraud, bad faith, or
negligence on the part of the corporation and its officers, (par.
2.) New certificates issued because of misrepresentation of the
registered owner are invalid, (see Red Grande Estate Co., Inc. vs.
Board of Liquidators, 104 SCRA 963 [1978].)
(4) The issue of whether or not a corporation is bound to
replace a stockholder's certificate is an intra-corporate one, the
jurisdiction of which belongs to the Securities and Exchange
Commission even if there is a prayer for damages for the question
of damages is merely incidental to the main issue. (Philex Mining
Corporation vs. Reyes, 118 SCRA 602 [1982]; see Sec. 141.)
(5) The expenses attendant to the issuance of a replacement
certificate shall be borne by the registered owner unless fault can
be attributed to the corporation or its officers.
W h e n publication requirement
may be dispensed with.
(1) The procedure prescribed in Section 73 is not applicable
in a proceeding to compel issuance of a certificate to one in whose
favor none was ever issued by the corporation where upon the
facts, the certificate was lost by the corporation.
(2) The provision of Section 73 appears to be mandatory. The
conditions prescribed therein are for the protection of the corpo-
ration which cannot be made liable to any claimant of the shares
until the procedure provided for has been complied with.
Nevertheless, a corporation may be compelled to issue a
new certificate if a bond or indemnity is given or it might do so
voluntarily; and it could be compelled to issue a new certificate
without any indemnity where, upon the facts, it is reasonably
certain that the original certificate will not reappear, as where
there is clear proof that the original had been destroyed, or where
the certificate was lost by the corporation itself by carelessness,
or if the corporation was otherwise protected, for in such a case
the corporation could not incur any liability by reason of the
original certificate. (SEC Opinions, Jan. 8,1990 and June 11,1990,
citing 11 Fletcher, Sec. 5180; see, however, SEC Opinion, March
29, 1990 to the effect that the publication requirement cannot be
dispensed with.)
When the stock and transfer book has been lost or destroyed,
and the corporation decides to issue new certificates of stock
in lieu of the old certificates held by existing stockholders, the
procedure or formalities prescribed under Section 73 are not
applicable, for the stockholder should not be made to suffer the
consequences on account of the negligence of the corporation.
— oOo —
Title VIII
CORPORATE BOOKS AND RECORDS
Sec. 74. Books to be kept; stock transfer agent. — Every

corporation shall, at its principal office, keep and care-
fully preserve a record of all business transactions, and
minutes of all meetings of stockholders or members, or
of the board of directors or trustees, in which shall be set
forth in detail the time and place of holding the meeting,
how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting.
Upon the demand of any director, trustee, stockholder or
member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in
the minutes; and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action
must be recorded in full on his demand.
The records of all business transactions of the corpo-
ration and the minutes of any meeting shall be open to the
inspection of any director, trustee, stockholder or member
of the corporation at reasonable hours on business days
and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse
to allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder
or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is pursuant to
a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be
632
Sec. 74 T I T L E VIII. C O R P O R A T E B O O K S A N D R E C O R D S 633
imposed upon the directors or trustees who voted for such

refusal: And provided, further, That it shall be a defense to
any action under this section that the person demanding to
examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured
through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making
his demand.
Stock corporations must also keep a book to be known
as the "stock and transfer book," in which must be kept
a record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and unpaid
on all stock for which subscription has been made, and
the date of payment of any installment; a statement of
every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book
shall be kept in the principal office of the corporation or in
the office of its stock transfer agent and shall be open for
inspection of any director or stockholder of the corporation
at reasonable hours on business days.
No stock transfer agent or one engaged principally
in the business of registering transfer of stocks in behalf
of a stock corporation shall be allowed to operate in the
Philippines unless he secures a license from the Securities
and Exchange Commission and pays a fee as may be fixed
by the Commission, which shall be renewed annually:
Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which
case all the rules and regulations imposed on stock
transfer agents, except the payment of a license fee herein
provided, shall be applicable. (51a and 32a; P.D. No. 268.)
Books and records to be kept

by corporations.
(1) Under the Corporation Code. — Section 74 requires every
private corporation, stock or non-stock, to keep books and
records as follows:
(a) A record of all business transactions;
(b) Minutes of all meetings of stockholders or members;
634
1
(c) Minutes of all meetings of directors or trustees (par.
1.); and
(d) Stock and transfer book, in the case of stock corpora-
tions, (par. 4.)
All the above books and records must be kept at the principal
office of the corporation (par. 1.), except that the stock and transfer
book may be kept in the principal office of the corporation or in
2
the office of its stock transfer agent, if one has been appointed by
the corporation, (par. 4.) A corporation which has been dissolved
'Without the signature of the board secretary, the alleged minutes of a board meeting
taken by a mere clerk, although it was part of the latter's duties to take down stenograph-
ic notes of the discussions in board meetings, have neither probative value nor credibility.
(Union of Supervisors [R.B.]-NATU vs. Secretary of Labor, 109 SCRA 139 [1981].)
The minutes are a brief statement not only of what transpired at a meeting, usually of
stockholders / members or directors / trustees, but also at meeting of an executive commit-
tee. The minutes are usually kept in a book especially designed for that purpose, but they
may also be kept in the form of memoranda or in any other manner in which they can be
identified as minutes of a meeting. (People vs. Dumlao, 580 SCRA 409 [2009], citing the
Corporation Code of the Phils. Annotated [1994] by R.N. Lopez, Vol. 2, p. 871.)
Essentially, a clearing house is an agent of the stock exchange and its members, and
the transfer agent is an arm or agent of an issuer corporation listed on the exchange and
its members. If the jobs of the auditor, clearing house, and transfer agent are lodged in
one and same person, all measures of checks and balances become ineffective, conflicts
of interest may come into play, and laxity in the proper performance of each work will
not be remote. (SEC Opinion, Oct. 29, 1971.) Transfer agents handle for a corporation all
matters pertaining to the transfer by stockholders or bondholders of their securities to
other persons, (see the Revised Securities Act [B.P. Big. 1781, Sec. 2(p}], Appendix "B.")
A transfer agent may, in addition to keeping the current stock and transfers book,
keep the stockholders' ledger, in which case he prepares a list of stockholders for the use of
the corporation whenever needed for the payment of dividends, the issue of stock war-
rants, stockholders' meetings, and other corporate purposes. He may also distribute the
dividends, warrants, and so forth. (E.L. Kohler, op. cit., p. 472.)
In addition to the records required to be maintained pursuant to Section 74, RSA
Rule 40-5 requires every transfer agent to make and retain for a period of five (5) years
the following books and records relating to its transfer agent activities:
(1) its rules and procedures;
(2) policy of financial institution bond coverage;
(3) exception reports filed with the Commission pursuant to RSA Rule 40-3;
(4) complaint log as required to be maintained under RSA Rule 40-3;
(5) reports to the issuers for whom the firm acts as transfer agent as required
under RSA Rule 40-3; and
(6) annual report on SEC Form 40-AR.
Every transfer agent shall make available any or all of its books and records upon
request of an authorized representative of the Securities and Exchange Commission. Fail-
ure to do so shall result in an immediate suspension of the transfer agent's registration.
Such suspension shall continue until such time as the books and records are made avail-
able to the SEC.
(For rules on registration of and reports from clearing agencies and transfer agents,
see RSA Rules 40-2, 3, 4.)
Sec. 74 TITLE VIII. CORPORATE BOOKS AND RECORDS 635
must continue to preserve them until the final settlement and

liquidation of its affairs.
The "records of all business transactions" would include
the journal, ledger, financial statements, income tax returns,
vouchers, receipts, contracts and all papers pertaining to the
operation of the corporation of interest to its stockholders. (SEC
Opinion, March 15,1991.) The minutes of board meetings should
be signed by the corporate secretary. Without such signature,
neither probative value nor credibility could be accorded such
minutes. (Union of Supervisors [R.B.]-NATU vs. Secretary of
Labor, 109 SCRA 139 [1981].)
(2) Under special laws. — In addition, corporations must keep
other books and records required by special laws like the Public
Service Act, General Banking Law, National Internal Revenue
Code, Labor Code, and others. They may also keep such optional
records and subsidiary books as the needs of their business may
require.
Practical necessity of k e e p i n g b o o k s .
The language of Section 74 imposing upon corporations the
3
duty of keeping books and records is imperative and mandatory.
3
Among the corporate records which are required by the SEC to be kept and/or
registered by corporations include the following:
(1) Books of account and stock and transfer books. — Within thirty (30) days from date
of registration of the articles of incorporation, the corporation must set up its books of ac-
counts, duly registered with the Bureau of Internal Revenue, wherein the paid-up capital
as well as other funds received and all disbursements made thereon are immediately
recorded and must set up and register with the Commission its stock and transfer book.
(2) List of members in non-stock corporation; list of stockholders. — Within thirty (30)
days from the date of registration, all non-stock corporations must set up and register
with the Commission their Membership Book. All stock corporations must prepare a list
of stockholders as of the date of the next annual or special stockholders' meeting, show-
ing the names of stockholders, address, nationality, number of shares subscribed, and
amount subscribed by each which shall be made available for inspection by any stock-
holder of record. Non-stock corporations must prepare a list of members as of the date
of the next annual or special meeting of the members showing the name of the members,
address, and nationality which shall be made available for inspection by any member. All
corporations must submit said list within five (5) days from the date of the stockholders' /
members' meeting. However, in the case of corporations where the stockholders/mem-
bers entitled to vote are as of a date prior to said meeting, the corporation must submit to
the Commission within five (5) days before the date of the said meeting the list of stock-
holders/members showing the information stated above duly certified by the corporate
secretary and/or the transfer agent concerned.
Corporations having 10,000 or more stockholders must submit a certification under
oath by the corporate secretary or transfer agent stating among others the total number
636
Aside from this legal duty, corporations are under the prac-
tical duty imposed by necessity and convenience of keeping ad-
equate books and records, if for no other reason than because it
is advisable as a measure of precaution, expediency and conve-
nience, since they provide the only certain and accurate method
of establishing the various corporate acts and transactions and of
4
showing the ownership of the stock and like matters. (See SEC
Opinion, Feb. 19,1975, citing 5 Fletcher, p. 509.)
Entries to be m a d e in stock
and transfer book.
Stock corporations must keep a "stock and transfer book" in
which must be kept a record of all stocks containing the entries
required by Section 74 to be made and such as other entries as the
by-laws may prescribe, (par. 4.)
(1) Transfers contemplated to be recorded. — The "alienation,
sale, or transfer of stock" that is supposed to be recorded in the
stock and transfer book as contemplated in Section 74 (par. 4.)
refers generally to shares which may be alienated, and they are
those covered by certificates of stock. (Nava vs. Peer Marketing
Corp., 74 SCRA 65 [1970]; see Sec. 63, par. 2.)
As a general rule, only those whose ownership of stock is
duly recorded or registered in the stocks and transfer book are
considered stockholders of record and are entitled to all the
rights of a stockholder.
(2) Where failure to make entry attributable to the corporation. —
Where a stockholder in good faith sells his stock, does all that he
believes is necessary to effect a transfer and requests the corporate
of shares subscribed, total amount subscribed, and total amount paid and the distribution
of the ownership thereof by citizenship classified into Filipino, American, Chinese, Japa-
nese, and others, in lieu of the list of stockholders mentioned in the preceding paragraph.
The membership book /stock and transfer book including loose leaf ledgers and
computer records being kept by the corporations concerned or the records of the transfer
agents as the case may be must at all times be made up-to-date and shall be subject to
inspection by this Commission or any interested stockholder/member of record.
(3) Financial records. — All corporations, whether domestic or foreign, transact-
ing business in the Philippines, shall keep proper books of accounts and other financial
records, vouchers and papers, showing all business transactions including the receipts
and disbursements of funds, the purposes for which they have been spent and the au-
thorization therefor.
•Lanuza vs. Court of Appeals, 454 SCRA 54 (2005), citing HECTOR S. DE LEON, The
Corporation Code of the Philippines Annotated, 1999 Ed., p. 606.
officers having charge of the books, to do all that is necessary to

that end, he is released from statutory liability, if any, to creditors
(Braken vs. Nicol, 124 Ky. 628, 4 L.R.A. [N.S.] 818.), although
the corporation does not keep a stock book as required by the
statute and hence, the transfer was not recorded therein. Even in
those states in which the sale of shares is ineffectual against the
claims of attaching creditors of the vendor until transferred to
the vendee on the books, the rule is otherwise when the failure to
make the transfer is attributable only to the corporation and its
officers. (Fisher, op. ext., pp. 150-151.)
Neither the transferor nor the transferee can be adversely
affected by the failure to make an entry of the transfer on the
books of the corporation. (Earle vs. Carson, 188 U.S. 42, 44; 47 L.
ed. 373.)
(3) Entry where stockholder unknown or cannot be located. —
Where the stockholder is unknown or cannot be identified or
located (see Sec. 122, par. 3.), a trust relation is impliedly created
between the corporation and the unknown stockholder. In such
case, his shares of stock shall be entered in the corporate books
and in the certificate of stock in the name of the corporation as
"trustee." The corporation shall continue to hold the stock in a
fiduciary capacity, until the real owner appears or the stock is
escheated in accordance with law. (SEC Opinions, Dec. 1, 1988;
July 13,1993.)
B o o k s a n d records, a n d entries
therein as evidence.
The records of a private corporation, even those required to
be kept by statute, are not in any sense public records. They are
merely private records, and, as such, subject to the general rules
of evidence applicable to documentary evidence.
(1) Admissibility as evidence. — As a general rule, the books
and records of a corporation are admissible in evidence in favor
of or against the corporation and its members to prove the corpo-
rate acts, its financial status, and other matters, including one's
status as a stockholder. They are ordinarily the best evidence
of corporate acts and proceedings or of the matters recorded
therein. Thus, the stock and transfer book is the best evidence of
638
the stock ownership and voting rights for purposes of corporate

elections or for the purposes of dividend payment. (18 Am. Jur.
2d 707.)
Where original corporate records are lost, mislaid, or
destroyed, secondary evidence may be admitted in accordance
with Section 4, Rule 130 of the Rules of Court.
(2) Probative value. — It is generally held, however, that the
records and minutes of a corporation are not conclusive even
against the corporation, but are prima facie evidence only of
the matters recorded therein. Thus, parol or extrinsic evidence
may be admitted to supply omissions in the records or explain
ambiguities, or to show what transpired where no records were
kept, and according to some cases, to contradict such records.
Corporations are not bound by false and simulated entries
on their records unless, knowing them to be such, they have
neglected to correct them and some innocent third person has
relied thereon to his prejudice. (Ibid.)
(3) Resort to other documents. — The quorum is based on the
totality of the shares which have been subscribed and issued,
whether it be founders shares or common shares, (see Sees. 52,
137.) The stock and transfer book cannot be used as the sole basis
for determining the quorum as it does not reflect the totality of
shares which have been subscribed, more so when the articles
of incorporation show a larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer
book. This is one instance where resort to documents other than
the stock and transfer book is necessary. One who is actively a
stockholder cannot be denied his right to vote by the corporation
merely because the corporate officers failed to keep its records
accurately. A contrary rule would work injustice to the owners
and/or successors in interest of said shares. (Lanuza vs. Court of
Appeals, 454 SCRA 54 [2005].)
Persons given the right to inspect

corporate b o o k s .
While the right of inspection of corporate books is granted as
a matter of precedent or practice in other jurisdictions, it is one
that is recognized by express provision of our corporation law.
Sec. 74 TITLE Vm. CORPORATE BOOKS AND RECORDS 639
(1) Any director, trustee, or stockholder or member. — Section

74 states that "the record of all business transactions of the
corporation and the minutes of any meeting shall be open to the
inspection of any director, trustee, or stockholder or member of
the corporation at reasonable hours on business days." (par. 2.)
(2) Voting trust certificate holder. — The word "stockholder,"
as used in Section 74, means not only a stockholder of record; it
includes a voting trust certificate holder who has become merely
the equitable owner of the shares transferred, (see Sec. 59, par. 3.)
(3) Stockholder of a sequestered company. — Pursuant to said
provision, a stockholder of a sequestered corporation retains the
right to inspect and/or examine the records of the corporation.
The act of sequestration of property does not import or bring
about a divestment of title over said property. In relation to the
property sequestered, frozen or provisionally taken over, the
sequestrating authority is a conservator, not an owner. (Republic
vs. Sandiganbayan, 199 SCRA 39 [1991]; Africa vs. Presidential
Commission on Good Government, 205 SCRA 39 [1992].)
(4) Beneficial owner of shares. — A beneficial owner of shares
(e.g., buyer from record owner), pledgee, or judgment debtor
may also be given the right of inspection, provided his interest is
clearly established by evidence.
R e m e d i e s a n d sanctions for e n f o r c e m e n t
of right.
(1) Action for mandamus or damages. — In case the officers of
the corporation wrongfully denies a stockholder or member of
the right to inspect corporate books or papers, the usual remedy
to enforce his right is by filing with the Commission an action
for mandamus against the corporation. The secretary should be
included as party defendant since such official is customarily
charged with the custody of all documents and records of the
corporation against whom personal orders of the court would be
made, (see Ibid.; SEC Opinion, April 27, 1970.)
In a proper case, the stockholder may maintain an action for
damages which he may have sustained by the wrongful denial.
(2) Civil and criminal liability. — Under Section 74 (par. 3.),
any officer or agent of the corporation who shall refuse to allow
640
any director, trustee, stockholder or member of the corporation

to examine and copy excerpts from its records or minutes, in
accordance with the provisions of the Code, shall be liable to
such director, etc. for damages, and, in addition, shall be guilty
of an offense which shall be punishable under Section 144 of the
Code. However, if such refusal is pursuant to a resolution or
order of the board of directors or trustees, the liability for such
action shall be imposed upon the directors or trustees who voted
for such refusal.
Note that Section 74 (par. 3.) refers only to the "minutes
or records" of the corporation, and does not include refusal to
allow inspection of the stock and transfer book. Nevertheless,
the officer or agent denying such inspection may be held civilly
liable for damages, (see Arts. 19,21, Civil Code.)
Basis and purpose of right to inspect

corporate books.
(1) Beneficial ownership of corporate assets. — Those in charge
of the corporation are merely the stockholders' or members'
agents concerning whose good faith in discharging their duties
the stockholders or members have an interest and right to be in-
formed. (5 Fletcher, p. 571.)
(a) The law is based on the principle that the stockhold-
ers or members have a right to be fully informed as to the
condition of the corporation, in the manner its affairs are
conducted, and how its capital stock to which they have con-
tributed is employed and managed. (SEC Opinion, April 29,
1970, citing Stone vs. Kellog, 46 N.E. 22.)
(b) The right of stockholders to inspect the books of the
corporation rests on the fact of beneficial ownership of the
corporate property and assets through ownership of shares.
With reference to his right of inspection, the relation of a
stockholder to the corporation is analogous to that of a part-
ner to the firm. (18 Am. Jur. 2d 710; Art. 1803, Civil Code.)
(c) The right is predicated not only upon the stockholders'
in the corporation and ownership of shares of the corporation's
assets but also ownerships of the corporation's assets but
also upon the necessity of self-protection. (Gokongwei, Jr. vs.
Securities and Exchange Commission, 89 SCRA 336 [1979].)
(2) Protection of stockholders and general public from mismanage-

ment, fraud, and other wrongful acts. — There is no question that
stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the manage-
ment, determine the financial condition of the corporation, and
generally take an account of the stewardship of the officers and
directors. (18 Am. Jur. 2d 718.)
(a) The evident purpose of the law in granting stock-
holders the right is to protect small and minority stockhold-
ers from the power of the majority and from mismanagement
by its officers as well as to ascertain, establish, and maintain
their rights and intelligently perform their corporate duties.
(SEC Opinion, April 29,1970, citing Stone vs. Kellog, 46 N.E.
22.)
(b) It has also been stated that the purpose of the law
which requires corporations to keep books of account and
gives stockholders the right to examine the records of their
corporation is not only to protect the interests of stockholders
but also to protect the public from monopolies, unlawful
combinations, and unreasonable exactions from corporations.
(Ibid., p. 710.)
In the exercise of its power of supervision and control over
all corporations, the Securities and Exchange Commission,
motu proprio or upon complaint by any aggrieved party,
undertake an inspection and examination of books and
records of any corporation, (see Sec. 142.)
Right to inspection not absolute.

In spite of the fact that the right of inspection by a stockholder
or member would appear to be absolute according to the
provision of Section 74, there are limitations on the right.
(1) Purpose of inspection. — The stockholder's (or member's)
right of inspection is given to him as such and must be exercised
by him with respect to his interest as a stockholder and for some
purpose germane thereto (such as where the purpose is to find
out the actual financial condition of the corporation and how his
investment is being used) or in the interest of the corporation,
(see Gokongwei, Jr. vs. Securities and Exchange Commission, 89
SCRA 336 [1979].)
642
(a) Ground for denial of right. — The right should be denied

on the ground that "the person demanding to examine or
copy excerpts from the corporation's records and minutes
has improperly used information secured through any prior
examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or
for a legitimate purpose in making his demand" (Sec. 74, par.
3.), or has an ulterior purpose or improper ends prejudicial
to the corporation (Acuna vs. Parlatone, [C.A.] O.G. Suppl.,
Oct. 17, 1941, p. 28.), such as where the purpose is merely
to gratify his curiosity or for a speculative use. (Gutherie vs.
Harkness, 199 U.S. 148.)
(b) Burden of proof that purpose is illegitimate or improper.
— On the application for mandamus to enforce the right, it is
proper for the court, however, to inquire into and consider
the stockholder's good faith and his purpose and motives
5
in seeking inspection. (Gokongwei, Jr. vs. Securities and
Exchange Commission, supra, citing 5 Fletcher, p. 716.) The
presumption is that the purpose of the stockholder or member
is legitimate or proper (i.e., related to his being a stockholder).
Once the stockholder alleges a proper purpose, the burden
of proving otherwise rests on the corporation, (see Republic
vs. Sandiganbayan, 199 SCRA 39 [1991].) He may, therefore,
demand an examination of the corporate books and records
6
without disclosing his reasons. (7 R.C.L. 326.) In a criminal
To ascertain the value of petitioner's shares for sale is generally regarded as a prop-
er motive. It is frequently combined with a purpose to inquire into and possibly initiate
litigation with respect to mismanagement. (Gothrie vs. Harkness, 199 U.S. 148 [1905].)
Mandamus has been denied, however, where the corporation alleged that the petitioner's
purpose was to bring groundless suits in order to force the corporation or its principal
shareholder to purchase his shares. (State ex rel. Linihan vs. United Brokerage Co., 101 A
433 [Del. Sup. Ct. 1917], cited in W.L. Cary, Cases and Materials on Corporations, 1969
ed., p. 1022.)
6
In a case, however, the Supreme Court ruled: "Although the petitioner has claimed
that he has justifiable motives in seeking the inspection of the books of the respond-
ent bank, he has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of the published reports regarding
certain transactions entered into by the respondent bank and to inquire into their validity.
The circumstances under which he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of his good faith and
proper motivation. Admittedly, he sought to be a stockholder in order to pry into transac-
tions entered into by respondent bank even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against the respondent bank
Sec. 74 TITLE Vni. CORPORATE BOOKS AND RECORDS 643
complaint for violation of Section 74, the defense of improper

use or motive is in the nature of a justifying circumstance that
could exonerate those who raise and are able to prove the
same. (Ang-Abaya vs. Ang, 573 SCRA 129 [2008].)
(2) Requisites for existence of probable cause to file a criminal case.
— In order that the penal provision under Section 144 may apply
in a case of violation of a stockholder's or member's right to
inspect corporate books, the following elements must be present.
(a) A director, etc. has made a prior demand in writing
for a copy or excerpts from the corporation's records or min-
utes;
(b) Any officer or agent of the concerned corporation
shall refuse to allow the said director, etc., to examine and
copy said excerpts;
(c) If such refusal is made pursuant to a resolution or
order of the board of directors' or trustees the liability for
such action shall be imposed upon the directors or trustees
who voted such refusal; and
(d) Where the officer or agent of the corporation sets up
the defense that the person demanding to examine and copy
excerpts from the corporation's records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or
for a legitimate purpose in making his demand, the contrary
must be shown or proved. (Ang-Abaya vs. Ang, supra; Sy
Tiong Shiou vs. Sy Chim, 582 SCRA 517 [2009].)
(3) Books of foreign corporation. — The right does not apply
where the corporation is not organized under the Philippine law
as in such a case, the right of the stockholder is governed by the
inspection requirements in the jurisdiction in which the foreign
corporation was organized. (Philpotts vs. Phil. Manufacturing
Co., 40 Phil. 471 [1919]; Grey vs. Insular Lumber Co., 67 Phil. 139
[1939]; see Sec. 129.)
for acts done by the latter when the petitioner was a total stranger to the same. He could
have been impelled by a laudable sense of civic consciousness, but it could not be said
that his purpose is germane to his interest as a stockholder." (Gonzales vs. Philippine
National Bank, 122 SCRA 490 [1983].)
644
(4) Trade secrets. — There are some things which a corpo-

ration may undoubtedly keep secret notwithstanding the right
of inspection given to stockholders, as where a corporation,
engaged in the business of manufacture, has acquired a formula
or process not generally known, which has proved of utility in
the manufacture of its products. The corporation or its board of
directors may properly adopt measures for the protection of such
process from publicity. (Philpotts vs. Phil. Manufacturing Co.,
supra.)
(5) Certified copies of minutes. — A stockholder does not have
any absolute right to secure certified copies of the minutes of
the corporation until these minutes have been written up and
approved by the directors. (Veraguth vs. Isabela Sugar Co., 52
Phil. 266 [1928].)
(6) Place of inspection. — The Code requires every stock
corporation to keep its stock and transfer books in the principal
office of the corporation or in the office of its stock transfer agent.
(Sec. 74, par. 4.) By implication, such books can only be inspected
at such office. It has been held that a stockholder cannot be
permitted to take the corporate books out of such office for the
purpose of inspecting the same. (Veraguth vs. Isabela Sugar Co.,
supra.)
(7) Reasonable regulations re inspection. — The right of inspec-
tion is subject to regulations as to time, place, and proper pur-
pose which the corporation through the by-laws may prescribe,
provided such regulations are reasonable and not contrary to
law. (see Sec. 46, par. 1.) It cannot in substance be denied or made
exercisable only at the whim or discretion of those in charge of
the corporation. Of course, the right may only be exercised at
reasonable hours on business days. (Sec. 74, par. 2.) Reasonable
hours must be understood to mean reasonable hours on business
days throughout the year and not merely during some arbitrary
period of a few days chosen by the directors, e.g., for ten days
prior to the annual meeting for the year. (Pardo vs. Hercules
Lumber Co., 47 Phil. 964 [1925].)
Extent of the right of inspection.

(1) Copies, abstracts and memoranda. — The right to inspect
the books and records of the corporation includes, as an incident
Sec. 74 TITLE VITJ. CORPORATE BOOKS AND RECORDS 645
thereof, the right to make copies, abstracts and memoranda of

their contents (Sec. 74, pars. 3, 4.) but a stockholder (or mem-
ber) cannot, without order of the court, be allowed to take books
from the office of the corporation. (Veraguth vs. Isabela Sugar
Co., Inc., supra.) Under Section 75, any stockholder or member
has the right to receive the corporation's most recent financial
statement.
(2) Agent or representative. — The right of inspection is
personal in the sense that it may be exercised by the director,
trustee, stockholder, or member himself but the inspection and
examination may be made by any proper representative or
attorney-in-fact, and either with or without the attendance of the
director, etc.; otherwise, the right would be futile or unavailing
in many instances where through lack of knowledge necessary to
exercise it, he is debarred from procuring in his behalf the services
of one who could exercise it. (Philpotts vs. Phil. Manufacturing
Co., 40 Phil. 471 [1919].)
(3) All pertinent books, papers, etc. — Section 74 includes
"record of all business transactions and minutes of all meetings
of stockholders or members or of the board of directors or
trustees." (par. 1.) In general, the right of the stockholder (or
member) extends to all books, papers, contracts, minutes, books
or other instruments from which he can derive any information
that will enable him to better protect his interest. (5 Fletcher, p.
638.) A stockholder cannot be denied access to the corporate
books simply because they contain, along with information to
which he is entitled, other information to which he has no right
to demand, where the right is given by statute. (SEC Opinion,
April 27,1970, citing 7 R.C.L. 225.)
Right of stockholder to d e m a n d a list

of stockholders.
(1) Right only to inspect and make own list. — Under the Corpo-
ration Code, there is no express provision making it as duty of
a corporation to supply any stockholder, upon his request, with
a list of its stockholders showing their respective subscriptions.
To do so would result to a great inconvenience on the part
of the corporation, especially when there are thousands of
stockholders. It seems, therefore, unnecessary for a stockholder
646
to request that he be supplied with a list of stockholders with

their shareholdings inasmuch as he can directly inspect the stock
and transfer book of the corporation, subject, of course, to such
limitation as to proper time, place, purpose, and conditions of
inspection. (Ballantine, p. 385.)
The Code impliedly recognizes the solicitation of proxies
as a right (see Sec. 58.) and a proxy-seeking stockholder must
have access to the corporation's list of stockholders before he can
begin soliciting proxies.
(2) Non-liability of corporation for allowing right. — As to
whether a stockholder can sue a corporation for revealing the
names of stockholders and their stockholdings, it is the opinion
of the Securities and Exchange Commission that a corporation
in allowing a shareholder to get the list of stockholders in the
exercise of his right to inspection, cannot be held liable by the
other stockholders who did not so request, for that would be
inconsistent with the express provision of the law granting
stockholders the right to inspection of corporate books and
records including the list of stockholders. (SEC Opinion, Aug. 11,
1972.)
Right of stockholder to d e m a n d a detailed

auditing of business o p e r a t i o n s .
The Code is silent as to whether a stockholder can demand
a detailed auditing of the business operations of a corporation
upon his discovery of probable anomalies and irregularities as
appearing in the books of the corporation and other sources of
information.
(1) Power of courts. — The weight of authority in the United
States, however, is to the effect that the courts do not have the
power to order a full and complete audit where no good reason
is shown that the same is necessary. (Merchants Brown Co. vs.
Butler, 70 Fla. 397, 70 So. 383.) But while the court does not have
authority to command in mandamus the corporation to allow an
audit made, it does have the power to allow a reasonable time
for the inspection of the books and records and if the auditor can
accomplish the making of an audit during that time, there is no
reason why he may not do so. (Florida Military Academy, Inc. vs.
Sate Ex rel Moya, 127 Fla. 381,174 Sc. 3, 5.)
Sec. 74 TITLE VTII. CORPORATE BOOKS AND RECORDS 647
(2) Liability for expenses of audit. — A stockholder is entitled to

an inspection and audit to ascertain the value of his stock and the
correctness of an inventory or audit in order to exercise an option
to purchase. (Dreyfuss and Sons vs. Benson, 239 S.W. 347.) It has
also been said that all expenses of the investigation or audit are
to be defrayed by the applicant unless the court orders them to
be paid or shared by the corporation. (Ballantine, p. 390.)
(3) Power of the Securities and Exchange Commission. — In
the light of all the foregoing authorities, a stockholder who
would like to ascertain the value of his liquidation dividend
may demand a detailed auditing of the corporate's business
operations to achieve such end. (SEC Opinion, Feb. 28, 1972.)
He can file a complaint or petition with the Securities and
Exchange Commission pursuant to Presidential Decree No. 902-
A upon discovery of probable anomalies or irregularities in the
management of the corporation, in which case, the Commission
may order an audit and examination of the corporate books if
there is a clear showing that the same is necessary. (SEC Opinion,
Oct. 16,1990.)
Right of stockholder to examine books

of corporation's subsidiary.
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of law,
the right of such stockholder to examine the books and records
of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing.
(1) Right recognized. — Some US State Courts recognize the
right under certain conditions, while others do not.
(a) Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of sub-
sidiary corporations which are merely agents or instrumen-
talities of the holding company, the legal fiction of distinct
corporate entities may be disregarded and the books, papers,
and documents of all the corporations may be required to
be produced for examination, and that a writ of mandamus
may be granted, as the records of the subsidiary were, to all
intents and purposes, the records of the parent even though
the subsidiary was not named as a party.
648
(b) Mandamus was likewise held proper to inspect both

the subsidiary's and the parent's corporation's books upon
proof of sufficient control or dominion by the parent show-
ing the relation of principal or agent or something similar
thereto.
(c) Stockholders were also held entitled to inspect the re-
cords of a controlled subsidiary corporation which used the
same offices and had identical officers and directors. (Gokon-
gwei, Jr. vs. Securities and Exchange Commission, 89 SCRA
336 [1979], citing American cases.)
Our Supreme Court has held that where the foreign subsid-
iary is wholly-owned by a holding company, and, therefore, un-
der its control, it would be more in accord with equity, good faith
and fair dealing to construe the statutory right of a stockholder
of the parent corporation to inspect the books and records of the
corporation as extending to books and records of such wholly-
owned subsidiary which are in the parent corporation's posses-
sion and control. (Ibid.)
(2) Right refused. — On the other hand, mandamus at the suit
of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally sub-
ject to the control of the parent company, although it owned a
vast majority of stocks in the subsidiary. Likewise, inspection of
the books of an allied corporation by a stockholder of the parent
company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the
class "persons having an interest." (Ibid.)
Sec. 75. Rights to financial statements. — Within ten (10)

days from receipt of a written request of any stockholder
or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance
sheet as of the end of the last taxable year and a profit
or loss statement for said taxable year, showing in
reasonable detail its assets and liabilities and the result of
its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to such
Sec. 75 TITLE Vin. CORPORATE BOOKS AND RECORDS 649
stockholders or members a financial report of the opera-

tions of the corporation for the preceding year, which shall
include financial statements, duly signed and certified by
an independent certified public accountant.
However, if the paid-up capital of the corporation is
less than P50.000.00, the financial statements may be
certified under oath by the treasurer or any responsible
officer of the corporation, (n)
Right of stockholder or member

to financial statements.
This additional right given to a stockholder or member rein-
forces his right of inspection and examination of corporate books
and records.
7 9
(1) The financial statements shall include (a) a balance sheet
TJnder generally accepted accounting principles, financial statements prepared to

present the financial position and operating results of an enterprise also include a state-
ment of changes in retained earnings, disclosure of changes in other categories of stock-
holders' equity, and related notes, (see PICPA Bulletin No. 19[3], Sept. 1977.) It is of com-
mon knowledge that audited financial statements are generally completed three or four
months after the close of the accounting period. (Comm. of Internal Revenue vs. Court of
Tax Appeals, 127 SCRA 9 [1981].) SEC Memo. Cir. No. 14 (Dec. 11, 2003) allows the use of
functional currency other than Philippine peso for financial statement purposes and con-
tains the guidelines for the use of such currency defined as the currency of the economic
environment in which an entity operates and primarily generates and expends cash. The
Philippine peso will be considered as a foreign currency if it is the functional currency of
the qualified entity.
Under existing SEC rules and regulations, the following corporations are required
to submit to the SEC annual audited financial statements: (1) Stock corporations with
paid-up capital stock each of P50,000.00 or more; (2) Non-stock corporations with total
assets each of P500,000.00 or more, or with gross annual receipts of P100,000.00 or more;
(3) Branch offices of stock foreign corporations with assigned capital each of P50,000.00
or more; (4) Branch offices of non-stock corporations with total assets each of P500,000.00
or more; and (5) Representative offices of foreign corporations with total assets each of
P500,000.00 or more. The duty of a company's external auditor is to conduct an inde-
pendent examination of the company's financial statement and supporting documents
pursuant to prescribed auditing standard and practices: A company should neither allow
nor require its external auditor to prepare its financial statements and lot any of its sup-
porting documents, (see SEC Memo. Cir. No. 16, series of 2009.)
"It presents data related to the financial condition of a business as of a specific period
of time (e.g., December 31,1999). This statement of financial position shows the assets of
the business, its liabilities, and the owners' equity. The totals of the amounts listed in each
of these three major categories of the statement conform to the basic accounting equation:
Assets = Liabilities and Owners' Equity.
If the total assets of a corporation exceed the liabilities (claims of creditors), the
excess of the assets (net worth or net assets) belongs to the stockholders. Such excess
650
as of the end of the last taxable year and (b) a profit and loss
statement* for said year, showing in reasonable detail its assets
10
and liabilities and the result of its operations.
(2) If included in the financial report of the operations of the
corporation for the preceding year, the financial statements must
be duly signed and certified by an independent certified public
accountant, except that if the paid-up capital of a stock corpora-
tion is less than P50,000.00, the certification under oath by the
treasurer or any responsible officer of the corporation is suffi-
cient.
(3) The Securities and Exchange Commission requires the
corporation to file with the Commission a copy of the balance
sheet and related profit and loss statements. They are open for
public inspection during reasonable hours on any business day.
Duty of board to present a n n u a l

financial report.
A financial report of the operations of the corporation for
the preceding year is required to be presented to stockholders or
members at every annual regular meeting of such stockholders
represents the stockholders' equity and is in the form of capital invested in stock and
surplus (retained earnings).
Thus, the term "net asset value" indicates the amount of assets exceeding the liabili-
ties as differentiated from "total assets" which include the liabilities. (Adamson vs. Court
of Appeals, 232 SCRA 602 [1994].)
'It shows the results of operations of a business over a period of time, usually one
year (e.g., January 1,1999 to December 31,1999). Other alternative terms used are "state-
ment of earnings," "statement of operations," and "income statement." The net results of
operations can be represented by the equation:
Receipts - Expenses = Net income (net loss).
With respect to alleged losses, it has been held that where a profit and loss state-
ment shows a loss, the statement must show income and items of expenses to explain the
method of determining such loss. A profit and loss statement is devoid of any evidentiary
weight where "the amounts are conclusions without premises, its bases left to specula-
tion, conjectures, assertions and guesswork." (Nicolas vs. Court of Appeals, 288 SCRA
307 [1998].)
'"Liabilities of an enterprise are obligations to pay sums of money, to convey assets
other than money, or to render service. They generally arise from the receipt of an asset or
service, as a consequence of a loss or expense incurred, or through the acquisition of bor-
rowed funds. They include amounts withheld from employees or other parties for taxes
and for contributions to the SSS or to pension funds and dividends declared but not yet
paid, (see PICPA Bulletin No. 9[1], May 1973.)
or members when directors or trustees are voted for.

(1) This annual report includes the financial statements
together with the accompanying supplementary notes explaining
the financial data which cannot be conveniently shown on
the body of the statements (see Sec. 141.), the corporation's
performance and other activities of the year in review, and the
prospects and other plans that the corporation may wish to
undertake.
(2) It contains the auditor's report which is a two-paragraph
declaration of an independent certified public accountant
following the completion of his examination of the corporation's
financial statements." It may be prepared in detailed or condensed
manner, depending on the specific needs of the corporation.
With respect to other documents concerning corporate
affairs, the corporation may require the stockholder to advance
the expenses for copying and mailing the same.
— oOo —
"The report simply renders an opinion on the fairness of the presentation of the fi-
nancial statements — chiefly the balance and the income statement — of the corporation
within the context of generally accepted accounting principles. Thus, it does not certify
that a corporation is in good financial condition or is a good credit risk.
Title IX
MERGER AND CONSOLIDATION
Sec. 76. Plan of merger or consolidation. — Two or more

corporations may merge into a single corporation which
shall be one of the constituent corporations or may con-
solidate into a new single corporation which shall be the
consolidated corporation.
The board of directors or trustees of each corporation
party to the merger or consolidation setting forth the fol-
lowing:
1. The names of the corporations proposing to merge
or consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the
mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles
of incorporation of the surviving corporation in case of
merger; and, with respect to the consolidated corporation
in case of consolidation, all the statements required to be
set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the pro-
posed merger or consolidation as are deemed necessary
or desirable, (n)
Sec. 77. Stockholders' or members' approval. — Upon
approval by majority vote of each of the board of directors
or trustees of the constituent corporation of the plan of
merger or consolidation, the same shall be submitted for
approval by the stockholders or members of each of such
corporations at separate corporate meetings duly called for
the purpose. Notice of such meetings shall be given to all
includes the votes of the owners of
652 the non-voting shares.
Sec. 78 TITLE IX. MERGER AND CONSOLIDATION 653
stockholders or members of the respective corporations,

at least two (2) weeks prior to the date of the meeting,
either personally or by registered mail. Said notice shall
state the purpose of the meeting and shall include a copy
or a summary of the plan of merger or consolidation, as
the case may be. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members
in the case of non-stock corporations, shall be necessary
for the approval of such plan. Any dissenting stockholder
in stock corporations may exercise his appraisal right
in accordance with this Code: Provided, That if after the
approval by the stockholders of such plan, the board of
directors should decide to abandon the plan, the appraisal
right shall be extinguished.
Any amendment to the plan of merger or consolidation

may be made, provided such amendment is approved by
majority vote of the respective boards of directors or trust-
ees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of two-thirds
(2/3) of the members of each of the constituent corpora-
tions. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation,
(n)
Sec. 78. Articles of merger or consolidation. — After the
approval by the stockholders or members as required by
the preceding section, articles of merger or articles of
consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-
president and certified by the secretary or assistant
secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolida-
tion;
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations, the
number of members; and
3. As to each corporation, the number of shares or
members voting for and against such plan, respectively,
(n)
654
Sec. 79. Securities and Exchange Commission's approval

and effectivity of merger or consolidation. — The articles
of merger or of consolidation, signed and certified
as hereinabove required, shall be submitted to the
Securities and Exchange Commission in quadruplicate
for its approval: Provided, That in the case of merger or
consolidation of banks or banking institutions, building
and loan associations, trust companies, insurance
companies, public utilities, educational institutions and
other special corporations governed by special laws, the
favorable recommendation of the appropriate government
agency shall first be obtained. Where the Commission is
satisfied that the merger or consolidation of the corporation
concerned is not inconsistent with the provisions of this
Code and existing laws, it shall issue a certificate of merger
or of consolidation, as the case may be, at which time the
merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange
Commission has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with
the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity
to be heard. Written notice of the date, time and place of
said hearing shall be given to each constituent corporation
at least two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code, (n)
Corporate combinations in g e n e r a l .
Changes may be made in the corporate organization by vari-
ous ways. The most common are by combination and merger.
(1) Under previous laws. — In the Philippines, before the
enactment of the Corporation Code, there were no laws which
expressly permitted the merger or consolidation of business
corporations except of railroads (Act No. 2772, as amended by
Act No. 2789.) and of banks. (Pres. Decrees No. 71 and 117, infra.)
Nevertheless, our Supreme Court has held that authority to
merge or consolidate can be derived from Section 281 / 2 (now Sec.
40.) of the former Corporation Law (Act No. 1459, as amended.)
which provides, among others, that a corporation may "sell,
exchange, lease or otherwise dispose of all or substantially all of
its property and assets" if the board of directors is so authorized
Sees. 76-79 TITLE IX. MERGER AND CONSOLIDATION 655
by the affirmative vote of the stockholders holding at least

2 / 3 of the voting power. The words "or otherwise dispose of,"
according to the Supreme Court, is very broad and in a sense,
1
covers a merger or consolidation. (Reyes vs. Blouse, 91 Phil 305
[1952].)
To encourage bank mergers or consolidations, Presidential
Decree No. 71, in amending certain provisions of the General
Banking Act (R.A. No. 337, as amended.), exempts merged or
consolidated banks from the application of Section 28 (now Sec.
23; see Sec. 14[6].) of the former Corporation Law which limits
the number of directors in a corporation. For the sole purpose
of facilitating bank mergers and consolidations duly approved
by the Monetary Board of the Central Bank, any bank is allowed
under Presidential Decree No. 117, to merge or consolidate
with another bank by the affirmative vote of the stockholders
representing at least a majority of the subscribed capital stock
of the respective merging or consolidating banks, in a meeting
called for that purpose, and the capital stock of the bank may
be increased to the extent necessary to effect such merger or
'Such authority can also be implied from the following provisions of the National
Internal Revenue Code (formerly, C A . No. 466, now Pres. Decree No. 1158, as amended.):
"Sec. 35. x x x . (c) Exchange of Property. — (1) General rule. — Except as herein pro-
vided, upon the sale or exchange of property, the entire amount of the gain or loss, as the
case may be, shall be recognized.
(2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of
merger or consolidation: (a) a corporation which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation which is a party to the merger or
consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the
merger or consolidation solely for the stock of another corporation, also a party to the
merger or consolidation, or (c) a security holder of a corporation which is a party to the
merger or consolidation exchanges his securities in such corporation solely for stock or
securities in another corporation, a party to the merger or consolidation. No gain or loss
shall be recognized if a person exchanges his property for stock in a corporation of which
as a result of such exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation: Provided, That stocks issued for services shall
not be considered as issued in return for property."
Note: The sentence before the proviso was amended by Presidential Decree No. 1705.
It reads as follows: "No gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for stock in such a corporation of which as a result
of such exchange said person, alone or together with others, not exceeding four persons,
gains control of said corporation." Section 35 became Section 34 and is now Section 40
with the amendments effected by R.A. No. 8424 which inserted "or unit of participation"
between "for stock" and "in such a corporation."
656
consolidation notwithstanding the provisions of Sections 17 and

18 112 (now Sees. 38 and 40.) of Act No. 1459.
(2) Under the Corporation Code. — The Code now expressly al-
lows merger or consolidation of corporations. Only corporations
stock or non-stock, can merge or consolidate into a single corpo-
ration. Hence, a partnership may not be allowed to merge with
a corporation but the partnership may transfer all its assets and
liabilities to the corporation which will issue its shares of stock
to be distributed to the partners in proportion to their respective
interest in the partnership, provided the partnership shall be dis-
solved in accordance with the Civil Code. (SEC Opinion, Jan. 3,
1984.)
C o m m o n forms of corporate c o m b i n a t i o n s .
Below are the common forms of corporate combinations.
(1) Sale of assets. — A union of corporations may be effected
by one corporation selling all or substantially all of its assets to
another, (see Sec. 40.) Such sale is usually, though not necessarily,
made in the course of the dissolution of the vendor corporation.
(a) In a strict legal sense, the mere sale of all its property
by a corporation and the distribution of its assets do not work
a dissolution of the corporation inasmuch as possession of
property is not essential to corporate existence. (Re Fulton, 178
N.E. 766.) Generally, therefore, where one corporation sells or
otherwise transfers all its assets to another corporation, the
2
latter is not liable for the debts and liabilities of the transferor.
(Edward J. Neil Co. vs. Pacific Farms, Inc., 15 SCRA 415
[1965].)
2
"Generally, a sale of assets does not constitute a dissolution requiring liquidation
unless it is so labelled. Winding up is a separate transaction, though it may be submitted
to the stockholders at the same time.
A merger-like result may be achieved by the sale-of-assets method if the buying cor-
poration is permitted to finance the purchase by issuing its own stock to the selling cor-
poration. The latter may then distribute the stock as its liquidating dividend. Normally, in
such instances, the buying company may assume the bulk of the seller's debt, but it still
may not take on the risks of the contingent and unknown liabilities and may insist that
there will be funds to pay them if the seller plans to liquidate. The issuance of additional
stock by the acquiring company may entail a charter amendment to increase the amount
of its authorized shares." (W.L. Cary, supra, op. ext., p. 1703.)
Sees. 76-79 TITLE DC. MERGER A N D C O N S O L I D A T I O N 657
(b) But, if in the agreement, a new corporation expressly

acquired the assets and properties, and assumed the obliga-
tions and liabilities of an old corporation which is succeeded,
the former cannot excuse itself from said obligations and
liabilities on the theory that said two corporations are dis-
tinct and separate, (see Rivera vs. Litam & Co., Inc., 4 SCRA
1072 [1962].) In a sale of assets, the acquiring corporation —
barring fraud of creditors — need assume only those obliga-
tions set forth explicitly in the agreement. (W.L. Cary, Cases
and Materials on Corporations, 1969 ed., p. 1702.)
(c) The sale of the assets for stock, if followed by dissolu-
tion, has the effect of a merger.
ILLUSTRATION:
X Inc., a shoe manufacturing company, sells all its assets to
Y Inc., another shoe manufacturing company. In consideration
for the transfer of all its assets, X Inc. receives shares of stocks
from Y Inc.
Thus, X Inc. becomes a stockholder of Y Inc. By the terms
of the sale, the shares of stock of Y Inc., may be issued directly
to the stockholders of X Inc. on the basis of their shareholdings.
In such case, X Inc. will have no more stockholders as well. It
may subsequently be dissolved. The above transaction is a sale
of assets for stock in name but may be found by the courts to be
really a de facto merger.
Y Inc. is not liable for the liabilities of X Inc. except where
Y Inc. expressly or impliedly assumed said liabilities, or Y Inc.
is merely a continuation of X Inc., especially where the sale to
Y Inc. was effected in furtherance of a fraudulent purpose, to
evade payment by X Inc. of its outstanding obligations, the
two corporations being treated as one, or where the transaction
amounts to a de facto merger or consolidation, (infra.)
(2) Lease of assets. — In this case, a corporation, without being

dissolved, leases its property to another corporation for which
the lessor merely receives rental paid by the lessee. This is usual-
ly practiced by railroad and transportation companies. The lease
of assets is similar to the sale of assets except that under a lease,
nothing passes except the right to use the property leased.
658
(3) Sale of stock. — The purpose of a holding company is to

acquire a sufficient amount of the stock of another corporation
3
for the purpose of acquiring control. The acquiring corporation
is called the parent or holding company. The corporation whose
stocks are acquired is known as the subsidiary corporation.
(a) A holding company has been defined as "a super
corporation which owns or at least controls such a dominant
interest in one or more other corporations that it is enabled
to dictate their policies through voting power, or which is in
position to control or materially to influence the management
of one or more companies by virtue, in part at least, of its
ownership of securities in the other company or companies."
(18 Am. Jur. 2d 557.)
(b) A subsidiary corporation may be created by organizing
a new corporation out of the operating division or divisions
of an existing corporation which shall continue its existence
after the spin off and act as a holding company of the new
corporation to which shall be transferred the net assets of
the operating divisions in exchange for the shares of stock of
the new corporation. This method of corporate combination
is effected when the corporation to be acquired refuses to
approve a sale of assets, a merger, or a consolidation.
3
"The sale of stock normally does not require formal stockholder or director authori-
zation, since the acquired company is not directly involved. Either cash or stock of the
buying company may be used to finance the purchase. While the acquiring corporation
does not become directly responsible for debts of the selling company, the spectre of un-
known and contingent liabilities still remains. In a purchase and sale of stock, there are
no actual 'dissenters' and hence, no appraisal rights.
Several special problems may arise which are peculiar to the stock acquisition meth-
od of fusion. First of all, since the offer is to the shareholders directly rather than to the
corporation, registration may be required under the Securities Act wherever a public of-
fering is made. At the same time, there is no likelihood of inequitable treatment of selling
shareholders so long as adequate disclosure is made to them, and so long as the control-
ling stockholders do not receive a premium or other special consideration for their shares.
Finally, this may pose for the acquiring company a problem of operating a subsidiary
with a possibly hostile minority interest. Whether or not dissident, the outsiders may
have legitimate expectations quite different from those of the buyer; and the buyer may
not ignore its fiduciary responsibility in dealing with its newly-acquired subsidiary.
A merger-like result may be achieved by the sale-of-stock approach, by liquidating
or merging the acquired company when a controlling interest in its stock has been
obtained. Stock purchase may in fact be the first step in acquiring assets. Dissident
minority interests may then be eliminated, although care must be exercised to ensure
proper treatment of them under the plan. (W.L. Cary, supra, op. cit., p. 1704.)
In all the foregoing three cases of corporate combinations, the

legal identity of each corporation is retained.
(4) Merger. — Here, two (or more) corporations unite, one
corporation which retains its corporate existence absorbing or
merging in itself the other which disappears as a separate corpo-
ration. It is the absorption of one corporation by another which
survives.
(a) Merger, as actually observed and practised in the
4
Philippines, necessitates a transfer of all assets and the
assumption of debts and liabilities of the absorbed corporation
by the acquiring corporation followed by a separate action
on the part of the absorbed corporation of dissolving itself,
generally by amendment of its articles of incorporation
shortening its term of existence, (see Sec. 40.) In return for the
transfer of all the assets and assumption of the liabilities of
the absorbed corporation (the latter with the consent of the
creditors), the acquiring entity issues a block of shares equal
to the net asset value transferred, which stocks are in turn
distributed to the stockholders of the absorbed corporation.
(SEC Opinion, Nov. 9,1961.)
(b) Where the merger is effected under Section 40 and
not under the "statutory merger" authorized under Title
IX, although the merger would result in dissolving the
absorbed corporation, the dissolution is not legally effected
by operation of such merger as the Code (see also Sec. 16.)
provides for the means of achieving this end. A corporation,
being a legal creation, can only be dissolved in the manner
prescribed by the law which gave it life, (see SEC Opinion,
Jan. 10,1975.)
ILLUSTRATION:
A Inc. and B Inc. are existing corporations. A Inc. transfers
all of its assets to B Inc. B Inc. absorbs and acquires all the
property, rights, and liabilities of A Inc., which is dissolved. B
Inc. continues its corporate existence.
4
Before the enactment of the Corporation Code which now expressly authorizes
merger and consolidation, the most distinguishing features of which are that they ac-
complish several steps simultaneously and that a prescribed statutory procedure must be
observed for their consummation.
660
A Inc. and B Inc. are the constituent corporations. A Inc.

is the merged or absorbed corporation while B Inc. is the
merging, absorbing, or surviving corporation that continues
the combined business. The stockholders of A Inc. become
stockholders of B Inc.
The merger shall be effective upon issuance by the Securi-
ties and Exchange Commission of a certificate of merger. (Sec.
79, par. 1.)
There is no provision in the Code which prohibits the merger

of a corporation whose term is about to expire with another cor-
poration where the purpose is merely to continue the operations
of the old entity, even if such other corporation is organized by a
group of stockholders as the merged corporation. (SEC Opinion,
April 19,1960.)
(5) Consolidation. — Here, two (or more) corporations unite,
giving rise to a new corporate body and dissolving the constitu-
ent corporations which cease to exist as separate corporations.
ILLUSTRATION:
A Inc. and B Inc. are existing corporations. They unite
together to form C Inc. to which they transfer all their assets. A
Inc. and B Inc. are dissolved by the consolidation. The title to
their property passes to C Inc. and all their rights and liabilities
are assumed by C Inc.
The dissolved corporations, A Inc. and B Inc., are the con-
stituent corporations. They are also the original corporations.
C Inc., the new corporation, is called the consolidated corpora-
tion. The stockholders of A Inc. and B Inc. become stockholders
of C Inc.
The consolidation shall be effective upon issuance by
the Securities and Exchange Commission of a certificate of
consolidation. (Sec. 79, par. 1.)
The legal effects of the merger or consolidation accom-
plished under Title IX are provided in Section 80. Both methods
involve a transfer of the assets of the constituent corporations
in exchange for securities in the new or surviving corporation
but neither involves the winding-up of the affairs of the con-
stituent corporations in the sense that the assets are distributed
to the stockholders. Note that there is automatic assumption of

liabilities of the absorbed corporation or constituent corpora-
tions (Sec. 80[5].) which are dissolved. (Sec. 80[1, 2].)
Advantages of stock acquisition

over asset acquisition.
A number of further reasons has been given why a sale of
stock, or merger or consolidation, may be preferable to a sale of
assets, as follows:
(1) Where assets of corporation to be acquired, not assignable with-
out consent. — Sometimes the corporation that is to be acquired
possesses valuable franchises, leases, or contracts which are not
assignable without consent.
(a) In such case, a statutory merger or consolidation or, if
consent to assignment would even then be required, a stock
acquisition has an advantage over an asset acquisition in that
the need to obtain consent to assignment is eliminated.
(b) Moreover, if assets are to be acquired, the task of
attending to all of the details involved in the transfer, such as
the preparation and execution of deeds, would be simplified
if the acquisition were by a statutory merger or consolidation.
(c) Again, state bulk sales law either would be of no
concern or would not apply to an acquisition by statutory
merger or consolidation.
(2) Where restrictions upon a merger or consolidation or transfer
of assets exist. — On the other hand, existing loan indentures or
other agreements contain restrictions upon a merger or consoli-
dation or transfer of assets.
(a) If one or more mortgages are involved, after-
acquired-property clauses therein might cause difficulty if
a statutory merger or consolidation, or an asset acquisition,
were attempted.
(b) Undesirable leases or contracts including burden-
some patent-license agreements may constitute an obstacle
to a statutory merger or consolidation or a stock acquisition.
662
(c) Labor union problems — the consequence, for exam-

ple, of bringing a union or a different union into the picture
— may present an obstacle to statutory merger or consolida-
tion or an asset acquisition but not to a stock acquisition.
(d) Problems of reconciling and meshing deferred-
compensation plans of the corporations (including pension,
profit-sharing, and stock option as well as individual
employment contracts and bonus policies) may present
similar obstacles.
(e) Finally, the corporate charter of the corporation to be
acquired may itself be important to preserve, as in the case of
a banking corporation; or the preservation of the organization
and its customers or even of an existing stock-exchange listing
may make it desirable that the corporation to be acquired be
technically the acquiring or surviving corporation or that its
stock be acquired.
(3) Where asset acquisition will give rise to greater tax liability. —
Not infrequently, an asset acquisition, unlike a stock acquisition,
will give rise not only to State or local excise taxes in connec-
tion with the transition but will also involve some duplication of
State or local franchise, business, and property taxes, including
sales, use, transfer, or license taxes, and fees applicable to real
estate, personal property, motor vehicles and the like. Sometimes
some of these extra taxes can be avoided entirely when the trans-
fer is effected by operation of law through statutory merger or
consolidation. (W.L. Cary, supra, op. cit., pp. 1704-1705.)
Procedure for effecting a plan of m e r g e r

or consolidation.
Section 36(8) expressly grants authority to a corporation "to
5
enter into with other corporations merger or consolidation" in
accordance with the procedure prescribed by Sections 76 to 80.
According to the Report of the Federal Trade Commission (Report on Corporate

Mergers and Acquisitions, 40 [1955].), the terms "merger" and "consolidation" are often
employed to describe fusions involving concerns of relatively equal size and importance.
In accounting terminology, such a combination might be referred to as a pooling of inter-
ests. If, on the other hand, a relatively small firm is being absorbed into a larger one, an
"acquisition," or in the terminology of the Accounting Bulletin (No. 48) (1957), a "pur-
chase," is said to have been made, (cited in W.L. Cary, supra, op. cit., p. 1622.)
(1) Approval of plan. — The board of directors or trustees

of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the
matters mentioned in Section 76;
(2) Submission to stockholders or members for approval. — The
plan shall be submitted for approval by the stockholders or mem-
bers of each of such corporations at separate corporate meetings
duly called for the purpose with proper notice. (Sec. 77.) Even
holders of non-voting shares or non-voting members, as the case
may be, are entitled to vote on the plan (Sec. 6, par. 6[6].);
(3) Execution of formal contract. — After approval by the pre-
scribed vote of the stockholders or members (Ibid.), a formal
6
contract known as articles of merger or of consolidation shall be
executed by each of the constituent corporations, to be signed by
the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth the matters
stated in Section 78;
(4) Submission to SEC for approval. — The articles shall then be
submitted for approval to the Securities and Exchange Commis-
sion in quadruplicate for its approval, provided that in the case
of merger or consolidation of corporations governed by special
laws, the favorable recommendation of the appropriate govern-
7
ment agency shall first be obtained. (Sec. 79, par. 1.) The SEC
""Usually in merger agreements today, authority is given to the directors of either

board to abandon it at any time before the effective date and after submission to the
shareholders upon the happening of certain events, if in their judgment — for example
— (1) any material litigation or government proceedings have been instituted against
one of them, or (2) one company has suffered substantial loss as a result of catastrophe
or any material adverse change in its condition, or (3) the merger would be impracticable
because of the number of stockholders who assert the right to have their stock appraised
and to receive payment." (W.L. Cary, supra, op. cit., p. 1699.)
7
The SEC requires the submission of the following documents for approval of a plan
of merger or consolidation:
(1) Articles of merger or consolidation signed by the President or Vice-President
and certified under oath by the Secretary or Assistant Secretary of the constituent corpo-
rations setting forth the following: the plan of merger or consolidation; the number of
shares outstanding of each constituent corporation, or in the case of non-stock corpora-
tion, the number of members; as to each corporation, the number of outstanding shares
voting for and against such plan, respectively;
(2) Copies of the minutes of the board of directors' meeting and minutes of the
stockholders' or members' meeting of the constituent corporations, approving and ratify-
664
Rules require that the resolutions of the respective boards of the

constituent corporations or that of the stockholders approving
the merger or consolidation, duly signed and attested by their
respective presidents and secretaries, must state the reasons or
causes for such action;
(5) Conduct of hearing by SEC. — The Securities and Exchange
Commission shall conduct a hearing with proper notice if, upon
investigation, it has reason to believe that the proposed merger
or consolidation is contrary to or inconsistent with the provisions
of the Code or existing laws (see Sec. 140.), to give the corpora-
tions concerned the opportunity to be heard. (Sec. 79, par. 2.) The
Commission may or may not conduct a hearing; and
(6) Issuance of certificate by SEC. — The Commission shall
issue a certificate of merger or of consolidation, as the case may
be, "at which time the merger or consolidation shall be effective,"
if satisfied that the same is not inconsistent with the provisions of
the Code and existing laws. (Ibid., par. 1.)
The merger or consolidation does not become effective
upon the mere agreement of the parties. Since it involves
fundamental changes in the corporation, as well as in the rights
of stockholders and creditors, there must be an express provision
of law authorizing them. The effectivity date is crucial for
determining when the merged or constituent corporations cease
ing the plan of merger or consolidation, certified under oath by their respective secretar-
ies or assistant secretaries;
(3) List of creditors of the absorbed corporations, as of the date of approval of the
plan of merger, or the list of creditors of the consolidating corporations, as of the date of
approval of the plan of consolidation, with their addresses and the amounts owing to
each;
(4) Audited financial statements (balance sheet and related statement of income
and expenses) of the constituent corporations, the date not earlier than 120 days prior to
the date of riling of the application with the Commission. The financial statements shall
be accompanied by a long form audit report of a certified public accountant; and
(5) Amended articles of incorporation and by-laws of the surviving corporation,
whenever necessary in accordance with the terms of the plan of merger, such as change
of name of the surviving corporation, increase of capital stock, etc.
In the case of consolidation, the articles of incorporation and by-laws of the new cor-
poration and all documents or papers required for incorporation of the new corporation
must be submitted to the Securities and Exchange Commission for the registration of the
new corporation, (see SEC Opinion, July 26,1989.)
to exist and when their rights, privileges, properties as well as

liabilities pass on to the surviving corporation. (Associated Bank
vs. Court of Appeals, 291 SCRA 511 [1998]; Philippine National
Bank vs. Andrada Electric & Engineering Company, 381 SCRA
244 [2002]; Poliand Industrial Limited vs. National Development
Co., 467 SCRA 500 [2005].) The Commission has opined that
notwithstanding Section 79, the parties may stipulate a specific
"effective date of merger (or consolidation)" where no third
party will be prejudiced by such stipulation. (SEC Opinion No.
09-13, July 1, 2009.)
The consent of the creditors of a corporation is not necessary
in merger or consolidation, it being authorized by law. (see Sec.
80[5].) Where the merger or consolidation involves a foreign cor-
poration licensed to transact business in the Philippines, Section
132 applies.
Sec. 80. Effects of merger or consolidation. — The merger

or consolidation, as provided in the preceding sections,
shall have the following effects:
1. The constituent corporations shall become a single
corporation which, in case of merger shall be the surviving
corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corpora-
tions shall cease, except that of the surviving or the con-
solidated corporation;
3. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a cor-
poration organized under this Code;
4. The surviving or the consolidated corporation
shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal,
and all receivables due on whatever account including
subscriptions to shares and other choses in action, and all
and every other interest of, or belonging to, or due to each
666
constituent corporation, shall be taken and deemed to be

transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations
of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any claim,
action or proceeding pending by or against any of such
constituent corporations may be prosecuted by or against
the surviving or consolidated corporation, as the case may
be. Neither the rights of creditors nor any lien upon the
property of any of each constituent corporations shall be
impaired by such merger or consolidation, (n)
Legal effects of merger and consolidation.

(1) The effects of the merger or consolidation accomplished
under Title IX are provided in Section 80. Note that unlike in
sale of assets under Section 40, there is automatic assumption of
the liabilities of the absorbed corporation or constituent corpora-
tions (Sec. 80[5].) which are dissolved. (Sec. 80[1,2].)
(2) In view of Section 82(2),
80(2) the absorbed or constituent cor-
porations are ipso facto dissolved by operation of law, without
necessity of any further act or deed (SEC Opinion, July 16,1981.)
but there is no winding up of their affairs or liquidation of their
assets, for the surviving corporation automatically acquires all
the rights and liabilities of the constituent corporations.
(3) An advantage of merger or consolidation, from the point
of view of the selling corporation, is that it permits the transfer
of the assets to the purchaser and the distribution of the con-
sideration received in a single operation pursuant to the plan of
merger or consolidation, whereas a sale requires as a separate
subsequent step the dissolution and liquidation of the vendor.
(C. Rohrlich, op. cit., p. 285.)
(4) Both merger and consolidation involve exchanges of
properties, a transfer of the assets of the constituent corporations
in exchange for securities in the new or surviving corporation but
neither involves the winding up of the affairs of the constituent
corporations in the sense that their assets are distributed to the

stockholders. Their tax consequences are governed by existing
law, rules and regulations, particularly Section 34 of the National
8
Internal Revenue Code. Where the exchange of property of a
corporation is solely for stock of another corporation, neither
gain nor loss is recognized as an exception to the general rule in
taxation that gain shall be taxable and loss shall be deductible. If
in addition to stock, money and/or other property is received,
the gain, if any, but not the loss, shall be recognized.
Thus, where the value of the assets exchanged by A Inc. is P2
million and the value of B Inc. is P2.2 million, the difference of P.2
million is not taxable as gain to A Inc. and deductible as loss to
B Inc. But if, in addition to stock of B Inc., A Inc. received money
and/or other property, the gain of A Inc. is taxable in an amount
not in excess of the sum of money and the fair market value of
such property.
(5) Dissolution of the constituent corporations which have
been consolidated into a new corporation cannot be made to
retroact to a date prior to the ratification or approval by their
respective stockholders of a Consolidation Agreement previously
approved by the respective boards of directors of the constituent
9
corporations and the new corporation, but the transfer of the
assets and liabilities of the constituent corporations could be
made effective retroactively as of the date the said board of
directors so resolved. (SEC Opinion, March 4,1975.)
(6) The consent of the creditors of a corporation is not neces-
sary in merger or consolidation, it being authorized by law. At
any rate, neither their rights nor any lien upon the property of
any of each constituent corporation shall be impaired by such
merger or consolidation. (Sec. 80[5].)
'See note 1.
"Under Section 79 (par. 1.), the merger or consolidation shall be effective only upon
issuance by the Securities and Exchange Commission of a certificate of merger or consoli-
dation, as the case may be.
The stipulated cut-off date (before or after date of issuance of certificate), however,
with respect to transactions of the absorbed corporation and surviving corporation shall
be binding on the parties to the merger agreement, (see SEC Memo. Opinion No. 04-36-
June 15, 2004.)
(7) Where, in its articles of incorporation, a new corporation

expressly acquired the assets and properties, and assumed
the obligations and liabilities of an old corporation which it
succeeded, the former cannot excuse itself from said obligations
and liabilities on the argument that said two corporations are
distinct and separate. (Rivera vs. Litam & Company, Inc., 4 SCRA
1072 [1962].)
Dissenting stockholders may exercise their right of appraisal
(Sec. 81 [3].) only after the plan of merger or consolidation is
approved by the Securities and Exchange Commission. If before
such approval the plan is abandoned by the board of directors,
the appraisal shall be extinguished. (Sec. 77, par. 1.)
(8) In a case, the main issue is whether the surviving bank (AB)
may enforce the promissory note made by private respondent in
favor of the absorbed bank (CBTC) after the merger agreement has
been signed but prior to the issuance of a certificate of merger by
the Securities and Exchange Commission. AB has a valid cause of
action even assuming that the effectivity date of the merger was
the date of execution. The agreement itself clearly provides that
all contracts, irrespective of the date of execution, entered into in
the name of CBTC shall be understood as pertaining to AB. The
clause must have been deliberately included in the agreement in
order to protect the interests of the combining banks, specifically,
to avoid giving the merger agreement a farcical interpretation
aimed at evading fulfillment of a due obligation. (Associated
Bank vs. Court of Appeals, 291 SCRA 511 [1998].)
Merger and consolidation distinguished

from sale of assets.
(1) In merger and consolidation, a sale of assets is always in-
volved, while in the latter, the former is not always involved;
(2) In the former, there is automatic assumption by the sur-
viving or consolidated corporation of the liabilities of the con-
10
stituent corporations, while in the latter, the purchasing corpo-
ration is not generally liable for the debts and liabilities of the
selling corporation;
(3) In the former, there is a continuance of the enterprise and
of the stockholders therein though in the altered form, while in
the latter, the selling corporation ordinarily contemplates a liqui-
dation of the enterprise;
(4) In the former, the title to the assets of the constituent
corporations is by operation of law transferred to the new
corporation, while in the latter, the transfer of title is by virtue of
contract; and
(5) In the former, the constituent corporations are automati-
cally dissolved, while in the latter, the selling corporation is not
dissolved by the mere transfer of all its property.
Reorganization of a corporation.
11
Generally speaking, reorganization of a corporation is a
means whereby those variously interested financially in a dis-
12
tressed business seek, through continuance of that business as
a going concern, to work out of the difficulty for themselves and
thus gain more than they could by a sale of the assets or of the
business to others. (19 Am. Jur. 2d 895.)
(1) Distinguished from merger or consolidation. — A reorganiza-
tion is distinguishable from a merger or consolidation. It is not
10
"One of the principal concerns in a merger is over unknown or hidden liabilities
which the acquired company fails to disclose or in fact is unaware of. A tax deficiency
is one of the most frequent to arise. Other types of obligations which may be significant
stem from collective bargaining agreement with unions, provisions under pension plans,
and outstanding stock option or executive compensation arrangements." (W.L. Cary, su-
pra, op. cit., p. 1702.)
Under the principle of absorption, a bona fide buyer or transferee of all, or substantially
all, the properties of the seller or transferor is not obliged to absorb the latter's employees.
(Barayoga v. Asset Privatization Trust, 473 SCRA 690 [2005].)
"This is not to be confused with that involving a mere change in structural organiza-
tion or management, in business policy, or in production or trading methods in a corpora-
tion. The reorganization here is "internal."
"E.g., the corporation's total assets are less than its total liabilities or it has a liquidity
problem (i.e., it cannot pay its debts as they become due), or it has been judicially declared
insolvent or in a state of suspension of payments.
670
ordinarily the combination of several existing corporations, but

is simply the carrying out by proper agreements and legal pro-
ceedings of a business plan or scheme for winding up the affairs
of, or foreclosing a mortgage or mortgages upon, the property of
insolvent corporations, and the organization of a new corporation
to take over the property and business of the distressed corpora-
tion." (Ibid., 895.)
(2) Distinguished from sale. — It differs fundamentally from a
sale where the vendor corporation parts with its interest for cash
and receives nothing more. The mere acquisition by one corpora-
tion of the capital stock of two others, without impairment of the
corporate existence or function of any of the three corporations,
is not a reorganization. The mere selling of authorized but unis-
sued stock is not, in any sense, a reorganization. (Ibid.) A "sale"
is the transfer of property from one person to another for a con-
sideration of value. As a "mere purchase by one corporation of
the properties of another corporation," it is not included in the
term "reorganization," because the term "imports a continuity
of interest on the part of the transferor or its stockholders in the
properties transferred." (C. Rohrlich, op. cit., pp. 278-279.)
(3) Distinguished from reincorporation. — Reorganization, as
the term is usually used, means the creation of a new company
to take over the assets of a new corporation, while reincorpora-
tion, as this term is ordinarily used, more closely resembles the
amendment of a charter, and is usually resorted either to correct
errors in the original incorporation or to obtain the benefits of a
statute enacted after the original incorporation or to extend the
corporate life. (Sulpicio Guevara, The Philippine Corporation
Law, 1967 ed., p. 210, citing Fletcher, Sec. 4839.) To reincorporate,
the incorporators must comply with the provisions on incorpora-
tion under Sections 10 to 15 of the Code.
Both involve the creation of a new corporation in place of
another corporation which ceases to exist.
'The reorganization typically involves a recapitalization or revision of the capital

structure of the corporation commonly effected by amendment of the articles of incorpo-
ration or merger with a subsidiary.
(4) Distinguished from bankruptcy. — A "corporate reorganiza-

tion" is not a bankruptcy proceeding, but is a special proceeding
which has for its object the rehabilitation of a debtor-corporation.
It differs from a "bankruptcy" in that it contemplates conserva-
tion of the corporation and continuity of its business and not a
liquidation of its assets. (9-A Words and Phrases 406.)
Quasi-reorganization of a c o r p o r a t i o n .
The term quasi-reorganization has been defined as a "proce-
dure recognized in accounting by which the accounts of the
corporation may be restated to the same extent they would be
if a new corporation were created and acquired the business of
the existing corporation; a new basis for accountability of assets,
14
liabilities, and capital is established." (SEC Opinion, Aug. 18,
1967, citing Montgomery's Auditing, 8th ed., p. 396.)
15
A quasi-reorganization as a type of capital readjustments
has been described as follows:
"C. Readjustments of balance sheet valuations resulting
in the revision of the stated value of the capital stock and of the
surplus. — This type of capital readjustment arises when the
management realizes that radical changes have occurred in the
value of a corporation's property — changes in value which
are not reflected in periodic adjustments to the book surplus
accounts. These changes are prompted by the realization on
the part of management that the property of the corporation
has radically increased or radically decreased beyond
anything that is apparent from the book entries in the surplus
accounts. These book entries representing either surplus or
deficit must, therefore, be restated to reflect the fundamental
changes that have affected the substantive values of the
"It has also been defined as follows: "A recapitalization, a principal feature of which
has been absorption of a deficit; specifically, the procedure whereby a corporation, with-
out the creation of a new corporate entity or the intervention of a court, eliminates an operat-
ing deficit or a deficit resulting from the recognition of other losses or both, and estab-
lishes a new retained earnings (earned surplus) account for the accumulation of new
income subsequent to the effective date of such action." (E.L. Kohler, A Dictionary For
Accountants, p. 388.)
15
See Guidelines for Quasi-Reorganizarions. (Appendix "E.")
672
corporation. In the process of revaluation, it may be necessary

to read just-stated values standing against the capital stocks,
and these changes may or may not involve restatement of the
surplus accounts. Quite frequently too, other alterations in
the capital structure are introduced to bring the outstanding
security issues in line with acknowledged changes in the
corporation's property values. As a group, they may be
called revaluation readjustments, and these valuations are
indicated by changes in the capital accounts." (Ibid., citing II
Dewing, Financial Policy of Corporations, 5th ed., p. 1177.)
ILLUSTRATION:
The proposed quasi-reorganization of X Corporation
as submitted to the Securities and Exchange Commission
involved the following steps:
"(a) Reduction of par value of common stock from P10.00
to P7.50 per share. — The present authorized capital stock of
P20,000,000 divided into 2,000,000 shares of the par value of
P10.00 each will correspondingly be reduced to 15,000,000
divided shares of the par value of P7.50 each. The amount of
issued and outstanding capital stock will be reduced from
about P10,300,000 to P7,725,000 but the number of issued and
outstanding shares (i.e., 1,030,000) will remain unchanged. The
reduction in par value of issued and outstanding shares will
create a reduction surplus of P2,575,000. (see comments under
Sec. 38.)
(b) Restatement of assets consisting of. —
(i) Write-off of fixed assets (property plant and equip-
ment) from original cost of P20,155,000 to the appraised
value of P27,551,000, approximately, thereby reflecting an
appraisal surplus of P7,396,000. (see comments under Sec.
43.) The great bulk of this surplus (almost P7 million) is
attributable to the appreciation in the value of X's factory
site consisting of six (6) parcels of land with an aggregate
area of 177,242 square meters. The appraisal was made by
an independent firm of high standing.
(ii) Write-off of development and start-up costs of
about P754,000.
(c) Write-offs against surplus. — The accumulated deficit
estimated at P8,978,000 (as of September 30, 1967) and the
development and start-up costs at about P754,000 to be written

off, or a total of P9,732,000 will be charged to the capital surplus
created totalling P9,971,000, consisting of reduction surplus of
P2,575,000 and an appraisal surplus of P7,396,000. The balance
of about P239,000 will be set up as a capital surplus account.
(d) Conditions for effecting plan. — Disclosure of the quasi-
reorganization will be made by appropriate notations in the
audited financial statements of X.
It appears from the project study made on the matter, that
if the plan is carried out, the company would be able not only
to rehabilitate itself but also realize profits. Conversely, if the
company cannot pursue its plan, it may not be able to solve its
financial difficulties and thus, may result in its total collapse.
Considering all the foregoing, the Commission interposed no
objection subject to the following conditions:
(1) Only the appreciation in the value of the com-
pany's six (6) parcels of land with an aggregate area of
177,242 square meters shall be considered, the increase in
appraisal value of the rest of the company's property being
excluded. This is for the reason that the increase in value
of the parcels of land is, in the opinion of the Commission,
realizable. As to those of the other kinds of property, the
Commission does not feel it necessary to pass upon this
matter at this time;
(2) It is not deemed proper to write-off the development
and start-up costs amounting to approximately P754,000;
(3) The appraisal surplus created shall be used to write
off deficit, and shall not be utilized for the declaration of
dividends;
(4) The plan shall be submitted to the stockholders
in a special meeting duly called for the purpose and
approved by the vote representing at least two-thirds of
the subscribed capital stock;
(5) Appropriate notice of the plan shall be given to the
creditors of the corporation within a reasonable time prior
to the submission of the papers reducing the company's
authorized capital stock to the Commission;
(6) Proper publication of the plan shall be made in at
least one newspaper of general circulation throughout the
Philippines, twice a week for two consecutive weeks; and
(7) Appropriate notations in the company's audited

financial statements of the utilization of the appraisal
surplus to write off deficits shall be made for at least five
(5) years after the effectivity of the quasi-reorganization.
Quasi-reorganization as a corporate practice has been

employed with some frequency in the United States, so much so
that the U.S. Federal Securities and Exchange Commission has
prescribed the conditions under which the same may be effected.
(Ibid.)
— oOo —
Title X
APPRAISAL RIGHT
Sec. 81. Instances of appraisal right. — Any stockholder

of a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorpo-
ration has the effect of changing or restricting the rights
of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstand-
ing shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mort-
gage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in this
Code; and
3. In case of merger or consolidation, (n)
Appraisal right of a stockholder.

The so-called appraisal right of a stockholder refers to his right
to demand payment of the fair value of his shares, after dissent-
ing from a proposed corporate action involving a fundamental
change in the corporation in the cases provided by law.
Any fundamental change in the corporate charter would
require the consent of all the stockholders, inasmuch as it would
impair the obligation of the contract between the corporation
and its stockholders, (see Sec. 16.) However, to meet the situation
whereby an arbitrary minority group of stockholders could
prevent advantageous corporate action, the Code authorizes
the making of changes in the corporate structure in specified
675
676
instances, by less than the unanimous vote, and to prevent any

injustice to the minority, gives them the right to an appraisal and
payment of their stock. (19 Am. Jur. 2d 49.)
The appraisal right of a stockholder is more important where
the corporation is a small one and there is no ready market for
its stock. In big corporations whose stocks are actively traded in
exchanges, the dissatisfied stockholder can easily sell his stocks.
Instances when appraisal right available.

The appraisal right does not normally belong to a stock-
holder as a matter of absolute right; otherwise, a stockholder can
withdraw from a corporation anytime by returning his share and
getting back his capital, which is truly violative of the trust fund
doctrine. (SEC Opinion, Jan. 11,1982; see Sec. 41.)
(1) Section 81 lists the three (3) instances when the right may
be exercised as provided in Sections 16,37,40, and 77.
(2) It is also available to a dissenting stockholder in case the
corporation decides to invest its funds in another corporation or
business for any purpose other than its primary purpose as pro-
vided in Section 42.
(3) Under Section 105, any stockholder of a close corpora-
tion may, for any reason, compel said corporation to purchase his
shares at their fair value, which shall not be less than their par
or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock.
Amendment of articles of incorporation

changing stockholders' rights.
Statutes authorizing amendments of articles of incorporation
upon a vote of a prescribed majority of its stock are as effective-
ly a part of the certificates of stock as though printed thereon.
Such statutes become a part of the stockholders' contract with
the corporation. A stockholder will be deemed to consent in ad-
vance to the making of such changes as the statutes permit and
as are designed to enable the corporation to conduct its business
in a more profitable manner. Upon acceptance of his stock, he is
bound by prior amendments as well as subsequent amendments,
provided, of course, there is no abuse of amendatory power. (18
Am. Jur. 2d 643-644.)
Stockholders dissenting from a particular corporate change
in their rights, though bound by such change, are given by the
Code some form of remedy. They may withdraw from the corpo-
ration by an appraisal and payment of their stock. (Ibid., 646.)
One of the limitations on the power of corporations to amend
is that the amendment must be "for legitimate purposes." If the
amendment was made in bad faith, the same may be questioned
by dissenting minority stockholders by resort to the Securities
and Exchange Commission (see Pres. Decree No. 902-A, Sec. 5[a,
b].) and ultimately, to the courts.
Limitations on the exercise

of appraisal right.
(1) Any of the instances provided by law for the exercise of
the right by a dissenting stockholder must be present (Sees. 81,
42.);
(2) The dissenting stockholder must have voted against the
proposed corporate action. (Sec. 82, par. 1.) So, the right is not
available to a stockholder who was either absent at the meeting
where the corporate action was approved, or was present at such
meeting but abstained from casting his vote;
(3) A written demand on the corporation for payment of his
shares must be made by him within 30 days after the date the
vote was taken (Ibid.);
(4) The price must be based on the fair value of the shares as
of the day prior to the date on which the vote was taken (Ibid.);
(5) Such fair value must be determined as provided in Section
82 (Ibid., par. 2.);
(6) Payment of the shares must be made only out of the
unrestricted earnings of the corporation (Ibid.); and
(7) Upon such payment, the stockholder must transfer his
shares to the corporation. (Ibid.)
678
Sec. 82. How right is exercised. — The appraisal right

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

Section 82 prescribes a uniform procedure for the exercise by
a dissenting stockholder of his appraisal right as follows:
(1) The dissenting stockholder shall make a written demand
on the corporation within thirty (30) days after the date on which
the vote was taken for payment of the fair value of his shares.
The failure of the stockholder to make the demand within the
thirty (30)-day period shall be deemed a waiver of his appraisal
right;
(2) If the proposed corporate action is implemented or
effected, the corporation shall pay to such stockholder, upon
surrender of the corresponding certificate(s) of stock within ten
(10) days after demanding payment for his shares (Sec. 86.), the
fair value thereof; and
(3) Upon payment of the agreed or awarded price, the stock-
holder shall transfer his shares to the corporation.
Determination of fair value

of shares.
(1) Appraisal of stockholder's shares. — If the withdrawing
stockholder and the corporation cannot agree on the fair value
of the shares, it shall be determined and appraised as provided
in the second paragraph of Section 82. In such case, either the
dissenting stockholder or the corporation is entitled to demand
an appraisal of the former's shares, and to compel such appraisal,
if the other refuses to have it effected.
(2) Valuation date. — Note that the fair value of the shares
of the dissenting stockholder is determined as of the day prior
to the date on which the vote was taken notwithstanding any
appreciation or depreciation in value of the shares in anticipa-
tion of such corporate action. This rule avoids controversy on the
valuation date, and prevents speculation on the shares. Payment
shall be made only if the corporation has unrestricted retained
earnings in its books to cover the same, (see Sec. 43.) This is in
consonance with the trust fund doctrine.
(3) Underlying theory of valuation. — The term "fair value," as
used in the Corporation Code, is said to mean the intrinsic worth
of the stock, which is to be arrived at after an appraisal of all the
elements of value. The underlying theory is one of compensating
the owner of the stock for his property right, and, therefore, no
method of valuation should be relied upon exclusively; and since
the theory of appraisal is to compensate the dissenting stock-
holder for the value of his stock as it was originally constituted,
the valuation of his shares should be determined without regard
to the effect of the corporate action. (19 Am. Jur. 2d 55-56.)
680
Sec. 83. Effect of demand and termination of right. —

From the time of demand for payment of the fair value of
a stockholder's shares until either the abandonment of
the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such
shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of this Code,
except the right of such stockholder to receive payment
of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30
days after the award, his voting and dividend rights shall
immediately be restored, (n)
Effect of exercise of right.

Once the dissenting stockholder demands payment of the
fair value of his shares —
(1) All rights accruing to such shares including voting and
dividend rights shall be suspended; and
(2) He shall be entitled to receive payment of the fair value
of his shares as agreed upon between him and the corporation or
as determined by the appraisers chosen by them.
Payment of s h a r e s .
(1) If he is not paid the value of his shares within thirty
(30) days after the award, his voting and dividend rights shall
be immediately restored until payment of his shares. (Sec. 83.)
Accordingly, even if his rights as stockholder are suspended after
his demand in writing is made, he cannot be considered as an
ordinary creditor of the corporation. (SEC Opinion, Jan. 11,1982.)
(2) Upon such payment, all his rights as stockholder are
terminated, not merely suspended, (see Sec. 82, last sentence.)
But if before he is paid the proposed corporate action is
abandoned, his rights and status as a stockholder shall thereupon
be permanently restored. (Sec. 84.)
Sec. 84. When right to payment ceases. — No demand

for payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or rescinded
by the corporation or disapproved by the Securities and
Exchange Commission where such approval is necessary,
or if the Securities and Exchange Commission determines
that such stockholder is not entitled to the appraisal right,
then the right of said stockholder to be paid the fair value
of his shares shall cease, his status as a stockholder
shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to
him. (n)
Extinguishment of right to payment.

A dissenting stockholder who demands payment of his
shares is no longer allowed to withdraw from his decision unless
the corporation consents thereto. Any of the following cases will
have the effect of extinguishing the withdrawing stockholder's
right to payment of his shares:
(1) Such stockholder withdraws his demand for payment
and the corporation consents thereto;
(2) The proposed corporate action is abandoned or rescind-
ed by the corporation;
(3) The proposed corporate action is disapproved by the
Securities and Exchange Commission where its approval is
necessary; or
(4) The Commission determines that such stockholder is not
entitled to appraisal right.
If any of the above cases arise, the stockholder shall not be
paid the fair value of his shares, his status as a stockholder shall
thereupon be restored, and all dividend distributions which
would have accrued on his shares shall be paid to him.
Sec. 85. Who bears costs of appraisal. — The costs and

expenses of appraisal shall be borne by the corporation,
unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation
may have offered to pay the stockholder, in which case
they shall be borne by the latter. In the case of an action
to recover such fair value, all costs and expenses shall be
assessed against the corporation, unless the refusal of the
stockholder to receive payment was unjustified, (n)
682
Liability for costs and expenses

of appraisal.
The costs and expenses of appraisal shall be borne as follows:
(1) By the corporation. —
(a) Where the price which the corporation offered to pay
the dissenting stockholder is lower than the fair value as
determined by the appraisers named by them;
(b) Where an action is filed by the dissenting stockholder
to recover such fair value and the refusal of the stockholder
to receive payment is found by the court to be justified.
(2) By the dissenting stockholder. —
(a) Where the price offered by the corporation is
approximately the same as the fair value ascertained by the
appraisers;
(b) Where the same action is filed by the dissenting
stockholder and his refusal to accept payment is found by
the court to be unjustified.
Sec. 86. Notation on certificate(s); right of transferee. —

Within ten (10) days after demanding payment for his shares,
a dissenting stockholder shall submit the certificate(s)
of stock representing his shares to the corporation for
notation thereon that such shares are dissenting shares.
His failure to do so shall, at the option of the corporation,
terminate his rights under this Title. If shares represented
by the certificate(s) bearing such notation are transferred,
and the certificate(s) consequently cancelled, the rights of
the transferor as a dissenting stockholder under the Title
shall cease and the transferee shall have all the rights of
a regular stockholder; and all dividend distributions which
would have accrued such shares shall be paid to the
transferee, (n)
Notation on certificate(s) of shares

of dissenting stockholder.
Section 86 requires the dissenting stockholder to submit to
the corporation within ten (10) days after demanding payment
Sec. 86 TITLE X. APPRAISAL RIGHT 683
for his shares, the corresponding certificate(s) of stock for nota-

tion thereon that such shares are dissenting shares.
With the notation, the secretary of the corporation will be
guided accordingly, for under Section 83 all rights accruing to
such shares including voting and dividend rights shall be sus-
pended except as provided in said section and Section 84.
Transfer of dissenting shares.

The shares represented by the certificate(s) bearing such no-
tation may be transferred or sold by the dissenting stockholder.
In such case:
(1) The transferee shall become a regular stockholder with
the right to receive all dividend distributions which would have
accrued to such shares; and
(2) The right of the transferor as a dissenting stockholder to
be paid the fair value of the shares shall cease. By transferring his
shares, he ceases to be a stockholder.
— oOo —
Title XI
NON-STOCK CORPORATIONS
Sec. 87. Definition. — For the purposes of this Code, a

non-stock corporation is one where no part of its income
is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on dissolu-
tion: Provided, That any profit which a non-stock corpo-
ration may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
The provisions governing stock corporations, when

pertinent, shall be applicable to non-stock corporations,
except as may be covered by specific provisions of this
Title, (n)
Sec. 88. Purposes. — Non-stock corporations may be
formed or organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, sci-
entific, social, civic service, or similar purposes, like trade,
industry, agriculture and like chambers, or any combina-
tion thereof, subject to the special provisions of this Title
governing particular classes of non-stock corporations,
(n)
Definition of non-stock c o r p o r a t i o n .
The definition of a non-stock corporation in Section 87 refers
to an ordinary non-stock corporation formed for any of the
purposes mentioned in Section 88. Thus, a non-stock corporation
organized to promote educational objectives may not be an
educational corporation as contemplated in Sections 106 to 108
of the Corporation Code.
684
Sees. 87-88 TITLE XI. NON-STOCK CORPORATIONS 685
In the enumeration of the purposes for which non-stock cor-

porations may be organized, "political" purpose is not specifical-
ly included. In view thereof, the Securities and Exchange Com-
mission may reject the articles of incorporation if the purpose
of the corporation is to engage in election campaign or partisan
1
political activity. (SEC Opinion, April 10,1985.)
Power to make profits and engage

in business.
(1) Incidental profits obtained from operations. — A non-stock
corporation, as a general rule, is not empowered to engage in
business with the object of making income or profits directly or
indirectly. However, it is not prohibited to make income or profits
as an incident to its operation. (Sec. 87, par. 1.) But, unlike stock
corporations, any profit derived by it from any authorized activity
cannot be distributed as dividends to its members. Incidental
profits obtained from its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized, (see Sec. 36[11].) It is in
this sense that a non-stock corporation is considered a non-profit
corporation.
(2) Profits obtained from investment of accumulated funds. — A
non-stock corporation may not lawfully engage in any business
activity for profit as it would run counter to its very nature as a
non-profit entity (see Sec. 14[2].) unless it is necessary to carry out
the purpose or purposes for which it was organized. However,
it may invest its accumulated funds for profit purposes. Thus, it
may subscribe to the capital stock of a corporation or invest in
commercial papers such as money instruments, but such power
must be included in its articles of incorporation in order that the
investment may not be considered ultra vires, (see Sec. 45.)
Non-stock corporations are not empowered to venture pri-
marily in business activities. However, when incidental to the
objects and purposes of the corporation and without the end of
making profits to be distributed to the members, it may engage
in certain economic activities stated in its articles of incorpora-
tion.
•See SEC Requirements for Non-stock Corporations. (Appendix "F.")

686
(3) Powers necessary furtherance of purposes. — Powers merely

convenient or useful are not implied (Sec. 36[11].) if they are not
essential, having in view the nature and object of incorporation.
Thus, an association of exporters cannot engage in fund-raising
projects where such activity is neither necessary nor incidental to
the furtherance of its objectives. Should the corporation desire to
engage in fund-raising activities, it should amend its articles of
incorporation (see Sec. 16.) to include the same in its purposes.
(4) Determination of actual purpose or object. — What is deter-
minative of whether a corporation is engaged in business is its
object or purpose as stated in its articles of incorporation and by-
laws. It is a familiar rule that the actual purpose of a corporation
is not controlled by the corporate form or by the commercial
aspect of the business prosecuted but may be shown by extrinsic
evidence, including its by-laws and the method of its operation.
Hence, the fact that its capital stock is divided into shares (see
Sec. 2.), does not detract from the fact that it is not engaged
in business for profit if such is the case. (Collector of Internal
Revenue vs. Club Filipino, Inc. de Cebu, 5 SCRA 321 [1962].)
A non-stock corporation is a non-profit corporation, while a
stock corporation is a for-profit corporation.
Applicable provisions.
Non-stock corporations are now governed by Title XI of the
Corporation Code.
They shall be governed by the pertinent general provisions
on stock corporations only in the absence of applicable specific
2
provisions in Title XI. (Sec. 87, par. 2.) Thus, a non-stock
corporation cannot be converted into a stock corporation by
mere amendment of the articles of incorporation. It can only
be dissolved under the methods specified in Title XIV, Sections
117-122. (SEC Opinion, Sept. 19, 1988.) Also, inasmuch as there
T h e Anti-Dummy Law (CA. No. 108.) applies only to entities engaged in wholly
or partly nationalized economic business activities, that is, where there is a constitutional
or statutory provision requiring Philippine citizenship as a requisite for the exercise or
enjoyment of a right, franchise, or privilege. Only when there is an existing law (presently
none) limiting foreign membership in a particular kind or type of non-stock corporation
will its provisions apply thereto. (SEC Opinion, Oct. 22,1992.)
is no special provision relating to hold-over term of the trustees

of non-stock corporations in Title XI, the provision of Section 23
allowing hold-over in stock corporations is also applicable to
non-stock corporations by virtue of Section 87.
Chapter I — MEMBERS
Sec. 89. Right to vote. — The right of the members of

any class or classes to vote may be limited, broadened
or denied to the extent specified in the articles of incor-
poration or the by-laws. Unless so limited, broadened or
denied, each member, regardless of class, shall be entitled
to one vote.
Unless otherwise provided by the articles of incorpora-
tion or the by-laws, a member may vote by proxy in accor-
dance with the provisions of this Code, (n)
Voting by mail or other similar means by members of
non-stock corporations may be authorized by the by-laws
of non-stock corporations with the approval of, and under
such conditions which may be prescribed by, the Securi-
ties and Exchange Commission.
Sec. 90. Non-transferability of membership. — Member-
ship in a non-stock corporation, and all rights arising
therefrom, are personal and non-transferable, unless the
articles of incorporation or the by-laws otherwise provide,
(n)
Sec. 9 1 . Termination of membership. — Membership shall
be terminated in the manner and for the causes provided
in the articles of incorporation or the by-laws. Termination
of membership shall have the effect of extinguishing all
rights of a member in the corporation or in its property,
unless otherwise provided in the articles of incorporation
or the by-laws, (n)
Chapter II — TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. — Unless otherwise

provided in the articles of incorporation or the by-laws, the
board of trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be fixed in
688 THE CORPORATION CODE OF THE PHILIPPINES Sees. 93-94
their articles of incorporation or by-laws, shall, as soon as

organized, so classify themselves that the term of office of
one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third
(1/3) of the board of trustees shall be held annually and
trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold once
only for the unexpired period.
No person shall be elected as trustee unless he is a
member of the corporation.
Unless otherwise provided for in the articles of incor-
poration or the by-laws, officers of a non-stock corpora-
tion may be directly elected by the members, (n)
Sec. 93. Place of meetings. — The by-laws may provide
that the members of a non-stock corporation may hold
their regular or special meetings at any place even outside
the place where the principal office of the corporation is
located: Provided, That proper notice is sent to all members
indicating the date, time and place of the meeting: And
provided, further, That the place of meeting shall be within
the Philippines, (n)
Chapter III — DISTRIBUTION OF ASSETS

IN NON-STOCK CORPORATIONS
Sec. 94. Rules for distribution. — In case of dissolution

of a non-stock corporation in accordance with the provi-
sions of this Code, its assets shall be applied and distrib-
uted as follows:
1. All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or adequate provi-
sion shall be made therefor;
2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which condi-
tion occurs by reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such require-
ments;
3. Assets received and held by the corporation sub-

ject to limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer or

conveyance by reason of the dissolution, shall be trans-
ferred or conveyed to one or more corporations, societies
or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation
pursuant to a plan of distribution adopted as provided in
this Chapter;
4. Assets other than those mentioned in the preced-

ing paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or the
by-laws, to the extent that the articles of incorporation or
the by-laws determine the distributive rights of members,
or any class or classes of members, or provide for distri-
bution; and
5. In any other case, assets may be distributed to
such persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified in
a plan of distribution as provided in this Chapter, (n)
Sec. 95. Plan of distribution of assets. — A plan provid-
ing for the distribution of assets, not inconsistent with the
provisions of this Title, may be adopted by a non-stock
corporation in the process of dissolution in the following
manner:
The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and direct-
ing the submission thereof to a vote at a regular or special
meeting of members having voting rights. Written notice
setting forth the proposed plan of distribution or summary
thereof; and the date, time and place of such meeting shall
be given to each member entitled to vote, within the time
and in the manner provided in this Code for the giving of
notice of meetings to members. Such plan of distribution
shall be adopted upon approval of at least two-thirds (2/3)
of the members having voting rights present or represent-
ed by proxy at such meeting, (n)
Rules applicable only to non-stock

corporations.
The specific rules that follow, governing a non-stock corpora-
tion, must be borne in mind. Most of the rules distinguish a non-
stock corporation from a stock corporation.
690
(1) Prohibition against distribution of dividends. — No part of

its income is distributable as dividends to its members (Ibid.,
par. 1.), meaning, no pecuniary benefits shall inure in favor of the
members although they may avail of, or derive other forms of,
assistance from the corporation. (SEC Opinion, April 10, 1985.)
Thus, a board cannot legally pass a resolution giving some
benefits to the active members of the corporation, among others,
in the form of grocery items and the like. (SEC Opinion, Dec. 17,
1987.)
(2) Non-profit character. — It cannot engage in business with
the object of making profits. Section 88 enumerates the allowable
purposes for which a non-stock corporation may be organized.
The fact that there is no distribution by an organization of earn-
ings or profits by way of dividends or otherwise to its members
is not conclusive as to its non-profit character.
Thus, where the members of an association (the purpose of
which according to its constitution is to "provide for its members
and their dependents recreational activities and a source of food
and other items at minimum prices that are consistent with good
service and efficient management") do not receive dividends
in the form of cash, but they receive benefits in the form of
commissary privileges, such as the importation of goods duty-
free, purchase of food and other items at minimum or reduced
prices, and return or refund of capital at the end of membership
or upon dissolution of the corporation, its constitution likewise
providing that profits of the association will be kept at a minimum
and at the end of each fiscal period 10% of the net earnings will
be put into a Reserve Fund if this fund is below $50,000 in value,
to be used at the discretion of the Board of Directors for capital
improvements and to absorb operating deficits or any kind of
3
loss," such an entity is one created and operated for profit. (U.S.
Employees Association Employees Association [USEAEA] vs.
U.S. Employees Association [USEA], 107 SCRA 87 [1981].)
(3) Right to vote. — The right to vote of members may be lim-
ited, broadened, or even denied in the articles of incorporation or
the by-laws. (Sec. 89, par. 1.)
3
As to meaning of profit, see "Dividends distinguished from profits or
under Section 43.
(a) The by-laws may declare who shall be entitled to

vote and how they shall be entitled to vote, or impose other
restrictions such as limiting the right to vote of each member
to a maximum number of votes irrespective of the amount
of his capital contribution, or authorizing the chairman to
vote the remaining balance after deducting the total votes
of the members/proxies (SEC Opinion, April 23, 1987.), or
restraining proxies from participating directly in the election
of trustees at the annual meeting of members (SEC Opinion,
Aug. 25,1987.), or limiting the right to vote only to members
of good standing, in which case delinquent members shall
not be included in determining the existence of the required
quorum. (SEC Opinion, Feb. 23,1993; see Sec. 24.)
(b) Unless otherwise provided by the articles of incor-
poration or the by-laws, a member may vote by proxy in
accordance with the provisions of the Corporation Code.
(Sec. 89, par. 2.) If proxy voting may be denied outrightly in
the articles of incorporation or by-laws, it necessarily follows
that the qualifications on who should be appointed proxies
or limitations on proxy may also be made therein. (SEC
Opinions, July 23,1981 and Sept. 20,1994.)
(c) Each member shall be entitled only to one vote in the
election of trustees unless cumulative voting is authorized in
the articles of incorporation or the by-laws. (Sec. 89, par. 1.)
He may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate. (Sec.
24.)
(d) Voting by mail or other similar means may be autho-
rized. (Sec. 89, last par.) This is necessary where a non-stock
corporation has numerous members who are located in vari-
ous parts of the country, but it must be specifically provided
for in the by-laws before the same can be availed of.
(4) Governing boards. — Non-stock corporations may, through
their articles of incorporation or their by-laws, designate their
governing boards by any name other than as board of trustees.
(Sec. 138.) Trustees of non-stock corporations have duties similar
to those of stock corporations.
692
(a) The number of trustees who must be members of the

corporation (Sec. 92, par. 2.), may be more than fifteen (15).
(Sec. 92, par. 1.) But the number of incorporating trustees
shall not be more than fifteen (15). (see Sec. 14[6].)
Although non-stock corporations are allowed to have
more than 15 trustees, under the principle of delegation of
corporate management, the board is supposed to be small
in number so that it may easily muster a quorum to act on
urgent matters. (SEC Opinion, Sept. 26, 1997.)
(b) Unless otherwise provided in the articles of incorpo-
ration or the by-laws, the terms of office of the trustees first
elected are staggered with a one (l)-year interval. (Sec. 92,
par. 1.) Although the law provides for a staggered term, the
number of trustees comprising the board and their term of
office may vary as the articles or the by-laws may provide.
(SEC Opinion, March 20, 1985.) While staggered terms are
allowed, the members of the board should always be elected
in accordance with Section 24 and any vacancy thereof filled
as provided by Section 29.
(c) Trustees subsequently elected shall have a term
of three (3) consecutive years. (Sec. 92, par. 1.) It may be
limited to one (1) year only as per Article 23. The term or the
percentage of trustees comprising a group may vary under
the articles of incorporation or by-laws. (SEC Opinion, May
7, 1981.) While non-stock corporations are allowed, in view
of the phrase "unless otherwise provided in the Articles of
Incorporation or the by-laws" found in Section 93, to provide
in their articles of incorporation or by-laws the desired term
of office (not necessarily one [1] year or three [3] years) of
the board, lifetime or unlimited term is not allowed as it
absolutely deprives other members to the opportunity to
participate in the management of the corporation or to
become officers of the corporation.
While the restriction under Section 7 (founders' shares) of
the Corporation Code applies to stock corporations, in view
of the rationale behind it, the same is likewise applicable to
non-stock corporations in view of Section 87 (par. 2.) which
states that the provisions governing stock corporations, when

pertinent, shall be applicable to non-stock corporations. (SEC
Opinions, Sept. 23,1991 and No. 04-46, Dec. 7, 2004.)
(d) Only members of the corporation can be elected to sit
in the board. (Sec. 92, par. 2; see Sec. 27.) Hence, to be eligi-
ble as trustee, a candidate should meet the qualifications for
membership of the corporation as prescribed by its by-laws.
(e) A corporation, being a juridical person, is not quali-
fied to occupy the position of a director or trustee. (Sec. 25.)
Accordingly, in the absence of an express provision in the
by-laws stating that authorized representatives of juridical
persons or corporate members are also to be considered as
"members" of the corporation for purposes of qualifying
them to be elected as members of the board, they cannot be
elected as trustees. (SEC Opinion, Sept. 2,1991.)
(f) Officers other than trustees may be directly elected by
the members (not by the board) unless otherwise provided
in the articles of incorporation and the by-laws. (Sec. 92, last
par.)
(5) Meetings. — Meetings of the board of trustees of a stock
corporation may be held anywhere in or outside the Philippines,
unless the by-laws provide otherwise. (Sec. 53, last par.)
(a) The by-laws may provide that the members may hold
their meetings at any place even outside the place where the
principal office of the corporation is located, provided that
such place is within the Philippines. (Sec. 93.) Thus, meetings
may coincide with conventions of the non-stock corporation
in any place of the country.
(b) Where the by-laws expressly provide for the holding
of members' meeting at the principal office of a non-stock
corporation conformably with the general rule in Section
51, meetings may not take place anywhere else without first
amending said by-laws in accordance with Section 48. In case
the by-laws do not indicate the place of meeting, the mem-
bers cannot hold their meetings outside the place where the
principal office of the corporation is located. The authority
694
to transfer the place of members' meetings outside the place

where the principal office of the corporation is located must
be expressly granted by the by-laws. (SEC Opinions, Dec. 26,
1991 and Sept. 24,1997.)
(6) Dissolution. — In case of dissolution, its assets shall be
applied and distributed in accordance with certain specific
rules laid down by law (Sec. 94.) or as may be specified in a
plan of distribution adopted by the corporation, provided it is
not inconsistent with such rules. (Sec. 95.) It is not allowed to
distribute any of the assets of the corporation or any incidental
income or profit made by the corporation during its existence.
(7) Conversion into stock corporation. — A non-stock corpo-
ration cannot be converted into a stock corporation by mere
amendment of the articles of incorporation. It must be dissolved
first under the methods specified in Title XIV, and thereafter, the
members may organize as a stock corporation. (SEC Opinion,
Feb. 24, 1989.)
The conversion of an existing non-stock, non-profit
corporation into a "stock corporation" by mere amendment of the
articles of incorporation would be tantamount to distribution of
the corporate assets or income of the corporation to its members
inasmuch as thereafter they automatically become stockholders
thereof. This scheme might defraud the public who might have
contributed donations or grants to the non-stock, non-profit
corporation since after its conversion the donated corporate
assets would in effect be treated as paid-in capital or subscription
payments of the stockholders. (SEC Opinion, March 20,1995.)
Membership in a non-stock corporation.

(1) Manner or mode of acquisition. — Membership in a non-
stock corporation cannot be acquired except in the particular
manner or mode of acquiring the same, as provided for in its
valid by-laws. (12-A Fletcher, pp. 579, 583-585.)
Transfer of membership rights by virtue of inheritance is not
provided for and is not, therefore, considered as a valid mode
of acquiring membership in the corporation. Furthermore, the
rights of members of a non-stock corporation which usually are
evidenced by a certificate or policy of some kind showing that

the person named therein or the holder is entitled to the rights of
membership, are not necessarily transferable although they may
be made so. (Ibid., p. 579.)
(2) Approval of admission of new members. — Admission of

members is one corporate power expressly granted under Sec-
tion 36(6) of the Code. In the absence of any express provision in
the by-laws as to what body the admission of corporate members
is lodged, it must logically be in the board of trustees because it
is the board which exercises the corporate powers of all corpora-
tions formed under the Corporation Code, and the approval of
the members of the corporation shall not be necessary, (see Sec.
23.)
(3) Mode adopted in the by-laws. — The manner of admitting
new members to a non-stock corporation is governed by the
by-laws and may not, therefore, be uniform in all corporations.
The by-laws may either provide that new members may be
admitted by a majority of the members of the board of trustees
or a committee on membership. Once adopted, such mode of
admitting new members must be observed until a new procedure
is adopted by the corporation through an amendment of the by-
laws. (SEC Opinion, Sept. 26,1969.)
(4) Qualifications for membership. — Under Section 6 of R.A.
No. 7192, otherwise known as the "Women in Development
and Nation-Building Act," "women shall enjoy equal access to
membership in all social, civic and recreational clubs, committees
associations, and similar other organizations devoted to public
purpose, x x x (italics supplied) The right refers to "equal access
to membership," not to "equal membership." It would be absurd
to construe it in terms of equality membership, as there are types
or kinds of organizations wherein not all sexes or persons, by
the nature of their objectives, are acceptable or qualified to
become members. It is also a matter of general knowledge
that corporations may validly prescribe certain qualifications
necessary for membership and the mode of procedure in which
membership can be acquired. It is also clear from the above
provision that women are given equal access to membership only
to associations or organizations "devoted to public purpose."

Neither is the equal protection guarantee of the Constitution
violated. (Art. Ill, Sec. 1 thereof.) The guarantee does not require
that persons different in fact be treated in law as though they
were the same. Where there are reasonable grounds for so doing,
persons or their properties may be grouped into classes to each
of which special legal rights and liabilities may be attached. No
violation is committed as long as the classification is reasonable,
not arbitrary or capricious. (SEC Opinion, Oct. 4, 1993, citing
Textbook on the Philippine Constitution by Hector S. De Leon.)
(5) Admission before adoption of corporate by-laws. — A private
corporation commences to have corporate existence and juridical
personality and is deemed incorporated from the date of issuance
of its certificate of incorporation. (Sec. 19.) If it is a non-stock
corporation, it has the power and capacity to admit members.
(Sec. 36[6].) The above provisions do not require the adoption
of corporate by-laws before a corporation can commence its
operation by accepting membership. Hence, it may accept
members in addition to the incorporating members even before
the adoption of its by-laws, notwithstanding a provision in its
articles of incorporation stating that additional members may
be accepted pursuant to the by-laws of the corporation. (SEC
(6) Amendment of by-laws. — The board of trustees of the
corporation may not increase the membership fee by mere
resolution, without first properly amending the by-laws of the
corporation. The trustees do not have the power to make such
step in their capacity alone as members of the board of trustees,
as it needs an amendment of the by-laws of the corporation, if
the matter is expressly treated therein. Under Section 48 (par.
1 ) of the Code, by-laws may be amended by vote of a majority
of the members of a non-stock corporation. In the absence of a
due delegation by the members of such power to the board of
trustees, the latter cannot amend the by-laws nor circumvent the
law by adopting a resolution to that effect. (SEC Opinion, March
3,1969.)
(7) Nature of membership rights. — Membership and all rights

arising therefrom are personal and non-transferable unless oth-
erwise provided in the articles of incorporation or the by-laws.
(Sec. 90.) The general rule is that membership in a non-stock
corporation has personal elements accompanied by social and
other ties; hence, except where the articles of incorporation or by-
laws so provide, it cannot be transferred to any other person who
wishes to be a member. (SEC Opinion, July 27, 1990.) Indeed, in
the absence of restrictions, it may act arbitrarily, and exclude any
person it may see fit and the courts have no power to interfere.
(SEC Opinion, Dec. 3,1991, citing 12-A Fletcher, Sec. 5687.)
(8) Power of courts. — Courts are without power to strip a
member of a non-stock, non-profit corporation of his member-
ship therein without cause; otherwise, that would be an unwar-
ranted and undue interference with the well-established right of
a corporation to determine its membership. (Chinese YMCA of
the Phil. Islands vs. Ching, 71 SCRA 460 [1976].)
(9) Termination of membership. — Membership shall be termi-
nated only in the manner and for the causes provided in the ar-
ticles of incorporation or by the by-laws. (Sec. 91.) Nevertheless,
it is essential that the expulsion or suspension of a member must
be based on just and reasonable ground (e.g., acts of disloyalty,
non-payment of dues, dishonesty) after notice and hearing of the
charge against him. In the absence of waiver, the member is en-
titled to due process. Its denial will entitle the member to award
of damages.
(10) Payment of dues and other assessments. — Membership
corporations, such as sports clubs, may provide in its articles of
incorporation for the payment by its members of monthly dues
called "club dues" as may be prescribed in the by-laws or by the
board of directors to meet the expenses for the general operations
of the club and for the maintenance and improvement of its
premises and facilities. The term "dues" are obligations payable
at recurring intervals for maintenance of an organization. It is
different from "assessment" which always implies a burden
imposed in invictum and a single act as distinguished from a
recurring act. (SEC Opinion, Nov. 12, 1986.)
A non-stock corporation is authorized by law to accept

members and may collect reasonable membership dues and
other assessments for purposes of accomplishing the purposes
or objectives for which the corporation was organized. (SEC
The articles of incorporation or by-laws may provide that
only members of good standing or those who are up-to-date in
the payment of their dues or other obligations may vote. (SEC
— oOo —
Title XII
CLOSE CORPORATIONS
Sec. 96. Definition and applicability of Title. — A close

corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All of
the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than
a specified number of persons, not exceeding twenty (20);
(2) All of the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock
of any class. Notwithstanding the foregoing, a corporation
shall be deemed not a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close corpo-

ration, except mining or oil companies, stock exchanges,
banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with
public interest in accordance with the provisions of this
Code.
The provisions of this Title shall primarily govern close
corporations: Provided, That the provisions of other Titles
of this Code shall apply suppletorily except insofar as this
Title otherwise provides, (n)
Definition of close corporation.

A close corporation has been defined as a corporation in which
the stock is held in a few hands, or in few families, and which
699
stock is not at all or only rarely dealt in buying and selling.

(Words and Phrases, p. 498.)
It has also been defined as one in which the directors and
officers have the power to fill vacancies in their own number,
without allowing to the general body of stockholders any choice
or vote in their elections. (Black's Law Diet., 4th ed., p. 410.)
Peculiarity of a close corporation.

The outstanding peculiarity of a close corporation is the
identity between stock ownership and active management.
In a close corporation, all the outstanding stock (there being
no publicly held securities of any other class) is owned by the
persons (or members of their immediate families) who are active
in the management and conduct of the business. (C. Rohrlich,
Law and Practice in Corporate Control, p. 96.)
It is essentially an incorporated partnership in which the
stockholders consider each other as partners but which the law
treats as a corporation. Thus, stockholders in a close corporation
are very much like members in a partnership. They owe to one
another the same duty of utmost good faith and diligence that
partners owe one another. This strict duty applies particularly to
controlling stockholders.
Meaning of t e r m under t h e C o d e .
Within the meaning of the Corporation Code, it is one whose
articles of incorporation provide the following:
(1) All its issued stock, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons,
not exceeding 20;
(2) All its issued stock shall be subject to one or more restric-
tions on transfer permitted by the Code (see Sec. 98.); and
(3) Any of its stock shall not be listed in any stock exchange
or offered to the public.
All the three (3) features must be present for a corporation
to be classified as a close corporation within the meaning of
Sec. % TITLE Xn. CLOSE CORPORATIONS 701
1
the Code. Where 2 / 3 of the voting stock or voting rights of a
corporation as defined above is owned or controlled by another
corporation which does not fall within the definition of a close
corporation, the former shall be deemed not a close corporation.
(Sec. 96, par. 1.) So too, a narrow distribution of ownership does
not, by itself, make a close corporation. (San Juan Structural &
Steel Fabricators, Inc. vs. Court of Appeals, 296 SCRA 631 [1998].)
Corporations which are vested with public interest such as
those mentioned are not allowed to be incorporated as a close
corporation. (Ibid., par. 2; see Sec. 140, pars. 2, 3.)
The rules set forth in Title XII primarily govern close cor-
porations. The provisions of other Titles of the Code apply in a
suppletory character, when not otherwise inconsistent with any
provision of Title XII. (Ibid., last par.)
Need for special rules for close

corporations. corporation in law but partnership in fact.
In a close corporation, we are dealing essentially with an
2
incorporated partnership. Indeed, a close corporation has also
been described as a "corporation de jure "and a "partnership de
•It has been opined that while a corporation with more than 20 stockholders due
to subsequent transfers may no longer be classified as a close corporation, the same will
not be treated as a publicly-held corporation if the corporation has no intention of going
public and provided that the subsequent transfers of shares have the prior approval of
the SEC and the offering is of a limited character. (SEC Opinion, Oct. 21,1992.)
T h e close corporation is organized primarily for the purpose of assuring limited
liability to all the participants, at least to the very large extent that such limitation is avail-
able to stockholders but not to partners. In view of the legal nature of the corporation, this
limitation of liability comes, however, inseparably tied to other characteristics which the
owners not only do not desire but also find affirmatively objectionable. (Rohrlich, op. cit.,
p. 97.) Among the lesser "evils" are the formalities incident to the corporate status, such
as the requirements for the filing of incorporation documents, need for a board of direc-
tors, for stockholders' meetings, and all the other paraphernalia of corporateness. These
burdens are generally accepted as a price which must be paid for the privileges of being
a corporation, even if some of them are all too frequently neglected in practice. (Ibid.)
The very objective then of a close corporation form is to enjoy the advantages of the
corporate organization, like the limitation of personal liability, and at the same time to
retain internally the partnership form of doing business. Close corporations are usually
small business corporations with few stockholders who participate actively in the man-
agement of the business.
702
facto." It may in fact be that the business began as a proprietorship,

or a partnership and the parties then decided to incorporate for
tax reasons, to insulate themselves from liability, to obtain outside
capital, or to meet the problems of continuity and transferability
which arise at the death or retirement of one of the members. A
close corporation then has special needs and problems different
3
from those of a widely-held corporation.
In many situations, it may not be fair nor practicable to apply
indiscriminately to the two types of corporate enterprise the same
rules or principles of law applicable to corporations. Hence, the
need for special provisions to govern close corporations. On this
point, the following discussion is illuminating:
(1) Incorporated business enjoying the characteristics of a part-
nership. — "Forty years ago, the literature in the corporate field
focused upon the subject of 'corporate advantages without incor-
poration.' This was in fact the title of a book published in 1929 by
Professor Edward H. Warren. Only recently has any noticeable
interest developed in the other direction, namely, how a busi-
ness, once incorporated, can nonetheless enjoy the characteristics
of a partnership.
Let us assume that a group of three persons, having promoted
a business, or perhaps already operating a partnership, decide to
incorporate and to divide the stock equally among them. Their
reason for incorporation may be to achieve limited liability, to
assure continuity of the business upon their death, to obtain
funds more readily, or to escape from taxation at individual rates
if they are in high brackets. In reality, though not in law, theirs
may be an incorporated partnership. Despite certain advantages
of incorporation they may nonetheless chafe at the rigid pattern
of internal control and management which is commonly
associated with it. They are still partners in spirit. For example,
rule by majority may be distasteful to them. They may all prefer
3
ln the field of finance, for instance, a widely-held corporation may sell its securities
to the public or to large institutional investors such as insurance companies. The question
of shareholders' pre-emptive rights in newly issued shares is considerably less significant
than in the case of a closely-held corporation (see Sees. 39,102.), which is unable to go to
the market for the issuance of securities but must pledge or mortgage its assets and even
borrow on the personal notes of its principal stockholders. (W.L. Cary, Cases and Materi-
als on Corporations, 1969 ed., pp. 19, 21.)
to retain a veto power over major business decisions. They may
be reluctant to have new 'partners' substituted without their
consent."
(2) Flexible standard operating procedure with respect to matters
of internal organization. — "The standard operating procedure for
corporations has been described as pyramidal in form, with the
shareholders at the base, the directors constituting the policy-
making body and managing the company's affairs, and the
officers executing policies already formulated, (see Sec. 23.)
Typically, both shareholders and directors are expected to act
by majority vote, shares are freely transferable and dissolution is
regarded as an extraordinary remedy. If there is any major devia-
tion from this established norm, by contract or otherwise, doubt
immediately arises whether it could be valid under the law. Ini-
tially, in this area of the law, no effort was made consciously to
distinguish between the publicly held concern and the small
so-called close corporation. One natural inquiry is why such an
inflexible standard operating procedure — for all corporations
alike — should be treated as sacrosanct. Is it realistic in the case of
the closely held corporation? Does it accord with business prac-
tice when the corporation is fundamentally the will and effort of
a few individuals? Is there any injury to outsiders — sharehold-
ers or creditors — to the public generally, if the deviations are
limited to the internal organization of the corporation? These are
some of the questions which are being raised today and which
may be responsible for a noticeable tendency toward increasing
corporate flexibility in this country.
In America today, there is developing some recognition that
a closely held concern may in fact function upon an entirely
different basis than a public corporation. Its success may
depend upon the cooperative effort and mutual confidence of
its shareholder owners. Business practice here may play a major
role in the development of corporation law. Realistically, should
public corporations on the one hand, and chartered partnerships
on the other, be governed by a single inflexible standard
operating procedure. Nevertheless, enthusiasm for flexibility and
the development of new legal concepts must be tempered with
competing practical considerations. If, for example, unanimity is
required for action by the shareholders or directors, have we not

thus encouraged the likelihood of a stalemate or deadlock? At
what point is a statutory solution available or even feasible, if the
'partners' cannot agree?"
(3) Restriction of the freedom of the vote at the shareholder and
at the director level. — "More specifically, let us return to the
three partners. Each of them will seek to implement his aims
at the different levels of corporate action. Each may want to
insure concerted action among the three of them, or perhaps
that his own voice will carry force, even to the point of veto.
This is accomplished by restricting the freedom of the vote at
the shareholder and at the director level, directly by contract or
indirectly by provisions in the charter or by-laws requiring more
than a majority for quorums and for policy decisions. Each may
want to obtain for himself a guaranteed position as an officer
of the company with a minimum salary. Each should consider
the possibilities for dissolving the corporation in the event of
a deadlock or of a serious clash of personalities. Finally, each
will want some control over the power of newcomers to buy
stock in the corporation." (W.L. Cary, Cases and Materials on
Corporations, 1969 ed., pp. 362-363.)
Sec. 97. Articles of incorporation. — The articles of incor-

poration of a close corporation may provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and restric-
tions on their transfers as may be stated therein, subject to
the provisions of the following section;
2. For a classification of directors into one or more
classes, each of which may be voted for and elected solely
by a particular class of stock; and
3. For a greater quorum or voting requirements in
meetings of stockholders or directors than those provided
in this Code.
The articles of incorporation of a close corporation

may provide that the business of the corporation shall be
managed by the stockholders of the corporation rather
than by a board of directors so long as this provision con-
tinues in effect:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for purposes of applying provisions of this Code;
and
3. The stockholders and the corporation shall be sub-
ject to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified officers
or employees shall be elected or appointed by the stock-
holders, instead of by the board of directors, (n)
Permissible provisions in articles

of incorporation.
The matters mentioned in Section 97 are allowed to be pro-
vided in the articles of incorporation of a close corporation.
(1) Classification of directors into one or more classes. — An illus-
tration of No. (2), in paragraph 1, is where the articles of incorpo-
ration provides for two classes of stock, "A" and " B , " allocating
a number of directors for each class, and the holders of each class
would be elected to the board of directors solely by the holders
of the same class regardless of the number of shares in each class.
But the members of the board of directors cannot be divided into
groups, with each group having different terms of office, (see Sec.
23; for exceptions, see Sees. 92,108.) It is not clear whether under
No. (3) a unanimity requirement for stockholders' and directors'
resolution would be valid.
The classification of directors into one or more classes or
groups is not allowed in an ordinary or widely-held corporation.
(2) Quorum and voting requirements. — The articles of incor-
poration of a close corporation may provide for quorum and vot-
ing requirements in meetings of stockholders or directors greater
than those provided in the Corporation Code. The classification
of shares into common and founders' shares and grant of found-
ers' shares a 1:10 voting rights ratio are valid. The 1:10 voting
rights ratio for founders' shares is not subject to the limited pe-
riod under Section 7 of the Code. The 5-year limitation provided
706
in Section 7 applies only to the grant of an exclusive right to vote

and be voted for in the election of directors. (SEC Opinion No.
10-02, Jan. 15, 2010.)
(3) Management of the corporation by the stockholders. — Where
the articles of incorporation provide that the business of the
corporation shall be managed by the stockholders themselves
rather than by a board of directors, then the stockholders shall
be deemed to be the directors with all the liabilities imposed by
the Code on directors, (par. 2.) In the ordinary stock corporation,
the management or conduct of the business and affairs thereof is
entrusted to the board of directors and cannot be turned over to
the stockholders except for a few specified matters concerning its
internal affairs, (see Sec. 23.)
(4) Election or appointment of officers directly by the stockhold-
ers. — The articles may likewise provide that all or certain speci-
fied officers or employees shall be elected or appointed directly
by the stockholders, instead of the board of directors. (Sec. 97,
last par.) In the ordinary stock corporation, corporate officers are
elected by a majority of all the members of the board of directors.
(Sec. 25.)
Stockholders in a close corporation are very much like mem-
bers in a partnership. They owe to one another the same duty of
utmost good faith and diligence that partners owe one another.
This strict duty applies particularly to controlling stockholders.
Sec. 98. Validity of restrictions on transfer of shares. —

Restrictions on the right to transfer shares must appear
in the articles of incorporation and in the by-laws as well
as in the certificate of stock, otherwise, the same shall
not be binding on any purchaser thereof in good faith.
Said restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option
to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option
to purchase, the transferring stockholder may sell his
shares to any third person, (n)
Sec. 98 TITLE XII. CLOSE CORPORATIONS 707
Restrictions on transfer of shares.

One of the three distinguishing characteristics of a close cor-
poration is that all of its stock shall be subject to one or more
specified restrictions permitted by Title XII. (Sec. 96, par. 1.)
Section 98 imposes two (2) conditions for the validity of
restrictions on the right to transfer shares, namely:
(1) Such restrictions must appear in the articles of incorpo-
ration and in the by-laws, as well as in the certificate of stock;
otherwise, they shall not be binding on any purchaser thereof in
good faith; and
(2) They shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares
of the transferring stockholders with such reasonable terms,
conditions or period stated therein. Thus, a restriction fixing
the purchase price very much below the fair market value of
4
the shares may be invalid. Also invalid is a prohibition against
transfer of stock without the prior consent of the board of
directors or of the other stockholders.
Right of first refusal.

The corporation or the stockholders have the right of first
refusal, that is, the stockholder who wants to sell his shares to
any third person must first offer it either to the corporation or
to the other existing stockholders usually under the same terms
4
In an American case, there was a question as to the "unreasonableness," that is,
"unfairness" of the price specified in the by-laws, namely, a price at which the shares
had originally been purchased from the corporation. Reversing the Appellate Division
upon this point, the court said (p. 543.): "Generally speaking, these restrictions are em-
ployed by the so-called 'close corporations' as part of the attempt to equate the corporate
structure to a partnership by giving the original stockholders a sort of pre-emptive right
through which they may, if they choose, veto the admission of a new participant. Obvi-
ously, the case where there is an easily ascertainable market value for the shares of a
closely-held corporate enterprise is the exception, not the rule, and consequently, various
methods or formulae for fixing the option price are employed in a practice, e.g., book or
appraisal value, often exclusive of good will, or a fixed price, or the par value of the stock.
In sum, then, the validity of the restriction on transfer does not rest on any abstract notion
of intrinsic fairness of price. To be invalid, more than mere disparity between option price
and current value of the stock must be shown. Since the parties have in effect agreed on a
price formula which suited them, and provision is made freeing the stock for outside sale
should the corporation not make, or provide for, the purchase, the restriction is reason-
able and valid." (W.L. Cary, pp. 502-503, citing Allen vs. Biltmore Tissue Corp., 2 N.Y. 2d.,
534,148 N.E. 2d 812 [1957].)
708
and conditions. The right pertains to shares already issued to

stockholders. If the existing stockholders or the corporation fails
to exercise the option to purchase within the period stated, the
transferring stockholder may sell his shares to any third person.
The present policy of the Securities and Exchange Commission
is to limit the period to one (1) month which is deemed "sufficient
for the stockholders or for the corporation (not necessarily a
closely-held one) to signify their desire to buy the shares of stock
being offered for sale by any stockholder." (SEC Opinion, Oct. 13,
1964.) Under Section 98, an absolute restraint on transfer of stock
unlimited in time is invalid.
Need for stock transfer restrictions

in close corporations.
(1) Prevent changes in control of corporation. — As noted earlier,
one of the major objectives of the shareholders of a close corpo-
ration may be to remain close, i.e., to choose new "partners" on
the death or retirement of the present shareholder participants.
Although restrictions on the transfer of shares are occasionally
adopted for other reasons, the usual purpose of such restrictions
is to prevent changes in control of the corporation which might
otherwise result from the transfer of voting shares. (W.L. Cary,
op. cit., p. 494.)
In this connection too, the shareholders of a close corpora-

tion, like partners, may wish to insure their own continuance as
directors and officers if it is permissible. (Ibid., p. 21.)
(2) Maintain delectus personae of partnership. — In contrast,
a widely-held corporation needs centralized management
distinguished from the owners which in a close corporation
may not be needed or desired since, often, the same persons are
both managers and shareholders, with no clear differentiation
separating one capacity from the other. The idea that they must
act as fiduciary directors for the benefit of themselves as passive
beneficial owners will strike them as a legalistic nonsense.
Again, in the widely-held company, the shares of stock must
be freely transferable, for the so-called "owners" demand a liquid
investment. In the close corporation, this is not likely to be wanted
any more than it is in a partnership. The incorporators want to
continue as partners albeit with the advantages of corporate
Sec. 98 TITLE Xn. CLOSE CORPORATIONS 709
personality; they do not want other people to be able to step

into the shoes of their co-partners. (Ibid., pp. 16-17, citing L.C.B.
Grower, in an article entitled "Some Contrast between British
and American Corporation Law," 69 Harv. L. Rev. 1369 [1956].)
They must prefer, for obvious reasons, the delectus personae of the
partnership. (C. Rohrlich, op. cit., p. 100.)
Scope of restrictions.
In construing the full scope of the intended restrictions as
expressly set forth in the articles of incorporation and in the by-
laws as well as in the certificate of stock, the courts take the view
that said stated restrictions are "not to be enlarged by implica-
tion."
(1) Transfers covered. — The articles of incorporation, etc.
should make clear whether the restrictions imposed upon trans-
fers of stock are applicable only to voluntary inter vivos sales
or also to gifts or to testamentary dispositions and devolution
upon death or other transfers by operation of law. Ordinarily,
option restrictions apply only to voluntary transfers. Thus, it has
been held that in the absence of provisions to the contrary, such
restraints do not prevent a shareholder from disposing of his
shares by testamentary provision (Stern vs. Stern, 146 F [2d] 870.)
nor apply to transfers by operation of law. (McDonald vs. Farley
& Loetscher Mfg. Co., 283 N.W. 261.) Neither do they apply to a
sheriff's sale on execution against a stockholder, nor to a sale of
stock by a receiver pursuant to an order of a court. (SEC Opinion,
May 5,1986.)
The SEC has held that the reasonable option period may range
from 30 to 60 days or even more, depending on the circumstances.
Where the articles of incorporation do not provide an option
period, a clause that restricts the transfer of makers of stock by
way of pledge or mortgage is not valid and enforceable because
the effect of the absence of such option period is to absolutely
prohibit the mortgage, pledge, or encumbrance of such stock
without the written consent of the other stockholders. (SEC
Opinion No. 06-19, March 16, 2006.)
(2) Transferees covered. — Consideration should also be given
as to whether transfers to existing shareholders or to members of
710
the transferor's immediate family should be included or excluded,

totally or partially, from the scope of the restriction. In this
connection, two considerations are involved. One, the limitation
upon the admission in the corporation of new shareholders; and
two, the preservation of the initial proportionate ownership as
among the original shareholders.
(3) Optionees covered. — The articles of incorporation, etc.
should likewise set forth with precision whether the option runs
in favor of all the stockholders or only to some of them, whether
there is any priority as among the optionees (e.g., the corporation
and the other shareholders), the order of any such priority and
the extent thereof, and the principle of participation as among the
optionees, i.e., whether they participate in the purchase equally,
pro rata to the existing holdings, or otherwise. (C. Rohrlich, op.
cit, pp. 114-116.)
Sec. 99. Issuance or transfer of stock of a close corpora-

tion in breach of qualifying conditions. —
1. If stock of a close corporation is issued or trans-
ferred to any person who is not entitled under any provi-
sion of the articles of incorporation to be a holder of record
of stock, and if the certificate for such stock conspicu-
ously shows the qualifications of the persons entitled to
be holders of record thereof, such person is conclusively
presumed to have notice of the fact of his ineligibility to be
a stockholder.
2. If the articles of incorporation of a close corpora-
tion states the number of persons, not in excess of twenty
(20), who are entitled to be holders of record of its stock,
and if the certificate for such stock conspicuously states
such number, and if the issuance or transfer of stock to
any person would cause the stock to be held by more than
such number of persons, the person to whom such stock
is issued or transferred is conclusively presumed to have
notice of this fact.
3. If a stock certificate of any close corporation con-

spicuously shows a restriction on transfer of stock of the
corporation, the transferee of the stock is conclusively
presumed to have notice of the fact that he has acquired
stock in violation of the restriction, if such acquisition vio-
lates the restriction.
4. Whenever any person to whom stock of a close

corporation has been issued or transferred has, or is
conclusively presumed under this section to have, notice
either (i) that he is a person not eligible to be a holder of
stock of the corporation, or (ii) that transfer of stock to him
would cause the stock of persons permitted by its articles
of incorporation to hold stock of the corporation, or (iii)
that the transfer of stock is in violation of a restriction on
transfer of stock, the corporation may, at its option, refuse
to register the transfer of the stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be appli-
cable if the transfer of stock, even though otherwise con-
trary to subsections (1), (2) or (3), has been consented to
by all the stockholders of the close corporation, or if the
close corporation has amended its articles of incorpora-
tion in accordance with this Title.
6. The term "transfer," as used in this section, is not
limited to a transfer for value.
7. The provisions of this section do not in any way
impair any right of a transferee regarding any right to re-
scind the transaction or to recover under any applicable
warranty, express or implied, (n)
Issuance or transfer of stock in breach

of qualifying conditions.
In the cases contemplated in Nos. 1, 2, and 3 of Section 99,
the transferee is conclusively presumed to have notice of the
restriction or condition and, therefore, he is not allowed to prove
lack of notice even if such is the fact. The corporation cannot
be compelled to register, although it may, at its option, register
the transfer of the stock in the name of the transferee. (No. 4.)
The transfer, however, shall be binding upon the corporation
notwithstanding such conclusive presumption, where it has been
consented to by all the stockholders of the close corporation or if
the close corporation has amended its articles of incorporation as
provided in Section 103. (No. 5.)
The term "transfer," as used above, includes donation as it is
not limited to a transfer for value. (No. 6.) Hence, the conclusive
presumption of notice applies to a donee.
The breach of any restriction in the issuance or transfer of

stock is without prejudice to the right of the transferee under
existing laws (i.e., Civil Code) to rescind the transaction or
recover under applicable warranty, express or implied. (No. 7.)
Sec. 100. Agreements by stockholders. —

1. Agreements by and among stockholders exe-
cuted before the formation and organization of a close
corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be
valid and binding between and among such stockholders,
if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation,
irrespective of whether the provisions of such agreements
are contained, except those required by this Title to be
embodied, in said articles of incorporation.
2. An agreement between two or more stockholders,
if in writing and signed by the parties thereto, may pro-
vide that in exercising any voting rights, the shares held
by them shall be voted as therein provided, or as they may
agree, or as determined in accordance with a procedure
agreed upon by them.
3. No provision in any written agreement signed by
the stockholders, relating to any phase of the corporate
affairs, shall be invalidated as between the parties on the
ground that its effect is to make them, partners among
themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be invali-
dated on the ground that it so relates to the conduct of
the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on
the stockholders who are parties thereto the liabilities for
managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively
engaged in the management or operation of the business
and affairs of a close corporation, the stockholders shall
be held to strict fiduciary duties to each other and among
themselves. Said stockholders shall be personally liable
for corporate torts unless the corporation has obtained
reasonably adequate liability insurance, (n)
Valid agreements by stockholders.

Section 100 considers as valid between the parties the agree-
ments mentioned when executed by the stockholders of a close
corporation.
Under No. (1), the pre-incorporation agreements among
stockholders shall continue to be valid and binding even after
incorporation if such be their intent, subject to the limitation that
they should not be inconsistent with the articles of incorporation.
No. (1) refers to stockholders' agreement in general, while
No. (2), to voting or pooling agreements in particular.
No. (3) makes clear that even if the effect of a provision in any
written agreement relating to any phase of the corporate affairs
is to make the parties partners among themselves, the same shall
not be invalidated on that ground. This follows the modern prac-
tice of allowing stockholders of a close corporation to operate as
a partnership among themselves but remaining as a corporation
with respect to third persons. Accordingly, a stockholders' agree-
ment shall not be invalidated on the ground that it restricts or
interferes with the discretion or powers of the board of directors.
But the stockholders actively engaged in the management of
a close corporation shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability
insurance. (No. 5.) It has been held that the President of a close
corporation who actually manages the business falls within the
meaning of an "employer" as contemplated by the Labor Code
and may be held jointly and severally liable for the obligations
of the corporation to its illegally dismissed employees. Our
jurisprudence is wanting as to the definite scope of "corporate
tort." Essentially, tort consists in the violation of a right given
or the omission of a duty imposed by law. Simply stated, tort is
the breach of a legal duty. (Naguiat vs. National Labor Relations
Sec. 101. When board meeting is unnecessary or impro-

perly held. — Unless the by-laws provide otherwise, any
action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written con-
sent thereto is signed by all the directors; or
714
2. All the stockholders have actual or implied knowl-

edge of the action and make no prompt objection thereto
in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiescence of all the
stockholders; or
4. All the directors have express or implied knowl-
edge of the action in question and none of them makes
prompt objection thereto in writing.
If a directors' meeting is held without proper call or
notice, an action taken therein within the corporate power
is deemed ratified by a director who failed to attend, unless
he promptly files his written objection with the secretary of
the corporation after having knowledge thereof, (n)
Action taken by directors without meeting

or at improperly called m e e t i n g .
In any of the four (4) cases specified, the action by the direc-
tors of a close corporation without a meeting is deemed valid.
The exception is when the by-laws provide otherwise.
Under No. (2), ratification cannot take place where the action
taken at a meeting held without proper call or notice is beyond
the corporate powers of the corporation, (see Sec. 45.)
Note that under the second paragraph, a written objection is
required, (see M.R. Dulay Enterprises, Inc. vs. Court of Appeals,
225 SCRA 678 [1993].) Under Section 53, an oral objection is suf-
ficient to preserve the right of a director to question the validity
of any action taken in a meeting held without proper notice.
Sec. 102. Pre-emptive right in close corporations. — The

pre-emptive right of stockholders in close corporations
shall extend to all stock to be issued, including reissuance
of treasury shares, whether for money or for property
or personal services, or in payment of corporate debts,
unless the articles of incorporation provide otherwise, (n)
Pre-emptive right of stockholders.

In close corporations, the pre-emptive right of stockholders
(see Sec. 39.) extends to all stock to be issued, whether common
or preferred, voting or non-voting, etc., newly authorized shares
or newly issued balance of originally authorized shares includ-
5
ing treasury shares; whether the consideration for the issuance
of the stock is cash or otherwise; and whether or not its denial
will affect their relative interests or positions in the corporation.
In other words, the right of pre-emption is a matter of
absolute right on the part of the stockholders, except only when
limited or curtailed by the articles of incorporation. This is of vital
importance in closely held corporations to keep the association
intact and prevent the shifting of control from one faction to
another or to unwelcome outsiders and thus, avoid deadlocks in
the management of the corporation, (see Sec. 104.)
The other exceptions provided in Section 39 are not appli-
cable.
In a widely-held corporation, the pre-emptive right extends
only to new issues of shares out of an increase of the capital stock,
(see Sec. 39.)
Sec. 103. Amendment of articles of incorporation. — Any

amendment to the articles of incorporation which seeks
to delete or remove any provision required by this Title to
be contained in the articles of incorporation or to reduce
a quorum or voting requirement stated in said articles
of incorporation shall not be valid or effective unless
approved by the affirmative vote of at least two-thirds (2/3)
of the outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares as
may be specifically provided in the articles of incorporation
for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose, (n)
A m e n d m e n t of the articles
of incorporation.
Any amendment of the articles of incorporation must comply
with the requirements prescribed by the above provision. The
amendment must be approved at the stockholders' meeting duly
called for the purpose. Mere written assent of the stockholders
5
As long as they remain in the treasury (see Sec. 57.), they have really the status of
unissued authorized shares subject to "issue" (although "re-issue" is the more appropri-
ate word) at some future time.
716
which is allowed under Section 16 is insufficient. The other pro-

visions of Section 16 apply, (see Sec. 96, last par.) Note that even
those without rights are entitled to vote.
The effect of the amendment is to terminate the status of the
corporation as a close corporation.
Sec. 104. Deadlocks. — Notwithstanding any contrary

provision in the articles of incorporation or by-laws or
agreement of stockholders of a close corporation, if the
directors or stockholders are so divided respecting the
management of the corporation's business and affairs
that the votes required for any corporate action cannot
be obtained with the consequence that the business and
affairs of the corporation can no longer be conducted to
the advantage of the stockholders generally, the Securities
and Exchange Commission, upon written petition by any
stockholder shall have the power to arbitrate the dispute.
In the exercise of such power, the Commission shall have
authority to make such order as it deems appropriate
including an order: (1) cancelling or altering any provision
contained in the articles of incorporation, by-laws, or
any stockholders' agreement; (2) cancelling, altering or
enjoining any resolution or other act of the corporation
or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or
its board of directors, stockholders, officers, or other
persons party to the action; (4) requiring the purchase at
their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted
retained earnings in its books or by the other stockholders;
(5) appointing a provisional director; (6) dissolving the
corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial person who
is neither a stockholder nor a creditor of the corporation
or of any subsidiary or affiliate of the corporation, and
whose further qualifications, if any, may be determined by
the Commission. A provisional director is not a receiver
of the corporation and does not have the title and pow-
ers of a custodian or receiver. A provisional director shall
have all the rights and powers of a duly elected director
of the corporation, including the right to notice of and to
Sec. 104 TITLE XH. CLOSE CORPORATIONS 717
vote at meetings of directors, until such time as he shall be

removed by order of the Commission or by all the stock-
holders. His compensation shall be determined by agree-
ment between him and the corporation subject to approval
of the Commission, which may fix his compensation in
the absence of agreement or in the event of disagreement
between the provisional director and the corporation, (n)
Arbitration of intra-corporate d e a d l o c k s by the

Securities a n d E x c h a n g e C o m m i s s i o n .
If the directors or stockholders of a close corporation are
evenly divided respecting the management of the corporation's
business and affairs, and there is no way to settle the dispute,
they may become deadlocked. The situation may lead to the
paralyzation of corporate operations which may have grave
consequences to the members of the corporation. To avoid these
consequences, the Securities and Exchange Commission, upon
written petition by any stockholder, shall have power to arbitrate
the dispute.
The power given to the Commission by Section 104 may
be exercised, notwithstanding any provision in the articles
of incorporation or by-laws or agreement of stockholders of a
close corporation to the contrary. In the exercise of its power, the
Commission may make such order as it deems appropriate under
the circumstances including the dissolution of the corporation.
The SEC may order the dissolution of the corporation if it will
be beneficial to the stockholders and to creditors but where
the business is successful, it may appoint instead a provisional
director as additional member of the board.
The second paragraph specifies the qualifications, rights,
and powers of a provisional director who may be appointed by
the Securities and Exchange Commission in the exercise of the
authority conferred upon it by Section 104.
Dissolution in the event of deadlock.

Some statutes (like Sec. 104.) expressly provide for dissolution
in the event of a deadlock in the board of directors and / or among
the stockholders respecting the management of the corporation's
business and affairs (e.g., in the election of directors). They
718
commonly refer to an "evenly divided" board and are, therefore,

not available when the board is composed of an uneven number
of directors unless the "odd man" is a "dummy." The "sword
of dissolution" cuts both ways, and whether ease or difficulty
of bringing about dissolution is "good" or "bad" depends upon
whose ox is being gored. All depends, of course, upon which
party is most seriously prejudiced by maintenance of the status
quo. It is, therefore, important in many situations to consider
means whereby the statutory power vested in a given percentage
to bring about dissolution is curtailed for the greater protection
of the minority who may be opposed to dissolution.
Section 104 provides a formula for obviating dissolution upon
disagreement among the stockholders of a close corporation by
authorizing the arbitration of their differences by the Securities
and Exchange Commission. Even where the law is in terms
applicable, the dissolution of a prosperously going corporation,
especially if the disagreement does not render it impossible for
the corporation to continue operating, should be the exception
rather than the rule. But while resort to statutory dissolution
proceedings (Title XIV.) are not precluded unless limited or
waived by express provision to such effect in an agreement
of all the stockholders (see Sec. 100.), the Commission has the
power, in a proper case, such as where there exists a fundamental
deadlock which is causing injury to the corporation, to order
its dissolution when there is no other way left to save the
6
stockholders' investment from disintegration. (see C. Rohrlich,
op. cit., pp. 137-139.)
'"Such small corporations, being really partnerships, between two or three people
who contribute their capital, skills, experience, and labor, should be treated by a court
of equity as partnerships in many respects. A large corporation or one that has some
prospect of becoming large is really an institution separate and distinct from its owners
serving a separate purpose in our society by providing employment, accumulating capi-
tal for proper purposes and adding to community wealth and community service. Even
if a large or growing corporation is temporarily operating at a loss, there may be quite
reasonable expectations that its position will improve. Not so with the two-man corpora-
tion which owns no valuable trade secrets, market advantages or growth probabilities
but simply continues to exist as the form in which individuals pool their efforts. When
one of those two dies and everything indicates that the corporation can never do more
than pay salary to the survivor, the reason for corporate existence is gone and the court
of equity should make a dissolution decree fashioned to fit the facts and providing for an
appropriate form of dissolution and sale of assets whether to the survivors or by public
auction or otherwise as may appear just." (Desmond, Chief Judge [dissenting], in Kreiger
vs. Gerth, 16 N.Y. 2d 802, 210 N.E. 2d 355.)
Sec. 105. Withdrawal of stockholder or dissolution of

corporation. — In addition and without prejudice to the
other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation
may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be
less than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written petition
to the Securities and Exchange Commission, compel
the dissolution of such corporation whenever any of
the acts of the directors, officers or those in control of
the corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being
misapplied or wasted, (n)
Right of stockholder to withdraw or to have

the corporation dissolved.
The right of the stockholder to withdraw may be exercised
"for any reason" provided that the corporation has sufficient
assets to cover its debts and liabilities exclusive of capital stock.
On the other hand, his right to have the corporation dissolved
by written petition to the Securities and Exchange Commission
must be founded on some legal grounds mentioned, justifying
dissolution by the Commission which shall order the dissolution
only after proper notice and hearing, (see Sec. 121.)
— oOo —
Title XIII
SPECIAL CORPORATIONS
Chapter I — E D U C A T I O N A L C O R P O R A T I O N S
Sec. 106. Incorporation. — Educational corporations

shall be governed by special laws and by the general
provisions of this Code, (n)
Educational corporation defined.

An educational corporation is a stock or non-stock corporation
organized to provide facilities for teaching or instruction. Such
corporations normally maintain a regular faculty and curriculum
and normally have a regular organized body of pupils or students,
or attendance at the place where the educational activities are
regularly carried on. (see Oleck, Modern Corporation Law, p.
540.)
Laws applicable.
1
Educational corporations are classified by the Code as
"special corporations" and are different from an ordinary non-
stock corporation formed or organized for educational purpose,
(see Sec. 88.)
'For purposes of Act No. 2076, "An Act making the inspection and recognition of
private schools and colleges obligatory for the Secretary of Public Instruction (now Sec-
retary of Education, Culture and Sports), and for other purposes," the term private school
or college shall be deemed to include any private institution for teaching, managed by
private individuals or corporations, x x x which offers courses of kindergarten, primary,
intermediate or secondary instruction or superior courses in vocational, technical, profes-
sional or special schools by which diplomas or certificates are to be granted or titles and
degrees conferred." (Sec. 2 thereof, as amended by C A . No. 180.)
720
Sec. 107 TITLE XIH. SPECIAL CORPORATIONS 721
2
Educational corporations are governed primarily by special
laws, and suppletorily, by the general provisions of the Corpora-
3
tion Code, (see Sec. 106.) Those organized as stock corporations
are governed by the provisions on stock corporations as to num-
ber and term of directors. (Sec. 108, last par.)
Sec. 107. Prerequisites to incorporation. — Except upon

favorable recommendation of the Ministry of Education
4
and Culture, the Securities and Exchange Commission
shall not accept or approve the articles of incorporation
and by-laws of any educational institution. (168a)
Incorporation.
Except insofar as may be provided by special laws, the
incorporation of educational corporations shall be governed by
5
the provisions of the Code. (see Sees. 10-19.) The Securities and
Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution unless
2
"Sec. 4(2). Educational institutions, other than those established by religious groups
and mission boards, shall be owned solely by citizens of the Philippines or corporations
or associations sixty per centum of the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino equity participation in all educational
institutions. The control and administration of educational institutions shall be vested in
citizens of the Philippines. No educational institution shall be established exclusively for
aliens, and no group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this subsection shall not apply to schools established for foreign
diplomatic personnel and their dependents, and, unless otherwise provided by law, for
other foreign temporary residents." (Constitution, Art. XTV.)
3
A non-stock educational institution is not allowed to convert to a non-profit edu-
cational foundation under R.A. No. 6055 which authorizes the conversion only of stock
corporations to non-profit educational foundations. (SEC Opinion, Feb. 22, 1961.) If the
educational institution is incorporated as a non-stock corporation under the Code, it can
be converted into a foundation by amending its articles of incorporation and by-laws to
reflect said change, and specifying the sources and application of funds in the amended
articles. In the amendment of the articles, the provisions of Section 16 of the Code must
be complied with. (SEC Opinion, Feb. 19,1974.)
'Now, Department of Education, Commission on Higher Education, and Technical
Education and Skills Development Authority, the first, concentrating on basic education,
the second, on college and university learning, and the third, on technical and vocational
skills training.
TJnless exempted for special reasons by the Secretary of Public Instruction, any pri-
vate school or college recognized by the Government shall be incorporated under the
provisions of Act No. 1459 known as the Corporation Law (now B.P. Big. 68, the Corpora-
tion Code) within 90 days after the date of recognition, and shall file with the Secretary of
Public Instruction a copy of its incorporation papers and by-laws. (Act No. 2076, Sec. 5,
par. 2, as amended by C A . No. 180.)
accompanied by a favorable recommendation of the Department

of Education, Culture and Sports. (Sees. 107,17.)
Sec. 108. Board of trustees. — Trustees of educational

institutions organized as non-stock corporations shall not
be less than five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall be in multiples
of five (5).
Unless otherwise provided in the articles of incorpo-
ration or the by-laws, the board of trustees of incorpo-
rated schools, colleges, or other institutions of learning
shall, as soon as organized, so classify themselves that
the term of office of one-fifth (1/5) of their number shall
expire every year. Trustees thereafter elected to fill vacan-
cies, occurring before the expiration of a particular term,
shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the
trustees shall constitute a quorum for the transaction of
business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the
number and term of directors shall be governed by the
provisions on stock corporation. (169a)
Board of trustees or directors.

Section 108 lays down the following rules:
(1) For non-stock educational corporations. —
(a) The number of trustees shall not be less than five (5)
nor more than fifteen (15);
(b) It shall be in multiples of five (5), i.e., their number
shall be five (5), ten (10), or fifteen (15);
(c) Unless otherwise provided in the articles of incorpo-
ration or the by-laws, the terms of office of the trustees shall
be staggered with one (l)-year interval;
(d) Trustees subsequently elected shall have a term of
five (5) years; same. (SEC Opinion, Nov. 17,1994.)
(e) Trustees elected to fill vacancies occurring before the
Sees. 109-111 TITLE XIII. SPECIAL CORPORATIONS 723
expiration of a particular term, shall hold office only for the

unexpired period;
(f) A majority of the trustees shall constitute a quorum
for the transaction of business; and
(g) The powers and authority of trustees shall be defined
in the by-laws, subject to the provisions of Section 23.
(2) For stock educational corporations. — The number and term
of directors shall be governed by the provisions on stock corpo-
rations.
The requirement that the number of trustees in educational
institutions shall be in multiples of five (5) in the first paragraph
and the staggering system in the second paragraph are man-
datory; otherwise, the legislature would have provided for an
exception to the same. Educational corporations may, through
their articles of incorporation or their by-laws, designate their
governing boards by any name than as board of trustees. (Sec.
138.)
Chapter II — RELIGIOUS CORPORATIONS
Sec. 109. Classes of religious corporation. — Religious

corporations may be incorporated by one or more per-
sons. Such corporations may be classified into corpora-
tions sole and religious societies.
Religious corporations shall be governed by this
Chapter and by the general provisions on non-stock
corporations insofar as they may be applicable, (n)
Sec. 110. Corporation sole. — For the purpose of ad-
ministering and managing, as trustee, the affairs, property
and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presid-
ing elder of such religious denomination, sect or church.
(154a)
Sec. 111. Articles of incorporation. — In order to
become a corporation sole, the chief archbishop, bishop,
priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities
and Exchange Commission articles of incorporation
setting forth the following:
724
1. That he is the chief archbishop, bishop, priest,

minister, rabbi or presiding elder of his religious denomi-
nation, sect or church and that he desires to become a
corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not inconsistent
with his becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged with the
administration of the temporalities and the management
of the affairs, estate and properties of his religious
denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister, rabbi
or presiding elder is required to be filled, according to the
rules, regulations or discipline of the religious denomina-
tion, sect or church to which he belongs; and
5. The place where the principal office of the corpo-
ration sole is to be established and located, which place
must be within the Philippines.
The articles of incorporation may include any other
provision not contrary to law for the regulation of the
affairs of the corporation. (155a)
Sec. 112. Submission of the articles of incorporation. —
The articles of incorporation must be verified, before filing,
by affidavit or affirmation of the chief archbishop, bishop,
priest, minister, rabbi or presiding elder, as the case may
be, and accompanied by a copy of the commission, certifi-
cate of election or letter of appointment of such chief arch-
bishop, bishop, priest, minister, rabbi or presiding elder,
duly certified to be correct by any notary public. (156a)
From and after the filing with the Securities and
Exchange Commission of the said articles of incorporation,
verified by affidavit or affirmation, and accompanied by the
documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, shall become a corporation sole,
and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or
managed by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in trust by

him as a corporation sole, for the use, purpose, behalf and
sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (157a)
Sec. 113. Acquisition and alienation of property. — Any
corporation sole may purchase and hold real estate and
personal property for its church, charitable, benevolent or
educational purposes, and may receive bequests or gifts
for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for the
purpose from the Court of First Instance of the province
where the property is situated; but before the order is
issued, proof must be made to the satisfaction of the court
that notice of the application for leave to mortgage or
sell has been given by publication or otherwise in such
manner and for such time as said court may have directed,
and that it is to the interest of the corporation that leave
to mortgage or sell should be granted. The application for
leave to mortgage or sell must be made by petition, duly
verified, by the chief archbishop, bishop, priest, minister,
rabbi or presiding elder acting as corporation sole, and may
be opposed by any member of the religious denomination,
sect or church represented by the corporation sole:
Provided, That in cases where the rules, regulations and
discipline of the religious denomination, sect or church,
religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property,
such rules, regulations and discipline shall control, and
the intervention of the courts shall not be necessary. (159a)
Sec. 114. Filling of vacancies. — The successors in

office of any chief archbishop, bishop, priest, minister,
rabbi or presiding elder in a corporation sole shall become
the corporation sole on their accession to office; and shall
be permitted to transact business as such on the filing
with the Securities and Exchange Commission of a copy
of their commission, certificate of election, or letters of
appointment, duly certified by any notary public.
'Now, Regional Trial Court.

726
During any vacancy in the office of chief archbishop,

bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church incorporated as
a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by
the corporation sole to administer the temporalities and
manage the affairs, estate and properties of the corpora-
tion sole during the vacancy shall exercise all the powers
and authority of the corporation sole during such vacancy.
(158a)
Sec. 115. Dissolution. — A corporation sole may be
dissolved and its affairs settled voluntarily by submitting
to the Securities and Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the cor-
poration by the particular religious denomination, sect or
church;
4. The names and addresses of the persons who are
to supervise the winding up of the affairs of the corpora-
tion.
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the corporation
shall cease to carry on its operations except for the pur-
pose of winding up its affairs, (n)
Sec. 116. Religious societies. — Any religious society
or religious order, or any diocese, synod, or district
organization of any religious denomination, sect, or church,
unless forbidden by the constitution, rules, regulations, or
discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting
called for the purpose of two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or
for the management of its affairs, properties and estate
by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such

religious society or religious order, or diocese, synod, or
district organization of the religious denomination, sect, or
church, setting forth the following:
1. That the religious society or religious order or dio-
cese, synod, or district organization is a religious organi-
zation of some religious denomination, sect, or church;
2. That two-thirds (2/3) of its membership have given
their written consent or have voted to incorporate at a duly
convened meeting of the body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district organiza-
tion desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or dis-
cipline of the religious denomination, sect, or church of
which it forms a part;
4. That the religious society or religious order, or dio-
cese, synod, or district organization desires to incorporate
for the administration of its affairs, properties and estate;
5. The place where the principal office of the corpora-
tion is to be established and located, which place must be
within the Philippines; and
6. The names, nationalities, and residences of the
trustees elected by the religious society or religious order,
or the diocese, synod, or district organization to serve for
the first year or such other period as may be prescribed
by the laws of the religious society or religious order, or of
the diocese, synod, or distinct organization, the board of
trustees to be not less than five (5) nor more than fifteen
(15). (160a)
Definition of religious corporation.

A religious corporation has been defined as a corporation com-
posed entirely of spiritual persons and which is organized for
the furtherance of a religion or for perpetuating the rights of the
church or for the administration of church or religious work or
property. (Oleck, Modern Corporation Law, p. 14.)
The spiritual persons that may compose ecclesiastical corpo-
rations are bishops, certain deans and prebendaries, all archdea-
728
cons, persons and vicars which are sole corporations and those
abbots and monks which may constitute corporations aggregate.
Religious corporations are classified by the Code as "special
corporations" and are not to be confused with an ordinary non-
stock corporation organized for religious purpose, (see Sec. 88.)
The Corporation Code does not require any religious group, sect,
or denomination to be registered as a corporation but the status
of an unregistered religious group is that of an ordinary organi-
zation or association without juridical or legal personality sepa-
rate and distinct from that of its members.
(1) Religious corporations are primarily governed by Sections
109 to 116 and suppletorily, by the general provisions of Title XI
on non-stock corporations (Sees. 87 to 95.) insofar as they may
be applicable. (Sec. 109, par. 2.) Thus, pursuant to Section 93,
their by-laws may provide that the members may hold their
regular or special meetings at any place even outside the place
where the principal office of the corporation is located. However,
although Section 92 allows more than 15 trustees for non-stock
corporations, Section 116(b) prescribes a maximum limit of 15
only. The rule is that a special provision prevails over a general
provision of a statute.
(2) As a rule, by-laws of a religious corporation must conform
with the general provisions affecting corporations. Any inconsis-
tency shall be resolved in favor of the special provisions of Title
XI on non-stock corporations and Title XIII, Chapter II on reli-
gious corporations. Thus, since the special provisions pertaining
to religious corporations do not specify the mode of election of
the board of trustees of a religious corporation, its by-laws may
provide for the same in line with rules of the religious denomina-
tion of which it is a part. (SEC Opinion, Feb. 28,1974.)
Classes of religious corporations.

Such corporations may be classified into corporation sole
and corporation aggregate /religious society. They may also be
formed or organized as ordinary religious non-stock corpora-
tions. (Sees. 87, 88.)
Sees. 109-116 TITLE Xm. SPECIAL CORPORATIONS 729
(1) Corporation sole. — It is incorporated by one person (Sec.

109, par. 2.) and consists of one member or corporator only and
his successors, such as a bishop. Under Section 110, it may be
formed by the chief archbishop, bishop, priest, minister, rabbi or
other presiding elder of a religious denomination, sect or church
for the purpose of administering and managing, as trustee, the
affairs, property and temporalities of such religious denomina-
tion, sect or church. In a wider sense, the term temporalities means
the money revenue of a church, derived from pew rents, sub-
scriptions, donations, collections, cemetery charges, and other
sources. (Black's Law Dictionary [Rev. 4th ed.], p. 1634.)
(a) Filing articles of incorporation and other documents. — In
order to be a corporation sole, the chief archbishop, etc. must
file with the Securities and Exchange Commission a verified
articles of incorporation setting forth the matters mentioned
in Section 111, although it may include any other provision
not contrary to law for the regulation of the affairs of the
corporation. (Sec. I l l , par. 2.) Thus, a corporation sole may
include in its articles all matters which could be provided
for in the by-laws. Such articles must be accompanied by a
copy of the commission, certificate of election, or letter of
appointment of such chief archbishop, etc., as the case may
be. (Sec. 112, par. 1.)
(b) Effect of filing. — From and after such filing, the chief
archbishop, etc., as the case may be, shall become a corpo-
ration sole,' and all the temporalities, estate, and properties
of the religious denomination, sect or church theretofore
administered by him as such chief archbishop, etc. shall be
held in trust by him as a corporation sole for the benefit of
his religious denomination, sect or church, including hos-
pitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof. (Ibid., par. 2.) But properties acquired by
the corporation shall be registered in the name of such chief
archbishop, etc. or in the name of the corporation, and not in
'It is not required by law to file by-laws with the Securities and Exchange Com-
mission; neither do the rules and regulations of the Commission require such class of
corporations to file any reportorial requirements, such as the general information sheet
and financial statements. (SEC Opinion, Oct. 17,1988.)
730
the name of such archbishop, etc. "in trust for the use, pur-
pose, and sole benefit" of his religious denomination. After
the decree of registration is entered, the Corporation Code,
Section 112 (par. 2.), operates and declares that the title to
the property is in the corporation and the chief archbishop,
etc. is administering it as representative of that corporation,
(see Bishop of Nueva Segovia vs. Insular Gov't., 26 Phil. 300
[1913].)
Note that Section 112 does not expressly require the
approval by the Securities and Exchange Commission of the
articles of incorporation unlike in the case of educational
corporations, (see Sec. 107.)
(c) Acquisition and alienation of property. — A corporation
sole may purchase and hold property, real and personal, and
receive bequests or gifts for its church, charitable, benevolent
or educational purposes. However, authority from the
Regional Trial Court is required before it can mortgage or
sell real property but such authority is not necessary where
the religious denomination, sect or church, religious society
or order concerned represented by the corporation sole has
rules which regulate the acquisition, mortgage, and selling
of real estate and personal property, in which case such
rules shall control. (Sec. 113; see Republic vs. Intermediate
Appellate Court, 168 SCRA 165 [1988].)
(d) Filling of vacancies. — The successors in office of any
chief archbishop, etc., as the case may be, shall become the
corporation sole on the filing with the Securities and Exchange
Commission of a notarized copy of their commission,
certificate of election, or letters of appointment. In case of
any vacancy in the office of chief archbishop, etc., as the case
may be, the person or persons authorized by the rules of the
denomination to administer the affairs of the corporation
sole during such vacancy shall exercise all the powers and
authority of the corporation sole during such vacancy. (Sec.
114.)
(e) Term of existence. — The articles of incorporation of a
corporation sole is not required to state the term for which it
is to exist. Once incorporated, a corporation sole, unless oth-
erwise provided in the articles of incorporation, shall exist

indefinitely unless it is dissolved.
(f) Dissolution. — Under the Code, a corporation sole
may be dissolved voluntarily by filing with the Securities and
Exchange Commission for approval a verified declaration
of dissolution setting forth the matters specified in Section
115. Upon such approval, the corporation shall be deemed
dissolved. (Sec. 115.)
(2) Religious society. — It is incorporated by an aggregate of
persons. (Sec. 109, par. 1.) Under Section 116, any religious society
or religious order, or any diocese, synod, or district organization
of any religious denomination, sect or church, unless forbidden
by the rules of the latter or by competent authority may, upon
consent and/or by an affirmative vote at a meeting called for
the purpose, of 2 / 3 of its membership, incorporate for the
administration or management of its temporalities, affairs and
property.
(a) Filing of articles of incorporation. — To incorporate,
said religious society, etc. must file with the Securities and
Exchange Commission, a verified articles of incorporation
setting forth the matters mentioned in Section 116. Note
again that the law does not expressly require the approval
by the Securities and Exchange Commission of the articles of
incorporation which is a condition for incorporation in the
case of educational corporations, (see Sec. 107.)
(b) Registration not mandatory. — The law does not require
religious societies or churches to register as a corporation
but they may do so in order to acquire legal personality for
the administration of their temporalities or properties. (SEC
Opinion, April 6, 1968.) It is only upon incorporation that a
religious society or church can have a juridical personality
7
and may be allowed to acquire properties in its own name.
Tn a case, the crux of the controversy was who of the two factions of a voluntary re-
ligious group (of hermanas mayores) would be entitled to possession of the properties (reli-
gious images) in litigation, all of them being members of the same association. It was held
that the rights of such an organization (which was strictly independent of the church) to
the use of its property must accordingly be determined by the ordinary principles which
govern voluntary association. "The use of properties of a religious congregation in case of
732
(SEC Opinion, Feb. 28, 1974.) The Roman Catholic Church

is not registered like other religious societies or churches in
the Philippines, because it has been recognized as a juridical
person since time immemorial. (Barlin vs. Ramirez, 7 Phil. 41
[1906].)
(c) Term of existence. — Section 116 (as well as Sec. 160
of the former Corporation Law) does not provide for a term
of existence of religious corporations whether classified as a
corporation sole or a corporation aggregate. As such, the law
intends that religious corporations may exist perpetually.
Accordingly, where the articles of incorporation of a religious
corporation does not provide for a term of existence, it shall
be understood that the intention is for the corporation to exist
for an mdefinite period, unless sooner dissolved or revoked
in accordance with law. (SEC Opinion No. 04-45, Nov. 4,
2004.)
Corporation sole.
(1) Components; purpose; power to hold and transmit property.
— A corporation sole is a special form of corporation usually
associated with the clergy. Conceived and introduced into the
common law by sheer necessity, the legal creation which was
referred to as "that unhappy freak of English law" was designed
to facilitate the exercise of the functions of ownership carried
on by the clerics for and on behalf of the church which was
regarded as the property owner. (1 Bouvier's Law Dictionary,
pp. 682-683.) It consists of one person only, and his successors
(who will always be one at a time), in some particular station,
who are incorporated by law in order to give them some legal
capacities and advantages particularly that of perpetuity which
in their natural persons they could not have. (Reid vs. Barry, 93
Fla. 849,112 So. 846.)
Through this legal fiction, church properties acquired by the
incumbent of a corporation sole pass by operation of law, upon
schism, is controlled by the numerical majority of the members. The minority in choosing
to separate themselves into a distinct body, and refusing to recognize the authority of the
government body, can claim no rights in the property from the fact that they once had
been members." (Caftete vs. Court of Appeals, 171 SCRA 13 [1989].)
Sees. 109-116 TITLE Xm. SPECIAL CORPORATIONS 733
his death, not to his personal heirs but to his successor in office.
A corporation sole, therefore, is created not only to administer
the temporalities of the church or religious society where he
belongs, but also to hold and transmit the same to his successor
in said office. (Roman Catholic Apostolic Adm. of Davao, Inc. vs.
Land Registration Commission, 102 Phil. 596 [1957]; Republic vs.
Intermediate Appellate Court, 168 SCRA 165 [1988].)
(2) Merely the administrator of properties of church. — Both
the Corporation Code (see Sec. 110.) and the Canon Law are
explicit in their provisions that a corporation sole or "ordinary"
is not the owner of the properties he may acquire but merely the
administrator thereof and holds the same in trust for the church
to which the corporation is an organized and constituent part.
Being mere administrator of the temporalities or properties titled
in his name, constitutional provisions requiring 60 (or 100) per
centum Filipino ownership are not applicable, unless the control
over the property affected has been devised to circumvent the
real purpose of the Constitution. (Ibid.)
Also, considering that there is no express provision
conferring ownership of properties of the Catholic Church on
the Pope, although he appears to be the administrator, nor on
the head of the corporation sole, as he is a mere administrator
of its properties, the ownership thereof devolves upon the
church or congregation acquiring the same. A corporation sole
can, therefore, purchase private lands in the Philippines without
violating the Constitution although its head is an alien, as long
as it can be shown that the religious denomination which he
represents is owned at least 60% by Philippine citizens. (SEC
Opinions, Nov. 6,1990 and Sept. 21,1993.)
(3) Without nationality. — Although a branch of the Univer-
sal Roman Catholic Apostolic Church, every Roman Catholic
Church in different countries, if it exercises its mission and is
lawfully incorporated in accordance with the laws of the country
where it is located, is considered an entity or person with all the
rights and privileges granted to such artificial being under the
laws of that country, separate and distinct from the personality
of the Roman Pontiff or the Holy See without prejudice to its reli-
gious relations with the latter which are governed by the Canon
734
Law or their rules and regulations. The Roman Catholic Church

in the Philippines has no nationality. Corporations sole cannot be
9
considered as aliens because they have no nationality at all.
In determining, therefore, whether constitutional provisions
requiring 60 (or 100) per centum Filipino capital are applicable
to a corporation sole, the nationality of the constituents of the
diocese, and not the nationality of the actual incumbent of the
parish, must be taken into consideration.' (Ibid.)
— 0 O 0 —
"It has been held that the Iglesia ni Crista, as a corporation sole or a juridical person,
is disqualified to acquire or hold alienable lands of the public domain, except by lease,
because of the prohibition in Article XTV, Section 11 of the Constitution (now Art. XII, Sec.
2.) and because the said church is not entitled to avail of the benefits of Section 48(b) of the
Public Land Law which applies only to Filipino citizens or natural persons. A corporation
has no nationality. (Republic vs. Villanueva, 11 SCRA 875 [1982]; Republic vs. Gonong,
118 SCRA 729 [1982]; Republic vs. Iglesia ni Crista, 127 SCRA 687 [1984] and 128 SCRA
44 [1984].)
'It is not for the SEC to determine as to what should be the basis of determining the
60% citizenship requirement — whether it should be based on the capital contribution or
on the number of membership. The question should be addressed to the Land Registra-
tion Authority for a definite ruling. (SEC Opinion, Aug. 8,1994.)
Title XIV
DISSOLUTION
Sec. 117. Methods of dissolution. — A corporation formed

or organized under the provisions of this Code may be
dissolved voluntarily or involuntarily, (n)
M e a n i n g of d i s s o l u t i o n .
(1) The term dissolution, as applied to a corporation, signifies
the extinguishment of its franchise to be a corporation and the
termination of its corporate existence.
(2) It is that condition of law and fact which ends the capacity
of the body corporate to act as such and necessitates a liquidation
and extinguishment of all legal relations existing in respect of the
corporate enterprise.
(3) It denotes the complete destruction of the corporation
and within contemplation of the law, is equivalent to its death,
1
being sometimes likened to the death of a natural person. (16
Fletcher, p. 655.)
P o w e r to dissolve corporation.
It is an accepted theory that what the law itself has granted,
the law may take away. And so a corporation may come to an
end and its life extinguished only by the act or with the approval
'A distinction not to be ignored exists, however, between the life of a human being
and that of a personi ficta, the creature of the State. When a human being dies, his death is
equally a fact whether it is brought about legally or illegally. But the death of a corpora-
tion must be "conditioned by juristic quality of the cause." There is no dissolution, strictly
speaking, unless the corporation has lost all power to continue or resume its business as
a going concern. (Ibid.)
As has been pointed out, the law which gives a corporation existence may terminate
for some purposes and yet permit it to continue for purposes of settling its affairs. (Bal-
lantine, p. 729.) The result of dissolution "is not death of the corporation, but its retire-
ment from active business." (Ibid., p. 731.)
735
of the sovereign power by which it was established. (Ibid., p. 659.)

Being a creation of the State, a corporation can only be dissolved
with the consent of the State.
Accordingly, the courts of one State do not have the power
to dissolve a corporation created by the laws of another State. In
fact, the dissolution of corporations is primarily a matter for the
legislature and is ordinarily not a matter of judicial cognizance.
However, our law (infra.) authorizes the dissolution of a corpora-
tion through judicial proceedings or permits dissolution by the
stockholders or members without judicial proceedings. (18 Am.
Jur. 2d 953-954.)
De jure and de facto dissolution.

The dissolution of a corporation may either be de jure or de
facto.
(1) A dejure dissolution is a dissolution in law adjudged and
determined by judicial sentence, or brought about by an act of or
with the consent of the sovereign power, or which results from
the expiration of the charter period of corporate life.
(2) A de facto dissolution, on the other hand, is one which takes
place in substance and in fact when the corporation by reason of
insolvency, cessation of business, or otherwise, suspends all its
operations and, as it may be, goes into liquidation still retaining
its primary franchise to be a corporation. The mere fact, however,
that the corporation has quit doing business does not necessarily
constitute even a de facto dissolution, if it is still solvent and has
not gone into liquidation. (16 Fletcher, p. 656.)
Two legal steps in corporate dissolution.

Dissolution of a corporation involves two legal steps:
(1) The termination of the corporate existence at least as far
as the right to go on doing ordinary business is concerned; and
(2) The winding up of its affairs, the payment of its debts,
and the distribution of its assets among the shareholders (Ibid.,
p. 655.) or members and other persons interested. After winding-
up, the existence of the corporation is terminated for all pur-
poses.
Sec. 117 TITLE XIV. DISSOLUTION 737
After the formal dissolution of the corporation, any of its

stockholders may form another corporation which will engage
in the same line of business even if it is done during the liquida-
tion period, (see Sec. 122.)
Methods or causes of corporate dissolution.

A corporation can have perpetual existence. The law,
however, permits the dissolution of corporations. Under Section
117, a private corporation organized under the law may be
dissolved either voluntarily or involuntarily. These two methods
of dissolving corporations may be outlined as follows:
(1) Voluntary, which may be effected:
(a) by the vote of the board of directors/trustees and the
stockholders/members where no creditors are affected (Sec.
118.);
(b) by judgment of the Securities and Exchange Commis-
sion after hearing of petition for voluntary dissolution where
creditors are affected (Sec. 119.);
(c) by amending the articles of incorporation to shorten
the corporate term (Sec. 120.); or
(d) In the case of a corporation sole, by submitting to the
Securities and Exchange Commission a verified declaration
of dissolution for approval. (Sec. 115.)
(2) Involuntary, which may be effected:
(a) by expiration of the term provided for in the original
articles of incorporation (Sec. 11.);
(b) by legislative enactment (infra.);
(c) by failure to formally organize and commence the
transaction of its business within two (2) years from date of
incorporation (Sec. 22.); or
(d) by order of the Securities and Exchange Commission.
(Sec. 121.)
Methods exclusive.
According to some decisions, the methods of effecting
dissolution as prescribed by statute are exclusive, and a
738
corporation cannot be dissolved except in the manner prescribed

by law. It is said that a failure to follow the prescribed statutory
method renders ineffectual any attempt to dissolve a corporation.
(19 Am. Jur. 2d 955.) The requirements for dissolution mandated
by the Corporation Code should be strictly complied with, (see
Vesagas vs. Court of Appeals, 371 SCRA 508 [2001].)
Piercing the veil of corporate fiction (see Sec. 2.) is not one of
the causes by which a corporation may be dissolved.
The total destruction of a condominium project does not
automatically dissolve the condominium corporation. Under
R.A. No. 4726 (Condominium Law), two general options are
available for unit owners to pursue: First, restore or reconstruct
the project and continue with the condominium; and second,
terminate the condominium project and voluntarily dissolve the
corporation under any of the conditions provided under said
law. (see Sees. 13,14 thereof.)
Sec. 118. Voluntary dissolution where no creditors are

affected. — In case dissolution of a corporation does not
prejudice the rights of any creditor having a claim against
such corporation, then such dissolution may be effected
by majority vote of the board of directors or trustees,
and by a resolution duly adopted by the affirmative vote
of the stockholders owning at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members at a meeting to be held on the call of the directors
or trustees after publishing the notice of the time, place
and object of the meeting for three (3) consecutive weeks
in a newspaper published in the place. Where the principal
office of said corporation is located, and if no newspaper
is published in such place, then in a newspaper of general
circulation in the Philippines, and after sending such
notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior
to said meeting. A copy of the resolution authorizing the
dissolution shall be certified by a majority of the board of
directors or trustees and countersigned by the secretary of
the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
Voluntary dissolution of c o r p o r a t i o n s .
The legal existence of a corporation is terminated only when
a corporation is dissolved by legal authority or expires by limita-
tion of existence or by forfeiture. (Ballantine, p. 709.) Thus, the
statutory provisions on voluntary dissolution must be followed
in order to legally effect the dissolution of a corporation. (SEC
(1) Compliance with legal requirements. — A mere resolution
by the board of directors or trustees and by the stockholders or
members of a corporation to dissolve the same does not have
the effect of dissolution but some other steps, administrative or
judicial, are necessary. (Daguhoy Enterprises, Inc. vs. Ponce, 96
Phil. 15 [1954].) In case of voluntary dissolution, it can have no
legal effect until all the requirements prescribed by law are com-
plied with. A corporation being a legal creation, it can only be
dissolved in the manner prescribed by the law which gave it life.
(2) When corporation deemed dissolved. — The corporation
shall be deemed dissolved only upon issuance of the certificate
of dissolution, if the dissolution is effected under Section 118;
when a judgment is rendered dissolving the corporation, if
under Section 119; upon approval of the amended articles of
incorporation or the expiration of the shortened term, as the case
may be, if under Section 120; and upon approval of the verified
declaration of dissolution, if under Section 115.
(3) Where no dissolution papers filed. — If no dissolution papers
are filed with the Securities and Exchange Commission by a
corporation claiming dissolution voluntarily, such corporation
is still deemed legally existing, notwithstanding the fact that it
has ceased to operate. The only possible exception is where the
corporation is dissolved by judicial decree (infra.) and the court
order dissolving it has not been filed with the Commission. In
such case, the corporation would be legally dead even if the
Commission has no notice of such fact. (SEC Opinion, March 1,
1971.)
(4) Where corporation sole. — A corporation sole may be
dissolved and its affairs settled voluntarily by submitting to the
Securities and Exchange Commission a verified declaration of
dissolution. Upon approval of such declaration by the Com-
mission, the corporation shall cease to carry on its operations

except for the purpose of winding up its affairs. (Sec. 115.)
Voluntary dissolution where no creditors

are affected.
(1) How effected. — A private corporation may be dissolved
voluntarily without the necessity of going to the Securities and
Exchange Commission or the court in case the dissolution does
not affect the rights of any creditor against such corporation. The
dissolution is effected by the mere vote of the board of directors
or trustees and the resolution duly adopted by the stockholders
or members. The procedure for dissolution is specifically
provided for in Section 118. Even holders of non-voting shares
or non-voting members, as the case may be, are entitled to vote
on the matter. (Sec. 6, par. 6[8].) The publication requirement is
prescribed for the protection of unknown creditors.
(2) Issuance of certificate of dissolution. — The Securities
and Exchange Commission is required to issue a certificate of
dissolution. Such requirement was not present in the former
law, and the practice of the Commission was merely to record
the fact of voluntary dissolution of a corporation. It was not
required to issue an order expressly approving the dissolution.
Consequently, the issuance of the certificate of filing of the
resolution of voluntary dissolution was sufficient to dissolve the
corporation. (SEC Opinion, Feb. 6,1964.)
(3) Dissolution of a corporation sole. — Under Section 115, a
corporation sole may be dissolved voluntarily by submitting to
the Securities and Exchange Commission a verified declaration
of dissolution which must be approved by the Commission
before the dissolution can take effect.
Sale of assets in anticipation of voluntary

dissolution.
Under the terms of Section 40 of the Code, the board of
directors or trustees of a corporation may be authorized by the
holders of at least 2 / 3 of the outstanding capital stock or by at least
2 / 3 of the members of the corporation "to sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all
its property and assets, including its goodwill upon such terms
and conditions and for such consideration which may be money,
stocks, bonds or other instruments for the payment of money
or other property or consideration as its board of directors or
trustees may deem expedient." (par. 1.)
(1) Liquidation of corporate debts permitted. — In anticipation of
a voluntary dissolution proceeding, a corporation may, pursuant
to the provisions of Section 40, convert its assets into cash and
settle with its creditors. The proceeds of such sale may be used to
pay debts, although no refund of capital to shareholders except
as authorized by the provision of Section 40 may be made until
the dissolution is accomplished. This is so, because corporations
are under no obligation to continue in business. The exercise of
the right to do business is one which is purely voluntary, and if
at anytime it is deemed advisable to suspend the transaction of
business, pay debts, and convert assets into cash or its equiva-
lent, the execution of that purpose is a matter which concerns the
corporation and its creditors alone. (Fisher, op. cit., p. 379.)
(2) Distribution of corporate assets prohibited. — While a
corporation may validly liquidate its debt prior to its dissolution
under Section 40 of the Code, it cannot, under the express
prohibition of Section 122 (last par.) thereof, "distribute any of
its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities." Since it is only upon
the issuance of the certificate of dissolution that the dissolution
of a corporation becomes legally effective, it cannot, prior to
such issuance, lawfully distribute its assets to its stockholders
though it may lawfully liquidate its debts in anticipation of such
voluntary dissolution. (SEC Opinion, Feb. 6,1964.)
Right of minority stockholders to o p p o s e

dissolution.
Ordinarily, the motive of the stockholders voting for dissolu-
tion is immaterial. It is only in rare and exceptional cases that
their action will be stayed or interfered with by the courts or the
Securities and Exchange Commission. If a stockholder had the
votes required for voluntary dissolution of a corporation and
dissolution was necessary to protect his investment and would
742
not give unfair advantage over other stockholders, the fact that
the corporation would suffer if it were dissolved is immaterial.
However, the right of stockholders to voluntarily dissolve
the corporation by vote of a prescribed percentage thereof is not
absolute. If it clearly appears that the action of the stockholders
in voting for dissolution is in bad faith, or that the resolution for
dissolution has been superinduced by fraud or undue influence,
or if it is clearly established that the resolution was not taken
for the benefit of the corporation or in furtherance of its inter-
est, but for the mere purpose of unjustly oppressing the minority
of the stockholders or any of them and causing a destruction or
sacrifice of their pecuniary interests or holdings, giving a clear
indication of a breach of trust, such action may be restrained. In
forcing dissolution and disposition of the corporate assets, the
majority stockholders cannot overreach the minority stockhold-
ers or freeze them out of their share of the proceeds. (19 Am. Jur.
2d 962-963.)
Sec. 119. Voluntary dissolution where creditors are affect-

ed. — Where the dissolution of a corporation may prejudice
the rights of any creditor, a petition for dissolution of a cor-
poration shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of
its board of directors or trustees or other officers having
the management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set
forth all claims and demands against it, and that its dis-
solution was resolved upon by the affirmative vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of
the members, at a meeting of its stockholders or members
called for that purpose.
If the petition is sufficient in form and substance, the

Commission, by an order reciting the purpose of the peti-
tion, shall fix a date on or before which objections thereto
may be filed by any person, which date shall not be less
than thirty (30) days nor more than sixty (60) days after the
entry of the order. Before such date, a copy of the order
shall be published at least once a week for three (3) con-
secutive weeks in a newspaper of general circulation pub-

lished in the municipality or city where the principal office
of the corporation is situated, or if there be no such news-
paper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three
(3) consecutive weeks in three (3) public places in such
municipality or city.
Upon five (5) days' notice, given after the date on
which the right to file objections as fixed in the order has
expired, the Commission shall proceed to hear the petition
and try any issue made by objections filed; and if no such
objection is sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets
as justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation. (Rule
104, Rules of Court)
Voluntary dissolution where creditors

are affected.
In case the dissolution of a corporation affects the right of
any creditor having a claim against the corporation, a hearing
before the Securities and Exchange Commission is required. In
the judgment dissolving the corporation, the Commission may
appoint a receiver (infra.) to take charge of the liquidation of the
corporation.
The procedure for dissolution is set forth in Section 119.
Sec. 120. Dissolution by shortening corporate term. — A

voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term
pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to
the Securities and Exchange Commission in accordance
with this Code. Upon approval of the amended articles
of incorporation or the expiration of the shortened term,
as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the
provisions of this Code on liquidation, (n)
744
Dissolution by shortening of t e r m .
(1) How effected. — A corporation is dissolved upon the
expiration of the period as fixed in the original articles of
incorporation, unless said period is extended by an amendment
of the articles of incorporation, (see Sees. 11, 36[2].) A voluntary
dissolution is effected if the articles of incorporation is amended to
shorten the corporate term. Upon approval by the Securities and
Exchange Commission of the amended articles of incorporation
or the expiration of the shortened term, as the case may be, the
corporation shall be deemed dissolved without any further
proceedings except its liquidation, (see Sees. 120,122.)
Section 120 is very clear that it is only upon approval by the
Commission that the corporation shall be deemed dissolved. The
automatic approval under Section 16 which is a general provi-
sion does not apply. The corporation is a creature of the State and
it can only be dissolved with the State's approval after comply-
ing with the formalities of the law for dissolution. (SEC Opinion,
March 30, 1982.)
(2) Publication of notice of dissolution. — An affidavit of
publication of notice of dissolution of the corporation must be
executed by the publisher of the print medium. It cannot be
dispensed with by alleging that the same is not required in Section
120 and that no creditors will be prejudiced by its dissolution.
The publication of the notice of dissolution serves as a protection
of the rights of existing creditors of the dissolving corporation
who, under the law, enjoy preference in the distribution of assets
before the stockholders are finally entitled to a return of their
investments. (SEC Opinion, Aug. 30,1988.)
Dissolution by expiration of t e r m .
(1) How effected. — A corporation is dissolved upon the
expiration of the period as fixed in the original articles of
incorporation, unless said period is extended by an amendment
of the articles of incorporation, (see Sees. 11, 36[2].)
(2) Extension of corporate existence/reincorporation. — Upon
dissolution of a corporation by expiration of corporate term
provided for in the original or amended articles of incorporation,
it ceases to exist de facto or de jure except only for purposes
Sec. 120 TITLE XTV. DISSOLUTION 745
connected with winding up or liquidation. (Sec. 122.) Its corporate

existence or juridical personality may thus no longer be extended.
(Alhambra Cigar vs. Securities and Exchange Commission, 24
SCRA 269 [1968].) But the stockholders may reincorporate the
expired corporation by complying with the requirements for
incorporation under Sections 10 to 15 of the Corporation Code.
A corporation automatically terminates upon the expiration
of the stated period. It is not necessary to seek the aid of the
Securities and Exchange Commission or a court to terminate the
corporation or to formally dissolve and liquidate it. The task of
distributing the assets of the corporation resets upon the board of
directors.
Dissolution by legislative enactment.

(1) Reserved power of Congress to dissolve corporations. — It is
provided by the former corporation law (Sec. 76 thereof.) that
"any or all corporations created by virtue of this Act may be
dissolved by legislative enactment." This provision has been
deleted in the new Code, but the power is still reserved, albeit
impliedly, by Section 145 subject to the limitations therein and the
constitutional prohibition against laws impairing the obligations
of contracts. (Constitution of the Philippines, Art. HI, Sec. 10.)
With reference to franchises of public utilities, the exercise of the
power by the legislature is reserved by the Constitution in the
clause which provides: "Neither shall any such franchise or right
be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the Congress when the
common good so requires." (Art. XII, Sec. 11 thereof.)
(2) Limitations on the power. — Thus, the limitations on the
power to dissolve corporations by legislative enactment are as
follows:
(a) Under the Constitution, the amendment, alteration,
or repeal of the corporate franchise of a public utility shall be
made only "when the common good so requires";
(b) Under Section 145 of the Code, it is provided that:
"No right or remedy in favor of or accrued against any
corporation, its stockholders, members, directors, trustees, or
746
officers nor any liability incurred by any such corporation, its

stockholders, members, directors, trustees, or officers, shall
be removed or impaired either by the subsequent amend-
ment or repeal of the Code or any part or portion thereof";
and
(c) While Congress may provide for the dissolution of
a corporation, it cannot impair the obligation of existing
contracts between the corporation and third persons, or
take away the vested rights of its creditors. And, of course, a
repeal of the charter of a corporation, except for some act or
neglect constituting a cause for forfeiture of its charter is void
as unconstitutionally impairing the obligation of the contract
between the State and the corporation, unless the corporation
consents. (16 Fletcher, p. 662.) In the case, however, of the
corporate franchise of a public utility, there is no impairment
if the amendment, etc. is effected because "the common good
so requires."
(3) Inherent power of Congress to amend or repeal laws. — The
inherent power of Congress to make laws carries with it the power
to amend or repeal them. Involuntary corporate dissolution may
be effected through the amendment or repeal of the Corporation
Code. It has even been said that "dissolution of a corporation
does not constitute an impairment of the obligation of contracts
made with creditors and others, since resort may be had to the
property of the corporation in the mode provided by statute, or, if
there is no adequate statutory remedy, by the process of equity."
(19 Am. Jur. 2d 954.) It would be a doctrine new in the law that
the existence of a private contract of the corporation should force
upon it a perpetuity of existence contrary to public policy and
the nature and object of its charter. (16 Fletcher 662.)
Dissolution by failure to formally o r g a n i z e

and c o m m e n c e transaction of b u s i n e s s .
(1) Cessation of corporate powers. — If a corporation does not
formally organize and commence the transaction of its business
or the construction of its works within two years from the date
of its incorporation, its corporate powers shall cease and the cor-
poration shall be deemed dissolved, except when such failure is
due to causes beyond its control. (Sec. 22, par. 2.) The cessation of
corporate powers operates as a dissolution.
An attempted completion of organization after such time is
wholly ineffective and will not give it even the status of a de facto
corporation. A complete organization from the very beginning is
necessary in order to give it a corporate existence, (see Sees. 10
to 15.) Under Section 22, the corporation is "deemed dissolved."
Nevertheless, there is no automatic dissolution until the dissolu-
tion has been lawfully declared by the Securities and Exchange
Commission after notice and hearing as required by due process
but the effect of the declaration shall retroact to the time the cor-
poration should be deemed dissolved.
(2) Collateral attack of a dissolved corporation. — The legal exis-
tence of a corporation whose powers have ceased under Section
22 can be collaterally attacked in any private suit to which the
said corporation may be a party.
(3) Subsequent continuous incorporation. — But a corporation
which had duly organized itself but failed to exercise its
corporate rights and franchise even beyond two (2) years from
date of incorporation is not deemed dissolved. The continuous
inoperation of a corporation for a period of at least five (5) years,
however, is a ground for the suspension or revocation of its
registration by the Commission. (Sec. 22, par. 1; Pres. Decree No.
902-A, Sec. 6[i, 4].)
Effect of c h a n g e of n a m e on corporate
existence.
A mere change in the name of a corporation does not result in
its dissolution.
The changing of the name of a corporation, either by the
legislature (i.e., by special act) or by the corporators under
legislative authority (i.e., under a general law), is no more the
creation of a corporation than the changing of the name of a
natural person is the begetting of a natural person. The act, in
both cases, is what the language imports — a change of name,
and not a change of being. Nor does it affect the rights of the
corporation or lessen or add to its obligations previously acquired
or incurred by it. After a corporation has effected a change in its
748
name, it should sue and be sued in its own name. (Phil. First
Insurance Co., Inc. vs. Hartigan, 34 SCRA 252 [1970].) It is the
same corporation with a different name but the same identity,
property, rights, and liabilities. (Republic Planters Bank vs. Court
of Appeals, 216 SCRA 738 [1992].)
Effect of insolvency or bankruptcy on corporate

existence.
Insolvency is the inability or failure to pay debts as they become
due. When used in the bankruptcy sense, it means that condition
of an individual or organization where the total liabilities exceed
the total assets available for their settlement.
While the possession of assets is necessary to the creation of
a stock corporation, the loss of all its property does not affect
its existence. (7 R.C.L. Corps., par. 4.) For the same reason, the
appointment of a receiver for a corporation does not ipso facto
produce its dissolution nor bar the exercise of corporate rights,
(see Teal Motor vs. Court of First Instance, 51 Phil. 549 [1928];
Leyte A & M Oil Co. vs. Block Johnston & Greebaum, 52 Phil. 429
[1928].)
However, the inability to exercise its corporate powers by
reason of insolvency might constitute such non-user as to war-
rant a decree of dissolution, (see Sec. 52, Act No. 1956 [The Insol-
vency Law], as amended.)
Effect of alienation of all a s s e t s

on corporate existence.
(1) Practical or de facto dissolution. — Under certain circum-
stances, a legal dissolution of a corporation may result from the
transfer or sale of all its property and assets, as where it virtually
amounts to a surrender of the corporate charter with the consent
of the State. Moreover, a transfer of all property of a corporation,
whatever its legal effect on the life of a corporation may be, is
generally, for all practical purposes, a dissolution, particularly
when the corporation is insolvent or nearly so, and conveys its
entire property with a view of going out of business.
(2) State of suspended animation. — But a corporation may exist
without property, and may at any time, purchase the same or
other property and resume business. And so, though a practical

or de facto dissolution may take place when a corporation disposes
of or is deprived of all its property, there is, in such case, as a rule,
no dissolution as a matter of law. (16 Fletcher, p. 707.) It may
continue in a state of suspended animation.
(3) Ground for voluntary dissolution. — The sale or other dis-
position of all, or substantially all of the corporate assets (Sec.
40.) to convert them into cash and liquidate corporate debts may,
however, be a ground for the voluntary dissolution of a corpora-
tion, (see Sees. 118-119.)
Effect of death, etc. of stockholders or

members on corporate existence.
(1) In the case of stock corporations. — Dissolution by the death
of all the members of the corporation cannot apply to business
corporations. The shares being property, pass by assignment,
bequest, or descent, and must ever remain the property of some
persons who, of necessity, must be members of the corporation
so long as it may exist. (19 Am. Jur. 2d 954-955.)
Under normal conditions, the stockholders of a corporation
are not the same as the corporation itself. The corporation has
the right of succession. Hence, the transfer of shares neither
dissolves the corporation nor renders the same inoperative
even if the transfer results to only four or less stockholders,
(see Sec. 10.) A corporation may be owned substantially by a
single individual and the rest of the stockholders may only be
qualifying shareholders for the purpose of complying with the
statutory requirement of at least five incorporators /stockholders
directors. (SEC Opinion, Jan. 18,1993.)
(2) In the case of non-stock corporations. — The death or with-
drawal of members may leave the association in such a state as
to be incapable of acting or continuing itself. Where that happens
and too few members remain to continue the succession and fill
vacancies under the constitution of the association, a dissolution
may result. As a rule, however, such a corporation is not dissolved
by the death or withdrawal of its members, even though it is left
without members. (16 Fletcher, p. 691.)
750
Effect of want of officers on corporate

existence.
The want of officers by reason of failure to elect or by reason
of death or resignation does not of itself work a dissolution of the
corporation or operate as a surrender of the corporate franchise.
Although the proper officers may be necessary to enable the
body to act, yet they are not essential to its validity. Even the want
of officers and the want of power to elect them would not be
fatal to its existence. The corporate body has a potentiality which
might, by proper authority, be called into action without affecting
its identity. Accordingly, the election of non-resident directors
will not ipso facto dissolve a corporation of a State the statutes
of which provide that every director of its corporations must be
a resident of the State. However, the failure of a corporation to
hold an election of officers may, in a proper case, be a cause for
forfeiture of its charter. (19 Am. Jur. 2d 957.)
Effect of concentration of stock

on corporate existence.
Although the shares of a corporation after its creation are held
by a less number of shareholders than that which the law would
have required as a condition precedent to the organization of
the same corporation, it is held that the corporation continues to
exist. While there is a dictum to the effect that on the acquisition
of ownership of all the stock of a corporation by a single
individual, the corporation is thereby virtually dissolved, it is
well recognized that the fact that all of the stock of a business
corporation is owned by or concentrated in the hands of one
person does not ipso facto dissolve the corporation; and if the
articles of incorporation or by-laws require certain acts by more
than the shareholder, the sole owner may transfer a portion of his
shares to other persons and thereby conform to the letter of the
requirement.
The purchase, however, by one of all the shares of a corpora-
tion may operate as a dissolution of the corporation to the extent
that in such event, it suspends the exercise of the rights under
the franchise until the owner transfers stock in good faith so as
to maintain an organization under the statute. It is held that the
fact that all the stock of a corporation is owned by one person is
no ground for a forfeiture of its franchise. (Ibid., 959.)
Sec. 121. Involuntary dissolution. — A corporation may

be dissolved by the Securities and Exchange Commission
upon filing of a verified complaint and after proper notice
and hearing on grounds provided by existing laws, rules
and regulations, (n)
Dissolution by order of the Securities

and Exchange Commission.
The Securities and Exchange Commission may order the
dissolution of a corporation on grounds provided by existing
laws, rules and regulations upon filing of a verified (i.e., under
oath) complaint and after proper notice and hearing. Section
121 does not state the person who, or the agent which, can file
the verified complaint. However, the Rules of Procedure in the
Securities and Exchange Commission requires that all actions
filed with the Commission must be prosecuted and defended in
the name of the real party-in-interest. (Rule III, Sec. 2 thereof.)
(1) Violations by a corporation. — Under Section 144, which
provides a general penalty for violations of the Code not
specifically penalized therein, if the violation is committed by a
corporation, the same may, after notice and hearing, be dissolved
in appropriate proceedings before the Securities and Exchange
Commission.
(2) Deadlocks in a close corporation. — In case of deadlock in
a close corporation respecting the management of its affairs, the
Securities and Exchange Commission, upon written petition of
any stockholder, shall have authority to make such orders as it
may deem appropriate including an order dissolving the corpo-
ration. (Sec. 104, par. 1.)
(3) Mismanagement of a close corporation. — Any stockhold-
er of a close corporation may, by written petition to the Securi-
ties and Exchange Commission, compel the dissolution of such
corporation whenever any of the acts of the directors, officers
or those in control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the corpora-
752
rion or any stockholder, or whenever corporate assets are being

misapplied or wasted. (Sec. 105.)
(4) Suspension or revocation of certificate of registration of a cor-
poration. — Although the Securities Regulation Code transferred
the Commission's jurisdiction over matters enumerated under
Section 5 of Presidential Decree No. 902-A to the regional trial
courts (infra.), it retains its power to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registra-
tion of corporations, partnerships or associations, upon any of
the grounds provided by law, including the following:
(a) Fraud in procuring its certificate of registration;
(b) Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of, or damage to, the
general public;
(c) Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which would
amount to a grave violation of its franchise;
(d) Continuous inoperation for a period of at least five (5)
years;
(e) Failure to file by-laws within the required period; and
(f) Failure to file required reports in appropriate forms
as determined by the Commission within the prescribed
2
period. (Sec. 6[1] thereof; see Sec. 144.)
2
Under the SEC Rules, the Commission may suspend or revoke the certificate of
registration of a corporation in the following cases: (a) Corporations which have failed to
formally organize and commence the transaction of their business or the construction of
their works within two (2) years from the date of incorporation; (b) Corporations which
have been inoperative for a continuous period of at least five (5) years; (c) Corporations
which have failed to file by-laws within the prescribed period; and (d) Corporations
which have failed to file/register for a period of five (5) years their financial statements,
general information sheet, or stock and transfer book or membership book.
In any of the foregoing instances, the SEC shall mail to the corporation and the
controlling stockholder a show-cause-order directing them to show cause within thirty
(30) days from receipt thereof why the certificate of registration shall not be suspended
or revoked. A second show-cause-order shall be published in a newspaper of general
circulation, directing the corporation which failed to respond to the first order to appear
before the SEC at a hearing on the date, time and at the place stated in the order. If the
corporation, through its officers/directors, shall not comply with the directives for the
submission of the required reports, or when the corporation fails to appear, the SEC may
issue the lesser sanction which is suspension which shall immediately be executory. The
A corporation sole may be dissolved and its affairs settled

voluntarily by submitting to the Securities and Exchange Com-
mission a verified declaration of dissolution. Upon approval of
such declaration by the Commission, the corporation shall cease
to carry on its operations except for the purpose of winding-up
its affairs. (Sec. 115.)
Subsection (d) speaks of "non-user" which means the corpo-
ration has failed to exercise the powers given to it, while subsec-
tions (a), (b) and (c) involve "misuser" which means that it has
abused said powers. As a rule, a forefeiture of corporate charter
will not be decreed if some other adequate remedy is available.
In conducting hearings and investigation, the Commission
is not strictly bound by the technical rules on procedure under
the Rules of Court, except in those matters where it is expressly
provided that the pertinent provisions of the Rules of Court shall
apply. Such hearings may be conducted by the body, board, com-
mittee or officer designated by the Commission for the purpose.
Dissolution by quo warranto proceedings.

(1) Jurisdiction. — This method is impliedly found in Section
20 of the Code which authorizes the Solicitor General to bring a
3
quo warranto proceeding against a (de facto) corporation claim-
ing in good faith to be a corporation to oust it from the exercise
of corporate powers, and, ultimately, to have it dissolved. The
corporation shall then have ninety (90) days from receipt thereof within which to file a pe-
tition for reconsideration of the order. After the lapse of the ninety (90) day period and no
petition for reconsideration has been filed, the order of revocation shall be issued which
shall become final and executory. (XXVIII SEC Quarterly Bulletin, 90 [No. 3, June 1994].)
The assets of a corporation whose SEC registration has been revoked are not
automatically transferred to a new corporation that has been registered to remove the
previous corporation's existence. The corporation must undergo corporate liquidation
pursuant to Section 122, distributes its assets to its stockholders, and the stockholders, in
turn, exchange the assets for shares in the new corporation. For all intents and purposes,
the two corporations are separate and distinct. (SEC Opinion No. 08-17, Aug. 20, 2008.)
A SEC order of revocation for non-operation and non-submission of reportorial re-
quirements automatically dissolves a corporation. The last elected directors may pass a
resolution to petition the SEC to lift the order of revocation. (SEC Opinion No. 06-01, Jan.
5, 2006.)
3
A Latin phrase meaning "by what authority." It is a challenge to a person's legal
authority to act.
754
law does not specify where the proceeding should be instituted,

whether with the Securities and Exchange Commission or the
4
Regional Trial Court.
Before its deletion by the 1997 Rules of Civil Procedure, quo
warranto actions against a corporation could be brought in the
5
Regional Trial Court under Section 2 of Rule 66 of the Rules of
Court. The deletion of Section 2 was apparently on recognition of
the fact that the matter of dissolution is within the original and
exclusive jurisdiction of the SEC pursuant to Pres. Decree No.
902-A, particularly Section 5(b) (see note 3.) and Section 6(d) pro-
viding for the creation and appointment by the Commission and
the powers of management committee or rehabilitation receiver.
In Unilongco vs. Court of Appeals (305 SCRA 561 [1997]), the
Supreme Court accordingly ruled:
"While the regular courts are granted jurisdiction over
involuntary dissolution of corporations through quo warranto
proceedings, as previously discussed, P.D. No. 902-Ais explicit
in its mandate that in all matters within its jurisdiction, the
SEC has original and exclusive authority, x x x.
Furthermore, the intent to remove from the regular
courts jurisdiction over actions against persons who usurp
corporate offices and quo warranto actions against corpora-
tions is crystallized in the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 66 of the old Rules is deleted in its
entirety, Section 1(a), Rule 66 of the amended Rules no longer
Section 21(1) of B.P. Big. 129 vests the Regional Trial Courts with original juris-
diction to issue writs of quo warranto. Section 5(b) of Pres. Decree No. 902-A (March 11,
1976), however, vests in the Securities and Exchange Commission "original and exclusive
jurisdiction to hear and decide cases involving x x x controversies x x x between [a] cor-
poration, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity." Hence, under said provisions they have concur-
rent jurisdiction over involuntary dissolution.
^ c . 2. Like actions against corporations. — A like action may be brought against a
corporation:
(a) When it has offended against a provision of an act for its creation or renewal;
(b) When it has forfeited its privileges and franchise by non-user;
(c) When it has committed or omitted an act which amounts to a surrender of its
corporate rights, privileges, or franchises;
(d) When it has misused a right, privilege, or franchise conferred upon it by law, or
when it has exercised a right, privilege, or franchise in contravention of law.
contains the phrase "or an office in a corporation created by

6
authority of law" found in the old section.
xxx xxx xxx
Hence, whatever ambiguities may arise regarding juris-
diction over quo warranto actions against corporations or
persons usurping corporate offices are now clarified and
resolved by the 1997 Rules of Civil Procedure. Quo warranto
actions against corporations or persons using corporate
offices fall under the jurisdiction of the SEC, unless otherwise
provided for by law, as in the instant case where the corporate
entities involved are homeowners associations, in which
case jurisdiction is lodged with the Home Insurance and
Guarantee Corporation (HIGC)."
Unilongo was decided in April 5, 1999 when original and
exclusive jurisdiction to hear and decide cases involving intra-
corporate disputes including controversies "between [the]
corporation, partnership or association and the State insofar as it
concerns their individual franchise or right to exist as such entity,"
was exercised by the SEC as expressly granted by Pres. Decree
7
No. 902-A. With the transfer of its quasi-judicial jurisdiction
'Section 1 of Rule 66 of the new Rules now reads: "Section 1. Action by Government
against individuals. — An action for the usurpation of a public office, position or franchise
may be commenced by a verified petition brought in the name of the Republic of the
Philippines against:
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public
office, position or franchise;
(b) A public officer who does or suffers an act which, by the provision of law, con-
stitutes a ground for the forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without
being legally incorporated or without lawful authority so to act. (la)
Subsection (a) deleted "or an office in a corporation created by authority of law."
Hence, an action against a person who usurps, etc. a corporate office fails under the juris-
diction of the SEC. Under Subsection (c), the action of a quo warranto is really against the
individuals who act as a corporation.
7
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by, or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholder, partners, members
of associations or organizations registered with the Commission.
756
over the said cases enumerated in Section 5 of Pres. Decree No.

902-A to the Regional Trial Courts pursuant to Section 5.2 of the
Securities Regulation Code (SRC), approved on July 19, 2000, it
is not clear whether the RTCs can take cognizance over any such
case where the matter of dissolution of the corporation is among
8
the issues involved, and order dissolution when warranted.
(2) Where violations not serious. — Where the violations are
not willful or fraudulent or do not affect the public adversely or
seriously, the court (or SEC) may in its discretion merely enjoin
the further commission of the wrongful act or acts. In other
words, not any violation if proved will warrant a dissolution
of a corporation. A different rule "would be dangerous in the
extreme, since it would actually place the life of all corporate
investments in the country within the absolute power of a single
government official. No corporate enterprise of any moment can
be conducted perpetually without some trivial misdemeanor
against corporate law being committed by someone or other of its
numerous employees." Thus, "the extreme penalty of forfeiture
of its franchise will not be visited upon a corporation for holding
a piece of real estate for a period slightly in excess of the time
(b) Controversies arising out of intra-corporate or partnership relations, between

and among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as such entity;
(c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations;
(d) Petitions of corporations, partnerships or associations to be declared in the
state of suspension of payments in case where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of meet-
ing them when they respectively fall due or in cases where the corporation, partnership
or association has no sufficient assets to cover its liabilities, but is under management of a
Rehabilitation Receiver or Management Committee created pursuant to this Decree. (As
added by P.D. No. 1758.)
'The Interim Rules of Procedure Governing Intra-Corporate Controversies under
R.A. No. 8799 omitted controversies "between such corporation, partnership or associa-
tion and the State insofar as it concerns their individual franchise or right to exist as such
entity." Section 5.2 of R.A. No. 8799 (SRC), however, is it very clear that "the Commis-
sion's jurisdiction over all cases enumerated" under said section "is hereby transferred
to the courts of general jurisdiction or the appropriate Regional Trial Court." Further-
more, Section 20 of the Corporation Code does not expressly require that a quo warranto
proceeding against a de facto corporation must be brought by the Solicitor General only
before the Securities and Exchange Commission.
allowed by law, where the conduct of the corporation does not

appear to have been characterized by obduracy or pertinacity in
contempt of law." (Republic of the Philippines vs. Security Credit
and Acceptance Corporation, 19 SCRA 58 [1967].)
(3) Instance where dissolution warranted. — In the cited case,
the Supreme Court which has consistently refused to impose the
capital punishment of dissolution ordered the dissolution of a
corporation found to have been operating as a banking institu-
tion and lending the amounts received from a total of 59,463 sav-
ings account deposits without the authorization of the Monetary
Board of the Central Bank as required by the General Banking
9
Act. (Sec. 2, R.A. No. 337.) Since the corporation could not oper-
ate lawfully as a bank and it had no function other than banking,
it is clear that if a mere injunction against future violations had
been granted, the corporation would have no reason to exist. The
dissolution was also warranted because the misuser of the cor-
porate funds and franchise was willful and repeated 59,463 times
and its continuance inflicted injury upon the public, considering
the number of persons affected thereby. (Ibid.)
Right of minority s t o c k h o l d e r s
to s u e for dissolution.
The general rule is that the minority stockholders of a corpo-
ration cannot sue and demand its dissolution.
(1) Where stockholders without redress or remedy within corpora-
tion itself. — There are cases, however, that hold that even minor-
ity stockholders may ask for dissolution, this, under the theory
that such minority members, if unable to obtain redress and pro-
tection of their right within the corporation, must not and should
not be left without redress and remedy. Even the existence of de
jure corporation may be terminated in a private suit for its disso-
lution by the stockholders without the intervention of the State.
(2) Where violations do not warrant quo warranto proceedings. —
Again, although, as a rule, minority stockholders of a corporation
may not ask for its dissolution in a private suit, and such action
should be brought by the government through the Solicitor
'Now, General Banking Law of 2000, R.A. No. 8791.

758
General in a quo warranto case, at their instance and request,

there might be exceptional cases wherein the intervention of the
State, for one reason or another, cannot be obtained, as when the
State is not interested because the complaint is strictly a matter
between the stockholders and does not involve, in the opinion
of the Solicitor General, any of the acts or omissions warranting
quo warranto proceedings, in which minority stockholders are
entitled to have such dissolution. When such action or private
suit is brought by them, the court has jurisdiction and may or
may not grant the prayer, depending upon the facts and the
circumstances attending it. (Financing Corp. of the Phils, vs.
Teodoro, 93 Phil. 678 [1953]; Hall vs. Piccio, 86 Phil. 603 [1950].)
Effects of dissolution.
A dissolved corporation continues to exist but only for a lim-
ited purpose and for a limited time.
(1) Transfer of legal title to corporate property. — The dissolu-
tion of the corporation results in the vesting of legal title to the
corporate property in the stockholders, who become co-owners
thereof. The stockholders are, therefore, entitled to have the cor-
porate assets sold or converted into cash which will, in turn, be
distributed to those entitled thereto. (SEC Opinion, Aug. 3,1984.)
(2) Continuation of corporate business. — The corporation
ceases as a body corporate to continue the business for which it
was established. (Sec. 122, par. 1.) But while the dissolved entity
is prohibited from continuing its operation as a "corporation,"
it may operate to continue to undertake the purposes for
which it was organized but its status is only that of an ordinary
"association" (see Sec. 10.) which has no juridical personality.
(SEC Opinion, Sept. 25, 1995.) However, any of its stockholders
or members, after its formal dissolution, may re-incorporate or
form another corporation to engage in the same line of business or
activity undertaken by the dissolved corporation by complying
with the registration requirements under the Corporation Code.
(3) Creation of a new corporation. — While the board of
directors of a dissolved corporation is not normally permitted
to undertake any activity outside of the usual liquidation of
its business, there is nothing to prevent its stockholders from
conveying their respective shareholdings toward the creation of

a new corporation to continue the business of the old. Winding
up is the sole activity of a dissolved corporation that does not
intend to incorporate anew. If it does, however, it is not unlawful
for the old board of directors to negotiate and transfer the assets
of the dissolved corporation, as expressly allowed by Section
40, to the new corporation intended to be created as long as
the stockholders have given their consent. (Chung Ka Bio vs.
Intermediate Appellate Court, 163 SCRA 534 [1988].)
(4) Reincorporation of dissolved corporation. — A dissolved
corporation cannot be revived. However, those interested may
reincorporate by refiling a new articles of incorporation and by-
laws. (Rebollido vs. Court of Appeals, 170 SCRA 800 [1989].)
(5) Continuation as a body corporate. — The dissolution does
not by itself imply the diminution or extinction of the rights and
liabilities of such entity (Gonzales vs. Sugar Regulatory Board,
170 SCRA 377 [1989].), nor those of its owners and creditors.
(Clemente vs. Court of Appeals, 242 SCRA 717 [1995].) A defen-
dant corporation is subject to suit and service of process even
though dissolved. (Rebollido vs. Court of Appeals, supra.) The
corporation continues as a body corporate for three (3) years for
purposes of winding up or liquidation. (Sec. 122, par. 1.) It may
hold an election of officers but only for said purposes.
(6) Cessation of corporate existence for all purposes. — Upon the
expiration of the winding up period of three (3) years, the corpo-
ration ceases to exist for all purposes and as a general rule, it can
no longer sue and be sued as such. (Gelano vs. Court of Appeals
and Insular Sawmill, Inc., 103 SCRA 90 [1981].)
In the absence of a statutory provision to the contrary,
pending actions by or against a corporation are abated upon the
expiration of the period allowed by law for the liquidation of its
affairs. (National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA
989 [1961].)
Sec. 122. Corporate liquidation. — Every corporation

whose charter expires by its own limitation or is annulled
by forfeiture or otherwise, or whose corporate existence
for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3)
760
years after the time when it would have been so dissolved,

for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business
for which it was established. (77)
At any time during said three (3) years, said corporation
is authorized and empowered to convey all of its property
to trustees for the benefit of stockholders, members,
creditors, and other persons in interest. From and after any
such conveyance by the corporation of its property in trust
for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had
in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest. (78)
Upon winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member
who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities. (77a, 78,
16, last par.)
Meaning of liquidation.
(1) Liquidation, as applied to a corporation, means the wind-
ing up of the affairs of the corporation by reducing its assets in
money, settling with creditors and debtors, and apportioning the
amount of profit and loss, (see 16 Fletcher, p. 658.)
(2) It consists of adjusting all debts and claims, that is, of
collecting all that is due the dissolved corporation, the settlement
and adjustment of claims against it, and the payment of its debts,
(see China Banking Corp. vs. Michelin & Cie, 58 Phil. 261 [1933].)
Nature of liquidation.
A distribution of all assets is a "winding up" of the affairs
of the corporation and is synonymous with liquidation. (19 Am.
Jur. 2d 953.)
Since the stockholders of a corporation are not co-owners or

tenants in common of the corporate property, the liquidation of
its assets by the stockholders is not and cannot be considered a
partition of community property but rather, a transfer or con-
veyance of the title of its assets to the individual stockholders.
(Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds 6
SCRA 373 [1962].)
M e t h o d s of corporate liquidation.
There are three methods by which a dissolved corporation
may wind up its affairs:
(1) Liquidation by the corporation itself (Sec. 122, par. 1.);
(2) Liquidation by a duly appointed receiver (Sec. 119, last
par.); and
(3) Liquidation by a trustee to whom the corporation had
conveyed the corporate assets, (see Sec. 122, par. 2.)
The liquidation process is an internal concern of the
corporation and falls within the powers of the directors and
stockholders to affect. (SEC Opinions, April 30,1986, July 23,1993,
and Nov. 21,1997.) While the SEC may order the dissolution of a
corporation, jurisdiction over the liquidation of the corporation
pertains to the appropriate regional trial court. Thus, the SEC has
no authority to liquidate the assets of a dissolved corporation
except where it can work out a final settlement of corporate
affairs in the absence of a duly designated receiver or trustee,
(see Clemente vs. Court of Appeals, 242 SCRA 717 [1995], infra.)
Liquidation requires the settlement of claims for and against the
corporation and the trial court is in the best position to convene
all creditors of the corporation, ascertain their claims, and
determine their preferences. (Consuelo Metal Corp. vs. Planters
Development Bank, 555 SCRA 465 [2008].)
Liquidation by the corporation itself.

The normal method or procedure is for the corporation
through the directors or trustees and executive officers to have
charge of the winding up operation.
(1) Period of three years. — As the law (Sec. 122.) grants the cor-
poration a period of three (3) years after the time when it would
762
have been so dissolved within which to wind up its affairs, the

claims by and against it not presented and settled within that
period become unenforceable as there exists no longer a corpo-
rate entity against which they can be enforced, (see Buenaflor vs.
Camarines Sur Industry Corp., 108 Phil. 472 [I960].)
In other words, actions pending by or against the corpora-
tion when the three (3)-year period expires are abated, for after
said period, the corporation becomes defunct and ceases to be an
entity capable of suing or being sued. (National Abaca & Other
Fibers Corp. vs. Pore, 2 SCRA 989 [1961].)
(2) Extension of period. — The law does not allow any exten-
sion of the period. However, a creditor with a pending action
against a corporation or a corporation with a pending suit filed
by it may prevent the abatement by asking the proper court for
the appointment of a receiver or trustee within the winding up
period, (par. 2.) The trustee may sue and be sued as such in all
matters connected with the liquidation, even beyond the period
where there is no time limit within which the trustee must finish
the liquidation. It may be found impossible to complete the work
of liquidation within the three-year period.
It has been held, however, that the counsel who prosecuted
and defended the interest of a dissolved corporation may be
considered a trustee of the corporation with respect to the
matter in litigation (Gelano vs. Court of Appeals, 103 SCRA 90
[1981].) and the board of directors may be permitted to complete
the corporate liquidation by continuing as "trustees" by legal
implication. (Clemente vs. Court of Appeals, 242 SCRA 717
[1995].) Indeed, if "the trustee may commence a suit which can
proceed to final judgment even beyond the three-year period,
[n]o reason can be conceived why a suit already commenced by
the corporation itself during its existence not by a mere trustee
who, by fiction, merely continues the legal personality of the
dissolved corporation should not be afforded similar treatment
and allowed to proceed to final judgment and execution thereof.
(Reburiano vs. Court of Appeals, 301 SCRA 342 [1991], citing
Gelano vs. Court of Appeals, supra; Knetch vs. United Cigarette
Corp., 384 SCRA 45 [2002].)
(3) Action against liquidators/stockholders. — It is to be noted

that there is nothing in Section 122 (par. 1.) which bars an
action for the recovery of the debts of the corporation against

the liquidator thereof after the lapse of the winding up period
of three (3) years. (Republic of the Philippines vs. Marsman
Dev. Co., 44 SCRA 418 [1972].) The dissolution of a corporation
does not extinguish the debts due or owing to it. A creditor of a
dissolved corporation may follow its assets, as in the nature of a
trust fund, into the hands of its former stockholders. Dissolution
or even the expiration of the three-year liquidation period does
not bar a corporation from enforcing its rights as a corporation,
(see Sec. 145.)
This rule applies to the tax obligations of a corporation to the
government. While the government cannot collect taxes from a
defunct corporation, it loses thereby none of its rights to assess
taxes which had been due from the corporation, and to collect
them from persons who, by reason of transactions with the cor-
poration, hold property against which the tax can be enforced.
(Tan Tiong Bio vs. Comm. of Internal Revenue, 4 SCRA 86 [1962].)
(4) Approval of SEC not required. — There is also nothing in
Section 122 which requires SEC's approval of distribution or
liquidation of the assets of a dissolved corporation. The same is
a matter of internal concern of the corporation and falls within
the power of the directors and stockholders or duly appointed
liquidation trustee. Liquidation of assets, however, is subject to
the payment of debts of the corporation. (SEC Opinion, July 23,
1993.)
(5) Authority of hold-over officers. — The hold-over officers of an
expired corporation are empowered to wind up the affairs of the
corporation within the 3-year liquidation period. While Section
122 gives a dissolved corporation three (3) years to continue as
a body corporation for purposes of liquidation, the disposition
of the remaining undistributed assets must necessarily continue
after such period. A contrary interpretation would have unjust
and absurd results. (SEC Opinion, May 14, 1996; see Clemente
vs. Court of Appeals, supra.)
Liquidation by a receiver.
The liquidation by receivership is authorized by Section 119
by virtue of which upon the dissolution of the corporation, the
764
Securities and Exchange Commission "may appoint a receiver to

collect its assets and pay the debts of the corporation." (last par.)
(1) Authority of receiver. — Being merely a ministerial officer,
a receiver of a corporation has only such authority as is conferred
by statute. (19 C.J.S. 1226.) Ordinarily, he may sue to enforce the
stockholder's liability on unpaid subscription in representation
of the corporation. (Ibid., 1236.) A call is considered a pre-
requisite to any action that a receiver may take to enforce unpaid
subscriptions. (Ibid., 1239.)
The appointment of a receiver operates to suspend the au-
thority of a corporation and of its directors/trustees and officers
over its property and effects, such authority being reposed in the
receiver, and in this respect the receivership is equivalent to an
injunction to restrain the corporation's officers from intermed-
dling with the property of the corporation in any way. (Villan-
ueva vs. Court of Appeals, 244 SCRA 395 [1995]; Yam vs. Court
of Appeals, 303 SCRA 1 [1999]; Abacus Real Estate Dev. Center,
Inc. vs. Manila Banking Corporation, 455 SCRA 97 [2005].)
(2) Status of receiver. — A receiver is not only a representa-
tive of the court. He also represents both the stockholders and
the creditors of the corporation and as their trustee, he acts not
for himself but for both and represents each. In some respect, he
is the agent or representative of the corporation. (SEC Opinion,
April 7, 1987, citing 16 Fletcher, p. 404.) He has, therefore, the
power to vote the shares owned by the latter in other corpora-
tions.
(3) Stay of pending actions. — Presidential Decree No. 902-A is
10
clear that "allocations for claims against corporations, partner-
ships or associations under management or receivership pend-
ing before any court, tribunal, board or body shall be suspended
accordingly."" (Sec. 6[c] thereof.)
"The word "claim" must be construed to mean debts or demand of a pecuniary

nature. An action for the nullification of a Special Power of Attorney and other documents
based on an obligation of forgery is not a "claim" under Section 6(c) which provides for
the suspension of all actions against corporations, partnerships or associations under
management or receivership. (Finasia Investments & Finance Corp. vs. Court of Appeals,
237 SCRA 446 [1994].)
"See Rizal Commercial Banking Corp. vs. Intermediate Appellate Court, 213 SCRA
830 (1992); Alemar's Sibal & Sons, Inc. vs. Elbinas, 186 SCRA 94 (1990); Philippine
The law does not make any exception in favor of labor claims.
"The justification for the automatic stay of all pending actions for
claims is to enable the management committee or the rehabilita-
12
tion receiver to effectively exercise its/his powers free from any
judicial or extrajudicial interference that might unduly hinder or
prevent the 'rescue' of the debtor company. To allow such other
actions to continue would only add to the burden of the manage-
ment committee or rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims against the cor-
poration instead of being directed toward its restructuring and
rehabilitation." (Rubberworld [Phils.], Inc. vs. National Labor
(4) Equality among creditors. — When a corporation threatened
by bankruptcy is taken over by a receiver, all the creditors stand
on equal footing. Its assets are held in trust for their equal benefit
to preclude one from obtaining an advantage or preference over
another by the expediency of an attachment, execution or other-
wise. This is precisely the reason for the suspension of all pend-
ing claims against the corporation under receivership. Instead of
creditors vexing the court with suits against the distressed firm,
they are directed to file their claims with the receiver who is a
duly appointed officer of the SEC (Alemar's Sibal & Sons, Inc. vs.
Elbinias, 186 SCRA 94 [1990].), subject to the rules on preference
of credits, to enable the receiver to effectively exercise his pow-
ers free from any judicial or extrajudicial interference that might
unduly hinder the rescue of the distressed corporation. Jurispru-
dence has established that a stay of execution may be warranted
by the fact that the corporation has been placed under rehabilita-
tion receivership. (Alemar's Sibal & Sons, Inc. vs. National Labor
Commercial International Bank vs. Court of Appeals, 172 SCRA 436 (1989); Clarion
Printing House, Inc. vs. National Labor Relations Commission, 461 SCRA 272 (2005);
Tyson's Super Concrete, Inc. vs. Court of Appeals, 461 SCRA 69 (2005).
12
The appointment of a management committee or rehabilitation receiver may only
take place after filing with the SEC of an appropriate petition for suspension of payments.
Pursuant to the proviso in Section 6(c) taken together with Section 6(d) and Section 5(d), a
court action is ipso jure suspended only upon the appointment of a management commit-
tee or a rehabilitation receiver. (Barotac Sugar Mills, Inc. vs. Court of Appeals, 275 SCRA
497 [1997]; see Annotation under Section 141, Corporation Code.)
See Interim Rules of Procedure on Corporate Rehabilitation. (Appendix "B.")
766
(5) Duration of receivership. — The receivership, unless

otherwise specifically limited in its duration, shall exist
indefinitely until the affairs of the dissolved corporation
shall have been completely settled and liquidated. During its
continuance, claims can be presented and allowed if they are not
barred by the statute of limitations. In other words, the period
of three (3) years prescribed by Section 122 is not applicable,
(see Sumera vs. Valencia, 67 Phil. 721 [1939].) The receiver or a
trustee (infra.) may act beyond the period. (Pepsi-Cola Products
Philippines, Inc. vs. Court of Appeals, 443 SCRA 580 [2004].)
Appointment of receiver discretionary.

(1) Where corporation has been dissolved. — The appointment of
a receiver is addressed to the sound discretion of the court or the
Securities and Exchange Commission (see Pres. Decree No. 902-
A, Sec. 6[c].) and such discretion should be exercised with great
caution and only when the necessity therefor is clear, in view of
the drastic nature and burdensome character of a receivership,
involving as it does the appointment of a stranger who would
take over the corporate business. (Chase vs. Court of First
Instance of Manila, 18 SCRA 602 [1966]; China Banking Corp. vs.
M. Michelin & Cie, 58 Phil. 261 [1933]; see Limsico vs. Bautista, 122
SCRA 337 [1983].) Thus, where, instead of appointing a receiver,
the court adopted precautionary measures for the protection of
the petitioner's rights and interests, the court cannot be said to
have abused its discretion. (Chase vs. Court of First Instance of
Manila, supra.)
(2) Where there is no dissolution. — Even without dissolution,

the court has the authority to appoint a receiver for a corpora-
tion to protect and preserve its properties for the use and benefit
of its creditors and others who may have similar interests in the
property as where there is already a final and executory judg-
ment against the corporation, which is in a precarious financial
condition. (Central Sawmills, Inc. vs. Alto Surety and Ins. Co.,
27 SCRA 247 [1969]; see Ching vs. Land Bank of the Phils., 201
SCRA 190 [1991].) Where corporate directors are guilty of breach
of trust, minority stockholders may ask for receivership. (Chase
vs. Court of First Instance, supra.) The court should appoint a
receiver when necessary in order to protect the rights of minor-

ity stockholders especially when said stockholders are unable to
obtain redress and protection of their rights within the corpora-
tion itself. (Financing Corp. of the Phils, vs. Teodoro, 93 Phil 678
[1953].)
The appointment of a receiver for a going corporation is a last
resort remedy, and should not be employed when another remedy
is available. Misconduct of corporate directors or other officers,
bad judgment, or even unauthorized use and misapplication
of the company's funds will not justify the appointment of a
receiver for the corporation if an appropriate relief can otherwise
be had. Thus, the refusal to allow the stockholders (or members
of a non-stock corporation) to examine the books of the company
is a ground for appointing a receiver (or creating a management
committee) since there are other adequate remedies, such as a
writ of mandamus. (Ao-As vs. Court of Appeals, 491 SCRA 339
[2006]; see Sec. 74.)
Liquidation by a trustee.
(1) Meaning of trustee. — The word "trustee," as used in the
law, must be understood in its general concept. It has been held
that a counsel who prosecuted and defended the interest of a
corporation and who in fact appeared in behalf of the corpora-
tion before and after its dissolution by amendment of its articles
of incorporation (see Sec. 120.) may be considered a trustee of the
corporation under Section 77 (now Sec. 122.), at least with respect
to the matter in litigation only. The purpose in the transfer of the
assets of the corporation to a trustee upon its dissolution is more
for the protection of its creditors and stockholders. The appoint-
ment of said counsel can be considered a substantial compliance
with Section 78 (par. 2.). (Gelano vs. Court of Appeals, 103 SCRA
90 [1981].)
(2) Conveyance of corporate property. — The liquidation of the
corporation may be placed in the hands of a trustee or assignee
to whom all the corporate assets are conveyed by resolution of
13
the stockholders or members (see Sec. 40. ) at any time during
,3
It applies to the sale, etc. of all or substantially all the assets of an existing corpora-
tion.
768
the three (3,-year period after the time when it would have been
dissolved.
(3) Effect of conveyance. — By the terms of Section 122 (par. 2.),
the effect of the conveyance is to make the trustee the legal owner
of the property, subject to the beneficial interest therein of the
creditors, stockholders, members, and other persons in interest.
The trustee may sue and be sued as such in all matters connected
with the liquidation. (Sumera vs. Valencia, 67 Phil. 721 [1939].)
(4) Rules applicable. — The same rules governing duration
and the time for filing of claim where the liquidation is done by
a receiver apply to liquidation effected by a trustee.
(5) Period of existence of trusteeship. — Where no time limit
has been fixed with respect to the existence of the trusteeship,
the trustee has authority to close the affairs of the corporation
even after the expiration of the statutory three-year period and
claims not barred by the statute of limitations can be presented
and allowed until the liquidation is terminated, (see National
Abaca & Other Fibers Corp. vs. Pore, 2 SCRA 989 [1961]; Board
of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967];
Pepsi-Cola Products Philippines, Inc. vs. Court of Appeals, 443
SCRA 580 [2004].) Since the law specifically allows a trustee
to manage the affairs of the corporation in liquidation, any
supervening fact, such as the dissolution of the corporation, the
repeal of a law (see Sec. 145.), or any other fact of similar nature,
would not serve as an effective bar to the enforcement of such
right. (Reburiano vs. Court of Appeals, 301 SCRA 342 [1999];
Knecht vs. United Cigarette Corp., 384 SCRA 45 [2002].)
(6) Where no receiver or trustee has been designated after disso-
lution. — If the three-year extended life has expired without a
receiver or trustee having been expressly designated by the cor-
poration within that period:
(a) the board of directors or trustees itself may be permitted
to so continue as "trustees" by legal implication to complete
the liquidation, (see Sec. 145.)
(b) Still, in the absence of a board of directors or trustees,
those having a pecuniary interest in the corporate assets,
including not only the stockholders but likewise the creditors
of the corporation, acting for and in its behalf, may make

proper representations with the Securities and Exchange
Commission which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns. (Clemente vs. Court
of Appeals, 242 SCRA 717 [1995]; see Premier Development
Banks vs. Flores, 574 SCRA 66 [2008].)
(c) The only surviving stockholder or director of a corpora-
tion whose term of existence has expired may act as trustee-
in-liquidation after the 3-year period to liquidate has expired
without the appointment of a trustee-in-liquidation. In case
of death of one or more directors during or after the 3-year
liquidation period, the surviving directors continue as trust-
ees-in-liquidation, without prejudice to the right of a person-
in-interest (e.g., creditor or stockholder) to petition the courts
for the appointment of a different trustee on account of fail-
ure to wind up the affairs of the corporation within a reason-
able period. (SEC Opinion No. 10-96, Jan. 29, 2010.)
(d) The counsel who prosecuted and defended the interest of
the corporation and who, in fact, appeared in behalf of the cor-
poration, may be considered a trustee of the corporation at
least with respect to the matter in litigation only. (Reburiano
vs. Court of Appeals, supra.)
Effect of dissolution on corporate power
to enter into contracts.
The dissolution of a corporation terminates its power to enter
into contracts or to continue the business as a going concern, even
though it continues its existence for a definite or indefinite time to
wind up the business. (16 Fletcher, p. 859.) Under Section 122, the
winding up period is only for the limited purposes enumerated
to enable the dissolved corporation to settle its affairs gradually.
(SEC Opinion, Aug. 24,1971.) Dissolution in its early stage is, in
reality, a change in the permitted scope of activity rather than a
change in the status. The result is not the death of the corporation
but its retirement from active business. (Ballantine, Sec. 317.)
Thus, a university whose charter expires in the middle of
the academic year may continue holding classes up to the end
of such year where the enrollment for such classes was made
prior to the date of dissolution, but only as part of the winding
up process of the affairs of the corporation. The university, how-
ever, cannot accept enrollment for a succeeding semester which
starts after the expiration of the corporate term. Since collegiate
courses are conducted by semesters, each semester would consti-
tute a fully executed contract. Should the university then accept
enrollment for the second semester classes, it would be entering
into a new contract which is impossible of execution as its sched-
uled performance could only be made after the dissolution of its
corporate existence. (SEC Opinion, Aug. 24,1971.)
Distribution of corporate assets.

(1) General rule/exceptions. — Except by decrease of its capital
stock as provided in Section 38 and as otherwise allowed by the
Corporation Code (see Sees. 8, 9, 41, 43, 104, par. 1[4], 105.), no
corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and
liabilities. (Sec. 122, last par.) The Trust Fund Doctrine (see Sec.
41.) is the underlying principle behind the stringent procedural
requirements to be complied with for the distribution of capital
assets of the corporation in the instances when such distribution
is allowed by the Corporation Code.
(a) Distribution in exchange for shares of stock. — Thus,
the property contributed to the corporation in exchange
for shares of stocks and forming part of the assets of the
corporation cannot be withdrawn by the subscriber but only
with the approval of the board of directors and stockholders,
respectively, provided that no creditor is prejudiced by such
withdrawal and provided further that the law, rules, and
regulations pertinent to said withdrawal are duly observed
and complied with, although stockholders owning stocks in
exchange therefor are not precluded from assigning and/
or transferring their shareholdings to any person qualified
in the absence of a valid and just restriction. (SEC Opinion,
Aug. 5,1976.)
(b) Distribution in pursuance of liquidation. — In a case, it
was held that where the purpose of a liquidation as well as
the distribution of the assets of the corporation is to transfer
the title thereto from the corporation to the stockholders
in proportion to their shareholdings, that transfer cannot
be effected without the corresponding deed of conveyance
from the corporation to the stockholders, and the certificate
of liquidation executed by the stockholders, though it
involves a distribution of the corporation's assets, should be
considered as one in the nature and in substance a transfer
or conveyance. (Stockholders of F. Guanzon & Sons, Inc. vs.
Register of Deeds, supra.)
(2) By act of stockholders. — The act of the stockholders dis-
tributing assets of the corporation among themselves is valid so
long as all corporate creditors are paid and no one is prejudiced
thereby.
(3) Trust fund doctrine. — The "trust fund" doctrine (see Sec.
41.) considers the subscribed capital as a trust fund or equity in
trust for the payment of the debts of the corporation, to which
the creditors look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned
or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus,
dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital
as the consideration therefor. (National Telecommunications
Commission vs. Court of Appeals, 311 SCRA 508 [1999].)
Priority of application of assets.

The question of the right of a claimant against the assets of a
corporation that is being dissolved and liquidated to priority in
the payment of his claims becomes of importance only when the
assets of the corporation are not sufficient to pay all claims. It is
evident that if the corporate assets are sufficient to pay all claims,
it cannot matter practically which claim is paid first or is entitled
to preferential payment. (19 Am. Jur. 2d 1027-1029.)
(1) When the corporation is insolvent, the creditors of the
corporation are entitled to have all its assets distributed first
772
among them according to their respective rights and priorities."

This is in accordance with the trust fund doctrine. (19 Am. Jur. 2d
1029.)
(2) Stockholders, members, directors, or officers of the cor-
poration who are also its creditors as a result of a legitimate or
proper loan or claim must be paid next. (Ibid., 1029-1030.)
(3) The remaining assets are then to be distributed among the
stockholders or members in proportion to their shareholdings
or interest in the absence of any provision to the contrary, (see
Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, 6
SCRA 373 [1966].)
(a) Of course, holders of preferred stock as to assets have
a preference over the common stockholders in the distri-
bution of the surplus proceeds of the assets of the dissolved
corporation.
(b) The amount of capital refund that a stockholder will
get in case of liquidation of a corporation will depend upon
the financial condition thereof at the time. He may get more
than his original capital investment or less or even none at
all, depending upon the success or failure of the enterprise.
(c) If, after the distribution to stockholders of corpo-
rate assets, unpaid debts of the corporation shall appear, the
stockholders are liable to pay the debts to the extent of the
value of the assets received by them.
(d) Upon winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who
'Secured creditors shall enjoy preference over unsecured creditors subject only
to the provisions of the Civil Code (see Arts. 2246-2250 thereof.) on concurrence and
preference of credits. Creditors of secured obligations may pursue their security interests
or lien, or they may choose to abandon the preference and prove their credits as ordinary
claims. The right to foreclose the mortgage under Article 2248 over a specific property
whether or not the debtor-mortgagor is under insolvency or liquidation proceedings is
merely suspended upon the appointment of a management committee or rehabilitation
receiver. (Sec. 6[c].) Pres. Decree No. 902-A or upon the issuance of stay order by the trial
court. (Sec. 4, Rule 4, Interim Rules of Procedure on Corporate Rehabilitation.) He may
exercise the right to foreclose the mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order. (Consuelo Metal Corp. vs. Planter's
Development Bank, 555 SCRA 465 [2008].)
is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located. (Sec 122 par
3.)
Under the law, such distributive shares of the assets of the
corporation upon its dissolution are not available for general
distribution among the whole class of stockholders. The reason
for this rule is that upon the dissolution of a corporation, the
assets become a trust fund with the title of the stockholders
becoming an equitable right to a distributive share therein, and
that the stockholders, in respect of the liquidating dividend,
are not mere creditors, but the money is set apart for them and
belongs to them severally in equity and is, therefore, not available
for general distribution. (19 Am. Jur. 2d 1035-1036.)
There is nothing in Section 122 which requires that the dis-
tribution of the remaining assets of a dissolved corporation to
either the creditors or stockholders should be approved by the
Securities and Exchange Commission. The liquidation process is
an internal concern of the corporation and falls within the pow-
ers of the directors and stockholders to effect. (SEC Opinions,
April 30, 1986; Nov. 21,1997.)
Refund to s t o c k h o l d e r s of their
investment.
"Stock corporations derive their capital stock from the
sale of shares or stock to the stockholders. The stockholders,
in purchasing shares from the corporation, merely invest their
capital in paying for those shares. Being investors, they expect
the corporation to earn profits and to distribute the profits among
them in the form of dividends. For this reason, stock corporations
are also known as commercial corporations, that is, corporations
organized for the purpose of earning profits to be divided among
the stockholders."
(1) Where shares with par value. — "When stock corporations
are dissolved, the assets are first applied to the payment of
their obligations and the balance is then used to refund to the
stockholders the amount they invested in the purchase of shares
of the corporation. Where the shares of a stock corporation
have par value, and unless the articles of incorporation or the
by-laws and the certificates of the stock specify what amount

is to be returned to the stockholders as their investment in the
corporation, the stockholders shall be entitled to receive as a
refund of their investment only an amount equal to the par value
of each of the shares which they hold, even if in acquiring those
shares they may have paid more than their par value."
(2) Where shares without par value. — "When the shares of
stock of a corporation have no par value, in the absence of any
provision in the articles of incorporation to the contrary, the
stockholders shall be entitled to receive from said corporation
upon its dissolution as a refund of their investment, the amount
which they have paid to the corporation for the purpose of the
said shares. If said shares, although belonging to the same class,
have been issued at different times and have different prices as
consideration, then the stockholders shall be entitled to receive
as a refund of their investment the amount which they respec-
tively paid for those shares."
(3) Where shares acquired from prior stockholder. — "When
stockholders did not acquire their shares directly from the corpo-
ration but acquired them by transfer from another stockholder,
the amount which the former shall be entitled from the corpora-
tion as a refund of their investment is not the price for which the
shares were acquired from the prior stockholder, but the refund
which the original stockholder to whom the shares were issued
by the corporation would have been entitled to receive from the
corporation had he not transferred his shares." (C.G. Alvendia,
op. cit., pp. 33-34.)
— oOo —
Title XV
FOREIGN CORPORATIONS
Sec. 123. Definition and rights of foreign corporations. —

For the purposes of this Code, a foreign corporation is
done, formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country
or State. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and
a certificate of authority from the appropriate government
agency. (68a)
Definition of foreign corporation.

(1) With respect to a particular State, a foreign corporation
is a corporation created by or under the laws of another State
or country. This is the traditional definition of the term. In
the incorporating State, it is a domestic corporation. Thus, X
corporation organized under the laws of the Philippines is a
domestic corporation with respect to the Philippines and a foreign
corporation with reference to any other State; if organized under
the laws of Y country, it is domestic with reference to Y and a
foreign corporation under the Corporation Code.
(2) For licensing purposes, the Corporation Code under Sec-
tion 123, defines a foreign corporation as one formed, organized
or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do busi-
1
ness in its own country or State. (see Sec. 125, par. 2.) It does not
'Section 123 does not apply to foreign partnerships. ( S E C Opinion, May 25, 1982.)
Neither does it cover joint ventures (see note 11 under Sec. 2.) formed outside the Philip-
pines by two foreign corporations to establish a representative office in the Philippines.
775
776
say that it is required that the laws under which foreign corpora-
tions are formed give Philippine nationals reciprocal rights. (State
Investment House, Inc. vs. Citibank, N.A., 203 SCRA 9 [1991].)
Under the Corporation Code, the existence of a foreign law
allowing Filipino citizens and corporations to do business in the
country of the foreign corporation is prescribed only as a condi-
tion for securing a license to transact business in the Philippines.
It is not an essential element of being a foreign corporation.
(3) During wartime, for reasons of national security, the
control test (infra.) and not the incorporation test above shall
determine the nationality of a corporation, that is, a domestic
corporation controlled by enemy aliens shall be deemed a
foreign corporation with a nationality identical with that of its
controlling stockholders. (Filipinas Cia de Seguros vs. Christern
Huenefeld & Co., 89 Phil. 54 [1951].) Under the second test, the
nationality of a corporation is that of the State of incorporation
2
regardless of the nationality of its stockholders. (Sec. 123.)
Corporation may operate within jurisdiction

of another State.
As a rule, a foreign corporation can have no legal existence
or status beyond the bounds of the State or sovereignty by which
it is created or incorporated and organized. It exists only in con-
The Securities and Exchange Commission has jurisdiction to issue licenses only to foreign
corporations. (SEC Opinion, April 22,1985.)
For tax purposes, a foreign corporation is either resident, if engaged in trade or busi-
ness within the Philippines or having an office or place of business therein, and nonresi-
dent, if not engaged in trade or business within the Philippines and not having any office
or place of business therein, (see Sec. 20[h, i], National Internal Revenue Code.) The first
is taxed on its net income from sources within and without the Philippines and the sec-
ond, only on its gross income from within the Philippines. (Sees. 24[a], 25[a], Ibid.)
2
However, a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code, of which 100% of the capital stock outstand-
ing and entitled to vote is wholly owned by Filipinos may be considered a "Philippine
National" under the Foreign Investments Act of 1991. (infra.) This situtation is the only
exception to the place of incorporation test. (SEC Opinion No. 04-14, March 3, 2004.)
W Corp. is owned 100% by X Corp., a Philippine corporation, X Corp. is in turn,
wholly-owned by Y Corp., a domestic holding company, which is owned by Z Corp.,
a publicly listed company, 26% of the outstanding capital stock of which is owned by
foreigners. W Corp. is not a corporation wholly-owned by Filipino citizens because Z
Corp., the third degree parent of W Corp., is owned 26% by foreigners. (SEC Opinion No.
06-07, Jan. 31, 2006.)
Sec. 123 TITLE XV. FOREIGN CORPORATIONS 777
templation of law and by force of the law and where that law
ceases to operate, the corporation can have no existence.
(1) With consent of foreign state where business conducted. —
This principle, however, does not prevent a corporation from
acting in another State or country with the latter's express or im-
3
plied consent. This is the "consent doctrine" which is provided
in Sections 125 and 126. But every power which a corporation
exercises as such in another State depends for its validity upon
the laws of the sovereignty in which it is exercised. A corporation
can exercise none of the functions and privileges conferred by
its charter in another State or country except by the comity and
consent of such State or country. (20 C.J.S. 12.)
(2) Subject to conditions and restrictions it may impose. — The
State in extending to foreign corporations the privilege of doing
business may impress such privilege with whatever conditions
and restrictions it deems fit to impose. Thus, it is within the
power and discretion of a State to require foreign corporations,
as a condition precedent to the right to do business within the
State, to take out a license, permit, or certificate from a designated
officer or agency, giving such foreign corporations authority or
permission to do so, and on compliance therewith, the transaction
has been held to constitute a contract between the corporation
and the State. (SEC Opinion, March 5,1959.) The conditions and
requirements, of course, must be reasonable.
Objectives of regulation of foreign

corporations.
The objectives of the statutory provisions prescribing condi-
tions under which foreign corporations are permitted to do busi-
ness in a State other than that of their creation have been stated
as follows:
(1) to place them on an equality with domestic corporations;
3
The new type of problems caused by big multinational corporations suggests the
need for special laws to regulate them. Created in one State, they transact business, main-
tain offices and operate plants or factories in numerous States. Most such corporations
with worldwide activities have stockholders, directors, officers, and employees from dif-
ferent countries where they do business.
(2) to subject them to inspection so that their condition may

be known; and
(3) to protect the residents of the State doing business with
them by subjecting them to the courts of the State.
Provisions of revenue requiring the payment of fees and
taxes are only incidental. (17 Fletcher, p. 424.)
License and certificate of authority required

of foreign corporations.
Under Section 123, foreign corporations shall not be
permitted to transact or do business in the Philippines until they
have secured a license for that purpose from the Securities and
Exchange Commission (see Sec. 126.) and a certificate of authority
4
from the appropriate government agency.
The fact, however, that a foreign corporation may not transact
business in the Philippines unless it has obtained a license for that
purpose, nor maintain a suit in Philippine courts for recovery of
any debt, claim or demand without such license, does not make
such corporation any less a juridical person. Indeed, an exception
to the license requirement has been recognized where a foreign
corporation sues on an isolated transaction. (General Garments
Corp. vs. Director of Patents, 41 SCRA 50 [1971].)
Nationality of corporations with

foreign equity.
(1) Determination of nationality. — There are two rules for
determining the corporate nationality of a corporation: Under
the "incorporation test," the nationality of a corporation is
that of the state of incorporation regardless of the nationality
of its stockholders. Under the "control test," it depends on the
nationality of the controlling stockholders. The application of
either test depends on the particular situation.
The Department of Justice, in an opinion (No. 18, Jan. 19,
1989), applying the "control test," has laid down the rule adopted
4
The Securities and Exchange Commission does not have rules and regulations gov-
erning the activities of foreign corporations in the Philippines before they are granted
a license, the reason being that until they have obtained a license, they cannot transact
business in the country. (SEC Opinion, March 29,1962.)
by the Securities and Exchange Commission (SEC Opinion, Dec.

7,1993.) and now expressly embodied in the Foreign Investments
Act (infra.) in the determination of the nationality of corporations
formed or organized under Philippine law with alien equity as
follows:
"Shares belonging to corporations or partnerships at
least 60% of the capital of which are owned by Filipino citi-
zens shall be considered as of Philippine nationality, but if
the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares cor-
responding to such percentage shall be counted as of Phil-
ippine nationality. Thus, if 100,000 shares are registered in
the name of a corporation or partnership at least 60% of the
capital stock or capital, respectively, of which belong to Fili-
pino citizens, all of said shares shall be recorded as owned by
Filipinos. But if less than 60% or, say only 50% of the capital
stock or capital belong to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000
shares shall be recorded as belonging to aliens." (see SEC
Opinions No. 07-20, Nov. 28, 2007 and No. 07-21, Nov. 28,
2007.)
(2) BASIS of computation of 60-40 percentage requirement. —
Under existing laws, the basis is the total outstanding capital
stock, irrespective of the amount of the par value of the shares,
(see Sec. 137.) Once it is established that a corporation is at least
60% owned by Filipinos, it is no longer necessary to conduct any
further inquiry as to the ownership of the shareholders since
the entire company is already considered a Filipino entity. (SEC
Opinion No. 07-18, Nov. 28, 2007.) However, while a corporation
with a 60% Filipino equity ownership may be considered a
Filipino corporation, it is not qualified to invest in or enter into
a joint venture agreement with corporations or partnerships, the
capital or ownership of which, under the Constitution or special
laws, are limited to Filipino citizens. (SEC Opinion, Nov. 21,
1989.)
The preferred stocks without voting rights are considered
in the computation of the Filipino-foreign equity percentage
requirement, unless the law covering the type of business to be
undertaken provides otherwise. (SEC Opinions No. 04-40, Aug.
10, 2004 and No. 04-29, April 20, 2004.) The shareholdings of
former Filipino citizens who became citizens of foreign countries
but who subsequently reacquired Philippine citizenship under
the "Citizenship Retention and Re-Acquisition Act of 2003 (R.A.
No. 9225)" are considered as Filipino investments. (SEC Opinion
No. 04-38, July 6, 2004.)
The Securities and Exchange Commission has done away
with the strict application of the so-called "grandfather rule"
and instead applied the more lenient "control test" above of
5
determining corporate nationality, in line with the state policy
to adopt a liberal interpretation or construction of our laws
aimed at encouraging foreign investment. (SEC Opinion, Oct.
14, 1991.) The "control test" is now expressly embodied in the
Foreign Investments Act of 1991 and its implementing rules and
regulations. Under this test, once it is clearly established that an
entity in 60% owned by Filipino citizens, further inquiry on the
ownership of the corporate shareholders is not necessary. The
test for compliance is based on the total outstanding capital stock
irrespective of the amount of the par value of the shares.
(3) Rule under the Foreign Investments Act of 1991. — Under
6
R.A. No. 7042: (a) "a citizen of the Philippines, or (b) a domes-
tic partnership or association wholly owned by citizens of the
T h e SEC employs the two (2) methods to determine the nationality of a corporation
depending on the corporation's business. The "grandfather rule" is a method of deter-
mining the nationality of a corporation which is owned in part by another corporation
by breaking down the equity structure of the shareholder corporation. This method can
be useful when a corporation's economic activity is strictly limited by law to Filipino citi-
zens, such as certain types of retail tradeing and mass media. On the other hand "control
test" is much more liberal. Under this method, the corporation shall be considered a Fili-
pino corporation if the Filipino ownership of its capital stock is at least 60% and where the
60%-40% Filipino-alien equity ownership is not in doubt. It is applied for corporations
intending to engage in commerce where 60%-40% equity ratio is allowed by law. (SEC
Opinion No. 07-19, Nov. 28, 2009.)
6
sUnder Section 3 thereof, it is the test for compliance with the nationality require-
ment. It is based on the total outstanding or subscribed/issued applied stock irrespective
of the amount of the par value of the shares. With respect to non-stock corporations, the
nationality is computed on the basis of the nationality of its members and not on the
membership contribution. (SEC Opinion No. 04-49, Dec. 22, 2004.) The control test under
the act to determine Filipino nationality cannot be applied in a situation where the law
requires a greater percentage of ownership. (SEC Opinions No. 04-41, Sept. 28, 2004 and
No. 04-30, April 28, 2004.)
Philippines, or (c) a corporation organized under the laws of the

Philippines of which at least 60% of the capital stock outstanding
and entitled to vote is owned and held by Filipino citizens, or (d)
a corporation organized abroad and registered as doing business
in the Philippines under the Corporation Code of which 100%
of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos, or (e) a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is
a Philippine national and at least 60% of the fund will accrue
to the benefit of Philippine nationals" is deemed a "Philippine
7
National."
Where a corporation and its non-Filipino stockholders own
stocks in an enterprise registered with the Securities and Exchange
Commission, at least 60% of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by
Filipino citizens and at least 60% of the members of the board of
directors of both corporations must be citizens of the Philippines
in order that the corporation shall be considered a Philippine
national. (Sec. 3[a] thereof, as amended by R.A. No. 8179.) The
law applies the control test both with respect to the ownership
'Section 7(a) of the rules promulgated by the Securities and Exchange Commission
on February 28, 1967 provides for the determination of Philippine nationality in case of
a corporation as follows: "Shares belonging to corporations x x x at least 60% of the capi-
tal which is owned by Filipino citizens shall be considered as of Philippine nationality.
X X X."
This rule follows the control test in determining the Philippine nationality of a cor-
poration owning shares in another corporation engaged in the exploration, development
and utilization of natural resources in this country. It is sufficient under the rule that the
subscribing corporation is owned to the extent of at least 60% of its capital stock by Fili-
pino citizens, to be considered a Philippine national. This is consistent with the provision
of the Constitution which states, among others, that the exploration, etc. of our natural
resources (which shall be under the control and supervision of the State) shall be limited
to Filipino citizens or to corporations or associations at least 60% of the capital stock of
which belongs to Filipino citizens. (Art. XII, Sec. 2[par. 1] thereof.)
The rule, however, is intended to apply only to corporations and associations subject
to our laws and not to foreign corporations not licensed to do business in the Philippines.
As regards such foreign entities, their shares of stock in a Philippine corporation engaged
in the exploration, etc. of our natural resources will be regarded as belonging to Filipinos
only to the extent of the interest that Filipino citizens own in the foreign company. Thus,
if the foreign entity is owned to the extent of 60% of its capital by Filipino citizens and
40% by aliens, the ownership of its shares in the Philippine corporation will be allocated
as follows: 60% Filipino and 40% alien, (see SEC Opinion, June 9,1973.)
782
of shares entitled to vote and the membership in the board of

8
directors.
(4) Purpose of 60% requirement. — The purpose is to ensure
that corporations and associations allowed to operate a public
utility shall be controlled by Filipino citizens. It does not suffice
to simply say that a corporation is a Filipino-owned if it is 60%
owned by another corporation which, in turn, 60% Filipino-
owned. It is imperative that beneficial ownership must ultimately
be in the hands of Filipinos, any attempt to defeat the same shall
be subject to sanctions imposed under applicable laws and rules
and regulations. (SEC Opinion No. 07-20, Nov. 28, 2007.)
(5) Determining board seats allowable for foreign investors. —
Under the Constitution, the allowable foreign investment in a
public utility is only up to the extent of 40% of the outstand-
ing capital stock and foreign participation in the governing body
shall be limited to their proportionate share in the capital. (Art.
XII, Sec. 11' thereof.) If, for example, the corporation's board of
directors is composed of nine (9) members, foreign investors are
entitled only to 40% of the nine (9) seats. By mathematical com-
putation, 40% of nine (9) is 3.6 and 60% is 5.4.
"Under Article 7(13) of Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, as amended by R.A. No. 7888, the Board of Investments (BOI)
may recommend the suspension of the nationality requirement with respect to specified
foreign investments, thus:
"(13)To the extent that such activities are allowed by the Constitution and relevant
laws, to recommend to the President of the Philippines, the suspension of the national-
ity requirement provided in this Code in cases of ASEAN projects, or investments by
ASEAN nationals, regional ASEAN or multilateral financial institutions including their
subsidiaries in preferred projects and/or projects allowed through either financial or
technical assistance agreements entered into by the President, and in the case of regional
complementation for the manufacture of a particular product which seeks to take advan-
tage of economics of scale. For the purpose of this Act, a multilateral financial institution
shall refer to a financial agency or entity, and its affiliates which satisfy the following
qualifications:
(1) The institution is either owned or controlled by member countries but does not
possess any national identity;
(2) The institution sources its funds from capital stock subscriptions and contribu-
tions by member countries; and
(3) The primary responsibility of the institution is to provide funds for develop-
mental purposes and international economic stability."
This provision (see Note 1 to Sec. 140.) does not qualify whether the 60% ownership
of capital shall be common or preferred, voting or non-voting.
Under the accepted rule of rounding off numbers, the

decimal figures to the right of a specified number of places are
dropped after increasing the final remaining figure by one (1) if
the first digit dropped is 5 or greater. (Third New Int. Diet., p.
1979 [1976].) Thus, applying the rule, 3.6 is considered 4 and 5.4
as only five. Accordingly, for purposes of computation, 40% of 9
is 4 and 60% is 5. (SEC Opinion, Oct. 14,1991.)
A corporation organized under the laws of another State is a
foreign corporation notwithstanding that 60% or even 100% of
its capital stock is owned by Filipino citizens, (see Sec. 123.)
(6) Determination of required Filipino interest in a corporation
for purposes of land ownership. — Save in cases of hereditary
succession, private lands may be transferred to corporations
provided they are "qualified to acquire or hold lands of the
10
public domain." (Art. XII, Sec. 7 thereof.) Sections 22 and 23 of
C. A. No. 141, otherwise known as the Public Land Act, "provide
as to who are qualified to own private lands. With respect to
corporations, it is required that at least 60% of the capital stock
belongs to citizens of the Philippines," without qualifying
whether the required ownership of "capital stock" are voting
or non-voting. Hence, the criterion of "beneficial ownership"
should be met, not merely the "control of the corporation."
(SEC Opinion, Dec. 27,1995.) Under the Foreign Investment Act
and its amended implementing rules and regulations, the term
"Philippine national" includes a "corporation organized under
the laws of the Philippines of which at least sixty percent (60%)
of the capital state outstanding and entitled to vote is owned
and held by citizens of the Philippines." Such a corporation is
qualified to own land in the Philippines, or to acquire the entire
capital of a Philippine corporation which owns lands in the
Philippines. (SEC Opinion No. 09-09, April 28, 2009.)
10
A condominium corporation that owns the land on which the condominium
project is situated is considered engaged in a partially nationalized activity, and, there-
fore, is covered by the "Anti-Dummy Law." Pursuant to Section 5 of the Condominium
Act (R.A. No. 4726.), no transfer of a unit and of an undivided interest in the common
areas shall be valid if the concomitant transfer of the appurtenant membership or stock-
holdings in the corporation will cause the alien interest in such corporation to exceed the
40% of its entire capital stock. (SEC Opinion No. 09-17, July 22, 2009.)
784
If the foreign shareholdings of a foreign landholding corpo-

ration exceeds 40%, it is not the foreign stockholders' ownership
of the shares which is adversely affected but the capacity of the
corporation to own land — that is, the corporation becomes
disqualified to own land. No law disqualifies a person from
purchasing shares in a landholding corporation even if it will
exceed the allowed foreign equity. What the law disqualifies is
the corporation from owning land. (J.G. Summit Holdings, Inc.
Sec. 124. Application to existing foreign corporations.

— Every foreign corporation which on the date of the
effect-ivity of this Code is authorized to do business in
the Philippines under a license theretofore issued to it,
shall continue to have such authority under the terms and
conditions of its license, subject to the provisions of this
Code and other special laws, (n)
Where license issued before effectivity

of the Code.
A foreign corporation authorized to transact business in the
Philippines under a license issued pursuant to the Corporation
Code shall be bound by the terms and conditions of such license
and the provisions of the Code. If the license was issued before
the effectivity of the Code, it "shall continue to have such author-
ity under the terms and conditions of its license," but "subject
to the provisions of this Code and other special laws." Thus, a
foreign corporation is not required by the Code to obtain a new
license to be able to continue transacting business in the Philip-
pines.
It should be noted that the present Code has expanded the
definition of a foreign corporation to include the requirement
that the laws of the foreign corporation "allow Filipino citizens
and corporations to do business in its own State or country."
(see Sec. 123.) Unless this requirement is satisfied, a foreign
corporation cannot be licensed to transact business in the
Philippines. But if, on the date of the effectivity of the Code, the
foreign corporation is already authorized to do business here
under a license theretofore issued to it, then, it may continue to
have such authority even if the requirement of reciprocity is not

met. However, under Section 148, it is given a period of not more
than two (2) years from the effectivity of the Code within which
to comply with the same.
Sec. 125. Application for a license. — A foreign corpo-

ration applying for a license to transact business in the
Philippines shall submit to the Securities and Exchange
Commission a copy of its articles of incorporation and by-
laws, certified in accordance with law, and their translation
to an official language of the Philippines, if necessary. The
application shall be under oath and shall specifically set
forth the following, unless already stated in its articles of
incorporation:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or state of
incorporation;
3. The name and address of its resident agent autho-
rized to accept summons and process in all legal proceed-
ings and, pending the establishment of a local office, all
notices affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes of the corpo-
ration which it intends to pursue in the transaction of its
business in the Philippines: Provided, That said purpose or
purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors
and officers of the corporation;
7. A statement of its authorized capital stock and
the aggregate number of shares which the corporation
has authority to issue, itemized by classes, par value of
shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and
the aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
786
9. A statement of the amount actually paid in; and

10. Such additional information as may be necessary or
appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is
entitled to a license to transact business in the Philippines,
and to determine and assess the fees payable.
Attached to the application for license shall be a duly
executed certificate under oath by the authorized official
or officials of the jurisdiction of its incorporation, attest-
ing to the fact that the laws of the country or state of the
applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing cor-
poration in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the
translator shall be attached thereto.
The application for a license to transact business
in the Philippines shall likewise be accompanied by a
statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction
of the Securities and Exchange Commission and other
governmental agency in the proper cases that the applicant
is solvent and in sound financial condition, and setting
forth the assets and liabilities of the corporation as of the
date not exceeding one (1) year immediately prior to the
filing of the application.
Foreign banking, financial and insurance corporations

shall, in addition to the above requirements, comply with
the provisions of existing laws applicable to them. In the
case of all other foreign corporations, no application for
license to transact business in the Philippines shall be
accepted by the Securities and Exchange Commission
without previous authority from the appropriate govern-
ment agency, whenever required by law. (68a)
Sec. 126. Issuance of a license. — Where the Securities
and Exchange Commission is satisfied that the applicant
has complied with all the requirements of this Code and
other special laws, rules and regulations, the Commission
shall issue a license to the applicant to transact business
in the Philippines for the purpose or purposes specified in
such license. Upon issuance of the license, such foreign
corporation may commence to transact its business in the
Philippines and continue to do so for as long as it retains

its authority to act as a corporation under the laws of the
country or state of its incorporation, unless such license
is sooner surrendered, revoked, suspended or annulled in
accordance with this Code or other special laws.
Within sixty (60) days after the issuance of the license
to transact business in the Philippines, the licensee,
except a foreign banking or insurance corporation, shall
deposit with the Securities and Exchange Commission for
the benefit of present and future creditors of the licensee
in the Philippines, securities satisfactory to the Securities
and Exchange Commission, consisting of bonds or other
evidence of indebtedness of the Government of the
Philippines, its political subdivisions and instrumentalities,
or of government-owned or -controlled corporations and
entities, shares of stock in "registered enterprises" as this
term is defined in Republic Act No. 5186, shares of stock in
domestic corporations registered in the stock exchange,
or shares of stock in domestic insurance companies and
banks, or any combination of these kinds of securities, in
the actual market value of at least one hundred thousand
(P100,000.00) pesos: Provided, however, That within
six (6) months after each fiscal year of the license, the
Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in
actual market value to two percent (2%) of the amount
by which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require deposit
of additional securities if the actual market value of the
securities on deposit has decreased by at least ten percent
(10%) of their actual market value at the time they were
deposited. The Securities and Exchange Commission may
"The Investments Incentives Act. This Act has been repealed by Presidential Decree
No. 1789, the Omnibus Investments Code, which codified the Investments Incentives Act,
Export Incentives Act (R.A. No. 6135, as amended.), Agricultural Investments incentives
Decree (R.A. No. 1159, as amended.), and the Foreign Business Regulation Act. (R.A. No.
5455.) Executive Order No. 226 (July 1987) is the new Omnibus Investments Code. The
Foreign Investments Act (R.A. No. 7042.), "an act to promote foreign investments, pre-
scribing the procedures for registering enterprises doing business in the Philippines, and
for other purposes," repealed Articles 44 to 56 of Book II (Foreign Investments Without
Incentives) of Executive Order No. 226.
788
at its discretion release part of the additional securities

deposited with it if the gross income of the licensee
has decreased, or if the actual market value of the total
securities on deposit has increased by more than ten
percent (10%) of the actual market value of the securities
at the time they were deposited. The Securities and
Exchange Commission may, from time to time, allow the
licensee to substitute other securities for those already on
deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the
securities deposited. In the event the licensee ceases to
do business in the Philippines, the securities deposited
as aforesaid shall be returned, upon the licensee's making
application therefor and proving to the satisfaction of the
Securities and Exchange Commission that the licensee
has no liability to Philippine residents, including the
Government of the Republic of the Philippines, (n)
Sec. 127. Who may be a resident agent. — A resident
agent may be either an individual residing in the Philip-
pines or a domestic corporation lawfully transacting busi-
ness in the Philippines: Provided, That in case of an indi-
vidual, he must be of good moral character and of sound
financial standing, (n)
Sec. 128. Resident agent; service of process. — The
Securities and Exchange Commission shall require as
a condition precedent to the issuance of the license
to transact business in the Philippines by any foreign
corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney
designating some person who must be a resident of
the Philippines, on whom any summons and other legal
processes may be served in all actions or other legal pro-
ceedings against such corporation, and consenting that
service upon such resident agent shall be admitted and
held as valid as if served upon the duly authorized officers
of the foreign corporation at its home office. Any such
foreign corporation shall likewise execute and file with
the Securities and Exchange Commission an agreement
or stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
"The (name of foreign corporation) does hereby
stipulate and agree, in consideration of its being
Sees. 125-128 TITLE XV. FOREIGN CORPORATIONS 789
granted by the Securities and Exchange Commission

a license to transact business in the Philippines, that
if at any time said corporation shall cease to transact
business in the Philippines, or shall be without
any resident agent in the Philippines on whom any
summons or other legal processes may be served, then
in any action or proceeding arising out of any business
or transaction which occurred in the Philippines,
service of any summons or other legal process may be
made upon the Securities and Exchange Commission
and that such service shall have the same force and
effect as if made upon the duly authorized officers of
the corporation at its home office."
Whenever such service of summons or other process
shall be made upon the Securities and Exchange Commis-
sion, it must, within ten (10) days thereafter, transmit by
mail a copy of such summons or other legal process to the
corporation at its home or principal office. The sending of
such copy by the Commission shall be a necessary part of
and shall complete such service. All expenses incurred by
the Commission for such service shall be paid in advance
by the party at whose instance the service is made.
In case of a change of address of the resident agent, it
shall be his or its duty to immediately notify in writing the
Securities and Exchange Commission of the new address.
(72a; and n)
Application for and issuance of license.

A foreign corporation" applying for a license to transact busi-
ness in the Philippines must comply with the following require-
ments and conditions precedent to the issuance of the license by
the Securities and Exchange Commission:
(1) Submission of required documents. — It shall submit to
the Securities and Exchange Commission a certified copy of its
articles of incorporation, with a translation to an official language
of the Philippines, if necessary, and the application for a license
which shall be under oath and shall specifically set forth the
"It includes corporations incorporated abroad owned or controlled by Filipinos.

(SEC Opinion, March 26, 1963.)
790
matters enumerated by law, unless already stated in its articles

of incorporation (Sec. 125, par. 1.);
(2) Accompanying documents to application. — The application
shall be accompanied by the following:
(a) A duly executed certificate under oath by the
authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the
country or State of the applicant allow Filipino citizens and
corporations to do business therein and the applicant is an
existing corporation of good standing, with a translation of
the certificate in English under oath of the translator if it is in
a foreign language (ibid., par. 2.);
(b) A sworn statement of the president or any authorized
officer of the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other government
agency in proper cases that the applicant is solvent and in
sound financial condition and setting forth its assets and
liabilities for the previous year (Ibid., par. 3.);
(c) A certificate of authority from the appropriate gov-
ernment authority, whenever required by law (Ibid., last par.;
Sec. 123.); and
(d) A written power of attorney designating a resident
agent on whom summons and other legal processes against
the corporation may be served and a written agreement or
stipulation consenting that such service may be made upon
the Securities and Exchange Commission if at any time it
shall cease to transact business in the Philippines, or shall be
without any resident agent." (Sees. 127,128.)
12
Under the Rules and Regulations implementing R.A. No. 7042, a foreign corpora-
tion is required to submit the following documents to secure a license to do business:
(1) Name verification slip;
(2) Certified copy of board resolution authorizing the establishment of an office
in the Philippines; designating the resident agent to whom summons and other legal
processes may be served in behalf of the foreign corporation; and stipulating that in the
absence of such agent or upon cessation of its business in the Philippines, the SEC shall
receive any summons or legal processes as if the same is made upon the corporation at its
home office;
(3) Financial statements for the immediately preceding year at the time of filing
of the application, certified by an independent certified public accountant of the home
country;
(3) Compliance with provisions of special laws. — Foreign bank-

ing, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws
applicable to them (Sec. 125, last par.); and
(4) Issuance of license to transact business. — If the applicant
shows to the satisfaction of the Securities and Exchange
Commission that it has complied with the above requirements
of the Code and those imposed by other special laws, rules and
regulations, the Commission shall issue a license authorizing it to
transact business in the Philippines for the purpose or purposes
13
specified therein. (Sec. 126, par. 1.)
Conditions subsequent to issuance

of license.
Upon the issuance of the license, the foreign corporation may
(4) Certified copies of the articles of incorporation/partnership with an English

translation thereof if in a foreign language;
(5) Proof of inward remittance such as bank certificate of inward remittance of
credit advises; and
(6) Other documents which the SEC may require, such as those for the issuance by
the SEC of a license to transact business in the Philippines.
For representative offices, the amount remitted initially should be at least US$30,000.
If the paid-in equity/capital is in kind, additional requirements shall be submitted
to the SEC pursuant to its existing rules and regulations. All documents executed abroad
should be authenticated by the Philippine Embassy or Consular Office. In the case of
an existing corporation intending to increase foreign equity participation, all documents
required of the proposed transaction under applicable laws, rules and regulations shall
be submitted.
Upon fulfillment of all SEC requirements and favorable evaluation by the SEC, the
Certificate of Registration for domestic corporations and partnerships, or license to do
business in the case of a foreign corporation, shall be issued by the SEC. In case of disap-
proval, the SEC shall inform the applicant in writing of the reasons for the disapproval of
the registration. Within fifteen (15) working days from official acceptance of the applica-
tion, the SEC shall act on the same. Otherwise, the application shall be considered as au-
tomatically approved if it is not acted upon within said period for a cause not attributable
to the applicant. (Sees. 2, 3 thereof.)
"Registration of a foreign corporation with the Securities and Exchange Commission
requires that the same is doing business in the Philippines; hence, a firm name belonging
to a foreign corporation cannot be registered here just for the sole purpose of precluding
the possibility of any group capitalizing on said firm name in the Philippines. (SEC
Opinion, Oct. 7, 1974; see Sec. 2, R.A. No. 166 [Trademark Law].) The Commission
may exempt foreign corporations from its licensing requirements upon appropriate
application for exemption to promote equity, justice, and national interest. Thus, it may
determine on a case-to-case basis whether a particular act or limited undertaking of a
foreign corporation constitutes an act of doing or transacting business in the Philippines.
(SEC Opinion, May 25, 1982.)
792
commence to transact its business in the Philippines and con-

tinue to do so for so long as it retains the authority to act as a cor-
poration under the laws of the State of its incorporation, unless
such license is sooner surrendered, revoked, suspended or an-
nulled in accordance with the Code or other special laws. (Ibid.)
(1) The foreign corporation shall transact business only for
the purpose or purposes for which it is authorized under its
license (Ibid.);
(2) Within 60 days after the issuance of the license, the
licensee, except a foreign banking or insurance corporation
(which shall be governed by the pertinent law), shall deposit
with the Securities and Exchange Commission for the benefit
of present and future creditors in the Philippines satisfactory
securities in the actual market value of at least P100,000. (Ibid.,
par. 2.) The deposit requirement is also a means of compelling
14
foreign firms to invest in or buy Philippine securities;
(3) Within six (6) months after each fiscal year of the license,
it shall deposit additional securities equivalent in actual market
value to 2% of the amount by which the licensee's gross income
for that fiscal year exceeds P5 million. Such deposit shall be
increased if the actual market value of the securities has decreased
by at least 10% of such value at the time they were deposited
(Ibid.); and
(4) It must comply with the provisions of existing laws, rules
and regulations; otherwise, its license may be revoked, suspend-
ed, or annulled by the Securities and Exchange Commission, (see
Sec. 134.)
Licensing of Regional or Area Headquarters.

As defined in R.A. No. 8756, a multinational company means a
foreign company or a group of foreign companies with business
establishments in two or more countries. (Sec. 2[2] thereof.)
"Under the guidelines issued by the SEC on April 23, 1982, the following firms are
exempted from the investment requirement:
(1) Foreign banks, including offshore banking units; (2) foreign insurance corpo-
rations; (3) foreign non-stock corporations; (4) foreign corporations with representative
offices here; and (5) regional or area headquarters of multinational companies registered
under Presidential Decree No. 218.
Regional or Area Headquarters (RHQs) means an office whose

purpose is to act as an administrative branch of a multinational
company engaged in international trade which principally serves
as a supervision, communications and coordination center for its
subsidiaries, branches or affiliates in the Asia-Pacific Region and
other foreign markets and which does not earn or derive income
in the Philippines. (Sec. 2[2] thereof.)
(1) Qualification. — Any foreign business entity formed,
organized and existing under any laws other than those of the
Philippines whose purpose, as expressed in its organizational
documents or by resolution of its Board of Directors or its
equivalent, is to supervise, superintend, inspect or coordinate
its own affiliates, subsidiaries or branches in the Asia-Pacific
Region and other foreign markets may establish a regional
or area headquarters in the Philippines, by securing a license
therefor from the Securities and Exchange Commission, upon
the favorable recommendation of the Board of Investments.
(2) Minimum requirements. — The following minimum
requirements shall, however, be complied with by the said
foreign entity:
(a) A certification from the Philippine Consulate/
Embassy, or a duly authenticated certification from the
Department of Trade and Industry or its equivalent in the
foreign firm's home country that said foreign firm is an entity
engaged in international trade with affiliates, subsidiaries or
branch offices in the Asia-Pacific Region and other foreign
markets.
(b) A duly authenticated certification from the principal
officer of the foreign entity to the effect that the said foreign
entity has been authorized by its Board of Directors or gov-
erning body to establish its regional or area headquarters in
the Philippines, specifying that:
1) The activities of the regional or area headquarters
shall be limited to acting as a supervisory, communica-
tions and coordinating center for its subsidiaries, affili-
ates and branches in the region;
2) The regional or area headquarters will not derive
any income from sources within the Philippines and will
794
not participate in any manner in the management of any

subsidiary or branch office it might have in the Philip-
pines nor shall it solicit or market goods and services
whether on behalf of its mother company or its branches,
affiliates, subsidiaries or any other company; and
3) The regional or area headquarters shall notify the
Board of Investments and the Commission of any deci-
sion to close down or suspend operations of its head-
quarters at least 15 days before the same is effected.
(c) An undertaking that the multinational company will
remit into the country such amount as may be necessary to
cover its operations in the Philippines but which amount will
not be less than $50,000.00 or its equivalent in other foreign
currencies annually. Within 30 days from receipt of certificate
of registration from the Commission, the multinational
company will submit to the Commission a certificate of
inward remittance from a local bank showing that it has
remitted to the Philippines the amount of at least $50,000.00
or its equivalent in other foreign currencies and converted
the same to Philippine currency. Annually, within 30 days
from the anniversary date of the multinational company's
registration as a regional or area headquarters with the
Commission, it will submit proof to the Commission of
inward remittance amounting to at least $50,000.00 or its
equivalent in other foreign currencies during the past year.
(d) Any violation by the regional or area headquarters
of a multinational company of any of the provisions of the
Omnibus Investments Code, or its implementing rules and
regulations, or other terms and conditions of its registration,
or any provision of existing laws, shall constitute a sufficient
cause for the cancellation of its license or registration." (Sec.
58, Omnibus Investments Code of 1987 [Exec. Order No.
226], as amended by R.A. No. 8756.)
Licensing of Regional Operating Headquarters.

As defined by R.A. No. 8756, a Regional Operating Headquar-
ters (ROHQs) means a foreign business entity which is allowed
to derive income in the Philippines by performing qualifying
services to its affiliates, subsidiaries or branches in the Philip-

pines, in the Asia-Pacific Region and in other foreign markets
(Sec. 2[3], thereof.)
(1) Qualification. — Any foreign business entity formed, or-
ganized and existing under any laws other than those of the Phil-
ippines may establish a regional operating headquarters in the
Philippines to service its own affiliates, subsidiaries or branches
in the Philippines, in the Asia-Pacific Region and other foreign
markets. ROHQs will be allowed to derive income by perform-
ing the qualifying services enumerated under (b), 1, infra.
ROHQs of non-banking and non-financial institutions are
required to secure a license from the Securities and Exchange
Commission, upon the favorable recommendation of the Board
of Investments. ROHQs of banking and financial institutions,
on the other hand, are required to secure licenses from the
Commission and the Bangko Sentral ng Pilipinas, upon the
favorable recommendation of the Board of Investments.
(2) Minimum requirements. — The following minimum
requirements shall be complied with by the said foreign entity:
(a) A certification from the Philippine Consulate/Embas-
sy, or a duly authenticated certification from the Department
of Trade and Industry or its equivalent in the foreign firm's
home country that said foreign firm is an entity engaged in
international trade with affiliates, subsidiaries or branch of-
fices in the Asia-Pacific Region and other foreign markets.
(b) A duly authenticated certification from the principal
officer of the foreign entity to the effect that the said foreign
entity has been authorized by its Board of Directors or gov-
erning body to establish its regional operating headquarters
in the Philippines, specifying that:
1) The regional operating headquarters may engage in
any of the following qualifying services:
a) General administration and planning;
b) Business planning and coordination;
c) Sourcing/procurement of raw materials and
components;
796
d) Corporate finance advisory services;

e) Marketing control and sales promotion;
f) Training and personnel management;
g) Logistics services;
h) Research and development services, and
product development;
i) Technical support and maintenance;
j) Data processing and communication; and
k) Business development.
ROHQs are prohibited from offering qualifying ser-
vices to entities other than their affiliates, branches or
subsidiaries, as declared in their registration with the
Commission nor shall they be allowed to directly and
indirectly solicit or market goods and services whether
on behalf of their mother company, branches, affiliates,
subsidiaries or any other company.
2) The regional operating headquarters shall notify
the Board of Investments, the Securities and Exchange
Commission and the Bangko Sentral ng Pilipinas, as the
case may be, of any decision to close down or suspend
operations of its headquarters at least 15 days before the
same is effected.
(c) An undertaking that the multinational company
will initially remit into the country such amount as may be
necessary to cover its operations in the Philippines but which
amount will not be less than $200,000.00 or its equivalent in
other foreign currencies.
Within 30 days from receipt of certificate of registration,
the multinational company will submit to the Commission
a certificate of inward remittance from a local bank showing
that it has remitted to the Philippines the amount of at least
US $200,000.00 or its equivalent in other foreign currencies
and converted the same to the Philippine currency.
(d) Any violation by the regional operating headquarters
of a multinational company of the provisions of the Omnibus
Investment Code, or its implementing rules and regulations,

or other terms and conditions of its registration, or any provi-
sion of existing laws, shall constitute a sufficient cause for the
cancellation of its license or registration.'" (Sec. 59, Omnibus
Investments Code of 1987 [Exec. Order No. 226], as amended
by R.A. No. 8756.)
R e s i d e n t agent.
The resident agent is an individual who must be of good moral
character and of sound financial standing, residing in the Philip-
pines, or a domestic corporation lawfully transacting business
in the Philippines (Sec. 127.), designated in a written power of
attorney, by a foreign corporation authorized to transact busi-
ness in the Philippines, "on whom any summons and other legal
processes may be served in all actions or other legal proceedings
against such corporation."
(1) Function of resident agent. — The only function of a resi-
dent agent is to receive in behalf of a foreign corporation notices,
summons and other legal processes in connection with actions
against such corporation. He has no control over the assets of
the corporation. The service of any such papers on such resident
agent has the same force and effect as if made upon the duly
authorized officers of the foreign corporation at its home office.
(Sec. 128, par. 1.)
Such agent, as a representative of the foreign corporation, is
tasked only to receive legal processes on behalf of its principal
and not to answer personally for any claim against the foreign
corporation. Being a mere agent and representative, he is not
the real party-in-interest in an action by or against his princi-
15
pal. (Smith Bell & Co., Inc. vs. Court of Appeals, 267 SCRA 530
[1997].)
15
The resident agent is not specifically authorized to execute a certificate of non-fo-
rum shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while
a resident agent may be aware of actions filed against his principal, he may not be aware
of actions initiated by his principal, whether in the Philippines against a domestic corpo-
ration or private individual, or in the country where such corporation was organized and
registered against a Philippine registered corporation or a Filipino citizen. (Expertravel &
Tours, Inc. vs. Court of Appeals, 459 SCRA 147 [2005].)
798
(2) Modes of service of summons and notices. — Under Section

12, Rule 14 of the Rules of Court on the manner of acquiring
jurisdiction upon a foreign private juridical entity, service may
be made on the foreign corporation's "resident agent designated
in accordance with law for that purpose, or, if there be no such
agent, on the government official designated by law to that
effect, or on any of its officers or agents within the Philippines."
Where the foreign corporation has designated a resident agent
to receive service of summons and other notices affecting it,
that designation is exclusive and service is without force and
effect unless made upon him. The two other modes of service
are allowed only when the foreign corporation has neglected or
refused to designate such agent. (Poizat vs. Morgan, 28 Phil. 597
[1914]; H.B. Zachry Co. International vs. Court of Appeals, 232
SCRA 329 [1994].) It is immaterial whether the "agent" be general
or special. As such, it does not necessarily connote an officer of the
corporation. (Pabon vs. National Labor Relations Commission,
296 SCRA 7 [1998]; Aboitiz International Forwarders, Inc. vs.
Where the complaint alleges that the foreign corporation
has an agent in the Philippines, summons can validly be served
thereto even without prior evidence of the truth of such factu-
al allegation. (Signetics Corporation vs. Court of Appeals, 225
SCRA 737 [1993].)
As used in Section 12, the term "agent" refers to its general
meaning, i.e., one who acts in behalf of the principal. (Signetics
Corporation vs. Court of Appeals, 225 SCRA 737 [1993].)
(3) Suit and judgment against foreign corporation. — Service
upon any agent of a foreign corporation, whether or not engaged
in business in the Philippines, constitutes personal service upon
the corporation and, accordingly, judgment may be rendered
against said foreign corporation. Indeed, if a foreign corporation
not engaged in business in the Philippines is not barred from
seeking redress from courts in the Philippines, a fortiori, that
same corporation cannot claim exemption from being sued in
Philippine courts for acts done against a person or persons in
the Philippines. (Facilities Management Corp. vs. De la Rosa,
89 SCRA 131 [1979]; Royale Crown Internationale vs. National
(4) Replacement of resident agent. — In the replacement of

a resident agent, the Securities and Exchange Commission
requires the submission of a duly authenticated copy of the
board resolution or a certification from the authorized officer of
the company formally revoking his appointment as a resident
agent of the corporation, accompanied by a duly authenticated
written power of attorney designating the substitute or the
new resident agent. The appointment of a resident agent of a
foreign corporation is revocable at any time at the instance of the
corporation. (SEC Opinion, Sept. 4,1990.)
(5) Establishing fact of doing business. — For purposes of ac-
quiring jurisdiction by way of service of summons, it is not
required that the fact of doing business in the Philippines must
first be proved. It is sufficient that such fact is established by
appropriate private allegations in the complaint. If in fact a for-
eign corporation does not do business here, that is a matter that
should be ventilated in the trial on the merits, but not in a motion
to dismiss. (Signetics Corporation vs. Court of Appeals, supra.)
P u r p o s e of law in requiring license.

The object of the statute in requiring that foreign corporations
doing business in the Philippines be licensed to do so and that
they appoint an agent for service of process is to subject the foreign
corporation doing business in the Philippines to the jurisdiction
16
of its courts. It is not to prevent the foreign corporation from
I6
Our laws and jurisprudence indicate a purpose to assimilate foreign corporations,
duly licensed to do business in the Philippines to the status of domestic corporation.
Courts have held that a domestic corporation is regarded as having a residence within
the State where it is engaged in the particulars of the corporate enterprise, and not only at
its chief place or home office. In other words, a corporation may have a residence (i.e., the
place where it operates and transacts business) separate from its domicile (i.e., the State
of its formation or organization). It is not really the grant of a license to a foreign corpora-
tion to do business in the Philippines that makes it a resident; the license merely gives
legitimacy to its doing business here. What effectively makes such a foreign corporation a
resident corporation in the Philippines is its actually being in the Philippines doing busi-
ness here, "locality of existence" being the "necessary element in x x x (the) signification"
of the term "resident foreign corporation."
Thus, the National Internal Revenue Code (P.D. No. 1158, as amended.) declares
that the term "resident foreign corporation" applies to a foreign corporation engaged in
trade or business within the Philippines. (Sec. 22[h, I] thereof.) The Offshore Banking Law
(Pres. Decree No. 1034.) states that "branches, subsidiaries, affiliates, extension offices
800
performing single or isolated acts, but to bar it from acquiring

a domicile for the purpose of business without taking steps
necessary to render it amenable to suit in the local courts.
(Marshall-Wells Co. vs. Elser & Co., 46 Phil. 71 [1924].) In other
words, what the law seeks to prevent is a foreign corporation
doing business in the Philippines without a license from gaining
access to Philippine courts. (Hang Lung Bank, Ltd. vs. Saulog,
201 SCRA 137 [1991].)
It was never the purpose of the legislature to exclude
a foreign corporation which happens to obtain an isolated
order for business from the Philippines, and thus, in effect, to
permit persons to avoid their contracts made with such foreign
corporation. (Marshall vs. Elser & Co., supra.) The requirement
enables our government to exercise jurisdiction over foreign
corporations doing business in the Philippines for the regulation
of their activities in the country. By securing a license, a foreign
corporation gives assurance that it will abide by the decisions
of our courts, even if adverse to it. (Eriks Pte., Ltd. vs. Court of
Appeals, 267 SCRA 567 [1997].)
The law, however, "must be given a reasonable, not an unduly
harsh interpretation which does not hamper the development of
trade relations and which fosters friendly commercial intercourse
among countries" (Home Insurance Co. vs. Eastern Shipping
Lines, 123 SCRA 424 [1983].) consistently with the need to enforce
our laws that regulate the conduct of foreigners who desire to do
business in our country. (Eriks Pte., Ltd. vs. Court of Appeals,
267 SCRA 567 [1997].)
or any other units of a corporation or juridical person organized under the laws of any
foreign country operating in the Philippines shall be considered residents of the Philip-
pines." (Sec. l[e] thereof.) The General Banking Act (R.A. No. 337, as amended.) places
"branches and agencies in the Philippines of foreign banks x x (which are) called Philip-
pine branches in the same category as commercial banks, savings associations, savings
and mortgage banks, development banks, rural banks, x x x" (which have been formed
and organized under Philippine laws).
The Supreme Court itself has held that a foreign corporation liedtly doing business
in the Philippines, which is a defendant in a civil suit, may not be considered a "nonresi-
dent" within the scope of the legal provision authorizing attachment against a defendant
"not residing in the Philippines." (State Investment House, Inc. vs. Citibank, N.A., 203
SCRA 9 |1991].)
It must be emphasized that a foreign corporation doing busi-

ness in the Philippines with or without a license is subject to pro-
cess and jurisdiction of the local courts (Marubeni Nedeland B.V.
vs. Tensuan, 190 SCRA 105 [1990].), and if it is not doing busi-
ness, a license is not required.
Meaning of "transacting business."

(1) Circumstances of each case. — No general rule or governing
principle can be laid down as to what constitutes "doing" or
"engaging" or "transacting" business. Indeed, the accepted rule
in jurisprudence is that each case must be judged in the light
of its peculiar environmental circumstances, considering the
purposes and the language of the statute or statutes applicable.
This is essentially a question of fact.
The true test, however, seems to be whether the foreign cor-
poration is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substan-
tially retired from it and turned it over to another." (Mentholatum
Co., Inc. vs. Mangalman, 72 Phil. 524 [1941].) "All the combined
acts of the foreign corporation in the state must be considered,
and every circumstance is material which indicates a purpose on
the part of the corporation to engage in some part of its regular
business." (Pacific Micronesian Line, Inc. vs. Del Rosario, 96 Phil.
23 [1954]; 17 Fletcher, pp. 465-466.) The expression should not be
given such a strict and literal construction as to make it apply to
any corporate dealing whatever. (MR Holdings, Ltd. vs. Bajar,
380 SCRA 617 [2002].)
(2) Continuous business acts or transactions. — It should ap-
pear that the corporation and its officers intended to establish a
continuous business, such as the appointment of a local agent,
and not one of the temporary character. (Marshall-Wells Co. vs.
Elser & Co., 46 Phil. 70 [1924]; see Far East Int'l. Import & Export
Corp. vs. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962].) Transac-
tions which are occasional, incidental, and casual — not of a char-
acter to indicate a purpose to engage in business — do not con-
stitute the doing or engaging in business contemplated by law.
(Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., 431 SCRA 266
[2004].) The term "doing business" implies continuity of conduct
by the foreign corporation in that respect, such as the investment
802
of capital and the maintenance of an office for the transaction of

business with those incidental circumstances which attest to the
corporate intention to avail itself of the privilege of doing busi-
ness. (Perm. Collieries Co. vs. Mokeover, 183 N.Y. 98.)
(a) Thus, where FC, a foreign corporation which habitual-
ly imports garments from the Philippines, sends its order to DC,
a commercial broker duly incorporated under the laws of the
Philippines, which, for a fee, looks for a local manufacturer,
say M, and if M agrees to produce the goods in accordance
with the specification of FC, DC then cables FC for confirma-
tion of the order, after which the finished products are sent
directly by M to FC, FC must be regarded as doing business
within the Philippines and, therefore, should obtain a license
from the Securities and Exchange Commission pursuant to
Section 68 (now Sees. 125, 126.) of the Corporation Law as
well as Republic Act No. 5455. (infra.) (SEC Opinion, Nov. 6,
1975.)
(b) Similarly, in a case, a foreign corporation with an "ex-
clusive distributing agent in the Philippines" and which had
been selling its products here, was held to be doing business
in the Philippines. (Mentholatum Co., Inc. vs. Mangalman,
supra.)
(c) Likewise, where a foreign insurance corporation
engages in regular marine insurance business here by issuing
twelve (12) marine insurance policies abroad to cover different
foreign shipments to the Philippines, said policies being
made payable here, and said insurance company appoints
and keeps an agent here to receive and settle claims, said
foreign corporation was regarded as doing business here.
(General Corp. of the Phils, vs. Union Society of Canton,
Ltd., 87 Phil. 313 [1950].) It has also been held that a foreign
corporation which sold its products 16 times over a five-month
period to the same Filipino buyer without first obtaining a
license was prohibited from maintaining an action to collect
payment therefor in Philippine courts. (Eriks Pte., Ltd. vs.
(d) In another case, a foreign corporation which had been
collecting premiums on its outstanding policies, incurring the
risks and /or enjoying the benefits consequent thereto was

held to be transacting business within the meaning of the law.
(Manufacturers Life Ins. Co. vs. Meer, 89 Phil. 351 [1951].)
But the mere issuance abroad by a foreign corporation of
marine insurance policies to cover international-bound car-
goes shipped by a Philippine carrier and the payment of the
claims of consignees do not constitute doing business in the
Philippines by an unlicensed foreign corporation. (Universal
Shipping Lines, Inc. vs. Intermediate Appellate Court, 188
SCRA 170 [1990]; see Aetna Casualty & Surety Co. vs. Pacific
Star Line, 80 SCRA 635 [1977].)
(e) Similarly, a foreign corporation engaged in the
business of manufacturing and selling computers worldwide,
which had installed at least 26 different products in several
corporations in the Philippines since 1976, registered its name
with the Philippine Patents Office, allowed its registered logo
and trademark to be used and made it known that there exists
a designated distributor in the Philippines as published in its
advertisements, its controller in Asia having visited the office
of its distributor for at least four times where it conducted
training programs in the Philippines, cannot unilaterally
declare that it is not doing business in the Philippines. (Wang
Laboratories, Inc. vs. Mendoza, 156 SCRA 44 [1987].)
(f) Foreign airline companies which sell tickets in
the Philippines through their local agents, whether called
liaison offices, agencies or branches, are considered under
the National Internal Revenue Code as resident foreign
corporations engaged in trade or business in the Philippines.
Such activities show continuity of commercial dealings
or arrangements and performance of acts or works or
the exercise of some functions normally incident to and
in progressive prosecution of commercial gain or for the
purpose and object of the business organization. (Comm. of
Internal Revenue vs. American Airlines, Inc., 180 SCRA 274
[1989].) Indeed, the sale of tickets is the very lifeblood of the
airline business, the generation of sales being the paramount
object. (Comm. of Internal Revenue vs. Japan Airlines, Inc.,
202 SCRA 450 [1991]; Comm. of Internal Revenue vs. British
Overseas Airways Corp., 140 SCRA 395 [1987].)
804
(g) Where a foreign corporation has been continuously,

for several years, acting as a supervision, communications, and
coordination center for its home office's affiliates and in the pro-
cess has named its local agent and has employed Philippine
nationals as sales representatives, it is clear from this uninter-
rupted performance by the foreign corporation of acts pursu-
ant to its primary purposes and functions as a regional/area
headquarters for its home office that it is doing business in
the Philippines. (Georg Grotjahn GMBH & Co. vs. Isnani, 235
SCRA 216 [1994].)
(3) Isolated business acts or transactions. — Where a foreign
corporation has not engaged in its general business in the State,
but had done only those acts which are preliminary to the doing
of the business for which it was incorporated, such acts will not
be regarded as the doing of business in the State. (17 Fletcher, p.
476.)
The authorities are to the effect that where the corporation
enters into a single agreement, or engaged in some other isolated
or casual business act or transaction within a particular State,
with no intention to repeat the same or make such State a basis
for the conduct of any part of its corporate business, such corpo-
ration cannot be said to be doing business or transacting busi-
ness within the State, within the meaning of the usual statutory
provisions regulating the transaction of business by foreign cor-
porations. (17 Fletcher, p. 478; see MR Holdings Ltd. vs. Bajar,
supra.)
(a) Thus, where the only acts performed in the Philip-

pines by a foreign corporation were the negotiations and sign-
ing of two agreements, to wit: one, for the sale to a domestic
corporation of a veneer plant, and the other, for the exclusive
right to purchase all core veneer that the domestic corpora-
tion would produce for a period of five (5) years, as to which
neither of the parties has as yet commenced performance of
their respective obligations thereunder — there have been no
payments, no shipments, nor deliveries made under the con-
tracts — and the foreign corporation has no branch office in
the Philippines, but for purposes of said contracts was repre-
sented by its president who was a transient visitor, it cannot
Sees. 125-128 TITLE XV. FOREIGN CORPORATIONS
805
be said that the mere entering into said contracts can by itself
be considered as transacting business in the Philippines for
which a license is necessary. (SEC Opinion, Feb. 15,1963.)
(b) Also, engaging the services of a cook, not as part of the
operation of the business of the foreign corporation but mere-
ly to employ as member of the crew in one of its ships (Pacific
Micronesian Lines, Inc. vs. Del Rosario, supra.), obtaining an
isolated order for business in the Philippines (Marshall-Wells
Co. vs. Elser & Co., supra.), and carrying cargo to and from the
Philippine ports on only two occasions (Eastboard Navigation,
Ltd. vs. Ysmael & Co., 102 Phil. 1 [1957].), were held not to
constitute "transacting" business within the meaning of the
rule.
(c) The acts of a foreign shipping corporation which did
not have a branch office in the Philippines in making only two
calls on the Philippines to load cargoes for foreign destination on
two occasions in 1963 and 1964, and collecting freight fees on
these transactions were held as a casual business activity not
amounting to engaging in trade or business in the Philip-
pines for income tax purposes. (N.V. Reedery vs. Comm. of
Internal Revenue, 162 SCRA 487 [1988].)
(d) Where the only act done by the foreign corporation
was to employ a Filipino as a member of the crew on one of its ships,
it was held that the act was an isolated, incidental, or casual
transaction, not sufficient to indicate a purpose to engage in
business. (Pacific Micronesian Lines, Inc. vs. Del Rosario, 96
Phil. 23 [1954].)
(e) The mere act of signing a loan agreement in Manila cover-
ing a $100 million loan of the Central Bank to be extended by
foreign banks where such signing is merely a preliminary act
of the parties for the loan itself and the delivery of funds will
be consummated abroad cannot also be considered as indi-
cating a purpose to engage in business as would necessitate
the licensing of foreign lenders in accordance with Philippine
laws. (SEC Opinion, Oct. 7,1981.)
However, the real estate mortgage agreement, the mort-
gagee being a foreign corporation, is subject to the provisions
of R.A. No. 133 (as amended by R.A. Nos. 4381 and 4882.) im-
806
posing certain restrictions upon the mortgagee or his succes-

sor-in-interest, if disqualified to acquire or hold lands of the
public domain in the Philippines, by forbidding him to take
possession of the mortgaged property during the existence
of the mortgage; neither is possession allowed after default
of the mortgagor except for the sole purpose of foreclosure,
receivership, enforcement of other proceedings and in no
case for a period of more than five (5) years from the actual
possession and such alien mortgagee cannot participate in
the bidding nor take part in any sale of such real property
in case of foreclosure. (SEC Opinion, March 29, 1995, citing
Pena, Registration of Land Titles and Deeds, 1982 Rev. Ed.)
(f) Where a foreign corporation entered into an agree-
ment to buy tons of crude coconut oil from a local corpo-
ration but the latter failed to make the delivery, resulting in
losses to the foreign corporation which had to cover its oil
needs in the open market at a price substantially in excess
of the contract, and in order to recover its losses, it entered
into two other transactions with the same local entity, said
foreign corporation did not do business within the meaning
of the law, because there was in reality only one agreement, for
the three seemingly different conditions were entered into only in
an effort to enable the seller to fulfill the basic agreement and in no
way indicated an intent on the part of the foreign corporation
to engage in a continuity of transactions in the Philippines.
(Antam Consolidated, Inc. vs. Court of Appeals, 143 SCRA
288 [1986].)
(g) A view subscribed by many authorities is that mere
ownership by a foreign corporation of a property in a cer-
tain state, unaccompanied by its active use in furtherance of
the business for which it was formed, is insufficient in itself
to constitute doing business. Thus, a foreign corporation
which becomes the assignee of mining properties, facilities
and equipment cannot automatically be considered as doing
business, nor presumed to have the intention engaging in
mining business. (MR Holdings, Ltd. vs. Bajar, 380 SCRA 617
[2002].)
(h) A foreign corporation which will take part in a joint
venture project for an activity which will be done only once
and not continually (although the project will be 910 days) is

considered as engaged in an isolated transaction for which it
need not register with the SEC. (SEC Opinion No. 04-34, June
8, 2004.)
(4) Single act or transaction in pursuance of corporations
ordinary business. — It is not really the fact that there is only a
single act done that is material. The other circumstances of
the case must be considered. A single act or isolated business
transaction may bring the corporation within the purview of the
statute where it is an act of the ordinary or customary business
of the corporation. In such a case, the single act or transaction
is not merely incidental, casual, sporadic, occasional, or isolated
but is of such character as distinctly to indicate a purpose on the
part of the foreign corporation to do other business in the State,
and to make the State a base of operations for the conduct of the
corporation's ordinary business, (see General Corp. of the Phils,
vs. Union Society of Canton, Ltd., supra; Wang Laboratories, Inc.
vs. Mendoza, supra.)
It is the performance by the foreign corporation of the act
or acts for which it was created, the frequency or the amount
or volume of the business being immaterial, that determines
whether it is required to secure a license or not. (see Granger
Associates vs. Microwave Systems, Inc., 189 SCRA 631 [1990].)
Whether a foreign corporation is engaged in business does
not necessarily depend upon the number and quantity of its
transactions although they are evidence of such intention, but
more upon the nature and character of the transaction, (see Eriks
Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].)
(a) Accordingly, the act of defendant foreign corporation
in purchasing 7,770 dozens of soccer uniforms from a domestic
corporation and opening an irrevocable letter of credit in favor
of the latter, was held to be within the ordinary course of
business of the company considering that it was engaged in
the manufacture of uniforms, being of such a character as to
indicate a purpose to do business. (Litton Mills, Inc. vs. Court
of Appeals, 256 SCRA 696 [1996].)
(b) In a case involving an action against a Japanese
corporation which entered into a contract with the plaintiff to
808
import scrap iron from the Philippines, it appearing that the

corporation rented an office and sent no less than one of its officers
to the Philippines "to look into the operation of mines, thereby
revealing the defendant's desire to continue engaging in
business here, after receiving the shipment of scrap iron under
consideration, making the Philippines a base of operations,"
the court ruled that from the facts the corporation was doing
business in the Philippines. (Far East IntT. Import & Export
Corp. vs. Nankai Kogyo Co., Ltd., supra.)
(c) And if the corporation is doing that for which it was cre-
ated, the amount or volume of the business done is immate-
rial and a single act of that character may constitute doing
business. (17 Fletcher, p. 474.) Thus, where X, a foreign cor-
poration, which is primarily an engineering consulting firm,
has entered into a contract with the National Waterworks and
Sewerage Authority (NAWASA) for the purpose of rendering
services for a period of three (3) years as technical consultant
in engineering, during the construction of interim projects of
the NAWASA for the improvement of Manila's water supply,
and during the effectivity of the contract, X will send to the
Philippines not more than eight (8) technical men to advise
the NAWASA in the supervision of construction work, X, as
engineering consultant, will be transacting that business in
the Philippines for which it was organized, although under
a single contract, for which a license is necessary under Sec-
tions 125 and 126. It is immaterial that X has no intention of
entering into other contracts in the Philippines. (SEC Opin-
ion, Jan. 19,1965; see SEC Opinion, Feb. 20,1976.)
(d) Similarly, a foreign corporation was considered as
doing business in the Philippines for having entered into a
contract with a Philippine corporation for the manufacture and
distribution of the formers welding products and equipment, as
said foreign corporation was carrying out the purposes for
which it was created, i.e., the manufacture and marketing of
said products, with the terms and conditions of the contract
indicating that it established within the country a continuous
business, and not merely one of temporary character, which
fact was even more strengthened by its admission that it was
negotiating with another group for the transfer of the dis-
tributorship and franchising rights from said Philippine cor-

poration. (Top-Weld Manufacturing, Inc. vs. ECED, S.A., 138
SCRA 118 [1985]; see Communication Materials and Design,
Inc. vs. Court of Appeals, 260 SCRA 673 [1996]; Merill Lynch
Futures, Inc. vs. Court of Appeals, 211 SCRA 824 [1992].)
(e) The act of appointing representatives or distributors,
operating under the full control of the foreign corporation,
domiciled in the Philippines, or who, in any calendar year,
stay in the country for a period or periods totalling 180 days
or more, is an act of doing business. (Sec. 3[d], R.A. No. 7042
[The Foreign Investments Act], as amended; SEC Opinion
No. 09-07, April 17,2009.)
(f) Also, a foreign corporation, by participating in
bidding for the operation of a waste management center
exhibits its intent to transact business in the Philippines. A
corporation may be considered as "doing business" when it
performs acts for which it was created or exercises some of the
functions for which it was organized. (European Resources
& Technologies, Inc. vs. Ingenieuburo, etc., 435 SCRA 246
[2004]; SEC Opinion No. 09-18, July 14, 2009.)
(5) Contracts consummated outside the State or by independent
agents. — As a general rule, a foreign corporation will not be
regarded as doing business in the State simply because it enters
into contracts with residents of the State where such contracts are
consummated outside the State or by an alleged agent, whether
a corporation or a natural person, where such activities are not
under the direction and control of the foreign corporation but are
engaged in by the alleged agent as an independent business.
(a) Thus, sales made to customers in the State by an
independent dealer who has purchased and obtained title
from the corporation to the products sold are not a doing
of business by the corporation. (Columbia Pictures, Inc. vs.
(b) A reinsurance company is not doing business in a
certain State merely because the property or lives which are
insured by the original insurer company are located in that
State. The reason for this is that a contract of reinsurance
is generally a separate and distinct arrangement from the
original contract of insurance, whose contracted risk is insured

in the reinsurance agreement. Hence, the original insured has
generally no interest in the contract of reinsurance. (Avon
Insurance PLC vs. Court of Appeals, 278 SCRA 312 [1997].)
(c) But a foreign corporation not engaged in business in
the Philippines can still be sued in Philippine courts for acts
done against a person or persons in the Philippines prejudi-
cial to the rights they may have acquired in their transactions
with such foreign corporation, (see Facilities Management
Corp. vs. De La Osa, 89 SCRA 131 [1979], infra.)
Meaning of phrase under investment laws.

The Corporation Code does not define the phrase "doing or
transacting business." The Omnibus Investments Code (Exec.
Order No. 226 [July 16, 1987], Sec. 44 thereof.) and the Foreign
Investments Act of 1991 (R.A. No. 7042, Sec. 2[d] thereof.), how-
ever, give a definition which may be adopted for purposes of
17
the Corporation Code. Under said laws, "doing business" by a
foreign corporation shall include:
(1) Soliciting orders, purchases (sales) and service contracts
(see Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 [1990].);
(2) Opening offices, whether called "liaison" offices or
branches;
18
(3) Appointing representatives or distributors who are do-
miciled in the Philippines or who in any calendar year stay in the
Philippines for a period or periods totalling 180 days or more;
(4) Participating in the management, supervision or control
of any domestic business firm, entity or corporation in the Philip-
pines; and
(5) Any other act or acts that imply a continuity of commer-
cial dealings or arrangements, and contemplate to that extent
17
See also Section 1(g) of Implementing Rules and Regulations which enumerate
particular acts deemed included in the phrase "doing business" under the Omnibus
Investments Code.
19
A foreign corporation with an agent or distributor in the Philippines of its products
is considered doing business in the Philippines but is not so considered if such middle-
man is an independent dealer acting in his own name and for his own account. (Hahn vs.
the performance of acts or works, or the exercise of some of the

functions normally incident to, and in progressive prosecution
of, commercial gain or for the purpose and object of the business
organization. (Sec. 65, Exec. Order No. 226; Sec. 3[d], R.A. No.
7042.)
What the Corporation Code seeks to prevent through the
provisions on licensing requirements, is the circumvention by
foreign corporations of said requirements through the device
of employing local representatives. A foreign corporation doing
business through an indentor is not deemed doing business in
the Philippines." The phrase "doing business" does not include
mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business and/or the exercise
of rights as such investor; nor having a nominee director or officer
to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which
20
transacts business in its own name and for its own account.
(Ibid.) A foreign corporation which invests merely as a limited
partner in a Philippine limited partnership and does not take
part in the management and control of the partnership is not
doing business in the Philippines.
"An indent is denned as a purchase of goods especially when sent from a foreign
country. There are three parties to an indent transaction, namely, the buyer, the inden-
tor, and its supplier who is usually a non-resident manufacturer residing in the country
where the goods are to be bought. An indentor may be best described as one who for
compensation, acts as one middleman in bringing a purchase and sale of goods between a
foreign supplier and a local purchaser. He is in the same class as a commercial broker and
a commission merchant. He is to some extent an agent of both the vendor and the vendee.
(Schmid & Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA 493 [1988].)
Ûnder the Rules implementing R.A. No. 7042, the following are also not consid-
ered "doing business":
(1) The publication of a general advertisement through any print or broadcast
media;
(2) Maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by another entity in the Philippines;
(3) Consignment by a foreign entity of equipment with a local company to be used
in the processing of products for export;
(4) Collecting information in the Philippines; and
(5) Performing services auxiliary to an existing isolated contract of sale which are
not on a continuing basis, such as installing in the Philippines machinery it has manu-
factured or exported to the Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services. (Sec. l[f] thereof.)
812
Sec. 129. Law applicable. — Any foreign corporation

lawfully doing business in the Philippines shall be bound
by all laws, rules and regulations applicable to domestic
corporations of the same class, save and except such
only as provide for the creation, formation, organization
or dissolution of corporations or such as fix the relations,
liabilities, responsibilities, or duties of stockholders,
members or officers of corporations to each other or to
the corporation. (73a)
Laws applicable to foreign corporations.

(1) Philippine laws. — A foreign corporation licensed to do
business in the Philippines is subject to the laws of the Philip-
pines.
(2) Laws of state of creation. — But matters relative to:
(a) the creation, formation, organization, or dissolution
of corporations; and
(b) the relations, liabilities, responsibilities, or duties of
members, stockholders, or officers of corporations to each
other or to the corporation, are governed by the laws of the
State of its creation.
In other words, matters relating to the organization or internal
affairs of the corporation are governed by the laws of the home
or incorporating State unless they offend any public policy of the
Philippines.
Thus, the right of the stockholders in a foreign corporation
e
( -g-> right to receive dividends, right to inspect corporate books,
etc.) relating as they do merely to the internal management
of the affairs of the corporation shall not be governed by the
Philippine corporation laws but by the law under which such
foreign corporation was incorporated. Therefore, the by-laws of
a foreign corporation fixing the relations, etc. of members, etc. to
each other or the corporation need not be filed with the Securities
and Exchange Commission. (SEC Opinion, Oct. 17,1975.) But the
amendment of its corporate name is subject to Philippine laws,
not being one of those enumerated in Section 129. (SEC Opinion,
Feb. 8,1988.)
(3) Proof of foreign laws. - It is well-settled that foreign laws
do not prove themselves in our jurisdiction and our courts are
not authorized to take judicial notice of them. Like any other fact,
they must be alleged and proved; otherwise, that will be pre-
sumed to be the same as those of the Philippines. (Collector of
Internal Revenue vs. Fisher, 1 SCRA 93 [1961].)
Powers of a foreign corporation subject

to Philippine laws.
(1) Although the power of a foreign corporation depends
upon the law of the State from which its existence is derived, in
the exercise of such power in another jurisdiction, the corpora-
tion must conform to the local laws and public policy.
(a) The validity of and effect of its acts in States other than
the State of incorporation, even though such acts are within
its charter, must depend upon the law of the jurisdiction in
which such exercise takes place and in which such acts are
done.
(b) Its submission to do business within the State is not
by right, but by comity only, and it is, in respect of business
done within the State, generally subject to, and bound by,
the local laws, and unable to exercise powers or perform acts
whether authorized by its charter or not, which are contrary
thereto.
(c) The general rule is that it tacitly submits itself, when
it voluntarily enters the State and engages in business there,
to the valid laws of the State and to the jurisdiction of process
of its courts to the extent required by such laws. (36 Am. Jur.
2d 63.)
(2) Conformably to Section 129, the license that is issued by
the Securities and Exchange Commission to foreign corpora-
tions desiring to do business in this jurisdiction contains, among
others, the conditions that such corporations be "subject to the
prohibitions and limitations of the laws of the Philippines as
regards foreign corporations and as regards domestic corpora-
tions of like nature." (SEC Opinion, March 5,1963.)
Sec. 130. Amendments to articles of incorporation or

by-laws of foreign corporations. — Whenever the articles
of incorporation or the by-laws of a foreign corporation
authorized to transact business in the Philippines are

amended, such foreign corporation shall, within sixty (60)
days after such amendment becomes effective, file with
the Securities and Exchange Commission, and in the
proper cases with the appropriate government agency, a
duly authenticated copy of the articles of incorporation
or by-laws, as amended, indicating clearly in capital
letters or by underscoring the change or changes made,
duly certified by the authorized official or officials of the
country or State of incorporation. The filing thereof shall
not of itself enlarge or alter the purpose or purposes for
which such corporation is authorized to transact business
in the Philippines, (n)
A m e n d m e n t of articles of incorporation
and by-laws.
(1) Effectivity. — The amendments to the articles of incorpo-
ration or the by-laws of a foreign corporation licensed to trans-
act business in the Philippines may become effective even before
they are filed with the Securities and Exchange Commission, and
in the proper cases, with the appropriate government agency.
(Sec. 130.) With respect to domestic corporations, the amend-
ment to the articles of incorporation shall take effect only upon
its approval by the Securities and Exchange Commission. (Sec.
16, last par.)
(2) Need for amended license. — The filing of the amended arti-
cles of incorporation or by-laws by the foreign corporation, how-
ever, does not of itself enlarge or alter the purpose or purposes
for which it is authorized to transact business in the Philippines.
(Sec. 130.)
(a) The foreign corporation must first obtain an amend-
ed license showing the other or additional purposes which
it intends to pursue in the transaction of its business in the
Philippines (Sees. 131, 125[5].); otherwise, its license shall be
subject to revocation by the Commission, (see Sec. 134[7].)
(b) But an isolated or incidental transaction by a foreign
corporation outside its corporate franchise does not constitute
engaging in that line of business which would require the
filing of an amended license. Thus, a foreign corporation
licensed to do business in the Philippines may lease a
condominium unit held in ownership by such corporation

and acquired in line with the purposes for which it ventured
to operate in the Philippines, without being considered as
engaging in the leasing business, where the end envisioned
was not realized and the foreign corporation would want to
exercise its prerogative as unit owner to recover its investment
by resale or lease thereof, for such contract of lease may be
considered merely as an isolated and incidental transaction
which the foreign corporation may validly enter into without
the need to amend the license issued to it. (SEC Opinion, July
27,1976.)
Sec. 131. Amended license. — A foreign corporation

authorized to transact business in the Philippines shall
obtain an amended license in the event it changes its cor-
porate name, or desires to pursue in the Philippines other
or additional purposes, by submitting an application there-
for to the Securities and Exchange Commission, favorably
endorsed by the appropriate government agency in the
proper cases, (n)
W h e n a m e n d e d license required.
Section 131 requires a foreign corporation authorized to
transact business in the Philippines to obtain an amended license
in case:
(1) it changes its corporate name; or
(2) it desires to pursue in the Philippines other or additional
purposes.
In the first case, the amendment is necessary because the
foreign corporation is authorized to do business under its original
corporate name as stated in its articles of incorporation (see Sec.
125, par. 1.) and not in its new name, and in the second case, only
"for the purpose or purposes specified in such license." (Ibid., [5];
Sec. 126, par. 1.) and not for the "other or additional purpose."
The application for an amended license must be submitted to the
Securities and Exchange Commission favorably endorsed by the
appropriate government agency in the proper cases.
A foreign corporation that fails to comply with Section 131
and conducts business operations in the Philippines may not in-
tervene in any action before any court or administrative agency

here but such corporation may be sued. (Sec. 133.)
Sec. 132. Merger or consolidation involving a foreign cor-

poration licensed in the Philippines. — One or more foreign
corporations authorized to transact business in the Philip-
pines may merge or consolidate with any domestic corpo-
ration or corporations if such is permitted under Philippine
laws and by the law of its incorporation: Provided, That the
requirements on merger or consolidation as provided in
this Code are followed.
Whenever a foreign corporation authorized to transact
business in the Philippines shall be a party to a merger or
consolidation in its home country or state as permitted by
the law of its incorporation, such foreign corporation shall,
within sixty (60) days after such merger or consolidation
becomes effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or
officials of the country or state under the laws of which
such merger or consolidation was effected: Provided, how-
ever, That if the absorbed corporation is the foreign corpo-
ration doing business in the Philippines, the latter shall at
the same time file a petition for withdrawal of its license in
accordance with this Title, (n)
Merger or consolidation involving

a foreign corporation.
(1) With a domestic corporation. — The merger or consolida-
tion is allowed provided that such is permitted under Philippine
laws and by the law of incorporation in the home country or
State of the licensed foreign corporation and the requirements
on merger or consolidation as provided in the Code (Title IX.)
are followed, (pars. 1-2.) In other words, there must be concur-
rent legislation in each State of constituent foreign and domestic
corporations authorizing the merger, for neither corporation can
have authority to merge or consolidate except by virtue of a law
of the State creating it.
(a) Corporations have no inherent power to merge or
consolidate with foreign corporations. As there is presently
no express provision in the Corporation Code or any other

statute authorizing merger of a domestic corporation with
a foreign corporation, such merger is not allowed in our
jurisdiction, but should the merger take place in foreign
jurisdiction, the corresponding dissolution of the domestic
corporation should be effected in accordance with the Code
to safeguard the interest of third parties. (SEC Opinion, Oct.
23,1985.)
(b) To achieve a combination, however, it is not always
necessary to resort to the statutory provisions on merger or
consolidation. One obvious alternative of two corporations
is to have one of them sell all its assets to the other in
exchange for the latter's stock. If the acquiring corporation
also assumes the payment of the corporation's liabilities
and the latter shortens its term, dissolves, liquidates and
distributes the stock received to its stockholders in exchange
for its own stock, as a liquidating distribution, the parties
would end up in the same position they would have been
under the statutory provisions on merger or consolidation.
(SEC Opinion, Dec. 13,1985, citing Campos & Campos, The
Corporation Code, 1981 ed., p. 959.)
(2) With another foreign corporation. — If the licensed foreign
corporation is a party to the merger or consolidation in its home
country or State as permitted by the law of its incorporation, it
must file the articles of merger or consolidation as prescribed in
Section 132 and at the same time, if it is the absorbed corporation,
a petition for withdrawal of its license as provided in Section 136.
(par. 2.) It is, in effect, dissolved because of the merger or consoli-
dation.
Sec. 133. Doing business without a license. — No foreign

corporation transacting in the Philippines without a
license, or its successors or assigns, shall be permitted
to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines;
but such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
(69a)
818
Effects of doing business without

a license.
Section 133 states the effects as follows:
(1) Suit by foreign corporation. — The foreign corporation
transacting business without a license or its successors or assigns
shall not be permitted, subject to certain exceptions (infra.), to
maintain or intervene in any action, suit, or proceeding in any
court or administrative agency of the Philippines. If a foreign
corporation operates in the Philippines without submitting to
its laws, it is only just that it be not allowed to invoke them in
our courts when it should need them later for its protection.
(Granger Associates vs. Microwave Systems, Inc., 189 SCRA
63 [1990].) It has been held, however, that a counterclaim filed
by the defendant against a foreign corporation doing business
without a license partakes of the nature of a complaint and/or
cause of action against the plaintiff corporation, making the latter
a defendant thereto, so that it cannot be said that said foreign
corporation is maintaining a suit and consequently, Section 69
(now Sec. 133.) of the Corporation Law is not applicable. (Phil.
Columbia Enterprises Co. vs. Lantin, 39 SCRA 376 [1971].)
To be doing or "transacting business in the Philippines for
purposes of Section 133, the foreign corporation must actually
transact business in the Philippines, that is, perform specific
business transactions within the Philippine territory on a con-
tinuing business in its own name and for its own account. If a
foreign corporation does not transact such kind of busines in the
Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corpora-
tion to secure a Philippine license in order to initiate and main-
tain a suit in the Philippines. (B Van Zuiden Bros. Ltd. vs. GTVL
Manufacturing Industries, Inc., 523 SCRA 233 [2007].)
(2) Suit against foreign corporation. — Such corporation may,
however, be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recog-
21
nized under Philippine laws under the doctrine of quasi-estoppel
21
In the United States, statutes permitting a resident of one State to sue in the State
court a corporation from another State are called "long arm statutes."
Sec. 133 "TITLE XV. FOREIGN CORPORATIONS 819
by acceptance of benefits. It shall not be allowed, under any circum-

stances, to invoke its lack of license to impugn their jurisdiction.
(Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 [1990].) It is
against justice and equity for an unlicensed foreign corporation
to execute contracts with domestic firms and then repudiate their
obligations thereunder or plead immunity to Philippine jurisdic-
tion just because it has not obtained license in the Philippines.
It has been held that where a local plaintiff and a foreign
corporation have agreed on Philippine courts as venue of action,
evidence as to whether such foreign corporation was doing
business in the Philippines is no longer necessary before it can be
sued, and for the expeditious determination of the controversy,
summons by publication can be made on it. (Lingner & Fisher
GMBH vs. Intermediate Appellate Court, 125 SCRA 522 [1983].)
(3) Application of the principle of estoppel. — The rule is that a
party is estopped to challenge the personality of a corporation
after having acknowledged the same by entering into a contract
with it. And the doctrine of estoppel to deny corporate existence
applies to foreign as well as to domestic corporations.
The principle that one who has dealt with a corporation
of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity, will be applied to prevent a
person contracting with a foreign corporation from later taking
advantage of the latter's non-compliance with the law, chiefly in
cases where such person has received the benefits of the contract.
The rule is deeply rooted in the time-honored axiom that no
person ought to derive any advantage of his own wrong. This
is especially true where the business relations with the foreign
corporation spanned a number of years and it would appear quite
inequitable for such person who was aware of the absence of the
requisite license on the part of the foreign corporation to evade
payment of an otherwise legitimate indebtedness due and owing
to the latter. (Merill Lynch Futures, Inc. vs. Court of Appeals, 211
SCRA 824 [1992]; Communication Materials and Design, Inc. vs.
Court of Appeals, 260 SCRA 673 [1996]; Subic Bay Metropolitan
Authority vs. Universal International Group of Taiwan, 340
SCRA 359 [2000]; Agent Technologies, etc. vs. Integrated Silicon,
820
etc., 427 SCRA 593 [2004]; European Resources & Technologies,

Inc.'vs. Ingenieuburo, etc., 435 SCRA 246 [2004].)
(4) Continuation of doing business. — Furthermore, it is im-
plied from the rule established in Section 123 (2nd sentence) that
the foreign corporation shall not be permitted to continue trans-
acting business in the Philippines, unless it shall have obtained
the license required by law and, until it complies with the law,
shall not be permitted to maintain any suit in the local courts,
(see Marshall-Wells Co. vs. Elser & Co., 46 Phil 70 [1924]; Con-
verse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc., 97
SCRA 158 [1980].)
(5) Penal sanction. — The prohibition against doing business
without first securing a license is given penal sanction under the
general provision of Section 144 of the Corporation Code.
(6) Right to relief by other guilty party. — A party to a contract
in pari delicto with a foreign corporation doing business in the
Philippines without a license is not entitled to relief from the latter.
Thus, where a contract entered into by a Philippine corporation
with a foreign corporation for the manufacture and marketing
of the latter's products is illegal for failure to secure a prior
license from the Board of Investments (under R.A. No. 5455.), the
former cannot ask the court to prohibit the foreign corporation
from terminating the contract and giving the production and
22
distributorship rights to another. The parties are charged with
knowledge of existing law at the time they enter into a contract
and at the time it is to become operative. Moreover, a person is
presumed to be knowledgeable about his own State law than his
alien or foreign contemporary. (Top-Weld Manufacturing, Inc.
vs. ECED, S.A., 138 SCRA 118 [1985].)
Suit by an unlicensed foreign

corporation.
It is not the lack of the prescribed license (to do business in
the Philippines) but doing business without such a license which
bars a foreign corporation from access to our courts. (Universal
Shipping Lines, Inc. vs. Intermediate Appellate Court, 188 SCRA
''See Note 6.
178 [1990]; Huang Lung Bank, Ltd. vs. Saulog, 201 SCRA 137
[1991]; MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 [2002]; Aboitiz
Shipping Corp. vs. Insurance Company of America, 561 SCRA
262 [2008].)
A foreign corporation without a license is not ipso facto barred
from bringing an action in Philippine courts. Thus, a foreign cor-
poration not transacting business in the Philippines may main-
23
tain an action in our courts for relief, even if it has no license;
reciprocally, such corporation may likewise be sued in Philip-
pine courts for acts done against a person or persons in the Phil-
ippines, provided that in this case, it would not be impossible
for court processes to reach the foreign corporation, a matter
that can later be consequential in the proper execution of judg-
ment. (Signetics Corporation vs. Court of Appeals, 225 SCRA 737
[1993].)
(1) To seek redress for an isolated business transaction. — The im-
plication of the law is that it was never the purpose of the legisla-
ture to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines from receiving
redress in Philippine courts and thus, in effect, to permit persons
to avoid contracts made with such foreign corporation or shield
debtors from their legitimate obligations. (General Garments
23
The SEC has issued rules (dated Nov. 5, 1962) requiring submission of reports by
unlicensed foreign firms having liaison representatives in the Philippines, to wit:
(1) Every foreign national who shall act as a liaison representative of a foreign
firm which is not licensed to engage in business in the Philippines or as a prearranged
employee between said firm and a domestic company, shall register with the Securities
and Exchange Commission upon his arrival in and departure from this country within
five days from the date of such arrival or before such departure;
(2) Every contract or document executed by and between a foreign firm not li-
censed to transact business but having liaison representatives in the Philippines and a
Philippine resident, to be performed or carried out in this country shall be reported to,
and a true copy thereof duly certified as such by, its legal keeper filed with the said Com-
mission within one month from the signing of the contract or document;
(3) Every foreign firm not licensed to transact business but having liaison repre-
sentative in the Philippines shall file with the Commission at the end of each month, a
certified statement of monetary remittances in the form of cash, bank drafts, bills of ex-
change, letters of credit or similar commercial documents it has made during the month,
to its liaison representatives in this country, signed by its senior representatives; and
(4) A quarterly report of the activities of the liaison representatives of every unli-
censed foreign firm maintaining offices in the Philippines shall be filed with the Commis-
sion within fifteen days after the close of such quarters.
Corp. vs. Director of Patents, 41 SCRA 50 [1971]; National Sugar

Trading Corp. vs. Court of Appeals, 246 SCRA 465 [1995]; Eriks
Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].)
(a) The doctrine of lack of capacity to sue based on failure
to first acquire a local license is based on considerations of
sound public policy. It was never intended to favor domestic
corporations who enter into solitary transactions with
unwary foreign firms and then repudiate their obligations
simply because the latter are not licensed to do business
in the Philippines. "It is a common ploy of defaulting local
companies which are sued by unlicensed foreign companies
not engaged in business in the Philippines to invoke lack
of capacity to sue." (Antam Consolidated, Inc. vs. Court of
Appeals, 143 SCRA 288 [1986]; Communication Materials
and Design, Inc. vs. Court of Appeals, 260 SCRA 673 [1996];
Subic Bay Metropolitan Authority vs. Universal Group of
Taiwan, 340 SCRA 359 [2000].)
(b) To deny a foreign corporation not licensed to do busi-
ness in the Philippines the right to file an action in our courts
for an isolated transaction in this country will hamper the
growth and development of business relations between Fili-
pino citizens and foreign nationals and, in effect, allow the
law to serve as a protective shield for unscrupulous Filipino
citizens who have business relationships abroad. (Huang
Lung Bank, Ltd. vs. Saulog, supra; see Comm. of Customs vs.
K.M.K. Gani, 182 SCRA 591 [1990].)
The term "isolated transaction" has not been construed to
literally mean "one" or a mere single act. (Lorenzo Shipping
Corp. vs. Chubb and Sons, Inc., 431 SCRA 266 [2004].) The
ascertainment of whether a foreign corporation is merely suing
on an isolated transaction or is actually doing business in the
Philippines requires evidence of a preponderant set of facts. It
cannot be answered through conjectures or unsubstantiated
allegations. (Rimbunan, etc. vs. Oriental Wood Processing Corp.,
470 SCRA 650 [2005].)
(2) To protect its corporate reputation, name and goodwill. —
Similarly, an unlicensed foreign corporation which has never
transacted business in the Philippines may maintain an action
in our local courts for the purpose of protecting its reputation,

corporate name and goodwill acquired through the sale by im-
porters and the use within the country of its products bearing
its corporate name or trademark, or whenever that reputation,
corporate name and goodwill have, through the natural devel-
opment of trade, established themselves.
(a) The right to the use of the corporate trade name is
property right, a right in rem, which the foreign corporation
may assert and protect in any of the courts in the world, even
in countries where it does not transact any business. (West-
ern Equipment & Supply Co. vs. Reyes, 51 Phil. 115 [1927];
General Garments Corp. vs. Director of Patents, supra; Con-
verse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc., 97
SCRA 158 [1980]; Universal Rubber Products, Inc. vs. Court
of Appeals, 130 SCRA 104 [1984]; Converse Rubber Corp. vs.
Universal Rubber Products, Inc., 147 SCRA 154 [1987].)
(b) A foreign corporation has an exclusive right to the
use of its name which may be protected by injunction upon a
principle similar to that upon which persons are protected in
the use of trademarks and trade names. (Philips Export B.V.
vs. Court of Appeals, 206 SCRA 457 [1992].) It may sue in our
jurisdiction for infringement of trademark and unfair com-
petition although it is not doing business in the Philippines
(Puma Sportschwhfabriken Rudolf Dassler, K.G. vs. Interme-
diate Appellate Court, 158 SCRA 233 [1988].) under Section
24
21-A of the Trademark Law. (R.A. No. 166, as amended.)
But it is not sufficient for a suing foreign corporation
under Section 21-A to simply allege its alien origin. Rather,
it must additionally allege its personality to sue, i.e., that it is
not doing business in the Philippines and that its action for
infringement is anchored on an isolated transaction. (Philip
Morris, Inc. vs. Court of Appeals, 224 SCRA 580 [1993].)
Also, a foreign corporation cannot sue for unfair competition
in Philippine courts under Section 21-A unless it complies
with the legal requirements thereof that its trademark has
"Repealed by R.A. No. 8293, the Intellectual Property Code, which now governs
registration and protection of trademarks, trade names and service marks, patents i
copyrights.
been registered with the Philippine Patent Office and that it

shows that the country of which it is a citizen, or in which it
is domiciled, grants a similar privilege to corporations of the
Philippines. (Leviton Industries vs. Salvador, 114 SCRA 420
[1982].)
(3) To enforce its right not arising out of a business transaction. —
Neither does the prohibition apply to a suit based on an act not
arising out of a business transaction in the Philippines.
(a) Thus, it has been held that a foreign corporation with-
out a license to engage in business in the Philippines may
maintain a suit to recover the value of goods that were part
of the shipment which was erroneously discharged in Ma-
nila and received by the defendant and not returned (Swed-
ish East Asia Co., Ltd. vs. Manila Port Service, 25 SCRA 633
[1968].); or to recover damages sustained by cargo shipped by
a foreign corporation on defendant's vessel (Aetna Casualty
& Surety Co. vs. Pacific State Lines, 80 SCRA 635 [1977].); or
caused by failure of a shipping corporation to deliver goods
shipped to it by the foreign corporation to their proper desti-
nation. (Bulakhidas vs. Navarro, 142 SCRA 1 [1986].)
(b) A foreign insurance corporation may, as insurer-
subrogee, sue in Philippine courts to recover from a Philippine
carrier the amounts paid by it to the consignee of the cargoes
insured, upon the marine insurance policies issued by it
abroad to cover international-bound cargoes shipped by said
carrier, even if it has no license to do business in the country.
(Universal Shipping Lines, Inc. vs. Intermediate Appellate
Court, supra.)
Suit against an unlicensed foreign corporation.

If a foreign corporation not engaged in business in the Philip-
pines is not barred from seeking redress from courts in the Phil-
ippines, a fortiori, that same corporation cannot claim exemption
from being sued in Philippine courts for actionable wrongs or
acts done against a person or persons in the Philippines (Facili-
ties Management Corp. vs. De la Osa, 89 SCRA 131 [1979]; FBA
Aircraft, SA vs. Zosa, 110 SCRA 1 [1981].) and whether a foreign
corporation actually doing business in the Philippines does or
does not have a license or authority to do so, it is amenable to

process under the jurisdiction of the local courts.
The rule is necessary for the protection of the citizens because
otherwise, a foreign corporation illegally doing business here,
because of its neglect or refusal to obtain the corresponding
license and authority to do business, may successfully, though
unfairly, plead such neglect or illegal act so as to avoid service
and thereby impugn the jurisdiction of the local courts. (Gen.
Corp. of the Phils, vs. Union Society of Canton, Ltd., 87 Phil. 313
[1950].) Where a foreign corporation appears to have constituted
a domestic liason office as its representative and its fully
subsidized extension office in the Philippines, the latter can be
charged for the liabilities incurred by the former in the country.
(Mavest [U.S.A.], Inc. vs. Sampaguita Garment Corporation, 470
SCRA 440 [2005].)
Facts showing capacity to sue.

(1) Appropriate allegations in complaint by plaintiff foreign corpo-
ration. — A foreign corporation is either engaged in business in
the Philippines or it is not so engaged. In the first, the corpora-
tion can maintain suit in this jurisdiction if it is duly licensed. In
the second, it can maintain such suit if the transaction sued upon
is singular and isolated, in which case no license is required. In
either case, compliance with the requirement of license, or that
the fact that the suing corporation is exempt therefrom (i.e., it is
not doing business in the Philippines), as the case may be, cannot
be inferred from the mere fact that the party suing is a foreign
corporation. In any case, the right of a foreign corporation to sue
is subject to provisions of special laws.
(a) The qualifying circumstances, being an essential
part of the plaintiff's capacity to sue, must be affirmatively
25
pleaded in the complaint; otherwise, the court may choose
În a case, there is no allegation in the complaint for the recovery of value of ship-
ment lost that the transaction sued upon by an unlicensed foreign corporation (insurance
company and subrogee) is singular or isolated. The court held that even assuming the
incapacity on the part of the foreign corporation to sue, no such incapacity may be attrib-
uted to its co-plaintiff, a domestic corporation (consignee of the shipment and subrogor).
If necessary, the latter could quite easily execute a cancellation of the deed of subrogation.
(Olympia Business Machines Co. vs. E. Razon, Inc., 155 SCRA 208 [1987].)
826
to deny it the right to sue. These are matters peculiarly within

the knowledge of the plaintiff alone, and it would be unfair
to impose upon the defendant the burden of asserting and
26
proving the contrary. Hence, the ultimate fact that a foreign
corporation is not doing business in the Philippines must first
be disclosed for it to be allowed to sue in Philippine courts
under the isolated transaction rule. (Atlantic Mutual Ins. Co.
and Continental Ins. Co. vs. Cebu Stevedoring Co., Inc., 17
SCRA 1037 [1966]; Comm. of Customs vs. K.M.K. Gani, 182
SCRA 591 [1990]; New York Marine Managers, Inc. vs. Court
of Appeals, 249 SCRA 416 [1995].)
(b) A court need not go beyond the allegations in the
complaint to determine whether or not a defendant foreign
corporation is doing business for the purpose of Section 14
(service of summons upon a private corporation), Rule 14 of
the Rules of Court. (Litton Mills, Inc. vs. Court of Appeals,
256 SCRA 696 [1996].) A determination that the foreign cor-
poration is doing business is only tentative and is made
only for the purpose of enabling the local court to acquire
jurisdiction over the foreign corporation through service of
summons. Such determination does not foreclose a contrary
finding should evidence later shows that it is not transact-
ing business in the country. (Hahn vs. Court of Appeals, 266
SCRA 537 [1997].)
It has been held that the "isolated transaction rule" applies
only to foreign corporations. Any other business entity such as
26
Section 4, Rule 8 of the Revised Rules of Court provides: "Sec. 4. Capacity. — Facts
showing the capacity of a party to sue or to be sued or the authority of a party to sue or
be sued in a representative capacity or the legal existence of an organized association of
persons that is made a party must be averred." Under the former Rules of Court (Sec.
11, Rule 15.) in force prior to the promulgation of the Revised Rules of Court on January
1, 1964, it was not necessary to aver the capacity of a party to sue except to the extent
required to show jurisdiction of the court.
The ruling in the Atlantic case seems to have set aside previous pronouncements
(Spreckels vs. Ward, 12 Phil. 414 [1909]; Marshall-Wells Co. vs. Elser & Co., 46 Phil. 70
[1924]; The Fletcher American National Bank of Indianapolis vs. Ang Cheng Lian, 65 Phil.
385 [1938].) imposing upon the defendant the duty of showing that a particular foreign
corporation may not sue in our courts — that failure by the foreign corporation to comply
with Sections 68 and 69 (now Sees. 125, 126, 133.) may be pleaded as an affirmative de-
fense; thereafter, the defendant must prove that the plaintiff: (1) is a foreign corporation,
(2) is transacting business in the Philippines, and (3) has not obtained the license required
by the law.
a single proprietorship or a partnership cannot avail of the right
to sue within Philippine jurisdiction under the rule. (Comm. of
Customs vs. K.M.K. Gani, supra.)
(2) Specific denial by defendant of plaintiff's capacity. — A
general denial is inadequate to attack a foreign corporation's lack
of capacity as against its positive averment that it is authorized to
do so. Section 4, Rule 8 of the Rules of Court requires that "a party
desiring to raise an issue as to the legal existence of any party or
the capacity shall do so by specific denial, which shall include
such supporting particulars as are particularly within pleader's
knowledge." (Home Insurance Co. vs. Eastern Shipping Lines,
123 SCRA 424 [1983].)
But a factual finding by the trial court that a foreign corpo-
ration was doing business in the Philippines without license
is binding on the Supreme Court in the absence of exceptional
circumstances that warrant a different conclusion, and the
foreign corporation has the burden of showing that such finding
falls under the exception and should be reviewed and reversed.
(Granger Associates vs. Microwave Systems, Inc., 189 SCRA 631
[1990].)
Validity of contracts of unlicensed

foreign corporations.
If the foreign corporation does business in the Philippines
without obtaining the required license (Sees. 123, 133.), are con-
tracts entered into by it in the course of its transacting business
void, or merely voidable or unenforceable? The Corporation
Code is silent on this question, while American decisions are
conflicting.
(1) Contract void. — Article 5 of the Civil Code provides as
follows:
"Acts executed against the provisions of mandatory or pro-
hibitory laws shall be void except when the law itself authorizes
their validity."
It has been opined that under the above provision, such con-
tracts are void and, therefore, subsequent compliance with the
legal requirement will not cure the defect of the contract. (SEC
Opinion, March 12, 1975.)
828
(2) Contract valid as to innocent parties. — It has been held,

however, that such a contract "shall prejudice only the guilty cor-
poration and not innocent parties who may have dealt with the
said corporation in good faith" (Bough vs. Cantiveros, 40 Phil.
209 [1919].) for it is unjust that the non-complying foreign corpo-
ration and persons standing in its shoes should escape liability
27
on contracts had by it by setting up its non-compliance.
(3) Contract enforceable upon compliance with the law. — "The
better reason, the wiser and fairer policy, and the greater weight
lie with those decisions which hold that where (as in our Corpo-
ration Code, Sec. 144.) there is a prohibition with a penalty, with
no express or implied declaration respecting the validity or en-
forceability of contracts made by qualified foreign corporations,
the contracts x x x are enforceable x x x upon compliance with
the law." (Home Insurance Co. vs. Eastern Shipping Lines, 123
SCRA 424 [1983], citing Peter & Burghard Stone Co. vs. Cerper,
172 N.E. 319 [1930]; see Eriks Pte., Ltd. vs. Court of Appeals, 267
SCRA 567 [1997].)
It is not necessary to declare the contract null and void as
against the erring foreign corporation. The penal sanction for the
violation and the denial of access to our courts and administra-
tive bodies are sufficient from the viewpoint of legislative policy.
The lack of capacity at the time of the execution of the contracts
is cured by the subsequent registration of the unlicensed foreign
corporation. (Ibid.)
Sec. 134. Revocation of license. — W i t h o u t prejudice to

other grounds provided by special laws, the license of a
foreign corporation to transact business in the Philippines
may be revoked or suspended by the Securities and
Exchange Commission upon any of the following grounds:
27
"Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the other's
undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given without
any obligation to comply with his promise." (Civil Code)
Sec 135 TITLE XV. FOREIGN CORPORATIONS 829
1. Failure to file its annual report or pay any fees as

required by this Code;
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange Com-
mission a statement of such change as required by this
Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment to
its articles of incorporation or by-laws or of any articles of
merger or consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, impost, assess-
ments or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivi-
sions;
7. Transacting business in the Philippines outside
of the purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit to trans-
act business in the Philippines. (71a)
Sec. 135. Issuance of certificate of revocation. — Upon
the revocation of any such license to transact business
in the Philippines, the Securities and Exchange Commis-
sion shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government
agency in the proper cases.
The Securities and Exchange Commission shall also
mail to the corporation at its registered office in the Philip-
pines a notice of such revocation accompanied by a copy
of the certificate of revocation, (n)
Revocation of license of foreign corporation.

Section 134 enumerates the grounds for revoking or sus-
pending the license of a foreign corporation by the Securities
and Exchange Commission. The grounds are without prejudice
to other grounds provided by special laws.
After revocation, the Securities and Exchange Commission is
required to issue a corresponding certificate of revocation, fur-
nishing a copy thereof to the appropriate government agency in
the proper cases and mailing a notice of such revocation accom-
panied with a copy of the certificate to the foreign corporation.
(Sec. 135.)
Effects of revocation.
(1) The revocation of the license of a foreign corporation
cannot affect the validity of contracts entered into by it before
the revocation nor its right to maintain an action to enforce them.
(Billmeyer Lumber Co. vs. Merchants' Coal Co., 69 S.E. 1073.) It
may still bring or maintain an action based on such contracts.
But contracts entered into by it after revocation are invalid and
unenforceable without prejudice to the rights of innocent parties.
As to such contracts, the effect is the same as if a license had
never been granted to the foreign corporation, (supra.)
(2) It has been opined, however, that the revocation shall not
affect the validity of contracts entered into by a foreign corpo-
ration after revocation. The only effect of the revocation is that
the foreign corporation cannot seek redress from the courts to
enforce such contracts. It simply removes its legal standing to
sue. (SEC Opinion No. 10-07, Feb. 5,2010.) If innocent parties can
still enforce such contracts, it really makes no difference whether
they are considered valid or invalid.
(3) Pursuant to Section 133, such foreign corporation can no
longer transact business in the Philippines, and it cannot main-
tain any suit or action in any court or administrative agency in
the Philippines although it may be sued on any valid cause of
action.
Sec. 136. Withdrawal of foreign corporation. — Subject

to existing laws and regulations, a foreign corporation
licensed to transact business in the Philippines may be

allowed to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of withdrawal shall
be issued by the Securities and Exchange Commission
unless all the following requirements are met:
1. All claims which have accrued in the Philippines

have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any of its
agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks in
a newspaper of general circulation in the Philippines, (n)
Withdrawal of a foreign corporation.

Section 136 prescribes the rules for the withdrawal of a
foreign corporation from business in the Philippines.
(1) A petition for withdrawal of license must be filed with
the Securities and Exchange Commission which shall issue a cer-
tificate of withdrawal only after compliance with all the require-
28
ments mentioned in Section 136.
(2) To ascertain that the foreign corporation has no out-
standing liabilities to residents in the Philippines, the Commission
shall have to make an examination and inspection of its books and
records. If the Commission is aware of pending cases against the
2S
To legally effect the withdrawal of a foreign corporation's license to transact busi-
ness in the Philippines, the Securities and Exchange Commission requires the submission
of the following:
(1) The letter-petition of the resident agent requesting the withdrawal of the
license to do business;
(2) Filing fee of P10.00;
(3) A copy of the resolution of the Board of Directors authorizing the closing of
the Philippine branch and empowering the resident agent to effectuate the withdrawal
thereof, duly authenticated in accordance with law, to be submitted in triplicate;
(4) Latest balance sheet and sworn statement that no creditors will be prejudiced
by the withdrawal, also to be submitted in triplicate;
(5) Proof of publication of the Notice of Withdrawal once a week, for three (3)
consecutive weeks in a newspaper of general circulation in the Philippines; and
(6) The license issued by the Commission to the corporation which shall be sur-
rendered. (SEC Opinion, Aug. 22, 1969.)
foreign corporation, it may not declare that such corporation has

no outstanding liabilities in the Philippines, (see Scottish Union
& National Insurance Co. vs. Macadaeg, 91 Phil. 89 [1952].)
(3) The courts may review the action of the Commission
approving the withdrawal of a foreign corporation, for the law
should not be interpreted as to permit a foreign corporation to
escape the results of pending action against it by withdrawing
from the Philippines with all the securities it has deposited, pro-
vided it gets the sanction of the Securities and Exchange Com-
mission, (see Ibid.)
Suits against a foreign corporation

that has c e a s e d to do business.
When the right to do business of a foreign corporation duly
licensed to do so in another State is revoked or such foreign
corporation subsequently withdraws its business from that
State, the cessation of its business works a quasi-dissolution of
the foreign corporation. Consequently, the corporation is placed
in the same situation in that State as if its charter had expired
or terminated. (SEC Opinion, March 5, 1963.) It is subject to the
rules of law governing expired domestic corporations in respect
to action against it. (Ibid., citing Frazier vs. Steel & Tube [W. Va.],
132S.E.723,45ALR1442.)
Accordingly, Section 122 (corporate liquidation) applies
to a branch of a foreign corporation withdrawing from doing
business in the Philippines, insofar as suits by or against it are
concerned, in connection with its business transactions done in
the Philippines.
— oOo —
Title XVI
MISCELLANEOUS PROVISIONS
Sec. 137. Outstanding capital stock defined. — The

term "outstanding capital stock," as used in this Code,
means the total shares of stock issued to subscribers
or stockholders, whether or not fully or partially paid (as
long as there is a binding subscription agreement), except
treasury shares, (n)
O u t s t a n d i n g capital s t o c k d e f i n e d .
Outstanding capital stock, as defined in Section 137, includes
all shares of stock issued to subscribers or stockholders of a stock
corporation which are fully paid, and in case they are unpaid
or only partially paid, as long as there is binding subscription
agreement between the subscriber or stockholder and the corpo-
ration, (see Sec. 60.)
The term refers to the "total shares," that is, the number of
shares, and thus includes unpaid subscriptions except when the
subscription agreement provides otherwise. Except treasury
1
shares which are excluded from the meaning of the terms, Section
2
137 makes no distinction between the different classes of shares.
Distinguished f r o m issued a n d
subscribed shares.
(1) An "outstanding" share of stock is necessarily "issued"
but an "issued" share may not have the status of an "outstand-
1
Although they are in the nature of unissued shares as long as they are held in the
treasury (see Sec. 57.), for they may be issued again to subscribers or stockholders.
2
For purposes of the next paragraph of Article 6, right of holders of non-voting
shares to vote in the eight (8) cases enumerated "outstanding capital stock" as denned in
Article 137, shall be deemed to include preferred shares. (SEC Memo. Cir. No. 4, Series
of 2004.)
833
834
ing" share such as treasury shares, (see Sec. 9.) To be considered

outstanding, the share of stock must be held by persons other
than the corporation itself.
An "issued" share may refer to any of the following:
(a) Shares acquired by subscription which are fully paid;
(b) Shares (subscribed shares) acquired by subscription
which are unpaid or partially paid;
(c) Shares acquired by a stockholder by transfer from a
previous stockholder;
(d) Shares acquired by a stockholder by purchase of trea-
sury shares from the corporation; and
(e) Treasury shares or shares issued and subsequently
reacquired by the corporation and which remain in the trea-
sury.
All the issued shares of a corporation except treasury shares
are outstanding. So, the term "issued" share is broader than
3
"outstanding" share.
(2) Technically speaking, shares that are fully paid are
"issued" not merely "subscribed" shares although the latter are
also categorized as "issued" and, therefore, "outstanding" even if
unpaid or only partially paid. (Sec. 137.) In its strict signification,
the term "subscribed" shares should be limited to shares acquired
by subscription which are unpaid or only partially paid.
But a subscription to shares in a corporation (see Sec. 60.) does
not constitute the subscriber a stockholder until the acceptance
by the corporation of the subscription. Prior to such acceptance,
the subscription amounts to nothing more than an offer to take
stock, and, therefore, the subscribed shares cannot be considered
4
issued or outstanding. The payments due on the subscribed
3
Under Section 6 (par. 6 and last par.), except in the eight (8) cases enumerated when
even non-voting shares may also vote, whenever a vote is necessary to approve a particu-
lar corporate act, such vote "shall be deemed to refer only to stock with voting rights."
This means that in the determination of the percentage of votes necessary for the ap-
proval of any such corporate acts, the phrase "outstanding capital stock" refers only to
voting shares.
4
In fine, all outstanding shares are "issued" but not all issued shares are "outstand-
ing" as in the case of treasury shares. All subscribed shares (assuming there is a bind-
Sees. 138-139 TITLE XVI. MISCELLANEOUS PROVISIONS 835
shares become a debt to the corporation payable on the date

specified in the contract of subscription or on the date stated in
the call made by the board of directors. (Sec. 67, par. 2.)
Sec. 138. Designation of governing boards. — The

provisions of specific provisions of this Code to the contrary
notwithstanding, non-stock or special corporations may,
through their articles of incorporation or their by-laws,
designate their governing boards by any name other than
as board of trustees, (n)
Designation o f g o v e r n i n g b o a r d s .
The authority given by Section 138 covers only non-stock
corporations (see Title XI.) and special corporations. (Title XIII.)
It accommodates the practice in various non-stock
corporations where their governing boards are called by a name
other than as "board of trustees." Thus, the governing board of
a non-stock educational corporation may be designated as board
of regents, board of governors, etc. Educational institutions may
be organized as stock corporations. (Sec. 108, last par.)
Sec. 139. Incorporation and other fees. — The Securities

and Exchange Commission is hereby authorized to collect
and receive fees as authorized by law or by rules and
regulations promulgated by the Commission, (n)
Collection of fees.
The Securities and Exchange Commission is authorized
to collect and receive fees as authorized by law (such as Pres.
Decree No. 902-A, R.A. No. 1143, R.A. No. 3531, and B.P Big.
178.) and by rules and regulations promulgated by it. Thus, the
Commission collects fees, among others, for examining and
filing articles of incorporation and the by-laws, and amendments
thereto, certificates of increase or decrease of the capital
ing subscription agreement) are "outstanding" but not all outstanding shares are "sub-
scribed" as in the case of: (a) shares acquired by subscription but which are already fully
paid, and (b) shares acquired by transfer from a previous stockholder or by purchase
from a corporation of treasury shares.
stock, or certificates incurring, creating, or increasing bonded

indebtedness; for granting exemption of securities from its
registration requirements, etc. (see Appendix "G.")
(1) Nature of fees. — The incorporation fee is not a tax in the
appropriate sense of the word and the legislature, by its imposi-
tion, does not impliedly divest itself of powers of taxing a corpo-
ration. (18 Am. Jur. 2d 588.) The fees collected by the Commis-
sion are for purely regulatory purposes in the exercise of police
power; hence, they should only be of sufficient amount to cover
the expenses of direct regulation and the incidental expenses.
Taxes, on the other hand, are imposed for revenue purposes. As
a general rule, there is no limit as to the amount or rate of tax that
may be imposed.
(2) Revision, etc. of fees. — The Commission is authorized
to recommend to the President the revision, alteration, amend-
ment, or adjustments of the charges and fees which by law it is
authorized to collect. (Pres. Decree No. 902-A, Sec. 7.)
In fine, fees and charges collected under rules promulgated
by the Securities and Exchange Commission may be revised,
amended, or adjusted by the Commission itself, but those which
by law it is authorized to collect may be revised, etc. only by the
President on its recommendation. Before, the incorporation and
other fees were fixed by law, particularly Section 8 of the former
Corporation Law such that the same could be changed only by
amending the law. Now, changes can easily be effected whenever
warranted by prevailing conditions.
Sec. 140. Stock ownership in certain corporation. — Pur-

suant to the duties specified by Article XIV* of the Consti-
tution** the National Economic and Development Authority
shall, from time to time, make a determination of whether
the corporate vehicle has been used by any corporation or
by business or industry to frustrate the provisions there-
of or of applicable laws and shall submit to the Batasang
•Now Article XII.

"Refers to the 1973 Constitution in force at the time of the enactment of the Corpo-
ration Code.
Sec. 140 TITLE XVI. MISCELLANEOUS PROVISIONS
837
Pambansa*** whenever deemed necessary, a report of its

findings including recommendations for their prevention
or correction.
Maximum limits may be set by the Batasang Pamban-
sa for stockholdings in corporations declared by it to be
vested with a public interest pursuant to the provisions
of this section, belonging to individuals or groups of indi-
viduals related to each other by consanguinity or affinity
or by close business interests, or whenever it is necessary
to achieve national objectives, prevent illegal monopo-
lies or combinations in restraint of trade, or to implement
national economic policies declared in laws, rules and
regulations designed to promote the general welfare and
foster economic development.
In recommending to the Batasang Pambansa corpo-
rations, businesses or industries to be declared vested
with a public interest and in formulating proposals for
limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature
of the industry, the size of the enterprise, the economies
of scale, the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the export
potential as well as other factors which are germane to the
rationalization and promotion of business and industry, (n)
Limitation of stock o w n e r s h i p in corporations

vested with public interest.
Congress may set maximum limits for stockholdings in cor-
porations declared by it to be vested with public interest upon
the recommendation of the National Economic and Develop-
ment Authority or NED A, belonging to individuals or groups
of individuals related to each other by consanguinity or affinity
or by close business interests, or whenever necessary to achieve
national objectives, prevent illegal monopolies or combinations
in restraint of trade, or to implement national economic policies.
(Sec. 140, pars. 2, 3.)
The pertinent provisions of the Constitution relating to the
NEDA and prescribing limits to ownership and management of
"'Now, Congress.
838
certain corporations are found in Sections 2, 3, 9, 10, 11, and 19,

Article XII; in Section 4(2), Article XIV; and in Section 11, Article
5
XVI thereof. Section 140 (par. 1.) imposes upon the NEDA the
5
"Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of agricul-
tural lands, all other natural resources shall not be alienated. The exploration, develop-
ment, and utilization of natural resources shall be under the full control and supervision
of the State. The State may directly undertake such activities, or it may enter into co-
production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such
citizens. Such agreements may be for a period not exceeding twenty-five years, renew-
able for not more than twenty-five years, and under such terms and conditions as may be
provided by law. In cases of water rights for irrigation, water supply, fisheries, or indus-
trial uses other than the development of water power, beneficial use may be the measure
and limit of the grant.
The State shall protect the nation's marine wealth in its archipelagic waters, territo-
rial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to
Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural resources by Fili-
pino citizens, as well as cooperative fish farming, with priority to subsistence fishermen
and fishworkers in rivers, lakes, bays, and lagoons.
The President may enter into agreements with foreign-owned corporations involv-
ing either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the State shall promote the develop-
ment and use of local scientific and technical resources.
The President shall notify the Congress of every contract entered into in accordance
with this provision, within thirty days from its execution." (Art. XII.)
"Sec. 3. Lands of the public domain are classified into agricultural, forest or tim-
ber, mineral lands, and national parks. Agricultural lands of the public domain may be
further classified by law according to the uses to which they may be devoted. Alienable
lands of the public domain shall be limited to agricultural lands. Private corporations or
associations may not hold such alienable lands of the public domain except by lease, for
a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and not to exceed one thousand hectares in area. Citizens of the Philippines may lease
not more than five hundred hectares or acquire not more than twelve hectares thereof by
purchase, homestead, or grant.
Taking into account the requirements of conservation, ecology, and development,
and subject to the requirements of agrarian reform, the Congress shall determine, by law,
the size of lands of the public domain which may be acquired, developed, held, or leased
and the conditions therefor." (Ibid.)
"Sec. 9. The Congress may establish an independent economic and planning agency
headed by the President, which shall, after consultations with the appropriate public
agencies, various private sectors, and local government units, recommend to Congress
and implement continuing integrated and coordinated programs and policies for nation-
al development." (Ibid.)
"Sec. 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to cor-
Sec. 140 TITLE XVI. MISCELLANEOUS PROVISIONS 839
duty to make, from time to time, a determination of whether the

corporate form of organization has been used to frustrate said
provisions or those of applicable laws, and whenever it deems
necessary, to submit to Congress a report of its findings includ-
ing recommendations for their prevention or correction.
porations or associations at least sixty per centum of whose capital is owned by such citi-
zens, or such higher percentage as Congress may prescribe, certain areas of investments.
The Congress shall enact measures that will encourage the formation and operation of
enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy
and patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities." (Ibid.)
"Sec. 11. No franchise, certificate, or any other form of authorization for the op-
eration of a public utility shall be granted except to citizens of the Philippines or to cor-
porations or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens, nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the Philip-
pines." (Ibid.)
"Sec. 19. The State shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed."
(Ibid.)
"Sec. 4. (2) Educational institutions, other than those established by religious groups
and mission boards, shall be owned solely by citizens of the Philippines or corporations
or associations at least sixty per centum of the capital of which is owned by such citizens.
The Congress may, however, require increased Filipino equity participation in all educa-
tional institutions.
The control and administration shall be vested in citizens of the Philippines." (Art.
XTV.)
"Sec. 11. (1) The ownership and management of mass media shall be limited to citi-
zens of the Philippines, or to corporations, cooperatives or associations, wholly-owned
and managed by such citizens.
The Congress shall regulate or prohibit monopolies in commercial mass media
when the public interest so requires. No combinations in restraint of trade or unfair com-
petition therein shall be allowed.
(2) The advertising industry is impressed with public interest, and shall be regu-
lated by law for the protection of consumers and the promotion of the general welfare.
Only Filipino citizens or corporations or associations at least seventy per centum of
the capital of which is owned by such citizens shall be allowed to engage in the advertis-
ing industry.
The participation of foreign investors in the governing body of entities in such
industry shall be limited to their proportionate share in the capital thereof, and all the
executive and managing officers of such entities must be citizens of the Philippines.'
(Art. XVI.)
Illegal monopolies a n d combinations

in restraint of trade.
(1) Constitutional provision. — The Constitution and the law
prohibit combinations in restraint of trade or unfair competition.
Thus, Section 19 of Article XII of the Constitution provides: "The
State shall regulate private monopolies when the public inter-
est so requires. No combinations in restraint of trade or unfair
competition shall be allowed." The use of the word "regulate" in
the Constitution indicates that some monopolies, properly regu-
lated, are in the public interest. In the field of public utilities, for
instance, the force of competition when left wholly free, might be
prejudicial to the common good.
(2) Existing legislations. — "There are other legislations in 6
our jurisdiction which prohibit monopolies and combinations in

restraint of trade. Basically, these anti-trust laws or laws against
monopolies or combinations in restraint of trade are aimed at
raising levels of competition by improving the consumer's
effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the
rule of the trade. It rests on the premise that the unrestrained
interaction of competitive forces will yield the best allocation of
our economic resources, the lowest price and the highest quality
x x x they operate to forestall concentration of economic power.
The law against monopolies and combinations in restraint of
trade is aimed at contracts and combinations that, by the inherent
nature of the contemplated acts, prejudice public interest by
unduly restraining competition or unduly obstructing the
course of trade." (Gokongwei, Jr. vs. Securities and Exchange
Commission, 89 SCRA 336 [1979], citing foreign cases.)
(3) Meaning of terms. — "The terms 'monopoly,' 'combination
in restraint of trade' and 'unfair competition' appeared to have
a well-defined meaning in other jurisdictions. A 'monopoly'
embraces any combination the tendency of which is to prevent
competition in the broad and general sense, or to control prices
to the detriment of the public. In short, it is the concentration of
the business in the hands of a few. The material consideration
"Art. 186, Revised Penal Code; Art. 28, Civil Code; Sec. 4 (par. 5.), R.A. No. 5455; and
Sec. 7(g), R.A. No. 6173; cf. Sec. 17 (par. 2.), Judiciary Act.
in determining its existence is not that prices are raised and

competition actually excluded, but that power exists to raise
prices or exclude competition when desired. Further, it must
be considered that the idea of monopoly is now understood to
include a condition produced by the mere act of individuals. Its
dominant thought is the notion of the exclusiveness or unity, or
the suppression of competition by the unification of interest or
management, or it may be thru agreement or concert for action.
It is, in brief, unified tactics with regard to prices." (Ibid.)
(4) Express agreement not necessary. — "From the foregoing
definitions, it is apparent that an express agreement is not neces-
sary for the existence of combination or conspiracy in restraint to
trade. It is enough that a concert of action is contemplated and
that the defendants conformed to the arrangement, and what
is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act (U.S.) prohib-
its a person from serving at the same time as a director in any
two or more corporations, if such corporations are, by virtue
of their business and location of operation, competitors so that
the elimination of competition between them would constitute
violation of any provision of the anti-trust laws. There is here a
statutory recognition of the anti-competitive dangers which may
arise when an individual simultaneously acts as a director of two
or more competing corporations. A common director of two or
more competing corporations would have access to confidential
sales, pricing, marketing information and would be in a position
to coordinate policies or to aid one corporation at the expense of
another, thereby stifling competition." (Ibid.)
Sec. 141. Annual report of corporations. — Every

corporation domestic or foreign lawfully doing business in
the Philippines shall submit to the Securities and Exchange
Commission an annual report of its operations together
with a financial statement of its assets and liabilities
certified by any independent certified public accountant in
appropriate cases covering the preceding fiscal year and
such other requirements as the Securities and Exchange
Commission may require. Such report shall be submitted
within such period as may be prescribed by the Securities
and Exchange Commission, (n)
The Securities and Exchange C o m m i s s i o n .

(1) Creation and supervision. — The Securities and Exchange
Commission (SEC) was created by Commonwealth Act No. 83
(Sec. 3 thereof.), otherwise known as the Securities Act.
(a) The Commission was placed by the Act under the
executive supervision of the Department of Justice. Subse-
quently, it was transferred to the Department of Commerce
and Industry. With the creation of the Department of Trade
and Tourism, administrative supervision was transferred
to this new Department which was later on split into the
Department of Trade and the Department of Tourism (see
Pres. Decree No. 189.), with the Commission remaining under
7
the Department of Trade until the issuance of Presidential
Decree No. 902-A which reorganized the Commission and
placed it under the direct general supervision of the Office of
the President.
(b) Letter of Instructions No. 1117 (dated April 3, 1981.)
placed the Commission under the administrative supervision
of the Cabinet Standing Committee "in order to assure better
consonance of the operations and activities of the Securities
and Exchange Commission with national policies and
objectives relative to the regulation of the corporate sector, and
in order to realize an effective link between the Commission
and the President in the expeditious resolution of problems
as may arise from such operations and activities."
(c) "To align the thrusts and activities of the SEC more
with the overall economic and financial programs of the gov-
ernment," the supervision of the Commission was assigned
to the Ministry of Finance by virtue of Executive Order No.
708 (July 27, 1981) until it was detached from the Ministry
(now Department) by Executive Order No. 127 (January 20,
1987). The Commission was transferred again to the Depart-
ment of Finance by Executive Order No. 202 (September 22,
1994), as amended by Executive Order No. 285 (November
24, 1995). The Department exercised administrative supervi-
sion over the Commission with the relationship between the
TMow, Department of Trade and Industry.

two agencies being governed by Executive Order No. 292,

the Administrative Code of 1987. (Subsec. 1, Sec. 38, Chap. 7,
Book IV thereof.)
(d) "To have a more efficient and more effective coordi-
nation between the SEC, now under the supervision of the
Department of Finance, and other offices to enable SEC
to perform its mandated functions consistent with [the]
national policy and objective" to "encourage a more active
participation of private corporations and enterprises in
the development of the domestic capital market and the
promotion of foreign investments," Executive Order No. 60
(Jan. 13, 1999) transferred direct supervisory power over the
SEC to the Office of the President which "shall assume all
oversight and other functions, administrative and otherwise,
over the SEC."
(e) Executive Order No. 192 (Jan. 11, 2000) reverted the
SEC from the Office of the President again to the Department
of Finance which assumed "administrative supervision over
the Commission including but not limited to the formation of
capital market development and savings mobilization poli-
cies, as may be consistent with the provisions of Section 38,
Chapter 7, Title III, Book IV of the Administrative Code of
1987."
(f) Executive Order No. 810 (July 8, 2009) transferred the
administrative supervision of the Commission again to the
Department of Trade and Industry.
(2) Composition and appointment of members. — From a single-
headed agency, it was reorganized on September 29, 1975 into
a collegial body of three, which was later expanded to include
two additional Commissioners pursuant to Presidential Decree
No. 1758 promulgated on January 2, 1981. Presidential Decree
No. 902-A provided for a collegial body of a Chairman and
four Associate Commissioners who shall be appointed by the
President. (Sec. 2, par. 1 thereof.) This composition is retained by,
R.A. No. 8799, the Securities Regulation Code. (Sec. 4, thereof.)
(3) Terms of office of members. — The Chairman and the four
Associate Commissioners first appointed shall serve for a period
of seven (7) years each and who shall serve as such until their
844
successors shall have been appointed and qualified. A Commis-

sioner appointed to fill a vacancy occurring prior to the expira-
tion of the term for which his/her predecessor was appointed
shall serve only for the unexpired portion of the term. (Ibid.)
(4) Qualifications. — The Commissioners must be natural-
born citizens of the Philippines, at least forty (40) years of age
for the Chairperson and at least thirty-five (35) years of age for
the Commissioners, of good moral character, of unquestionable
integrity, of known probity and patriotism, and with recognized
competence in social and economic disciplines.
The majority of Commissioners, including the Chairperson,
shall be members of the Philippine Bar. (Ibid.)
(5) Chairperson. — The Chairperson is the chief executive
officer of the Commission. The Chairperson shall execute
and administer the policies, decisions, orders and resolutions
approved by the Commission and shall have the general exe-
cutive direction and supervision of the work and operation of
the Commission and of its members, bodies, boards, offices,
personnel and all its administrative business. (Ibid.)
(6) Salary. — The salary of the Chairperson and the Com-
missioners shall be fixed by the President of the Philippines
based on an objective classification system, at a sum comparable
to the members of the Monetary Board and commensurate to the
importance and responsibilities attached to the position. (Ibid.)
(7) Meetings and quorum. — The Commission shall hold
meetings at least once a week for the conduct of business or as
often as may be necessary upon call of the Chairperson or upon
the request of three (3) Commissioners. The notice of the meeting
shall be given to all Commissioners and the presence of three (3)
Commissioners shall constitute a quorum.
In the absence of the Chairperson, the most senior Commis-
sioner shall act as presiding officer of the meeting. (Ibid.)
(8) Delegation of functions and administrative review. — The
Commission may, for purposes of efficiency, delegate any of its
functions to any department or office of the Commission, an
individual Commissioner or staff member of the Commission
except its review or appellate authority and its power to adopt,

alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon
the petition of any interested party any action of any department
or office, individual Commissioner, or staff member of the Com-
mission. (Ibid.)
8
(9) Judicial review of commission's orders. — A person aggrieved

by an order of the Commission may appeal the order to the
Court of Appeals by petition for review in accordance with the
9
pertinent provisions of the Rules of Court. (Sec. 70, SRC.)
Powers and functions of the Commission.

The Securities and Exchange Commission shall act with
transparency and shall have the powers and functions provided
by the Securities Regulation Code, Presidential Decree No.
Presidential Decree No. 902-A provides for the positions of Secretary and Executive
Director as follows: "There shall be a Secretary to the Commission, who shall be of equal
rank or level with that of a Director of the Department and shall be the recorder and offi-
cial reporter of the proceedings of the Commission and shall have authority to administer
oath in all matters coming under the jurisdiction of the Commission.
"There shall be an Executive Director of the Commission who shall be responsible
for the effective implementation of the policies, rules and standards promulgated by the
Commission, to coordinate and supervise the activities of the different operating units,
to report to the Chairman the operations of such units, and to perform such functions as
may be assigned to him by the Chairman and/or by the Commissioner."
T h e procedure for appeal is as follows:
"(4) Period of appeal. — The appeal shall be taken within fifteen (15) days from notice
of the ruling, award, order, decision, or judgment or from the date of its last publication,
if publication is required by law for its effectivity. One (1) motion for reconsideration of
said ruling, award, order, decision, or judgment may be allowed. If the motion is denied,
the movant may appeal during the remaining period for appeal reckoned from notice of
the resolution of denial.
(5) How appeal taken. — Appeals shall be taken by filing a verified petition for
review in six (6) legible copies, with the Court of Appeals, a copy of which shall be served
on the adverse party and on the court or agency a quo. Proof of service of the petition on
the adverse party and on the court or agency a quo shall be attached to the petition.
(6) Contents of the petition. — The petition for review shall contain a concise state-
ment of the facts and issues involved and the grounds relied upon for the review, and
shall be accompanied by a duplicate, original or a certified true copy of the ruling, award,
order, decision or judgment appealed from, together with certified true copies of such
material portions of the record as are referred to therein and other supporting papers. The
petition shall state the specific material dates showing that it was filed within the period
fixed herein."
The decision of the Court of Appeals may be appealed to the Supreme Court by peti-
tion for certiorari within fifteen (15) days from notice of judgment or of the denial of the
motion for reconsideration filed in due time. (Rules of Court, Rule 45, Sec. 1.)
846
902-A, the Corporation Code, the Investment Houses Law, the

Financing Company Act and other existing laws. Pursuant
thereto the Commission shall have, among others, the following
powers and functions:
(1) Have jurisdiction and supervision over all corporations,
partnerships or associations who are the grantees of primary
franchises and/or a license or permit issued by the Government;
(2) Formulate policies and recommendations on issues con-
cerning the securities market, advise Congress and other govern-
ment agencies on all aspects of the securities market and propose
legislation and amendments thereto;
(3) Approve, reject, suspend, revoke or require amendments
to registration statements, and registration and licensing applica-
tions;
(4) Regulate, investigate or supervise the activities of per-
sons to ensure compliance;
(5) Supervise, monitor, suspend or take over the activities of
exchanges, clearing agencies and other SROs;
(6) Impose sanctions for the violation of laws and the rules,
regulations and orders issued pursuant thereto;
(7) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and super-
vise compliance with such rules, regulations and orders;
(8) Enlist the aid and support of and/or deputize any and
all enforcement agencies of the Government, civil or military as
well as any private institution, corporation, firm, association or
person in the implementation of its powers and functions under
this Code;
(9) Issue cease and desist orders to prevent fraud or injury to
the investing public;
(10) Punish for contempt of the Commission, both direct
and indirect, in accordance with the pertinent provisions of and
penalties prescribed by the Rules of Court;
(11) Compel the officers of any registered corporation or
association to call meetings of stockholders or members thereof
under its supervision;
(12) Issue subpoena duces tecum and summon witnesses to

appear in any proceedings of the Commission and in appropriate
cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns, and books of accounts of
any entity or person under investigation as may be necessary
for the proper disposition of the cases before it, subject to the
provisions of existing laws;
(13) Suspend, or revoke, after proper notice and hearing the
franchise or certificate of registration of corporations, partner-
ships or associations, upon any of the grounds provided by law;
and
(14) Exercise such other powers as may be provided by
law as well as those which may be implied from, or which are
necessary or incidental to the carrying out of, the express powers
granted the Commission to achieve the objectives and purposes
of these laws. (Sec. 5, SRC.)
Among the other powers provided in Section 6 of Presiden-
tial Decree No. 902-A are:
(a) To issue preliminary or permanent injunctions,
whether prohibitory or mandatory, in all cases in which it
has jurisdiction, and in which cases the pertinent provisions
of the Rules of Court shall apply;
(b) To issue writs of attachment in cases in which it has
jurisdiction, in order to preserve the rights of parties and in
such cases the pertinent provisions of the Rules of Court shall
apply;
(c) To appoint one or more receivers of the property, real
and personal, which is the subject of the action pending be-
10
fore the Commission x x x;
10
See Garcia vs. Philippine Airlines, Inc., 531 SCRA 564 (2007); Uniwide Holdings,
Inc. vs. Jandees Transportation Co., Inc., 541 SCRA 158 (2007); Rizal Commercial
Banking Corp. vs. Intermediate Appellate Court, 320 SCRA 279 (1999). The suspension
contemplated under Section 6(c) of Pres. Decree No. 902-A refers only to claims involving
actions which are pecuniary in value. A claim within the contemplation of Pres. Decree
No. 902-A is construed to refer to debts or demands of a pecuniary nature. (Finasia
Investments & Finance Corp. vs. Court of Appeals, 237 SCRA 446 [1994]; Malayan
Insurance Co. vs. Victorias Milling Co., Inc., 586 SCRA 45 [2009].) The filing of a case for
violation of the Bouncing Check Law (B.P. Big. 22) is not, however, a claim that can be
enjoined within the purview of Section 6(c). The purpose of suspending the proceedings
under Pres. Decree No. 902-A is to prevent a creditor from obtaining an advantage or
848
(d) To create and appoint a management committee,

board, or body upon petition or motu proprio" x x x ;
(g) To pass upon the validity of the issuance and use of
proxies and voting trust agreements for absent stockholders
or members;
(j) To authorize the establishment and operation of stock
exchanges, commodity exchanges and such other similar
organizations and to supervise and regulate the same,
including the authority to determine their number, size and
location, in the light of national or regional requirements
for such activities with the view to promote, conserve or
rationalize investment; and
(k) To pass upon, refuse or deny, after consultation with
the Board of Investments, Department of Industry, National
Economic and Development Authority or any other appro-
priate government agency, the application for registration of
any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establish-
ment, organization or operation will not be consistent with
the declared national economic policies. (Sec. 6, thereof.)
preference over another and to protect and preserve the rights of party litigants as well
as the interest of the investing public or creditors. (Rosario vs. Co, 563 SCRA 239 [2008].)
"When the dissension among stockholders is such that the corporation cannot suc-
cessfully carry on its corporate functions, the appointment of a management commit-
tee becomes imperative, especially where there is imminent danger of dissipation, loss,
wastage or destruction of corporate assets. Mere disagreement amount stockholders as to
the affairs of the corporation would not in itself suffice as a ground for the appointment
of a management committee. (Jacinto vs. First Women's Credit Corporation, 410 SCRA
140 [2003].) Having the power to create a management committee, a regional trial court
can order the reorganization of the existing management committee. The appointment
of new members does not mean the creation of a new management committee. (Punong-
bayan vs. Punongbayan, Jr., 491 SCRA 477 [2006].) All actions for claims (whether secured
or unsecured) against a corporation pending before any court, tribunal or board shall ipso
jure be suspended in whatever stage such actions may be found upon the appointment
by the SEC of a management committee or a rehabilitation receiver. (Philippine Airlines,
Inc. vs. Zamora, 514 SCRA 584 [2007].)
See Phil. Airlines, Inc. vs. PAL Employees Assoc., 525 SCRA 29 (2007); Union Bank
of the Phils, vs. Conception, 525 SCRA 672 (2007); Cordova vs. Reyes, etc., Law Offices,
526 SCRA 300 (2007); Phil. Airlines, Inc. vs. Heirs of B.J. Zamora, 538 SCRA 456 (2007).
Jurisdiction of Commission over corporations.

The Securities and Exchange Commission has jurisdiction and
supervision over all corporations, partnerships or associations,
who are the grantees of primary franchise and /or a license or
permit issued by the government to operate in the Philippines;
and in the exercise of its authority, it has the power to enlist the
aid and support of and/or deputize any and all enforcement
agencies of the government, civil or military, as well as any
private institution, corporation, firm, association or person in the
implementation of its powers and functions. (Sec. 5[a], [h], SRC.)
It is the certificate of incorporation that gives juridical
personality to a corporation and places it within the Com-
mission's jurisdiction. This jurisdiction is not affected even if the
authority to operate a certain specialized activity is withdrawn
by the appropriate regulatory body other than the Commission.
(Pilipinas Loan Company, Inc. vs. Securities and Exchange
Commission, 356 SCRA 193 [2001]; Orosa, Jr. vs. Court of Appeals,
193 SCRA 391 [1991].)
(1) Corporation covered. — Section 5 above plainly vests the
Commission with jurisdiction and supervision over all corpo-
rations which are enfranchised to act as corporate entities. It by
no means restricts that jurisdiction to entities other than those
granted permits or licenses to operate by another government
regulatory body. It is the certificate of incorporation that gives
juridical personality to a corporation and places it within the
Commission's jurisdiction, (see Oroza, Jr. vs. Court of Appeals,
193 SCRA 391 [1991].)
The Commission's regulatory authority over private
corporations provided in the Securities Regulation Code (supra.)
encompasses a wide margin of areas, touching nearly all of a
corporation's concerns. This authority springs from the fact that
a corporation owes its existence to the concession of its corporate
franchise from the State. (Philippine Stock Exchange, Inc. vs.
Court of Appeals, 281 SCRA 232 [1997].) Thus, the determination
as to which of two stock and transfer books (STB) is authentic
and duly registered with it, whether a STB registration may be
cancelled, or whether a certification with respect to a STB may be
revoked, is an issue that necessarily belongs to the SEC as part of
850
its regulatory jurisdiction, and not with the regional trial court.
(Provident International Resources Corp. vs. Venus, 554 SCRA
540 [2008].)
The Commission, however, has no jurisdiction over corpo-
rations created by a special law and not under the Corporation
Code or the former Corporation Law. (infra.) Thus:
(a) The SEC has no power of supervision or control over
the activities of juridical entities known as "water districts"
created by Presidential Decree No. 198 although considered
as quasi-public corporations as they are entirely distinct from
corporations organized under the Corporation Code. The
function of supervision or control over them is entrusted by
law to the Local Water Utilities Administration. (Marilao Wa-
ter Consumers Assoc., Inc. vs. Intermediate Appellate Court,
201 SCRA 437 [1991]; see Davao City Water District vs. Civil
Service Commission, 201 SCRA 593 [1991].)
(b) Quo warranto actions against corporations or persons
using corporate offices fall under the jurisdiction of the
commission unless otherwise provided for by law, as in the
case where the corporate entities involved are homeowners
associations in which jurisdiction is lodged with the Home
Insurance and Guarantee Corporation (HIGC), the new name
given by Exec. Order No. 90, Section 1(d) to what was formerly
the Home Financing Corporation (HFC) created under R.A.
No. 580. Under Section 2 of Exec. Order No. 535, implemented
by HIGC's Revised Rules of Procedure, the HIGC shall
"exercise all the powers, authorities and responsibilities that
are vested on the Securities and Exchange Commission with
respect to homeowners association." (Unilongo vs. Court of
Appeals, 305 SCRA 561 [2000].)
(2) Matter or cases contemplated. — The jurisdiction of the SEC
is limited to matters intrinsically connected with the regulation
of corporations, partnerships and associations. It is not vested
with absolute jurisdiction and control in all matters affecting
corporations, partnerships and associations, for to uphold such
a proposition would remove without legal imprimatur from the
regular courts all conflicts over matters involving or affecting
them, regardless of the nature of the transactions which gave rise

to such disputes. (Peneyra vs. Intermediate Appellate Court, 181
SCRA 244 [1990]; DMRC Enterprises vs. Este del Sol Mountain
Reserve, Inc., 132 SCRA 293 [1984]; Dee vs. Securities and
(3) Jurisdiction and powers strictly construed. — Administrative
agencies like the Securities and Exchange Commission are
tribunals of limited jurisdiction, and as such, can exercise only
those powers which are specifically granted to them by their
enabling statutes and their jurisdiction should be interpreted
strictissimi juris. It is likewise the rule, however, that an admi-
nistrative agency has also such powers as are necessarily
implied in the exercise of its express powers. It is a well-settled
rule, however, that findings of quasi-judicial agencies, like the
Securities and Exchange Commission, which have acquired
expertise in the matters entrusted to their jurisdiction are
generally accorded by the Supreme Court not only great weight
and respect but with finality if they are supported by substantial
evidence.
(4) Corporations subject to its secondary jurisdiction. — In cases
where a government agency regulates the operation of a certain
type of business or activity by virtue of a special law, that agency
has the primary jurisdiction over the same while the SEC assumes
only secondary jurisdiction with respect to matters involving its
authority to enforce the Corporation Code and the Securities
Regulation Code.
(a) Thus, the SEC has no jurisdiction over matters relating
to the implementation of the Insurance Code (Pres. Decree
No. 1460.) which is entrusted to the Insurance Commission.
While it can impose sanctions on insurance companies for
violations of the Corporation Code, it has no power to go after
erring insurance companies for violation of the Insurance
Code. (SEC Opinion, Oct. 9, 1989.)
(b) Also, while the SEC has no jurisdiction over the
business operation of the Philippine National Bank which
was created by a special law and is not registered with it and
although the bank's securities are exempt from registration
requirements under the Revised Securities Act (now
852
Securities Regulation Code), it has jurisdiction to intervene

on matters pertaining to the listing of securities in the stock
exchange. (SEC Opinion Oct. 10,1991.)
Note: The SEC retains its administratie regulatory and
oversight powers over all corporations, partnerships and
associations which are grantees of primary franchises and/
or a license or permit issued by the Government, (see Oren-
dain vs. B.F. Homes, Inc., 506 SCRA 348 [2006].) However,
intra-corporate controversies have been transferred by R.A.
No. 8799 (SRC) to regional trial courts, (see Appendix " C " )
Concomitant to the power of regional trial courts to hear and
decide, intra-corporate controversies is to authority to issue
orders necessary or incideental to the carrying out of the
powers expressly granted to it. (Yuyuico vs. Quiambao, 513
SCRA 243 [2007].)
Indemnifications and responsibilities

of Commissioners.
(1) The Securities and Exchange Commission shall indem-
nify each Commissioner and other officials of the Commission,
including personnel performing supervision and examination
functions for all costs and expenses reasonably incurred by such
persons in connection with any civil or criminal actions, suits or
proceedings to which they may be or made a party by reason
of the performance of their functions or duties, unless they are
finally adjudged in such actions or proceedings to be liable for
gross negligence or misconduct.
(a) In the event of settlement or compromise, indem-
nification shall be provided only in connection with such
matters covered by the settlement as to which the Com-
mission is advised by external counsel that the persons
to be indemnified did not commit any gross negligence or
misconduct.
(b) The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be paid by
the Commission in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by
or on behalf of the Commissioner, officer or employee to repay
the amount advanced should it ultimately be determined by

the Commission that he/she is not entitled to be indemnified
as provided in this subsection.
(2) The Commissioners, officers and employees of the Com-
mission who willfully violate the Securities Regulation Code or
who are guilty of negligence, abuse or acts of malfeasance or fail
to exercise extraordinary diligence in the performance of their
duties shall be held liable for any loss or injury suffered by the
Commission or other institutions as a result of such violation,
negligence, abuse, malfeasance, or failure to exercise extraordi-
nary diligence.
(3) Similar responsibility shall apply to the Commissioners,
officers and employees of the Commission for:
(a) the disclosure of any information, discussion or reso-
lution of the Commission of a confidential nature, or about
the confidential operations of the Commission, unless the
disclosure is in connection with the performance of official
functions with the Commission or with prior authorization
of the Commissioners; or
(b) the use of such information for personal gain or to
the detriment of the government, the Commission or third
parties.
Any data or information required to be submitted to the
President and/or Congress or its appropriate committee, or to
be published under the provisions of this Code shall not be con-
sidered confidential. (Sec. 6, SRC.)
Jurisdiction over cases transferred

to ordinary courts.
The jurisdiction of the Securities and Exchange Commission
"over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the courts of general
12
jurisdiction or the appropriate Regional Trial Court." The
"Congress recognized that the intra-corporate disputes are not that much of a tech-
nical matter that requires the competence of a specialized agency like the SEC. Thus, even
a regular trial court can resolve such disputes.
854
Supreme Court in the exercise of its authority may designate

the Regional Trial Court branches that shall exercise jurisdiction
13
over these cases. (Sec. 5.2, SRC.)
(1) Cases transferred. — The cases enumerated in Section 5 of
Presidential Decree No. 902-A, involve the following:
"(a) Devices or schemes employed by or any acts of the
board of directors, business associates, its officers or part-
ners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the
stockholders, partners, or members of associations or organi-
zations registered with the Commission;
(b) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders,
members, or associates; between any or all of them and
the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the
State insofar as it concerns their individual franchise or right
to exist as such entity;
(c) Controversies in the election or appointment of direc-
tors, trustees, officers or managers of such corporations, part-
nerships or associations;
(d) Petitions of corporations, partnerships or associations
to be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due
or in cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is under
management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree."
(2) Status or relationship contemplated. — Otherwise stated,
the controversy must pertain to any of the following relation-
ships of the parties:
i3"Xhe Commission shall retain jurisdiction over pending suspension of payments/

rehabilitation cases filed as of 30 June 2000 until finally disposed."
(a) between the corporation, partnership, or association

and the public; or
(b) between the corporation, etc., and its stockholders,
partners, members, or officers; or
(c) between the corporation, etc., and the State insofar as
its franchise, permit or license to operate is concerned; or
(d) among the stockholders, partners, or associates them-
selves. (Embassy Farms, Inc. vs. Court of Appeals, 188 SCRA
492 [1990]; Rivera vs. Florendo, 144 SCRA 643 [1986]; Abejo
vs. De la Cruz, 149 SCRA 654 [1987]; Dee vs. Securities and
(3) Previous quasi-judicial powers of SEC delimited. — Before, to
determine which body, the Commission or the regular court, has
jurisdiction over a dispute, not only the status or relationship of
the parties (which requires that the controversy must arise out
of intra-corporate or partnership relations) but also the nature of
the question that is the subject of the controversy (which requires
that the dispute among the parties be intrinsically connected
with the regulation of the corporation, etc. or deal which its
internal affairs) must be considered. Thus, not only every conflict
or disagreement between a corporation and its stockholders
could be resolved by the SEC in the exercise of its adjudicatory
or quasi-judicial jurisdiction.
If, for example, a person leases an apartment owned by a cor-
poration of which he is a stockholder, a complaint for ejectment
for non-payment of rentals would come under the jurisdiction
of the regular courts. (Viray vs. Court of Appeals, 191 SCRA 308
[1990]; see Torio vs. Court of Appeals, 230 SCRA 626 [1994].) His
position as a stockholder of the corporation is incidental only to
the issue of his liability for unpaid rentals.
A claim for unpaid wages and separation pay filed by a
corporate officer against a corporation involves a labor dispute as
it relates to an employer-employee relationship, which is distinct
from the corporate relationship of one with the other. (Mainland
Construction Co., Inc. vs. Movilla, 250 SCRA 290 [1995].) Article
226 of the Labor Code vests upon the Bureau of Labor Relations
original and exclusive authority and jurisdiction to act on all
856
inter-union and intra-union disputes. The controversy between

two sets of officers of a labor union both claiming to be entitled
to the release of the union dues collected by the company with
whom it had an existing collective bargaining agreement is
an intra-union dispute over which the SEC (now RTC) has no
jurisdiction. (Cebu Seamen's Assoc., Inc. vs. Ferrer, 212 SCRA
50 [1992].) It has been held, however, that a corporate officer's
dismissal is always a corporate act and its nature is not altered
by the reason or wisdom which the board of directors may have
in taking such action. The question of remuneration involving a
person who is not a mere employee but a stockholder and officer
of a corporation is not a simple labor problem but a matter that
comes within the area of corporate officers and management
and is, in fact, a corporate controversy in contemplation of the
Corporation Code. (Velarde vs. Lopez, Inc., 419 SCRA422 [2003].)
(4) Jurisdiction over all the cases now with appropriate regioanl
trial courts. — Now, in view of R.A. No. 8799 (SRC), every judi-
cial controversy, whether or not it arises out of intra-corporate or
partnership relations or deals with the internal affairs of a corpo-
ration, partnership, or association, including derivative suits and
inspection of books, falls within the jurisdiction of the appropri-
ate regional trial courts.
Note: The Interim Rules of Procedure for Intra-corporate
Controversies (Appendix " C " ) approved by the Supreme Court
governing the procedure to be observed in civil cases involving
controversies enumerated in Section 5 of Pres. Decree No. 902-
A jurisdiction over which has been transferred to Regional
Trial Courts does not include controversies "between such
corporation, partnership or association and the state insofar as
it concerns their individual franchise or right to exist as such
entity" mentioned in No. (l)(b) above. Section 5.2 of R.A. No.
8799 (SRC), however, is very clear that the jurisdiction that has
been transferred is "over all cases enumerated under Section 5 of
Presidential Decree No. 902-A."
Submission of annual report

to the C o m m i s s i o n .
Every corporation doing business in the Philippines is
required to submit to the Securities and Exchange Commission
within such period as may be prescribed by it an annual report

of its operations for the preceding year, including an audited
financial statement of its assets and liabilities and such other
requirements (e.g., see Sec. 126.) as it may require. The annual
report contemplated is separate and apart from the financial
report which the board of directors or trustees is required to
present to stockholders or members at the annual regular meeting
14
of stockholders or members. (see Sec. 75, par. 2.)
Section 141 makes the submission of reportorial requirements
15
obligatory. (SEC Opinion, Jan. 13, 1986.) However, in case of
suspension of corporate business, a corporation may be exempted
from submitting its annual financial statements by filing with the
Securities and Exchange Commission in duplicate an affidavit
of its manager stating the fact of suspension of the corporate
business and the cause thereof. (SEC Opinion, Jan. 2, 1973.)
The sale or divestment by a public official of his corporate
"The provisions of Section 141, together with Section 126 which requires a branch
office of a foreign corporation to deposit with the SEC securities, basing the computation
of the value of these securities and of penalties for failure to comply with reportorial re-
quirements on the accumulated income of the branch office, show that complete financial
statements must be submitted to enable the SEC to perform its monitoring functions.
(SEC Opinion No. 07-04, April 20, 2007.)
15
The SEC rules require that at the end of its fiscal year, each corporation, whether
domestic or foreign, must prepare a balance sheet and related profit and loss statement
duly audited and certified by an independent certified public accountant. Where the au-
thorized capital stock or the paid-up capital, whichever is lower, is less than P50,000.00,
the said financial statements may, instead, be attested and sworn to by the treasurer of the
corporation. The deadline for submission of copy of said statements to the Commission
is as follows:
(1) For corporations whose securities are not registered under the Revised Securi-
ties Act —120 days from the end of the fiscal year of the corporation. A copy of the annual
financial statements, duly stamped "Received" by the Bureau of Internal Revenue must
also be submitted.
(2) For corporations whose securities are registered under the Revised Securities
Act including commercial paper issuers — 1 0 5 days from the end of the fiscal year of the
corporation. In addition, written consent by the corporation allowing the SEC to obtain
a copy of the annual financial statements filed with the Bureau of Internal Revenue must
be submitted.
(3) For securities brokers — sixty (60) days from the end of the fiscal year of the
corporation.
An application for extension of time of not exceeding thirty (30) days to file the an-
nual financial statements may be entertained if presented before the due date and upon
payment of a compromise penalty.
See Appendices "I" and "J."
858
shares before assuming office need not be reported to the Com-

mission as no law requires it. Section 141 only requires submis-
sion of financial reports, not sales or disposal of stocks. (Trueste,
Sr. vs. Sandiganbayan, 145 SCRA 508 [1986].)
Corporations covered by the requirement.

It would seem that Section 141 applies only to stock corpora-
tions, whether they actually declare and distribute dividends or
not, and not to non-stock corporations. This is evident from the
fact that Section 141 limits its application to corporations "law-
fully doing business in the Philippines."
(1) It has been opined, however, that a corporation, whether
stock or non-stock, may be deemed to be "doing business"
when it engages in the exercise of its corporate purposes. Thus,
while non-stock, non-profit corporations, including corporations
sole, by their very nature do not undertake economic business
ventures, they are considered doing or transacting business in
the carrying of the purpose(s) for which they were organized.
(SEC Opinion, July 3,1992.) Furthermore, Section 87 provides for
the supplementary application of the Code provisions on stock
corporations, (par. 2 thereof.)
(2) Pension funds, retirement plans, and provident funds
which are established within the corporation and are not
separately registered with the Commission are not required to
be audited by an external auditor as their auditing is the internal
concern of the corporation. (SEC Opinion, Sept. 18,1989.)
(3) Stock corporations such as banks and banking institutions,
public utility corporations, insurance corporations, cooperative
associations, labor unions, and other corporations governed by
laws not entrusted to the Securities and Exchange Commission
for enforcement are likewise excluded from the operation of
Section 141.
Sec. 142. Confidential nature of examination results. —

All interrogatories propounded by the Securities and
Exchange Commission and the answers thereto, as well as
the results of any examination made by the Commission
or by any other official authorized by law to make an
examination of the operations, books and records of any

corporation, shall be kept strictly confidential, except
insofar as the law may require the same to be made public
or where such interrogatories, answers or results are
necessary to be presented as evidence before any court
(n)
Visitorial p o w e r in g e n e r a l .
Visitorial power or right of visitation is the power of the State
through the proper governmental agency to examine the busi-
ness affairs, administration, and condition of corporations.
(1) Nature. — It is a public right as distinguished from the
right of inspection of the corporate books and records by a stock-
holder (see Sec. 74, par. 2.), which is merely a private right exist-
ing in virtue of his stock ownership. (Harkness vs. Guthrine, 72
Utah 248, 75 P. 624.)
(2) Purpose. — The purpose of visitation is to supervise and
control the management of corporations and keep them within
the limits of their legitimate powers. (Ibid.)
(3) Scope. — It extends to "any corporation" transacting busi-
ness in the Philippines (Sec. 142.) even, therefore, to corporations
created by special laws and foreign corporations. In the exercise
of its right of visitation, for purposes of taxation and regulation,
or to facilitate the accomplishment of any other proper end, the
State has the power to compel corporations to render reports. (18
Am. Jur. 2d 705.)
Visitorial power granted certain

governmental agencies.
The visitorial power is vested in the State, particularly in the
lawmaking body. By special laws, the following, among others,
have been granted visitorial powers which they may exercise
motu proprio or upon complaint of a party-in-interest:
(1) The Securities and Exchange Commission, as to books of
corporations and partnerships when such is necessary in the en-
forcement of the Corporation Law. (see C A . No. 287.) The Com-
mission has the power to require corporations and partnerships
registered with it to submit such reports, financial or otherwise,
as may be necessary in the public interest or for the proper dis-

charge of its duties, (see Sec. 141.) Under the Securities Regula-
tion Code, it may order the examination, search and seizure of all
documents, papers, files and records, tax returns, and books of
accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases before it, subject
to the provisions of existing laws.
Section 142 declares as confidential all interrogatories pro-
pounded by the Commission and the answers thereto by any
corporation and the result of the examination of its operations,
its books and records except (a) when otherwise provided by law
or (b) when they are necessary to be presented as evidence before
any court;
(2) The Bureau of Internal Revenue, with respect to liability
of corporations for taxes (Sees. 232-235, Pres. Decree No. 1158
[National Internal Revenue Code], as amended.);
(3) The Insurance Commission, over all insurance companies
(Sees. 245-246, Pres. Decree No. 1460 [Insurance Code of 1978].);
(4) The supervising and examining department head of the
Bangko Sentral ng Pilipinas, over all banking and quasi-banking
institutions operating in the Philippines (Sec. 28, R.A. No. 7653
[the new Central Bank Act].);
(5) The National Telecommunications Commission, as to radio
and television broadcasting companies, operators of radio com-
munications systems, wire or wireless telephone systems, and
other similar public utilities (see Sees. 14 and 15, Exec. Order No.
546.);
(6) The Department of Labor and Employment or its duly author-
ized representative, as to employer's records and premises,
when such is necessary to determine compliance with or in
aid in enforcement of the Labor Code (Pres. Decree No. 442, as
amended.) or the rules and the regulations issued thereunder (see
Sec. 1, Rule VI, Book III, Rules and Regulations Implementing
the Labor Code.);
(7) The Commission on Audit, as to books, papers, and docu-

ments filed by individuals and corporations with, and which are
in the custody of, government offices in connection with govern-

ment revenue collection operations, for the sole purpose of ascer-
taining that all funds determined by the appropriate agencies as
collectible and due the government have been actually collected,
except as otherwise provided in the National Internal Revenue
Code of 1986. (Sec. 28, Pres. Decree No. 1445 [Auditing Code of
the Philippines].)
The Commission has visitorial authority over non-govern-
ment entities subsidized by the government, those required
to pay levies or government share, those which have received
counterpart funds from the government or are partly funded by
donations through the government, the said authority, however,
pertaining only to the audit of those funds or subsidiaries com-
ing from or through the government. Upon direction of the Presi-
dent, the Commission shall likewise exercise visitorial authority
over non-governmental entities whose loans are guaranteed by
the government, but such authority shall pertain only to the au-
dit of the government's contingent liability (Sec. 29, Ibid.); and
(8) The National Housing Authority as to the business affairs,
administration, and condition of any person, corporation, part-
nership, cooperative, or association engaged in the business of
selling subdivision lots and condominium units. For this pur-
pose, the official authorized to do so shall have the authority to
examine under oath the directors, officers, stockholders or mem-
bers of any corporation, partnership, association, cooperative or
other persons associated or connected with the business and to
issue subpoena or subpoena duces tecum in relation to any investi-
gation that may arise therefrom.
The Authority may also authorize the Provincial, City, or
Municipal Engineer, as the case may be, to conduct an ocular
inspection of the project to determine whether the development
of said project conforms to the standards and specifications pre-
scribed by the government. The books, papers, letters, and other
documents belonging to the person or entities herein mentioned
shall be open to inspection by the Authority or its duly autho-
rized representative. (Sec. 34, Pres. Decree No. 957 [Subdivision
and Condominium Buyers' Protective Decree], as amended.)
862
Judicial supervision, generally.

Although the general visitorial powers of the State may be
exercised by the courts, as a general rule, courts will refrain from
interfering with the internal management of a corporation. It
will not do so at the instance of minority stockholders as long as
those in control are acting honestly and within their discretion-
ary powers.
The rule, however, is not absolute or inflexible. Where the
action of a board of directors or the stockholders is an abuse of
discretion, or is forbidden by law or is against public policy, or is
ultra vires, or is a fraud upon minority stockholders, or will result
in waste, dissipation, or misapplication of the corporate assets,
the courts have the power to grant appropriate relief. (19 Am.
Jur. 2d 834.)
Sec. 143. Rule-making power of the Securities and

Exchange Commission. — The Securities and Exchange
Commission shall have the power and authority to
implement the provisions of this Code, and to promulgate
rules and regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the prevention
of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers, (n)
Rule-making power of the Securities

and Exchange C o m m i s s i o n .
(1) Rules governing corporations. — In the exercise of its
general power and authority to implement the provisions of the
Corporation Code, the Securities and Exchange Commission
is empowered to promulgate rules and regulations governing
corporations reasonably necessary to enable it to perform the
duties imposed upon it by the Code, particularly in the prevention
of fraud and abuses on the part of the controlling stockholders,
16
members, directors, trustees, or officers. (Sec. 143.)
l6
There are certain provisions in the 1999 SEC new Rules of Procedure that suggest
Le availability of petitions for certiorari to be filed with the Commission en banc as against
iterlocutory orders. (Yamaoka vs. Pescarich Manufacturing Corporations, 361 SCRA 672
(2) Rules governing securities. - To effect the provisions and

purposes of the Securities Regulation Code (SRC), the Commis-
sion may issue, amend, and rescind such rules and regulations
and orders necessary or appropriate, including rules and regula-
tions defining accounting, technical, and trade terms used in the
SRC, and prescribing the form or forms in which information
required in registration statements, applications, and reports to
the Commission shall be set forth.
(a) Forpurposesofitsrulesorregulations,theCommission
may classify persons, securities, and other matters within its
jurisdiction, prescribe different requirements for different
classes of persons, securities, or matters, and by rule or order,
conditionally or unconditionally exempt any person, security,
or transaction, or class or classes of persons, securities or
transactions, from any or all provisions of the SRC.
(b) Failure on the part of the Commission to issue rules
and regulations shall not in any manner affect the self-execu-
tory nature of the SRC.
(c) The Commission shall promulgate rules and regula-
tions providing for reporting, disclosure and the prevention
of fraudulent, deceptive or manipulative practices in connec-
tion with the purchase by an issuer, by tender offer or other-
wise, of and equity security of a class issued by it that sat-
isfies the requirements of Subsection 17.2 (refers to Periodic
and other Reports of Issuers) of the SRC. Such rules and reg-
ulations may require such issuer to provide holders of equity
securities of such dates with such information relating to the
reasons for such purchase, the source of funds, the number
of shares to be purchased, the price to be paid for such secu-
rities, the method of purchase and such additional informa-
tion as the Commission deems necessary or appropriate in
the public interest or for the protection of investors, or which
the Commission deems to be material to a determination by
holders whether such security should be sold.
(d) For the purposes of paragraph (c) above, a purchase
by or for the issuer or any person controlling, controlled
by, or under common control with the issuer, or a purchase
subject to the control of the issuer or any such person, shall
be deemed to be a purchase by the issuer. The Commission

shall have the power to make the necessary implementing
rules and regulations. Including exemptive rules and
regulations covering situations in which the Commission
deems it unnecessary or inappropriate that a purchase of the
type described shall be deemed to be a purchase by the issuer
for the purpose of some or all of paragraph (c).
(e) The rules and regulations promulgated by the Com-
mission shall be published in two (2) newspapers of gen-
eral circulation in the Philippines, and unless otherwise
prescribed by the Commission, the same shall be effective 15
days after the date of the last publication. (Sec. 72, SRC.)
(3) Rules prescribing fines and/or penalties. — Furthermore, the
Commission may impose fines and/or penalties for violations of
the Code, or any other laws being implemented by it, the perti-
17
nent rules and regulations, its orders, decisions and/or rulings.
(Ibid., Sec. 6[f]; see also, Sec. l[b], R.A. No. 1143.) Thus, a corpora-
tion may be dissolved by the Commission on grounds provided
by its rules and regulations. (Sec. 121.) The Commission is au-
thorized to collect and receive fees under rules and regulations
promulgated by it. (Sec. 139.)
(4) Entities not subject to rules. — Banks and banking insti-
tutions, public utility corporations, insurance corporations, co-
operative associations, labor unions and other corporations
governed by laws not entrusted to the Securities and Exchange
Commission for enforcement or falling under the jurisdiction of
government agencies other than the Commission are not subject
to its rules, (see Sec. 4, SEC Rules and Regulations, dated March
5,1958.)
Sec. 144. Violations of the Code.—Violations of any of the

provisions of this Code or its amendments not otherwise
specifically penalized therein shall be punished by a fine of
not less than one thousand pesos (P1,000.00) but not more
than ten thousand pesos (P10,000.00) or by imprisonment
for not less than thirty (30) days but not more than five (5)
years, or both, in the discretion of the court. If the violation
17
See Consolidated Scale of Fines (Appendix "H.")
is committed by a corporation, the same may, after notice

and hearing, be dissolved in appropriate proceedings
before the Securities and Exchange Commission: Provided,
That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer
of the corporation responsible for said violation: Provided,
further, That nothing in this section shall be construed to
repeal the other causes for dissolution of a corporation
provided in this Code. (190 1/2a)
General penalty.
In addition to specific penalties or sanctions provided by
the Code for violation of any of its provisions or amendments
thereto, the Code expressly provides under the above section a
general penalty for violations "not otherwise specifically penal-
ized therein."
(1) If the violation is committed by a director or trustee,
officer or stockholder or member of a corporation, he shall be
punished by fine or by imprisonment, or both in the discretion of
the court, (see Sec. 74, par. 3.)
(2) If the violation is committed by the corporation, the
same shall be dissolved after appropriate proceedings before
the Securities and Exchange Commission (see Sec. 121.) without
prejudice to the institution of appropriate action against the
director, trustee or officer of the corporation responsible for the
violation.
Sec. 145. Amendment or repeal. — No right or remedy

in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members,
directors, trustees or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation
or by any subsequent amendment or repeal of this Code or
of any part thereof, (n)
Limitations on legislative power to a m e n d

or repeal.
(1) Right against impairment of obligations of contracts and vested
rights. — Under Section 145, any remedy or right already acquired
866
by or against, or any liability already incurred by any corporation,

its stockholders, members, directors, trustees, or officers shall
not be removed or impaired by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of
the Code or of any part thereof. There is here a recognition of the
right against impairment of the obligations of a contract or of
vested rights.
(2) Right survives dissolution of corporation. — The reserved
power of "amendment, alteration, or repeal by the Congress" (see
Constitution, Art. XII, Sec. 11.) is subject to the provision of the
Constitution against impairing the obligation of contracts. (Art.
Ill, Sec. 10 thereof.) The obligation of contracts entered into by the
corporation and vested or acquired rights survive its dissolution.
Thus, an educational institution whose charter has expired in the
middle of a school year may continue holding classes up to the
end of such school year where the enrollment for such classes
was made prior to the date of its dissolution. (SEC Opinion, Aug.
24,1971.)
(3) Right to compensation for property taken. — The right to
amend does not also authorize the taking of the corporation's
property without just compensation. (Constitution, Art. Ill, Sec.
9.)
Sec. 146. Repealing clause. — Except as expressly

provided by this Code, all laws or parts thereof inconsistent
with any provision of this Code shall be deemed repealed,
(n)
Former Corporation Law repealed.

There is no express repeal of Act No. 1459 (as amended.), the
old Corporation Law. Repeals by implication are not favored as
laws are presumed to be passed with full knowledge of existing
laws. However, Act No. 1459 should be deemed repealed by
the Code as the latter "is intended to supplant" the former, (see
Explanatory Note to Cabinet Bill No. 3 which became B.R Big. 68;
see Sec. 1.)
While as a general rule, implied repeal of a former statute

by a later one is not favored, yet if the later act covers the whole
subject of the earlier one and is clearly intended as a substitute,

it will operate as a repeal of the earlier act, and in such a revision
of the law, whatever is excluded is discarded and repealed. {In
re Guzman, 73 Phil. 52 [1941]; Joaquin vs. Navarro, 81 Phil. 373
[1948]; Iloilo Palay and Corn Planters Assoc., Inc. vs. Feliciano, 13
SCRA 377 [1965].)
R e p e a l of other l a w s .
All other laws, decrees, executive orders, rules and regula-

tions or parts thereof contrary to or inconsistent with any provi-
sion of the Corporation Code shall also be deemed repealed.
(1) Presumption against implied repeals. — It has been held,
however, that a repealing clause which states that "all laws or
parts thereof inconsistent with the provisions of this Act are here-
by repealed or modified accordingly" is not an express repealing
clause because it fails to identify or designate the Act or Acts that
are intended to be repealed. Such being the case, the presump-
tion against implied repeals still applies unless an irreconcilable
inconsistency or repugnancy exists in the terms of the new and
old laws. (Iloilo Palay and Corn Planters Assoc., Inc. vs. Felicia-
no, supra; Quimsing vs. Lachica, 2 SCRA 182 [1961].)
(2) Suppletory application of Corporation Code. — The enact-
ment of a later general law cannot be construed to have implied-
ly repealed a previously enacted special law. The established rule
is that a special statute, providing for a particular case or class
of cases, is not repealed by a subsequent statute, general in its
terms, provisions and applications, unless there is a specific and
express repeal or at least the intent to repeal or alter is manifest,
although the terms of the general law (like the Corporation Code)
are broad enough to include the cases embraced in the special
law (like the General Banking Law). (National Power Corpora-
tion vs. Area, 25 SCRA 931 [1968].) Such "particular case or class
of cases" shall be governed by the provisions of the general law
only "insofar as they are applicable" (see Sec. 4.), either because
they are not inconsistent with or are expressly made applicable
by the special law.
866
Sec. 147. Separability of provisions. — Should any provi-

sion of this Code or any part thereof be declared invalid or
unconstitutional, the other provisions, so far as they are
separable, shall remain in force, (n)
Sec. 148. Applicability to existing corporations. — All
corporations lawfully existing and doing business in
the Philippines on the date of the effectivity of this
Code and heretofore authorized, licensed or registered
by the Securities and Exchange Commission, shall be
deemed to have been authorized, licensed or registered
under the provisions of this Code, subject to the terms
and conditions of its license, and shall be governed by
the provisions hereof: Provided, That where any such
corporation is affected by the new requirements of this
Code, said corporation shall, unless otherwise herein
provided, be given a period of not more than two (2) years
from the effectivity of this Code within which to comply
with the same, (n)
Applicability of C o d e to existing
corporations.
All lawfully existing corporations including foreign corpora-

tions licensed by the Securities and Exchange Commission before
the effectivity of the Code shall be deemed licensed under the
provisions of the Code, and shall continue to have such authority
under the terms and conditions of their licenses but subject to the
provisions of the Code.
Where any such corporation is affected by new requirements
of the Code (e.g., the 2 5 % / 2 5 % ratio requirement on the subs-
cribed and paid-up capital of stock corporation under Section
13; requirement under Section 123 that the laws of a foreign
corporation "allow Filipino citizens and corporations to do
business in its own country or State"; requirement under Section
126 for foreign corporations to deposit with the SEC Philippine
securities worth at least PI00,000), said corporation shall, unless
otherwise provided, have a period of not more than two (2) years
from the effectivity of the Code within which to comply with the
same.
For pre-war corporations without any provisions in their

articles of incorporation as to their term of existence, the required
50-year term should be counted not from the date of registration,
but from May 1, 1980, the effectivity date of the Corporation
Code. (SEC Opinion, Sept. 25,1990.)
Sec. 149. Effectivity. — This Code shall take effect

immediately upon its approval.
Effectivity of the Code.

The Corporation Code was approved on May 1, 1980. Not-
withstanding the provision of Section 149, the Code did not take
effect immediately upon its approval.
The prior publication of laws is a requirement of constitutional
due process and cannot be dispensed with. Laws take effect
after 15 days following the completion of their publication in
the Official Gazette, publication being counted from the date
of release thereof for circulation. The law may provide for its
publication in a newspaper of general circulation, (see Tanada
vs. Tuvera, 146 SCRA 446 [1986]; Almario vs. Alba, 127 SCRA 69
[1984]; see Art. 2, Civil Code.)
— oOo —
Appendix A
THE SECURITIES REGULATION CODE*
(R.A. NO. 8799)
CHAPTER I
TITLE AND DEFINITIONS
S E C T I O N 1. Title. — This shall be k n o w n as "The Securities Regulation

Code."
SEC. 2. Declaration of State Policy. — The State shall establish a socially
conscious, free market that regulates itself, encourage the widest participation
of ownership in enterprises, enhance the democratization of wealth, promote
the development of the capital market, protect investors, ensure full and fair
disclosure about securities, m i n i m i z e if not totally eliminate insider trading
and other fraudulent or manipulative devices and practices w h i c h create
distortions in the free market.
To achieve these ends, this Securities Regulation Code is hereby enacted.

SEC. 3. Definition of Terms. — 3.1. "Securities" are shares, participation
or interests in a corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instrument, whether w r i t t e n
or electronic in character. It includes:
(a) Shares of stock, bonds, debentures, notes, evidences of

indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a
profit sharing agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust

certificates, voting trust certificates or similar instruments;
(f) Proprietary or non-proprietary membership certificates in
corporations; and
(g) Other instruments as m a y in the future be determined by the

Commission.
*With Implementing Rules and Regulations promulgated by the Securities and

870
Sec. 3 THE SECURITIES REGULATION CODE 871
Appendix A
3.2. "Issuer" is the originator, maker, obligor, or creator of the security.

3.3. "Broker" is a person engaged in the business of b u y i n g and selling
securities for the account of others.
3.4. "Dealer" means any person w h o buys and sells securities for h i s / h e r
o w n account in the ordinary course of business.
3.5. "Associated person of a broker or dealer" is an employee thereof

w h o , directly exercises control of supervisory authority, but does not include
a salesman, or an agent or a person whose functions are solely clerical or
ministerial.
3.6. "Clearing agency" is any person w h o acts as intermediary in m a k i n g

deliveries u p o n payment to effect settlement in securities transactions.
3.7. "Exchange" is an organized marketplace or facility that brings together
buyers and sellers and executes trades of securities a n d / o r commodities.
3.8. "Insider" means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling the issuer; (c) a
person whose relationship or former relationship to the issuer gives or gave
h i m access to material information about the issuer or the security that is not
generally available to the public; (d) a government employee, or director, or
officer of an exchange, clearing agency and / o r self-regulatory organization
w h o has access to material information about an issuer or a security that is not
generally available to the public; or (e) a person w h o learns such information
by a communication f r o m any of the foregoing insiders.
3.9. "Pre-need plans" are contracts w h i c h provide for the performance of

future services or the payment of future monetary considerations at the time of
actual need, for w h i c h planholders pay in cash or installment at stated prices,
w i t h or w i t h o u t interest or insurance coverage and includes life, pension,
education, interment, and other plans w h i c h the Commission may from time to
time approve.
3.10. "Promoter" is a person w h o , acting alone or w i t h others, takes
initiative in founding and organizing the business or enterprise of the issuer
and receives consideration therefor.
3.11. "Prospectus" is the document made by or on behalf of an issuer,
underwriter or dealer to sell or offer securities for sale to the public through a
registration statement filed w i t h the Commission.
3.12. "Registration statement" is the application for the registration of
securities required to be filed w i t h the Commission.
3.13. "Salesman" is a natural person, employed as such or as an agent, by
a dealer, issuer or broker to buy and sell securities.
3.14. "Uncertificated security" is a security evidenced by electronic or
similar records.
3.15. "Underwriter" is a person w h o guarantees on a firm commitment
a n d / o r declared best effort basis the distribution and sale of securities of any
kind by another company.
CHAPTER II
SECURITIES AND EXCHANGE COMMISSION
SEC. 4. Administrative Agency. — 4.1. This Code shall be administered

by the Securities and Exchange Commission (thereinafter referred to as the
1
"Commission") as a collegial body, composed of a Chairperson and four (4)
Commissioners, appointed by the President for a term of seven (7) years each
and w h o shall serve as such until their successor shall have been appointed
and qualified. A Commissioner appointed to fill a vacancy occurring prior to
the expiration of the term for which h i s / h e r predecessor was appointed, shall
serve only for the unexpired portion of such term. The incumbent Chairperson
and Commissioners at the effectivity of this Code, shall serve the unexpired
portion of their terms under Presidential Decree N o . 902-A. Unless the context
indicates otherwise, the term "Commissioner" includes the Chairperson.
4.2. The Commissioners must be natural-bom citizens of the Philippines,

at least forty (40) years of age for the Chairperson and at least thirty-five (35)
years of age for the Commissioners, of good moral character, of unquestionable
integrity, of k n o w n probity and patriotism, and w i t h recognized competence in
social and economic disciplines: Provided, That the majority of Commissioners,
including the Chairperson, shall be members of the Philippine Bar.
4.3. The Chairperson is chief executive officer of the Commission. The

Chairperson shall execute and administer the policies, decisions, orders and
resolutions approved by the Commission and shall have the general executive
direction and supervision of the w o r k and operation of the Commission and
of its members, bodies, boards, offices, personnel and all its administrative
business.
4.4. The salary of the Chairperson and the Commissioners shall be fixed
by the President of the Philippines based on an objective classification system,
at a sum comparable to the members of the M o n e t a r y Board and commensurate
to the importance and responsibilities attached to the position.
4.5. The Commission shall hold meetings at least once a w e e k for the
conduct of business or as often as m a y be necessary u p o n call of the Chairperson
or upon the request of three (3) Commissioners. The notice of the meeting shall
be given to all Commissioners and the presence of three (3) Commissioners
shall constitute a quorum. In the absence of the Chairperson, the most senior
Commissioner shall act as presiding officer of the meeting.
4.6. The Commission may, for purposes of efficiency, delegate any of
its functions to any department or office of the Commission, an i n d i v i d u a l
Commissioner or staff member of the Commission except its review or appellate
authority and its p o w e r to adopt, alter and supplement any rule or regulation.
The Commission m a y review u p o n its o w n initiative or u p o n the petition
of any interested party any action of any department or office, i n d i v i d u a l
Commissioner, or staff member of the Commission.
GMCR vs. Bell, 271 SCRA 790 (1997); GSIS vs. Court of Appeals, 585 SCRA 679
Appendix A
SEC. 5. Powers and Functions of the Commission. — 5 . 1 . The Commission shall

act w i t h transparency and shall have the powers and functions provided by this
Code, Presidential Decree N o . 902-A, the Corporation Code, the Investment
Houses Law, the Financing C o m p a n y A c t and other existing laws. Pursuant
thereto the Commission shall have, among others, the following powers and
functions:
(a) H a v e jurisdiction and supervision over all corporations,

partnerships or associations w h o are the grantees of primary franchises
a n d / o r a license or permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning
the securities market, advise Congress and other government agencies on
all aspects of the securities market and propose legislation and amendments
thereto;
(c) A p p r o v e , reject, suspend, revoke or require amendments to
registration statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to
ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of
exchanges, clearing agencies a n d other SROs;
(f) Impose sanctions for the violation of laws and the rules,
2
regulations and orders issued pursuant thereto;
(g) Prepare, approve, a m e n d or repeal rules, regulations and orders,
and issue opinions and provide guidance on and supervise compliance
w i t h such rules, regulations and orders;
(h) Enlist the aid and support of a n d / o r deputize any and all
enforcement agencies of the Government, civil or military as well as
any private institution, corporation, firm, association or person in the
implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the
investing public;
(j) Punish for contempt of the Commission, both direct and indirect,
in accordance w i t h the pertinent provisions of and penalties prescribed by
the Rules of Court;
(k) Compel the officers of any registered corporation or association
to call meetings of stockholders or members thereof under its supervision;
(1) Issue subpoena duces tecum and summon witnesses to appear
in any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers, files and
records, tax returns, and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;
^See Sec. 53.1.

874
(m) Suspend, or revoke, after proper notice and hearing the franchise
or certificate of registration of corporations, partnerships or associations,
upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as
those which may be implied from, or which are necessary or incidental to
the carrying out of, the express powers granted the Commission to achieve
3
the objectives and purposes of these laws.
5.2. The Commission's jurisdiction over all cases enumerated under
Section 5 of Presidential Decree N o . 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority m a y designate the Regional Trial
Court branches that shall exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved w i t h i n one (1) year
4
from the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
SEC. 6. Indemnification and Responsibilities of Commissioners. — 6.1. The
Commission shall indemnify each Commissioner and other officials of the
Commission, including personnel performing supervision and examination
functions for all costs and expenses reasonably incurred by such persons in
connection w i t h any civil or criminal actions, suits or proceedings to w h i c h
they may be or made a party by reason of the performance of their functions
or duties, unless they are finally adjudged in such actions or proceedings to be
liable for gross negligence or misconduct.
In the event of settlement or compromise, indemnification shall be

provided only in connection w i t h such matters covered by the settlement as
to which the Commission is advised by external counsel that the persons to be
mdemnified did not commit any gross negligence or misconduct.
The costs and expenses incurred in defending the aforementioned action,
suit or proceeding m a y be paid by the Commission in advance of the final
disposition of such action, suit or proceeding u p o n receipt of an undertaking
by or on behalf of the Commissioner, officer or employee to repay the amount
advanced should it ultimately be determined by the Commission that h e / s h e
is not entitled to be indemnified as provided in this subsection.
6.2. The Commissioners, officers and employees of the Commission w h o

willfully violate this Code or w h o are guilty of negligence, abuse or acts of
malfeasance or fail to exercise extraordinary diligence in the performance of their
duties shall be held liable for any loss or injury suffered by the Commission or
other institutions as a result of such violation, negligence, abuse, malfeasance,
or failure to exercise extraordinary diligence.
'See Provident International Resources Corp. vs. Venus, 554 SCRA 540 (2008).
*See GD Express Worldwide vs. Court of Appeals, 587 SCRA 333 (2009). Intema-
il Broadcasting Corporation vs. Jalandoon, 475 SCRA 446 (2005).
Appendix A
Similar responsibility shall apply to the Commissioners, officers and

employees of the Commission for (1) the disclosure of any information,
discussion or resolution of the Commission of a confidential nature, or about
the confidential operations of the Commission, unless the disclosure is in
connection w i t h the performance of official functions w i t h the Commission
or w i t h prior authorization of the Commissioners; or (2) the use of such
information for personal gain or to the detriment of the government, the
Commission or third parties: Provided, however, That any data or information
required to be submitted to the President a n d / o r Congress or its appropriate
committee, or to be published under the provisions of this Code shall not be
considered confidential.
SEC. 7. Reorganization. — 7.1. To achieve the goals of this Code, consistent

w i t h C i v i l Service laws, the Commission is hereby authorized to provide for its
reorganization, to streamline its structure and operations, upgrade its h u m a n
resource component and enable it to more efficiently and effectively perform its
functions and exercise its powers under this Code.
7.2. A l l positions of the Commission shall be governed by a compensation

and position classification systems and qualification standards approved by
the Commission based on a comprehensive job analysis and audit of actual
duties and responsibilities. The compensation plan shall be comparable w i t h
the prevailing compensation p l a n in the Bangko Sentral ng Pilipinas and other
government financial institutions and shall be subject to periodic review by
the Commission no more than once every t w o (2) years without prejudice to
yearly merit reviews or increases based on productivity and efficiency. The
Commission shall, therefore, be exempt f r o m laws, rules, and regulations
on compensation, position classification and qualification standards. The
Commission shall, however, endeavor to make its system conform as closely as
possible w i t h the principles under the Compensation and Position Classification
Act of 1989. (Republic Act No. 6758, as amended.)
CHAPTER III
REGISTRATION OF SECURITIES
SEC. 8. Requirement of Registration of Securities. — 8.1. Securities shall

5
not be sold or offered for sale or distribution w i t h i n the Philippines, without

a registration statement duly filed w i t h and approved by the Commission.
Prior to such sale, information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made available to each
6
prospective purchaser.
8.2. The Commission may conditionally approve the registration statement
under such terms as it may deem necessary.
'Securities and Exchange Commission vs. Interport Resources Corp., 567 SCRA 354
(2008).
'Power Homes Unlimited Corp. vs. Securities and Exchange Commission, 546
SCRA 567 (2008).
876
8.3. The Commission may specify the terms and conditions under which
any written communication, including any summary prospectus, shall be
deemed not to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in a Register of
Securities in which shall be recorded orders entered by the Commission w i t h
respect to such securities. Such register and all documents or information w i t h
respect to the securities registered therein shall be open to public inspection at
reasonable hours on business days.
8.5. The Commission may audit the financial statements, assets and other
information of a firm applying for registration of its securities whenever it
deems the same necessary to insure full disclosure or to protect the interest of
7
the investors and the public in general.
SEC. 9. Exempt Securities. — 9.1. The requirement of registration under
Subsection 8.1 shall not as a general rule apply to any of the following classes
of securities:
(a) A n y security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof, or by any
person controlled or supervised by, and acting as an instrumentality of
said Government.
(b) A n y security issued or guaranteed by the government of any
country w i t h which the Philippines maintains diplomatic relations, or
by any State, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission m a y require compliance w i t h
the form and content of disclosures the Commission m a y prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy

duly approved by the proper adjudicatory body.
(d) A n y security or its derivatives the sale or transfer of w h i c h , by
law, is under the supervision and regulation of the Office of the Insurance
Commission, Housing and L a n d Use Regulatory Board, or the Bureau of
Internal Revenue.
(e) A n y security issued by a bank except its o w n shares of stock.

9.2. The Commission may, by rule or regulation after public hearing, a d d
to the foregoing any class of securities if it finds that the enforcement of this
Code w i t h respect to such securities is not necessary in the public interest and
for the protection of investors.
SEC. 10. Exempt Transactions. — 10.1. The requirement of registration under

Subsection 8.1 shall not apply to the sale of any security in any of the following
transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian

or receiver or trustee in insolvency or bankruptcy.
7
See Timeshare Realty Corporation vs. Lao, 544 SCRA 254 (2008).
Appendix A
(b) By or for the account of a pledge holder, or mortgagee or any other

similar lien holder selling or offering for sale or delivery in the ordinary
course of business and not for the purpose of avoiding the provisions of
this Code, to liquidate a bona fide debt, a security pledged in good faith as
security for such debt.
(c) An isolated transaction in w h i c h any security is sold, offered for

sale, subscription or delivery by the owner thereof, or by his representative
for the owner's account, such sale or offer for sale, subscription or delivery
not being made in the course of repeated and successive transactions of a
like character by such owner, or on his account by such representative and
such owner or representative not being the underwriter of such security.
(d) The distribution by a corporation, actively engaged in the business

authorized by its articles of incorporation, of securities to its stockholders
or other security holders as a stock d i v i d e n d or other distribution out of
surplus.
(e) The sale of capital stock of a corporation to its o w n stockholders

exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection w i t h the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real
estate or tangible personal property, where the entire mortgage together
w i t h all the bonds or notes secured thereby are sold to a single purchaser
at a single sale.
(g) The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion entitling the
holder of the security surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been registered under this
Code or was, w h e n sold, exempt from the provisions of this Code, and that
the security issued and delivered in exchange, if sold at the conversion
price, w o u l d at the time of such conversion fall w i t h i n the class of securities
entitled to registration under this Code. U p o n such conversion the par
value of the security surrendered in such exchange shall be deemed the
price at which the securities issued and delivered in such exchange are
sold.
(h) Broker's transactions, executed upon customer's orders, on any
registered Exchange or other trading market.
(i) Subscriptions for shares of the capital stock of a corporation
prior to the incorporation thereof or in pursuance of an increase in its
authorized capital stock under the Corporation Code, when no expense
is incurred, or no commission, compensation or remuneration is paid or
given in connection w i t h the sale or disposition of such securities, and only
w h e n the purpose for soliciting, giving or taking of such subscriptions is
to comply w i t h the requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized capital increased.
878
(j) The exchange of securities by the issuer w i t h its existing security

holders exclusively, where no commission or other remuneration is paid or
given directly or indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20)
persons in the Philippines during any twelve-month period.
(1) The sale of securities to any number of the following qualified
buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the
Government of the Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by the Bangko Sentral
to engage in trust functions;
(v) Investment company; or
(vi) Such other person as the Commission m a y by rule
determine as qualified buyers, on the basis of such factors as financial
sophistication, net w o r t h , knowledge, and experience in financial and
business matters, or amount of assets under management.
10.2. The Commission m a y exempt other transactions, if it finds that the

requirements of registration under this Code is not necessary in the public
interest or for the protection of the investors such as by reason of the small
amount involved or the limited character of the public offering.
10.3. A n y person applying for an exemption under this Section, shall file
w i t h the Commission a notice identifying the exemption relied u p o n on such
form and at such time as the Commission by rule m a y prescribe and w i t h such
notice shall pay to the Commission a fee equivalent to one-tenth (1 / 1 0 ) of one
percent (1%) of the m a x i m u m aggregate price or issued value of the securities.
SEC. 11. Commodity Futures Contracts. — No person shall offer, sell or
enter into commodity futures contracts except in accordance w i t h rules,
regulations and orders the Commission m a y prescribe in the public interest.
The Commission shall promulgate rules and regulations involving commodity
futures contracts to protect investors to ensure the development of a fair and
transparent commodities market.
SEC. 12. Procedure for Registration of Securities.' — 12.1. A l l securities

required to be registered under Subsection 8.1 shall be registered through the
filing by the issuer in the m a i n office of the Commission, of a sworn registration
statement w i t h respect to such securities, in such f o r m and containing such
information and documents as the Commission shall prescribe. The registration
statement shall include any prospectus required or permitted to be delivered
under Subsections 8.2, 8.3 and 8.4.
"See Note 5.
Appendix A
12.2. In promulgating rules governing the content of any registration

statement (including any prospectus made a part thereof or annexed thereto),
the Commission m a y require the registration statement to contain such
information or documents as it may, by rule, prescribe. It m a y dispense w i t h
any such requirement, or m a y require additional information or documents,
including w r i t t e n information f r o m an expert, depending on the necessity
thereof or their applicability to the class of securities sought to be registered.
12.3. The information required for the registration of any k i n d , and all
securities, shall include, among others, the effect of the securities issue on
ownership, on the m i x of ownership, especially foreign and local ownership.
12.4. The registration statement shall be signed by the issuer's executive
officer, its principal operating officer, its principal financial officer, its comptroller,
its principal accounting officer, its corporate secretary or persons performing
similar functions accompanied by a d u l y verified resolution of the board of
directors of the issuer corporation. The written consent of the expert named as
having certified any part of the registration statement or any document used
in connection therewith shall also be filed. W h e r e the registration statement
includes shares to be sold by selling shareholders, a written certification by
such selling shareholders as to the accuracy of any part of the registration
statement contributed to by such selling shareholders shall also be filed.
12.5. (a) U p o n filing of the registration statement, the issuer shall pay to
the Commission a fee of not more than one-tenth (1 / 1 0 ) of one per centum (1%)
of the m a x i m u m aggregate price at w h i c h such securities are proposed to be
offered. The Commission shall prescribe by rule diminishing fees in inverse
proportion the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be immediately
published by the issuer, at its o w n expense, in t w o (2) newspapers of general
circulation in the Philippines, once a w e e k for t w o (2) consecutive weeks, or
in such other manner as the Commission by rule shall prescribe, reciting that
a registration statement for the sale of such security has been filed, and that
the aforesaid registration statement, as w e l l as the papers attached thereto
are open to inspection at the Commission during business hours, and copies
thereof, photostatic or otherwise, shall be furnished to interested parties at such
reasonable charge as the Commission may prescribe.
12.6. W i t h i n forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented, the
Commission shall declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration statement as provided
in Section 14 hereof. The Commission shall enter an order declaring the
registration statement to be effective if it finds that the registration statement
together w i t h all the other papers and documents attached thereto, is on its face
complete and that the requirements have been complied with. The Commission
may impose such terms and conditions as may be necessary or appropriate for
the protection of the investors.
12.7. U p o n effectivity of the registration statement, the issuer shall state
under oath in every prospectus that all registration requirements have been
880
met and that all information are true and correct as represented by the issuer or
the one making the statement. A n y untrue statement of fact or omission to state
a material fact required to be stated therein or necessary to make the statement
therein not misleading shall constitute fraud.
SEC. 13. Rejection and Revocation of Registration of Securities. — 13.1. The
Commission may reject a registration statement and refuse registration of the
security thereunder, or revoke the effectivity of a registration statement and the
registration of the security thereunder after due notice and hearing by issuing
an order to such effect, setting forth its findings in respect thereto, if it finds
that:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this Code, the rules
promulgated pursuant thereto, or any order of the Commission of
which the issuer has notice in connection w i t h the offering for w h i c h a
registration statement has been filed;
(iii) Has been or is engaged or is about to engage in fraudulent
transactions;
(iv) Has made any false or misleading representation of material
facts in any prospectus concerning the issuer or its securities;
(v) Has failed to comply w i t h any requirement that the
Commission m a y impose as a condition for registration of the security
for which the registration statement has been filed; or
(b) The registration statement is on its face incomplete or inaccurate
in any material respect or includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(c) The issuer, any officer, director or controlling person of the issuer,
or person performing similar functions, or any underwriter has been
convicted, by a competent judicial or administrative body, u p o n plea of
guilty, or otherwise, of an offense involving m o r a l turpitude a n d / o r fraud
or is enjoined or restrained by the Commission or other competent judicial
or administrative body for violations of securities, commodities, and other
related laws.
For purposes of this subsection, the term "competent judicial or

administrative body" shall include a foreign court of competent jurisdiction as
provided for under the Rules of Court.
13.2. The Commission m a y compel the production of all the books and
papers of such issuer, and m a y administer oaths to, and examine the officers
of such issuer or any other person connected therewith as to its business and
affairs.
13.3. If any issuer shall refuse to permit an examination to be made by

the Commission, its refusal shall be ground for the refusal or revocation of the
registration of its securities.
Sees. 14-15 THE SECURITIES REGULATION CODE 881
Appendix A
13.4. If the Commission deems it necessary, it m a y issue an order sus-

pending the offer and sale of the securities pending any investigation. The
order shall state the grounds for taking such action, but such order of suspen-
sion although binding u p o n the persons notified thereof, shall be deemed confi-
dential, and shall not be published. U p o n the issuance of the suspension order,
no further offer or sale of such security shall be m a d e until the same is lifted or
set aside by the Commission. Otherwise, such sale shall be void.
13.5. Notice of issuance of such order shall be given to the issuer and every
dealer and broker w h o shall have notified the Commission of an intention to
sell such security.
13.6. A registration statement m a y be w i t h d r a w n by the issuer only w i t h

the consent of the Commission.
SEC. 14. Amendments to the Registration Statement. — 14.1. If a registration

statement is on its face incomplete or inaccurate in any material respect, the
Commission shall issue an order directing the a m e n d m e n t of the registration
statement. U p o n compliance w i t h such order, the amended registration
statement shall become effective in accordance w i t h the procedure mentioned
in Subsection 12.6 hereof.
14.2. An a m e n d m e n t filed prior to the effective date of the registration

statement shall recommence the forty-five (45)-day period w i t h i n which the
Commission shall act on a registration statement. An amendment filed after
the effective date of the registration statement shall become effective only upon
such date as detenrtined by the Commission.
14.3. If any change occurs in the facts set forth in a registration statement,
the issuer shall file an amendment thereto setting forth the change.
14.4. If, at any time, the Commission finds that a registration statement
contains any false statement or omits to state any fact required to be stated
therein or necessary to m a k e the statements therein not misleading, the
Commission m a y conduct an examination, and, after due notice and hearing,
issue an Order suspending the effectivity of the registration statement. If the
statement is d u l y amended, the suspension order m a y be lifted.
14.5. In making such examination the Commission or any officer or

officers designated by it may administer oaths and affirmations and shall have
access to, and m a y demand the production of, any books, records or documents
relevant to the examination. Failure of the issuer, underwriter, or any other
person to cooperate, or his obstruction or refusal to undergo an examination,
shall be a ground for the issuance of a suspension order.
SEC. 15. Suspension of Registration. — 15.1. If, at any time, the information
contained in the registration statement filed is or has become misleading,
incorrect, inadequate or incomplete in any material respect, or the sale or
offering for sale of the security registered thereunder may work or tend to work
a fraud, the Commission may require from the issuer such further information
as may in its judgment be necessary to enable the Commission to ascertain
whether the registration of such security should be revoked on any ground
specified in this Code. The Commission may also suspend the right to sell and
offer for sale such security pending further investigation, by entering an order
specifying the grounds for such action, and by notifying the issuer, underwriter,
dealer or broker k n o w n as participating in such offering.
15.2. The refusal to furnish information required by the Commission
may be a ground for the issuance of an order of suspension pursuant to
Subsection 15.1. U p o n the issuance of any such order and notification to the
issuer, underwriter, dealer or broker k n o w n as participating in such offering,
no further offer or sale of any such security shall be made until the same is lifted
or set aside by the Commission. Otherwise, such sale shall be v o i d .
15.3. U p o n issuance of an order of suspension, the Commission shall
conduct a hearing. If the Commission determines that the sale of any security
should be revoked, it shall issue an order prohibiting sale of such security.
Until the issuance of a final order, the suspension of the right to sell, though
binding upon the persons notified thereof, shall be deemed confidential, and
shall not be published, unless it shall appear that the order of suspension has
been violated after notice. If, however, the Commission finds that the sale of the
security w i l l neither be fraudulent nor result in fraud, it shall forthwith issue
an order revoking the order of suspension, and such security shall be restored
to its status as a registered security as of the date of such order of suspension.
CHAPTER IV
REGULATION OF PRE-NEED PLANS
SEC. 16. Pre-Need Plans. — No person shall sell or offer for sale to the public
any pre-need plan except in accordance w i t h rules and regulations w h i c h the
Commission shall prescribe. Such rules shall regulate the sale of pre-need
plans by, among other things, requiring the registration of pre-need plans,
licensing persons involved in the sale of pre-need plans, requiring disclosures
to prospective plan holders, prescribing advertising guidelines, providing
for uniform accounting system, reports and record keeping w i t h respect to
such plans, imposing capital, bonding a n d other financial responsibility, and
establishing trust funds for the payment of benefits under such plans.
CHAPTER V
REPORTORIAL REQUIREMENTS
SEC. 17. Periodic and Other Reports of Issuers. — 17.1. Every issuer satisfying
the requirements in Subsection 17.2 hereof shall file w i t h the Commission:
(a) W i t h i n one hundred thirty-five (135) days, after the end of the
issuer's fiscal year, or such other time as the Commission m a y prescribe,
an annual report which shall include, among others, a balance sheet, profit
and loss statement and statement of cash flows, for such last fiscal year,
certified by an independent certified public accountant, and a management
discussion and analysis of results of operations; and
Appendix A
(b) Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission may
prescribe as necessary to keep current information on the operation of the
business and financial condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply to the

following:
(a) An issuer w h i c h has sold a class of its securities pursuant to a

registration under Section 12 hereof: Provided, however, That the obligation
of such issuer to file reports shall be suspended for any fiscal year after the
year such registration became effective if such issuer, as of the first day of
any such fiscal year, has less than one h u n d r e d (100) holders of such class
of securities or such other n u m b e r as the Commission shall prescribe and
it notifies the Commission of such;
(b) An issuer w i t h a class of securities listed for trading an Exchange;

and
(c) An issuer w i t h assets of at least Fifty million pesos (P50,000,000.00)

or such other amount as the Commission shall prescribe, and having
t w o h u n d r e d (200) or more holders each holding at least one hundred
(100) shares of a class of its equity securities: Provided, however, That the
obligation of such issuer to file reports shall be terminated ninety (90) days
after notification to the Commission by the issuer that the number of its
holders holding at least one h u n d r e d (100) shares is reduced to less than
one h u n d r e d (100).
17.3. Every issuer of a security listed for trading on an Exchange shall

file w i t h the Exchange a copy of any report filed w i t h the Commission under
Subsection 17.1 hereof.
17.4. A l l reports (including financial statements) required to be filed
w i t h the Commission pursuant to Subsection 17.1 hereof shall be in such form,
contain such information and be filed at such times as the Commission shall
prescribe, and shall be in lieu of any periodical or current reports or financial
statements otherwise required to be filed under the Corporation Code.
17.5. Every issuer which has a class of equity securities satisfying any of
the requirements in Subsection 17.2 shall furnish to each holder of such equity
security an annual report in such f o r m and containing such information as the
Commission shall prescribe.
17.6. Within such period as the Commission may prescribe preceding the
annual meeting of the holders of any equity security of a class entitled to vote
at such meeting, the issuer shall transmit to such holders an annual report in
conformity w i t h Subsection 17.5.
SEC. 18. Reports by Five per centum (5%) Holders of Equity Securities. — 18.1.
In every case in which an issuer satisfies the requirements of Subsection 17.2
hereof, any person w h o acquires directly or indirectly the beneficial ownership
of more than five per centum (5%) of such class or in excess of such lesser per
centum as the Commission by rule may prescribe, shall, within ten (10) days after
884
such acquisition or such reasonable time as fixed by the Commission, submit to

the issuer of the security, to the Exchange where the security is traded, and to
the Commission a s w o m statement containing the following information and
such other information as the Commission may require in the public interest or
for the protection of investors:
(a) The personal background, identity, residence, and citizenship of,
and the nature of such beneficial ownership by, such person and all other
persons by w h o m or on whose behalf the purchases are effected; in the
event the beneficial owner is a juridical person, the lines of business of the
beneficial owner shall also be reported;
(b) If the purpose of the purchases or prospective purchases is to
acquire control of the business of the issuer of the securities, any plans or
proposals which such persons may have that w i l l effect a major change in
its business or corporate structure;
(c) The number of shares of such security w h i c h are beneficially
owned, and the number of shares concerning w h i c h there is a right to
acquire, directly or indirectly, by: (i) such person, a n d (ii) each associate of
such person, giving the background, identity, residence, and citizenship of
each such associate; and
(d) Information as to any contracts, arrangements, or understanding
w i t h any person w i t h respect to any securities of the issuer including but
not limited to transfer, joint ventures, loan or option arrangements, puts
or calls, guarantees or division of losses or profits, or proxies n a m i n g the
persons w i t h w h o m such contracts, arrangements, or understanding have
been entered into, and giving the details thereof.
18.2. If any change occurs in the facts set forth in the statements, an a m e n d -
ment shall be transmitted to the issuer, the Exchange and the Commission.
18.3. The Commission, m a y permit any person to file in lieu of the
statement required by Subsection 17.1 hereof, a notice stating the name of such
person, the shares of any equity securities subject to Subsection 17.1 w h i c h are
owned by h i m , the date of their acquisition and such other information as the
Commission may specify, if it appears to the Commission that such securities
were acquired by such person in the ordinary course of his business and
were not acquired for the purpose of and do not have the effect of changing
or influencing the control of the issuer nor in connection w i t h any transaction
having such purpose or effect.
CHAPTER VI
PROTECTION OF SHAREHOLDER INTERESTS
SEC. 19. Tender Offers. — 19.1. (a) A n y person or group of persons acting
in concert w h o intends to acquire at least fifteen percent (15%) of any class of
any equity security of a listed corporation or of any class of any equity security
of a corporation w i t h assets of at least Fifty million pesos (P50,000,000.00) and
having t w o hundred (200) or more stockholders w i t h at least one h u n d r e d (100)
shares each or w h o intends to acquire at least thirty percent (30%) of such equity
over a period of twelve (12) months shall m a k e a tender offer to stockholders by
filing w i t h the Commission a declaration to that effect; and furnish the issuer,
a statement containing such of the information required in Section 17 of this
Code as the Commission m a y prescribe. Such person or group of persons shall
publish all requests or invitations for tender, or materials making a tender offer
or requesting or inviting letters of such a security. Copies of any additional
material soliciting or requesting such tender offers subsequent to the initial
solicitation or request shall contain such information as the Commission may
prescribe, and shall be filed w i t h the Commission and sent to the issuer not
later than the t i m e copies of such materials are first published or sent or given
to security holders.
(b) A n y solicitation or recommendation to the holders of such a security

to accept or reject a tender offer or request or invitation for tenders shall be
m a d e in accordance w i t h such rules and regulations as the Commission may
prescribe.
(c) Securities deposited pursuant to a tender offer or request or invitation

for tenders m a y be w i t h d r a w n by or on behalf of the depositor at any time
throughout the period that the tender offer remains open and if the securities
deposited have not been previously accepted for payment, and at any time after
sixty (60) days f r o m the date of the original tender offer or request or invitation,
except as the Commission m a y otherwise prescribe.
(d) W h e r e the securities offered exceed that which a person or group of
persons is b o u n d or w i l l i n g to take up and pay for, the securities that are subject
of the tender offer shall be taken up as nearly as m a y be pro rata, disregarding
fractions, according to the number of securities deposited by each depositor.
The provisions of this subsection shall also apply to securities deposited w i t h i n
ten (10) days after notice of an increase in the consideration offered to security
holders, as described in paragraph (e) of this subsection, is first published or
sent or given to security holders.
(e) Where any person varies the terms of a tender offer or request
or invitation for tenders before the expiration thereof by increasing the
consideration offered to holders of such securities, such person shall pay the
increased consideration to each security holder whose securities are taken up
and paid for whether or not such securities have been taken up by such person
before the variation of the tender offer or request or invitation.'
'A tender offer is a publicly announced "offer by the acquiring person to stockhold-
ers of a public company for them to tender their shares therein on the terms specified in
the offer" Tender offer is in place to protect the interests of minority stockholders of a
target company against any scheme that dilutes the share value of their investments. It
affords such minority shareholders the opportunity to withdraw or exit from the com-
pany under reasonable terms, a chance to sell their shares at the same price as those of the
majority stockholders. The "right to match" under the Swiss Challenge procedure cannot
be exercised, a tender offer being wholly inconsistent with public bidding. No bidding
is involved in the process. (Osmena III vs. Social Security System, 532 SCRA 313 [2007].)
886
19.2. It shall be unlawful for any person to make any untrue statement of
a material fact or omit to state any material fact necessary in order to make the
statements made, in the light of the circumstances under which they are made,
not misleading, or to engage in any fraudulent, deceptive, or manipulative acts
or practices, in connection w i t h any tender offer or request or invitation for
tenders, or any solicitation of security holders in opposition to or in favor of
any such offer, request, or invitation. The Commission shall, for the purposes
of this subsection, define and prescribe means reasonably designed to prevent,
10
such acts and practices as are fraudulent, deceptive, or manipulative.
SEC. 20. Proxy Solicitations. — 20.1. Proxies must be issued and proxy
solicitation must be made in accordance w i t h rules and regulations to be issued
by the Commission."
20.2. Proxies must be in writing, signed by the stockholder or his duly
authorized representative and filed before the scheduled meeting w i t h the
corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or authorization, in
respect of any security carried for the account of a customer, to a person other
than the customer, without the express written authorization of such customer.
20.5. A broker or dealer w h o holds or acquires the proxy for at least ten
per centum (10%) or such percentage as the Commission m a y prescribe of the
outstanding share of the issuer, shall submit a report identifying the beneficial
owner w i t h i n ten (10) days after such acquisition, for its o w n account or
customer, to the issuer of the security, to the Exchange where the security is
traded and to the Commission.
SEC. 2 1 . Fees for Tender Offers and Certain Proxy Solicitations. — At the time
of filing w i t h the Commission of any statement required under Section 19 for
any tender offer or Section 72.2 for issuer repurchases, or Section 20 for proxy or
consent solicitation, the Commission m a y require that the person m a k i n g such
filing pay a fee of not more than one-tenth (1 / 1 0 ) of one per centum (1%) of:
21.1. The proposed aggregate purchase price in the case of a transaction
under Section 20 or Sec. 72.2; or
21.2. The proposed payment in cash, a n d the value of any securities or

property to be transferred in the acquisition, merger or consolidation, or the
cash and value of any securities proposed to be received u p o n the sale or
disposition of such assets in the case of a solicitation under Section 20. The
Commission shall prescribe by rule diminishing fees in inverse proportion to
the value of the aggregate price of the offering.
10
See Cemco Holdings, Inc. vs. National Life Insurance Co. of the Philippines, Inc.,
529 SCRA 355 (2007).
"Proxy solicitation involves the securing and submission of proxies, while proxy
validation concerns the validation of such secured and submitted proxies (GSIS vs
Appendix A
SEC. 22. Internal Record Keeping and Accounting Controls. — Every issuer
w h i c h has a class of securities that satisfies the requirements of Subsection 17 2
shall:
22.1. M a k e and keep books, records, and accounts which, in reasonable

detail accurately and fairly reflect the transactions and dispositions of assets of
the issuer;
22.2. Devise and maintain a system of internal accounting controls

sufficient to provide reasonable assurances that: (a) Transactions and access to
assets are pursuant to management authorization; (b) Financial statements are
prepared in conformity w i t h generally accepted accounting principles that are
adopted by the Accounting Standards Council and the rules promulgated by
the Commission w i t h regard to the preparation of financial statements; and (c)
Recorded assets are compared w i t h existing assets at reasonable intervals and
differences are reconciled.
SEC. 23. Transactions of Directors, Officers and Principal Stockholders." —

23.1. Every person w h o is directly or indirectly the beneficial owner of more
than ten per centum (10%) of any class of any equity security w h i c h satisfies the
requirements of Subsection 17.2, or w h o is a director or an officer of the issuer
of such security, shall file, at the time either such requirement is first satisfied
or w i t h i n ten days after he becomes such a beneficial owner, director, or officer,
a statement w i t h the Commission and, if such security is listed for trading on
an Exchange, also w i t h the Exchange, of the amount of all equity securities
of such issuer of w h i c h he is the beneficial owner, and w i t h i n ten (10) days
after the close of each calendar m o n t h thereafter, if there has been a change in
such ownership during such m o n t h , shall file w i t h the Commission, and if such
security is listed for trading on an Exchange, shall also file w i t h the Exchange, a
statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month.
23.2. For the purpose of preventing the unfair use of information which
m a y have been obtained by such beneficial owner, director, or officer by reason
of his relationship to the issuer, any profit realized by h i m from any purchase
and sale, or any sale and purchase, of any equity security of such issuer within
any period of less than six (6) months, unless such security was acquired in
good faith in connection w i t h a debt previously contracted, shall inure to and
be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6)
months. Suit to recover such profit may be instituted before the Regional Trial
Court by the issuer, or by the owner of any security of the issuer in the name
and in behalf of the issuer if the issuer shall fail or refuse to bring such suit
w i t h i n sixty (60) days after request or shall fail diligently to prosecute the same
thereafter, but no such suit shall be brought more than two (2) years after the
date such profit was realized. This subsection shall not be construed to cover
any transaction where such beneficial owner was not such both at the time of
12
SEC vs. Interport Resources Corp., 567 SCRA 354 (2008).
888
the purchase and sale, or the sale and purchase, of the security involved, or
any transaction or transactions which the Commission by rules and regulations
may exempt as not comprehended w i t h i n the purpose of this subsection.
23.3. It shall be unlawful for any such beneficial owner, director, or officer,
directly or indirectly, to sell any equity security of such issuer if the person
selling the security or his principal: (a) Does not o w n the security sold; or (b)
If owning the security, does not deliver it against such sale w i t h i n twenty (20)
days thereafter, or does not w i t h i n five (5) days after such sale deposit it in the
mails or other usual channels of transportation; but no person shall be deemed
to have violated this subsection if he proves that notwithstanding the exercise
of good faith he was unable to make such delivery or deposit w i t h i n such time,
or that to do so w o u l d cause undue inconvenience or expense.
23.4. The provisions of Subsection 23.2 shall not apply to any purchase
and sale, or sale and purchase> and the provisions of Subsection 23.3 shall not
apply to any sale, of an equity security not then or thereafter held by h i m in
an investment account, by a dealer in the ordinary course of his business and
incident to the establishment or maintenance by h i m of a primary or secondary
market, otherwise than on an Exchange, for such security. The Commission may,
by such rules and regulations as it deems necessary or appropriate in the public
interest, define and prescribe terms and conditions w i t h respect to securities
held in an investment account and transactions m a d e in the ordinary course
of business and incident to the establishment or maintenance of a p r i m a r y or
secondary market.
CHAPTER VII
PROHIBITIONS ON FRAUD, MANIPULATION
AND INSIDER TRADING
SEC. 24. Manipulation of Security Prices; Devices and Practices. — 24.1 It shall
be unlawful for any person acting for himself or through a dealer or broker,
directly or indirectly:
(a) To create a false or misleading appearance of active trading in

any listed security traded in an Exchange or any other trading market
(hereafter referred to purposes of this Chapter as "Exchange"):
(i) By effecting any transaction in such security w h i c h involves
no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such
security w i t h the knowledge that a simultaneous order or orders of
substantially the same size, time and price, for the sale or purchase of
any such security, has or w i l l be entered by or for the same or different
parties; or
(iii) By performing similar act where there is no change in

beneficial ownership.
(b) To effect, alone or w i t h others, a series of transactions in securities

that, (i) Raises their price to induce the purchase of a security, whether of the
Appendix A
same or a different class of the same issuer or of a controlling, controlled,

or commonly controlled company by others; (ii) Depresses their price to
induce the sale of a security, whether of the same or a different class, of
the same issuer or of a controlling, controlled, or commonly controlled
company by others; or (iii) Creates active trading to induce such a purchase
or sale through manipulative devices such as m a r k i n g the close, painting
the tape, squeezing the float, h y p e and d u m p , boiler room operations and
such other similar devices.
(c) To circulate or disseminate information that the price of any

security listed in an Exchange w i l l or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted
for the purpose of raising or depressing the price of the security for the
purpose of inducing the purchase or sale of such security.
(d) To m a k e false or misleading statement w i t h respect to any

material fact, w h i c h he k n e w or h a d reasonable ground to believe was so
false or misleading, for the purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for
the purchase a n d / o r sale of any security traded in an Exchange for the
purpose of pegging, fixing or stabilizing the price of such security, unless
otherwise allowed by this Code or by rules of the Commission.
24.2. No person shall use or employ, in connection w i t h the purchase
or sale of any security any manipulative or deceptive device or contrivance.
Neither shall any short sale be effected nor any stop-loss order be executed in
connection w i t h the purchase or sale of any security except in accordance w i t h
such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.
24.3. The foregoing provisions notwithstanding, the Commission, having
due regard to the public interest and the protection of investors, may, by rules
and regulations, allow certain acts or transactions that may otherwise be
prohibited under this Section.
SEC. 25. Regulation of Option Trading. — No member of an Exchange shall,
directly or indirectly endorse or guarantee the performance of any put, call,
straddle, option or privilege in relation to any security registered on a securities
exchange.
The terms "put," "call," "straddle," "option," or "privilege" shall not
include any registered warrant, right or convertible security.
SEC. 26. Fraudulent Transactions." - It shall be unlawful for any person,
directly or indirectly, in connection w i t h the purchase or sale of any securities
to:
26.1. Employ any device, scheme, or artifice to defraud;
13
See SEC vs. Interport Resources Corp., 567 SCRA 354 (2008).
890
26.2. Obtain money or property by means of any untrue statement of a

material fact of any omission to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which they were
made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business which
operates or w o u l d operate as a fraud or deceit u p o n any person.
SEC. 27. Insider's Duty to Disclose When Trading." — 27.1. It shall be
unlawful for an insider to sell or buy a security of the issuer, while in possession
of material information w i t h respect to the issuer or the security that is not
generally available to the public, unless: (a) The insider proves that the
information was not gained from such relationship; or (b) If the other party
selling to or buying from the insider (or his agent) is identified, the insider
proves: (i) that he disclosed the information to the other party, or (ii) that he
had reason to believe that the other party otherwise is also in possession of the
information. A purchase or sale of a security of the issuer made by an insider
denned in Subsection 3.8, or such insider's spouse or relatives by affinity or
consanguinity w i t h i n the second degree, legitimate or common-law, shall be
presumed to have been effected while in possession of material non-public
information if transacted after such information came into existence but prior
to dissemination of such information to the public and the lapse of a reasonable
time for the market to absorb such information: Provided, however, That this
presumption shall be rebutted u p o n a showing by the purchaser or seller that
he was not aware of the material non-public information at the time of the
purchase or sale.
27.2. For purposes of this Section, information is "material non-public" if:

(a) It has not been generally disclosed to the public and w o u l d likely affect the
market price of the security after being disseminated to the public and the lapse
of a reasonable time for the market to absorb the information; or (b) w o u l d
be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
27.3. It shall be u n l a w f u l for any insider to communicate material non-

public information about the issuer or the security to any person w h o , by virtue
of the communication, becomes an insider as defined in Subsection 3.8, where
the insider communicating the information k n o w s or has reason to believe that
such person w i l l likely buy or sell a security of the issuer w h i l e in possession of
such information.
27.4. a) It shall be u n l a w f u l where a tender offer has commenced or is

about to commence for:
(i) A n y person (other than the tender offeror) w h o is in possession of

material non-public information relating to such tender offer, to b u y or sell
the securities of the issuer that are sought or to be sought by such tender
offer if such person knows or has reason to believe that the information is
non-public and has been acquired directly or indirectly from the tender
u
Ibid.
Appendix A
offer, or those acting on its behalf, the issuer of the securities sought or to
be sought by such tender offer, or any insider of such issuer; and
(ii) A n y tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, and any insider of
such issuer to communicate material non-public information relating to
the tender offer to any other person where such communication is likely to
result in a violation of Subsection 27.4(a)(i).
(b) For purposes of this subsection the term "securities of the issuer
sought or to be sought by such tender offer" shall include any securities
convertible or exchangeable into such securities or any options or rights in any
of the foregoing securities.
CHAPTER VIII
REGULATION OF SECURITIES MARKET PROFESSIONALS
SEC. 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. —

28.1. No person shall engage in the business of b u y i n g or selling securities in
the Philippines as a broker or dealer, or act as a salesman, or an associated
person of any broker or dealer unless registered as such w i t h the Commission.
28.2. No registered broker or dealer shall employ any salesman or any
associated person, and no issuer shall employ any salesman, w h o is not
registered as such w i t h the Commission.
28.3. The Commission, by rule or order, m a y conditionally or uncondi-

tionally exempt from Subsections 28.1 and 28.2 any broker, dealer, salesman,
associated person of any broker or dealer, or any class of the foregoing, as it
deems consistent w i t h the public interest and the protection of investors.
28.4. The Commission shall promulgate rules and regulations prescribing
the qualifications for registration of each category of applicant, which shall,
among other things, require as a condition for registration that:
(a) If a natural person, the applicant satisfactorily pass a written
examination as to his proficiency and knowledge in the area of activity for
which registration is sought;
(b) In the case of a broker or dealer, the applicant satisfy a m i n i m u m
net capital as prescribed by the Commission, and provide a bond or other
security as the Commission may prescribe to secure compliance w i t h the
provisions of this Code; and
(c) If located outside of the Philippines, the applicant files a written
consent to service of process upon the Commission pursuant to Section 65
hereof.
28.5. A broker or dealer may apply for registration by filing with the
Commission a written application in such form and containing such information
and documents concerning such broker or dealer as the Commission by rule
shall prescribe.
892
28.6. Registration of a salesman or of an associated person of a registered

broker or dealer may be made upon written application filed w i t h the
Commission by such salesman or associated person. The application shall be
separately signed and certified by the registered broker or dealer to which
such salesman or associated person is to become affiliated, or by the issuer
in the case of a salesman employed, appointed or authorized solely by such
issuer. The application shall be in such f o r m and contain such information and
documents concerning the salesman or associated person as the Commission by
rule shall prescribe. For purposes of this Section, a salesman shall not include
any employee of an issuer whose compensation is not determined directly or
indirectly on sales of securities of the issuer.
28.7. Applications filed pursuant to Subsections 28.5 and 28.6 shall be
accompanied by a registration fee in such reasonable amount prescribed by the
Commission.
28.8. Within thirty (30) days after the filing of any application under this
Section, the Commission shall by order: (a) Grant registration if it determines
that the requirements of this Section and the qualifications for registration
set forth in its rules and regulations have been satisfied; or (b) D e n y said
registration.
28.9. The names and addresses of all persons approved for registration
as brokers, dealers, associated persons or salesmen and all orders of the
Commission w i t h respect thereto shall be recorded in a Register of Securities
Market Professionals kept in the office of the Commission w h i c h shall be open
to public inspection.
28.10. Every person registered pursuant to this Section shall file w i t h the
Commission, in such form as the Commission shall prescribe, information
necessary to keep the application for registration current and accurate, including
in the case of a broker or dealer changes in salesmen, associated persons and
owners thereof.
28.11. Every person registered pursuant to this Section shall pay to the
Commission an annual fee at such time and in such reasonable amount as the
Commission shall prescribe. U p o n notice by the Commission that such annual
fee has not been paid as required, the registration of such person shall be
suspended until payment has been made.
28.12. The registration of a salesman or associated person shall be
automatically terminated u p o n the cessation of his affiliation w i t h said
registered broker or dealer, or w i t h an issuer in the case of a salesman employed,
appointed or authorized by such issuer. Promptly following any such cessation
of affiliation, the registered broker or dealer, or issuer, as the case m a y be, shall
file w i t h the Commission a notice of separation of such salesman or associated
person.
SEC. 29. Revocation, Refusal or Suspension of Registration of Brokers, Dealers,

Salesmen and Associated Persons. - 29.1. Registration under Section 28 of this
Code may be refused, or any registration granted thereunder m a y be revoked,
suspended, or limitations placed thereon, by the Commission if, after due
notice and hearing, the Commission determines the applicant or registrant:
(a) H a s w i l l f u l l y violated any provision of this Code, any rule,
regulation or order made hereunder, or any other law administered by
the Commission, or in the case of a registered broker, dealer or associated
person has failed to supervise, w i t h a v i e w to preventing such violation,
another person w h o commits such violation;
(b) H a s w i l l f u l l y m a d e or caused to be m a d e a materially false or

misleading statement in any application for registration or report filed
w i t h the Commission or a self-regulatory organization, or has willfully
omitted to state any material fact that is required to be stated therein;
(c) H a s failed to satisfy the qualifications or requirements for

registration prescribed under Section 28 and the rules and regulations of
the Commission promulgated thereunder;
(d) H a s been convicted, by a competent judicial or administrative

b o d y of an offense involving moral turpitude, fraud, embezzlement,
counterfeiting, theft, estafa, misappropriation, forgery, bribery, false oath,
or perjury, or of a violation of securities, commodities, banking, real estate
or insurance laws;
(e) Is enjoined or restrained by a competent judicial or administrative

b o d y f r o m engaging in securities, commodities, banking, real estate
or insurance activities or from w i l l f u l l y violating laws governing such
activities;
(f) Is subject to an order of a competent judicial or administrative

body refusing, revoking or suspending any registration, license or other
permit under this Code, the rules and regulations promulgated thereunder,
any other l a w administered by the Commission;
(g) Is subject to an order of a self-regulatory organization suspending

or expelling h i m f r o m membership or participation therein or from
association w i t h a member or participant thereof;
(h) H a s been found by a competent judicial or administrative body to

have willfully violated any provisions of securities, commodities, banking,
real estate or insurance laws, or has willfully aided, abetted, counseled,
commanded, induced or procured such violation; or
(i) Has been judicially declared insolvent.
For purposes of this subsection, the term "competent judicial or admi-

nistrative body" shall include a foreign court of competent jurisdiction and a
foreign financial regulator.
29.2. (a) In cases of charges against a salesman or associated person, notice
thereof shall also be given the broker, dealer or issuer employing such salesman
or associated person.
(b) Pending the hearing, the Commission shall have the power to order
the suspension of such broker's, dealer's, associated person's or salesman's
registration: Provided, That such order shall state the cause for such suspension.
894
Until the entry of a final order, the suspension of such registration, though
binding upon the persons notified thereof, shall be deemed confidential, and
shall not be published, unless it shall appear that the order of suspension has
been violated after notice.
29.3. The order of the Commission refusing, revoking, suspending or
placing limitations on a registration as herein above provided, together w i t h
its findings, shall be entered in the Register of Securities M a r k e t Professionals.
The suspension or revocation of the registration of a dealer or broker shall also
automatically suspend the registration of all salesmen and associated persons
affiliated w i t h such broker or dealer.
29.4. It shall be sufficient cause for refusal, revocation or suspension
of a broker's or dealer's registration, if any associated person thereof or any
juridical entity controlled by such associated person has committed any act or
omission or is subject to any disability enumerated in paragraphs (a) to (i) of
Subsection 29.1 hereof.
SEC. 30. Transactions and Responsibility of Brokers and Dealers.™ — 30.1. No
broker or dealer shall deal in or otherwise b u y or sell, for its o w n account or
for the account of customers, securities listed on an Exchange issued by any
corporation where any stockholder, director, associated person or salesman, or
authorized clerk of said broker or dealer and all the relatives of the foregoing
w i t h i n the fourth civil degree of consanguinity or affinity, is at the time holding
office in said issuer corporation as a director, president, vice-president, manager,
treasurer, comptroller, secretary or any office of trust and responsibility, or is a
controlling person of the issuer.
30.2. No broker or dealer shall effect any transaction in securities or

induce or attempt to induce the purchase or sale of any security except in
compliance w i t h such rules and regulations as the Commission shall prescribe
to ensure fair and honest dealings in securities and provide financial safeguards
and other standards for the operation of brokers and dealers, including the
establishment of m i n i m u m net capital requirements, the acceptance of custody
and use of securities of customers, and the carrying a n d use of deposits and
credit balances of customers.
SEC. 31. Development of Securities Market Professionals. — T h e Commission,

in joint undertaking w i t h self regulatory organizations, organizations and
associations of finance professionals as w e l l as private educational and
research institutions shall undertake or facilitate/organize continuing training,
conferences/seminars, updating programs, research and development as w e l l
as technology transfer at the latest and advanced trends in issuance and trading
of securities, derivatives, commodity trades and other financial instruments, as
w e l l as securities markets of other countries.
"Abacus Securities Corporation vs. Ampil, 483 SCRA 315 (2006).

Appendix A
CHAPTER IX
EXCHANGES AND OTHER SECURITIES
TRADING MARKETS
SEC. 32. Prohibition on Use of Unregistered Exchange; Regulation of Over-

the-Counter Markets. — 32.1. No broker, dealer, salesman, associated person of
a broker or dealer, or Exchange, directly or indirectly, shall make use of any
facility of an Exchange in the Philippines to effect any transaction in a security,
or to report such transaction, unless such Exchange is registered as such under
Section 33 of this Code.
32.2. (a) No broker, dealer, salesman or associated person of a broker or

dealer, singly or in concert w i t h any other person, shall make, create or operate,
or enable another to make, create or operate, any trading market, otherwise
than on a registered Exchange, for the b u y i n g and selling of any security, except
in accordance w i t h rules and regulations the Commission m a y prescribe.
(b) The Commission m a y promulgate rules and regulations governing

transactions by brokers, dealers, salesmen or associated persons of a broker
or dealer, over any facilities of such trading market and m a y require such
market to be administered by a self-regulatory organization determined by
the Commission as capable of insuring the protection of investors comparable
to that provided in the case of a registered Exchange. Such self-regulatory
organization must provide a centralized marketplace for trading and must
satisfy requirements comparable to those prescribed for registration of
Exchanges in Section 33 of this Code.
SEC. 33. Registration of Exchanges. — 33.1. A n y Exchange may be registered
as such w i t h the Commission under the terms and conditions hereinafter
provided in this Section and Section 40 hereof, by filing an application for
registration in such f o r m and containing such information and supporting
documents as the Commission by rule shall prescribe, including the following:
(a) An undertaking to comply and enforce compliance by its members
w i t h the provisions of this Code, its implementing rules or regulations and
the rules of the Exchange;
(b) The organizational charts of the Exchange, rules of procedure,
and a list of its officers and members;
(c) Copies of the rules of the Exchange; and
(d) An undertaking that in the event a member firm becomes insolvent
or w h e n the Exchange shall have found that the financial condition of its
member firm has so deteriorated that it cannot readily meet the demands
of its customers for the delivery of securities a n d / o r payment of sales
proceeds, the Exchange shall, u p o n order of the Commission, take over the
operation of the insolvent member firm and immediately proceed to settle
the member firm's liabilities to its customers.
33.2. Registration of an Exchange shall be granted upon compliance with
the following provisions:
896
(a) That the applicant is organized as a stock corporation: Provided,

That any registered Exchange existing prior to the effectivity of this Code
shall within one (1) year reorganize as a stock corporation pursuant to a
demutualization plan approved by the Commission;
(b) That the applicant is engaged solely in the business of operating
an exchange: Provided, however, That the Commission m a y adopt rules,
regulations or issue an order, u p o n application, exempting an Exchange
organized as a stock corporation and o w n e d and controlled by another
juridical person from this restriction;
(c) Where the Exchange is organized as a stock corporation, that no
person may beneficially o w n or control, direcdy or indirectly, more than
five percent (5%) of the voting rights of the Exchange and no industry or
business group may beneficially o w n or control, directly or indirectly, more
than twenty percent (20%) of the voting rights of the Exchange: Provided,
however, That the Commission m a y adopt rules, regulations or issue an
order, upon application, exempting an applicant f r o m this prohibition
where it finds that such ownership or control w i l l not negatively impact
on the Exchange's ability to effectively operate in the public interest;
(d) The expulsion, suspension, or disciplining of a member and
persons associated w i t h a member for conduct or proceeding inconsistent
w i t h just and equitable principles of fair trade, and for violations of
provisions of this Code, or any other Act administered by the Commission,
the rules, regulations and orders thereunder, or the rules of the Exchange;
(e) A fair procedure for the disciplining of members and persons
associated w i t h members, the denial of membership to any person seeking
to be a member, the barring of any person f r o m association w i t h a member,
and the prohibition or limitation of any person f r o m access to services
offered by the Exchange;
(f) That the brokers in the board of the Exchange shall comprise
of not more than forty-nine percent (49%) of such board a n d shall
proportionately represent the Exchange membership in terms of v o l u m e /
value of trade and paid up capital, and that any natural person associated
w i t h a juridical entity that is a member shall himself be deemed to be a
member for this purpose: Provided, That any registered Exchange existing
prior to the effectivity of this Code shall immediately comply w i t h this
requirement;
(g) For the board of the Exchange to include in its composition

(i) the president of the Exchange, and (ii) no less than fifty-one percent
(51%) of the remaining members of the board to be comprised of three
(3) independent directors and persons w h o represent the interests of
issuers, investors, and other market participants, w h o are not associated
w i t h any broker or dealer or member of the Exchange for a period of
t w o (2) years prior to h i s / h e r appointment. No officer or employee of a
member, its subsidiaries or affiliates or related interests shall become an
independent director: Provided, however, That the Commission m a y by rule,
Appendix A
regulation, or order u p o n application, permit the exchange organized as a

stock corporation to use a different governance structure: Provided, further,
That the Commission is satisfied that the Exchange is acting in the public
interest and is able to effectively operate as a self-regulatory organization
under this Code: Provided, finally, That any registered exchange existing
prior to the effectivity of this Code shall immediately comply w i t h this
requirement;
(h) The president and other management of the Exchange to consist

only of persons w h o are not members and are not associated in any
capacity, directly or indirectly w i t h any broker or dealer or member or
listed company of the Exchange: Provided, That the Exchange m a y only
appoint, and a person m a y only serve, as an offer of the exchange if such
person has not been a member or affiliated w i t h any broker, dealer, or
member of the Exchange for a period of at least t w o (2) years prior to such
appointment;
(i) The transparency of transactions on the Exchange;
(j) The equitable allocation of reasonable dues, fees, and other

charges among members and issuers and other persons using any facility
or system w h i c h the Exchange operates or controls;
(k) Prevention of fraudulent and manipulative acts and practices,

promotion of just and equitable principles of trade, and, in general,
protection of investors and the public interest; and
(1) The transparent, p r o m p t and accurate clearance and statement of

transactions effected on the Exchange.
33.3. If the Commission finds that the applicant Exchange is capable of
complying and enforcing compliance by its members, and persons associated
w i t h such members, w i t h the provisions of this Code, its rules and regulations,
and the rules of the Exchange are fair, just and adequate, the Commission shall
cause such Exchange to be registered. If, after notice due and hearing, the
Commission finds otherwise, the application shall be denied.
33.4. W i t h i n ninety (90) days after the filing of the application the
Commission m a y issue an order either granting or denying registration as
an Exchange, unless the Exchange applying for registration shall withdraw
its application or shall consent to the Commission's deferring action on its
application for a stated longer period after the date of filing. The filing w i t h the
Commission of an application for registration by an Exchange shall be deemed
to have taken place upon the receipt thereof. Amendments to an application
may be made u p o n such terms as the Commission may prescribe.
33.5. U p o n the registration of an Exchange, it shall pay a fee in such
amount and within such period as the Commission may fix.
33.6. U p o n appropriate application in accordance with the rules and
regulations of the Commission and upon such terms as the Commission may
deem necessary for the protection of investors, an Exchange may withdraw its
registration or suspend its operations or resume the same.
898
SEC. 34. Segregation and Limitation of Functions of Members, Brokers and

Dealers. —
34.1. It shall be unlawful for any member-broker of an Exchange to
effect any transaction on such Exchange for its o w n account, the account of
an associated person, or an account w i t h respect to which it or an associated
person thereof exercises investment discretion: Provided, however, That this
section shall not make unlawful:
(a) A n y transaction by a member-broker acting in the capacity of a
market maker;
(b) A n y transaction reasonably necessary to carry on an odd-lot
transactions;
(c) A n y transaction to offset a transaction made in error; and
(d) A n y other transaction of a similar nature as m a y be defined by the
Commission.
34.2. In all instances where the member-broker effects a transaction on
an Exchange for its o w n account or the account of an associated person or an
account w i t h respect to which it exercises investment discretion, it shall disclose
to such customer at or before the completion of the transaction it is acting for its
o w n account: Provided, further, That this fact shall be reflected in the order ticket
and the confirmation slip.
34.3. A n y member-broker w h o violates the provisions of this Section shall
be subject to the administrative sanctions provided in Section 54 of this Code.
SEC. 35. Additional Fees of Exchanges. — In addition to the registration
fee prescribed in Section 33 of this Code, every Exchange shall pay to the
Commission, on a semestral basis on or before the tenth day of the end of
every semester of the calendar year, a fee in such an amount as Commission
shall prescribe, but not more than one-hundredth of one per centum (1%) of
the aggregate amount of the sales of securities transacted on such Exchange
during the preceding calendar year, for the privilege of doing business, d u r i n g
the preceding calendar year or any part thereof.
SEC. 36. Powers with Respect to Exchanges and Other Trading Market. —
36.1. The Commission is authorized, if in its opinion such action is
necessary or appropriate for the protection of investors and the public interest
so requires, summarily to suspend trading in any listed security on any
Exchange or other trading market for a period not exceeding thirty (30) days or,
w i t h the approval of the President of the Philippines, summarily to suspend all
trading on any securities Exchange or other trading market for a period of more
that thirty (30) but not exceeding ninety (90) days: Provided, however, That the
Commission, promptly following the issuance of the order of suspension, shall
notify the affected issuer of the reasons for such suspension and provide such
issuer w i t h an opportunity for hearing to determine whether the suspension
should be lifted.
36.2. Wherever t w o or more Exchange or other trading markets exist,

the Commission may require and enforce uniformity of trading regulations in
a n d / o r between or among said Exchanges or other trading markets.
Appendix A
36.3. In addition to the existing Philippine Stock Exchange, the

Commission shall have the authority to determine the number, size and
location of stock Exchanges, other trading markets and commodity Exchanges
a n d other similar organizations in the light of national or regional requirements
for such activities w i t h the v i e w to promote, enhance, protect, conserve or
rationalize investment.
36.4. The Commission, h a v i n g due regard to the public interest, the pro-
tection of investors, the safeguarding of securities and funds, and maintenance
of fair competition a m o n g brokers, dealers, clearing agencies, and transfer
agents, shall promulgate rules and regulations for the p r o m p t and accurate
clearance and settlement of securities transactions.
36.5. (a) The Commission m a y establish or facilitate the establishment

of trust funds w h i c h shall be contributed by Exchanges, brokers, dealers,
underwriters, transfer agents, salesmen and other persons transacting in
securities, as the Commission m a y require, for the purpose of compensating
investors for the extraordinary losses or damage they m a y suffer due to
business failure or fraud or mismanagement of the persons w i t h w h o m they
transact, under such rules and regulations as the Commission m a y from time
to time prescribed or approve in the public interest.
(b) The Commission may, having due regard to the public interest or the
protection of investors, regulate, supervise, examine, suspend or otherwise
discontinue such other similar funds under such rules and regulations which
the Commission m a y promulgate, and w h i c h m a y include taking custody and
management of the f u n d itself as w e l l as investments in disbursements from
the funds under such forms of control and supervision by the Commission as it
m a y f r o m time to time require. The authority granted to the Commission under
this subsection shall also apply to all funds established for the protection of
investors, whether established by the Commission or otherwise.
SEC. 37. Registration of Innovative and Other Trading Markets. — The
Commission, having due regard for national economic development, shall
encourage competitiveness in the market by promulgating w i t h i n six (6) months
u p o n the enactment of this Code, rules for the registration and licensing of
innovative and other trading markets or Exchanges covering, but not limited to,
the issuance and trading of innovative securities, securities of small, medium,
growth and venture enterprises, and technology-based ventures pursuant to
Section 33 of this Code.
SEC. 38. Independent Directors. — A n y corporation w i t h a class of equity
securities listed for trading on an Exchange or with assets in excess of Fifty
million pesos (P50,000,000.00) and having two hundred (200) or more holders,
at least two hundred (200) of which are holding at least one hundred (100)
shares of a class of its equity securities or which has sold a class of equity
securities to the public pursuant to an effective registration statement in
compliance with Section 12 hereof shall have at least two (2) independent
directors or such independent directors shall constitute at least twenty percent
(20%) of the members of such board, whichever is lesser. For this purpose, an
"independent director" shall mean a person other than an officer or employee
900
of the corporation, its parent or subsidiaries, or any other individual having a

relationship with the corporation, which w o u l d interfere w i t h the exercise of
independent judgment in carrying out the responsibilities of a director.
CHAPTER X
REGISTRATION, RESPONSIBILITIES AND
OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS
SEC. 39. Associations of Securities Brokers, and Dealers, and Other Securities
Related Organizations. — 39.1. The Commission shall have the power to register
as a self-regulatory organization, or otherwise grant licenses, and to regulate,
supervise, examine, suspend or otherwise discontinue, as a condition for the
operation of organizations whose operations are related to or connected w i t h
the securities market such as but not limited to associations of brokers and
dealers, transfer agents, custodians, fiscal and paying agents, computer services,
news disseminating services, proxy solicitors, statistical agencies, securities
rating agencies, and securities information processors w h i c h are engaged in
the business of: (a) Collecting, processing, or preparing for distribution or
publication, or assisting, participating in, or coordinating the distribution or
publication of, information w i t h respect to transactions in or quotations for
any security; or (b) Distributing or publishing, whether by means of a ticker
tape, a communications network, a terminal display device, or otherwise, on
a current and continuing basis, information w i t h respect to such transactions
or quotations. The Commission m a y prescribe rules and regulations w h i c h are
necessary or appropriate in the public interest or for the protection of investors
to govern self-regulatory organizations and other organizations licensed or
regulated pursuant to the authority granted in Subsection 39.1 including the
requirement of cooperation w i t h i n and among, a n d electronic integration of the
records of, all participants in the securities market to ensure transparency and
facilitate exchange of information.
39.2. An association of brokers and dealers m a y be registered as a

securities association pursuant to Subsection 39.3 by filing w i t h the Commission
an application for registration in such f o r m as the Commission, by rule, m a y
prescribe containing the rules of the association and such other information
and documents as the Commission, by rule, m a y prescribe as necessary or
appropriate in the public interest or for the protection of investors.
39.3. An association of brokers and dealers shall not be registered as a

securities association unless the Commission determines that:
(a) The association is so organized and has the capacity to be able

to carry out the purposes of this Code and to comply w i t h , and to enforce
compliance by its members and persons associated w i t h its members, w i t h
the provisions of this Code, the rules and regulations thereunder, and the
rules of the association.
(b) The rules of the association, notwithstanding anything in

Corporation Code to the contrary, provide that:
Appendix A
(i) A n y registered broker or dealer m a y become a member of

the association;
(ii) There exist a fair representation of its members to serve on

the Board of Directors of the association a n d in the administration
of its affairs, and that any natural person associated w i t h a juridical
entity that is a member shall himself be deemed to be a member for
this purpose;
(iii) The Board of Directors of the association includes in its

composition: (a) The president of the association and (b) Persons w h o
represent the interests of issuers and public investors and are not
associated w i t h any broker or dealer or member of the association;
that the president and other management of the association not be
a member or associated w i t h any broker, dealer or member of the
association;
(iv) For the equitable allocation of reasonable dues, fees, and

other charges among members and issuers and other persons using
any facility or system w h i c h the association operates or controls;
(v) For the prevention of fraudulent and manipulative acts and
practices, the promotion of just a n d equitable principles of trade, and,
in general, the protection of investors and the public interest;
(vi) That its members a n d persons associated w i t h its members
shall be appropriately disciplined for violation of any provision
of this Code, the rules or regulations thereunder, or the rules of the
association;
(vii) That a fair procedure for the disdplining of members and

persons associated w i t h members, the denial of membership to any
person seeking membership therein, the barring of any person from
becoming associated w i t h a member thereof, and the prohibition or
limitation by the association of any person w i t h respect to access to
services offered by the association or a member thereof.
39.4. (a) A registered securities association shall deny membership to any
person w h o is not a registered broker or dealer.
(b) A registered securities association may deny membership to, or
condition the membership of, a registered broker or dealer if such broker or
dealer:
(i) Does not meet the standards of financial responsibility, operational
capability, training, experience, or competence that are prescribed by the
rules of the association; or
(ii) Has engaged, and there is a reasonable likelihood it will again
engage, in acts or practices inconsistent w i t h just and equitable principles
of fair trade.
(c) A registered securities association may deny membership to a
registered broker or dealer not engaged in a type of business in which the rules
of the association require members to be engaged: Provided, however. That no
902
registered securities association may deny membership to a registered broker

or dealer by reason of the amount of business done by the broker or dealer.
Aregistered securities association may examine and verify the qualifications
of an applicant to become a member in accordance w i t h procedures established
by the rules of the association.
(d) A registered securities association may bar a salesman or person
associated w i t h a broker or dealer from being employed by a member or set
conditions for the employment of a salesman or associated if such person:
(i) Does not meet the standards of training, experience, or competence
that are prescribed by the rules of the association; or
(ii) Has engaged, and there is a reasonable likelihood he w i l l again
engage, in acts or practices inconsistent w i t h just and equitable principles
of fair trade.
A registered securities association m a y examine and verify the qualifica-
tions of an applicant to become a salesman or associated person employed by a
member in accordance w i t h procedures established by the rules of the associa-
tion. A registered association also m a y require a salesman or associated person
employed by a member to be registered w i t h the association in accordance w i t h
procedures prescribed in the rules of the association.
39.5. In any proceeding by a registered securities association to determine

whether a person shall be denied membership, or barred f r o m association w i t h
a member, the association shall provide notice to the person under review of
the specific grounds being considered for denial, afford h i m an opportunity
to defend against the allegations, a n d keep a record of the proceedings. A
determination by the association to deny membership shall be supported by a
statement setting forth the specific grounds on w h i c h the denial is based.
SEC. 40. Powers with Respect to Self-Regulatory Organizations. — 40.1. U p o n
the filing of an application for registration as an Exchange under Section 33, a
registered securities association under Section 39, a registered clearing agency
under Section 42, or other self-regulatory organization under this Section,
the Commission shall have ninety (90) days w i t h i n w h i c h to either grant
registration or institute a proceeding to determine whether registration should
be denied. In the event proceedings are instituted, the Commission shall have
two hundred seventy (270) days w i t h i n w h i c h to conclude such proceedings at
which time it shall, by order, grant or deny such registration.
40.2. Every self-regulatory organization shall comply w i t h the provisions

of this Code, the rules and regulations thereunder, and its o w n rules, and enforce
compliance therewith, notwithstanding any provision of the Corporation Code
to the contrary, by its members, persons associated w i t h its members or its
participants.
40.3. (a) Each self-regulatory organization shall submit to the Commission

for prior approval any proposed rule or amendment thereto, together w i t h a
concise statement of the reason and effect of the proposed amendment.
Appendix A
(b) W i t h i n sixty (60) days after submission of a proposed amend-

ment, the Commission shall, by order, approve the proposed amendment.
Otherwise, the same m a y be m a d e effective by the self-regulatory organi-
zation.
(c) In the event of an emergency requiring action for the protection of
investors, the maintenance of fair and orderly markets, or the safeguarding
of securities and funds, a self-regulatory organization m a y p u t a proposed
a m e n d m e n t into effect summarily: Provided, however, That a copy of the
same shall be immediately submitted to the Commission.
40.4. The Commission is further authorized, if after making appropriate

request in w r i t i n g to a self-regulatory organization that such organization effect
on its o w n behalf specified changes in its rules and practices and, after due
notice and hearing it determines that such changes have not been effected, and
that such changes are necessary, by rule or regulation or by order, may alter,
abrogate or supplement the rules of such self-regulatory organization in so far
as necessary or appropriate to effect such changes in respect of such matters as:
(a) Safeguards in respect of the financial responsibility of members

and adequate provision against the evasion of financial responsibility
through the use of corporate forms or special partnerships;
(b) The supervision of trading practices;

(c) T h e listing or striking from listing of any security;
(d) H o u r s of trading;
(e) The manner, method, and place of soliciting business;
(f) Fictitious accounts;
(g) The time and m e t h o d of making settlements, payments, and
deliveries, and of closing accounts;
(h) The transparency of securities transactions and prices;
(i) The fixing of reasonable rates of fees, interest, listing and other
charges, but not rates of commission;
(j) M i n i m u m units of trading;
(k) Odd-lot purchases and sales;
(1) M i n i m u m deposits on margin accounts; and
(m) The supervision, auditing and disciplining of members or
participants.
40.5. The Commission, after due notice and hearing, is authorized, in the
public interest and to protect investors:
(a) To suspend for a period not exceeding twelve (12) months or
to revoke the registration of a self-regulatory organization, or to censure
or impose limitations on the activities, functions, and operations of such
self-regulatory organization, if the Commission finds that such a self-
regulatory organization has willfully violated or is unable to comply with
904
any provision of this Code or of the rules and regulations thereunder, or its
o w n rules, or has failed to enforce compliance therewith by a member of,
person associated w i t h a member, or a participant in such self-regulatory
organization;
(b) To expel from a self-regulatory organization any member thereof
or any participant therein w h o is subject to an order of the Commission
under Section 29 of this Code or is found to have willfully violated any
provision of this Code or suspend for a period not exceeding twelve (12)
months for violation of any provision of this Code or any other laws
administered by the Commission, or the rules and regulations thereunder,
or effected, directly or indirectly, any transaction for any person w h o , such
member or participant had reason to believe, was violating in respect of
such transaction any of such provisions; and
(c) To remove from office or censure any officer or director of a
self-regulatory organization if it finds that such officer or director has
violated any provision of this Code, any other l a w administered by the
Commission, the rules or regulations thereunder, or the rules of such
self-regulatory organization, abused his authority, or without reasonable
justification or excuse has failed to enforce compliance w i t h any of such
provisions.
40.6. (a) A self-regulatory organization is authorized to discipline a member

or participant in such self-regulatory organization, or any person associated
w i t h a member, including the suspension or expulsion of such member or
participant, and the suspension or bar f r o m being associated w i t h a member,
if such person has engaged in acts or practices inconsistent w i t h just and
equitable principles of fair trade or in w i l l f u l violation of any provision of the
Code, any other law administered by the Commission, the rules or regulations
thereunder, or the rules of the self-regulatory organization. In any disciplinary
proceeding by a self-regulatory organization (other than a s u m m a r y proceeding
pursuant to paragraph [b] of this subsection) the self-regulatory organization
shall bring specific charges, provide notice to the person charged, afford the
person charged w i t h an opportunity to defend against the charges, a n d keep
a record of the proceedings. A determination to impose a disciplinary sanction
shall be supported by a written statement of the offense, a s u m m a r y of the
evidence presented and a statement of the sanction imposed.
(b) A self-regulatory organization m a y summarily: (i) Suspend a member,

participant or person associated w i t h a member w h o has been or is expelled
or suspended from any other self-regulatory organization; or (ii) Suspend a
member w h o the self-regulatory organization finds to be in such financial or
operating difficulty that the member or participant cannot be permitted to
continue to do business as a member w i t h safety to investors, creditors, other
members, participants or the self-regulatory organization: Provided, That the
self-regulatory organization immediately notifies the Commission of the action
taken. A n y person aggrieved by a summary action pursuant to this paragraph
shall be promptly afforded an opportunity for a hearing by the association
in accordance w i t h the provisions of paragraph (a) of this subsection. The
Appendix A
Commission, by order, m a y stay a s u m m a r y action on its o w n morion or upon

application by any person aggrieved thereby, if the Commission determines
s u m m a r i l y or after due notice and hearing (which hearing m a y consist solely
of the submission of affidavits or presentation of oral arguments) that a stay is
consistent w i t h the public interest and the protection of investors.
40.7. A self-regulatory organization shall p r o m p t l y notify the Commission
of any disciplinary sanction on any member thereof or participant therein, any
denial of membership or participation in such organization, or the imposition
of any disciplinary sanction on a person associated w i t h a member or a bar of
such person f r o m becoming so associated. W i t h i n thirty (30) days after such
notice, any aggrieved person m a y appeal to the Commission from, or the
Commission on its o w n m o t i o n w i t h i n such period, m a y institute review of,
the decision of the self-regulatory organization, at the conclusion of which,
after due notice and hearing ( w h i c h m a y consist solely of review of the record
before the self-regulatory organization), the Commission shall affirm, modify
or set aside the sanction. In such proceeding the Commission shall determine
whether the aggrieved person has engaged or omitted to engage in the acts and
practices as found by the self-regulatory organization, whether such acts and
practices constitute w i l l f u l violations of this Code, any other law administered
by the Commission, the rules or regulations thereunder, or the rules of the
self-regulatory organization as specified by such organization, whether such
provisions were applied in a manner consistent w i t h the purposes of this Code,
and whether, w i t h due regard for the public interest and the protection of
investors the sanction is excessive or oppressive.
40.8. The powers of the Commission under this section shall apply to
organized exchanges and registered clearing agencies.
CHAPTER XI
ACQUISITION AND TRANSFER OF SECURITIES AND
SETTLEMENT OF TRANSACTIONS IN SECURITIES
SEC. 4 1 . Prohibition on Use of Unregistered Clearing Agency. — It shall be

u n l a w f u l for any broker, dealer, salesman, associated person of a broker or
dealer, or clearing agency, directly or indirectly, to make use of any facility
of a clearing agency in the Philippines to make deliveries in connection with
transactions in securities or to reduce the number of settlements of securities
transactions or to allocate securities settlement responsibilities or to provide
for the central handling of securities so that transfers, loans and pledges and
similar transactions can be made by bookkeeping entry or otherwise to facilitate
the settlement of securities transactions without physical delivery of securities
certificates, unless such clearing agency is registered as such under Section 42
of this Code or is exempted from such registration upon application by the
clearing agency because, in the opinion of the Commission, by reason of the
limited volume of transactions which are settled using the clearing agency, it is
not practicable and not necessary or appropriate in the public interest or for the
protection of investors to require such registration.
906
SEC. 42. Registration of Clearing Agencies. — 42.1. A n y clearing agency may

be registered as such w i t h the Commission under the terms and conditions
hereinafter provided in this Section, by filing an application for registration in
such form and containing such information and supporting documents as the
Commission by rule shall prescribe, including the following:
(a) An undertaking to comply and enforce compliance by its
participants w i t h the provisions of this Code, and any amendment thereto,
and the implementing rules or regulations made or to be made thereunder,
and the clearing agency's rules;
(b) The organizational charts of the Exchange, its rules of procedure,
and a list of its officers and participants; and
(c) Copies of the clearing agency's rules.
42.2. No registration of a clearing agency shall be granted unless the rules
of the clearing agency include provision for:
(a) The expulsion, suspension, or disciplining of a participant for
violations of this Code, or any other Act administered by the Commission,
the rules, regulations, and orders thereunder, or the clearing agency's
rules;
(b) A fair procedure for the disciplining of participants, the denial
of participation rights to any person seeking to be a participant, and the
prohibition or limitation of any person from access to services offered by
the clearing agency;
(c) The equitable allocation of reasonable dues, fees, and other
charges among participants;
(d) Prevention of fraudulent and manipulative acts and practices,
promotion of just and equitable principles of trade, and, in general,
protection of investors and the public interest;
(e) The transparent, p r o m p t and accurate clearance and settlement of
transactions in securities handled by the clearing agency; and
(f) The establishment and oversight of a f u n d to guarantee the
prompt and accurate clearance and settlement of transactions executed
on an exchange, including a requirement that members each contribute
an amount based on their volume and a relevant percentage of the daily
exposure of the four (4) largest trading brokers w h i c h adequately reflects
trading risks undertaken or pursuant to another formula set forth in
Commission rules or regulations or order, u p o n application: Provided,
however, That a clearing agency engaged in the business of a securities
depository shall be exempt f r o m this requirement.
42.3. In the case of an application filed pursuant to this Section, the
Commission shall grant registration if it finds that the requirements of this
Code and the rules and regulations thereunder w i t h respect to the applicant
have been satisfied, and shall deny registration if it does not m a k e such finding.
42.4. U p o n appropriate application in accordance w i t h the rules and
regulations of the Commission and u p o n such terms as the Commission m a y
* Sees. 43-44 THE SECURITIES REGULATION CODE 907
Appendix A
d e e m necessary for the protection of investors, a clearing agency m a y w i t h d r a w

its registration or suspend its operation or resume the same.
42.5. Section 32 of this Code shall apply to every registered clearing

agency.
SEC. 43. Uncertificated Securities. — N o t w i t h s t a n d i n g Section 63 of the

Corporation Code of the Philippines: 43.1. A corporation whose securities are
registered pursuant to this Code or listed on a Securities Exchange may:
(a) If so resolved by its Board of Directors and agreed by a shareholder,

investor or securities intermediary, issue shares to, or record the transfer
of some or all of its shares into the name of said shareholders, investors or,
securities intermediary in the f o r m of uncertificated securities. The use of
uncertificated securities in these circumstances shall be without prejudice
to the rights of the securities intermediary subsequently to require the
corporation to issue a certificate in respect of any shares recorded in its
name; and
(b) If so provided in its articles of incorporation and by-laws, issue

all of the shares of a particular class in the f o r m of uncertificated securities
and subject to a condition that investors m a y not require the corporation to
issue a certificate in respect of any shares recorded in their name.
43.2. The Commission by rule m a y allow other corporations to provide

in their articles of incorporation and by-laws for the use of uncertificated
securities.
43.3. Transfers of securities, including an uncertificated securities, may be

validly m a d e and consummated by appropriate book entries in the securities
accounts maintained by securities intermediaries, or in the stock and transfer
book held by the corporation or the stock transfer agent and such bookkeeping
entries shall be binding on the parties to the transfer. A transfer under this
subsection has the effect of the delivery of a security in bearer form or duly
indorsed in blank representing the quantity or amount of security or right
transferred, including the unrestricted negotiability of that security by reason
of such delivery. However, transfer of uncertificated shares shall only be valid,
so far as the corporation is concerned, w h e n a transfer is recorded in the books
of the corporation so as to show the names of the parties to the transfer and the
number of shares transferred.
However, nothing in this Code shall preclude compliance by banking and
other institutions under the supervision of the Bangko Sentral ng Pilipinas and
their stockholders w i t h the applicable ceilings on shareholdings prescribed
under pertinent banking laws and regulations.
SEC. 44. Evidentiary Value of Clearing Agency Record. — The official records
and book entries of a clearing agency shall constitute the best evidence of such
transactions between clearing agency and its participants and members, without
prejudice to the right of participants' or members' clients to prove their rights,
title and entitlement w i t h respect to the book-entry security holdings of the
participants or members held on behalf of the clients. However, the corporation
THE CORPORATION CODE OF THE PHILIPPINES Sees. 45-47'
908
shall not be bound by the foregoing transactions unless the corporate secretary
is duly notified in such manner as the Commission may provide.
SEC. 45. Pledging a Security or Interest Therein. — In addition to other
methods recognized by law, a pledge of, or release of a pledge of, a security,
including an uncertificated security, is properly constituted and the instrument
proving the right pledged shall be considered delivered to the creditor under
Articles 2093 and 2095 of the Civil Code if a securities intermediary indicates
by book entry that such security has been credited to a specially designated
pledge account in favor of the pledgee. A pledge under this subsection has the
effect of the delivery of a security in bearer form or duly indorsed in blank
representing the quantity or amount of such security or right pledged. In the
case of a registered clearing agency, the procedures by which, and the exact
time at which, such book entries are created shall be governed by the registered
clearing agency's rules. However, the corporation shall not be b o u n d by the
foregoing transactions unless the corporate secretary is d u l y notified in such
manner as the Commission m a y provide.
SEC. 46. Issuer's Responsibility for Wrongful Transfer to Registered Clearing

Agency. — The registration of a transfer of a security into the name of and by a
registered clearing agency or its nominee shall be final and conclusive unless
the clearing agency had notice of an adverse claim before the registration was
made. The above provision shall be w i t h o u t prejudice to any rights w h i c h
the claimant may have against the issuer for w r o n g f u l registration in such
circumstances.
SEC. 47. Power of the Commission With Respect to Securities Ownership. — The
Commission is authorized, having due regard to the public interest and the
protection of investors, to promulgate rules and regulations which:
47.1. Validate the transfer of securities by book-entries rather than the
delivery of physical certificates;
47.2. Establish w h e n a person acquires a security or an interest therein
and w h e n delivery of a security to a purchaser occurs;
47.3. Establish which records constitute the best evidence of a person's
interests in a security and the effect of any errors in electronic records of
ownership;
47.4. Codify the rights of investors w h o choose to hold their securities
indirectly through a registered clearing agency a n d / o r other securities
intermediaries;
47.5. Codify the duties of securities intermediaries (including clearing
agencies) w h o hold securities on behalf of investors; and
47.6. Give first priority to any claims of a registered clearing agency
against a participant arising f r o m a failure by the participant to meet its
obligations under the clearing agency's rules in respect of the clearing and
settlement of transactions in securities, in a dissolution of the participant, and
any such rules and regulations shall bind the issuers of the securities, investors
in the securities, any third parties w i t h interests in the securities, and the
creditors of a participant of a registered clearing agency.
Appendix A
CHAPTER XII
MARGIN AND CREDIT
16
SEC. 48. Margin Requirements. — 48.1. For the purpose of preventing
the excessive use of credit for the purchase or carrying of securities, the
Commission, in accordance w i t h the credit and monetary policies that may be
promulgated f r o m time to time by the M o n e t a r y Board of the Bangko Sentral
ng Pilipinas, shall prescribe rules and regulations w i t h respect to the amount
of credit that m a y be extended on any security. For the extension of credit, such
rules and regulations shall be based u p o n the following standard:
An amount not greater than whichever is the higher of —
(a) Sixty-five per centum (65%) of the current market price of the security,
or
(b) O n e h u n d r e d per centum (100%) of the lowest market price of the

security during the preceding thirty-six (36) calendar months, but not more
than seventy-five per centum (75%) of the current market price.
However, the M o n e t a r y Board m a y increase or decrease the above

percentages, in order to achieve the objectives of the Government w i t h due
regard for promotion of the economy and prevention of the use of excessive
credit.
Such rules and regulations m a y m a k e appropriate provision w i t h respect

to the carrying of undermargined accounts for limited periods and under
specified conditions; the w i t h d r a w a l of funds or securities; the transfer of
accounts f r o m one lender to another; special or different margin requirements
for delayed deliveries, short sales, arbitrage transactions, and securities to
w h i c h letter (b) of the second paragraph of this subsection does not apply; the
bases and the methods to be used in calculating loans, and margins and market
prices; and similar administrative adjustments and details.
48.2. No member of an Exchange or broker or dealer shall, directly or

indirectly, extend or maintain credit or arrange for the extension or maintenance
of credit to or for any customer:
(a) On any security unless such credit is extended and maintained
in accordance w i t h the rules and regulations which the Commission shall
prescribe under this Section including rules setting credit in relation to net
capital of such member, broker or dealer; and
(b) Without collateral or on any collateral other than securities, except
(i) to maintain a credit initially extended in conformity w i t h the rules and
regulations of the Commission and (ii) in cases where the extension or
maintenance of credit is not for the purpose of purchasing or carrying
securities or of evading or circumventing the provisions of paragraph (a)
of this subsection.
16
See Abacus Securities Corporation vs. Ampil, 483 SCRA 315 (2006).
910
48.3. A n y person not subject to Subsection 48.2 hereof shall extend

or maintain credit or arrange for the extension or maintenance of credit for
the purpose of purchasing or carrying any security, only in accordance w i t h
such rules and regulations as the Commission shall prescribe to prevent the
excessive use of credit for the purchasing or carrying of or trading in securities
in circumvention of the other provisions of this Section. Such rules and
regulations may impose upon all loans made for the purpose of purchasing
or carrying securities limitations similar to those imposed u p o n members,
brokers, or dealers by Subsection 48.2 and the rules and regulations thereunder.
This subsection and the rules and regulations thereunder shall not apply:
(a) To a credit extension made by a person not in the ordinary course
of business; (b) To a loan to a dealer to aid in the financing of the distribution
of securities to customers not through the m e d i u m of an Exchange; or (c)
To such other credit extension as the Commission shall exempt f r o m the
operation of this subsection and the rules and regulations thereunder u p o n
specified terms and conditions or for stated period.
SEC. 49. Restrictions on Borrowings by Members, Brokers, and Dealers. — It
shall be unlawful for any registered broker or dealer, or member of an Exchange,
directly or indirectly:
49.1. To permit in the ordinary course of business as a broker or dealer his
aggregate indebtedness including customers' credit balances, to exceed such
percentage of the net capital (exclusive of fixed assets a n d value of Exchange
membership) employed in the business, but not exceeding in any case t w o
thousand per centum (2,000%), as the Commission m a y by rules and regulations
prescribe as necessary or appropriate in the public interest or for the protection
of investors.
49.2. To pledge, mortgage, or otherwise encumber or arrange for the

pledge, mortgage or encumbrance of any security carried for the account of
any customer under circumstances: (a) That w i l l permit the cornmingling of
his securities, without his written consent, w i t h the securities of any customer;
(b) That w i l l permit such securities to be commingled w i t h the securities of any
person other than a bona fide customer; or (c) That w i l l permit such securities to
be pledged, mortgaged or encumbered, or subjected to any lien or claim of the
pledgee, for a sum in excess of the aggregate indebtedness of such customers in
respect of such securities. However, the Commission, having due regard to the
protection of investors, may, by rules and regulations, allow certain transactions
that may otherwise be prohibited under this subsection.
49.3. To lend or arrange for the lending of any security carried for the
account of any customer without the written consent of such customer or in
contravention of such rules and regulations as the Commission shall prescribe.
SEC. 50. Enforcement of Margin Requirements and Restrictions on Borrowing.
— To prevent indirect violations of the margin requirements under Section 48,
the broker or dealer shall require the customer in non-margin transactions to
pay the price of the security purchased for his account w i t h i n such period as
the Commission may prescribe, which shall in no case exceed the prescribed
settlement date. Otherwise, the broker shall sell the security purchased starting
on the next trading day but not beyond ten (10) trading days following the
last day for the customer to pay such purchase price, unless such sale cannot
be effected w i t h i n said period for justifiable reasons. The sale shall be without
prejudice to the right of the broker or dealer to recover any deficiency from the
customer. To prevent indirect violation of the restrictions on borrowings under
Section 49, the broker shall, unless otherwise directed by the customer, pay
the net sales price of the securities sold for a customer w i t h i n the same period
as above prescribed by the Commission: Provided, That the customer shall be
required to deliver the instruments evidencing the securities as a condition for
such payment u p o n d e m a n d by the broker.
CHAPTER XIII
GENERAL PROVISIONS
SEC. 5 1 . Liabilities of Controlling Persons, Aider and Abettor and Other

Secondary Liability. — 51.1. Every person w h o , by or through stock ownership,
agency, or otherwise, or in connection w i t h an agreement or understanding
w i t h one or more other persons, controls any person liable under this Code
or the rules or regulations of the Commission thereunder, shall also be liable
jointly and severally w i t h and to the same extent as such controlled persons
to any person to w h o m such controlled person is liable, unless the controlling
person proves that, despite the exercise of due diligence on his part, he has no
knowledge of the existence of the facts by reason of w h i c h the liability of the
controlled person is alleged to exist.
51.2. It shall be u n l a w f u l for any person, directly or indirectly, to do

any act or thing w h i c h it w o u l d be u n l a w f u l for such person to do under the
provisions of this Code or any rule or regulation thereunder.
51.3. It shall be u n l a w f u l for any director or officer of, or any owner of
any securities issued by, any issuer required to file any document, report or
other information under this Code or any rule or regulation of the Commission
thereunder, without just cause, to hinder, delay or obstruct the making or filing
of any such document, report, or information.
51.4. It shall be u n l a w f u l for any person to aid, abet, counsel, command,
induce or procure any violation of this Code, or any rule, regulation or order of
the Commission thereunder.
51.5. Every person w h o substantially assists the act or omission of any
person primarily liable under Sections 57, 58, 59 and 60 of this Code, with
knowledge or in reckless disregard that such act or omission is wrongful, shall
be jointly and severally liable as an aider and abettor for damages resulting
from the conduct of the person primarily liable: Provided, however, That an
aider and abettor shall be liable only to the extent of his relative contribution
in causing such damages in comparison to that of the person primarily liable,
or the extent to which the aider and abettor was unjustly enriched thereby,
whichever is greater.
912
SEC. 52. Accounts and Records, Reports, Examination of Exchanges, Members,

and Others. - 52.1. Every registered Exchange, broker or dealer, transfer agent,
clearing agency, securities association, and other self-regulatory organization,
and every other person required to register under this Code, shall make, keep
and preserve for such periods, records, furnish such copies thereof, and make
such reports, as the Commission by its rules and regulations m a y prescribe.
Such accounts, correspondence, memoranda, papers, books, and other records
shall be subject at any time to such reasonable periodic, special or other exami-
nations by representatives of the Commission as the Commission may deem
necessary or appropriate in the public interest or for the protection of investors.
52.2. A n y broker, dealer or other person extending credit, w h o is subject to
the rules and regulations prescribed by the Commission pursuant to this Code,
shall make such reports to the Commission as m a y be necessary or appropriate
to enable it to perform the functions conferred u p o n it by this Code.
52.3. For purposes of this Section, the term "records" refers to accounts,
correspondence, memoranda, tapes, discs, papers, books and other documents
or transcribed information of any type, whether written or electronic in
character.
SEC. 53. Investigations, Injunctions and Prosecution of Offenses. — 53.1.
17
The Commission may, in its discretion, m a k e such investigations as it deems

necessary to determine whether any person has violated or is about to violate
any provision of this Code, any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities association, clearing agency, other
self-regulatory organization, and m a y require or permit any person to file
w i t h it a statement in writing, under oath or otherwise, as the Commission
shall determine, as to all facts and circumstances concerning the matter to be
investigated. The Commission m a y publish information concerning any such
violations, and to investigate any fact, condition, practice or matter w h i c h it
may deem necessary or proper to aid in the enforcement of the provisions
of this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further legislation
concerning the matters to w h i c h this Code relates: Provided, however, That
any person requested or subpoenaed to produce documents or testify in any
investigation shall simultaneously be notified in w r i t i n g of the purpose of
such investigation: Provided, further, That all criminal complaints for violations
of this Code, and the implementing rules and regulations enforced or
administered by the Commission shall be referred to the Department of Justice
for preliminary investigation and prosecution before the proper court: Provided,
furthermore, That in instances where the law allows independent civil or
criminal proceedings of violations arising f r o m the same act, the Commission
shall take appropriate action to implement the same: Provided, finally, That the
18
investigation, prosecution, and trial of such cases shall be given priority.
17
See SEC vs. Interport Resources Corp., 567 SCRA 384 (2008).
le
See GSIS vs. Court of Appeals, 585 SCRA 679 (2009); Baviera vs. Paelinawan, 515
5
SCRA 170 (2007).
Appendix A
53.2. For the purpose of any such investigation, or any other proceeding
under this Code, the Commission or any officer designated by it is empowered
to administer oaths and affirmations, subpoena witnesses, compel attendance,
take evidence, require the production of any book, paper, correspondence,
m e m o r a n d u m , or other record w h i c h the Commission deems relevant or
material to the inquiry, and to p e r f o r m such other acts necessary in the conduct
of such investigation or proceedings.
53.3. Whenever it shall appear to the Commission that any person has
engaged or is about to engage in any act or practice constituting a violation
of any provision of this Code, any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities association, clearing agency or other
self-regulatory organization, it m a y issue an order to such person to desist
f r o m committing such act or practice: Provided, however, That the Commission
shall not charge any person w i t h violation of the rules of an Exchange or other
self-regulatory organization unless it appears to the Commission that such
Exchange or other self-regulatory organization is unable or u n w i l l i n g to take
action against such person. After finding that such person has engaged in any
such act or practice a n d that there is a reasonable likelihood of continuing,
further or future violations by such person, the Commission m a y issue ex-parte
a cease and desist order for a m a x i m u m period of ten (10) days, enjoining the
violation and compelling compliance w i t h such provision. The Commission
m a y transmit such evidence as m a y be available concerning any violation
of any provision of this Code, or any rule, regulation or order thereunder,
to the Department of Justice, w h i c h m a y institute the appropriate criminal
proceedings under this Code.
53.4. A n y person w h o , w i t h i n his power but without cause, fails or refuses
to comply w i t h any l a w f u l order, decision or subpoena issued by the Commission
under Subsection 53.2 or Subsection 53.3 or Section 64 of this Code, shall after
due notice and hearing, be guilty of contempt of the Commission. Such person
shall be fined in such reasonable amount as the Commission m a y determine, or
w h e n such failure or refusal is a clear and open defiance of the Commission's
order, decision or subpoena, shall be detained under an arrest order issued by
the Commission, until such order, decision or subpoena is complied w i t h .
SEC. 54. Administrative Sanctions: — 54.1. If, after due notice and hearing,
9
the Commission finds that: (a) There is a violation of this Code, its rules, or its
orders; (b) A n y registered broker or dealer, associated person thereof has failed
reasonably to supervise, w i t h a v i e w to preventing violations, another person
subject to supervision w h o commits any such violation; (c) A n y registrant or
other person has, in a registration statement or in other reports, applications,
accounts, records or documents required by law or rules to be filed with the
Commission, made any untrue statement of a material fact, or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; or in the case of an underwriter, has failed
"See Note 2.
914
to conduct an inquiry with reasonable diligence to insure that a registration

statement is accurate and complete in all material respects; or (d) A n y person
has refused to permit any lawful examinations into its affairs, it shall, in its
discretion, and subject only to the limitations hereinafter prescribed, impose
any or all of the following sanctions as may be appropriate in light of the facts
and circumstances:
(i) Suspension, or revocation of any registration for the offering of
securities;
(ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more
than One million pesos (P1,000,000.00) plus not more than T w o thousand
pesos (P2,000.00) for each day of continuing violation;
(iii) In the case of a violation of Sections 19.2, 20, 24, 26 and 27,
disqualification from being an officer, member of the Board of Directors,
or person performing similar functions, of an issuer required to file
reports under Section 17 of this Code or any other act, rule or regulation
administered by the Commission;
(iv) In the case of a violation of Section 34, a fine of no more than three
(3) times the profit gained or loss avoided as a result of the purchase, sale
or communication proscribed by such Section; and
(v) Other penalties w i t h i n the p o w e r of the Commission to impose.
54.2. The imposition of the foregoing administrative sanctions shall be
without prejudice to the filing of criminal charges against the individuals
responsible for the violation.
54.3. The Commission shall have the p o w e r to issue writs of execution to

enforce the provisions of this Section and to enforce p a y m e n t of the fees and
other dues collectible under this Code.
SEC. 55. Settlement Offers. — 55.1. At any time, d u r i n g an investigation or

proceeding under this Code, parties being investigated and / or charged m a y
propose in writing an offer of settlement w i t h the Commission.
55.2. U p o n receipt of such offer of settlement, the Commission m a y consider

the offer based on timing, the nature of the investigation or proceeding, a n d the
public interest.
55.3. The Commission m a y only agree to a settlement offer based on its

findings that such settlement is in the public interest. A n y agreement to settle
shall have no legal effect until publicly disclosed. Such decision m a y be m a d e
without a determination of guilt on the part of the person m a k i n g the offer.
55.4. The Commission shall adopt rules and procedures governing the
filing, review, w i t h d r a w a l , form of rejection and acceptance of such offers.
SEC. 56. Civil Liabilities on Account of False Registration Statement. — 56.1.
A n y person acquiring a security, the registration statement of w h i c h or any
part thereof contains on its effectivity an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to m a k e
such statements not misleading, and w h o suffers damage, m a y sue and recover
Appendix A
damages f r o m the following enumerated persons, unless it is proved that at the

time of such acquisition he k n e w of such untrue statement or omission:
(a) The issuer and every person w h o signed the registration
statement;
(b) Every person w h o was a director of, or any other person perform-
ing similar functions, or a partner in, the issuer at the time of the filing of
the registration statement or any part, supplement or amendment thereof
w i t h respect to w h i c h his liability is asserted;
(c) "Every person w h o is n a m e d in the registration statement as being

or about to become a director of, or a person performing similar functions,
or a partner in, the issuer and whose w r i t t e n consent thereto is filed w i t h
the registration statement;
(d) Every auditor or auditing f i r m n a m e d as having certified any

financial statements used in connection w i t h the registration statement or
prospectus;
(e) Every person w h o , w i t h his w r i t t e n consent, which shall be filed

w i t h the registration statement, has been n a m e d as having prepared or
certified any part of the registration statement, or as having prepared or
certified any report or valuation w h i c h is used in connection w i t h the
registration statement, w i t h respect to the statement, report, or valuation,
w h i c h purports to have been prepared or certified by h i m ;
(f) Every selling shareholder w h o contributed to and certified as

to the accuracy of a portion of the registration statement, w i t h respect to
that portion of the registration statement which purports to have been
contributed by h i m ; and
(g) Every underwriter w i t h respect to such security.
56.2. If the person w h o acquired the security d i d so after the issuer has
made generally available to its security holders an income statement covering
a period of at least twelve (12) months beginning from the effective date of the
registration statement, then the right of recovery under this subsection shall be
conditioned on proof that such person acquired the security relying upon such
untrue statement in the registration statement or relying upon the registration
statement and not k n o w i n g of such income statement, but such reliance may be
established without proof of the reading of the registration statement by such
person.
SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications
and Reports. — 57.1. A n y person w h o :
(a) Offers to sell or sells a security in violation of Chapter I I I , or
(b) Offers to sell or sells a security, whether or not exempted by
the provisions of this Code, by the use of any means or instruments of
transportation or communication, by means of a prospectus or other
written or oral communication, which includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make the
916
statements, in the light of the circumstances under which they were made,
not misleading (the purchaser not knowing of such untruth or omission),
and w h o shall fail in the burden of proof that he d i d not know, and in
the exercise of reasonable care could not have k n o w n , of such untruth
or omission, shall be liable to the person purchasing such security from
him, who may sue to recover the consideration paid for such security w i t h
interest thereon, less the amount of any income received thereon, u p o n the
tender of such security, or for damages if he no longer owns the security.
57.2. A n y person w h o shall make or cause to be made any statement in
any report, or document filed pursuant to this Code or any rule or regulation
thereunder, which statement was at the time and in the light of the circumstances
under which it was made false or misleading w i t h respect to any material fact,
shall be liable to any person w h o , not k n o w i n g that such statement was false
or misleading, and relying u p o n such statements shall have purchased or sold
a security at a price which was affected by such statement, for damages caused
by such reliance, unless the person sued shall prove that he acted in good faith
and had no knowledge that such statement was false or misleading.
SEC. 58. Civil Liability for Fraud in Connection with Securities Transactions. —
A n y person w h o engages in any act or transaction in violation of Sections 19.2,
20 or 26, or any rule or regulation of the Commission thereunder, shall be liable
to any other person w h o purchases or sells any security, grants or refuses to
grant any proxy, consent or authorization, or accepts or declines an invitation
for tender of a security, as the case m a y be, for the damages sustained by such
other person as a result of such act or transaction.
SEC. 59. Civil Liability for Manipulation of Security Prices. — A n y person w h o

willfully participates in any act or transaction in violation of Section 24 shall
be liable to any person w h o shall purchase or sell any security at a price w h i c h
was affected by such act or transaction, and the person so injured m a y sue to
recover the damages sustained as a result of such act or transaction.
SEC. 60. Civil Liability with Respect to Commodity Futures Contracts and Pre-
need Plans. — 60.1. A n y person w h o engages in any act or transaction in w i l l f u l
violation of any rule or regulation promulgated by the Commission under
Section 11 or 16, which the Commission denominates at the time of issuance as
intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit
fraud, manipulation, fictitious transactions, u n d u e speculation, or other unfair
or abusive practices w i t h respect to commodity future contracts, shall be liable
to any other person sustaining damage as a result of such act or transaction.
60.2. As to each such rule or regulation so denominated, the Commission

by rule shall prescribe the elements of proof required for recovery and any
limitations on the amount of damages that m a y be imposed.
SEC. 6 1 . Civil Liability on Account of Insider Trading. — 61.1. A n y insider

w h o violates Subsection 27.1 and any person in the case of a tender offer
w h o violates Subsection 27.4(a)(i), or any rule or regulation thereunder, by
purchasing or selling a security while in possession of material information
not generally available to the public, shall be liable in a suit brought by any
Appendix A
investor w h o , contemporaneously w i t h the purchase or sale of securities that

is the subject of the violation, purchased or sold securities of the same class
unless such insider, or such person in the case of a tender offer, proves that such
investor k n e w the information or w o u l d have purchased or sold at the same
price regardless of disclosure of the information to h i m .
61.2. An insider w h o violates Subsection 27.3 or any person in the case
of a tender offer w h o violates Subsection 27.4(a), or any rule or regulation
thereunder, by communicating material non-public information, shall be jointly
and severally liable under Subsection 61.1 w i t h , and to the same extent as, the
insider, or person in the case of a tender offer, to w h o m the communication was
directed and w h o is liable under Subsection 61.1 by reason of his purchase or
sale of a security.
SEC. 62. Limitation of Actions. — 62.1. No action shall be maintained to

enforce any liability created under Section 56 or 57 of this Code unless brought
w i t h i n t w o (2) years after the discovery of the untrue statement or the omission,
or, if the action is to enforce a liability created under Subsection 57.1(a), unless
brought w i t h i n t w o (2) years after the violation u p o n w h i c h it is based. In no
event shall any such action be brought to enforce a liability created under
Section 56 or Subsection 57.1(a) more than five (5) years after the security was
bona fide offered to the public, or under Subsection 57.1(b) more than five (5)
years after the sale.
62.2. No action shall be maintained to enforce any liability created under

any other provision of this Code unless brought w i t h i n two (2) years after the
discovery of the facts constituting the cause of action and w i t h i n five (5) years
after such cause of action accrued.
SEC. 63. Amount of Damages to be Awarded. — 63.1. A l l suits to recover
damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before
the Regional Trial Court, which shall have exclusive jurisdiction to hear and
decide such suits. The Court is hereby authorized to award damages in an
amount not exceeding triple the amount of the transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith, fraud,

malevolence or wantonness in the violation of this Code or the rules and
regulations promulgated thereunder.
The Court is also authorized to award attorney's fees exceeding thirty per
centum (30%) of the award.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall
be jointly and severally liable for the payment of damages. However, any person
w h o becomes liable for the payment of such damages may recover contribution
from any other person w h o , if sued separately, w o u l d have been liable to make
the same payment, unless the former was guilty of fraudulent representation
and the latter was not.
63.3. Notwithstanding any provision of law to the contrary, all persons,
including the issuer, held liable under the provisions of Sections 56, 57, 58, 59,
60 and 61 shall contribute equally to the total liability adjudged herein. In no
918
case shall the principal stockholders, directors and other officers of the issuer
or persons occupying similar positions therein, recover their contribution to
the liability from the issuer. However, the right of the issuer to recover from
the guilty parties the amount it has contributed under this Section shall not be
prejudiced.
SEC. 64. Cease and Desist Order. — 64.1. The Commission, after proper 20
investigation or verification, motu proprio, or u p o n verified complaint by any

aggrieved party, may issue a cease and desist order without the necessity of a
prior hearing if in its judgment the act or practice, unless restrained, w i l l operate
as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public.
64.2. U n t i l the Commission issues a cease and desist order, the fact that an
investigation has been initiated or that a complaint has been filed, including the
contents of the complaint, shall be confidential. U p o n issuance of a cease and
desist order, the Commission shall make public such order and a copy thereof
shall be immediately furnished to each person subject to the order.
64.3. A n y person against w h o m a cease and desist order was issued may,
within five (5) days from receipt of the order, file a formal request for a lifting
thereof. Said request shall be set for hearing by the Commission not later than
fifteen (15) days from its filing and the resolution thereof shall be m a d e not later
than ten (10) days from the termination of the hearing. If the Commission fails
to resolve the request w i t h i n the time herein prescribed, the cease and desist
order shall automatically be lifted.
SEC. 65. Substituted Service Upon the Commission. — Service of summons or

other process shall be made u p o n the Commission in actions or legal proceedings
against an issuer or any person liable under this Code w h o is not domiciled
in the Philippines. U p o n receipt by the Commission of such summons, the
Commission shall w i t h i n ten (10) days thereafter, transmit by registered m a i l a
copy of such summons and the complaint or other legal process to such issuer
or person at his last k n o w n address or principal office. The sending thereof
by the Commission, the expenses for w h i c h shall be advanced by the party at
whose instance it is made, shall complete such service.
SEC. 66. Revelation of Information Filed with the Commission. — 6 6 . 1 . A l l
information filed w i t h the Commission in compliance w i t h the requirements of
this Code shall be made available to any member of the general public, u p o n
request, in the premises and during regular office hours of the Commission,
except as set forth in this Section.
66.2. N o t h i n g in this Code shall be construed to require, or to authorize

the Commission to require, the revealing of trade secrets or processes in any
application, report, or document filed w i t h the Commission.
20
See Securities and Exchange Commission vs. Performance Foreign Exchange
Corp., 495 SCRA 579 (2006); Phil. Assoc. of Stock Transfer and Registry Agencies, Inc.
vs. Court of Appeals, 536 SCRA 61 (2007); Power Homes Unlimited Corp. vs. Securities
6 C o m m i s s i o n 5 4 6 S C R A 5 6 7
f ™ ™ ' (2008); GSIS vs. Court o f Appeals, 585 SCRA 679
Appendix A
66.3. A n y person filing any such application, report or document may

m a k e written objection to the public disclosure of information contained
therein, stating the grounds for such objection, and the Commission may hear
objections as it deems necessary. The Commission may, in such cases, make
available to the public the information contained in any such application,
report, or document only w h e n a disclosure of such information is required in
the public interest or for the protection of investors; and copies of information
so made available m a y be furnished to any person having a legitimate interest
therein at such reasonable charge and under such reasonable limitations as the
Commission m a y prescribe.
66.4. It shall be u n l a w f u l for any member, officer, or employee of the

Commission to disclose to any person other than a member, officer or employee
of the Commission or to use for personal benefit, any information contained in
any application, report, or document filed w i t h the Commission which is not
m a d e available to the public pursuant to Subsection 66.3.
66.5. N o t w i t h s t a n d i n g anything in Subsection 66.4 to the contrary, on
request from a foreign enforcement authority of any country whose laws grant
reciprocal assistance as herein provided, the Commission may provide assistance
in accordance w i t h this subsection, including the disclosure of any information
filed w i t h or transmitted to the Commission, if the requesting authority states
that it is conducting an investigation w h i c h it deems necessary to determine
whether any person has violated, is violating, or is about to violate any laws
relating to securities or commodities matters that the requesting authority
administers or enforces. Such assistance may be provided without regard to
whether the facts stated in the request w o u l d also constitute a violation of law
of the Philippines.
SEC. 67. Effect of Action of Commission and Unlawful Representations with

Respect Thereto. — 67.1. No action or failure to act by the Commission in the
administration of this Code shall be construed to mean that the Commission has
in any w a y passed u p o n the merits of or given approval to any security or any
transaction or transactions therein, nor shall such action or failure to act w i t h
regard to any statement or report filed w i t h or examined by the Commission
pursuant to this Code or the rules and regulations thereunder to be deemed a
finding by the Commission that such statements or report is true and accurate
on its face or that it is not false or misleading. It shall be unlawful to make,
or cause to be made, to any prospective purchaser or seller of a security any
representation that any such action or failure to act by the Commission is to be
so construed or has such effect.
67.2. N o t h i n g contained in Subsection 67.1 shall, however, be construed
as an exemption from liability of an employee or officer of the Commission for
any nonfeasance, misfeasance or malfeasance in the discharge of his official
duties.
SEC. 68. Special Accounting Rules. — The Commission shall have the
authority to make, amend, and rescind such accounting rules and regulations
as may be necessary to carry out the provisions of this Code, including rules
and regulations governing registration statements and prospectuses for various
920
classes of securities and issuers, and defining accounting, technical and trade
terms used in this Code. A m o n g other things, the Commission may prescribe
the form or forms in which required information shall be set forth, the items or
details to be shown in the balance sheet and income statement, and the methods
to be followed in the preparation of accounts, appraisal or valuation of assets
and liabilities, determination of depreciation and depletion, differentiation
of recurring and non-recurring income, differentiation of investment and
operating income, and in the preparation, where the Commission deems it
necessary or desirable, of consolidated balance sheets or income accounts of
any person directly or indirectly controlling or controlled by the issuer, or any
person under direct or indirect common control w i t h , the issuer.
SEC. 69. Effect on Existing Law. — The rights and remedies provided by
this Code shall be in addition to any and all other rights and remedies that
may n o w exist. However, except as provided in Sections 56 and 63 hereof, no
person permitted to maintain a suit for damages under the provisions of this
Code shall recover, through satisfaction of judgment in one or more actions, a
total amount in excess of his actual damages on account of the act complained
of: Provided, That exemplary damages m a y be awarded in cases of bad faith,
fraud, malevolence or wantonness in the violation of this Code or the rules and
regulations promulgated thereunder.
SEC. 70. Judicial Review of Commission Orders. — A n y person aggrieved by

an order of the Commission m a y appeal the order to the Court of Appeals by
petition for review in accordance w i t h the pertinent provisions of the Rules of
Court.
SEC. 71. Validity of Contracts. — 71.1. A n y condition, stipulation, provision

binding any person to w a i v e compliance w i t h any provision of this Code or
of any rule or regulation thereunder, or of any rule of an Exchange required
thereby, as well as the waiver itself, shall be v o i d .
71.2. Every contract made in violation of any provision of this Code or of

any rule or regulation thereunder, a n d every contract, including any contract for
listing a security on an Exchange heretofore or hereafter made, the performance
of which involves the violation of, or the continuance of any relationship or
practice in violation of, any provision of this Code, or any rule or regulation
thereunder, shall be void:
(a) As regards the rights of any person w h o , in violation of any

such provision, rule or regulation, shall have m a d e or engaged in the
performance of any such contract; and
(b) As regards the rights of any person w h o , not being a party to such
contract, shall have acquired any right thereunder w i t h actual knowledge
of the facts by reason of which the m a k i n g or performance of such contract
was in violation of any such provision, rule or regulation.
71.3. N o t h i n g in this Code shall be construed:
(a) To affect the validity of any loan or extension of credit m a d e or of

any lien created prior or subsequent to the effectivity of this Code, unless at
the time of the making of such loan or extension of credit or the creating of
Appendix A
such lien, the person m a k i n g such loan or extension of credit or acquiring

such lien shall have actual k n o w l e d g e of the facts by reason of which the
m a k i n g of such loan or extension of credit or the acquisition of such lien
is a violation of the provisions of this Code or any rules or regulations
thereunder; or
(b) To afford a defense to the collection of any debt, obligation or the

enforcement of any lien by any person w h o shall have acquired such debt,
obligation or lien in good faith, for value and without actual knowledge
of the violation of any provision of this Code or any rule or regulation
thereunder affecting the legality of such debt, obligation or lien.
SEC. 72. Rules and Regulations; Effectivity. — 72.1. This Code shall be self-
executory. To effect the provisions and purposes of this Code, the Commission
m a y issue, amend, and rescind such rules and regulations and orders necessary
or appropriate, including rules a n d regulations defining accounting, technical,
and trade terms used in this Code, a n d prescribing the f o r m or forms in which
information required in registration statements, applications, and reports to
the Commission shall be set forth. For purposes of its rules or regulations,
the Commission m a y classify persons, securities, and other matters w i t h i n its
jurisdiction, prescribe different requirements for different classes of persons,
securities, or matters, and by rule or order, conditionally or unconditionally
exempt any person, security, or transaction, or class or classes of persons,
securities or transactions, f r o m any or all provisions of this Code.
Failure on the part of the Commission to issue rules and regulations shall
not in any manner affect the self-executory nature of this Code.
72.2. The Commission shall promulgate rules and regulations providing
for reporting, disclosure and the prevention of fraudulent, deceptive or
manipulative practices in connection w i t h the purchase by an issuer, by tender
offer or otherwise, of and equity security of a class issued by it that satisfies
the requirements of Subsection 17.2. Such rules and regulations may require
such issuer to provide holders of equity securities of such dates w i t h such
information relating to the reasons for such purchase, the source of funds, the
number of shares to be purchased, the price to be paid for such securities, the
method of purchase and such additional information as the Commission deems
necessary or appropriate in the public interest or for the protection of investors,
or which the Commission deems to be material to a determination by holders
whether such security should be sold.
72.3. For the purpose of Subsection 72.2, a purchase by or for the issuer
or any person controlling, controlled by, or under common control with the
issuer, or a purchase subject to the control of the issuer or any such person,
shall be deemed to be a purchase by the issuer. The Commission shall have the
power to make rules and regulations implementing this subsection, including
exemptive rules and regulations covering situations in which the Commission
deems it unnecessary or inappropriate that a purchase of the type described in
this subsection shall be deemed to be a purchase by the issuer for the purpose
of some or all of the provisions of Subsection 72.2.
922
72.4. The rules and regulations promulgated by the Commission shall be

published in two (2) newspapers of general circulation in the Philippines, and
unless otherwise prescribed by the Commission, the same shall be effective
fifteen (15) days after the date of the last publication.
SEC. 73. Penalties. — A n y person w h o violates any of the provisions of
this Code, or the rules and regulations promulgated by the Commission under
authority thereof, or any person w h o , in a registration statement filed under
this Code, makes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, shall, u p o n conviction, suffer a fine of not less than Fifty
thousand pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00)
or imprisonment of not less than seven (7) years nor more than twenty-one
(21) years, or both in the discretion of the court. If the offender is a corporation,
partnership or association or other juridical entity, the penalty m a y in the dis-
cretion of the court be imposed u p o n such juridical entity and u p o n the officer
or officers of the corporation, partnership, association or entity responsible for
the violation, and if such officer is an alien, he shall in addition to the penalties
prescribed, be deported without further proceedings after service of sentence.
SEC. 74. Transitory Provisions. — T h e Commission, as organized under

existing laws, shall continue to exist and exercise its powers, functions and
duties under such laws and this Code: Provided, That until otherwise mandated
by a subsequent law, the Commission shall continue to regulate and supervise
commodity futures contracts as provided in Section 11 and pre-need plans and
the pre-need industry as provided in Section 16 of this Code.
A l l further requirements herein shall be complied w i t h u p o n approval

of this Code: Provided, however, That compliance m a y be deferred for such
reasonable time as the Commission m a y determine but not to exceed one (1)
year from approval of this Code: Provided, further, That securities w h i c h are
being offered at the time of effectivity of this Code pursuant to an effective
registration and permit, m a y continue to be offered and sold in accordance
w i t h the provisions of the Revised Securities Act in effect immediately prior to
approval of this Code.
A l l unexpended funds for the calendar year, properties, equipment and

records of the Securities and Exchange Commission are hereby retained by the
Commission as reorganized under this Code and the amount of T w o h u n d r e d
million pesos (P200,000,000.00) or such amount necessary to carry out the
reorganization provided in this Code is hereby appropriated.
A l l employees of the Commission w h o voluntarily retire or are separated

from the service w i t h the Commission and whose retirement or separation
has been approved by the Commission, shall be paid retirement or separation
benefits and other entitlements granted under existing laws.
SEC. 75. Partial Use of Income. — To carry out the purposes of this Code, the
Commission is hereby authorized, in addition to its annual budget, to retain
and utilize an amount equal to O n e h u n d r e d million pesos (PI00,000,000.00)
from its income.
Appendix A
The use of such additional amount shall be subject to the auditing

requirements, standards and procedures under existing laws.
SEC. 76. Repealing Clause. — The Revised Securities Act (Batas Pambansa
Big. 178.), as amended, in its entirety, and Sections 2, 4 and 8 of Presidential
Decree 902-A, as amended, are hereby repealed. A l l other laws, orders, rules
and regulations, or parts thereof, inconsistent w i t h any provision of this Code
are hereby repealed or modified accordingly.
SEC. 77. Separability Clause. — If any portion or provision of this Code is

declared unconstitutional or invalid, the other portions or provisions hereof,
w h i c h are not affected thereby shall continue in full force and effect.
SEC. 78. Effectivity. - This Code shall take effect fifteen (15) days after
its publication in the Official Gazette or in t w o (2) newspapers of general
21
circulation.
— oOo —
21
It became effective on August 8, 2000. (Gochan vs. Young, 354 SCRA 207 [2001].)
Appendix B
EN BANC
Agenda for December 2, 2008
Item No. 76
EN BANC
A.M. NO. 00-8-10-SC
RULES OF PROCEDURE ON CORPORATE

REHABILITATION*
RULE 1
COVERAGE
S E C T I O N 1. Scope. — These Rules shall apply to petitions for rehabilitation

of corporations, partnerships and associations pursuant to Presidential Decree
N o . 902-A, as amended.
SEC. 2. Applicability to Rehabilitation Cases Transferred from the Securities and
Exchange Commission. — Cases for rehabilitation transferred f r o m the Securities
and Exchange Commission to the Regional Trial Courts pursuant to Republic
Act N o . 8799, otherwise k n o w n as The Securities Regulation Code, shall
likewise be governed by these Rules.
RULE 2
DEFINITION OF TERMS AND CONSTRUCTION
SEC. 1. Definition of Terms. — For purposes of these Rules:

"Administrative Expenses" shall refer to (a) reasonable and necessary
expenses that are incurred in connection w i t h the filing of the petition; (b)
'Acting on the recommendation of The Subcommittee on Special Rules for Special

Commercial Courts, submitting for the consideration and approval of the Court the pro-
posed "Rules of Procedure on Corporate Rehabilitation (2008)," the Court Resolved to
APPROVE the same.
The Rule shall take effect on January 16, 2009 following its publication in two (2)
newspapers of general circulation.
December 2, 2008.
924
Rule 2 RULES OF PROCEDURE ON 925
CORPORATE REHABILITATION
Appendix B
expenses incurred in the ordinary course of business after the issuance of

the stay order, excluding interest payable to the creditors for loans and
credit accommodations existing at the time of the issuance of the stay
order; and (c) other expenses that are authorized under these Rules.
"Affidavit of General Financial Condition" shall refer to a verified
statement on the general financial condition of the debtor required in
Section 2, Rule 4 of these Rules.
"Affiliate" is a corporation that directly or indirectly, through one or

more intermediaries, is controlled by, or is under the common control of
another corporation, w h i c h thereby becomes its parent corporation.
"Asset" is anything of value that can be in the f o r m of money, such
as cash at the bank or amounts o w e d ; fixed assets such as property
or equipment; or intangibles including intellectual property, the book
value of w h i c h is s h o w n in the last three audited financial statements
immediately preceding the filing of the petition. In case the debtor is less
than three years in operation, it is sufficient that the book value is based
on the audited financial statement/s for the t w o years or year immediately
preceding the filing of the petition, as the case m a y be.
"Board of Directors" shall include the executive committee or the
management of a partnership or association.
"Claim" shall include all claims or demands of whatever nature or
character against a debtor or its property, whether for money or otherwise.
"Control" is the p o w e r of a parent corporation to direct or govern the
financial and operating policies of an enterprise so as to obtain benefits
from its activities. Control is presumed to exist w h e n the parent owns,
directly or indirectly through subsidiaries, more than one-half ( 1 / 2 ) of the
voting power of an enterprise unless, in exceptional circumstances, it can
clearly be demonstrated that such ownership does not constitute control.
Control also exists even w h e n the parent owns one-half (112) or less of the
voting power of an enterprise w h e n there is power:
(a) Over more than one-half ( 1 / 2 ) of the voting rights by virtue
of an agreement w i t h investors;
(b) To direct or govern the financial and operating policies of the
enterprise under a statute or an agreement;
(c) To appoint or remove the majority of the members of the
board of directors or equivalent governing body; or
(d) To cast the majority votes at meetings of the board of directors
or equivalent governing body.
"Creditof shall mean any holder of a Claim. "Court" shall refer to
the proper Regional Trial Court designated to hear and decide the cases
contemplated under these Rules.
"Days" shall refer to calendar days unless otherwise provided in these
Rules.
THE CORPORATION CODE OF THE PHILIPPINES Rule 2
926
"Debtor" shall mean any corporation, partnership or association or a

group of companies, whether supervised or regulated by the Securities and
Exchange Commission or other government agencies, on whose behalf a
petition for rehabilitation has been filed under these Rules.
"Foreign court" means a judicial or other authority competent to
control or supervise a foreign proceeding.
"Foreign proceeding" means a collective judicial or administrative
proceeding in a foreign State, including an interim proceeding, pursuant
to a law relating to insolvency in which proceeding the assets and affairs of
the debtor are subject to control or supervision by a foreign court, for the
purpose of rehabilitation or re-organization.
"Foreign representative" means a person or entity, including one

appointed on an interim basis, authorized in a foreign proceeding to
administer the reorganization or rehabilitation of the debtor or to act as a
representative of the foreign proceeding.
"Group of companies" refers to, and can cover only, corporations that
are financially related to one another as parent corporations, subsidiaries
and affiliates.
W h e n the petition covers a group of companies, all reference under
these Rules to "debtor" shall include and apply to the group of companies.
"Liabilities " shall refer to monetary claims against the debtor, including
stockholder's advances that have been recorded in the debtor's audited
financial statements as advances for future subscriptions.
"Parent" is a corporation w h i c h has control over another corporation
directly or indirectly through one or more intermediaries.
"Rehabilitation" shall m e a n the restoration of the debtor to a position

of successful operation and solvency, if it is s h o w n that its continuance of
operation is economically feasible and its creditors can recover by w a y of
the present value of payments projected in the plan, more if the corporation
continues as a going concern than if it is immediately liquidated.
"Secured claim" shall refer to any claim whose payment or fulfillment

is secured by contract or by law, including any claim or credit enumerated
under Articles 2241 and 2242 of the Civil Code and Article 110, as amended,
of the Labor Code of the Philippines.
"Subsidiary" means a corporation more than fifty percent (50%) of

the voting stock of w h i c h is o w n e d or controlled directly or indirectly
through one or more intermediaries by another corporation, w h i c h thereby
becomes its parent corporation.
"Unsecured claim" shall m e a n any claim other than a secured claim.

SEC. 2. Construction. — These Rules shall be liberally construed to carry
out the objectives of Sections 5(d), 6(c) and 6(d) of Presidential Decree N o . 902-
A, as amended, and to assist the parties in obtaining a just, expeditious and
Rule 3 RULES OF PROCEDURE ON 92 7
Appendix B
inexpensive determination of cases. W h e r e applicable, the Rules of Court shall

a p p l y suppletorily to proceedings under these Rules.
RULE 3
GENERAL PROVISIONS
SEC. 1. Nature of Proceedings. — A n y proceeding initiated under these

Rules shall be considered in rem. Jurisdiction over all persons affected by the
proceedings shall be considered as acquired u p o n publication of the notice of
the commencement of the proceedings in any newspaper of general circulation
in the Philippines in the manner prescribed by these Rules.
The proceedings shall also be s u m m a r y and non-adversarial in nature. The

following pleadings are prohibited:
(a) M o t i o n to dismiss;
(b) M o t i o n for a bill of particulars;
(c) Petition for relief;
(d) M o t i o n for extension;
(e) M o t i o n for postponement;
(f) Third-party complaint;
(g) Intervention;
(h) M o t i o n to hear affirmative defenses; and
(i) A n y pleading or motion which is similar to or of like effect as any
of the foregoing.
A n y pleading, morion, opposition, defense or claim filed by any interested
party shall be supported by verified statements that the affiant has read the
same and that the factual allegations therein are true and correct of his personal
knowledge or based on authentic records, and shall contain as annexes such
documents as m a y be deemed by the party submitting the same as supportive
of the allegations in the affidavits. The court may decide matters on the basis
of affidavits and other documentary evidence. Where necessary, the court shall
conduct clarificatory hearings before resolving any matter submitted to it for
resolution.
SEC. 2. Venue. — Petitions for rehabilitation pursuant to these Rules shall
be filed in the regional trial court which has jurisdiction over the principal office
of the debtor as specified in its articles of incorporation or partnership. Where
the principal office of the corporation, partnership or association is registered
in the Securities and Exchange Commission as Metro Manila, the action must
be filed in the regional trial court of the city or municipality where the head
office is located.
A joint petition by a group of companies shall be filed in the Regional Trial
Court which has jurisdiction over the principal office of the parent company, as
specified in its Articles of Incorporation.
928
SEC. 3. Service of Pleadings and Documents. — W h e n so authorized by the

court, any pleading and / o r document required by these Rules may be filed
with the court a n d / o r served upon the other parties by facsimile transmission
(fax) or electronic mail (e-mail). In such cases, the date of transmission shall
be deemed to be the date of service. Where the pleading or document is
voluminous, the court may, upon motion, w a i v e the requirement of service;
provided that a copy thereof together w i t h all its attachments is duly filed w i t h
the court and is made available for examination and reproduction by any party,
and provided, further, that a notice of such filing and availability is d u l y served
on the parties.
SEC. 4. Trade Secrets and Other Confidential Information. — U p o n motion, the
court may issue an order to protect trade secrets or other confidential research,
development or commercial information belonging to the debtor.
SEC. 5. Executory Nature of Orders. — A n y order issued by the court under
these Rules is immediately executory. A petition to review the order shall not
stay the execution of the order unless restrained or enjoined by the appellate
court. Unless otherwise provided in these Rules, the review of any order
or decision of the court or an appeal therefrom shall be in accordance w i t h
the Rules of Court; provided, however, that the reliefs ordered by the trial or
appellate courts shall take into account the need for resolution of proceedings
in a just, equitable and speedy manner.
SEC. 6. Nullification of Illegal Transfers and Preferences. — U p o n motion

the court may nullify any transfer of property or any other conveyance, sale,
payment or agreement made in violation of its stay order or in violation of
these Rules.
SEC. 7. Stay Order. — If the court finds the petition to be sufficient in f o r m

and substance, it shall, not later than five (5) w o r k i n g days f r o m the filing of the
petition, issue an order: (a) appointing a rehabilitation receiver a n d fixing his
bond; (b) staying enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor,
its guarantors and persons not solidarily liable w i t h the debtor; provided, that
the stay order shall not cover claims against letters of credit and similar security
arrangements issued by a third party to secure the p a y m e n t of the debtor's
obligations; provided, further, that the stay order shall not cover foreclosure by
a creditor of property not belonging to a debtor under corporate rehabilitation;
provided, however, that where the o w n e r of such property sought to be
foreclosed is also a guarantor or one w h o is not solidarily liable, said owner
shall be entitled to the benefit of excussion as such guarantor; (c) prohibiting
the debtor from selling, encumbering, transferring, or disposing in any manner
any of its properties except in the ordinary course of business; (d) prohibiting
the debtor from m a k i n g any payment of its liabilities except as provided in
items (e), (f) and (g) of this Section or w h e n ordered by the court pursuant to
Section 10 of Rule 3; (e) prohibiting the debtor's suppliers of goods or services
from withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and goods
supplied after the issuance of the stay order; (f) directing the payment in full
Appendix B
of all administrative expenses incurred after the issuance of the stay order; (g)
directing the payment of n e w loans or other forms of credit accommodations
obtained for the rehabilitation of the debtor w i t h prior court approval; (h)
fixing the dates of the initial hearing on the petition not earlier than forty-five
(45) days but not later than sixty (60) days f r o m the filing thereof; (i) directing
the petitioner to publish the O r d e r in a newspaper of general circulation in
the Philippines once a w e e k for t w o (2) consecutive weeks; (j) directing the
petitioner to furnish a copy of the petition and its annexes, as well as the stay
order, to the creditors n a m e d in the petition and the appropriate regulatory
agencies such as, but not limited to, the Securities and Exchange Commission,
the Bangko Sentral ng Pilipinas, the Insurance Commission, the National
Telecommunications Commission, the Housing and Land Use Regulatory
Board and the Energy Regulatory Commission; (k) directing the petitioner that
foreign creditors w i t h no k n o w n addresses in the Philippines be individually
given a copy of the stay order at their foreign addresses; (1) directing all creditors
and all interested parties (including the regulatory agencies concerned) to file
and serve on the debtor a verified comment on or opposition to the petition,
w i t h supporting affidavits and documents, not later than fifteen (15) days
before the date of the first initial hearing and putting them on notice that their
failure to do so w i l l bar t h e m f r o m participating in the proceedings; and (m)
directing the creditors and interested parties to secure from the court copies
of the petition and its annexes w i t h i n such time as to enable themselves to file
their comment on or opposition to the petition and to prepare for the initial
hearing of the petition.
The issuance of a stay order does not affect the right to commence actions
or proceedings insofar as it is necessary to preserve a claim against the debtor.
SEC. 8. Service of Stay Order on Rehabilitation Receiver. — The petitioner
shall immediately serve a copy of the stay order on the rehabilitation receiver
appointed by the court, w h o shall manifest his acceptance or non-acceptance of
his appointment not later than ten (10) days from receipt of the order.
SEC. 9. Period of Stay Order. — The stay order shall be effective from the
date of its issuance until the approval of the rehabilitation plan or the dismissal
of the petition.
SEC. 10. Relief from, Modification, or Termination of Stay Order. —
(a) The court may, u p o n motion, terminate, modify, or set conditions for
the continuance of the stay order, or relieve a claim from the coverage thereof
u p o n showing that (1) any of the allegations in the petition, or any of the
contents of any attachment, or the verification thereof has ceased to be true;
(2) a creditor does not have adequate protection over property securing its
claim; (3) the debtor's secured obligation is more than the fair market value
of the property subject of the stay and such property is not necessary for the
rehabilitation of the debtor; or (4) the property covered by the stay order is not
essential or necessary to the rehabilitation and the creditor's failure to enforce
its claim w i l l cause more damage to the creditor than to the debtor.
(b) For purposes of this Section, the creditor lacks adequate protection if
it can be shown that:
930
(1) The debtor fails or refuses to honor a pre-existing agreement w i t h

the creditor to keep the property insured;
(2) The debtor fails or refuses to take commercially reasonable steps
to maintain the property; or
(3) The property has depreciated to an extent that the creditor is
undersecured.
(c) U p o n showing of the creditor's lack of adequate protection, the court
shall order the rehabilitation receiver to (1) make arrangements to provide
for the insurance or maintenance of the property, or (2) to make payments or
otherwise provide additional or replacement security such that the obligation is
fully secured. If such arrangements are not feasible, the court shall modify the
stay order to allow the secured creditor lacking adequate protection to enforce
its claim against the debtor; provided, however, that the court m a y deny the
creditor the remedies in this paragraph if such remedies w o u l d prevent the
continuation of the debtor as a going concern or otherwise prevent the approval
and implementation of a rehabilitation plan.
SEC. 11. Qualifications of Rehabilitation Receiver. —

(a) In the appointment of the rehabilitation receiver, the following
qualifications shall be taken into consideration by the court:
(1) Expertise and acumen to manage and operate a business similar
in size and complexity to that of the debtor;
(2) Knowledge in management, finance and rehabilitation of
distressed companies;
(3) General familiarity w i t h the rights of creditors in suspension of
payments or rehabilitation, and general understanding of the duties and
obligations of a rehabilitation receiver;
(4) Good moral character, independence a n d integrity;
(5) Lack of conflict of interest as defined in this Section; and
(6) Willingness and ability to file a bond in such amount as m a y be
determined by the court.
(b) Without limiting the generality of the following, a rehabilitation
receiver may be deemed to have a conflict of interest if:
(1) He is a creditor or stockholder of the debtor;
(2) He is engaged in a line of business w h i c h competes w i t h the
debtor;
(3) He is, or was w i t h i n t w o (2) years f r o m the filing of the petition,

a director, officer, or employee of the debtor or any of its present creditors,
or the auditor or accountant of the debtor;
(4) He is or was w i t h i n two (2) years from the filing of the petition, an
underwriter of the outstanding securities of the debtor;
(5) He is related by consanguinity or affinity w i t h i n the fourth
civil degree to any creditor, stockholder, director, officer, employee, or
underwriter of the debtor; or
Rule 3 RULES OF PROCEDURE ON 93!
Appendix B
(6) He has any other direct or indirect material interest in the debtor
or any creditor.
SEC. 12. Powers and Functions of Rehabilitation Receiver. — The rehabilitation

receiver shall not take over the management and control of the debtor but shall
closely oversee and monitor the operations of the debtor during the pendency
of the proceedings. For this purpose, the rehabilitation receiver shall have the
powers, duties and functions of a receiver under Presidential Decree N o . 902-A,
as amended, and the Rules of Court.
The rehabilitation receiver shall be considered as an officer of the court. He

shall be primarily tasked to study the best w a y to rehabilitate the debtor and to
ensure that the value of the debtor's property is reasonably maintained pending
the determination of whether or not the debtor should be rehabilitated, as well
as implement the rehabilitation plan after its approval. Accordingly, he shall
have the following powers and functions:
(a) To verify the accuracy of the petition, including its annexes such as the
Schedule of Debts and Liabilities a n d the Inventory of Assets submitted in support
of the petition;
(b) To accept and incorporate, w h e n justified, amendments to the Schedule
of Debts and Liabilities;
(c) To recommend to the court the disallowance of claims and rejection of
amendments to the Schedule of Debts and Liabilities that lack sufficient proof and
justification;
(d) To submit to the court and m a k e available for review by the creditors,
a revised Schedule of Debts and Liabilities;
(e) To investigate the acts, conduct, properties, liabilities and financial
condition of the debtor, the operation of its business and the desirability of the
continuance thereof; and, any other matter relevant to the proceeding or to the
formulation of a rehabilitation plan;
(f) To examine under oath the directors and officers of the debtor and any
other witnesses that he may deem appropriate;
(g) To make available to the creditors documents and notices necessary
for them to follow and participate in the proceedings;
(h) To report to the court any fact ascertained by h i m pertaining to the
causes of the debtor's problems, fraud, preferences, dispositions, encumbrances,
misconduct, mismanagement and irregularities committed by the stockholders,
directors, management, or any other person against the debtor;
(i) To employ such person or persons such as lawyers, accountants,
appraisers and staff as are necessary in performing his functions and duties as
rehabilitation receiver;
(j) To monitor the operations of the debtor and to immediately report to
the court any material adverse change in the debtor's business;
(k) To evaluate the existing assets and liabilities, earnings and operations
of the debtor;
932
(1) To determine and recommend to the court the best w a y to salvage and
protect the interests of the creditors, stockholders and the general public;
(m) To study the rehabilitation plan proposed by the debtor or any
rehabilitation plan submitted during the proceedings, together w i t h any
comments made thereon;
(n) To prohibit and report to the court any encumbrance, transfer or
disposition of the debtor's property outside of the ordinary course of business
or what is allowed by the court;
(o) To prohibit and report to the court any payments outside of the
ordinary course of business;
(p) To have unlimited access to the debtor's employees, premises, books,
records and financial documents during business hours;
(q) To inspect, copy, photocopy or photograph any document, paper,
book, account or letter, whether in the possession of the debtor or other persons;
(r) To gain entry into any property for the purpose of inspecting,
measuring, surveying or photographing it or any designated relevant object or
operation thereon;
(s) To take possession, control and custody of the debtor's assets;
(t) To notify counterparties and the court as to contracts that the debtor
has decided to continue to perform or breach;
(u) To be notified of and to attend all meetings of the board of directors
and stockholders of the debtor;
(v) To recommend any modification of an approved rehabilitation plan as
he m a y deem appropriate;
( w ) To bring to the attention of the court any material change affecting the
debtor's ability to meet the obligations under the rehabilitation plan;
(x) To recommend the appointment of a management committee in the
cases provided for under Presidential Decree N o . 902-A, as amended;
(y) To recommend the termination of the proceedings and the dissolution
of the debtor if he determines that the continuance in business of such entity
is no longer feasible or profitable or no longer works to the best interest of the
stockholders, parties-litigants, creditors or the general public;
(z) To apply to the court for any order or directive that he m a y d e e m

necessary or desirable to aid h i m in the exercise of his powers and performance
of his duties and functions; and
(aa) To exercise such other powers as m a y f r o m time to time be conferred

upon h i m by the court.
SEC. 13. Oath and Bond. — Before entering u p o n his powers, duties
and functions, the rehabilitation receiver must be sworn in to p e r f o r m them
faithfully, and must post a bond executed in favor of the debtor in such sum as
the court may direct, to guarantee that he w i l l faithfully discharge his duties
and obey the orders of the court. If necessary, he shall also declare under
Appendix B
oath that he w i l l perform the duties of a trustee of the assets of the debtor,
will act honestly and in good faith, and deal w i t h the assets of the debtor in a
commercially reasonable manner.
SEC. 14. Fees and Expenses. — The rehabilitation receiver and the persons
hired by h i m shall be entitled to reasonable professional fees and reimbursement
of expenses w h i c h shall be considered as administrative expenses.
SEC. 15. Immunity from Suit. — T h e rehabilitation receiver shall not be

subject to any action, claim or d e m a n d in connection w i t h any act done or
omitted by h i m in good faith in the exercise of his functions and powers herein
conferred.
SEC. 16. Reports. — The rehabilitation receiver shall file a written report
every three (3) months to the court or as often as the court m a y require on
the general condition of the debtor. The report shall include, at the m i n i m u m ,
interim financial statements of the debtor.
SEC. 17. Dismissal of Rehabilitation Receiver. — A rehabilitation receiver may,

u p o n motion, be dismissed by the court on the following grounds: (a) if he fails,
without just cause, to p e r f o r m any of his powers and functions under these
Rules; or (b) on any of the grounds for removing a trustee under the general
principles of trusts.
SEC. 18. Rehabilitation Plan. — T h e rehabilitation p l a n shall include (a)
the desired business targets or goals and the duration and coverage of the
rehabilitation; (b) the terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due regard to the interests
of secured creditors such as, but not limited, to the nonimpairment of their
security liens or interests; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which m a y include debt to equity conversion, restructuring of the debts, dacion
en pago or sale or exchange or any disposition of assets or of the interest of
shareholders, partners or members; (e) a liquidation analysis setting out for
each creditor that the present value of payments it w o u l d receive under the
plan is more than that w h i c h it w o u l d receive if the assets of the debtor were
sold by a liquidator w i t h i n a six-month period from the estimated date of filing
of the petition; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation
plan.
SEC. 19. Repayment Period. — If the rehabilitation plan extends the period
for the debtor to pay its contractual obligations, the new period should not
extend beyond fifteen (15) years from the expiration of the stipulated term
existing at the time of filing of the petition.
SEC. 20. Effects of Rehabilitation Plan. — The approval of the rehabilitation
plan by the court shall result in the following:
(a) The plan and its provisions shall be binding upon the debtor and
all persons w h o may be affected thereby, including the creditors, whether or
not such persons have participated in the proceedings or opposed the plan or
whether or not their claims have been scheduled;
934
(b) The debtor shall comply w i t h the provisions of the plan and shall take
all actions necessary to carry out the plan;
(c) Payments shall be made to the creditors in accordance w i t h the
provisions of the plan;
(d) Contracts and other arrangements between the debtor and its creditors
shall be interpreted as continuing to apply to the extent that they do not conflict
w i t h the provisions of the plan; and
(e) A n y compromises on amounts or rescheduling of timing of payments
by the debtor shall be binding on creditors regardless of whether or not the plan
is successfully implemented.
SEC. 2 1 . Revocation of Rehabilitation Plan on Grounds of Fraud. — U p o n
motion, w i t h i n ninety (90) days from the approval of the rehabilitation plan,
and after notice and hearing, the court m a y revoke the approval thereof on the
ground that the same was secured through fraud.
SEC. 22. Alteration or Modification of Rehabilitation Plan. — An approved
rehabilitation plan may, upon motion, be altered or modified if, in the judgment
of the court, such alteration or modification is necessary to achieve the desired
targets or goals set forth therein.
SEC. 23. Termination of Proceedings. — The court shall, u p o n motion or u p o n
recommendation of the rehabilitation receiver, terminate the proceeding in any
of the following cases:
(a) Dismissal of the petition;
(b) Failure of the debtor to submit the rehabilitation plan;
(c) Disapproval of the rehabilitation plan by the court;
(d) Failure to achieve the desired targets or goals as set forth in the
rehabilitation plan;
(e) Failure of the debtor to perform its obligations under the plan;
(f) Determination that the rehabilitation plan m a y no longer be imple-
mented in accordance w i t h its terms, conditions, restrictions or assumptions; or
(g) Successful implementation of the rehabilitation plan.
SEC. 24. Discharge of Rehabilitation Receiver. — U p o n termination of the
rehabilitation proceedings, the rehabilitation receiver shall submit his final
report and accounting w i t h i n such period of time as the court w i l l allow h i m .
U p o n approval of his report and accounting, the court shall order his discharge.
RULE 4
DEBTOR-INITIATED REHABILITATION
SEC. 1. Who May Petition. — A n y debtor w h o foresees the impossibility

of meeting its debts w h e n they respectively fall due, m a y petition the proper
regional trial court for rehabilitation. A group of companies m a y jointly file a
Appendix B
petition for rehabilitation under these Rules w h e n one or more of its constituent
corporations foresee the impossibility of meeting debts w h e n they respectively
fall due, and the financial distress w o u l d likely adversely affect the financial
condition and / or operations of the other member companies of the group and /
or the participation of the other member companies of the group is essential
1
under the terms and conditions of the proposed rehabilitation plan.
SEC. 2. Contents of Petition. —
(a) The petition filed by the debtor must be verified and must set forth
w i t h sufficient particularity all the following material facts:
(1) the name and business of the debtor;
(2) the nature of the business of the debtor;
(3) the history of the debtor;
(4) the cause of its inability to pay its debts;

(5) all the p e n d i n g actions or proceedings k n o w n to the debtor and
the courts or tribunals where they are pending;
(6) threats or demands to enforce claims or liens against the debtor;

and
(7) the manner by w h i c h the debtor m a y be rehabilitated and h o w
such rehabilitation m a y benefit the general body of creditors, employees
and stockholders.
(b) The petition shall be accompanied by the following documents:
(1) An audited financial statement of the debtor at the end of its last
fiscal year;
(2) I n t e r i m financial statements as of the end of the month prior to
the filing of the petition;
(3) A Schedule of Debts and Liabilities w h i c h lists all the creditors of
the debtor, indicating the name and last address of record of each creditor;
the amount of each claim as to principal, interest, or penalties due as of
the date of filing; the nature of the claim; and any pledge, lien, mortgage
judgment or other security given for the payment thereof;
'Rehabilitation contemplates a continuance of corporate life and activities in an ef-

fort to restore and reinstate the corporation to its former position of successful operation
and solvency. (New Frontier Sugar Corp. vs. Regional Trial Court, 513 SCRA 601 [2007].)
The purpose of rehabilitation proceedings is to enable the company to gain new lease on
the life and thereby allows credits to be paid their claims fro its earnings the approval of
the rehabilitation plan and the appointment of a rehabilitation receiver merely suspends
the actions for claims against the corporation the preferred status of secured creditors
over unsecured creditors relative to their liens is retained but the enforcement of such
preference is suspended. (Metropolitan Bank and Trust Co. vs. ASB Holdings, Inc., 517
SCRA 1 [2007]; China Banking Corp. vs. ASB Holdings, Inc., 575 SCRA 247 [2008]; Phil.
Airlines, Inc. vs. Court of Appeals, 576 SCRA 547 [2008]; Garcia vs. Phil. Airlines, Inc., 576
SCRA 479 [2009]; Phil. National Bank vs. Court of Appeals, 576 SCRA 537 [2009].)
936
(4) An Inventory of Assets which must list w i t h reasonable specificity

all the assets of the debtor, stating the nature of each asset, the location
and condition thereof, the book value or market value of the asset, and
attaching the corresponding certificate of title therefor in case of real
property, or the evidence of title or ownership in case of movable property,
the encumbrances, liens or claims thereon, if any, and the identities and
addresses of the lienholders and claimants. The Inventory shall include
a Schedule of Accounts Receivable which must indicate the amount of each,
the persons from w h o m due, the date of maturity and the degree of
collectibility categorizing them as highly collectible to remotely collectible;
(5) A rehabilitation plan which conforms with the minimal

requirements set out in Section 18 of Rule 3;
(6) A Schedule of Payments and Disposition of Assets w h i c h the debtor
may have effected w i t h i n three (3) months immediately preceding the
filing of the petition;
(7) A Schedule of Cash Flow of the debtor for three (3) months
immediately preceding the filing of the petition, and a detailed schedule of
the projected cash flow for the succeeding three (3) months;
(8) A Statement of Possible Claims by or against the debtor w h i c h must
contain a brief statement of the facts w h i c h might give rise to the claim and
an estimate of the probable amount thereof;
(9) An Affidavit of General Financial Condition w h i c h shall contain
answers to the questions or matters prescribed in A n n e x " A " hereof;
(10) At least three (3) nominees for the position of rehabilitation
receiver as well as their qualifications and addresses, including but not
limited to their telephone numbers, fax numbers and e-mail address; and
(11) A certificate attesting under oath that (i) the filing of the petition
has been duly authorized; and (ii) the directors and stockholders of the
debtor have irrevocably approved and / or consented to, in accordance w i t h
existing laws, all actions or matters necessary and desirable to rehabilitate
the debtor including, but not limited to, amendments to the articles of
incorporation and by-laws or articles of partnership; increase or decrease in
the authorized capital stock; issuance of bonded indebtedness; alienation,
transfer, or encumbrance of assets of the debtor; and modification of
2
shareholders' rights.
(c) Five (5) copies of the petition shall be filed w i t h the court.
SEC. 3. Verification by Debtor. — The petition filed by the debtor must be
verified by an affidavit of a responsible officer of the debtor and shall be in a
form substantially as follows:
"1/ , (position) of (name of petitioner), do solemnly

swear that the petitioner has been d u l y authorized to file the petition
and that the stockholders and board of directors (or governing body)
*See Chas Realty and Development Corporation vs. Talavera, 397 SCRA 84 (2003).
Rule 4 RULES OF PROCEDURE ON 9 3 7
Appendix B
have approved a n d / o r consented to, in accordance w i t h law, all actions

or matters necessary or desirable to rehabilitate the debtor. The petition
is being filed to protect the interests of the debtor, the stockholders, the
investors and the creditors of the debtor, w h i c h warrant the appointment
of a rehabilitation receiver. There is no petition for insolvency filed w i t h
any other body, court or tribunal affecting the petitioner. The Inventory of
Assets and the Schedule of Debts and Liabilities contains a full, correct and true
description of all debts a n d liabilities and of all goods, effects, estate and
property of whatever k i n d or class belonging to petitioner. The Inventory
also contains a full, correct a n d true statement of all debts o w i n g or due
to petitioner, or to any person or persons in trust for petitioner and of all
securities and contracts whereby any money m a y hereafter become due
or payable to petitioner or by or through w h i c h any benefit or advantage
m a y accrue to petitioner. The petition contains a concise statement of the
facts giving rise, or w h i c h m i g h t give rise, to any cause of action in favor
of petitioner. Petitioner has no land, money, stock, expectancy, or property
of any k i n d , except those set forth in the Inventory of Assets. Petitioner has,
in no instance, created or acknowledged a debt for a greater sum than the
true a n d correct amount. Petitioner, its officers, directors and stockholders
have not, directly or indirectly, concealed, fraudulently sold or otherwise
fraudulently disposed of, any part of petitioner's real or personal property,
estate, effects or rights of action, and petitioner, its officers, directors and
stockholders have not in any w a y compounded w i t h any of its creditors
in order to give preference to such creditors, or to receive or to accept any
profit or advantage therefrom, or to defraud or deceive in any manner any
creditor to w h o m petitioner is indebted. Petitioner, its officers, directors,
and stockholders have been acting in good faith and w i t h due diligence.
SEC. 4. Opposition to or Comment on Petition. — Every creditor of the debtor

or any interested party shall file his verified opposition to or comment on the
petition not later than fifteen (15) days before the date of the initial hearing
fixed in the stay order. After such time, no creditor or interested party shall be
allowed to file any comment thereon or opposition thereto without leave of
court.
If the Schedule of Debts and Liabilities omits a claim or liability, the creditor
concerned shall attach to its comment or opposition a verified statement of the
obligations allegedly due it.
SEC. 5. Initial Hearing. —
(a) On or before the initial hearing set in the order mentioned in Section
7 of Rule 3, the petitioner shall file a publisher's affidavit showing that the
publication requirements and a petitioner's affidavit showing that the
notification requirement for foreign creditors had been complied with, as
required in the stay order.
(b) Before proceeding w i t h the initial hearing, the court shall determine
whether the jurisdictional requirements set forth above had been complied
w i t h . After finding that such requirements are met, the court shall ensure that
the parties consider in detail all of the following:
938
(1) Amendments to the rehabilitation plan proposed by the debtor;

(2) Simplification of the issues;
(3) The possibility of obtaining stipulations and admission of facts
and documents, including resort to request for admission under Rule 26 of
the Rules of Court;
(4) The possibility of amicably agreeing on any issue brought up in
the comments on, or opposition to, the petition;
(5) Referral of any accounting, financial and other technical issues to
an expert;
(6) The possibility of submitting the petition for decision on the basis
of the comments, opposition, affidavits and other documents on record;
(7) The possibility of a new rehabilitation p l a n voluntarily agreed
upon by the debtor and its creditors; and
(8) Such other matters as m a y aid in the speedy and summary
disposition of the case.
SEC. 6. Additional Hearings. — The court m a y hold additional hearings as
part of the initial hearing contemplated in these Rules but the initial hearing
must be concluded not later than ninety (90) days f r o m the initial date of the
initial hearing fixed in the stay order.
SEC. 7. Order After Initial Hearing. —
(a) Within twenty (20) days after the last hearing, the court shall issue an
order which shall:
(1) Give due course to the petition a n d immediately refer the
petition and its annexes to the rehabilitation receiver w h o shall evaluate
the rehabilitation p l a n and submit his recommendations to the court not
later than ninety (90) days f r o m the date of the last initial hearing, if the
court is satisfied that there is merit to the petition, otherwise the court shall
immediately dismiss the petition; and
(2) Recite in detail the matters taken up in the initial hearing and
the actions taken thereon, including a substitute rehabilitation p l a n
contemplated in Sections 5(b)(7) and (8) of this Rule;
(b) If the debtor and creditors agree on a new rehabilitation p l a n pursuant
to Section 5(b)(7) of this Rule, the order shall so state the fact and require the
rehabilitation receiver to supply the details of the p l a n and submit it for the
approval of the court not later than sixty (60) days f r o m the date of the last
initial hearing. The court shall approve the n e w rehabilitation p l a n not later
than ninety (90) days from the date of the last initial hearing u p o n concurrence
of the following:
(1) A p p r o v a l or endorsement of creditors holding at least twothirds

( 2 / 3 ) of the total liabilities of the debtor including secured creditors
holding more than fifty percent (50%) of the total secured claims of the
debtor and unsecured creditors holding more than fifty percent (50%) of
the total unsecured claims of the debtor;
Appendix B
(2) The rehabilitation plan complies w i t h the requirements specified

in Section 18 of Rule 3;
(3) The rehabilitation plan w o u l d provide the objecting class of

creditors w i t h payments whose present value projected in the plan w o u l d
be greater than that w h i c h they w o u l d have received if the assets of the
debtor were sold by a liquidator w i t h i n a six (6)-month period from the
date of filing of the petition; and
(4) The rehabilitation receiver has recommended approval of the

plan.
The approval by the court of the n e w rehabilitation plan shall have the
same effect as approval of a rehabilitation plan under Section 20 of Rule 3.
SEC. 8. Creditors' Meetings. — If no n e w rehabilitation plan is agreed u p o n
by the debtor and the creditors, the rehabilitation receiver, at any time before
he submits his evaluation on the debtor-proposed rehabilitation plan to the
court as prescribed in Section 7(a)(1) of this Rule, shall, either alone or w i t h the
debtor, meet w i t h the creditors or any interested party to discuss the plan w i t h
a v i e w to clarifying or resolving any matter connected therewith.
SEC. 9. Comments on or Opposition to Rehabilitation Plan. — A n y creditor or
interested party of record m a y file comments on or opposition to the proposed
rehabilitation plan, w i t h a copy given to the rehabilitation receiver, not later
than sixty (60) days f r o m the date of the last initial hearing. The court shall
conduct summary a n d non-adversarial proceedings to receive evidence, if
necessary, in hearing the comments on and opposition to the plan.
SEC. 10. Modification of Proposed Rehabilitation Plan. — The debtor may
modify its rehabilitation plan in the light of the comments of the rehabilitation
receiver and creditors or any interested party and submit a revised or substitute
rehabilitation plan for the final approval of the court. Such rehabilitation plan
must be submitted to the court not later than ten (10) months from the date of
the date of filing of the petition.
SEC. 11. Approval of Rehabilitation Plan. — The court may approve a
rehabilitation plan even over the opposition of creditors of the debtor if, in
its judgment, the rehabilitation of the debtor is feasible and the opposition
of the creditors is manifestly unreasonable. The opposition of the creditors is
manifestly unreasonable if the following are present:
(a) The rehabilitation plan complies w i t h the requirements specified in
Section 18 of Rule 3;
(b) The rehabilitation plan w o u l d provide the objecting class of creditors
w i t h payments whose present value projected in the plan w o u l d be greater than
that which they w o u l d have received if the assets of the debtor were sold by a
liquidator within a six (6)-month period from the date of filing of the petition;
and
(c) The rehabilitation receiver has recommended approval of the plan.
In approving the rehabilitation plan, the court shall ensure that the rights of
the secured creditors are not impaired. The court shall also issue the necessary
THE CORPORATION CODE OF THE PHILIPPINES Rules 5-6
940
orders or processes for its immediate and successful implementation. It may

impose such terms, conditions, or restrictions as the effective implementation
and monitoring thereof may reasonably require, or for the protection and
preservation of the interests of the creditors should the plan fail.
SEC. 12. Period to Decide Petition. — The court shall decide the petition
within one (1) year from the date of filing of the petition, unless the court,
for good cause shown, is able to secure an extension of the period from the
Supreme Court.
RULE 5
CREDITOR-INITIATED REHABILITATION
SEC. 1. Who May Petition. — A n y creditor or creditors holding at least
twenty percent (20%) of the debtor's total liabilities m a y file a petition w i t h
the proper regional trial court for rehabilitation of a debtor that cannot meet its
debts as they respectively fall due.
SEC. 2. Requirements for Creditor-Initiated Petitions. — W h e r e the petition is
filed by a creditor or creditors under this Rule, it is sufficient that the petition
is accompanied by a rehabilitation plan and a list of at least three (3) nominees
to the position of rehabilitation receiver and verified by a sworn statement that
the affiant has read the petition and that its contents are true and correct of his
personal knowledge or based on authentic records and that the petition is being
filed to protect the interests of the debtor, the stockholders, the investors and
the creditors of the debtor.
SEC. 3. Applicability of Provisions Relating to Debtor-Initiated Rehabilitation. —

The provisions of Sections 5 to 12 of Rule 4 shall apply to rehabilitation under
this Rule.
RULE 6
PRE-NEGOTIATED REHABILITATION
SEC. 1. Pre-negotiated Rehabilitation Plan. — A debtor that foresees the
impossibility of meeting its debts as they fall due may, by itself or jointly w i t h
any of its creditors, file a verified petition for the approval of a pre-negotiated
rehabilitation plan. The petition shall comply w i t h Section 2 of Rule 4 and be
supported by an affidavit showing the w r i t t e n approval or endorsement of
creditors holding at least two-thirds ( 2 / 3 ) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total
secured claims of the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor.
SEC. 2. Issuance of Order. — If the court finds the petition sufficient in form
and substance, it shall, not later than five (5) w o r k i n g days from the filing of the
petition, issue an order which shall:
(a) Identify the debtor, its principal business or activity/ies and its
principal place of business;
Appendix B
(b) Direct the publication of the order in a newspaper of general circulation

once a w e e k for at least t w o (2) consecutive weeks, w i t h the first publication to
be m a d e w i t h i n seven (7) days f r o m the time of its issuance;
(c) Direct the service by personal delivery of a copy of the petition on

each creditor w h o is not a petitioner holding at least five percent (5%) of the
total liabilities of the debtor, as determined in the schedule attached to the
petition, w i t h i n three (3) days;
(d) Direct the petitioner to furnish a copy of the petition and its annexes,
as w e l l as the stay order, to the relevant regulatory agency;
(e) State that copies of the petition and the rehabilitation plan are available
for examination and copying by any interested party;
(f) Direct creditors and other parties interested (including the Securities
and Exchange Commission and the relevant regulatory agencies such as, but
not limited to, the Bangko Sentral ng Pilipinas, the Insurance Commission,
the National Telecommunications Commission, the Housing and Land Use
Regulatory Board and the Energy Regulatory Commission) in opposing
the petition or rehabilitation plan to file their verified objections thereto or
comments thereon w i t h i n a period of not later than twenty (20) days from the
second publication of the order, w i t h a w a r n i n g that failure to do so w i l l bar
them from participating in the proceedings;
(g) A p p o i n t the rehabilitation receiver n a m e d in the plan, unless the court

finds that he is not qualified under these Rules in which case it may appoint a
qualified rehabilitation receiver of its choice;
(h) Stay enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor,
its guarantors and persons not solidarily liable w i t h the debtor; provided, that
the stay order shall not cover claims against letters of credit and similar security
arrangements issued by a third party to secure the payment of the debtor's
obligations; provided further, that the stay order shall not cover foreclosure by
a creditor of property not belonging to a debtor under corporate rehabilitation;
provided, however, that where the owner of such property sought to be
foreclosed is also a guarantor or one w h o is not solidarily liable, said owner
shall be entitled to the benefit of excussion as such guarantor;
(i) Prohibit the debtor from selling, encumbering, transferring, or

disposing in any manner any of its properties except in the ordinary course of
business;
(j) Prohibit the debtor from making any payment of its liabilities
outstanding as of the date of filing of the petition;
(k) Prohibit the debtor's suppliers of goods or services from withholding
supply of goods and services in the ordinary course of business for as long
as the debtor makes payments for the services and goods supplied after the
issuance of the stay order;
(1) Direct the payment in full of all administrative expenses incurred after
the issuance of the stay order; and
942
(m) Direct the payment of new loans or other forms of credit accommoda-
3
tions obtained for the rehabilitation of the debtor w i t h prior court approval.
SEC. 3. Approval of Plan. — Within ten (10) days from the date of the second
publication of the order referred to in Section 2 of this Rule, the court shall
approve the rehabilitation plan unless a creditor or other interested party
submits a verified objection to it in accordance w i t h the next succeeding section.
SEC. 4. Objection to Petition or Rehabilitation Plan. — A n y creditor or other
interested party may submit to the court a verified objection to the petition or
the rehabilitation plan. The objections shall be limited to the following:
(a) The petition or the rehabilitation p l a n or their attachments contain
material omissions or are materially false or misleading;
(b) The terms of rehabilitation are unattainable; or
(c) The approval or endorsement of creditors required under Section 1 of
this Rule has not been obtained
Copies of any objection to the petition or the rehabilitation plan shall be
served on the petitioning debtor a n d / o r creditors.
SEC. 5. Hearing on Objections. — The court shall set the case for hearing
not earlier than ten (10) days and no later than twenty (20) days from the date
of the second publication of the order mentioned in Section 2 of this Rule on
the objections to the petition or rehabilitation plan. If the court finds that the
objection is in accordance w i t h the immediately preceding section, it shall
direct the petitioner to cure the defect w i t h i n a period fifteen (15) days f r o m
receipt of the order.
SEC. 6. Period for Approval of Rehabilitation Plan. — T h e court shall decide the
petition not later than one h u n d r e d twenty (120) days f r o m the date of the filing
of the petition. If the court fails to do so w i t h i n said period, the rehabilitation
plan shall be deemed approved.
SEC. 7. Effects of Approval of Rehabilitation Plan. — A p p r o v a l of the

rehabilitation plan under this Rule shall have the same legal effect as approval
of a rehabilitation plan under Section 20 of Rule 3.
SEC. 8. Revocation of Approved Rehabilitation Plan. — N o t later than thirty

(30) days from the approval of a rehabilitation p l a n under this Rule, the plan
may, upon motion and after notice and hearing, be revoked on the ground that
the approval was secured by fraud or that the petitioner has failed to cure the
defect ordered by the court pursuant to Section 5 of this Rule.
SEC. 9. Effect of Rule on Pending Petitions. — A n y p e n d i n g petition for

rehabilitation that has not undergone the initial hearing prescribed under
the Interim Rules of Procedure for Corporate Rehabilitation at the time of the
effectivity of these Rules may be converted into a rehabilitation proceeding
under this Rule.
'See Pryce Corporation vs. Court of Appeals, 543 SCRA 657 (2005); Banco de Oro-
EPCI, Inc. vs. JAPRL Dev. Corp., 551 SCRA 342 (2008).
Appendix B
RULE 7
RECOGNITION OF FOREIGN PROCEEDINGS
SEC. 1. Scope of Application. — This Rule applies where (a) assistance is

sought in a Philippine court by a foreign court or a foreign representative in
connection w i t h a foreign proceeding; (b) assistance is sought in a foreign State
in connection w i t h a domestic proceeding governed by these Rules; or (c) a
foreign proceeding and a domestic proceeding are concurrently taking place.
The sole fact that a petition is filed pursuant to this Rule does not subject
the foreign representative or the foreign assets and affairs of the debtor to the
jurisdiction of the local courts for any purpose other than the petition.
SEC. 2. Non-Recognition of Foreign Proceeding. — N o t h i n g in this Rule

prevents the court f r o m refusing to take an action governed by this Rule if (a)
the action w o u l d be manifestly contrary to the public policy of the Philippines;
and (b) if the court finds that the country of w h i c h the petitioner is a national
does not grant recognition to a Philippine rehabilitation proceeding in a manner
substantially in accordance w i t h this Rule.
SEC. 3. Petition for Recognition of Foreign Proceeding. — A foreign represen-
tative m a y apply w i t h the Regional Trial Court where the debtor resides for
recognition of the foreign proceeding in w h i c h the foreign representative has
been appointed.
A petition for recognition shall be accompanied by:
(a) A certified copy of the decision commencing the foreign proceeding
and appointing the foreign representative; or
(b) A certificate f r o m the foreign court affirming the existence of the
foreign proceeding and of the appointment of the foreign representative; or
(c) In the absence of evidence referred to in subparagraphs (a) and (b), any
other evidence acceptable to the court of the existence of the foreign proceeding
and of the appointment of the foreign representative.
SEC. 4. Recognition of Foreign Proceeding. — A foreign proceeding shall be
recognized if:
(a) The proceeding is a foreign proceeding as defined herein;
(b) The person or body applying for recognition is a foreign representa rive
as defined herein; and
(c) The petition meets the requirements of Section 3 of this Rule;
SEC. 5. Period to Recognize Foreign Proceeding. — A petition for recognition
of a foreign proceeding shall be decided w i t h i n thirty (30) days from the filing
thereof.
SEC. 6. Notification to Court. — From the time of filing the petition for
recognition of the foreign proceeding, the foreign representative shall inform
the court promptly of:
(a) A n y substantial change in the status of the foreign proceeding or the
status of the foreign representative's appointment; and
944
(b) A n y other foreign proceeding regarding the same debtor that becomes
known to the foreign representative.
SEC. 7. Provisional Relief that May be Granted upon Application for Recognition
of Foreign Proceeding. — From the time of filing a petition for recognition until the
same is decided upon, the court may, upon motion of the foreign representative
where relief is urgently needed to protect the assets of the debtor or the interests
of the creditors, grant relief of a provisional nature, including:
(a) Staying execution against the debtor's assets;
(b) Entrusting the administration or realization of all or part of the debtor's
assets located in the Philippines to the foreign representative or another person
designated by the court in order to protect and preserve the value of assets that,
by their nature or because of other circumstances, are perishable, susceptible to
devaluation or otherwise in jeopardy;
(c) A n y relief mentioned in Sections 9(a)(1), (2) and (7) of this Rule.
SEC. 8. Effects of Recognition of Foreign Proceeding. — U p o n recognition of a
foreign proceeding:
(a) Commencement or continuation of individual actions or i n d i v i d u a l
proceedings concerning the debtor's assets, rights, obligations or liabilities is
stayed; provided, that such stay does not affect the right to commence individual
actions or proceedings to the extent necessary to preserve a claim against the
debtor.
(b) Execution against the debtor's assets is stayed; and
(c) The right to transfer, encumber or otherwise dispose of any assets of
the debtor is suspended.
SEC. 9. Relief That May be Granted After Recognition of Foreign Proceeding. —
(a) U p o n recognition of a foreign proceeding, where necessary to protect
the assets of the debtor or the interests of the creditors, the court may, u p o n
motion of the foreign representative, grant any appropriate relief including:
(1) Staying the commencement or continuation of i n d i v i d u a l actions
or individual proceedings concerning the debtor's assets, rights, obliga-
tions or liabilities to the extent they have not been stayed under Section
8(a) of this Rule;
(2) Staying execution against the debtor's assets to the extent it has
not been stayed under Section 8(b) of this Rule;
(3) Suspending the right to transfer, encumber or otherwise dispose
of any assets of the debtor to the extent this right has not been suspended
under Section 8(c) of this Rule;
(4) Providing for the examination of witnesses, the taking of evidence

or the delivery of information concerning the debtor's assets, affairs, rights,
obligations or liabilities;
(5) Entrusting the administration or realization of all or part of the

debtor's assets located in the Philippines to the foreign representative or
another person designated by the court;
Appendix B
(6) Extending the relief granted under Section 7 of this Rule;

(7) Granting any additional relief that m a y be available to the
rehabilitation receiver under these laws.
(b) U p o n recognition of a foreign proceeding, the court may, at the

request of the foreign representative, entrust the distribution of all or part of
the debtor's assets located in the Philippines to the foreign representative or
another person designated by the court; provided that the court is satisfied that
the interests of local creditors are adequately protected.
SEC. 10. Protection of Creditors and Other Interested Persons. —

(a) In granting or denying relief under this Rule or in modifying or
terminating the relief under paragraph (c) of this Section, the court must
be satisfied that the interests of the creditors and other interested persons,
including the debtor, are adequately protected.
(b) The court m a y subject the relief granted under Section 7 or Section 9 of
this Rule to conditions it considers appropriate.
(c) The court may, u p o n motion of the foreign representative or a person
affected by the relief granted under Section 7 or Section 9 of this Rule, or on its
o w n motion, m o d i f y or terminate such relief.
SEC. 11. Actions to Avoid Acts Detrimental to Creditors. — U p o n recognition

of a foreign proceeding, the foreign representative acquires the standing to
initiate actions to avoid or otherwise render ineffective acts detrimental to
creditors that are available under these Rules.
SEC. 12. Intervention by Foreign Representative in Philippine Proceedings.
— U p o n recognition of a foreign proceeding, the foreign representative may
intervene in any action or proceeding in the Philippines in which the debtor is
a party.
SEC. 13. Cooperation and Direct Communication with Foreign Courts and Foreign
Representatives. — In matters covered by this Rule, the court shall cooperate to
the m a x i m u m extent possible w i t h foreign courts or foreign representatives.
The court is entitled to communicate directly w i t h , or request information
or assistance directly from, foreign courts or foreign representatives.
SEC. 14. Forms of Cooperation. — Cooperation m a y be implemented by any
appropriate means, including but not limited to the following:
(a) Appointment of a person or body to act at the discretion of the court;
(b) Communication of information by any means considered appropriate
by the court;
(c) Coordination of the administration and supervision of the debtor's
assets and affairs;
(d) Approval or implementation by courts of agreements concerning the
coordination of proceedings;
(e) Coordination of concurrent proceedings regarding the same debtor;
(f) Suspension of proceedings against the debtor;
946 THE CORPORATION CODE OF THE PHILIPPINES Rules 8-9
(g) Limiting the relief to assets that should be administered in a foreign

proceeding pending in a jurisdiction other than the place where the debtor has
its principal place of business (foreign non-main proceeding) or information
required in that proceeding; and
(h) Implementation of rehabilitation or re-organization plan for the
debtor.
Nothing in this Rule limits the power of the court to provide additional
assistance to the foreign representative under other applicable laws.
SEC. 15. Commencement of Local Proceeding after Recognition of Foreign Pro-
ceeding. — After the recognition of a foreign proceeding, a local proceeding u n -
der these Rules may be commenced only if the debtor is doing business in the
Philippines, the effects of the proceedings shall be restricted to the assets of the
debtor located in the country and, to the extent necessary to implement cooper-
ation and coordination under Sections 13 and 14 of this Rule, to the other assets
of the debtor that, under local laws, must be administered in that proceeding.
SEC. 16. Local and Foreign Proceedings. — W h e r e a foreign proceeding and
a local proceeding are taking place concurrently regarding the same debtor, the
court shall seek cooperation and coordination under Sections 13 and 14 of this
Rule. A n y relief granted to the foreign proceeding must be m a d e consistent
with the relief granted in the local proceeding.
RULE 8
PROCEDURAL REMEDIES
SEC. 1. Motion for Reconsideration. — A party m a y file a m o t i o n for

reconsideration of any order issued by the court prior to the approval of the
rehabilitation plan. No relief can be extended to the party aggrieved by the
court's order on the motion through a special civil action for certiorari under
Rule 65 of the Rules of Court. Such order can only be elevated to the Court of
Appeals as an assigned error in the petition for review of the decision or order
approving or disapproving the rehabilitation plan.
An order issued after the approval of the rehabilitation plan can be

reviewed only through a special civil action for certiorari under Rule 65 of the
Rules of Court.
SEC. 2. Review of Decision or Order on Rehabilitation Plan. — An order

approving or disapproving a rehabilitation plan can only be reviewed through
a petition for review to the Court of Appeals under Rule 43 of the Rules of
Court w i t h i n fifteen (15) days from notice of the decision or order.
RULE 9
FINAL PROVISIONS
SEC. 1. Severability. — If any provision or section of these Rules is held

invalid, the other provisions or sections shall not be affected thereby.
Annex "A" RULES OF PROCEDURE ON 947
Appendix B
SEC. 2. Transitory Provision. — Unless the court orders otherwise to

prevent manifest injustice, any pending petition for rehabilitation that has not
undergone the initial hearing prescribed under the Interim Rules of Procedure
for Corporate Rehabilitation at the time of the effectivity of these Rules shall be
governed by these Rules.
SEC. 3. Effectivity. — These Rules shall take effect on 16 January 2009

following its publication in t w o (2) newspapers of general circulation in the
Philippines.
ANNEX "A"
AFFIDAVIT OF GENERAL FINANCIAL C O N D I T I O N
(1) A r e y o u an officer of the debtor referred to in these proceedings?

(2) W h a t is your full n a m e and w h a t position do y o u hold in the debtor?
(3) W h a t is the full name of the debtor and w h a t is the address of its head
office?
(4) W h e n was it formed or incorporated?
(5) W h e n d i d the debtor commence business?
(6) W h a t is the nature of its business? W h a t is the market share of the
debtor in the industry in w h i c h it is engaged?
(7) W h o are the parties, members, or stockholders? H o w many employees?
(8) W h a t is the capital of the debtor?
(9) W h a t is the capital contribution and w h a t is the amount of the capital,
paid and unpaid, of each of the partners or shareholders?
(10) Do any of these people hold the shares in trust for others?
(11) W h o are the directors and officers of the debtors?
(12) H a s the debtor any subsidiary corporation? If so, give particulars?
(13) Has the debtor properly maintained its books and are they updated?
(14) Were the books audited annually?
(15) If so, w h a t is the name of the auditor and w h e n was the last audited
statement d r a w n up?
(16) H a v e all proper returns been made to the various government
agencies requiring same?
(17) W h e n did the debtor first become aware of its problems?
(18) Has the debtor w i t h i n the twelve months preceding the filing of the
petition:
(a) made any payments, returned any goods or delivered any
property to any of its creditors, except in the normal course of business?
(b) executed any mortgage, pledge, or security over any of its
properties in favor of any creditor?
THE CORPORATION CODE OF THE PHILIPPINES Annex "A'
948
(c) transferred or disposed of any of its properties in payment of any

debt?
(d) sold, disposed of, or removed any of its property except in the
ordinary course of business?
(e) sold any merchandise at less than fair market value or purchased
merchandise or services at more than fair market value?
(f) made or been a party to any settlement of property in favor of any
person?
If, so, give particulars.
(19) Has the debtor recorded all sales or dispositions of assets?
(20) W h a t were the sales for the last three years and w h a t percentage of
the sales represented the profit or mark-up?
(21) W h a t were the profits or losses for the debtor for the last three years?
(22) W h a t are the causes of the problems of the debtor? Please provide
particulars?
(23) W h e n did you first notice these problems and w h a t actions d i d the
debtor take to rectify them?
(24) H o w much do y o u estimate is needed to rehabilitate the debtor?
(25) Has any person expressed interest in investing n e w money into the
debtor?
(26) Are there any pending and threatened legal actions against the
debtor? If so, please provide particulars.
(27) Has the debtor discussed any restructuring or repayment p l a n w i t h

any of the creditors? Please provide status and details.
(28) Has any creditor expressed interest in restructuring the debts of the
debtor? If so, please give particulars.
(29) H a v e employees' wages and salaries been kept current? If not, h o w

much are in arrears and w h a t time period do the arrears represent?
(30) H a v e obligation to the government and its agencies been kept

current? If not, h o w much are in arrears and w h a t time period do the arrears
represent?
Appendix C
INTERIM RULES OF PROCEDURE

GOVERNING INTRA-CORPORATE
CONTROVERSIES UNDER R.A. NO. 8799
RESOLUTION
"Acting on the M e m o r a n d u m of the Committee on SEC Cases submitting
for this Court's consideration and approval the Proposed Interim Rules of
Procedure for Intra-Corporate Controversies, the Court Resolved to A P P R O V E
the same.
The Interim Rules shall take effect on A p r i l 1,2001 following its publication
in t w o (2) newspapers of general circulation.
M a r c h 13, 2001, M a n i l a . "
INTERIM RULES OF PROCEDURE FOR

INTRA-CORPORATE CONTROVERSIES
RULE 1
GENERAL PROVISIONS
S E C T I O N 1. (a) Cases covered. — These Rules shall govern the procedure to
be observed in civil cases involving the following:
(1) Devices or schemes employed by, or any act of, the board of
directors, business associates, officers or partners, amounting to fraud or
misrepresentation w h i c h m a y be detrimental to the interest of the public
a n d / o r of the stockholders, partners, or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or as-
sociation relations, between and among stockholders, members, or associ-
ates, and between, any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respec-
tively;
(3) Controversies in the election or appointment of directors, trustees,
officers, or managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
949
THE CORPORATION CODE OF THE PHILIPPINES Rulel
950
(b) Prohibition against nuisance and harassment suits. — Nuisance and

harassment suits are prohibited. In determining whether a suit is a nuisance or
harassment suit, the court shall consider, among others, the following:
(1) The extent of the shareholding or interest of the initiating
stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of;
and
(5) Prejudice or damage to the corporation, partnership, or association
in relation to the relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or u p o n
motion, forthwith dismiss the case.
SEC. 2. Suppletory Application of the Rules of Court. — The Rules of Court, in
so far as they may be applicable and are not inconsistent w i t h these Rules, are
hereby adopted to form an integral part of these Rules.
SEC. 3. Construction. — These Rules shall be liberally construed in order to
promote their objective of securing a just, summary, speedy and inexpensive
determination of every action or proceeding.
SEC. 4. Executory nature of decisions and orders. — A l l decisions and orders
issued under these Rules shall immediately be executory, except the awards for
moral damages, exemplary damages and attorney's fees, if any, no appeal or
petition taken therefrom shall stay the enforcement or implementation of the
decision or order, unless restrained by an appellate court. Interlocutory orders
shall not be subject to appeal, (as amended by A . M . N o . 01-2-04-SC.)
SEC. 5. Venue. — A l l actions covered by these Rules shall be commenced

and tried in the Regional Trial Court w h i c h has jurisdiction over the principal
office of the corporation, partnership, or association concerned. W h e r e the
principal office of the corporation, partnership or association is registered in
the Securities and Exchange Commission as M e t r o M a n i l a , the action must be
filed in the city or municipality where the head office is located.
SEC. 6. Service of pleadings. — W h e n so authorized by the court, any pleading

a n d / o r document required by these Rules m a y be filed w i t h the court a n d / o r
served upon the other parties by facsimile transmission (fax) or electronic m a i l
(e-mail). In such cases, the date of transmission shall be deemed to be prima facie
the date of service.
SEC. 7. Signing of pleadings, motions and other papers. — Every pleading,

motion, and other paper of a party represented by an attorney shall be signed
by at least one attorney of record in the attorney's i n d i v i d u a l name, whose
address shall be stated. A party w h o is not represented by an attorney shall
sign the pleading, motion, or other paper and state his address.
The signature of an attorney or party constitutes a certification by the

signer that the has read the pleading, motion, or other paper; that to the best
Rule 2 INTERIM RULES OF PROCEDURE GOVERNING
INTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799
Appendix C
of his knowledge, information, and belief formed after reasonable inquiry,

it is w e l l grounded in fact and is warranted by existing law or a good faith
argument for the extension, modification, or reversal of existing jurisprudence;
and that it is not interposed for any improper purpose, such as to harass or to
cause unnecessary delay or needless increase in the cost of litigation.
If a pleading, motion, or other paper is not signed, it shall be stricken off

the record unless it is p r o m p t l y signed by the pleader or movant, after he is
notified of the omission.
SEC. 8. Prohibited pleadings. — The following pleadings are prohibited:

(1) M o t i o n to dismiss;
(2) M o t i o n for a bill of particulars;
(3) M o t i o n for n e w trial, or for reconsideration of judgment or order, or

1
for re-opening of trial;
(4) M o t i o n for extension of time to file pleadings, affidavits or any other

paper, except those filed due to clearly compelling reasons. Such motion must
be verified and under oath; and
(5) M o t i o n for postponement and other motions of similar intent, except

those filed due to clearly compelling reasons. Such motion must be verified and
under oath.
SEC. 9. Assignment of cases. — A l l cases filed under these Rules shall be

tried by judges designated by the Supreme Court to hear and decide cases
transferred f r o m the Securities a n d Exchange Commission to the Regional Trial
Courts and filed directly w i t h said courts pursuant to Republic Act N o . 8799,
otherwise k n o w n as the Securities and Regulation Code.
RULE 2
C O M M E N C E M E N T OF A C T I O N A N D PLEADINGS
S E C T I O N 1. Commencement of action. — An action under these Rules is

commenced by the filing of a verified complaint w i t h the proper Regional Trial
Court.
SEC. 2. Pleadings allowed. — The only pleadings allowed to be filed under
these Rules are the complaint, answer, compulsory counterclaims or cross-
claims pleaded in the answer, and the answer to the counterclaims or cross-
claims.
SEC. 3. Verification. — The complaint and the answer shall be verified by
an affidavit stating that the affiant has read the pleading and the allegations
therein are true and correct based on his o w n personal knowledge or on
authentic records.
êe Sand Bank of the Phils, vs. Ascot Holdings and Equities, Inc., 537 SCRA 396
(2007).
952
SEC. 4. Complaint. — The complaint shall state or contain:

(1) the names, addresses, and other relevant personal or juridical circum-
stances of the parties;
(2) all facts material and relevant to the plaintiff's cause or causes of
action, which shall be supported by affidavits of the plaintiff or his witnesses
and copies of documentary and other evidence supportive of such cause or
causes of action;
(3) the law, rule, or regulation relied upon, violated, or sought to be
enforced;
(4) a certification that: (a) the plaintiff has not theretofore commenced any
action or filed any claim involving the same issues in any court, tribunal or
quasi-judicial agency, and, to the best of his knowledge, no such other action
or claim is pending therein; (b) if there is such other action or claim, a complete
statement of the present status thereof; and (c) if he should thereafter l e a m that
the same or similar action or claim has been filed or is pending, he shall report
that fact w i t h i n five (5) days therefrom to the court; and
(5) the relief sought.

SEC. 5. Summons. — The summons and the complaint shall be served
together not later than five (5) days from the date of filing of the complaint.
(a) Service upon domestic private juridical entities. — If the defendant is a
domestic corporation, service shall be deemed adequate if m a d e u p o n any of
the statutory or corporate officers as fixed by the by-laws or their respective
secretaries. If the defendant is a partnership, service shall be deemed adequate
if made upon any of the managing or general partners or u p o n their respective
secretaries. If the defendant is an association, service shall be deemed adequate
if made upon any of its officers or their respective secretaries.
(b) Service upon foreign private juridical entity. — W h e n the defendant is a
foreign private juridical entity w h i c h is transacting or has transacted business
in the Philippines, service may be made on its resident agent designated in
accordance w i t h law for that purpose, or, if there be no such agent, on the
government official designated by law to that effect, or on any of its officers or
agents w i t h i n the Philippines.
SEC. 6. Answer. — The defendant shall file his answer to -the complaint,
serving a copy thereof on the plaintiff, w i t h i n fifteen (15) days f r o m service of
summons.
In the answer, the defendant shall:
(1) Specify each material allegation of fact the truth of w h i c h he admits;

(2) Specify each material allegation of fact the truth of w h i c h he does not
admit. Where the defendant desires to deny only a part of an aver meet, he shall
specify so much of it as true and material and shall deny only the remainder;
(3) Specify each material allegation of fact as to w h i c h truth he has no
knowledge or information sufficient to f o r m a belief, and this shall have the
effect of a denial;
Rule 3 INTERIM RULES OF PROCEDURE GOVERNING 953
Appendix C
(4) State the defenses, including grounds for a motion to dismiss under
the Rules of Court;
(5) State the law, rule, or regulation relied u p o n ;
(6) Address each of the causes of action stated in the complaint;
(7) State the facts u p o n w h i c h he relies for his defense, including affidavits
of witnesses and copies of documentary and other evidence supportive of such
cause or causes of action;
(8) State any compulsory counterclaim / s and cross-claim / s; and

(9) State the relief sought.
The answer to counterclaims or cross-claims shall be filed w i t h i n ten (10)

days f r o m service of the answer in w h i c h they are pleaded.
SEC. 7. Effect of failure to answer. — If the defendant fails to answer w i t h i n
the period above provided, he shall be considered in default. U p o n motion or
motu proprio, court shall render judgment either dismissing the complaint or
granting the relief prayed for as the records m a y warrant. In no case shall the
court a w a r d a relief beyond or different f r o m that prayed for.
SEC. 8. Affidavits, documentary and other evidence. — Affidavits shall be
based on personal knowledge, shall set forth such facts as w o u l d be admissible
in evidence, and shall show affirmatively that the affiant is competent to testify
on the matters stated therein. The affidavits shall be in question and answer
form, and shall comply w i t h the rules on admissibility of evidence.
Affidavits of witnesses as w e l l as documentary and other evidence shall
be attached to the appropriate pleading; Provided, however, That affidavits,
documentary and other evidence not so submitted m a y be attached to the pre-
trial brief required under these Rules. Affidavits and other evidence not so
submitted shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness
is presumed prima facie hostile if he fails or refuses to execute an affidavit after
a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling
reasons; and
(3) N e w l y discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence.
RULE 3
MODES OF DISCOVERY
S E C T I O N 1. In general. — A party can only avail of any of the modes of
discovery not later than fifteen (15) days from the joinder of issues.
SEC. 2. Objections. — A n y mode of discovery such as interrogatories,
request or admission, production or inspection of documents or things, may be
954
objected to within ten (10) days from receipt of the discovery device and only
on the ground that the matter requested is patently incompetent, immaterial,
irrelevant or privileged in nature.
The court shall rule on the objections not later than fifteen (15) days from
the filing thereof.
SEC. 3. Compliance. — Compliance w i t h any mode of discovery shall be
made within ten (10) days from receipt of the discovery device, or if there are
objections, from receipt of the ruling of the court.
SEC. 4. Sanctions. — The sanctions prescribed in the Rules of Court for
failure to avail of, or refusal to comply w i t h , the modes of discovery shall apply.
In addition, the court may, u p o n motion, declare a party non-suited or as in
default, as the case may be, if the refusal to comply w i t h a mode of discovery is
patently unjustified.
RULE 4
PRE-TRIAL
S E C T I O N 1. Pre-trial conference; mandatory nature. — W i t h i n five (5) days
after the period for availment of, and compliance w i t h , the modes of discovery
prescribed in Rule hereof, whichever comes later, the court shall issue and serve
an order immediately setting the case for pre-trial conference and directing the
parties to submit their respective pre-trial briefs. The parties shall file w i t h the
court and furnish each other copies of their respective pre-trial brief in such
manner as to ensure its receipt by the court a n d the other party at least five (5)
days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
(1) Brief statement of the nature of the case, w h i c h shall summarize the
theory or theories of the party in clear and concise language;
(2) Allegations expressly admitted by either or both parties;
(3) Allegations deemed admitted by either or both parties;
(4) Documents not specifically denied under oath by either or both
parties;
(5) Amendments to the pleadings;

(6) Statement of the issues, w h i c h shall separately summarize the factual
and legal issues involved in the case;
(7) Names of witnesses to be presented and the summary of their

testimony as contained in their affidavits supporting their positions on each of
the issues;
(8) A l l other pieces of evidence, whether documentary or otherwise and

their respective purposes;
(9) Specific proposals for an amicable settlement;

Appendix C
(10) Possibility of referral to mediation or other alternative modes of

dispute resolution;
(11) Proposed schedule of hearings; and
(12) Such other matters as m a y aid in the just and speedy disposition of the
case.
SEC. 2. Nature and purpose of pre-trial conference. — D u r i n g the pre-trial

conference, the court shall, w i t h its active participation, ensure that the parties
consider in detail the following:
(1) The possibility of an amicable settlement;
(2) Referral of the dispute to mediation or other forms of dispute

resolution;
(3) Facts that need not be proven, either because they are matters of
judicial notice or expressly or deemed admitted;
(4) A m e n d m e n t s to the pleadings;
(5) The possibility of obtaining stipulations and admissions of facts and

documents;
(6) Objections to the admissibility of testimonial, documentary and other

evidence;
(7) Objections to the f o r m or substance of any affidavit, or part thereof;
(8) Simplification of the issues;
(9) The possibility of submitting the case for decision on the basis of
position papers, affidavits, documentary and real evidence;
(10) A complete schedule of hearing dates; and
( 1 1 ) Such other makers as m a y aid in the speedy and makers as m a y aid in
the speedy and summary disposition of the case.
SEC. 3. Termination. — The preliminary conference shall be terminated not
later than ten (10) days after its commencement, whether or not the parties have
agreed to settle amicably.
SEC. 4. Judgment before pre-trial. — If, after submission of the pre-trial briefs,
the court determines that, u p o n consideration of the pleadings, the affidavits
and other evidence submitted by the parties, a judgment may be rendered, the
court may order the parties to file simultaneously their respective memoranda
w i t h i n a non-extendible period of twenty (20) days from receipt of the order.
Thereafter, the court shall render judgment, either full or otherwise, not later
than ninety (90) days from the expiration of the period to file the memoranda.
SEC. 5. Pre-trial order, judgment after pre-trial. — The proceedings in the pre-
trial shall be recorded. Within ten (10) days after the termination of the pre-trial,
the court shall issue an order which shall recite in detail the makers taken up
in the conference, the actions taken thereon, the amendments allowed in the
pleadings, and the agreements or admissions made by the parries as to any of
the makers considered. The court shall rule on all objections to or comments on
956
the admissibility of any documentary or other evidence, including any affidavit

or any part thereof. Should the action proceed to trial, the order shall explicitly
define and limit the issues to be tried and shall strictly follow the form set forth
in Annex " A " of these Rules.
The contents of the order shall control the subsequent course of the action,
unless modified before trial to prevent manifest injustice.
After the pre-trial, the court may render judgment, either full or partial, as
the evidence presented during the pre-trial m a y warrant.
RULE 5
TRIAL
S E C T I O N 1. Witnesses. — If the court deems necessary to hold hearings

to determine specific factual makers before rendering judgment, it shall, in the
pre-trial order, set the case for trial on the dates agreed u p o n by the parties.
Only persons whose affidavits were submitted m a y be presented as
witnesses, except in cases specified in Section 8, Rule 2 of these Rules. The
affidavits of the witnesses shall serve as their direct testimonies, subject to
cross-examination in accordance w i t h existing rules on evidence.
SEC. 2. Trial schedule. — Unless judgment is rendered pursuant to Rule 4 of

these Rules, the initial hearing shall be held not later than thirty (30) days from
the date of the pre-trial order. The hearings shall be completed not later than
sixty (60) days from the date of the initial hearing, thirty (30) days of w h i c h shall
be allotted to the plaintiffs and thirty (30) days to the defendants in the manner
prescribed in the pre-trial order. The failure of a party to present a witness
on a scheduled hearing date shall be deemed a w a i v e r of such hearing date.
However, a party m a y present such witness or witnesses w i t h i n his remaining
allotted hearing dates.
SEC. 3. Written offer of evidence. — Evidence not otherwise admitted by

the parties or ruled u p o n by the court during the pre-trial conference shall
be offered in writing not later than five (5) days f r o m the completion of the
presentation of evidence of the party concerned. The opposing party shall have
five (5) days from receipt of the offer to file his comments or objections. The
court shall make its ruling on the offer w i t h i n five (5) days f r o m the expiration
of the period to file comments or objections.
SEC. 4. Memoranda. — Immediately after ruling on the last offer of evidence,

the court shall order the parties to simultaneously file, w i t h i n thirty (30) days
from receipt of the order, their respective memoranda. The m e m o r a n d a shall
contain the following:
(1) A "Statement of the Case," w h i c h is a clear and concise statement of

the nature of the action and a summary of the proceedings;
(2) A "Statement of the Facts," w h i c h is a clear and concise statement
in narrative form of the established facts, w i t h reference to the testimonial,
documentary or other evidence in support thereof;
Appendix C
(3) A "Statement of the Issues," w h i c h is a clear and concise statement of

the issues presented to the court for resolution;
(4) The "Arguments," w h i c h is a clear and concise presentation of the

argument in support, of each issue; and
(5) The "Relief" w h i c h is a specification of the order or judgment which

the party seeks to obtain.
No reply m e m o r a n d u m shall be allowed.
SEC. 5. Decision after trial. — T h e court shall render a decision not later than
ninety (90) days f r o m the lapse of the period to file the memoranda, w i t h or
without said pleading h a v i n g been filed.
RULE 6
ELECTION CONTESTS
S E C T I O N 1. Cases covered. — The provisions of this rule shall apply to

election contests in stock and non-stock corporations.
SEC. 2. Definition. — An election contest refers to any controversy or
dispute involving title or claim to any elective office in a stock or non-stock
corporation, the validation of proxies, the manner and validity of elections, and
the qualifications of candidates, including the proclamation of winners, to the
office of director, trustee or other officer directly elected by the stockholders in
a close corporation or by members of a non-stock corporation where the articles
of incorporation or by-laws so provide.
SEC. 3. Complaint. — In addition to the requirements in section 4, Rule 2 of
these, Rules, the complaint in an election contest must state the following:
(1) The case was filed w i t h i n fifteen (15) days from the date of the
election if the by-laws of the corporation do not provide for a procedure for
resolution of the controversy, or w i t h i n fifteen (15) days from the resolution of
the controversy by the corporation as provided in its by-laws; and
(2) The plaintiff has exhausted all intra-corporate remedies in election
cases as provided for in the by-laws of the corporation.
SEC. 4. Duty of the court upon the filing of the complaint. — Within two (2)
days from the filing of the complaint, the court, upon a consideration of the
allegations thereof, m a y dismiss the complaint outright if it is not sufficient in
form and substance, or, if it is sufficient, order the issuance of summons which
shall be served, together with a copy of the complaint, on the defendant within
two (2) days from its issuance.
SEC. 5. Answer. — The defendant shall file his answer to the complaint,
serving a copy thereof on the plaintiff, w i t h i n ten (10) days from service of
summons and the complaint. The answer shall contain the matters required in
Section 6, Rule 2 of these Rules.
SEC. 6. Affidavits, documentary and other evidence. - The parties shall attach
to the complaint and answer the affidavits of witnesses, documentary and
other evidence in support thereof, if any.
958 THE CORPORATION CODE OF THE PHILIPPINES Rule 7
SEC. 7. Effect of failure to answer. — If the defendant fails to file an answer

within the period above provided, the court shall, w i t h i n ten (10) days from
the lapse of said period motu proprio or on motion, render judgment as may
be warranted by the allegations of the complaint, as well as the affidavits,
documentary and other evidence on record. In no case shall the court award a
relief beyond or different from that prayed for.
SEC. 8. Trial. — If the court deems it necessary to hold a hearing to clarify
specific factual makers before rendering judgment, it shall, w i t h i n ten (10) days
from the filing of last pleading, issue an order setting the case for hearing for the
purpose. The order shall, in clear and concise terms, specify the factual makers
the court desires to be clarified and the witnesses, whose affidavits have been
submitted, w h o w i l l give the necessary clarification.
The hearing shall be set on a date not later than ten (10) days from the
date of the order, and shall be completed not later than fifteen (15) days from
the date of the first hearing. The affidavit of a witness w h o fails to appear for
clarificatory questions of the court shall be ordered stricken off the record.
SEC. 9. Decision. — The Court shall render a decision w i t h i n fifteen (15) days
from receipt of the last pleading, or f r o m the date of the last hearing as the case
may be. The decision shall be based on the pleadings, affidavits, documentary
and other evidence attached thereto and the answers of the witnesses to the
clarificatory questions of the court given during the hearings.
RULE 7
INSPECTION OF CORPORATE BOOKS A N D RECORDS
S E C T I O N 1. Cases covered. — The provisions of this Rule shall apply to

disputes exclusively involving the rights of stockholders or members to inspect
the books and records and / o r to be furnished w i t h the financial statements of
a corporation, under Sections 74 and 75 of Batas Pambansa Big. 68, otherwise
k n o w n as the Corporation Code of the Philippines.
SEC. 2. Complaint. — In addition to the requirements in Section 4, Rule 2 of

these Rules, the complaint must state the following:
(1) The case is for the enforcement of plaintiff's right of inspection of

corporate orders or records and / o r to be furnished w i t h financial statements
under Sections 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and / or to
be furnished w i t h financial statements made by the plaintiff u p o n defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the
reasons given for such refusal, if any; and
(4) The reasons w h y the refusal of defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the l a w and jurisprudence in support
SEC. 3. Duty of the court upon the filing of the complaint. - W i t h i n t w o (2)
days from the filing of the complaint, the court, u p o n a consideration of the
FNTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799
Appendix C
allegations thereof, m a y dismiss the complaint outright if it is not sufficient in

f o r m and substance, or, if it is sufficient, order the issuance of summons which
shall be served, together w i t h a copy of the complaint, on the defendant w i t h i n
t w o (2) days from its issuance.
SEC. 4. Answer. — The defendant shall file his answer to the complaint,
serving a copy thereof on the plaintiff, w i t h i n ten (10) days from service of
summons and the complaint. In addition to the requirements in Section 6, Rule
2 of these Rules, the answer must state the following:
(1) The grounds for the refusal of defendant to grant the demands of the
plaintiff, stating the law and jurisprudence in support thereof;
(2) The conditions or limitations on the exercise of the right to inspect
w h i c h should be imposed by the court; and
(3) The cost of inspection, including m a n p o w e r and photocopying
expenses, if the right to inspect is granted.
SEC. 5. Affidavits, documentary and other evidence. — The parties shall attach
to the complaint and answer the affidavits of witnesses, documentary and
other evidence in support thereof, if any.
SEC. 6. Effect of failure to answer. — If the defendant fails to file an answer

w i t h i n the period above provided, the court, w i t h i n ten (10) days from the
lapse of the said period, motu vrovrio or u p o n motion, shall render judgment
as warranted by the allegations of the complaint, as w e l l as the affidavits,
documentary and other evidence on record. In no case shall the court award a
relief beyond or different from that prayed for.
SEC. 7. Decision. — The court shall render a decision based on the pleadings,
affidavits and documentary and other evidence attached thereto w i t h i n fifteen
(15) days from receipt of the last pleading. A decision ordering defendants to
allow tihe inspection of, books and records and / o r to furnish copies thereof
shall also order the plaintiff to deposit the estimated cost of the manpower
necessary to produce the books and records and the cost of copying, and state,
in clear and categorical terms, the limitations and conditions to the exercise of
the right allowed or enforced.
RULE 8
DERIVATIVE SUITS
S E C T I O N 1. Derivative action. — A stockholder or member may bring an

action in the name of a corporation or association, as the case may be, provided,
that:
(1) He was a stockholder or member at the rime the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
960
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the
case.
SEC. 2. Discontinuance. — A derivative action shall not be discontinued,
compromised or settled without approval of the court. D u r i n g the pendency of
the action, any sale of shares of the complaining stockholder shall be approved
by the court. If the court determines that the interest of the stockholders or
members w i l l be substantially affected by the discontinuance, compromise or
settlement, the court may direct that notice, by publication or otherwise, be
given to the stockholders or members whose interests it determines w i l l be so
affected.
RULE 9
MANAGEMENT COMMITTEE
S E C T I O N 1. Creation of a management committee. — As an incident to any of
the cases filed under these Rules or the Interim Rules on Corporate Rehabilitation,
a party may apply for the appointment of a management committee for the
corporation, partnership or association w h e n there is i m m i n e n t danger of:
(1) Dissipation, loss, wastage or destruction of assets or other properties;
and
(2) Paralyzation of its business operations w h i c h m a y be prejudicial to the
interest of the minority stockholders, parties-litigants or the general public.
SEC. 2. Receiver. — In the event the court finds the application to be
sufficient in f o r m and substance, the court shall issue an order: (a) appointing a
receiver of k n o w n probity, integrity and competence and w i t h o u t any conflict
of interest as hereunder defined to immediately take over the corporation,
partnership or association, specifying such powers as it m a y d e e m appropriate
under the circumstances, including any of the powers specified in section 5 of
this Rule; (b) fixing the bond of the receiver; (c) directing the receiver to m a k e
a report as to the affairs of the entity under receivership a n d on other relevant
makers w i t h i n sixty (60) days from the time he assumes office; (d) prohibiting
the incumbent management of the company, partnership or association
from selling, encumbering, transferring or disposing in any manner any of
its properties except in the ordinary course of business; a n d (e) directing the
payment in full of all administrative expenses incurred after the issuance of the
order.
SEC. 3. Receiver and management committee as officers of the court. — The

receiver and the members of the management committee in the exercise of their
powers and performance of their duties are considered officers of the court and
shall be under its control and supervision.
SEC. 4. Composition of the management committee. — After d u e notice

and hearing, the court may appoint a management committee composed of
Appendix C
three (3) members chosen by the court. In the appointment of the members
of the management committee, the following qualifications shall be taken into
consideration by the court:
(1) Expertise and acumen to manage and operate a business similar

in size and complexity as that of the corporation, association or partnership
sought to be p u t under management committee;
(2) Knowledge in management and finance;
(3) G o o d m o r a l character, independence and integrity;
(4) A lack of a conflict of interest as defined in these Rules; and

(5) Willingness and ability to file a bond in such amount as may be
determined by the court.
W i t h o u t limiting the generality of the following, a member of a management

committee m a y be deemed to have a conflict of interest if:
(1) He is engaged in a line of business w h i c h competes w i t h the

corporation, association or partnership sought to be placed under management;
(2) He is a director, officer or stockholder charged w i t h mismanagement,
dissipation or wastage of the properties of the entity under management; or
(3) He is related by consanguinity or affinity w i t h i n the fourth civil
degree to any director, officer or stockholder charged w i t h mismanagement,
dissipation or wastage of the properties of the entity under management.
SEC. 5. Powers and functions of the management committee. — U p o n assumption
to office of the management committee, the receiver shall immediately render
a report and t u r n over the management and control of the entity under his
receivership to the management committee.
The management committee shall have the power to take custody of
and control assets and properties o w n e d or possessed by the entity under
management. It shall take the place of the management and board of directors
of the entity under management, assume their rights and responsibilities, and
preserve the entity's assets and properties in possession.
Without limiting the generality of the foregoing, the management
committee shall exercise the following powers and functions:
(1) To investigate the acts, conduct, properties, liabilities, and financial
condition of the corporation, association or partnership under management;
(2) To examine under oath the directors and officers of the entity and any
other witnesses that it may deem appropriate;
(3) To report to the court any fact ascertained by it pertaining to the
causes of the problems, fraud, misconduct, mismanagement and irregularities
committed by the stockholders, directors, management or any other person;
(4) To employ such person or persons such as lawyers, accountants,
auditors, appraisers and staff as are necessary in performing its functions and
duties as management committee;
962
(5) To report to the court any material adverse change in the business of
the corporation, association or partnership under management;
(6) To evaluate the existing assets and liabilities, earnings and operations
of the corporation, association or partnership under management;
(7) To determine and recommend to the court the best w a y to salvage
and protect the interest of the creditors, stockholders and the general public,
including the rehabilitation of the corporation, association or partnership
under management;
(8) To prohibit and report to the court any encumbrance, transfer, or
disposition of the debtor's property outside of the ordinary course of business
or what is allowed by the court;
(9) To prohibit and report to the court any payments made outside of the
ordinary course of business;
(10) To have unlimited access to the employees, premises, books, records
and financial documents during business hours;
(11) To inspect, copy, photocopy or photograph any document, paper,
book, account or letter, whether in the possession of the corporation, association
or partnership or other persons;
(12) To gain entry into any property for the purposes of inspecting,
measuring, surveying, or photographing it or any designated relevant object or
operation thereon;
(13) To bring to the attention of the court any material change affecting the
entity's ability to meet its obligations;
(14) To revoke resolutions passed by the Executive Committee or Board
of Directors/Trustees or any governing body of the entity under management
and pass resolution in substitution of the same to enable it to more effectively
exercise its powers and functions;
(15) To modify, nullify or revoke transactions coming to its knowledge

which it deems detrimental or prejudicial to the interest of the entity under
management;
(16) To recommend the termination of the proceedings and the dissolution

of the entity if it determines that the continuance in business of such entity is
no longer feasible or profitable or no longer works to the best interest of the
stockholders, parties-litigants, creditors or the general public;
(17) To apply to the court for any order or directive that it m a y d e e m
necessary or desirable to aid it in the exercise of its powers and performance of
its duties and functions; and
(18) To exercise such other powers as may, from time to time, be conferred
upon it by the court.
SEC. 6. Action by management committee. — A majority of its members shall

be necessary for the management committee to act or m a k e a decision. The
chairman of the management committee shall be chosen by the members from
among themselves. The committee may delegate its management functions as
Appendix C
m a y be necessary to operate the business of the entity under management and

preserve its assets.
SEC. 7. Transactions deemed to be in bad faith. — A l l transactions made by
the previous management and directors shall be deemed fraudulent and are
rescissible if m a d e w i t h i n thirty (30) days prior to the appointment of the
receiver or management committee or d u r i n g their incumbency as receiver or
management committee.
SEC. 8. Fees and expenses. — The receiver or the management committee

and the persons hired by it shall be entitled to reasonable professional fees
and reimbursement of expenses w h i c h shall be considered as administrative
expenses.
SEC. 9. Immunity from suit. — The receiver and members of the management
committee and the persons e m p l o y e d by them shall not be subject to any
action, claim or d e m a n d in connection w i t h any act done or omitted by them
in good faith in the exercise of their functions and powers. A l l official acts
and transactions of the receiver or management committee d u l y approved or
ratified by the court shall render them i m m u n e f r o m any suit in connection
w i t h such act or transaction.
SEC. 10. Reports. — W i t h i n a period of sixty (60) days from the appointment
of its members, the management committee shall make a report to the court
on the state of the corporation, partnership or association under management.
Thereafter, the management committee shall report every three (3) months to
the court or as often as the court m a y require on the general condition of the
entity under management.
SEC. 11. Removal and replacement of a member of the management committee.
— A member of the management committee is deemed removed upon
appointment by the court of his replacement chosen in accordance w i t h Section
4 of this Rule.
SEC. 12. Discharge of the management committee. — The management
committee shall be discharged and dissolved under the following circumstances:
(1) Whenever the court, on motion or motu proprio, has determined that
the necessity for the management committee no longer exists;
(2) By agreement of the parties; and
(3) U p o n termination of the proceedings.
U p o n its discharge and dissolution, the management committee shall
submit its final report and render an accounting of its management within such
reasonable time as the court may allow.
RULE 10
PROVISIONAL REMEDIES
S E C T I O N 1. Provisional remedies. — A party may apply for any of the

provisional remedies provided in the Rules of Court as may be available for the
THE CORPORATION CODE OF THE PHILIPPINES Rules 11-12
964
purposes. However, no temporary restraining order or status quo ordeT shall

be issued save in exceptional cases and only after hearing the parties and the
posting of a bond.
R U L E 11
SANCTIONS
S E C T I O N 1. Sanctions on the parties or counsel. — In any of the following

cases, the court may, upon motion or motu propria, impose appropriate sanctions:
(1) In case the court determines in the course of the proceeding that the
action is a nuisance or harassment suit;
(2) In case a pleading, motion or other paper is filed in violation of Section
7, Rule 1 of these Rules;
(3) In case a party omits or violates the certification required under
Section 4, Rule 2 of these Rules;
(4) In case of unwarranted denials in the answer to the complaint;
(5) In case of willful concealment or non-disclosure of material facts or
evidence;
The sanctions may include an order to pay the other party or parties the
amount of the reasonable expenses incurred because of the act complained of,
including reasonable attorney's fees.
SEC. 2. Disciplinary sanctions on the judge. — T h e presiding judge may, u p o n

a verified complaint filed w i t h the Office of the Court Administrator, be subject
to disciplinary action under any of the following cases:
( 1 ) Failure to observe the special s u m m a r y procedures prescribed in these

Rules; or
(2) Failure to issue a pre-trial order in the f o r m prescribed in these Rules.
R U L E 12
FINAL PROVISIONS
S E C T I O N 1. Severability. — If any provision or section of these Rules is held

invalid, the remaining provisions or sections shall not be affected thereby.
SEC. 2. Effectivity. - These Rules shall take effect on 1 A p r i l 2001 following
its publication in two (2) newspapers of general circulation in the Philippines.
Annex "A" INTERIM RULES OF PROCEDURE GOVERNING 965
Appendix C
Annex "A"
Republic of the Philippines

Judicial Region
Regional Trial Court
Branch
NAME(s) OF PLAINTIFF /S,

Plaintiff/s,
— versus — Case N o .
NAME(s) OF D E F E N D A N T / S ,
Defendant/s.
x x
PRE-TRIAL ORDER
I. S u m m a r y of the Case
II. Preliminary Matters
A. A m e n d m e n t s allowed in the pleadings

B. Rulings on all objections to or comments on admissibility of any
documentary or other evidence
C. Other matters taken up in conference not covered by the subsequent
items and actions taken thereon
I I I . Statement of the Facts
A. Admitted
B. Disputed
1. Version of the Plaintiff
2. Version of the Defendant
IV. Issues to be Resolved
A. Factual
B. Legal
V. Applicable Laws
V I . Evidence for the Parties
A l l evidence to be adduced and presented by both parties shall be
limited to those identified below. A l l documentary evidence have already
been pre-marked and copies thereof, after comparison with the original,
have been given the other party or such party has been given an opportunity
to examine the same in cases w h e n generating copies proves impractical.
The testimonies of the witnesses have all been reduced to affidavit form in
accordance w i t h these Rules and copies thereof given to the other party.
THE CORPORATION CODE OF THE PHILIPPINES Annex"A"
966
No other evidence shall be allowed other than those indicated

below except in accordance with Section 8, Rule 2 of the Interim Rules of
Procedure for Intra-Corporate Controversies.
A. Evidence of the Plaintiff
1. Documentary Evidence
a) Document N o . 1 (Exh. )
(1) Name/Type
(2) Pre-Marking N u m b e r
(3) Summary
(4) Purpose
b) Document N o . 2 (Exh. )
(1) Name/Type
(3) Summary
(4) Purpose
(Additional documentary evidence shall be similarly
presented)
2. Testimonial Evidence
a) N a m e of First Witness
(1) Purpose of the testimony
(2) Estimated length of testimony
b) N a m e of Second Witness
(Additional witnesses shall be similarly presented)
3. Other Evidence
B. Evidence of the Defendant
1. Documentary Evidence
a) Document N o . 1 (Exh. )
(1) Name/Type
(3) Summary
(4) Purpose
b) Document N o . 2 (Exh. )
(1) Name/Type
Annex "A" INTERIM RULES OF PROCEDURE GOVERNING 967
Appendix C
(3) Summary
(4) Purpose
( A d d i t i o n a l documentary evidence shall be similarly

presented)
2. Testimonial Evidence
a) N a m e of First Witness

b) N a m e of Second Witness

( A d d i t i o n a l witnesses shall be similarly presented)

3. Other Evidence
VTI. H e a r i n g Dates
(These hearing dates, w h i c h should be scheduled not later than thirty

(30) days f r o m the completion at the pre-trial, shall be strictly followed
and all postponements by either party shall be deducted from such party's
allotted time to present evidence.)
A. Schedule Plaintiff's Presentation of Evidence
B. Schedule of Defendant's Presentation of Evidence
— oOo —
Appendix D
GUIDELINES IN THE FORMATION AND
ORGANIZATION OF A PRIVATE STOCK
CORPORATION
Under the Corporation Code of the Philippines, five (5) or more persons
not exceeding fifteen (15), all of legal age, a majority of w h o m are residents
of the Philippines, may form a private stock corporation by filing w i t h this
Commission, articles of incorporation in any of the official languages (Filipino
or English) in triplicate, duly signed and acknowledged by all the incorporators
before a notary public. The articles of incorporation must contain, substantially
the following matters:
(1) The name of the corporation, w h i c h must contain the w o r d
"Incorporated," "Inc." or "Corporation." Such name must not be identical or
deceptively or confusingly similar to the f i r m name, business name, trade name
or style of another person, f i r m or entity. Likewise, it must not be contrary to
existing laws. In this connection, the Commission, as a matter of policy, requires
the submission, together w i t h the articles of incorporation, of a statement
signed by at least a majority of the incorporators, to the effect that they are
willing to change the corporate name in the event that another person, f i r m or
entity has a prior right to the use of an identical or a confusingly similar name;
(2) The purpose or purposes for w h i c h the corporation is to be formed

must be grouped into Primary and Secondary Purposes. The Primary Purpose
must be only one, but the Secondary Purposes m a y be several;
(3) The place where the principal office is to be established w h i c h must be

w i t h i n the Philippines, provided that for purposes of stockholders' or members'
meeting, Metro M a n i l a shall be considered a City or Municipality;
(4) The term of existence w h i c h must not exceed fifty (50) years f r o m and
after the date of incorporation;
(5) The names, citizenship, and residences of the incorporators. The

incorporators must be natural persons and must not be less than five (5) nor
more than fifteen (15), a majority of w h o m must be residents of the Philippines.
Each of the incorporators of a stock corporation must o w n or a subscriber to
at least one (1) share of the capital stock of the corporation. If there are alien
incorporators, a certificate of the M u n i c i p a l Treasurer of the place of residence
of such aliens showing that he has verified their alien certificates of registration
and the number and dates of issue and renewal of each certificate, together
968
GUIDELINES IN THE FORMATION AND ORGANIZATION 969
OF A PRIVATE STOCK CORPORATION
Appendix D
w i t h the i m m i g r a n t certificate of residence of said alien incorporators and

subscribers must be submitted.
(6) The names and addresses of the incorporating directors which must
not be less than five (5) nor more t h a n fifteen (15) and at least majority are
residents of the Philippines.
(7) The authorized capital stock, the number of shares into which it is
divided, the par value of such shares, in l a w f u l money of the Philippines, if the
shares have par value; otherwise, only the number of shares need be stated.
W i t h respect to capital stock, the shares m a y be divided into classes or
series of shares or both, any of w h i c h classes or series of shares m a y have
such rights, privileges or restrictions, as m a y be provided for in the articles of
incorporation: Provided, That no share m a y be deprived of voting rights except
preferred or redeemable shares: And provided further, That there shall always be
a class or series of shares w h i c h have complete voting rights. A n y or all of the
shares m a y have a par value or have no par value, as provided in the articles
of incorporation. Shares of stock w i t h o u t par value m a y not be issued for a
consideration less than P5.00 per share.
(8) The amount subscribed by the subscribers, w h i c h must be at least

25% of the authorized capital stock. The names, addresses, and the respective
amounts subscribed and paid by them must be also stated. The total amount
p a i d on account of subscriptions except where the capital stock consists of no
par value shares, in w h i c h case, the subscriptions must be fully paid.
(9) The name of the Treasurer elected by the subscribers authorized to
receive for and in the name and for the benefit of the corporation all subscriptions
paid or given by the subscribers.
(10) For corporations which w i l l engage in any business reserved for
Filipino citizens, the following provision shall be included:
" N o transfer of interest w h i c h w i l l reduce the ownership of Filipino
citizens to less than the required percentage of the capital shall be allowed
or permitted to be recorded in the proper books. This restriction shall be
printed in all the stock certificates of the corporation."
(11) An affidavit of the treasurer of the corporation must be attached to
the articles of incorporation showing that at least 25% of the authorized capital
stock has been subscribed and at least 25% of the subscription has been paid in
cash a n d / o r property, the fair valuation of which is equal to or at least 25% of
the said subscription.
As regards the paid-up capital which must not be less than five thousand
pesos (P5,000.00), if the same is in cash, the sum must be deposited with a
bank in the name of the proposed corporation, or in the name of the Treasurer
in trust for the corporation, and a bank certificate, in accordance with the
prescribed form, executed under oath by a responsible officer of the bank must
be submitted to the Commission. A letter of authority, also in accordance with
the prescribed form, executed by the treasurer of the corporation authorizing
this Commission to examine not only the bank deposit, but also its books of
970 THE CORPORATION CODE OF THE PHILIPPINES
accounts and supporting records to determine the existence and utilization of

the paid-up capital must likewise be submitted. This letter of authority shall be
binding upon the corporation even if there is a change of corporate officers.
If the paid-up capital consists of property, verification of its ownership,
physical existence, and reasonableness of the valuation at w h i c h it is being
transferred to the corporation is made by the Commission. Documents to
support ownership such as original /transfer Certificate of Title, and Tax
Declaration with respect to land, certificate of registration w i t h respect to motor
vehicles and motor vessels, and other documents to support the ownership
of the properties are required to be submitted. If any of the properties used
as paid-up capital is mortgaged or otherwise encumbered, written consent of
the mortgagee is necessary. If the transfer value of the property is higher than
cost or assessed value, an appraisal report prepared by a licensed appraiser is
required.
If a going concern like a single proprietorship or partnership is being

converted into a corporation, financial statements d u l y certified by an
independent Certified Public Accountant, as w e l l as the long f o r m audit report
of the certifying CPA is required. Likewise, written consent of creditors must be
submitted.
A deed of assignment executed by the owner, proprietor, or partners in case

of partnership, transferring the properties, as w e l l as other assets and liabilities
in favor of the corporation is required. The D e e d of Assignment covering real
estate properties must be presented for p r i m a r y entry to the Register of Deeds
where the property is located.
A Statement of Assets and Liabilities, in accordance w i t h the prescribed

form, executed under oath by the Treasurer of the corporation is required to be
attached to the incorporation papers.
The Securities and Exchange Commission shall immediately after the filing
of the articles of incorporation publish at the expense of said Corporation, the
assets and liabilities of the same once in a newspaper of general circulation in
the locality where the corporation is domiciled, if any or, in default thereof, in a
newspaper of general circulation in M e t r o M a n i l a .
The Commission m a y require such other documents to support the

ownership and valuation of the properties being used as paid-up capital. (SEC
Quarterly Bulletin, N o . 3, Sept. 1982, pp. 72-75.)
Note: To expedite the registration of the corporation, the services of the

new "express lane" project of the Commission m a y be availed of. Printed forms
of articles of incorporation and by-laws of stock and non-stock corporations
are available at the Commission at a nominal cost only. U n d e r this project,
applications for registration are processed and approved w i t h i n a period of one
day.
— oOo —
Appendix E
GUIDELINES FOR
I. INFORMATION AND ORGANIZATION

(1) Verification Slip. — As in stock corporations, the Securities and
Exchange Commission likewise requires that verification slip regarding the
proposed corporate n a m e should be submitted, (see note 3 to Sec. 10.)
(2) Articles of Incorporation. — A non-stock, non-profit corporation may
be formed by filing w i t h the Commission articles of incorporation executed
by five or more persons not exceeding 15, majority of w h o m are residents of
the Philippines, attested by t w o witnesses and acknowledged before a notary
public. Said articles must contain the following:
(a) Name of Corporation. — A w r i t t e n undertaking to change the
corporate name in the event that another person, f i r m , or entity has
acquired a prior right to the use of said name or one similar to it, must be
submitted by the corporation, through its authorized representative.
(b) Purpose. —
1) Non-stock corporations m a y be formed or organized for
charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or similar purposes,
like trade, industry, agricultural and like chambers, or any combination
thereof pursuant to Section 88 of the Corporation Code.
2) Non-stock corporations have no secondary purposes.
3) A non-stock corporation may not include a purpose which
changes or contradicts its nature as such, pursuant to Section 14 of the
Corporation Code.
(c) Place of Principal Office. — The principal office of the corporation
must be stated in the articles of incorporation pursuant to Section 14 of the
Corporation Code.
(d) Term of Existence. — The term of existence shall be for 50 years from
the date of incorporation in accordance w i t h Section 11 of the Corporation
Code.
(e) The names, citizenships, and residences of incorporators. — The
incorporators must be natural persons and must not be less than five nor
971
more than 15, all of legal age and majority of w h o m are residents of the
Philippines.
(f) Board of Directors or Trustees. — The number of directors or
trustees, which shall not be less than five nor more than 15. The names,
nationalities, and residences of the persons w h o shall act as directors or
trustees until the first regular directors or trustees are elected and qualified
in accordance w i t h the Corporation Code should likewise be stated.
(g) The amount of its capital, the names, nationalities and residences
of the contributors and the amount contributed by each.
(h) The statement that "the present members are those whose names
appear in the attached list and that the SEC shall be furnished w i t h the
names of additional members as may be admitted f r o m time to time."
(i) The name of the treasurer elected by the members of the association
w h o is authorized to receive for and in the name of the association all dues
and fees from the members.
(3) Attachments to the Articles of Incorporation of Non-stock Corporations:
(a) List of members w i t h their respective n o r m a l signatures as
certified by the Secretary.
(b) Modus operandi w h i c h is the statement d u l y signed by the
members explaining in specific details the w a y s and means of achieving
its objectives or purposes.
(c) Written undertaking to change the corporate name.
(d) Resolution of the Board of Directors that the corporation shall
comply w i t h the SEC requirements for non-stock corporation dated M a y
24,1963.
(e) Registration D a t a Sheet signed by an authorized representative of

the corporation summarizing in statistical data f o r m the important data of
the corporation such as name, principal office, incorporators, contributions
1
and T A N . (SEC Bulletin, Oct. 1982, p. 7.)
II. OPERATION
In connection w i t h the operation of the association, the following must be

complied w i t h :
(1) The corporation must have a book of membership w h i c h shall indicate

the names, addresses, and signatures of the members.
The by-laws shall provide the procedure for acquiring membership therein.
In substance, it should require every person desirous of joining the association
to file an application for membership w h i c h must be approved by the board of
directors. Every application for membership d u l y approved must be properly
kept on file.
'Taxpayer Account Number, now TIN (Taxpayer Identification Number).

GUIDELINES FOR NON-STOCK CORPORATIONS 973
Appendix E
(2) It must have the proper books of accounts and other necessary records,
such as:
(a) Cash book. — w h i c h must show all receipts and disbursements,

specifying each item, nature, and in the case of disbursements, the purpose
thereof.
(b) General journal. — w h i c h must contain a record of non-cash

transactions.
(c) Ledger book. — w h i c h must contain a summary of transactions

recorded in the cash book and general journal.
(d) Minute book. — w h i c h must e m b o d y a complete record of the

proceedings of all meetings of the board of directors and of the members
of the association.
A l l such books w h i c h the association w i l l use must first be submitted to the

Commission for certification and stamping, and the same shall be the only ones
utilized by the corporation.
(3) A n y resolution requiring contribution or fees from the members must

indicate the purpose for w h i c h the funds are used, the necessity therefor, and
the manner in w h i c h the same shall be spent.
(4) As regards its funds, the corporation shall comply w i t h the following:
(a) It shall issue official receipts for all funds received by it.
(b) A n y amount received in excess of P100.00 shall be deposited in
behalf of the corporation w i t h a reputable banking institution.
(c) The treasurer of the corporation shall post a bond in such sum
and w i t h surety as m a y be approved by the board of directors.
(d) A l l disbursements must be duly evidenced by appropriate
vouchers which must specify the purpose and nature thereof.
(5) The corporation shall prepare an annual report of its activities
showing, among others, the funds received during the preceding year, the
purposes for w h i c h the same were spent, and the cash position of the company
as of the date of the report. T w o signed copies of such report shall be furnished
this Commission, and the same or at least the substance thereof, particularly
the financial aspects must be sent out or made k n o w n to the members.
(6) In no instance shall the corporation open any branch office in the
suburbs or in the provinces without the consent of the Commission first had
and secured.
(7) Within fifteen (15) days after the annual meeting electing the new
officers and members of the board of directors of the corporation, the Secretary
or any officer shall submit to the Commission, the names and addresses of
the new officers and members of the board of directors. Should an officer or
director die, resign or in any manner cease to hold office, the Secretary or any
officer of the corporation shall report immediately such fact to the Commission.
A n y officer or director w h o has resigned or has ceased to hold office, shall be
974
deemed to continue holding his position until the Commission shall have
received information or notice of his resignation or withdrawal.
It shall be understood that for the purpose of carrying out all of the
foregoing requirements, representatives of the Commission m a y at any time
look into the affairs and inspect the books of accounts and other records of the
association. It shall also be understood that the Commission may require the
corporation to submit appropriate reports to show the progress of its operations
and its actual status.
Finally, it shall be understood that the violation of, or non-compliance w i t h ,
any of the aforesaid requirements shall subject the offender to such penalties
as the Commission may impose under Republic Act N o . 1143, the pertinent
provisions of which read as follows:
"(b) To penalize any violation of or non-compliance w i t h any terms or

conditions of any certificate, license, or permit issued by the Commission
or of any order, decision, ruling or regulation thereof, by a fine of not
exceeding two hundred pesos per day for everyday d u r i n g w h i c h such
violation or default continues; and the Commission is hereby authorized
and empowered to impose and collect such fine after due notice and
hearing."
(8) The following supporting papers shall be submitted w i t h the articles

of incorporation of a non-stock corporation:
(a) Letter of undertaking addressed to the Commission signed by at
least a majority of the incorporators or by a d u l y authorized representative,
to the effect that the association w i l l change its corporate n a m e in the event
another person, firm or entity has acquired a prior right to use the same
name or one similar to it (3 copies);
(b) Modus operandi or a detailed explanation as to h o w the association

shall carry out its objectives signed by at least a majority of the incorporators
or by a duly authorized representative (3 copies);
(c) Resolution of the Board signed by at least a majority of the

Directors or certified under oath by the Secretary in the following tenor (3
copies) to wit:
"RESOLVED, that the corporation or association w i l l comply w i t h

the S.E.C. R E Q U I R E M E N T S F O R N O N - S T O C K C O R P O R A T I O N
dated M a y 24,1963, in the course of its operation."
(d) List of members of the association containing their m a n u a l

signatures and attested by the Acting Secretary. If the incorporators are the
present members so far, state such fact in w r i t i n g and further state that the
list of additional members w h o w i l l be admitted in accordance w i t h the
by-laws of the association shall be submitted to the Commission f r o m time
to time (3 copies). (SEC Quarterly Bulletin, No. 3, Sept. 1982, pp. 77-79.)
(e) Registration Data Sheet; and
GUIDELINES FOR NON-STOCK CORPORATIONS 975
Appendix E
(f) List of contributions and amounts they respectively contributed

duly certified under oath by the Treasurer. (SEC Opinion, Aug. 22,1989.)
(9) The following amounts must be paid to the Commission as registration
2
fees:
(a) Articles of Incorporation — P100.00;
(b) By-laws, if filed simultaneously with the articles — P100;
(c) Legal Research fee — P20.00. (Ibid.)
— 0O0 —
Appendix F
GUIDELINES FOR
QUASI-REORGANIZATION
A. Guidelines or conditions for approval of quasi-reorganization:

(1) That only companies which are financially in distress, m a y be allowed
to undergo quasi-reorganization.
(2) That the company has substantial increment in the market value of its
fixed assets as appraised by a reputable licensed appraiser w h i c h is adequate to
absorb its accumulated past losses.
(3) That the appraisal increment to be considered in the p l a n shall
be limited to real properties, permanently installed fixed assets, and other
machineries and equipment directly needed and actually used in the operations
of the company.
(4) That the appraisal increment of fixed assets undergoing repair or w i l l
require before either same can be put into productive use shall not be included
in the appraisal of assets for purposes of quasi-reorganization.
(5) That the company shall present a project study on its future operations
to support its quasi-reorganization.
(6) That the remaining appraisal surplus set up in the books of the
company after the deficit shall have been offset w i l l not be used to w i p e
out losses that may be incurred in the future w i t h o u t prior approval of the
Commission.
(7) For purposes of dividend declaration, the retained earnings of the

company shall be restricted to the extent of the deficit w i p e d out (and not
recovered by accumulated depreciation on appraisal increment by the appraisal
surplus).
(8) That after the quasi-reorganization of the company has been effected
and approved by the Commission, the company shall disclose in all its financial
statements for a m i n i m u m period of three (3) years the mechanics, purpose and
effect of such quasi-reorganization on the financial condition of the company.
B. Documents
(1) A corporation which proposes to reorganize and meets the above
conditions must submit the following:
976
GUIDELINES FOR QUASI-REORGANIZATION 977
Appendix F
(a) An appraisal report rendered by a d u l y licensed appraiser cover-

ing the corporate assets specified in Item A N o . 3 of the above G U I D E -
L I N E S , together w i t h supporting schedules showing the details of such
properties and their costs, book values, appraised values, sound values
and appraisal increment as w e l l as the estimated remaining useful life of
each of the depreciable properties appraised.
(b) A project study on the company's future operations showing

the yearly projected balance sheets, income statements and cash flow
statements for a m i n i m u m period of five (5) years starting from the year
immediately following the application for quasi-reorganization.
(c) The latest audited financial statements of the corporation prior to
the write-off of the existing deficit, together w i t h the longform audit report
of the certifying a u d i t o r / s .
(d) A list of directors a n d officers of the corporation as of the present
date, d u l y certified by the corporate Secretary. (SEC Quarterly Bulletin, No.
3, Sept. 1982, pp. 6-7; SEC Opinion, May 15,1982.)
— oOo —
Appendix G
CONSOLIDATED SCHEDULE OF FEES

AND CHARGES
( S E C M E M O . C I R . N O . 9 , M A Y 20, 2004)
As approved by the Commission en banc, hereunder is the list of all the

fees and charges to be imposed and collected by the Securities and Exchange
Commission.
In addition to the Registration Fee, there shall be a Legal Research Fee
equivalent to one percent (1%) of the Filing Fee but not les than Ten pesos
(P10.00).
C o m p a n y Registration a n d M o n i t o r i n g D e p a r t m e n t
Application Filing Fee

1. Articles of Partnership 1 / 5 of 1% of the Partnership's capital
but not less than P1,000.00
2. Increase of capital of partnership 1 / 5 of 1% of the increase in capital

but not less than P1,000.00
3. A m e n d e d Articles of Partnership P1,000.00

4. Deed of Assignment of Partner- P500.00
ship Interest
5. Articles of Dissolution of Part- P500.00

nership
6. Affidavit of Withdrawal of P500.00

Partner
7. Articles of Incorporation
a. Stock corporation w i t h par 1 / 5 of 1% of the authorized capital

value stock or the subscription price of the
subscribed capital stock whichever is
higher but not less than P1,000.00
978
CONSOLIDATED SCHEDULE OF FEES AND CHARGES 979
Appendix G
b. Stock corporation w i t h o u t 1 / 5 of 1% of the authorized capital

par value stock computed at P100.00 per share
stock or the subscription price of the
8. Articles of Incorporation of N o n - P500.00
stock corporation
9. By-laws of both stock and non- P500.00

stock corporation
10. A m e n d e d Articles of Incorpora- P500.00

tion of both stock and non-stock
corporation
11. A m e n d e d Articles of Incorpora- 1 / 5 of 1% of the authorized capital

tion where amendment consists stock but not less than P2,000.00
of extending the term of corpo-
rate existence
12. A m e n d e d Articles of Incorpora- P2,000.00

tion Re: Conversion/Reclassifi-
cation of shares
13. A m e n d e d by-laws of both stock P500.00

and non-stock corporation
14. Increase of Capital Stock
a. Corporation w i t h par value 1 / 5 of 1% of the increase in capital

stock or the subscription price of the
higher but not less P1,000.00
b. Corporation without par 1 / 5 of 1% of the increase in capital

value stock computed at P100.00 per share
or the subscription price of the sub-
scribed capital stock whichever is
15. Decrease of Capital Stock

a. Return of Capital P3,000.00
b. A l l others P2,000.00
16. Certificate of incurring, creating, 1 / 1 0 of 1% of the total indebtedness

increasing bonded indebtedness but not less than P500.00
17. Merger or consolidation of cor- 1 / 5 of 1% of the equity of the ab-

porations sorbed corporation/s but not less
than P3,000.00
980
a. In merger, in case of simul- Filing fee for increase in Capital stock

taneous filing of application (refer to item 14 above) or the fil-
for increase of authorized ing fee for Merger (refer to item 17
capital stock by the surviv- above) whichever is higher
ing corporation
b. In consolidation where the 1 / 5 of 1% of total equity of the con-
total equity of constituent stituent corporation or the filing fee
corporations is different for Articles of Incorporation (refer to
from the authorized capital item 7 above) whichever is higher
of the consolidated corpora-
tion
18. Valuation of consideration for 1 / 5 of 1% of the amount of shares of
shares of stock stock to be issued but not less than
P2,000.00
19. Equity restructuring

a. to wipe out existing deficit P3,000.00
b. to create additional paid-in 1 / 5 of 1% of the amount infused but

capital not less than P1,000.00
20. Stock/Cash dividend of up to P500.00

P50,000,000.00 declared by the
corporation whose securities are
not listed.
2 1 . Stock/Cash dividend of over P1,000.00

P50,000,000.00 declared by the
corporation whose securities are
not listed
22. Property D i v i d e n d Declaration 1 / 5 of 1% of the amount infused but

not less than P1,000.00
23. Application under the Foreign P2,000.00
Investment Act (aside f r o m the
filing fee for articles of incorpo-
ration)
24. Application of Stock Foreign 1 % of the actual i n w a r d remittance of

Corporations: the corporation converted into Phil-
a. branch office ippine currency but not less than
P2,000.00
b. representative office 1 / 1 0 of 1% of the actual i n w a r d re-
mittance of the corporation convert-
ed into Philippine currency but not
less than P2,000.00
Appendix G
25. Application of Non-Stock For- P2,000.00

eign Corp.
26. Application for Area or Regional P5,000.00

Headquarters
27. Application for Regional Oper- 1% of the actual remittance but not
ating Headquarters or petition less than 1% of peso equivalent of
for Conversion of an A r e a or $200,000 at the time of remittance
Regional Headquarters into a
Regional Operating H e a d q u a r -
ters.
28. Petition for A m e n d m e n t of P2,000.00

License of a foreign corporation
29. Cancellation of license of a for- P2,000.00

eign corp.
30. Cancellation of license of Re- P1,000.00

gional Headquarters of multina-
tional corporation
31. Cancellation of license of Re- P2,000.00

gional Operating Headquarters
of M u l t i n a t i o n a l C o m p a n y
32. A p p o i n t m e n t of a Resident P1,000.00

Agent or Substitute Resident
Agent
33. Revocation of A p p o i n t m e n t of P1,000.00

Resident Agent or Substitute
Agent
34. A m e n d e d Articles of Incorpora- P1,000.00

tion of a Foreign Corporation
35. A m e n d e d By-Laws of a Foreign P1,000.00

Corporation
36. Recording of Deed of Assign- P300.00

ment of Shares of Stock
37. Petition to set aside Order of P1,000.00
Suspension / Revocation
38. Petition for Correction in A r t i - P1,000.00
cles of Incorporation, By-laws or
amendments thereto
39. Certification on Corporate Infor- P300.00
mation, recording of deed of as-
signment of stock
40. Certificate of company status P500.00
41. Certification of paid-up capital, P400.00

Outstanding capital, Percentage
of Filipino stockholdings, etc.
42. Accreditation of Appraisal C o m - P5,000.00
panies
43. Registration fee for Stock and P150.00
Transfer Book
44. Registration fee for Membership P75.00
Book
45. N a m e Verification/Reservation P40.00 per allowed name
Fee
Corporation Finance D e p a r t m e n t

1. Registration Statement Not more than P500 Million worth of se-
(Registration of equity securi- curities:
ties, commercial papers or debt
0.10% of the m a x i m u m aggregate
securities, proprietary or non-
price of the securities to be offered
proprietary shares or member-
ships, warrants and options) More than P500 Million but not more
than P750 Million;
P500,000 plus 0.075% of the excess
over P500 M i l l i o n
More than P750 million but not more

than PI Billion:

More than PI Billion:
over P I Billion
(in case of options or warrants which have
no issue value: Minimum of P50,000.00
in addition to the fees which may be due
on the underlying shares)
2. Voluntary Revocation of Securi- P5,000.00
ties under SRC Rule 13
CONSOLIDATED SCHEDULE OF FEES AND CHARGES
983
Appendix G
3. A m e n d e d Registration State- P10,000.00

ment in accordance w i t h SRC
In case of an increase in offering price:
Rule 14
1 / 1 0 of 1% of the amount of differ-
ence between the highest aggregate
amount per old range and the total
amount based on new volume or
price.
4. Confirmation for exemption u n - 1 / 1 0 of 1% of the aggregate value of

der Section 10.1 of the Securities the securities to be sold or issued
Regulation Code (SRC)
5. Request for exemption under 1 / 1 0 of 1% of the aggregate value of

Section 10.2 of the Securities the securities to be sold or issued
Regulation Code
6. Request for exemptive relief u n - P5,000.00

der Section 72.2 of the SRC Rule
19
7. Accreditation of External A u d i - P2,000.00

tor (Original and Renewal)
8. Accreditation of an A u d i t i n g P5,000.00
F i r m (Original and Renewal)
9. Accreditation of Credit Rating Original application:

Agency
P50,000.00
Annual fee:
P10,000.00
10. Original Application for a Cer- 1 / 1 0 of 1% of the amount of Paid-up

tificate of Authority to operate capital stock
as a Financing Company ( H e a d
Office and each Branch)
11. A n n u a l Fee ( H e a d and Branch 1 / 8 of 1% of the required paid-up

Office) capital stock
12. Registration as Investment C o m - P5,000.00
pany
13. Other Filings
a. Information Statement filed P5,000.00
by the registrant (SEC Form
20-IS)
b. Information Statement filed P2,000.00
by a person other than Reg-
istrant under SRC Rule 20
984
c. Tender Offer Statement Not more than P500 Million worth of

(SEC Form 19-1) and other Securities:
appropriate filings under 0.10% of the m a x i m u m aggregate
Section 21 of the SRC price of the securities to be offered
More than P500M million but not more
than P750 Million:
P500,000.00 plus 0.075% of the excess
More than P750 Million but not more
than PI Billion:
More than PI Billion:
over P I Billion
d. Listing Fee P2,500.00
e. Annual Information State- P10,000.00

ment of Exempt Commer-
cial Paper Issuer (SEC F o r m
85-18-1)
f. Certification Fee P300.00
N o n - T r a d i t i o n a l Securities a n d Instruments D e p a r t m e n t
A. Registration/Licensing of Securities
1. N e w and Additional 1 / 1 0 % of 1% of the m a x i m u m aggre-
gate price at w h i c h the securities are
proposed to be offered
2. Petition for Price Increase P2,500.00
3. Petition for amendment of Reg- P2,500.00
istration Statement/contracts/
all applications
4. Petition for release of balance P2,500.00

5. Petition for cancellation of regis- P2,500.00
tration
6. Petition for suspension and / o r P2,500.00

cancellation of permit to sell
Appendix G
B. Dealer/Branch/Salesmen/General Agent
1. N e w
1.1 Dealer
a. H e a d Office P10,000.00
b. Branch Office
1) Within Metro P5,000.00

Manila
2) Outside M e t r o P2,500.00
Manila
1.2 General Agent P5,000.00
1.3 Salesman
a. Dealer P200.00
b. General Agent P200.00

2. Renewal
2.1 Dealer
b. Branch Office
1) Within Metro P2,500.00

Manila
2) Outside M e t r o Pl,500.00
Manila
2.2 General Agent P2,500.00
2.3 Salesman P200.00
3. Closure of Branch Office P1,000.00

C. Others
1. A p p r o v a l of Trust Agreement P2,500.00
2. Accreditation of Pre-need Actu- P1,000.00

aries
3. Certifications P300.00
4. Accreditation of Pre-need Exter- P2,000.00
nal Auditors (Sec. 6.3 of SEC MC
N o . 13, series of 2003)
D. Alternative Trading System (ATS)
1. Registration and Licensing of
the system or renewal
986
1.1 Alternative Trading System P50,000.00
1.2 Semestral Transaction Fee

a. For first two (2) bil- 1/300 of 1 %
lion of the aggregate
amount of the sales of
securities transacted
on such ATS during the
preceding semester
b. For the next two (2) 1 / 2 0 0 of 1 %
billion
c. Onwards 1 / 1 0 0 of 1 %
2. Application for exemption u n - P5,000.00

der ATS
3. Certification under ATS P300.00
M a r k e t Regulation D e p a r t m e n t
A. Registration/Licensing
1. N e w
1.1 Broker-Dealer
a. H e a d Office psaooo.oo
b. Branch piaooo.oo
1.2 Broker
1.3 Dealer
1.4 Salesperson P2,000.00
1.5 Associate Person P3,000.00
1.6 Investment C o m p a n y
Adviser
1.7 Certified investment 2004 - P945.00
Distributor / Salesperson /
2005 - Pl,420.00
Certified Investment
Solicitor 2006 - P2,125.00
Appendix G
1.8 Investment H o u s e s /
Underwriters of Securities/
Government Securities
Eligible Dealers
b. Branch P10,000.00
1.9 Investment H o u s e s /
Underwriters of Securities
Dealing in G o v e r n m e n t
Securities
b. Branch piaooo.oo
1.10 Associated Person P1,000.00
1.11 Transfer Agents P10,000.00
1.12 Stock Exchange P50,000.00
a. A d d i t i o n a l fees 1 / 1 0 0 t h of 1% of the aggregate

amount of securities transacted dur-
ing the preceding calendar year
1.13 Clearing Agencies and

Central Depositories
a. A d d i t i o n a l Fees P50,000.00
2. Renewal
2.1 Broker-Dealer
b. Branch P5,000.00
2.2 Broker
a. H e a d office P10,000.00
2.3 Dealer
a. H e a d Office piaooo.oo
2.4 Salesperson P1,000.00
2.5 Associated Person Pl,500.00
2.6 Investment Company

Adviser
988
2.7 Certified Investment 2004 - P650.00

Distributor / Salesperson / 2005 - P815.00
Certified Investment
Solicitor 2006 - Pl,015.00
2.8 Investment Houses/

Underwriters of Securities/
Government Securities
Eligible Dealers
a. H e a d office P20,000.00
b. Branch P5,000.00
2.9 Investment Houses/

Underwriters of Securities
Dealing in Government
Securities
b. Branch P5,000.00
2.10 Associated Person P500.00
2.11 Transfer Agents P3,000.00
B. Others
1. Additional Listing of PSE shares P10,000.00
2. Listing Fee for PSE Shares 1 / 1 0 of 1% of the number of shares

to be listed x placement fee
3. Certification P300.00
Economic Research and Information Department
A. Preparation of statistical reports, company listings and

related information on SEC-registered entities
Application Service Charge/Fee
1. Computer usage / processing P2.00 per m i n u t e
time
2. Special program fee for institu- P500.00 per transaction

t i o n a l / i n d i v i d u a l researchers
3. H a r d copy of documents w i t h P5.00 per page
list containing various informa-
tion such as address, industry
classification, equity structure,
etc.
Appendix G
4. Soft copy of documents w i t h list

containing various information
such as address, industry clas-
sification, equity structure, etc.
a. C D - R W media PIOO.OO per piece
b. 1.44 MB floppy diskette P50.00 per piece
B. SEC Publication
1. SEC Bulletin P150.00 per copy
Human Resource and Administrative Department

Application Service Charge/Fee
1. Public Reference U n i t Service P20.00 per transaction
Charge
2. Reproduction of Documents Plain M i c r o f i l m Authenticated

Copy Copy
a. Articles of Incorporation PIOO.OO P150.00
b. By-Laws PIOO.OO P150.00
c. General Information Sheet P25.00 P50.00
d. Increase in Capital Stock P50.00 PIOO.OO
e. Resolution P15.00 P50.00
f. Secretary's Certificate P15.00 P50.00
g. Board Resolution P15.00 P50.00
h. Registration Data Sheet P25.00 P50.00
i. Deed of Assignment P15.00 P50.00
j. Borrowing fee for hard Reproduction Cost (Xerox) plus

copy ( P R U paper copy not P50.00/document
available in microfilm or
CD)
3. Reproduction of documents not P5.00/page plus P20.00/corporation

mentioned in item 2 above.
4. Authentication of documents P5.00/page plus P20.00/documents
not mentioned in item 2 above.
- oOo -
Appendix H
CONSOLIDATED SCALE OF FINES

(SEC M E M O . C I R . N O . 6, S E P T . 22, 2005)
The Commission resolved to approve the following revised administrative

penalties for each specified violation of the Securities Regulation Code (SRC)
and its A m e n d e d Implementing Rules and Regulations (IRR), Investment
Company Act ( I C A ) and I C A Rule 35-1, Pre-Need Rules, and the Financing
Company Act and its Implementing Rules:
SRC/IRR Description First Second Third

Provisions Offense Offense Offense
Sections 8 and SELLING OR OF- 1% of the 2% of the 6% of the
12; SRC Rules FERING FOR SALE amount amount amount
8&12 OR DISTRIBUTION of each of each of each
OF SECURITIES transaction transaction transaction
TO THE PUBLIC or P10,000 or P20,000 or P60,000
WITHOUT PRIOR per per per
REGISTRATION OR transaction, transaction, transaction,
PERMIT TO SELL whichever is whichever is whichever is
higher. higher. higher.
Section 10; LATE FILING P2,000 plus P4,000 plus P600 per day
SRC Rule 10.1 OF NOTICE OF P100 per day P200 per day. of delay
EXEMPTION of delay of delay
PURSUANT TO
SRC RULE 10.1 (k
&1)
For listed
companies:
P10,000 plus P20,000 plus P60,000 plus
P100 per day P200 per day P600 per day
of delay of delay of delay
990
CONSOLIDATED SCALE OF FINES 991
Appendix H
NON- PiaOOO plus P20,000 plus P60,000 plus

COMPLIANCE P100 per day P200 per day P600 per day
WITH THE of delay of delay of delay
DISCLOSURE
REQUIREMENTS
UNDER SRC RULE
10.1
Section 14; FAILURE

SRC Rule 14 TO AMEND
REGISTRATION
STATEMENT IN
ACCORDANCE
WITH SRC RULE 14
Change in the P10,000 plus P20,000 plus P60,000 plus

Qualitative Terms P100 per day P200 per day P600 per day
and Conditions of the of delay of delay of delay
Securities including
work program or use
of proceeds
Increase in the 1% of the 2% of the 6% of the

number of shares or amount of amount of amount of
offering price per each sale in each sale in each sale in
share (in excess of excess of the excess of the excess of the
the price range, if authorized authorized authorized
any) shares or shares or shares or
price, or price, or price, or
P10,000 per P20,000 per P60,000 per
transaction, transaction, transaction,
whichever whichever whichever
is higher, is higher, is higher,
plus P100 plus P200 plus P600
per day of per day of per day of
delay of the delay of the delay of the
riling of the filing of the filing of the
amendment amendment amendment
FAILURE TO P10,000 plus P20,000 plus P60,000 plus

TIMELY PUBLISH P100 per day P200 per day P600 per day
THE NOTICE OF of delay of delay of delay
AMENDMENTS
FAILURE 5% of the 15% of the 30% of the
TO REFUND amount amount amount
INVESTMENT of the of the of the
(In case of unrefunded unrefunded unrefunded
derogation of rights investment amount plus amount plus
of purchasers due to plus P100 P200 per day P600 per day
the amendments) per day of of delay of of delay of
delay of the the refund the refund
refund
992
Section 17.1;' LATE FILING OF Reprimand / P30,000 plus P40,000 plus

SRC Rule 17.1 CURRENT REPORT Warning P200 per day P400 per day
(SEC. FORM 17-C) of delay of delay
INCOMPLETE Reprimand/ PiaOOO plus P2a000 plus

CURRENT REPORT Warning P200 per P400 per
(SEC FORM 17-C) day of delay day of delay
This shall be in of filing the of filing the
addition to the amended amended
penalty for late filing report report
of the report per
due date under the
Rules.
LATE FILING Reprimand/ P50,000 plus P60,000 plus
OF QUARTERLY Warning P300 per day P600 per day
REPORT (SEC of delay of delay
FORM 17-Q)
INCOMPLETE Reprimand/ P20,000 plus P40,000 plus

QUARTERLY Warning P300per P600per
REPORT (SEC day of delay day of delay
FORM 17-Q) of filing the of filing the
This shall be in amended amended
addition to the report report
penalty for late filing
of the report per
due date under the
Rules.
LATE FILING OF Reprimand/ PlOaOOO plus P200,000
ANNUAL REPORT Warning P500 per day plus P1,000
(SEC FORM 17-A) of delay per day of
delay
ANNUAL REPORT Warning P500 per P1,000 per
(SEC FORM 17-A) day of delay day of delay
This shall be in of filing the of filing the
penalty for late filing report report
of the report per
due date under the
Rules.
Section 17.1; LATE FILING OF P10,000 plus P20,000 plus P50,000 plus
SRC Rule 17.1 THE NOTICE OF P100 per day P200 per day P600 per day
SUSPENSION TO of delay of delay of delay
FILE REPORTS (SEC
FORM 17-EX)
'See amendment, infra.

Appendix H

OF MONTHLY Warning PI 00 per day P200 per day
REPORT ON of delay of delay
EXEMPT
COMMERCIAL
PAPERS

OF QUARTERLY Warning P100 per day P200 per day
REPORT ON of delay of delay
EXEMPT
COMMERCIAL
PAPERS

OF ANNUAL Warning P200 per day P400 per day
INFORMATION of delay of delay
STATEMENT ON
COMMERCIAL
PAPERS AND/
OR PAYMENT
OF ANNUAL
EXEMPTION FEE
Section 18; LATE FILING OF Reprimand / 1% of the 2% of the

SRC Rule 18 REPORTS BY 5% OR Warning amount amount
MORE HOLDERS of each of each
OF EQUITY purchase or transaction
SECURITIES (SEC disposition, or P20,000
FORM18-A/18-AS) or P10,000 per
per transaction,
transaction, whichever is
whichever is higher plus
higher plus P200 per day
P100 per day of delay.
of delay.
INCOMPLETE Reprimand/ P10,000 P20,000

REPORTS BY 5% OR Warning plus P300 plus P600
MORE HOLDERS per day of per day of
OF EQUITY delay of the delay of the
SECURITIES (SEC submission submission
FORM18-A/18-AS) of the of the
This shall be in amended amended
addition to the report report
penalty for late filing
of the report per
due date under the
Rules.
994
Section 19.1; LATE FILING OF P50,000 plus PI00,000 plus P200,000

SRC Rule 19.1 TENDER OFFER P500 per P1,000 per plus P2,000
REPORT (SEC day of delay day of delay per day of
FORM 19-1) of filing the of filing the delay of
report report filing the
report
INCOMPLETE P30,000 plus P60,000 plus P120,000
TENDER OFFER P300 per P1,000 per plus P2,000
REPORT (SEC day of delay day of delay per day of
FORM 19-1) of filing the of filing the delay of
This shall be in amended amended filing the
addition to the report report amended
penalty for late filing report
of the report per
due date under the
Rules.
FAILURE TO P100,000 or P200,000 or P300,000 or

CONDUCTA .01% of the .02% of the .06% of the
TENDER OFFER aggregate aggregate aggregate
Pursuant to SRC amount of amount of amount of
Rule 19.1 the tender the tender the tender
offer, offer, offer,
whichever is whichever is whichever is
higher plus higher plus higher plus
P500 per day P1,000 per P2,000 per
of delay day of delay day of delay
FAILURE TO P50,000 plus P100,000 P200,000
COMPLY WITH P500 per day plus P1,000 plus P2,000
ANY OTHER of continuing per day of per day of
REQUIREMENTS violation continuing continuing
OF SRC RULE 19-1 violation violation
Section 20 LATE FILING OF Reprimand/ P100,000 plus P200,000
[in relation INFORMATION Warning P500 per day plus P1,000
with 17.1(b)]; STATEMENT (SEC of continuing per day of
SRC Rule 20 FORM 20-IS) violation delay
INFORMATION Warning P500 per P1,000 per
STATEMENT (SEC day of delay day of delay
FORM 20-IS) of filing the of filing the
amended amended
report report
FAILURE Reprimand/ P50,000 plus P100,000
TO COMPLY Warning P500 per day plus P1,000
WITH ANY OF of continuing per day of
THE OTHER violation continuing
PROCEDURAL violation
REQUIREMENTS
OF SRC RULE 20
Appendix H
Section 23; LATE FILING Reprimand / 1% of the 2% of the

SRC Rule 23 OF STATEMENT Warning amount of amount
OF BENEFICIAL each pur- of each
OWNERSHIPS (SEC chase or dis- transaction
FORM 23 A / B ) position, or or P20,000
PI0,000 per per
transaction, transaction,
whichever is whichever is
higher plus higher plus
P100 per day P200 per day
of delay of delay
STATEMENT OF Warning P100 per day P200 per day
BENEFICIAL OWN- of delay of of delay of
ERSHIP (SEC FORM the submis- the submis-
23-A/B) sion of the sion of the
This shall be in addi- amended amended
tion to the penalty report report
for late filing of the
report per due date
under the Rules
FOR DIRECTORS/OFFICERS
Qualifying or not Reprimand / P10,000 P20,000

more than shares Warning plus P100 plus P200
(100) shares per day of per day of
delay of the delay of the
submission submission
of the report of the report
More than 100 Reprimand / P20,000 plus P40,000 plus

shares but less Warning P100 per day P200 per day
than 5% of the of delay of delay
outstanding equity
security
More than 5% but Reprimand / P10,000 plus P20,000 plus
less than 10% Warning PI 00 per day P200 per day
of delay of delay
Section 38; FAILURE TO Reprimand / P100,000 plus P150,000
SRC Rule 38 ELECT INDEPEND- Warning P500 per day plus PLOO0
ENT DIRECTOR(S) of continuing per day of
Or ELECTION OF violation continuing
AN UNQUALIFIED violation
INDEPENDENT
DIRECTOR
Section 54 MISREPRESENTA- PI00,000 P200,000 P400,000

TION OR MIS- plus P500 plus P1,000 plus P2,000
LEADING STATE- per day of per day of per day of
MENTS IN ANY continuing continuing continuing
FILING REQUIRED violation violation violation
TO BE SUBMITTED
TO THE COMMIS-
SION
(This is in addition
to the penalty on the
principal report, if
any.)
Failure to submit Reprimand/ P25,000 plus P50,000
any of the certifica- Warning P500 per day plus P1,000
tions on corporate of violation per day of
governance which violation
were represented to
be submitted
Any misrepresenta- Reprimand/ P50,000 plus pioaooo

tion in the submitted Warning P500 per day plus P1,000
Manual on Corpo- of continuing per day of
rate Governance violation continuing
violation
Section 68 FAILURE TO P25,000 plus P50,000 P100,000
COMPLY WITH P500 per day plus P1,000 plus P1,000
ANY OF THE of violation per day of per day of
REQUIREMENTS violation violation
OF SRC RULE 68
Or INCOMPLETE
DISCLOSURE IN
THE FINANCIAL
STATEMENTS
(That is in addition
late or incomplete
filing of the annual
report)
MATERIAL P50,000 or P100,000 P200,000

MISTATEMENTS IN 1/10 of l%of or 1/10 of or 1/10 of
THE FINANCIAL the amount 2% of the 6% of the
REPORT of mis- amount of amount
statement, misstatement of mis-
whichever is whichever statement,
higher, plus is higher, whichever
P500 per day plus P1,000 is higher,
of continuing per day of plus P2,000
violation continuing per day of
violation continuing
violation
Appendix H
SRC and IRR provisions on Exchange, Brokers and Dealers, Other Selling
Persons
SRC/IRR Description First Second Third

Provisions Offense Offense Offense
SRC Rule 24.1 MANIPULATE BD — Pisaooo.oo P200,000.00
(So)-I PRACTICES P100,000.00 P75,000.00 Pioaooo.oo
AP/
S-P50,000.00
SRC Rule ADVERTISEMENTS Reprimand/ BD — P15a000.00
24.1(d) — 1 AND COMMUNI- Warning pioaooo.oo P75,000.00
CATIONS WITH AP/
THE PUBLIC s-psaooo.oo
SRC Rule PUBLICATION OF Reprimand/ BD — pisaooo.oo
24.1(d) - 2 TRANSACTIONS Warning pioaooo.oo P75,000.00
AND QUOTATIONS AP/
S-P50,000.00
SRC Rule 24.1 PAYMENT TO IN- BD — pisaooo.oo P2oaooo.oo
(d)-3 FLUENCE MARKET P100,000.00 P75,ooaoo P100,000.00
PRICES AP/
S-P50,000.00
SRC Rule PROHIBITION ON Reprimand/ BD — pisaooo.oo
24.2-3 GUARANTEES Warning pioaooo.oo P75,000.00
AGAINST LOSS AP/
s-psaooo.oo
Section 25 VIOLATION OF P50,000.00 P75 000.00
/ pioaooo.oo
REGULATION OF
OPTION TRADING
Section 26 FRAUDULENT BD — P150,000.00 P200 000.00
/
TRANSACTIONS pioaooo.oo P75,000.00 pioaooo.oo

AP/
S-P50,000.00
SRC Rule USE OF Reprimand/ P50,000.00 P75,000.00
26.3-1 INFORMATION Warning
OBTAINED IN
FIDUCIARY
CAPACITY
SRC Rule 26.3 PROHIBITED REP- P50,000.00 P75,0O0.O0 pioaooo.oo
-2(d) RESENTATIONS
Section 27 INSIDER'S BD — P150,000.00 P200,000.00
TRADING pioaooo.oo P75,000.00 pioaooo.oo
AP/
S-P50,000.00
Section 28.1 FAILURE TO REG-

ISTER AS BRO-
KERS,
DEALERS OF:
pioaooo.oo N/A
EQUITY
SECURITIES Reprimand/ P50,000.00 N/A
Warning
PROPRIETARY
SHARES
SRC Rule 28.1- FAILURE TO piaooo.oo P25,000.00 50,000.00
l(E)(vi) REGISTER PlOO/day of PlOO/day of PlOO/day
BRANCH OFFICE delay delay of delay
SRC Rule 28.1- FAILURE TO Reprimand/ 10,000.00 25,000.00

l(E)(viii) MAINTAIN REGIS- Warning PlOO/day of PlOO/day
TERED AP delay of delay
SRC Rule 28.1- FAILURE TO Reprimand / 20,000.00 25,000.00

l(E)(xi) MAINTAIN Warning
SEPARATE BANK
ACCOUNT FOR
CLIENT FUND
SRC Rule 28.1- FAILURE TO RE- Reprimand/ 10,000.00 15,000.00
l(E)(xiii) PORT AMEND- Warning PlOO/day of -do-
MENT delay
SRC Rule FAILURE TO
28.1-4 REGISTER AS:
SALESMAN
COMPANY Reprimand/ 10,000.00 15,000.00

INDIVIDUAL Warning 5,000.00 7,000.00
ASSOCIATED
PERSON
COMPANY Reprimand/ 10,000.00 20,000.00

INDIVIDUAL Warning 5,000.00 7,000.00
SRC Rule 28.1- FAILURE TO Reprimand/
4(C) NOTIFY DISCON- Warning
TINUATION OF
EMPLOYMENT OF
SALESMAN, ASSO- 10,000.00 15,000.00
CIATED PERSON PlOO/day of PlOO/day
(SEC FORM 28-1) delay of delay
SRC Rule 30.1 VIOLATION Reprimand / 10,000.00 25,000.00
OF RULES ON Warning
AFFILIATED
TRANSACTIONS
Appendix H
SRC Rule ETHICAL Reprimand/ 50,000.00 100,000.00

30.2-1 STANDARDS RULE Warning
CONFIRMATION
OF CUSTOMER -do- 10,000.00 15,000.00
SRC Rule ORDERS
30.2-2
CLIENT
AGREEMENT -do- 10,000.00 15,000.00
CLIENT
SRC Rule
AGREEMENT -do- 50,000.00
30.2-3 100,000.00
WITH
DISCRETIONARY
ACCOUNT
SUITABILITY RULE
-do- 50,000.00 100,000.00
CHURNING/
EXCESSIVE
TRADING 10,000.00 15,000.00 20,000.00
SRC Rule
30.2-4 RULES ON
COMMISSIONS
& CHARGES FOR Reprimand/ 10,000.00 15,000.00
SERVICES OF Warning
BROKER DEALER
SRC Rule
30.2-5
SRC Rule FAILURE TO ES- Reprimand/ 25,000.00 50,000.00
30.2-6 TABLISH/MAIN- Warning
TAIN EFFECTIVE
& APPROPRIATE
COMPLIANCE
FUNCTION
50,000.00 100,000.00
FAILURE TO IN- 25,000.00
FORM THE COM-
MISSION OF OC-
CURRENCES OF
MATERIAL NON-
COMPLIANCE
WITH LEGAL RE-
QUIREMENTS
FAILURE TO RE- Reprimand / 5,000.00 7,000.00

PORT TO MAN- Warning
AGEMENT AND
TO MAINTAIN A
LOGBOOK
5,000.00 7,000.00
FAILURE TO FILE Reprimand/
PlOO/day of PlOO/day
COMPLIANCE RE- Warning
delay of delay
PORT
1000
SRC Rule FAILURE TO ES- Reprimand/ 10,000.00 15,000.00

30.2-7 TABLISH, IMPLE- Warning
MENT TRAINING
PROGRAM
SRC Rule FAILURE TO SUB- Reprimand / 10,000.00 15,000.00

30.2-9 MIT NAMES OF . Warning
STOCKHOLDERS,
MEMBERS, PAR-
TICIPANTS, CLI-
ENTS, RELATED
INFORMATION
Section 32 PROHIBITION 200,000.00

ON THE USE OF
UNREGISTERED
EXCHANGE, FAIL-
URE TO RENEW
LICENSE, REGU-
LATION OF OVER
THE COUNTER
MARKET
SRC Rule 32.1 TRADING OF B/D — P150,000.00 P200,000.00
UNREGISTERED P100,000.00 P75,000.00 pioaooo.oo
SECURITIES OR IN AP/SP —
UNREGISTERED P50,000.00
EXCHANGE/MAR-
KET
SRC Rule BEST EXECUTION B/D — 75,000.00 100,000.00
32.3 (a) RULE P50,000.00 50,000.00 75,000.00
AP/S —
25,000.00
SRC Rule COMPOSITION OF Reprimand/ 100,000.00 150,000.00
33.2 (c) THE BOARD OF Warning
AN EXCHANGE
SRC Rule FAILURE P100,000.00 P150,000.00 P2oo,ooaoo
33.2 (c) TO COMPLY 100.00 day of 100.00/day of. 100.00/day
WITH THE delay delay of delay
OWNERSHIP LIMIT
REQUIREMENT
SRC Rule FAILURE OF pioaooo.oo P150,000.00 P200,000.00
33.2 (d) AN EXCHANGE 100.00/day 100.00/day of 100.00/day
TO PROTECT of delay delay of delay
CUSTOMER
ACCOUNTS IN
CASE OF BUSINESS
FAILURE
SRC Rule VIOLATION OF Reprimand/ P25,000.00 P50,000.00
34.1-1 CUSTOMER FIRST Warning
POLICY
Appendix H
SRC Rule VIOLATION OF P25,000.00 P50,000.00 pioaooo.oo

34.1-2 CHINESE WALLS
POLICY
SRC Rule 36- FAILURE TO REG- Reprimand / P50,000.00 P75,000.00
4-1 ISTER AS A TRANS- Warning 100.00/day of 100.00/day
FER AGENT delay of delay
SRC Rules FAILURE TO Reprimand / P10,000.00
36.4-2 SUBMIT Warning PIOO.OO/day
• ANNUAL of delay
REPORT;
• EXCEPTION
REPORT;
• PERIODIC
REPORT TO
ISSUER;
• ANNUAL
AUDITED
FINANCIAL
STATEMENTS;
• GENERAL
INFORMATION
SHEET;
• AFFIDAVIT OF
NON HOLDING
OF MEETING;
• MONTHLY REC-
ONCILIATION
OF PCD & TA;
• MONTHLY CER-
TIFICATION AS
TO NUMBER OF
SHARES REGIS-
TERED UNDER
PCD NOMINEE;
• NOTICE OF
CHANGE OF
ADDRESS;
• OTHER
REQUIRED
REPORTS
FAILURE TO
MAINTAIN COM- Reprimand/ piaooo.oo
PLAINT LOG Warning PIOO.OO/day
of delay
SRC Rule FAILURE TO Reprimand/ piaooo.oo P25,000.00
36-4.3 RETAIN REQUIRED Warning PlOO.OO/day P100.00/
RECORDS of delay day of
delay
1002
SRC Rule 39.1- FAILURE TO Reprimand / P50,000.00 P75,000.00

1(D) SUPERVISE LISTED Warning
COMPANIES
SRC Rule 39.1- FAILURE TO Reprimand / P100,000.00 P150,000.00

1(E) COMPLY WITH Warning
REQUIREMENTS
ON COMPLIANCE
& SURVEILLANCE
SRC Rule 39.1- FAILURE OF Reprimand/ P10,000.00 P25,000.00

KF) SRO TO SUBMIT Warning
EXAMINATION
CALENDAR OR
NOTIFY OF ANY
AMENDMENT
THERETO
SRC Rule 39.1- FAILURE OF SRO Reprimand / P50,000.00 P75,000.00

KF) TO EXAMINE Warning
MEMBERS
DURING ONE
EXAMINATION
CYCLE
SRC Rule 39.1- FAILURE OF SRO Reprimand / piaooo.oo P25,000.00
KF) TO FILE MONTHLY Warning
REPORTS OF
ITS PERIODIC
EXAMINATION
SRC Rule 39.1- FAILURE TO Reprimand/ P50,000.00 P75,000.00
KF) SRO TO SEND Warning
DEFICIENCY
LETTER, IF
WARRANTED
SRC Rule 39.1- FAILURE OF SRO Reprimand/ P50,000.00 P75,000.00
KF) TO INITIATE Warning
INVESTIGATION,
IF WARRANTED
SRC Rule 39.1- FAILURE OF SRO Reprimand/ P50,000.00' P75,000.00
KG-i) TO INVESTIGATE Warning
SUSPECTED
VIOLATIONS OF
SRC SECTIONS 24,
26, 27
1 (G-ii) TO INVESTIGATE Warning
VIOLATION OF
RULES ON SALES
PRACTICES, ETC.
Appendix H
SRC Rule 39.1- FAILURE OF SRO Reprimand / P10,000.00 P25,000.00

1 (G-iii) TO NOTIFY THE Warning
COMMISSION OF
INVESTIGATION
OF VIOLATION OF
SRC SECTIONS 24,
26,27

1(H) COMPLY WITH Warning
RULES ON
DISCIPLINE OF
SRO MEMBERS &
PARTICIPANTS
KD COMPLY WITH Warning
DISCIPLINARY
ACTION OF THE
COMMISSION
10) TO FILE REQUIRED Warning
REPORT
SRC Rule 39.1- FAILURE TO Reprimand/ P200,000.00 —
2(B) REGISTER AS AN Warning
SRO (SEC FORM 39)
2(C) AMEND SEC Warning
FORM 39
SRC Rule 39.1- FAILURE OF SRO Reprimand/ piaooo.oo P25,000.00
2(D) TO FILE ANNUAL Warning
RETURN (SEC
FORM 39-AR)
SRC Rule 39.1- FAILURE OF SRO Reprimand / piaooo.oo P25,000.00
2(F) TO SEND TO THE Warning
COMMISSION
COPIES OF NO-
TICES, REPORTS
OR RECORDS OF
CHANGES COV-
ERED BY AMEND-
MENTS
SRC Rule FAILURE TO COM- Reprimand/ piaooo.oo P25,000.00
39.1-3 PLY WITH RULES Warning
ON ALLOCATION
OF REGULATORY
RESPONSIBILITIES
AMONG SROS
Section 40.2 FAILURE OF SRO Reprimand / piaooo.oo P25,000.00

TO COMPLY WITH Warning
SRC PROVISIONS
SRC Rule 40.3 FAILURE OF SRO, Reprimand / P10,000.00 P25,000.00

REGISTERED Warning PIOO.OO/day P100.00/
EXCHANGE of delay day of
OR TRADING delay
PARTICIPANT AND
ANY REGISTERED
CLEARING
AGENCY
TO SUBMIT
PROPOSED RULE
OR AMENDMENT
THERETO OR
TO OBSERVE
PROCEDURE ON
RULE MAKING
SRC Rule 40.4 FAILURE OF SRO, Reprimand/ piaooo.oo P25,000.00

REGISTERED Warning PIOO.OO/day PIOO.OO/
EXCHANGE OR of delay day of
TRADING PAR- delay
TICIPANT AND
ANY REGISTERED
CLEARING
AGENCY TO COM-
PLY WITH THE
COMMISSION'S
ORDER TO EFFECT
CHANGES IN ITS
RULE/PRACTICE
Section 40.6 FAILURE OF SRO Reprimand/ P50,000.00 P75,000.00
TO DISCIPLINE A Warning
MEMBER OR PAR-
TICIPANT
Section 40.7 FAILURE OF SRO Reprimand / piaooo.oo P25,000.00
TO NOTIFY THE Warning PlOO.OO/day P100.00/
COMMISSION OF of delay day of
ANY DISCIPLI- delay
NARY SANCTION
ON ANY MEMBER
Section 41 USE OF Reprimand/ P200,000.00
UNREGISTERED Warning
CLEARING
AGENCY
SRC Rule 42- FAILURE TO Reprimand / P200,000.00
KA) REGISTER AS Warning
CLEARING
AGENCY
Appendix H
SRC Rule 42- FAILURE OF Reprimand/ P50,000.00 P75,0O0.00

KB) CLEARING Warning PIOO.OO/day P100.00/
AGENCY TO PAY of delay day of
PRESCRIBED delay
ANNUAL FEE
SRC Rule 42- FAILURE Reprimand/ P25,000.00 P50,000.00

1(D) TO AMEND Warning PlOO.OO/day P100.00/
APPLICATION of delay day of
INFORMATION delay
SRC Rule 42- FAILURE OF Reprimand/ piaooo.oo P25,000.00
KE) CLEARING Warning PlOO.OO/day P100.00/
AGENCY TO FILE of delay day of
WITH ANNUAL delay
AUDITED
BALANCE SHEET
ETC.
SRC Rule 42-2 FAILURE Reprimand/ piaooo.oo P25,000.00
TO REPORT Warning PIOO.OO/day P100.00/
BREACHES of delay day of
OF RULES OR delay
DIFFICULTIES BY
PARTICIPANT
SRC Rule 48.1 MARGIN Reprimand/ 10,000.00 15,000.00

REQUIREMENT Warning
SRC Rule NET CAPITAL
49.1-1 RULE:
BELOW 5% OF Reprimand/ Voluntary

AGGREGATE Warning suspension
INDEBTEDNESS
OR 5 MILLION
WHICHEVER IS
HIGHER
DAILY Reprimand/ 10,000 15,000.00

DETERMINATION Warning PlOO/day of PlOO/day
& SHOULD BE delay of delay
AVAILABLE
ANYTIME UPON
REQUEST
IF BELOW 120%, Reprimand / 10,000.00 15,000.00

SUBMIT DAILY Warning PlOO/day of PlOO/day
COMPUTATION delay of delay
LATE FILING OF Reprimand / 10,000.00 15,000.00

FINOP REPORT Warning PlOO/day of P100.00/
delay day of
delay
1006
SRC Rule EFFECT PROPOSAL Reprimand / 10,000.00 15,000.00

49.1-1 (MEASURES TO BE Warning PlOO.OO/day P100.00/
TAKEN) WITHIN 10 of delay day of
DAYS delay
ERRONEOUS Reprimand/ 10,000.00 15,000.00

COMPUTATION Warning
NOT USING THE Reprimand / 10,000.00 15,000.00

REQUIRED Warning
FORMAT
SRC Rule VIOLATION OF Reprimand/ 25,000.00 50,000.00
49.1-1 (H) LIMITATION OF Warning
WITHDRAWAL OF
EQUITY CAPITAL
SRC Rule 49.2 CUSTOMER Reprimand/ 25,000.00 50,000.00

PROTECTION Warning
RESERVES &
CUSTODY OF
SECURITIES
SRC Rule VIOLATION OF Reprimand/ 25,000.00 50,000.00
49.2-4 SPECIAL RESERVE Warning
ACCOUNT
SRC Rule 49.3 LENDING Reprimand/ 25,000.00 50,000.00
& VOTING Warning
CUSTOMERS
SECURITIES
SRC Rule 50 PURCHASES AND Reprimand/ 10,000.00 15,000.00
SALES IN CASH Warning
ACCOUNT
-T + 3 VIOLATION
-FAILURE TO
LIQUIDATE
(PER
TRANSACTION,
NO MAXIMUM)
SRC Rule BOOKS AND
52.1-1 RECORDS RULE:
Reprimand/ 25,000.00 50,000.00
Warning P200.00/day P200.00/
NOT CURRENT of delay day of
delay
Immediate Immediate
suspension suspension
SRC Rule NOT AVAILABLE
RECORDS
52.1-2 RETENTION RULE
PRESERVATION Reprimand / 25,000.00 50,000.00

FOR 5 YEARS Warning
Appendix H
ACCESSIBLE FOR 2 Reprimand / 10,000.00 15,000.00

YEARS Warning
CEASED Reprimand/ 25,000.00 50,000.00
OPERATION Warning
SRC Rule REPORT OF Reprimand / 10,000.00 15,000.00
52.1-4 EXCHANGE Warning
MEMBERS,
BROKERS,
DEALERS
TRADING
THROUGH
MEMBERS
SRC Rule FAILURE TO Reprimand/ 10,000.00 15,000.00
52.1-5 FILE ANNUAL Warning PlOO.OO/day P100.00/
AUDITED of delay day of
FINANCIAL delay
REPORTS OF
BROKERS,
DEALERS WITHIN
THE PERIOD
SRC Rule CUSTOMER Reprimand / 10,000.00 15,000.00

52.1-6 ACCOUNT Warning
INFORMATION
RULE (MAXIMUM
OF 10 CLIENTS)
SRC Rule ORDER TICKET Reprimand/ 10,000.00 15,000.00

52.1-7 RULE (MAXIMUM Warning
OF 10)
SRC Rule FAILURE TO Reprimand / 10,000.00 15,000.00
52.1-8 SEND CUSTOMER Warning
ACCOUNT
STATEMENT
MONTHLY
SRC Rule FAILURE TO Reprimand / 10,000.00 15,000.00
52.1-9 PRESERVE Warning
SEPARATE FILE
OF COMPLAINTS
RECEIVED AND
ACTION TAKEN
SRC Rule MONTHLY Reprimand / 10,000.00 15,000.00
52.1-10 SECURITIES Warning
COUNT BY
BROKER, DEALER
PRE-NEED RULES (Implementing Rules of Section 16 of the SRC)
Rule 3; Rule ISSUING, OFFER- 1% of the 2% of the 6% of the

35.1 ING FOR SALE amount amount amount
OR SELLING of each of each of each
PRE-NEED PLANS transaction or transaction or transaction or
WITHOUT PRIOR P10,000 per P20,000 per P60,000 per
REGISTRATION transaction, transaction, transaction,
WITH SEC. whichever is whichever is whichever is
higher higher higher
Rule 4 FAILURE TO
AMEND REG-
ISTRATION
STATEMENT IN
ACCORDANCE
WITH SRC RULE
14
Change in the P10,000 plus P20,000 plus P60,000 plus
Qualitative Terms P100 per day P200 per day P600 per day
and Conditions of of delay of delay of delay
the Plans
Rule 6.1.a; PRICE INCREASE 1% of the 2% of the 6% of the
SEC Memo. MADE WITHOUT amount of amount of amount of
Circular No. PRIOR APPROVAL each sale in each sale in each sale in
3, Series of OF SEC excess of the excess of the excess of the
2002 authorized authorized authorized
price, or price, or shares or
P10,000 per P20,000 per price, or
transaction, transaction, P60,000 per
whichever is whichever is transaction,
higher, plus higher, plus whichever is
PI 00 per day P200 per day higher, plus
of delay in of delay in P600 per day
obtaining obtaining of delay in
approval approval obtaining
approval
Rule 6.1.b RESALE OR P50,000 P100,000 P200,000
CANCELLED OR
LAPSED PLANS
Rules 6.1.c, UNREGISTERED Reprimand/ P50,000 plus PI00,000 plus
15.4 and 15.6 AND UNLI- Warning P300 per day P600 per day
CENSED SALES- of continuing of continuing
MEN OR GEN- violation violation
ERAL AGENT
Appendix H
Rule 6.1.d; FAILURE TO SE- Reprimand / P50,000 plus PI00,000 plus

Rule 33 CURE PRIOR SEC Warning P300 per day P600 per day
APPROVAL TO of continuing of continuing
THE FOLLOW- violation violation
ING:
(1) Appointment
of salesmen or
general agent;
or
(2) Opening, clo-
sure or transfer
of branches
Rule 6.1.f FAILURE TO Reprimand/ P50,000 plus P100,000 plus
and 16.1 COMPLY WITH Warning P300 per day P600 per day
TRUST FUND of continuing of continuing
DEPOSIT RATES violation violation
USED IN THE
ACTUARIAL
STUDIES
SUBMITTED
UNDER RULE 4.1
PAR. 7(I)(c)
Rule 6.1.i IMPAIRMENT OF Reprimand/ P50,000 plus PI00,000 plus

CAPITAL Warning P300 per day P600 per day
of continuing of continuing
violation violation
Rule 35.4 AUDITED P25,000 plus P50,000 plus P100,000
FINANCIAL P500 per day P1,000 per day plus P1,000
STATEMENTS: of violation of violation per day of
Failure to comply violation
with any of the
requirements of
PNUCAunder
Pre-Need rule
31; or Incomplete
disclosure per SRC
Rule 68
MATERIAL P50,000 or P100,000 or P200,000 or

MISTATEMENT IN 1/10 of 1% of 1/10 of 2% of 1/10 of 6% of
THE FINANCIAL the amount of the amount of the amount of
REPORT misstatement, misstatement, misstatement,
whichever is whichever is whichever
higher, plus higher, plus is higher,
P500 per day P1,000 per day plus P2,000
of continuing of continuing per day of
violation violation continuing
violation
Rule 35.5; MISREPRESEN- P100,000 plus P200,000 plus P400,000

Rule 8.1 TATION OR P500 per day P1,000 per day plus P2,000
MISLEADING of continuing of continuing per day of
STATEMENTS violation violation continuing
IN ANY FILINGS violation
REQUIRED TO BE
SUBMITTED TO
THE COMMIS-
SION
(This is in addition
principal report, if
any.)
FAILURE TO SUB- Reprimand/ P25,000 plus P50,000
MIT ANY OF THE Warning P500 per day plus P1,000
CERTIFICATIONS of violation per day of
ON CORPORATE violation
GOVERNANCE
WHICH WERE
REPRESENTED
TO BE SUBMIT-
TED
ANY MISREPRE- Reprimand/ P50,000 plus P100,000
SENTATION IN Warning P500 per day plus P1,000
THE SUBMITTED of continuing per day of
MANUALON violation continuing
CORPORATE violation
GOVERNANCE
Rule 6.1.j;
Rule 23 2.1 FAILURE TO PUB- Reprimand / P50,000 plus pioaooo
LISH THE AUDIT- Warning P500 per day plus P1,000
ED FINANCIAL of continuing per day of
STATEMENTS violation continuing
WITHIN 120 DAYS violation
AFTER THE END
OF FISCAL YEAR
Rule 6.1.k FAILURE TO Reprimand/ P50,000 plus P100,000
PROVIDE A Warning P500 per day plus P1,000
DISCLAIMER of continuing per day of
PER SEC MEMO violation continuing
CIRCULAR NO. 4, violation
SERIES OF 2004
Rule 6.1.n VIOLATION OF Reprimand/ P50,000 plus P100,000 plus
ANY OTHER Warning P300 per day P600 per day
CONDITION IM- of continuing of continuing
POSED IN THE violation violation
CERTIFICATE OF
REGISTRATION
OR PERMIT TO
SELL
Appendix H
Rule 7.1 FAILURE TO Reprimand/ P50,000 plus P100,000 plus

CONSTTrUTE A Warning P300 per day P600 per day
COMPLAINTS of continuing of continuing
ACTION UNIT violation violation
Rule 7.2 FAILURE TO Reprimand/ P50,000 plus PI00,000 plus
DESIGNATE A Warning P300 per day P600 per day
COMPLIANCE of continuing of continuing
OFFICER violation violation
FAILURE TO Reprimand / P30,000 plus P40,000 plus
TIMELY DIS- Warning P200 per day P400 per day
CLOSE CHANGE of delay of delay
OF COMPLIANCE
OFFICER
Rule 7.3 LATE FILING Reprimand/ P50,000 plus P100,000 plus

OF REQUIRED Warning P300 per day P600 per day
LIST: accredited of continuing of continuing
mortuaries, violation violation
telephone numbers
and contact person
of pre-need selling
life plan
Rule 8.3 REFUSAL TO Reprimand/ P50,000 plus P100,000 plus
FURNISH Warning P300 per day P600 per day
INFORMATION of continuing of continuing
REQUIRED violation violation
BY THE
COMMISSION
Rule 9.2 FAILURE TO P100,000 plus P200,000 plus P400,000 plus

PRODUCE ALL P500 per day P1,000 per day P2,000 per
THE BOOKS AND of delay of delay day of delay
RECORDS OF
THE PRE-NEED
COMPANY FOR
EXAMINATION
OF SEC
AUDITORS
Rule 9.3 REFUSAL OF P100,000 plus P200,000 plus P400,000 plus
THE ISSUER P500 per day P1,000 per day P2,000 per
TO PERMIT of delay of delay day of delay
EXAMINATION
OF A FINANCIAL
AND RELATED
DOCUMENTS TO
BE MADE BY THE
COMMISSION
1012
Rule 12.1 FAILURE TO P50,000 plus PI00,000 plus P200,000 plus

OBTAIN SEC P300 per day P600 per day P800 per day
APPROVAL of continuing of continuing of continuing
ON THE violation violation violation
AMENDMENT
OF ANY. Pre-need
Plan Contract:
Trust Agreement;
Other pertinent
documents
Rule 13.3 INFORMATION Reprimand / P50,000 P100,000

BROCHURE IS Warning
NOT ACCURATE-
LY REFLECTING
THE TERMS OF
THE PLAN OR
THE FINANCIAL
ABILITY OF THE
PRE-NEED COM-
PANY
Rule 15.1 OPERATION P100,000 plus P200,000 plus P300,000 plus

WITHOUT PRIOR P300 per day P600 per day P800 per day
SEC REGISTRA- of continuing of continuing of continuing
TION AS DEALER violation violation violation
Rule 16.4 WITHDRAWAL Reprimand/ P50,000 plus P100,000 plus
FROM TRUST Warning P300 per day P600 per day
FUND OTHER of continuing of continuing
THAN THE violation violation
PLANHOLDERS'
BENEFIT
(This is Imposable
upon the Trustee)
Rule 17 FAILURE TO Reprimand/ P50,000 plus P100,000 plus

CREATE OR Warning P300 per day P600 per day
MAINTAIN of continuing of continuing
THE REQUIRED violation violation
INVESTMENT
PORTFOLIO
(This is Imposable
upon the Trustee)
COMPLY WITH Warning P300 per day P600 per day
THE LIQUID- of continuing of continuing
ITY RESERVE RE- violation violation
QUIREMENT
(This is Imposable
upon the Trustee)
Appendix H

MAKE ADDI- Warning P300 per day P600 per day
TIONAL DEPOS- of continuing of continuing
ITS TO TRUST violation violation
FUND TO COVER
DEFICIENCIES
WITHIN THE
PRESCRIBED PE-
RIOD
Rule 20.1 FAILURE OF THE Reprimand / P50,000 plus PlOaOOO plus

TRUSTEE TO EX- Warning P300 per day P600 per day
ERCISE DUE DILI- of continuing of continuing
GENCE FOR THE violation violation
PROTECTION OF
THE PLANHOLD-
ERS
(This is Imposable
upon the Trustee)
Rule 20.2 INVESTMENT Reprimand/ P50,000 plus P100,000 plus
OF THE TRUST Warning P300 per day P600 per day
FUND TO DOSRI of continuing of continuing
OR PROHIBITED violation violation
ACCOUNTS
(This is Imposable
upon the Trustee)
COMPLY WITH Warning P300 per day P600 per day
THE DIRECTIVE of continuing of continuing
OF THE violation violation
COMMISSION TO
CONVERT THE
TRUST FUND
ASSETS OF THE
INVESTMENT TO
PROTECT THE
INTEREST OF THE
PLANHOLDERS
(This is Imposable
upon the Trustee)
Rule 22 ENCUMBRANCE, P100,000 plus P200,000 plus P400,000 plus

CONVEYANCE P500 per day PL000 per day P2,000 per
OR MORTGAGE upon upon day upon
OVER ALL OR discovery discovery discovery
SUBSTANTIALLY
ALL THE ASSETS
OF THE ISSUER
WITHOUT PRIOR
APPROVAL OF
THE COMMIS-
SION
1014
Rule 23 NON-FILING OR Reprimand/ P100,000 plus P200,000 plus

LATE FILING Warning P500 per day P1,000 per
OF ANY OF THE of delay day of delay
FOLLOWING:
• Audited Finan-
cial Statements;
• Actuarial Valua-
tion Report;
• Corporate Gov-
ernance Manual
23.1-23.1.2 INCOMPLETE Reprimand/ P10,000 plus P20,000 plus
REPORT Warning P200 per P400per
(This shall be in day of delay day of delay
addition to the of filing the of filing the
penalty for late amended amended
filing of the report report report
per due date under
the Rules)
Rule 24 NON-FILLING/ Reprimand / P50,000 plus P60,000 plus
LATE FILING OF Warning P300 per day P600 per day
QUARTERLY RE- of delay of delay
PORTS
Rule 24.1- INCOMPLETE Reprimand/ P20,000 plus P40,000 plus
24.4 QUARTERLY RE- Warning P300per P600 per
PORT day of delay day of delay
(This shall be in of filing the of filing the
penalty for late report report
filing of the report
per due date under
the Rules)
Rule 25 NON-FILING/ Reprimand/ P50,000 plus P60,000 plus
LATE FILING OF Warning P300 per day P600 per day
FOLLOWING of delay of delay
MONTHLY RE-
PORTS.
• Sales Reports;
• Collection
Reports;
• Trust Fund
Deposits;
• List of Sales-
men
Terminated and
Apprenticeship;
• Trust Fund
Statement
Appendix H
Rule 35 PAYMENT OF Reprimand/ P50,000 plus P100,000 plus

EXCESSIVE Warning P300 per day P600 per day
COMMISSION of continuing of continuing
violation violation
Rule 35.3 OVERPRICING OF Reprimand/ P50,000 plus P60,000 plus
PLANS Warning P300 per day P300 per day
from time of from time of
discovery discovery
INVESTMENT COMPANY ACT & ICA RULE 35-1
Sections 7 VIOLATION OF 1% of the 2% of the 3% of the

and 24 REGISTRATION amount amount amount
REQUIREMENTS of each of each of each
transaction transaction transaction or
or P10,000 or P20,000 P60,000 per
per per transaction,
transaction, transaction, whichever is
whichever is whichever is higher
higher. higher.
Section 8 ELECTION P50,000 plus PI00,000 P150,000
OF CERTAIN P300 per day plus P600 plus Pl,800
INELIGIBLE of continuing per day of per day of
AFFILIATED violation continuing continuing
PERSONS AND violation violation
UNDERWRITERS
Section 9 UNAUTHORIZED P50,000 plus P100,000 P200,000
AFFILIATIONS OF P300 per day plus P600 plus Pl,800
DIRECTORS, OF- of continuing per day of per day of
FICERS AND EM- violation continuing continuing
PLOYEES violation violation
Section 10 PROHIBITED P50,000 plus P100,000 P200,000

OFFERS TO P300 per day plus P600 plus Pl,800
EXCHANGE of continuing per day of per day of
SECURITIES violation continuing continuing
violation violation
Section 11 UNAUTHORIZED P50,000 plus P100,000 P200,000

OR ILLEGAL AC- P300 per day plus P600 plus Pl,800
TIVITIES OF IN- of continuing per day of per day of
VESTMENT COM- violation continuing continuing
PANIES violation violation
Section 12 UNAUTHORIZED P50,000 plus PI00,000 P200,000 plus

CHANGES IN IN- P300 per day plus P600 P800 per day
VESTMENT POLICY of continuing per day of of continuing
(Imposable on violation continuing violation
responsible directors violation
and officers)
1016
Section 14 UNAUTHORIZED P50,000 plus P100,000 P200,000 plus

CONTRACTS OF P300 per day plus P600 P800 per day
ADVISERS AND of continuing per day of of continuing
UNDERWRITERS violation continuing violation
(Imposable on re- violation
sponsible directors
and officers)
Sections 22 VIOLATION OF P50,000 plus P100,000 P200,000 plus

and 23; ICA REQUIREMENTS P300 per day plus P600 P800 per day
Rule 35-1 (e) ON DISTRIBUTION, of continuing per day of of continuing
REDEMPTION, violation continuing violation
AND REPURCHASE violation
OF SECURITIES
Section 26 EXCESSIVE PERI- Reprimand / P50,000 P100,000 plus

ODIC PAYMENT Warning plus P300 P600 per day
PLAN per day of of continuing
continuing violation
violation
Sections 25, FAILURE TO SUB- Reprimand/ P10,000 P20,000 plus

27, & 30, ICA MIT REQUIRED Warning plus P200 P400 per day
Rule 35-1 (c)(3) REPORTS UNDER per day of of continuing
THESE SECTIONS continuing violation
AND/OR TO PUB- violation
LISH DAILY PRICES
Section 32 MISREPRESENTA- P50,000 plus P100,000 P300,000
TIONS P300 per day plus P600 plus Pl,800
of continuing per day of per day of
violation continuing continuing
violation violation
ICA Rule 35-1 VIOLATION OF Reprimand/ P50,000 P100,000 plus
(d) RECITED INVEST- Warning plus P300 P600 per day
MENT OBJECTIVES, per day of of continuing
POLICIES AND RE- continuing violation
STRICTIONS violation
ICA Rule 35-1 NON-DEPOSIT OF P10,000 plus P20,000 P50,000 plus
(c)(2) SALES PROCEEDS P200 per day plusP400 P600 per day
TO A CUSTODIAN of continuing per day of of continuing
BANK violation continuing violation
violation
ICA Rule 35-1 REDEMPTION Reprimand / P10,000 per P20,000 per
(c)(3) OF ORIGINAL Warning redemption redemption
CAPITAL FOR LESS
THAN 12 MONTHS
ICA Rule 35-1 LATE FILING OF Reprimand / P10,000 P20,000 plus
(0(2) MONTHLY SALES/ Warning plus P200 P400 per day
REDEMPTION RE- per day of of continuing
PORT continuing violation
violation
Appendix H
ICA Rule 35-1 FAILURE TO EF- Reprimand / P10,000 per P20,000 per
(e)(3) FECT REDEMP- Warning redemption redemption
TION REQUEST
WITHIN 7 BANK-
ING DAYS
Section 35 FAILURE TO REG- Reprimand/ 100,000.00

ICA Rule 35- ISTER AS AN IN- Warning
KgKD VESTMENT COM-
PANY
ADVISER
ICA Rule 35- FAILURE TO Reprimand/ 25,000.00 50,000.00

l(g)(l)-A MAINTAIN THE Warning
MINIMUM UN-
IMPAIRED NET
WORTH OF AT
LEAST P10 M
EXCLUSIVE OF
REVALUATION
SURPLUS
Section 40 FAILURE TO REG-

ISTER AGENTS &
INVESTMENT SO-
LICITORS
Reprimand / 10,000.00 15,000.00
Company Warning
5,000.00 7,000.00
Individual
FINANCING COMPANY ACT AND ITS IMPLEMENTING RULES
Sec. 7(c), ENGAGING IN P10,000 plus P20,000 P30,000 plus

FCA of 1998; THE BUSINESS P100 per day plus P300 P500 per
Section 4(a), OF A FINANCING per day day
ERR COMPANY
WITHOUT
CERTIFICATE OF
AUTHORITY (CA)
TO OPERATE AS
A FINANCING
COMPANY
Section 5(b), FAILURE TO P10,000 plus PI 5,000 P20,000 plus
IRR OPERATE WITHIN P100 per day plus P200 P300 per
120 DAYS FROM per day day
GRANT OF CA
Section 6(a), NO CATO P10,000 plus P10,000 P10,000 plus

IRR ESTABLISH/ P100 per day plus P200 P300 per
OPERATE A per day day
BRANCH OFFICE
Section 8, LATE PAYMENT Reprimand/ P10,000 P10,000 plus
IRR OF ANNUAL FEE Warning plus P100 P200 per
BEFORE THE per day day
ANNIVERSARY
DATE OF CA
Section 9(a), INVESTMENT Reprimand/ PI 0,000 P10,000 plus
IRR IN REAL ESTATE Warning plus P100 P300per
AND IN SHARES per day day
OF STOCK IN A
REAL ESTATE
DEVELOPMENT
CORPORATION
AND OTHER REAL
BASED PROJECTS IN
EXCESS OF 25% OF
THE COMPANY'S
NETWORTH
Section 9(b), LESS THAN 51% OF Reprimand/ P10,000 P10,000 plus
IRR THE FUNDS HAVE Warning plus P100 P300 per
NOT BEEN USED per day day
IN FINANCING
COMPANY
AcnvrnES
Section 9(c), TOTAL CREDIT Reprimand/ P10,000 P10,000 plus
IRR EXTENDED TO Warning plus P100 P300 per
COMPANY'S per day day
DIRECTORS,
OFFICERS,
STOCKHOLDERS
AND RELATED
INTEREST (DOSRI)
IN EXCESS OF 15%
OF THE FORMER'S
NETWORTH
Section 9(d), TOTAL, CREDIT EX- Reprimand/ P10,000 P10,000 plus
IRR TENDED TO THIRD Warning plus P100 P300 per
PERSON (SINGLE per day day
BORROWER LIMIT)
IN EXCESS OF 30%
OF THE COMPANY'S
NETWORTH
Section 11, IMPAIRMENT OF Reprimand/ P10,000 P15,000
IRR PAID-UP CAPITAL Warning
Appendix H
Section 13(a), LATE FILING OF Reprimand / P10,000 P10,000 plus

IRR QUARTERLY RE- Warning plus P100 P200 per
PORTS per day day
Section 13(b), LATE FILING OF Reprimand/ P10,000 P10,000 plus
IRR ANNUAL AUDITED Warning plus P100 P200 per
FINANCIAL STATE- per day day
MENTS
AMLA, as FAILURE TO FILE PI00,000

amended ANTI-MONEY
LAUNDERING OP-
ERATING MANUAL
SEC Circular FAILURE TO TIMELY Reprimand / P500 per
No. 2, S. 2002 SUBMIT MANUAL Warning day
ON CORPORATE
GOVERNANCE
FAILURE TO Reprimand/ P10,000 P10,000 plus

SUBMIT ANY OF Warning plus P100 P200 per
THE FOLLOWING per day day
CERTIFICATION, AS
REPRESENTED IN
THE MANUAL:
Certification by
Corporate Secretary
on the Attendance of
Directors
Certification by the
Compliance Officers
on the Extent of
Compliance with
Manual on Corporate
Governance
FAILURE TO COM- Reprimand/ P10,000 P10,000 plus
PLY WITH OTHER Warning plus P200 P300per
REPRESENTATIONS per day day
IN THE MANUAL OF
CORPORATE GOV-
ERNANCE
Continued non-payment of the assessed fine a n d / o r failure to comply

with the requirement, despite notice and hearing for a period of fifteen (15)
days, shall be a sufficient ground for the Commission to take other appropriate
action or remedies available under the Securities Regulation Code and other
related laws.
The commission of a fourth offense for the same violation is a ground for
the suspension/revocation of the erring company's registration or secondary
license which shall be m a d e after notice and hearing, in accordance with the
1020
above-mentioned procedures. Erring companies which are primarily regulated

by other government agencies shall be endorsed thereto.
The imposition of the foregoing penalties shall be without prejudice to the
imposition of other administrative sanctions or to the filing of criminal charges
against the person/s responsible for the violation.
Amendment to the Consolidated Scale of Fine

(SEC Memo. Cir. No. 6, Series of 2005)
The Commission En Banc, in its meeting held on M a y 13, 2009, approved
the amendment of the Consolidated Scale of Fines (SEC M e m o r a n d u m Circular
No. 6, Series of 2005) by deleting the w o r d "Warning" as a penalty for the
First Offense and including a sub-group for public companies engaged in the
business of providing "health and educational" services after paragraph 3 of
said Circular as follows:
"However, if the violation of the SRC Rule 17.1 and its I m p l e m e n t i n g Rules
and Regulations is committed more than three (3) times by any of the public
companies enumerated below, the Commission m a y impose a fine, in lieu of
suspension or revocation, equivalent to the basic penalty plus the daily penalty
per current Scale and increments of PI0,000.00 and PIOO.OO on the basic penalty
and the daily penalty, respectively:
i. Public companies engaged in the business of formal education as

defined under Section 20 of Batas Pambansa Bilang 232 w h i c h includes
preparatory grade or the one-year preparatory level prior to Grade I,
elementary education, secondary a n d / o r tertiary education; a n d
ii. Public companies engaged in the business of health care services
rendered by health care institutions as defined under Section 4(0)(1),
Article II of Republic Act 7875, excluding wellness centers and health
care institutions engaged exclusively in out-patient psychotherapy
and counseling for mental disorders, d r u g and alcohol abuse or
dependency treatment, cosmetic surgery, home and rehabilitation
services, optometric services, or n o r m a l obstetrical delivery.
Attached as Annex " A " is a Table of penalties for public companies engaged
in the business of education and health care services to the public."
The foregoing amendment shall take effect fifteen (15) days f r o m
publication in t w o (2) newspapers of general circulation in the Philippines.
June 8, 2009, M a n d a l u y o n g City, Philippines.
— oOo —
Appendix I
SCALE OF FINES FOR NON-COMPLIANCE

WITH THE FINANCIAL REPORTING
REQUIREMENTS OF THE COMMISSION
(SEC MEMO. CIR. NO. 8, SERIES OF 2009)
In line w i t h the continuing efforts to strengthen compliance by corporations

w i t h the financial reporting requirements provided for in Section 141 of the
Corporation Code, Section 68 of the Securities Regulation Code, Pre-Need
Uniform Chart of Accounts ( P N U C A ) , as revised, Investment C o m p a n y Act,
Financing Company Act, Lending C o m p a n y Act and Investment Houses
Law, the Commission, in its meeting on June 18, 2009, approved the scale of
administrative penalties set forth below.
I. Scale of Fines
(A) Ordinary corporations with no secondary license issued by the

Commission
Violation 1st 2nd 3rd Offense

Offense Offense
Material de- Stock Corporations Deficit P500 P1,000 P2,000
ficiency in Capital Deficiency
the financial Retained Earnings: 300 600 1,200
statements or 0 to 100,000 P500 P1,000 P2,000
non-compli- P100,0001 to P500,000 1,000 P2,000 P4,000
ance with the P500,001 to P5,000,000 2,000 P4,000 P8,000
requirements P5,000,001 to P10,000,000 3,000 P6,000 P12,000
of the Rules Above P10,000,000 4,000 P8,000 P16,000
Non-stock Corporations
Negative Fund Balance P200 P400 P800
Fund Balance/Equity Up
to P100,000 P300 P600 1,200
P100,001 to P500,000 500 1,000 2,000
P500,001 to P10,000,000 1,000 2,000 4,000
Above P10,000,000 2,000 4,000 8,000
1022
SCALE OF FINES FOR NON-COMPLIANCE WITH THE
FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION
Appendix I
Material An An An amount
misstatement amount amount based on
in the financial based on based on the above
statements the above the Above scale or
scale or scale or 4 / 1 0 of
1/10 of 2 / 1 0 of 1% of the
1% of the 1% of the amount
amount amount of mis-
of mis- of misstatement,
statement, statement whichever
whichever whichever is higher
is higher is higher
(B) Branches and regional offices of foreign corporations licensed to

operate in the Philippines by the Commission
Violation 1st Offense 2nd Offense 3rd Offense
Material Net Cash

deficiency in Receipts
the financial 0 to P100,000 P500 P1,000 P2,000
statements pioaoooi to
or non- P500,000 P1,000 P2,000 P4,000
compliance P500,001 to
with the P5,000,000 P2,000 P4,000 P8,000
requirements
of the Rules P5,000,001 to P12,000
P3,000 P6,00
P10,000,000
Above
P10,000,000 P4,000 P8,000 PI 6,000
Material mis- An amount An amount An amount

statement in based on the based on the based on the
the financial above scale or above scale above scale or
statements 1/10 of l%of or 2 / 1 0 of 4 / 1 0 of l%of
the amount of 1% of the the amount of
misstatement, amount of misstatement.
whichever is misstatement whichever is
higher whichever is higher
higher
(C) Lending Companies; Transfer Agents Annual Financial Statements
nd ri
Violation 1"* Offense 2 Offense 3 Offense
Material Deficit
deficiency in Retained
the financial Earnings: P500 P1,000 P2,000
statements Up to pioaooo P4,000
P1,000 P2,000
or non-com-
pioaooi to
pliance with
P500,000 2,000 4,000 8,000
the require-
ments of the P50a001 to
Rules P5,000,000 3,000 6,000 12,000
P5,000,001 to
pio,ooo,ooo 4,000 8,000 16,000
Above
P10,000,000 5,000 10,000 20,000
Material An amount An amount An amount

misstate- based on the based on the based on the
ment in the above scale or above scale or above scale or
financial 1/10 of l%of 2 / 1 0 of 1% of 4 / 1 0 of 1% of
statements the amount of the amount of the amount of
misstatement, misstatement misstatement
Interim Financial Statements
Violation 1" Offense 2 n d

Offense 1
3" Offense
Material Deficit
the financial Earnings: P100 P200 P400
statements
Up to
or non-
pioaooo P200 P400 P800
compliance
with the P100,001 to
requirements P500,000 400 800 1,600
of the Rules
P500,001 to
P5,000,000 600 1,200 2,400
P5,000,001 to
P10,000,000 800 1,600 3,200
Above
P10,000,000 1,000 2,000 4,000
Appendix I

misstatement based on the based on the based on the
in the above scale or above scale or above scale or
financial 1 / 1 0 of l%of 2 / 1 0 of l%of 4 / 1 0 of 1% of
(D) Financing Companies
Annual Financial Statements
Material Deficit
the financial Earnings: P1,000 P2,000 P4,000
statements
Up to
or non- pioaooo P2,000 P4,000 P8,000
compliance
with the pioaooi to
requirements P5oaooo 3,000 6,000 12,000
of the Rules
P500,001 to
P5,ooaooo 4,000 8,000 16,000
P5,000,001 to
piaooaooo 5,000 10,000 20,000
Above
piaooaooo 6,000 12,000 24,000

financial 1/10 of 1% of 2 / 1 0 ofl%of 4 / 1 0 of l%of
misstatement. misstatement misstatement
Material Deficit
the financial Earnings: P400 P800 Pl,600
statements Up to
or non- P100,000 P600 Pl,200 P2,400
compliance
with the pioaooi to
requirements psoaooo 800 1,600 3,200
of the Rules P500,001 to
P5,000,000 1,000 2,000 4,000
P5,000,001 to
piaooaooo 1,200 2,400 4,800
Above
piaooaooo 1,400 2,800 5,600

financial 1/10 of l%of 2 / 1 0 of 1% of 4 / 1 0 of 1% of
(E) Brokers and Dealers of securities; Government Securities Eligible

Dealers (GSEDs)
Violation s
I 'Offense 2 n d
Offense rd
3 Offense
Material Deficit
statements Up to
or non- P1,000,000 P5,000 P10,00 P20,000
compliance
with the Pl,000,001 to
requirements P10,00,000 6,000 12,000 24,000
of the Rules P10,000,001 to
P20,000,000 7,000 14,000 28,000
P20,000,001 to
P30,000,000 8,000 16,000 32,000
Above
P30,000,000 9,000 18,000 36,000
Appendix I

in the financial above scale or above scale or above scale or
statements 1 / 1 0 of l%of 2 / 1 0 of 1% of 4 / 1 0 of 1% of
the amount of the amount of the amount of
Material Deficit
the financial Earnings: P500 P1,000 P2,000
statements
or non- Up to P1,000 P2,000 P4,000
compliance P1,000,000
with the Pl,000,001 to
requirements piaooaooo 2,000 4,000 8,000
of the Rules piaoaooi to
P20,000,000 3,000 6,000 12,000
rcaooaooi to
P30,000,000 4,000 8,000 16,000
Above
P30,00a000 5,000 10,000 20,000

statements 1/10 of 1% of 2 / 1 0 of 1% of 4 / 1 0 of 1% of
(F) Investment Houses; Universal Banks Registered as Underwriters of

Securities Investment Company
Advisers Annual Financial Statements
Material Deficit
statements Up to
or non- P5,ooo,ooo piaooo P20,000 P40,000
compliance
P5,000,001 to
with the
piaooaooo 11,000 22,000 44,000
requirements
P30 000,000
/
12,000 24,000 48,000
P3aooo,ooi to
pso.ooaooo 13,000 26,000 52,000
Above
PSO,OOO,OOO 14,000 28,000 56,000

statements 1/10 of 1% of 2 / 1 0 of 1% of 4 / 1 0 of l%of

Material Deficit
statements or
Up to
non-cmpliance
P5,000,000 P3,000 P6,000 P12,000
with the
requirements P5,000,001 to
of the Rules P15,000,000 4,000 8,000 16,000
P15,00,001 to
P30,000,000 5,000 10,000 20,000
P30,000,001 to
P50,000,000 6,000 12,000 24,000
Above
P50,000,000 7,000 14,000 28,000
Appendix I

mistatement based on the based on the based on the
statements 1 / 1 0 of l%of 2 / 1 0 of 1% of 4 / 1 0 of 1% of
(G) Clearing Agency and Clearing Agency as Depository; Stock and

Securities Exchange/s
Material Deficit
the financial Earnings: piaooo P20,000 P40,000
statements Up to
or non- P10,000,000 P20,000 P40,000 P80,000
compliance
piaooaooi to
with the
P20,000,000 21,000 42,000 84,000
requirements
P50,000,000 22,000 44,000 88,000
P50,000,001 to
pioaooaooo 23,000 46,000 92,000
Above
pioaooaooo 24,000 48,000 96,000

statements 1/10 of 1% of 2 / 1 0 of 1% of 4 / 1 0 of l%of
higher higher highei
Material Deficit
statements Up to
or non- P10,000,000 P5,000 P10,000 P20,000
compliance
with the piaooaooi to
requirements P20,000,000 6,000 12,000 24,000
P50,000,000 7,000 14,000 28,000
P50,000,001 to
pioaooaooo 8,000 16,000 32,000
Above
pioaooaooo 9,000 18,000 36,000
statements l/10ofl%of 2 / 1 0 of l%of 4 / 1 0 of l%of
(H) Pre-need Corporations

Material deficiency Active: 1
Active: Active:
in the financial
statements or non- P25,000 P50,000 P100,000
compliance with Inactive 2
Inactive Inactive
the requirements of
the Rules P12,500 P25,000 P50,000
Material Active: Active: Active:
misstatement
in the financial P25,000 P50,000 P50,000
statements Inactive Inactive Inactive
P12,500 P25,000 P25,000
"With dealer license.

Without dealer license.
Appendix I
Failure to Active: Active: Active:

comply with the P25,000 P50,000 pioaooo
requirements of Inactive Inactive Inactive
PNUCA
P12,500 P25,000 P50,000

Material deficiency Active: 1
Active: Active:
in the financial P5,000 P10,000 P20,000
statements or non- Inactive 2
Inactive Inactive
compliance with P2,soo
the requirements of P5,000 P10,000
the Rules
1
Material Active: Active: Active:
misstatement P5,000 P10,000 P20,000
in the financial Inactive 2
Inactive Inactive
statements
P2,500 P5,000 P10,000
1
Failure to Active: Active: Active:
comply with the P5,000 P10,000 P20,000
requirements of Inactive 2
Inactive Inactive
PNUCA
P2,500 P5,000 P10,000
(I) Issuers of securities registered under the SRC and public companies
Material deficiency P25 000 plus

/ P50,000 plus pioaooo plus
in the financial P500 per day P1,000 per day P2,000 per day
statements or non- until completed/ until completed/ until completed/
compliance with complied complied complied
the requirements
of the Rules
Material P50,000 or 1/10 of PlOaOOO or 1/10 of P200,000 or 1/10 of
misstatement 1% of the amount 2% of the amount 4% of the amount
in the financial of misstatement, of misstatement, of misstatement,
statements whichever is whichever is whichever is
higher, plus P500 higher, plus P1,000 higher, plus P1,000
per day until per day until per day until
corrected corrected corrected
With dealer license.

2
Without dealer license.
Material deficiency PiaOOO plus P20,000 plus P30,000 plus

in the financial P100 per day P500 per day P1,000 per day
statements or non- until completed / until completed/ until completed /
compliance with complied complied complied
the requirements
of the Rules
Material P25,000 or 1/10 of P50,000 or 1/10 of P 1 0 0 , 0 0 0 o r l / 1 0 of

misstatement 1% of the amount 2% of the amount 4% of the amount
in the financial of misstatement, of misstatement, of misstatement,
statements whichever is whichever is whichever is
higher, plus P500 higher, plus P1,000 higher, plus P1,000
per day until per day until per day until
corrected corrected corrected
The penalty for material deficiencies in the financial statements of a

public company engaged in the business of providing health and education
services are covered by SEC M e m o r a n d u m Circular N o . 4, Series of 2009,
or any amendments thereto.
II. Definition
For purposes of this Circular, Retained Earnings shall m e a n the
accumulated profits realized out of n o r m a l and continuous operations of
the business after deducting therefrom distributions to stockholders and
transfers to capital stock or other accounts. The Retained Earnings for the
purpose of computing the penalty under this Circular shall be the total
amount of appropriated and unappropriated retained earnings as shown
in the latest financial statements audited by the company's independent
auditor.
I I I . Test of M a t e r i a l i t y
A. The following shall be considered a material deficiency in the financial

statements (FS) or significant non-compliance w i t h SRC Rule 68:
(i) A n y of the following is not submitted w i t h the FS:
(1) Balance Sheet;
(2) Income Statement or Statement of Receipts and Disburse-

ments;
(3) Cash Flow Statement;
(4) Statement of Changes in Equity or F u n d Balance;

(5) Notes to Financial Statements;
(6) Statement of Management's Responsibility;
(7) Auditor's Report.
SCALE OF FINES FOR NON-COMPLIANCE WITH THE 1033
Appendix I
(ii) The following shall likewise render the financial statements

significantly not compliant:
(1) If a listed company, public company, m u t u a l f u n d or issuer

of securities to the public, the auditor's opinion is qualified
due to a deviation f r o m the applicable financial reporting
f r a m e w o r k . However, for listed banks, a qualified opinion of
the external auditor shall not be considered a non-compliance
w i t h SRC Rule 68 if the qualification pertains to a deviation
adopted by the Bangko Sentral ng Pilipinas as part of its
prudential reporting requirements;
(2) The auditor's report is substantially not compliant w i t h the

w o r d i n g prescribed by Philippine Standards on Auditing
(PSA) N o . 700, as revised, and other applicable auditing
standards and practices.
(iii) T h e Statement of Management's Responsibility is not signed by
the prescribed signatories a n d / o r not notarized in the case of a
listed or public company;
(iv) There is no accounting policy for a significant account;
For purposes of these Guidelines, a significant account
means a Balance Sheet or Income Statement item, the amount of
w h i c h is equivalent to:
For listed companies, public companies, mutual funds, other
issuers of securities to the public, and pre-need companies
(1) 5% or more of Total Current Asset, if it is one of the current
asset items;
(2) 5% or more of Total Non-Current Asset, if it is one of the non-
current asset items;
(3) 5% or more of Total Current Liabilities, if it is one of the
current liabilities items;
(4) 5% or more of Total Long-Term Liabilities, if it is one of the
long-term liabilities items;
(5) % or more of the Total Stockholders' Equity, if it is one of the
equity items or the amount of Total Assets if there is capital
deficiency;
(6) 5% or more of the Gross Income, Cost of Sales/Services or
the Total Operating Expenses, as may be applicable.
For all other corporations, the threshold shall be 10% or more
of the items mentioned above.
(iv) The required disclosures or presentations under the applicable
financial reporting framework and SRC Rule 68/68.1 for a
significant account are not provided in the financial statements.
In case however of disclosures on related party transactions as
1034
required under PAS 24, any deficiency thereof shall be considered

significant regardless of the amount involved if the reporting
company is a public company, listed company, issuer of securities
to the public or secondary licensee of the Commission.
(v) Five (5) or more of the following minor deficiencies are noted:
(1) The financial statements are not presented in the prescribed
comparative format;
(2) There is no distinction between the current and non-current
portion of assets or liabilities except in cases where PAS 1
allows non-classification;
(3) There are no cross-references to the notes to financial
statements;
(4) The number of disclosure items that are not provided for a
significant account does not exceed t w o ;
(5) The Statement of Management's Responsibility is not in full
conformity w i t h the prescribed w o r d i n g of SRC Rule 68 or
68.1;
(6) Such other deficiencies as the Commission m a y consider
minor.
B. A n y of the following shall be considered a material misstatement in

the financial statements:
(1) An accounting policy for a significant account is not consistent
w i t h PFRS or G A A P , e.g., for non-publicly accountable entities or
pre-need companies;
(2) An accounting policy for a significant account is not consistently

applied between periods or to similar transactions and events
(inconsistent application); or
(3) The estimate or assumption used on a significant account is
1
unreasonable and resulted to material misstatement of the
financial statements;
(4) There is more than one (1) minor misstatement and the aggregate
amount involved for said misstatements meets the test of
materiality;
(5) The financial statements of a corporation w i t h a subsidiary or

subsidiaries are not presented on a consolidated basis in violation
of PAS 27;
(6) Such other misstatements in the financial statement, i.e., over-

statement or understatement of income, asset, liability or equity,
that the Commission m a y consider material.
^ s e the 5% and 10% threshold in item (b) above.

SCALE OF FINES FOR NON-COMPLIANCE WITH THE 1035
Appendix I
IV. Reckoning Date of Computation of Penalty

The a m o u n t of daily penalty shall be computed from the date the
violation is discovered, as indicated in the comment letter of the Commission,
up to the time that a sufficient and meritorious explanation, together with an audit
committee or board resolution taking up the matter, and the corrective measures
to be taken thereon, are submitted to the Commission. The submission shall
include the revised financial statements or an a d d e n d u m to the financial
statements, as m a y be directed by the Commission.
V. Delinquency
A. An entity that commits a violation for the fourth time shall be subject
to the following penalties:
i. In the case of a corporation holding a secondary license from

the Commission, suspension of the license for a period of sixty
(60) business days and a monetary penalty equivalent to 200%
of the fine for the third offense. Failure to pay the fine w i t h i n the
suspension period shall be a ground for the revocation of the
company's license;
ii. In the case of a corporation w i t h no secondary license from the

Commission, a monetary penalty equivalent to 200% of the fine for
the third offense w i t h a w a r n i n g that a subsequent violation shall
be a ground for the revocation of the corporation's registration
w i t h the Commission. Failure to pay the fine shall be a ground for
the revocation of the company's registration.
B. An entity that commits a violation for the fifth time shall be subject to
the following penalties:
i. In the case of a corporation holding a secondary license from the
Commission, revocation of the license and a monetary penalty
equivalent to 200% of the fine for the fourth offense;
ii. In the case of a corporation w i t h no secondary license from
the Commission, revocation of its registration and a monetary
penalty equivalent to 200% of the fine for the fourth offense.
The non-payment of the above monetary penalty shall
constitute a derogatory record on the directors and officers of the
corporation.
C. The suspension or revocation of the company's secondary license
shall not affect its civil or criminal liability for any act committed prior
to such suspension or revocation. The provisions of Section 71.2 of the
Securities Regulation Code shall likewise be observed for contracts
entered into by the subject company.
VI. Coverage of the Penalty
A. The penalties for the violations cited shall be in addition to the fine
imposable for the late filing of the financial statements, as provided for
in earlier circulars or may in the future be issued by the Commission.
B. The imposition of monetary penalty shall be without prejudice to any

action that the Commission may institute against the corporation,
its directors and officers, in accordance w i t h existing laws and
regulations.
VII. Repealing Clause
The salient provisions of SEC M e m o r a n d u m Circular N o . 6, Series of
2005 (Consolidated Scale of Fines) and other circulars, rules, orders earlier
issued by the Commission that are inconsistent w i t h any of the foregoing
enumeration of violations and penalties shall be deemed superseded,
repealed or amended by this Circular.
VIII. Transitory Clause

This Circular shall be applied to violations committed in prior years
in so far as the stated penalty is favorable to the corporation. In all other
cases, the Circular shall cover financial statements for the period ended
December 31,2008 and onwards.
This Circular shall take effect on July 15, 2009.
Issued this 24th day of June, 2009. M a n d a l u y o n g City, Philippines.
— oOo —
Appendix J
REVISED GENERAL INFORMATION

SHEET
(SEC Memo. Cir. No. 3, Series of 2006)
1. For Stock Corporation
In order to effectively facilitate the monitoring of activities of domestic

corporations a n d to keep the stockholders and the public transacting business
w i t h domestic corporations properly informed of their organizational and
operational status, all domestic corporations are required to submit the revised
general information sheets in the f o r m and w i t h i n the period prescribed in SEC
1
M e m o r a n d u m Circular N o . 2 ( S M D Series 1993).
Failure to comply w i t h the Circular shall subject the corporation to

applicable sanctions prescribed under the scale of penalties provided in SEC
2
M e m o r a n d u m Circular Nos. 3 and 4 ( S M D Series 1993).
January 07,1993.
'In line with the "full disclosure" requirement of existing laws, all corporations and
partnerships applying for registration with the Securities and Exchange Commission
should state in their Articles of Incorporation or Articles of Partnership the (i) specific
address of their principal office, which shall include, if feasible, the street number, street
name, barangay, city or municipality; and (ii) specific residence address of each incorpo-
rator, stockholder, director, trustee, or partner.
"Metro Manila" shall no longer be allowed as address of the principal office.
Additionally, all corporations are required to state in their General Information Sheet
the specific residence address of each stockholder, officer, director or trustee.
Filings that do not comply with the foregoing requirements shall be considered as
non-compliant with existing rules and regulations. (SEC Cir. No. 3, Feb. 16, 2006.)
SEC Memo. Cir. No. 6, series 2006 mandates the submission in electronic format — on
diskette or CD — of the General Information Sheet (GSI), the General Form for Financial
Statements (GFFS), and the industry-specific Special Forms for Financial Statements (SFFS).
^ e Appendix "H."
1037
1038
GENERAL INFORMATION SHEET

STOCK CORPORATION
CFNIER Al. INSTRUCTIONS ON T H E USE O F T H E REVISED G E N E R A L INFORMATION SHEET (GS)
1 THIS REPORT IS TO BE SUBMITTED WITHIN THIRTY (30) C A L E N D A R DATE FOLLOW-

ING THE DATE OF THE A N N U A L STOCKHOLDERS MEETING. DO NOT LEAVE A N Y ITEM
BLANK. WRITE N. A. IF INFORMATION REQUIRED IS NOT A P P L I C A B L E T O T H E CORPORA-
TION.
2 IF NO MEETING WAS HELD, T H E CORPORATION S H A L L SUBMIT T H E GIS TOGETHER
WITH AN AFFIDAVIT OF NON-HOLDING OF MEETING WITHIN THIRTY (30) C A L E N D A R
DAYS FROM THE DATE OF T H E S C H E D U L E D A N N U A L / S P E C I A L (AS PROVIDED IN T H E
BY-LAWS).
3. THE REPORT SHOULD BE CERTIFIED A N D SWORN TO BY T H E CORPORATE SECRETARY,
OR BY T H E PRESIDENT OR A N Y DULY AUTHORIZED OFFICER O F T H E CORPORATION.
4. SUBMIT T H R E E (3) COPIES TO T H E RECORDS DIVISION, G R O U N D FLOOR, SEC BUILDING,
EDSA, GREENHILLS, M A N D A L U Y O N G , M E T R O M A N I L A .
5. SHADED BOXES ARE FOR SEC PERSONNEL.
6. ONLY THE GIS ACCOMPLISHED IN A C C O R D A N C E W I T H T H E H E R E I N INSTRUCTIONS
SHALL BE COMSIDERED AS HAVING B E E N F I L E D / S U B M I T T E D .
A C T U A L DATE O F A N N U A L / S P E C I A L M E E T I N G
PRINT LEGIBLY
REG. NO. DATE OF ANNUAL MEETING PER FISCAL YEAR END.

BY-LAWS
CORPORATE NAME
ADDRESS / PRINCIPAL / ACTIVITY PRESENTLY ENGAGED IN AREA CODE
PRESENT ADDRESS AREA CODE
TELEPHONE NO. FAX NO. CORPORATE TIN
PRIMARY PURPOSE/ACTIVITY PRESENTLY ENGAGED IN INDUSTRY CLASSIFICATION
INDUSTRY CODE
PARENT COMPANY
REG. NO. COMPANY NAME AND ADDRESS
SUBSIDIARY / AFFILIATE COMPANY NAME AND ADDRESS

REG. NO.
TOTAL NUMBER OF EMPLOYEES: TOTAL NUMBER TOTAL ANNUAL WITH SEC/

OF MANAGERS/ COMWPENSATION OTHER CITY
SUPERVISORY NON-SUPERVISORY OFFICERS OF DIRECTORS AGENCY
DURING THE SECONDARY
PRECEEDING LICENSED/
FISCAL YEAR RS NO.:
P
CERTIFIED CORRECT:
(SIGNATURE OVER PRINTED NAME) POSITION
NOTE: SHADED AREAS ARE FOR SEC PERSONNEL. USE ADDITIIONAL SHEET/ANNEX IF NECESSARY.
REVISED GENERAL INFORMATION SHEET 1039
Appendix J

STOCK CORPORATION
PRINT LEGIBLY
FINANCIAL PROFILE
NUMBER OF NUMBER OF PAR/

TYPE OF
STOCK- CODE SHARES/ STATED AMOUNT
SHARES
HOLDERS TYPE VALUE
AUTHORIZED N/A
CAPITAL
SUBSCRIBED CAPITAl
FILIPINO
FOREIGN
TOTAL
PAID-UP CAPITAL
FILIPINO
FOREIGN
TOTAL
DIRECTORS/OFFICERS
NAME AND ADDRESS INCR BOARD STOCK OFFICER AUTHORIZED

(RESIDENCE) ILLDR
AUTHORIZED
INSTITUTIONS:
FOR BOARD — PUT "C" FOR CHAIRMAN "M" FOR MEMBER
FOR -
FOR
FOR
NOTE:
1040

STOCK CORPORATION
^^^Z PRINT LEGIBLY
A. FORMS OF INVESTMENT OF CORPORATE AMOUNT DATE OF DATE OF

FUNDS IN ANOTHER CORPORATION BOARD STOCKHOLDER
RESOLUTION RATIFICATION
STOCKS
BONDS/COMMERCIAL PAPERS
LOANS / CREDITS / ADVANCES
GOVERNMENT TREASURY BILLS
OTHERS
A. INVESTMENT OF CORPORATE FUNDS IN ANY OF ITS DATE OF DATE OF

SECONDARY PURPOSES BOARD STOCKHOLDER
RESOLUTION RATIFICATION
NATURE OF SECONDARY PURPOSE
C. TREASURY SHARES: NUMBER OF SHARES ACQUISITION COST P

D. UNRESTRICTED RETAINED EARNINGS AS OF END OF LAST FISCAL YEAR
E DIVIDENDS DECLARED DURING THE IMMEDIATELY PRECEDING YEAR _
TYPE OF DIVIDENDS AMOUNT

CASH DIVIDEND
STOCK DIVIDEND
PROPERTY DIVIDEND
TOTAL P
1
OF THE ABOVE
(NAME) (POSITION)
MENTIONED CORPORATION, DO SOLEMNLY SWEAR THAT ALL MATTERS SET FORTH IN THIS
REPORT ARE TRUE AND CORRECT TO THE BEST OF MY KNOWLEDGED.
SIGNATURE
SUBSCRIBED ARE SWORN TO BEFORE ME THIS DAY OF

AFFIANT EXHIBITED HIS/HER RESIDENCE CERTIFICATE No. ISSUED ON
AT
NO IAXV PUBLIC
DOC. No. _ UNTIL, DECEMBER 3 1 , 1 9

PAGE No. . PTR:
BOOK No. _ ISSUED AT ON
SERIES OF IBP_
Appendix J

STOCK CORPORATION
Z = ^ ^ = ^ = ^ ^ ^ ^ = ^ ^ ^ ^ = PRINT LEGIBLY ^ =
^ =
CORPORATE NAME
STOCKHOLDERS
SHARES SUBSCRIBED TAXPAYER'S ID

NO.
TYPE/ AMOUNT NATIONALITY

NO. AMOUNT
NAME AND ADDRESS CLASS PAID-UP
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
TOTAL
INSTRUCTIONS INDICATE THE TOP 20 STOCKHOLDERS. If MORE THAN 20. INDICATE THE BEST
AS OTHERS
NOTE: USE: ADDITIONAL, SHEET/ANNEX IF NECESSARY

1042
2. For Non-Stock Corporation 1
1
GENERAL INFORMATION SHEET (GIS)
NON-STOCK CORPORATION
FOR THE YEAR
General Instructions:
1. For User Corporation: This GIS shall be submitted within thirty (30) calendar days
from the date of the annual members' meeting as stated in the by-laws. Do not leave
any item blank. Write "NA" if the information required is not applicable to the
corporation or "NONE" if the information is non-existent.
2. If the annual members' meeting is held on a date other than that stated in the by-laws,
the GIS shall be submitted within thirty (30) calendar days from the actual date of the
annual members' meeting.
3. This GIS shall be accomplished in English and Certified and swom to by the Corporate
Secretary of the Corporation.
4. All changes arising between annual meetings and affecting the Information stated in
the GIS, such as the death, resignation or cessation of holding of office of a director,
trustee, or officer, shall be reflected in an amended GIS labeled as such and the changes
clearly highlighted. The amended GIS shall be submitted thirty (30) days after such
changes occurred or became effective.
5. Submit five (5) copies of the GIS to the Central receiving section, ground floor, SEC
Bldg., EDSA, Mandaluyong City. All copies shall be on A4 or letter-size paper with
the standard cover sheet. The pages of all copies shall use only one side. Corporations
submitting a soft copy of their GIS shall submit four (4) hard copies of the GIS.
Together with a certification under oath by its president, chief executive officer, or
corporate secretary that the soft copy contains the exact data in the hard copies.
6. Only the GIS accomplished in accordance with these instructions shall be
considered as compliant with existing rules and regulations.
7. This GIS may be used as evidence against the corporation and its responsible
directors/trustees/officers for any violation of existing laws, rules and regulations.
=========== = = = = = = P L E A S E PRINT LEGIBLY
^'In line with the "full disclosure" requirement of existing laws, all domestic non-
stock corporations are required to use the revised official General Information Sheet (GIS)
for non-stock corporations, GIS-NON-STOCK (v.2006), attached.
The official GIS form is available for downloading at the SEC website (www.sec.gov.
ph) or from any of the Commission's offices.
This Circular shall take effect fifteen (15) days after its publication in a newspaper
of general circulation and at the SEC website. Hereafter, only filings that conform to the
format of the official GIS from shall be' accepted by the Commission. Filings that deviate
from this form shall be considered as non-compliant with existing rules and regulations."
(SEC Cir. No. 9, Series of 2006.)
Appendix J
CORPORATE NAME: DATE REGISTERED:

BUSINESS/TRADE NAME FISCAL YEAR END:
SEC REGISTRATION CORPORATE TAX
NUMBER: IDENTIFICATION
NUMBER (TIN):
DATE OF ANNUAL WEBSITE/URL ADDRESS:
MEETING-PER BY-LAWS:
DATE OFACTUAL EMAIL ADDRESS:
MEETING:
COMPLETE PRINCIPAL TELEPHONE NUMBER(S):
OFFICE ADDRESS:
COMPLETE BUSINESS FAX NUMBER(S):
ADDRESS:
PRIMARY PURPOSE
ENGAGED IN:
NAME OF EXTERNAL SEC TELEPHONE
AUDITOR & SIGNING ACCREDITATION NUMBER(S):
PARTNER: NUMBER:
IF ENGAGED IN MICROFINANCE BUSINESS, TO BE FILLED UP BY SEC PERSONNEL:

CHECK SERVICES
INDUSTRY NATIONAL
Deposits Insurance Products CLASSIFICATION GEOGRAPHICAL
Loans Payment Services CODE:
Money Others CODE (NGC):
Transfer
1044

= = = = = P L E A S E P R I N T LEGIBLY = = = = =
CORPORATE NAME:
DIRECTORS / OFFICERS
NAME NATIONALITY INCORPO- BOARD OFFICER TAX IDENTIFI-

RATOR CATION NO.
CURRENT, COMPLETE (TIN) FOR FILI-
RESIDENTIAL PINOS or PASS-
PORT NO. FOR
ADDRESS
FOREIGNERS
9.
10.
1.1
1.2.
1.3.
1.4.
1.5.
_L
INSTRUCTION
F O R I N C O R P O R A T O R C O L U M N , P U T " Y " I F A N I N C O R P O R A T O R , "N" I F N O T .
F O R B O A R D C O L U M N , P U T " C " F O R C H A I R M A N , "M" F O R M E M B E R .
F O R O F F I C E R C O L U M N , I N D I C A T E P A R T I C U L A R P O S I T I O N I F A N O F F I C E R , S U C H AS:
PRE-PRESIDENT GEO - CHIEF EXEC. OFFICER CFO-TREAS N-NONE
COO - CHIEF OPERATING
OFFICER COS - CORPORATE SECRETARY LEF - LEGAL COUNSEL
AUD-EXTERNAL AUDITOR GOV - GOVERNMENT OTR-OTHERS
REPRESENTATIVE
Appendix J

CORPORATE NAME:
1. I N T E R C O M P A N Y AFFILIAH O N S
PARENT COMPANY SEC REG. NO. ADDRESS
AFFILIATE SEC REG. NO. ADDRESS
NOTE: USE ADDITIONAL SHEET IF NECESSARY
2. INVESTMENT OF CORPORATE FUNDS A M O U N T (in P h P ) DATE OF BOARD

IN A N O T H E R CORPORATION RESOLUTION
2.1 STOCKS
2.2 BONDS / COMMERCIAL PAPER

(issued b y p r i v a t e c o r p o r a t i o n s )
2.3 LOANS/CREDITS/ADVANCES
2.4 G O V E R N M E N T TREASURY BILLS
2.5 OTHERS
INVESTMENT OF CORPORATE DATE OF BOARD DATE OF MEMBERS

F U N D S I N A C T I V I T I E S U N D E R ITS RESOLUTION RATIFICATION
SECONDARY PURPOSES (PLEASE
SPECIFY:)
3.1
3.3
3.5
4. F U N D B A L A N C E (in PUP):
5. S E C O N D A R Y L I C E N S E / REGISTRATION / A U T H O R I T Y / A C C R E D I T A T I O N W I T H O T H E R
GOVERNMENT AGENCY(IES):
5.1 NAME OF BANCKO INSURANCE DEPARTMENT COMMISSION TECHNICAL DEPART-

AGENCY: SENTRAL NC COMMISSION OF ON HIGHER EDUCATION MENT OF
PILIPINAS EDUCATION EDUCATION AND SKILLS SOCIAL WEL-
DEVELOP- FARE AND
MENT DEVELOP-
AUTHORITY MENT
S2 DATE
ISSUED:
5.3 DATE
STARTED
OPERA-
TIONS:
6 TOTAL ANNUAL COMPENSATION 7. TOTAL NO. OF 8. TOTAL NO. OF RANK 9. TOTAL MANPOWER
OF DIRECTORS/TRUSTEES DURING OFFICERS & FILE EMPLOYEES COMPLEMENT
THE PRECEDING FISCAL YEAR (in
PhP)
NOTE: USE ADDITIONAL SHEET IF NECESSARY

Appendix J

NONSTOCK CORPORATION
I CORPORATE SECRETARY OF
(Position) (Corporation)
DECLARE UNDER THE PENALTY OF PERJURY, THAT ALL MATTERS SET FORTH
LN THIS GENERAL INFORMATION SHEET WHICH CONSISTS OF ( )
PAGES HAVE BEEN MADE IN GOOD FAITH, DULY VERIFIED BY ME AND TO THE
BEST OF MY KNOWLEDGE AND BELIEF, ARE TRUE AND CORRECT.
I UNDERSTAND THAT THE FAILURE OF THE CORPORATION TO FILE THIS GIS
FOR FIVE (5) CONSECUTIVE YEARS SHALL BE CONSTRUED AS NON-OPERATION
OF THE CORPORATION AND A GROUND FOR THE REVOCATION OF THE
CORPORATION'S CERTIFICATE OF INCORPORATION. IN THIS EVENTUALITY,
THE CORPORATION HEREBY WAIVES ITS RIGHT TO A HEARING FOR THE SAID
REVOCATION.
DONE THIS DAY OF , 20 IN
(SIGNATURE)
SUBSCRIBED AND SWORN TO BEFORE ME IN

PHILIPPINES ON AFFIANT PERSONALLY APPEARED BEFORE ME AND
EXHIBITED TO ME HIS/HER COMMUNITY TAX CERTIFICATE NO.
ISSUED AT ON
DOC. NO: NOTARY PUBLIC FOR

PAGE NO. Notarial Commission No.
BOOK NO. Commission expires on December 31,
SERIES OF Roll of Attorney Number
PTRNo.
IBP No.
Office Address
— oOo —
Appendix K
PUBLIC FORM TYPE MASTERLIST

(SEC MEMO. CIR. NO. 2, SERIES OF 1997)
To: A l l Corporations and Partnerships Registered U n d e r A l l Acts and Laws

Administered by the SEC, and A l l Companies Subject to Rule l l ( a ) - l
Under Section 11 of the Revised Securities Act.
The Public Form Type Masterlist contains the listing of form types for
submitting filings to SEC. A l l files referred to above shall use the Masterlist
in determining the appropriate form type code that should be indicated in the
cover sheet of filings. The basis for this Masterlist and its use is Paragraph 7
of SEC M e m o r a n d u m Circular N o . 2, Series of 1996 on physical filing criteria
regarding a standard cover page or sheet for all filing submitted under all acts
and laws administered by the SEC and in compliance w i t h RSA Rule 3-4(d)(6)
regarding information required to be written on the cover page for filings made
under the Revised Securities Act.
The list shall be revised whenever there are n e w rules creating n e w filing
requirements or as there are amendments to existing rules. Revisions to the
Masterlist shall be accordingly published from time to time.
For your compliance effective immediately.
28 January 1997.
PUBLIC FORM TYPE MASTERLIST

AS OF 1/28/97
F O R M TYPE FORM FILING

CODE DESCRIPTION CODE
CORPORATE AND PARTNERSHIP ARTICLES/

BY LAWS/REORGS/TRUST/DEEDS
EL-C EXPRESS L A N E - D O M C O R P 01
EL-P EXPRESS L A N D - D O M P A R T N E R 01
PL-C PRIMARY L I C - D O M CORP 01
PL-P PRIMARY L I C - D O M PARTNER 01
1048
PUBLIC FORM TYPE MASTERLIST 1049
Appendix K
PL-FC PRIMARY LIC-FGN CORP 01

PL-FP PRIMARY LIC-FGN PARTNER 01
P-DOA D E E D OF ASSIGN TO T R A N S SHARES 01
P-VTA V O T I N G TRUST A G R E E M E N T 01
P-CON PRIMARY LIC-CONSOLIDATION 01
P-MER PRIMARY LIC-MERGER 01
MISCELLANEOUS CORPORATE FILINGS

BYLAW DELAYED BYLAW / PRIMARY A M D T 01
BCERT BANK CERTIFICATE/MANILA 01
BVRPT B A N K V E R I F I C A T I O N RPT 01
REMIT INWARD REMITTANCE 01
SDEPW SECURITY D E P O S I T / W I T H D R A W A L 01
MEMBK MEMBERSHIP BOOK 01
STRBK STOCK /TRANSFER BOOK 01
P-DIS PRIMARY LIC-DISSOLUTION 01
SECURITIES REGISTRATIONS/EXEMPTIONS
S-6EX F O R M 6-EX: S O L D A B R O A D 6(B)-1 02
S-8-1 F O R M 8-1: SECURITIES REG S T M T 02
S-ABS F O R M ABS: ASSET B A C K S E C U R I T Y 02
S-CPL F O R M LTCP: C M PAPER L O N G T E R M 02
S-CPS F O R M STCP: C M PAPER S H O R T T E R M 02
S-PAY SECURITIES-PAY SEC F O R P R O P 02
S-WTS SECURITIES- WARRANTS REG STMT 02
SN-CP SEC N T C E - C P E X E M P T D I S C L S T M T 02
SN-PV SEC N T C E - E X E M P T P R I V A T E OFFER 02
SN-X5 SEC N T C E - R S A 5 E X E M P T S E C U R I T Y 02
SN-X6 SEC N T C E - R S A 6(B) E X E M P T T R A N S 02
MISCELLANEOUS SECURITIES FILINGS

PROSP POST-EFFECTIVE PROSPECTUS 02
RS-W R E G SECURITIES W I T H D R A W A L 02
SR-8A F O R M 8 A - 1 A 3 : N T C E OFFER T E R M I N 02
TCERT T R U S T E E CERT OF E L I G I B I L I T Y 02
TQUAL TRUST I N D E N T U R E Q U A L A P P L 02
PROPRIETARY CERTS/SHARES REGISTRATION

S-PRS SEC-PROPRIETARY REG S T M T 02
S-PER S E C U R I T I E S - P E R M I T TO OFFER 02
SCG STANDBY CREDIT G U A R A N T E E / A M D T 02
SR SALES RPT-STOCK S O L D / PCT F I L I P 02
LISTING MATTERS
LIST LISTING APPLICATION 03
1050
LjgTE LISTING APPL EXEMPTIONS 03

L I S T W LISTING APPL W I T H D R A W A L 03
INVESTMENT COMPANY REGISTRATIONS
IC-CL INVEST CO REG-CLOSED E N D 05

_OP
I C INVEST CO REG-OPEN E N D 05
IC-UN INVEST CO R E G - U N I T TRUST 05
IC-EX I N V E S T CO E X E M P T I O N S 05
!C-W INVEST CO W I T H D R A W A L 05
SR-IC SALES RPT-SECUR S O L D / P C T F I L I P 05
I N V E S T M E N T C O M P A N Y REGULATORY REPORTS
FS-Q I N V E S T C O Q T R A U D I T E D FS 05
PORT I N V E S T C O Q T R P O R T F O L I O RPT 05
TR-IC A N N U A L T R A N S A C T I O N RPT / I N V C O 05
BROKER, DEALER, I N V E S T M E N T H O U S E A N D
FUND ADVISOR REGISTRATION
19-BD F O R M 19-BD: BKR D L R A D V I S R R E G 07

19-S F O R M 19-S: BD S A L E S M A N R E G 07
24SUB BD SUBORD A G R E E M T FOR A P P R O V A L 07
25EXT BD APPL E X T E N D CUST P M T PERIOD 07
3 7 REQ B D SEC C O U N T E X E M P T R E Q 37A-13 07
BD-EX BKR D L R E X E M P T I O N S 07
CF-EX C O M M O D / F U T EXEMPTIONS 07
GS-EX G O V T SEC D L R E X E M P T I O N S 07
IA-EX INVEST A D V EXEMPTIONS 07
IH-EX INVEST HOUSE EXEMPTIONS 07
BROKER, DEALER, I N V E S T M E N T H O U S E
A N D F U N D ADVISOR RENEWAL
19-R F O R M 19-BDR: BKR D L R A D V R E N E W 07

19-SR F O R M 19-SR: B D S A L E S M A N R E N E W 07
19-ST F O R M 19-ST: B D S A L E S M A N T E R M I N 07
3 7 Y
"F B D N T C E FOR F I S C A L Y R A P P R O V A L 07
BD-W BKR D L R W I T H D R A W A L 07
CF-W COMMOD/FUT WITHDRAWAL 07
GS-W G O V T SEC D L R W I T H D R A W A L 07
IA-W INVEST A D V W I T H D R A W A L 07
IH-W INVEST HOUSE W I T H D R A W A L 07
BROKER A N D DEALER REGULATORY

REPORTS/NOTICES
24 COL BD N T C E C O L L A T BELOW PRINCIPAL 08

24DEP BD N T C E N O T M A K E REQ DEPOSIT 08
Appendix K
24MAT BD NTCE MATURITY DEBT/C A P PROB 08

24NET BD NTCE MINIMUM NET CAPITAL 08
24-OP F O R M 24-FINOP: BD M O N T H L Y RPT 08
24EXT EXTENSION REQUEST FOR 24-FINOP 08
24BDQ BD QTR SECURITIES CONTROL INFO 08
31SEC BD INVENT OF LINKED ISSUER SEC 08
37-AR F O R M 37-AR: BD A N N U A L RPT/FS 08
INVESTMENT HOUSE REGULATORY REPORTS
IH-OD IH C H A N G E S : O F C R S/BD OF DIRS 08

IH129 F O R M 129-1: I H A N N U A L R E P O R T 08
IHQ IH-QUARTERLY PROGRESS RPT 08
IHSFS IH-SEMI A N N U A L U N A U D I T E D FS 08
WP-BD W O R K PERMIT: BD, IH 08
COMMODITIES/FUTURES BROKERS AND

DEALERS REGULATORY REPORTS
BD-OE BD CHANGES: OFCRS/EMPLOYEES 08

BDCFB BD CONTRACTS WITH FGN BKRS 08
BDDHA BD DAILY HOUSE ACCT TRANS RPT 08
BDDTR BD DAILY TRANSACTIONS RPT 08
BDMCA BD MONTHLY CLIENT ACCT MOVEMENT 08
BDMFS BD MONTHLY UNAUDITED FS 08
BDMSB BD MONTHLY STMT BY BANK 08
BDMTR BD MONTHLY TRANSACTIONS RPT 08
BDSFS BD SEMI A N N U A L AUDITED FS 08
BDUPC BD UNIMPAIRED PAIDUP CAP 08
CLEARING AGENCY AND EXCHANGE

REGISTRATION
40-CA F O R M 40-CA: CLEARING A G E N C Y REG 09

CA-EX CLEAR AGENCY EXEMPTIONS 09
CA-SV C L E A R A G E N C Y SERVICE PROPOSAL 09
EX-1 E X C H A N G E REGISTRATION 09
EX-EX EXCH EXEMPTIONS 09
EX-PR EXCHANGE PRODUCT PROPOSAL 09
RULES E X C H/C A/SRO R U L E PROPOSAL 09
SRO-1 SELF REG ORG REGISTRATION 09
CA-W CLEAR AGENCY WITHDRAWAL 09
EX-W EXCH WITHDRAWAL 09
SRO-W SELF REG ORG WITHDRAWAL 09
CLEARING AGENCY NOTICE AND

EXCHANGE REGULATORY REPORTS
24EXM EXCH-MO APPROVED SUBAGRMNT RPT 09

40NTC C A N T C E PARTICIPANT B R E A C H / DIF 09
1052
-AF
E X EXCH- ADDITION AL FEES / RSA 54 09
WP-EX WORK PERMIT: EX, CA, SRO 09
TRANSFER AGENT REGISTRATION

AND RENEWAL
.
4 0 T A FORM 40-TA: TRANSFER AGENT REG 10
40-2K TRANS AGENT RENEWAL / RULE 40-2K 10
TA-EX TRANS AGENT EXEMPTIONS 10
TA-W TRANS AGENT WITHDRAWAL 10
TRANSFER AGENT REGULATORY REPORTS
40-AR FORM 40-AR: TA ANNUAL RPT / FS 10

40RPT TA EXCEPTION/CESSATION REPORT 10
WP-TA WORK PERMIT: TA, CU 10
PRIVATE COMPANY REPORTS/ORDINARY
CORPORATIONS
GIS GENERAL INFORMATION SHEET 11

GIS-N NTCE OF CESSATION / CODE SECT 26 11
ANHAM AFFIDAVIT OF NONHOLDING OF AM 11
ANO AFFIDAVIT OF NONCOPERATION 11
NAAM NTCE OF ADJOURNMENT OF AM 11
NPAM NTCE OF POSTPONEMENT OF AM 11
HOLDR LIST OF STOCKHOLDERS (PVT CO) 11
ANNUAL FINANCIAL STATEMENTS

NOT INCLUDED IN REPORTS
FS FINANCIAL STATEMENT-ANNUAL 12
ANNUAL REPORTS AND PROXIES/

INFO STATEMENTS
11-A FORM 11-A: ANNUAL REPORT/FS 13

AR-SH ANNUAL RPT TO SHAREHOLDERS 13
AR-AA ANNUAL RPT-ASSET BACK ACCTANT 13
AR-AS ANNUAL RPT-ASSET BACK SERVICER 13
AR-FC ANNUAL RPT-FGN CORP-PRIMARY/FS 13
AR-FR ANNUAL RPT-FGN REGIONAL HQ 13
CPX-P PRELIMINARY CONTEST PXY/CONFID 13
PXY-P PRELIMINARY PROXY STMT/CONFID 13
I N F p
- PRELIMINARY INFO STMT/CONFID 13
INFO FORM 34-C: INFORMATION STMT 13
PROXY FORM 34-A: PROXY STATEMENT 13
CPROX FORM 34-A(l): CONTESTED PROXY 13
Appendix K
QUARTERLY REPORTS
11-Q FORM 11-Q: QUARTERLY REPORT/FS 15

CPQCF QTR RPT-CP / BOND CASH FLOW 85-1 15
CPQFS QTR RPT-CP / BOND INTERIM FS 101 15
QR-AS QTR RPT-ASSET BACK SERVICER 15
CURRENT REPORTS/REPORTING
EXEMPTION OR DELAY
11-C FORM 11-C: CURRENT DISCL RPT 16
11-EX FORM 11-EX: NTCE EXMPT RPTNG 16
11-L FORM 11-L: NTCE TO DELAY RPT 16
COMMERCIAL PAPER REGULATORY REPORTS

CPAIN CP-ANNUAL INFO STMT 04
CPM CP-MONTHLY M-101/1040 04
CPM-N CP-MONTHLY M-101/NQB 04
CPM-23 CP-MONTHLY M-23-01 04
CPQ23 CP-QTR Q-23-01 / INTERIM FS 04
CPQES CP-QTR EPS STMT 4-83 04
PROPRIETARY CERTS/SHARES REPORTS
COA CHANGE OF ADDRESS 16
DIV DIVIDEND DECLARATION 16
EDN EXPANSION/DEVELOPMENT NTCE 16
MER MERGER/CONSOLIDATION CONTRACT 16
MOC MGT/OPERATING CONTRACT 16
OFFDR LIST OF OFFICERS AND DIRECTORS 16
TENDER OFFERS
STEND FORM 32-B: SELF-TENDER INFO 17
TENDR FORM 33-A: TENDER OFFER STMT 17
ACQUISITION REPORTS
ACQ FORM 32-A1: ACQUISITION STMT 18
ACQ-N FORM 32-A2: ACQUISITION NTCE 18
BENEFICIAL REPORTS
BEN FORM 36-A: BENEFICIAL OWNER 19
BEN-C FORM 36-B: BENEFICIAL CHANGES 19
PRE-NEED REGISTRATION and RENEWALS

PN-1 PRE-NEED CO / PLAN / DLR FILING 60
PN-S PRE-NEED SALESMAN REG 60
PN-RB PN RELEASE OF BALANCE 60
PN-TF P N A G R E E M E N T W I T H TR F U N D B K 60
PN-EX PRE-NEED EXEMPTIONS 60
PN-W PRE-NEED W I T H D R A W A L 60
PND-R PN DEALER RENEWAL 60
PNS-R PRE-NEED S A L E S M A N R E N E W 60
PRE-NEED REPORTS
PNAVR P N A N N U A L A C T U A R I A L V A L RPT 61
PNMCD P N M O N T H L Y C O L L E C T I O N / D E P RPTS 61
PNMSA P N M O N T H L Y S A L E S M A N / A P P R E N RPT 61
PNMSR P N M O N T H L Y P L A N SALES / H L D R RPT 61
PNQFS PN QTR U N A U D I T E D FS 61
PNQLP P N Q T R L A P S E D P L A N S RPT 61
PNQTF QTR STMT BY PN TRUST F U N D 61
PNUPC PN DLR U N I M P A I R E D PAIDUP CAP 61
WP-PN W O R K PERMIT: PN D L R 61
FINANCING COMPANY REGISTRATION
FC-1 F I N A N C E CO REGISTRATION 70
FC-EX F I N A N C E CO EXEMPTIONS 70
FC-W FINANCE CO W I T H D R A W A L 70
F I N A N C I N G C O M P A N Y REGULATORY REPORTS
FCQ88 F I N C O Q T R R P T FCQ-88-01 O F F D R 71
FCQBS F I N C O Q T R B A L S H E E T 7-26-02B 71
FCQIS F I N C O Q T R I N C S T M T 7-26-03B 71
— oOo —
Appendix L
COPIES OF REPORTS AND OTHER FILINGS

WITH THE SECURITIES & EXCHANGE
COMMISSION
In line w i t h the objectives of the Anti-Red Tape Act of 2007 and, by way
of contribution to the government's efforts to protect the environment, the
Securities & Exchange Commission, effective March 15,2010, reduced the number of
copies of reports and other filings by reporting corporations w i t h the Commission
(exclusive of the filer's receiving copy) as follows:
1. Filings with the Company Registration and Monitoring Department:

Applications for registration of Articles of Incorporation (AOI)/Articles of
Partnership (AOP); By-laws; Amendments of A O I / A O P and By-laws; mergers;
licenses of foreign corporations, regional headquarters and regional operating
headquarters; General Information Sheet (GIS) and Financial Statements... 3 copies
2. Filings with the Corporation Finance Department:
A. LISTED AND PUBLIC COMPANIES
Form Type DESCRIPTION COPIES

SEC F o r m 12-1 Registration S t a t e m e n t 3
SEC F o r m 1 7 - A Annual Report 3
SEC F o r m 1 7 - Q Quarterly Report 2
SEC F o r m 17-C Current Report 2
SEC F o r m 1 7 - L N o t i f i c a t i o n of Inability to File F o r m 1 7 - A or 2

17-Q
SEC F o r m 17-EX Notification of Suspension of Duty to File 2

R e p o r t s U n d e r Sec. 17 of the Securities
Regulation C o d e
SEC F o r m 20-IS Information Statement 2
SEC F o r m 2 3 - A Initial Statement of Beneficial O w n e r s h i p 2
SEC F o r m 23-B Statement of C h a n g e s in Beneficial Ownership 2
Secretary's Certificate of Attendance of Directors 2
1055
1056
Certificate of C o m p l i a n c e with the Revised C o d e 2

of C o r p o r a t e G o v e r n a n c e
S E C F o r m 18-A R e p o r t of 5% Beneficial O w n e r s h i p 2
S E C F o r m 18-AS R e p o r t of 5% Institutional B u y e r 2
S E C F o r m 19.1 Tender Offer Report 2
B. FINANCING COMPANIES

SEC F o r m F C F S Semi-Annual Reports 2
S E C F o r m FCIF Special F o r m for A u d i t e d Financial S t a t e m e n t s 2
C o r p o r a t e S e c r e t a r y ' s Certification on directors' 2

a t t e n d a n c e in b o a r d m e e t i n g s
C o m p l i a n c e Officer's Certification on extent of 2

c o m p l i a n c e w i t h the R e v i s e d C o d e o f C o r p o r a t e
Governance
Revised C o d e o f C o r p o r a t e G o v e r n a n c e 2
Corporate Governance Scorecard 2
AMLA Manual on Anti-Money Laundering 2
A M L A Compliance Form 2
C. LENDING COMPANIES

SEC Form LCIF Semi-Annual Reports 2
SEC Form LCFS Special F o r m for A u d i t e d Financial S t a t e m e n t s 2

(LCFS)
D. COMMERCIAL PAPERS ISSUERS
Form T y p e DESCRIPTION COPIES

CPAIN Information Statement 2
3. Filings with the Market Regulation Department:

A. TRANSFER AGENTS

SEC Form 3 6 - A R Annual Report 2
SEC Form 36-FS A n n u a l A u d i t e d Financial S t a t e m e n t 2
SEC Form 3 6 - E R Exception Report 2
COPIES OF REPORTS AND OTHER FILINGS WITH THE SECURITIES 1057
& EXCHANGE COMMISSION
Appendix L
SEC Form MCG-2002 Certificate o f C o m p l i a n c e w i t h the R e v i s e d C o d e 2

of Corporate Governance
Certificate of A t t e n d a n c e of Directors in m e e t i n g s 2
o f the B o a r d o f the D i r e c t o r s
B. EXCHANGI:S
SEC Form 33-A A m e n d m e n t F o r m for E x c h a n g e s 2
SEC Form MCG-2002 Certificate o f C o m p l i a n c e w i t h the Revised C o d e 2

Certificate of A t t e n d a n c e of Directors in m e e t i n g s 2
o f the B o a r d o f D i r e c t o r s
E x c h a n g e ' s r e p o r t o n B l o c k Sales 2
Broker/Dealer's report on transactions/trading 2

o f P S E shares.
C. SELF-REGULATORY ORGANIZATIONS
SEC Form 33-SRO A m e n d m e n t F o r m for E x c h a n g e s 2
E x c h a n g e ' s R e p o r t o n Ceiling and Floor Alerts 2
Exchange's Audit Calendar 2

(N
E x c h a n g e ' s m o n t h l y r e p o r t o n periodic e x a m i -
nation
Exchange's monthly report on dockets of 2

E x a m i n a t i o n s a n d Investigations being c o n d u c t e d
b y the E x c h a n g e
E x c h a n g e ' s S e m i - A n n u a l R e p o r t on listed and 2

delisted / s u s p e n d e d issues
D. CLEARING AGENCIES
SEC Form 42-CA Registration F o r m / A m e n d m e n t F o r m for Clear- 2

ing A g e n c i e s
SEC Form 42-FS Annual A u d i t e d Financial Statements 2
SEC Form MCG-2002 Certificate of C o m p l i a n c e with the Revised C o d e 2

Certificate of A t t e n d a n c e of Directors in meetings 2

of the Board of Directors
Clearing Agency's report on Breaches of Rules or 2

Difficulties of Participants
1058
E. INVESTMENTS HOUSES/UNDER WRITERS OF SECURITIES
SEC Form IH-14 QPR Quarterly Progress Report 2
SEC Form IH-14 AR Annual Report 2
SEC Form I H / U - I A Report on any c h a n g e / s in the information 2

contained in SEC Form I H / U - I A
SEC Form MCC-2002 Certificate of C o m p l i a n c e w i t h the R e v i s e d 2

Code of Corporate Governance
Certificate of A t t e n d a n c e of Directors in 2
meetings of Board of Directors
Risk Based Capital A d e q u a c y Report 2
SEC Form 28-T Notice of Termination of Salesman a n d / o r 2

Associated Person
SEC F o r m BD — 30.2 Q C R Associated Person's Quarterly Compliance 2

Report
SEC F o r m 28-S A m e n d m e n t / C h a n g e s in the Information 2

contained in SEC F o r m 28-S
SEC Form 2 8 - C O / A P A m e n d m e n t / C h a n g e s in the Information 2

contained in SEC — F o r m 2 3 - C O / A P
F. INVESTMENT COMPANY ADVISERS
Form Type DESCRIPTION copres

SEC Form ICA-IA Registration F o r m / A m e n d m e n t F o r m for 2
Investment Company Advisers
SEC F o r m ICA-CIS A m e n d m e n t / C h a n g e s in the information 2

contained in SEC F o r m ICA-CIS
SEC Form I C A - C O / A P A m e n d m e n t / C h a n g e s in the Information 2

contained in SEC Form C O / A P
SEC Form ICA-T Notice of Termination of Salesman a n d / o r 2

Associated Person
SEC Form MCC-2002 Certificate o f C o m p l i a n c e w i t h the R e v i s e d 2

Code of Corporate Governance
Certificate of A t t e n d a n c e of Directors in 2
m e e t i n g s of the B o a r d of D i r e c t o r s
G. MUTUAL FUND DISTRIBUTORS

SEC F o r m M F D Registration Form/Amendment Form for 2
Mutual Fund Distributors
SEC Form ICA-T Notice of Termination of Salesman and/or 2

Associated Person
COPIES OF REPORTS AND OTHER FILINGS WITH THE SECURITIES 1059
& EXCHANGE COMMISSION
Appendix L
H. GOVERNMENT SECURITIES ELIGIBLE DEALERS

SEC Form MCC-2002 Certificate of Compliance with the Revised Code 2
Certificate of Attendance of Directors in meetings 2

of the Board of Directors
Risk Based Capital Adequacy Report 2
SEC Form 28 — BDA Amendment Form for Government Securities 2

Eligible Dealer
SEC Form 28-T Notice of Termination of Salesman and/or 2

Associated Person
SEC Form 1313 — 30.2 OCR Associated Person's Quarterly Compliance Report 2
SEC Form 28-S Amendment/Changes in the Information 2
contained in SEC Form 28-S
SEC Form 28-CO/AP Amendment/Changes in the Information 2

contained in SEC Form 28-CO/AP
I. BROKER/DEALER(S) IN SECURITIES
SEC Form MCC-2002 Certificate of Compliance with the Revised Code of 2

Corporate Governance
Certificate of Attendance of Directors in meetings of 2

the Board of Directors
Risk Based Capital Adequacy Report 2
SEC Form 30.1 Report on Monitoring of Affiliated Transactions of 2

Brokers and Dealers
SEC Form BD — 30.2 QCR Associated Person's Quarterly Compliance Report 2
SEC Form 28-S Amendment /Changes in the Information contained 2

in SEC Form 28-S
SEC Form 28-CO/AP Amendment/Changes in the Information contained 2

in SEC Form 28-CO/AP
4. Filings and pleadings filed with the Office of the General Counsel:
a) Request for Opinion 1 copy
b) En B a n c cases 2 copies
c) Complaints and other cases
• O n e respondent 2 copies
• Two or m o r e respondents 2 copies per
respondent
All other reports a n d filings with the Commission that are not included in
the e n u m e r a t i o n a b o v e shall b e i n the s a m e n u m b e r o f c o p i e s a s p r e s e n t l y
in effect.
March 5, 2010, M a n d a l u y o n g City, Metro Manila.

Appendix M
REVISED CODE OF CORPORATE GOVERNANCE
SEC CIRCULAR NO. 6
SERIES OF 2009
Pursuant to its mandate under the Securities Regulation Code and
the Corporation Code, the Securities and Exchange Commission (the
"Commission"), in a meeting held on June 18,2009, approved the promulgation
of this Revised Code of Corporate Governance (the "Code") w h i c h shall
apply to registered corporations and to branches or subsidiaries of foreign
corporations operating in the Philippines that (a) sell equity a n d / o r debt
securities to the public that are required to be registered w i t h the Commission,
or (b) have assets in excess of Fifty M i l l i o n Pesos and at least t w o h u n d r e d
(200) stockholders w h o o w n at least one h u n d r e d (100) shares each of equity
securities, or (c) whose equity securities are listed on an Exchange, or (d) are
grantees of secondary licenses f r o m the Commission.
Article 1: D e f i n i t i o n of Terms
a) Corporate Governance — the f r a m e w o r k of rules, systems and
processes in the corporation that governs the performance by the
Board of Directors and M a n a g e m e n t of their respective duties a n d
responsibilities to the stockholders;
b) Board of Directors — the governing b o d y elected by the stockholders

that exercises the corporate powers of a corporation, conducts all its
business and controls its properties;
c) Exchange — an organized market place or facility that brings

together buyers and sellers, a n d executes trades of securities a n d / o r
commodities;
d) Management — the body given the authority by the Board of Directors

to implement the policies it has laid d o w n in the conduct of the
business of the corporation;
e) Independent director — a person w h o , apart from his 'fees and share

holdings, is independent of management and free f r o m any business
or other relationship w h i c h could, or could reasonably be perceived
to: materially interfere w i t h his exercise of independent judgment in
carrying out his responsibilities as a director;
1060
REVISED CODE OF CORPORATE GOVERNANCE 1061
SEC CIRCULAR NO. 6
Appendix M
f) Executive director — a director w h o is also the head of a department -or

unit of the corporation or performs any w o r k related to its operation;
g) Non-executive director — a director w h o is not the head of a department
or unit of the corporation nor performs any w o r k related to its
operation;
h) Non-audit work — the other services offered by an external auditor

to a corporation that are not directly related and relevant to its
statutory audit functions, such as, accounting, payroll, bookkeeping,
reconciliation, computer project management, data processing, or
information technology outsourcing services, internal audit, and
other services that m a y compromise the independence and objectivity
of an external auditor;
i) Internal control — the system established by the Board of Directors and

M a n a g e m e n t for the accomplishment of the corporation's objectives,
the efficient operation of its business, the reliability of its financial
reporting, and faithful compliance w i t h applicable laws, regulations
and internal rules;
j) Internal control system — the f r a m e w o r k under w h i c h internal controls

are developed and implemented (alone or in concert w i t h other
policies or procedures) to manage and control a particular risk or
business activity, or combination of risks or business activities, to
w h i c h the corporation is exposed;
k) Internal audit — an independent and objective assurance activity

designed to a d d value to and improve the corporation's operations,
and help it accomplish its objectives by providing a systematic and
disciplined approach in the evaluation and improvement of the
effectiveness of risk management, control and governance processes;
1) Internal audit department — a department or unit of the corporation
and its consultants, if any, that provide independent and objective
assurance services in order to add value to and improve the
corporation's operations;
m) Internal Auditor — the highest position in the corporation responsible
for internal audit activities. If internal audit activities are performed by
outside service providers, he is the person responsible for overseeing
the service contract, the overall quality of these activities, and follow-
up of engagement results.
Article 2: Rules of Interpretation

A) A l l references to the masculine gender in the salient provisions of this
Code shall likewise cover the feminine gender.
B) A l l doubts or questions that may arise in the interpretation or
application of this Code shall be resolved in favor of promoting
transparency, accountability and fairness to the stockholders and
investors of the corporation.
1062
Article 3: Board Governance

The Board of Directors (the "Board") is primarily responsible for the
governance of the corporation. Corollary to setting the policies for the
accomplishment of the corporate objectives, it shall provide an independent
check on Management.
A) Composition of the Board
The Board shall be composed of at least five (5), but not more than
fifteen (15), members w h o are elected by the stockholders.
A l l companies covered by this Code shall have at least t w o (2)
independent directors or such number of independent directors
that constitutes twenty percent (20%) of the members of the Board,
whichever is lesser, but in no case less than t w o (2). A l l other companies
are encouraged to have independent directors in their boards.
The membership of the Board m a y be a combination of executive
and non-executive directors (which include independent directors) in
order that no director or small group of directors can dominate the
decision-making process.
The non-executive directors should possess such qualifications
and stature that w o u l d enable t h e m to effectively participate in the
deliberations of the Board.
B) M u l t i p l e Board Seats
The Board m a y consider the adoption of guidelines on the number

of directorships that its members can h o l d in stock a n d non-stock
corporations. The o p t i m u m number should take into consideration
the capacity of a director to diligently and efficiently p e r f o r m his
duties and responsibilities.
The Chief Executive Officer ( " C E O " ) and other executive directors
may be covered by a lower indicative limit for membership in other
boards. A similar limit m a y apply to independent or non-executive
directors w h o , at the same time, serve as full-time executives in other
corporations. In any case, the capacity of the directors to diligently
and efficiently perform their duties and responsibilities to the boards
they serve should not be compromised.
C) T h e Chair and C h i e f Executive Officer
The roles of Chair and C E O should, as m u c h as practicable,

be separate to foster an appropriate balance of power, increased
accountability and better capacity for independent decision-making
by the Board. A clear delineation of functions should be m a d e between
the Chair and C E O u p o n their election.
If the positions of Chair and C E O are unified, the proper checks

and balances should be laid d o w n to ensure that the Board gets the
benefit of independent views and perspectives.
REVISED CODE OF CORPORATE GOVERNANCE 1 0 6 3
SEC CIRCULAR NO. 6

Appendix M
The duties and responsibilities of the Chair in relation to the

Board m a y include, among others, the following:
(i) Ensure that the meetings of the Board are held in accordance with
the by-laws or as the Chair m a y deem necessary;
(ii) Supervise the preparation of the agenda of the meeting
in coordination w i t h the Corporate Secretary, taking into
consideration the suggestions of the C E O , Management and the
directors; a n d
(iii) M a i n t a i n qualitative and timely lines of communication and

information between the Board and Management.
D) Qualifications of Directors
In addition to the qualifications for membership in the Board
p r o v i d e d for in the Corporation Code, Securities Regulation Code
a n d other relevant laws, the Board m a y provide for additional
qualifications w h i c h include, among others, the following:
(i) College education or equivalent academic degree;
(ii) Practical understanding of the business of the corporation;
(iii) M e m b e r s h i p in good standing in relevant industry, business or
professional organizations; and
(iv) Previous business experience.
E) Disqualification of Directors
1. Permanent Disqualification
The following shall be grounds for the permanent
disqualification of a director:
(i) A n y person convicted by final judgment or order by a
competent judicial or administrative body of any crime that
(a) involves the purchase or sale of securities, as defined in
the Securities Regulation Code; (b) arises out of the person's
conduct as an underwriter, broker, dealer, investment
adviser, principal, distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or floor
broker; or (c) arises out of his fiduciary relationship with a
bank, quasi-bank, trust company, investment house or as an
affiliated person of any of them;
(ii) A n y person who, by reason of misconduct, after hearinq,
is permanently enjoined by a final judgment or order of
the Commission or any court or administrative body of
competent jurisdiction from: (a) acting as underwriter, broker,
dealer, investment adviser, principal distributor, mutual
fund dealer, futures commission merchant, commodity
trading advisor, or floor broker; (b) acting as director or
officer of a bank, quasi-bank, trust company, investment
house, or investment company; (c) engaging in or continuing
any conduct or practice in any of the capacities mentioned in

sub-paragraphs (a) and (b) above, or willfully violating the
laws that govern securities and banking activities.
The disqualification shall also apply if such person
is currently the subject of an order of the Commission or
any court or administrative body denying, revoking or
suspending any registration, license or permit issued to h i m
under the Corporation Code, Securities Regulation Code or
any other law administered by the Commission or Bangko
Sentral ng Pilipinas (BSP), or under any rule or regulation
issued by the Commission or BSP, or has otherwise been
restrained to engage in any activity involving securities and
banking; or such person is currently the subject of an effective
order of a self-regulatory organization suspending or
expelling h i m from membership, participation or association
w i t h a member or participant of the organization;
(iii) A n y person convicted by final judgment or order by a court or

competent administrative body of an offense involving moral
turpitude, fraud, embezzlement, theft, estafa, counterfeiting,
misappropriation, forgery, bribery, false affirmation, perjury
or other fraudulent acts;
(iv) A n y person w h o has been adjudged by final judgment or
order of the Commission, court, or competent administrative
body to have w i l l f u l l y violated, or w i l l f u l l y aided, abetted,
counseled, induced or procured the violation of any provision
of the Corporation Code, Securities Regulation Code or any
other law administered by the Commission or BSP, or any of
its rule, regulation or order;
(v) A n y person earlier elected as independent director w h o
becomes an officer, employee or consultant of the same
corporation;
(vi) A n y person judicially declared as insolvent;
(vii) A n y person found guilty by final judgment, or order of a
foreign court or equivalent financial regulatory authority
of acts, violations or misconduct similar to any of the acts,
violations or misconduct enumerated in sub-paragraphs (i)
to (v) above;
(viii) Conviction by final judgment of an offense punishable by
imprisonment for more than six (6) years, or a violation of
the Corporation Code committed w i t h i n five (5) years prior
to the date of his election or appointment.
Temporary Disqualification
The Board m a y provide for the temporary disqualification of
a director for any of the following reasons:
SEC CIRCULAR NO. 6
Appendix M
(i) Refusal to comply w i t h the disclosure requirements of the

Securities Regulation Code and its Implementing Rules and
Regulations. The disqualification shall be in effect as long as
the refusal persists.
(ii) Absence in more than fifty (50) percent of all regular and
special meetings of the Board d u r i n g his incumbency, or
any twelve (12) m o n t h period d u r i n g the said incumbency,
unless the absence is due to illness, death in the immediate
family or serious accident. The disqualification shall apply
for purposes of the succeeding election.
(iii) Dismissal or termination for cause as director of any

corporation covered by this Code. The disqualification shall
be in effect until he has cleared himself from any involvement
in the cause that gave rise to his dismissal or termination.
(iv) If the beneficial equity ownership of an independent director

in the corporation or its subsidiaries and affiliates exceeds
t w o percent of its subscribed capital stock. The disqualifica-
tion shall be lifted if the limit is later complied w i t h .
(v) If any of the judgments or orders cited in the grounds for
permanent disqualification has not yet become final.
A temporarily disqualified director shall, w i t h i n sixty
(60) business days f r o m such disqualification, take the
appropriate action to remedy or correct the disqualification.
If he fails or refuses to do so for unjustified reasons, the
disqualification shall become permanent.
Responsibilities, Duties and Functions of the Board

1. General Responsibility
It is the Board's responsibility to foster the long-term
success of the corporation, and to sustain its competitiveness and
profitability in a manner consistent w i t h its corporate objectives
and the best interests of its stockholders.
The Board should formulate the corporation's vision,
mission, strategic objectives, policies and procedures that shall
guide its activities, including the means to effectively monitor
Management's performance.
2. Duties and Functions
To ensure a high standard of best practice for the corporation
and its stockholders, the Board should conduct itself with honesty
and integrity in the performance of, among others, the following
duties and functions:
a) Implement a process for the selection of directors who can
add value and contribute independent judgment to the for-
mulation of sound corporate strategies and policies. Appoint
competent, professional, honest and highly-motivated m a n -

agement officers. A d o p t an effective succession planning
program for Management.
b) Provide sound strategic policies and guidelines to the
corporation on major capital expenditures. Establish
programs that can sustain its long-term viability and strength.
Periodically evaluate and monitor the implementation of
such policies and strategies, including the business plans,
operating budgets and Management's overall performance.
c) Ensure the corporation's faithful compliance w i t h all appli-
cable laws, regulations and best business practices.
d) Establish and maintain an investor relations program that w i l l
keep the stockholders informed of important developments
in the corporation. If feasible, the corporation's C E O or chief
financial officer shall exercise oversight responsibility over
this program.
e) Identify the sectors in the community in w h i c h the corpora-

tion operates or are directly affected by its operations, and
formulate a clear policy of accurate, timely and effective
communication w i t h them.
f) A d o p t a system of check and balance w i t h i n the Board. A

regular review of the effectiveness of such system should be
conducted to ensure the integrity of the decision-making and
reporting processes at all times. There should be a continuing
review of the corporation's internal control system in order
to maintain its adequacy and effectiveness.
g) Identify key risk areas and performance indicators and

monitor these factors w i t h due diligence to enable the
corporation to anticipate and prepare for possible threats to
its operational and financial viability.
h) Formulate and implement policies and procedures that

w o u l d ensure the integrity and transparency of related par-
ty transactions between and among the corporation and its
parent company, joint ventures, subsidiaries, associates, af-
filiates, major stockholders, officers and directors, including
their spouses, children and dependent siblings and parents,
and of interlocking director relationships by members of the
Board.
i) Constitute an A u d i t Committee and such other committees it

deems necessary to assist the Board in the performance of its
duties and responsibilities.
j) Establish and maintain an alternative dispute resolution
system in the corporation that can amicably settle conflicts or
differences between the corporation and its stockholders, and
REVISED CODE OF CORPORATE GOVERNANCE 1 0 6 7
SEC CIRCULAR NO. 6

Appendix M
the corporation and third parties, including the regulatory

authorities.
k) M e e t at such times or frequency as m a y be needed. The
minutes of such meetings should be duly recorded.
Independent views d u r i n g Board meetings should be
encouraged and given due consideration.
1) Keep the activities and decisions of the Board w i t h i n its

authority under the articles of incorporation and by-laws,
and in accordance w i t h existing laws, rules and regulations.
m) A p p o i n t a Compliance Officer w h o shall have the rank of
at least vice president. In the absence of such appointment,
the Corporate Secretary, preferably a lawyer, shall act as
Compliance Officer.
G) Specific Duties and Responsibilities of a Director

A director's office is one of trust and confidence. A director should
act in the best interest of the corporation in a manner characterized
by transparency, accountability and fairness. He should also exercise
leadership, prudence and integrity in directing the corporation
towards sustained progress.
A director should observe the following norms of conduct:

(i) Conduct fair business transactions w i t h the corporation, and
ensure that his personal interest does not conflict w i t h the
interests of the corporation.
The basic principle to be observed is that a director should

not use his position to profit or gain some benefit or advantage for
himself a n d / o r his related interests. He should avoid situations
that m a y compromise his impartiality. If an actual or potential
conflict of interest m a y arise on the part of a director, he should
fully and immediately disclose it and should not participate in
the decision-making process. A director w h o has a continuing
material conflict of interest should seriously consider resigning
from his position.
A conflict of interest shall be considered material if the

director's personal or business interest is antagonistic to that of
the corporation, or stands to acquire or gain financial advantage
at the expense of the corporation.
(ii) Devote the time and attention necessary to properly and
effectively perform his duties and responsibilities.
A director should devote sufficient time to familiarize himself
w i t h the corporation's business. He should be constantly aware of
and knowledgeable w i t h the corporation's operations to enable
h i m to meaningfully contribute to the Board's work. He should
attend and actively participate in Board and committee meetings,
1068
review meeting materials and, if called' for, ask questions or seek

explanation.
(iii) Act judiciously.
Before deciding on any matter brought before the Board, a
director should carefully evaluate the issues and, if necessary,
make inquiries and request clarification.
(iv) Exercise independent judgment.
A director should v i e w each problem or situation objectively.
If a disagreement w i t h other directors arises, he should carefully
evaluate and explain his position. He should not be afraid to take
an unpopular position. Corollarily, he should support plans and
ideas that he thinks are beneficial to the corporation.
(v) H a v e a w o r k i n g knowledge of the statutory and regulatory
requirements that affect the corporation, including its articles
of incorporation and by-laws, the rules and regulations of the
Commission and, where applicable, the requirements of relevant
regulatory agencies.
A director should also keep abreast w i t h industry develop-
ments and business trends in order to promote the corporation's
competitiveness.
(vi) Observe confidentiality.
A director should keep secure and confidential all non-public
information he m a y acquire or l e a m by reason of his position
as director. He should not reveal confidential information to
unauthorized persons w i t h o u t the authority of the Board.
H) Internal Control Responsibilities of the Board

The control environment of the corporation consists of (a) the
Board which ensures that the corporation is properly and effectively
managed and supervised; (b) a M a n a g e m e n t that actively manages
and operates the corporation in a sound and p r u d e n t manner; (c)
the organizational and procedural controls supported by effective
management information and risk management reporting systems;
and (d) an independent audit mechanism to monitor the adequacy
and effectiveness of the corporation's governance, operations,
and information systems, including the reliability and integrity of
financial and operational information, the effectiveness a n d efficiency
of operations, the safeguarding of assets, and compliance w i t h laws,
rules, regulations and contracts.
(i) The m i n i m u m internal control mechanisms for the performance

of the Board's oversight responsibility m a y include:
a) Definition of the duties and responsibilities of the C E O w h o
is ultimately accountable for the corporation's organizational
and operational controls;
SEC CIRCULAR NO. 6
Appendix M
b) Selection of the person w h o possesses the ability, integrity

and expertise essential for the position of C E O ;
c) Evaluation of proposed senior management appointments;

d) Selection a n d appointment of qualified and competent
management officers; and
e) Review of the corporation's h u m a n resource policies, conflict

of interest situations, compensation program for employees,
a n d management succession plan.
(ii) The scope and particulars of the systems of effective organiza-

tional and operational controls m a y differ among corporations
depending on, among others, the following factors: nature and
complexity of the business and the business culture; volume, size
and complexity of transactions; degree of risks involved; degree
of centralization a n d delegation of authority; extent and effective-
ness of information technology; and extent of regulatory com-
pliance.
(iii) A corporation m a y establish an internal audit system that can

reasonably assure the Board, Management and stockholders
that its key organizational and operational controls are faithfully
complied w i t h . The Board m a y appoint an Internal A u d i t o r to
perform the audit function, and m a y require h i m to report to a
level in the organization that allows the internal audit activity
to fulfill its mandate. The Internal A u d i t o r shall be guided by
the International Standards on Professional Practice of Internal
Auditing.
Board Meetings and Quorum Requirement

The members of the Board should attend its regular and special
meetings in person or through teleconferencing conducted in
accordance w i t h the rules and regulations of the Commission.
Independent directors should always attend Board meetings.
Unless otherwise provided in the by-laws, their absence shall not
affect the q u o r u m requirement. However, the Board may, to promote
transparency, require the presence of at least one independent director
in all its meetings.
To monitor the directors' compliance w i t h the attendance
requirements, corporations shall submit to the Commission, on or
before January 30 of the following year, a sworn certification about the
directors' record of attendance in Board meetings. The certification
may be submitted through SEC Form 17-C or in a separate filing.
Remuneration of Directors and Officers
The levels of remuneration of the corporation should be sufficient
to be able to attract and retain the services of qualified and competent
directors and officers. A portion of the remuneration of executive
1070
directors may be structured or be based on corporate and individual

performance.
Corporations may establish formal and transparent procedures
for the development of a policy on executive remuneration or
determination of remuneration levels for individual directors and
officers depending on the particular needs of the corporation. No
director should participate in deciding on his remuneration.
The corporation's annual reports and information and proxy
statements shall include a clear, concise and understandable disclosure
of all fixed and variable compensation that m a y be paid, directly or
indirectly, to its directors and top four (4) management officers during
the preceding fiscal year.
To protect the funds of a corporation, the Commission may, in
exceptional cases, e.g., w h e n a corporation is under receivership or
rehabilitation, regulate the payment of the compensation, allowances,
fees and fringe benefits to its directors and officers.
K) Board Committees
The Board shall constitute the proper committees to assist it in
good corporate governance.
(i) The A u d i t Committee shall consist of at least three (3) directors,
w h o shall preferably have accounting and finance backgrounds,
one of w h o m shall be an independent director a n d another w i t h
audit experience. The chair of the A u d i t Committee should be an
independent director. The committee shall have the following
functions:
a) Assist the Board in the performance of its oversight respon-

sibility for the financial reporting process, system of internal
control, audit process, and monitoring of compliance w i t h
applicable laws, rules and regulations;
b) Provide oversight over Management's activities in managing

credit, market, liquidity, operational, legal and other risks of
the corporation. This function shall include regular receipt
from Management of information on risk exposures and risk
management activities;
c) Perform oversight functions over the corporation's internal

and external auditors. It should ensure that the internal and
external auditors act independently from each other, and
that both auditors are given unrestricted access to all records,
properties and personnel to enable them to perform their
respective audit functions;
d) Review the annual internal audit p l a n to ensure its confor-
mity w i t h the objectives of the corporation. The plan shall
include the audit scope, resources and budget necessary to
implement it;
SEC CIRCULAR NO. 6
Appendix M
e) Prior to the commencement of the audit, discuss w i t h the

external auditor the nature, scope and expenses of the audit,
a n d ensure proper coordination if more than one audit firm
is involved in the activity to secure proper coverage and
m i n i m i z e duplication of efforts;
f) Organize an internal audit department, and consider the

appointment of an independent internal auditor and the
terms and conditions of its engagement and removal;
g) M o n i t o r and evaluate the adequacy and effectiveness of the

corporation's internal control system, including financial
reporting control and information technology security;
h) Review the reports submitted by the internal and external

auditors;
i) R e v i e w the quarterly, half-year and annual financial state-

ments before their submission to the Board, w i t h particular
focus on the following matters:
• A n y change / s in accounting policies and practices

• M a j o r judgmental areas
• Significant adjustments resulting from the audit
• G o i n g concern assumptions
• Compliance w i t h accounting standards
• Compliance w i t h tax, legal and regulatory requirements.
j) Coordinate, monitor and facilitate compliance w i t h laws,
rules and regulations;
k) Evaluate and determine the non-audit work, if any, of the
external auditor, and review periodically the non-audit fees
paid to the external auditor in relation to their significance
to the total annual income of the external auditor and to the
corporation's overall consultancy expenses. The committee
shall disallow any non-audit w o r k that w i l l conflict with
his duties as an external auditor or may pose a threat to his
independence. The non-audit work, if allowed, should be
disclosed in the corporation's annual report;
1) Establish and identify the reporting line of the Internal
Auditor to enable h i m to properly fulfill his duties and
responsibilities. He shall functionally report directly to the
A u d i t Committee.
The A u d i t Committee shall ensure that, in the
performance of the w o r k of the Internal Auditor, he shall be
free from interference by outside parties.
For Philippine branches or subsidiaries of foreign cor-
porations covered by this Code, their Internal Auditor
should be independent of the Philippine operations and

should report to the regional or corporate headquarters.
(ii) The Board may also organize the following committees:
a) A Nomination Committee, which m a y be composed of at
least three (3) members and one of w h o m should be an inde-
pendent director, to review and evaluate the qualifications of
all persons nominated to the Board and other appointments
that require Board approval, and to assess the effectiveness
of the Board's processes and procedures in the election or
replacement of directors;
b) A Compensation or Remuneration Committee, w h i c h may

be composed of at least three (3) members and one of w h o m
should be an independent director, to establish a formal
and transparent procedure for developing a policy on
remuneration of directors and officers to ensure that their
compensation is consistent w i t h the corporation's culture,
strategy and the business environment in w h i c h it operates.
L) T h e Corporate Secretary
The Corporate Secretary, w h o should be a Filipino citizen and
a resident of the Philippines, is an officer of the corporation. He
should —
(i) Be responsible for the safekeeping and preservation of the integ-

rity of the minutes of the meetings of the Board and its commit-
tees, as w e l l as the other official records of the corporation;
(ii) Be loyal to the mission, vision and objectives of the corporation;

(iii) W o r k fairly and objectively w i t h the Board, Management and
stockholders;
(iv) H a v e appropriate administrative and interpersonal skills;
(v) If he is not at the same time the corporation's legal counsel, be

aware of the laws, rules and regulations necessary in the perfor-
mance of his duties and responsibilities;
(vi) H a v e a w o r k i n g knowledge of the operations of the corporation;

(vii) Inform the members of the Board, in accordance w i t h the by-laws,
of the agenda of their meetings and ensure that the members have
before them accurate information that w i l l enable them to arrive
at intelligent decisions on matters that require their approval;
(viii) Attend all Board meetings, except w h e n justifiable causes, such
as, illness, death in the immediate family and serious accidents,
prevent h i m from doing so;
(ix) Ensure that all Board procedures, rules and regulations are strictly
followed by the members; and
SEC CIRCULAR NO. 6
Appendix M
(x) If he is also the Compliance Officer, perform all the duties and
responsibilities of the said officer as provided for in this Code.
M) The Compliance Officer
The Board shall appoint a Compliance Officer w h o shall report
directly to the Chair of the Board. He shall perform the following
duties:
(i) M o n i t o r compliance by the corporation w i t h this Code and the

rules and regulations of regulatory agencies and, if any violations
. are f o u n d , report the matter to the Board and recommend the
imposition of appropriate disciplinary action on the responsible
parties and the adoption of measures to prevent a repetition of
the violation;
(ii) A p p e a r before the Commission w h e n summoned in relation to

compliance w i t h this Code; and
(iii) Issue a certification every January 30th of the year on the extent
of the corporation's compliance w i t h this Code for the completed
year a n d , if there are any deviations, explain the reason for such
deviation.
Article 4: Adequate and Timely Information

To enable the members of the Board to properly fulfill their duties and
responsibilities, M a n a g e m e n t should provide them w i t h complete, adequate
and timely information about the matters to be taken in their meetings.
Reliance on information volunteered by Management w o u l d not be

sufficient in all circumstances and further inquiries m a y have to be made
by a member of the Board to enable h i m to properly perform his duties and
responsibilities. Hence, the members should be given independent access to
Management and the Corporate Secretary.
The information m a y include the background or explanation on matters
brought before the Board, disclosures, budgets, forecasts and internal financial
documents.
The members, either individually or as a Board, and in furtherance of their
duties and responsibilities, should have access to independent professional
advice at the corporation's expense.
Article 5: Accountability and Audit
A) The Board is primarily accountable to the stockholders. It should
provide them w i t h a balanced and comprehensible assessment of
the corporation's performance, position and prospects on a quarterly
basis, including interim and other reports that could adversely affect
its business, as well as reports to regulators that are required by law.
Thus, it is essential that Management provide all members of the
Board with accurate and timely information that would enable the
Board to comply with its responsibilities to the stockholders.
Management should formulate, under the supervision of the

A u d i t Committee, the rules and procedures on financial reporting and
internal control in accordance w i t h the following guidelines:
(i) The extent of its responsibility in the preparation of the financial
statements of the corporation, w i t h the corresponding delineation
of the responsibilities that pertain to the external auditor, should
be clearly explained;
(ii) An effective system of internal control that w i l l ensure the
integrity of the financial reports and protection of the assets of
the corporation should be maintained;
(iii) On the basis of the approved audit plans, internal audit
examinations should cover, at the m i n i m u m , the evaluation of the
adequacy and effectiveness of controls that cover the corporation's
governance, operations and information systems, including the
reliability and integrity of financial and operational information,
effectiveness and efficiency of operations, protection of assets,
and compliance w i t h contracts, laws, rules and regulations;
(iv) The corporation should consistently comply w i t h the financial

reporting requirements of the Commission;
(v) The external auditor should be rotated or changed every five (5)
years or earlier, or the signing partner of the external auditing
firm assigned to the corporation, should be changed w i t h the
same frequency. The Internal A u d i t o r should submit to the A u d i t
Committee a n d M a n a g e m e n t an annual report on the internal
audit department's activities, responsibilities a n d performance
relative to the audit plans and strategies as approved by the
A u d i t Committee. The annual report should include significant
risk exposures, control issues and such other matters as m a y
be needed or requested by the Board a n d Management. The
Internal A u d i t o r should certify that he conducts his activities in
accordance w i t h the International Standards on the Professional
Practice of Internal A u d i t i n g . If he does not, he shall disclose to
the Board and M a n a g e m e n t the reasons w h y he has not fully
complied w i t h the said standards.
The Board, after consultations w i t h the A u d i t Committee, shall

recommend to the stockholders an external auditor d u l y accredited
by the Commission w h o shall undertake an independent audit of the
corporation, and shall provide an objective assurance on the manner
by which the financial statements shall be prepared and presented
to the stockholders. The external auditor shall not, at the same time,
provide internal audit services to the corporation. N o n - a u d i t w o r k
may be given to the external auditor, provided it does not conflict w i t h
his duties as an independent auditor, or does not pose a threat to his
independence.
SEC CIRCULAR NO. 6
Appendix M
If the external auditor resigns, is dismissed or ceases to perform

his services, the reason/s for and the date of effectivity of such action
shall be reported in the corporation's annual and current reports. The
report shall include a discussion of any disagreement between h i m
and the corporation on accounting principles or practices, financial
disclosures or audit procedures w h i c h the former auditor and the
corporation failed to resolve satisfactorily. A preliminary copy of the
said report shall be given by the corporation to the external auditor
before its submission.
If the external auditor believes that any statement made in

an annual report, information statement or any report filed w i t h
the Commission or any regulatory b o d y d u r i n g the period of his
engagement is incorrect or incomplete, he shall give his comments or
views on the matter in the said reports.
Article 6: Stockholders' Rights and Protection of Minority Stockholders'

Interests
A) The Board shall respect the rights of the stockholders as provided for
in the Corporation Code, namely:
(i) Right to vote on all matters that require their consent or approval;
(ii) Pre-emptive right to all stock issuances of the corporation;
(iii) Right to inspect corporate books and records;
(iv) Right to information;
(v) Right to dividends; and
(vi) Appraisal right.
B) The Board should be transparent and fair in the conduct of the
annual and special stockholders' meetings of the corporation.
The stockholders should be encouraged to personally attend such
meetings. If they cannot attend, they should be apprised ahead of
time of their right to appoint a proxy. Subject to the requirements of
the by-laws, the exercise of that right shall not be unduly restricted
and any doubt about the validity of a proxy should be resolved in the
stockholder's favor.
It is the duty of the Board to promote the rights of the stockholders,
remove impediments to the exercise of those rights and provide an
adequate avenue for them to seek timely redress for breach of their
rights.
The Board should take the appropriate steps to remove excessive
or unnecessary costs and other administrative impediments to
the stockholders' meaningful participation in meetings, whether
in person or by proxy. Accurate and timely information should be
made available to the stockholders to enable them to make a sound
judgment on all matters brought to their attention for consideration or
approval.
Although all stockholders should be treated equally or without

discrimination, the Board should give minority stockholders the right
to propose the holding of meetings and the items for discussion in the
agenda that relate directly to the business of the corporation.
Article 7: Governance Self-Rating System

The Board may create an internal self-rating system that can measure the
performance of the Board and Management in accordance w i t h the criteria
provided for in this Code.
The creation and implementation of such self-rating system, including its
salient features, may be disclosed in the corporation's annual report.
Article 8: Disclosure and Transparency

The essence of corporate governance is transparency. The more transparent
the internal workings of the corporation are, the more difficult it w i l l be for
Management and dominant stockholders to mismanage the corporation or
misappropriate its assets.
It is therefore essential that all material information about the corporation
which could adversely affect its viability or the interests of the stockholders
should be publicly and timely disclosed. Such information should include,
among others, earnings results, acquisition or disposition of assets, off
balance sheet transactions, related party transactions, and direct and indirect
remuneration of members of the Board and Management. A l l such information
should be disclosed through the appropriate Exchange mechanisms and
submissions to the Commission.
Article 9: C o m m i t m e n t to Good Corporate Governance

A l l covered corporations shall establish a n d i m p l e m e n t their corporate
governance rules in accordance w i t h this Code. The rules shall be embodied
in a m a n u a l that can be used as reference by the members of the Board and
Management. The m a n u a l should be submitted to the Commission for its
evaluation w i t h i n one hundred eighty (180) business days from the date this
Code becomes effective to enable the Commission to determine its compliance
with this Code taking into consideration the nature, size and scope of the
business of the corporation; provided, however, that corporations that have
earlier submitted their manual may, at their option, continue to use the said
manual as long it complies w i t h the provisions of this Code.
The manual shall be made available for inspection by any shareholder at

reasonable hours on business days.
Article 10: Regular Review of the Code and the Scorecard

To monitor the compliance by covered corporations w i t h this Code, the
Commission may require them to accomplish annually a scorecard on the
scope, nature and extent of the actions they have taken to meet the objectives
of this Code.
SEC CIRCULAR NO. 6
Appendix M
The Commission shall periodically review this Code to ensure that it meets
its objectives.
Article 11: Administrative Sanctions

A fine of not more than T w o H u n d r e d Thousand Pesos (P200,000) shall, after
due notice and hearing, be imposed for every year that a covered corporation
violates the provisions of this Code, w i t h o u t prejudice to other sanctions
that the Commission m a y be authorized to impose under the law; provided,
however, that any violation of the Securities Regulation Code punishable by
a specific penalty shall be assessed separately and shall not be covered by the
abovementioned fine.
Article 12: Effective Date

This M e m o r a n d u m Circular shall take effect on July 15, 2009.
Signed this 22nd day of June 2009 at M a n d a l u y o n g City, Philippines.
— oO —
Appendix N
THE 2006 RULES OF PROCEDURE
OF THE SECURITIES AND EXCHANGE
COMMISSION
Pursuant to the Securities Regulation Code (R.A. 8799), Corporation

Code of the Philippines (B.P 68), Presidential Decree N o . 902-A, as amended,
and other related laws, and in the interest of a just, speedy and inexpensive
resolution of disputes and complaints over w h i c h the SEC has jurisdiction, the
Commission hereby promulgates the following rules of procedure to govern
actions and proceedings before it.
RULE I
G e n e r a l Provisions
SEC. 1-1. Title. — These Rules shall be k n o w n as the "The 2006 Rules of
Procedure of the Securities and Exchange Commission."
SEC. 1-2. Definitions. — For purposes of these Rules, the following terms
shall mean:
a. Commission the Securities and Exchange Commission (SEC).
b. The Code, The SRC — the Securities Regulation Code or Republic Act
(R.A.) 8799.
c. Commissioner — the Chairperson or any of the Commissioners.

d. Commission En Banc — the Commissioners appointed pursuant
to the Securities Regulation Code acting as a collegial body; it is the highest
governing body of the Commission.
e. Operating Department — refers to the C o m p a n y Registrsation and

Monitoring Department ( C R M D ) , Compliance a n d Enforcement Department
(CED), Corporation Finance Department ( C F D ) , M a r k e t Regulation Department
( M R D ) , Non-Traditional Securities and Instruments Department ( N T D ) , a n d
Extension Offices (EOs).
f. Hearing Panel or Officer — any officer, b o d y or panel d u l y designat-

ed or created through the pertinent office order by the Director (or Officer-in-
Charge) of an Operating Department, or by the Commission pursuant to these
Rules or by Resolution of the En Banc, to hear and decide a case or complaint.
At least one member of the hearing panel shall be a member of the Philippine
Bar.
1078
THE 2006 RULES OF PROCEDURE OF THE SECURITIES 1079
AND EXCHANGE COMMISSION
Appendix N
g. Order — any directive, other than a Decision of a Hearing Panel or

Officer.
h. Decision — means the w h o l e or any part of the final disposition issued

by a H e a r i n g Panel or Officer, Operating D e p a r t m e n t or the Commission En
Banc pertaining to any matter w i t h i n its jurisdiction.
i. Corporation also refers to a partnership, association or any other

entity registered or licensed by the Commission.
j. Office of the General Accountant ( O G A ) — the office that advises,

assists and provides technical support to the Commission and SEC Operating
Departments on issues relating to accounting and auditing.
k. Office of the General Counsel ( O G C ) — the office that advises and

assists the Commission and its Directors on legal issues that m a y be brought
before them, a n d it m a y be assigned such other functions as m a y be delegated
by the Commission En Banc.
SEC. 1-3. Construction. — These rules shall be liberally construed in order

to promote public interest a n d assist the parties in obtaining a just, prompt,
expeditious, and inexpensive resolution, settlement, and / o r disposition of all
actions brought before the Commission and to carry out the objectives of the
laws it is mandated to implement.
The following rules shall be used in the interpretation of certain words and
phrases f o u n d in these Rules:
(a) "Action" shall include any case, complaint or petition filed by a party
before the Commission;
(b) "Complaint" or "complainant" shall have the same meaning as
"petition" or "petitioner", respectively;
(c) Unless otherwise specified, the duties and responsibilities of a Director
of an Operating Department as provided for in these Rules shall likewise
devolve u p o n the Officer-in-Charge of the said department;
(d) The words "he" and "his" shall be construed as a collective reference
to persons and not meant to give preferential treatment to the male gender.
SEC. 1-4. N a t u r e of Proceedings. — Subject to the requirements of due
process, the proceedings before the Commission shall be summary in nature
and the technical rules of evidence used in the regular courts shall, whenever
practicable, be suppletory to these Rules.
SEC. 1-5. Venue of Hearings. — As a general rule, all actions brought
under these Rules shall be commenced and heard at the principal office of
the Commission in Metro Manila. In cases where it involves a corporation,
the principal office of which is located in a place where the Commission has
an extension office, the action or complaint may be filed in the said extension
office, provided that unless specified in the next following section or when the
Commission en banc orders otherwise, the hearing of the action shall be held at
the principal office of the Commission in Metro Manila.
1080
SEC. 1-6. Jurisdiction of Operating Departments, Extension Offices

and Special Offices over cases filed before the Commission. The Operating
Departments, Extension Offices and Special Offices shall take jurisdiction over
cases in accordance with their respective core functions.
SEC. 1-7. Assignment of Cases. — A l l actions filed w i t h the Commission
shall be assigned to a hearing panel or officer duly designated by the Director
or Officer in Charge of the Operational Department which has jurisdiction over
them, as the case may be, unless otherwise determined by the Commission En
Banc.
RULE II
PARTIES
SEC. 2-1. Who may be Parties. — O n l y natural or juridical persons or
entities authorized by l a w or a party in interest acting through an attorney-
in-fact, where applicable, may be parties to any action before the Commission.
SEC. 2-2. Parties in Interest. — A l l actions filed w i t h the Commission
must be pursued and defended in the name of the real party in interest. A l l
persons w h o have an interest in the subject of an action and in obtaining the
relief demanded shall be joined as complainants. A l l persons w h o claim an
interest in the controversy, or the subject thereof w h i c h is adverse to that of
the complainant, or is necessary for a complete resolution or settlement of the
action shall be joined as respondents.
SEC. 2-3. Intervention. — A natural or juridical person may, at any stage

of the proceedings, be permitted by the H e a r i n g Panel or Officer to intervene in
an action or complaint if he has a legal interest therein or w h e n he is so situated
as to be adversely affected by the decision of the Commission.
The said party m a y file a motion to intervene or oppose the subject

action before the H e a r i n g Panel or Officer stating therein the reason for his
intervention or opposition.
The motion should contain all the relevant supporting documents and, if
allowed, shall be treated as a complaint-in-intervention. The H e a r i n g Panel or
Officer may require the original parties to the action to answer or comment
on the intervention as the case m a y w a r r a n t or require them to submit their
arguments against it in their position papers or m e m o r a n d a prior to the
submission of the action for resolution.
An answer to the intervention, w h e n required by the H e a r i n g Panel or

Officer, should be filed w i t h i n five (5) days f r o m receipt of the corresponding
order.
RULE III
COMMENCEMENT OF ACTION
SEC. 3-1. Commencement of Actions. — A n action filed under these Rules
shall be commenced by filing a verified complaint w i t h supporting documents
w i t h the Operating Department that has jurisdiction over the subject matter.
Appendix N
SEC. 3-2. Definition of Action. — A n action refers to the right of a party

to avail of the procedures provided in these Rules to protect his interests and to
expect a resolution based on the facts of the case and applicable laws.
SEC. 3-3. Pleadings Allowed. — T h e only pleadings that m a y be filed

in any action are the complaint, answer, reply and rejoinder, if necessary, and
motions in intervention.
SEC. 3-4. Verification. — T h e complaint a n d answer shall be verified by

an affidavit that states that the affiant has read the complaint or answer and
that the allegations therein are true and correct of his o w n personal knowledge
a n d / o r based on authentic records. A verification based on "information and
belief," or w h i c h lacks the proper f o r m of verification, shall be considered
as improper a n d m a y cause the s u m m a r y dismissal of the complaint or the
expunging of the answer.
SEC. 3-5. Non-Forum Shopping. — T h e complainant shall certify under

oath that: (a) he has not commenced any action or filed any complaint involving
the same subject matter or issues in any court, tribunal or agency and, to the
best of his knowledge, no such other action is pending therein; (b) if there is
such other pending action, a complete statement of its present status; and (c)
if he should thereafter learn that the same or similar action has been filed or is
pending, he shall report that fact w i t h i n five (5) days from such knowledge to
the Operating D e p a r t m e n t concerned.
Failure to comply w i t h any of the foregoing requirements shall result in

the dismissal w i t h o u t prejudice of the complaint. The submission of a false
certification or non-compliance w i t h any of the undertakings enumerated in
the preceding paragraph shall constitute indirect contempt of the Commission
and may give rise to the imposition of administrative and criminal sanctions.
If the acts of the party or his counsel constitute w i l l f u l forum shopping, the
same shall be considered a justifiable ground for the summary dismissal w i t h
prejudice of the action and constitute direct contempt of the Commission w i t h
the attendant administrative and criminal consequences.
SEC. 3-6. Prohibited Pleadings. — The following pleadings or any

submission that is filed or made under a similar guise or title shall not be
allowed:
a) M o t i o n to Dismiss
b) M o t i o n for a Bill of Particulars

c) Motion for N e w Trial, Reconsideration of Judgment or Order, or
Reopening of Trial;
d) Petition for relief from judgment;
e) M o t i o n for extension of time to file pleadings, affidavits, or any other
submission of similar intent;
f) Motion to declare a party in default;
g) Motion for postponement and any other motions of similar intent; and
1082
h) Motion for leave to amend pleadings.

Should one be filed, said prohibited pleadings or submissions shall be
automatically expunged from the records of the case.
Notwithstanding sub-paragraph " g " above, the Hearing Panel or Officer
may, for a compelling and valid reason, reset a hearing or conference not later
than ten (10) business days thereafter.
SEC. 3-7. D u t y of the Director of the O p e r a t i n g D e p a r t m e n t . The Director
shall, from an initial examination of the allegations or averments in the
complaint and such evidence that may be attached to it, dismiss the complaint
if he finds that it is insufficient in f o r m and substance. Otherwise, he shall
refer it to a Hearing Panel or Officer for investigation or examination. If the
complaint has a valid and legal basis, he shall issue the appropriate summons
to the parties concerned. A l l orders emanating from an Operating Department
under this section shall be under the signature of its Director or Officer-in-
Charge, as the case may be.
SEC. 3-8. F o r m of Pleadings. — A l l pleadings filed shall be written,

printed or typed on bond paper in English or Pilipino.
Each pleading shall contain a caption stating the name of the Commission,
the Operating Department that has jurisdiction over the action, the title of the
case, the case number, if any, and a description of the pleading.
The original and three (3) signed copies of the pleading shall be filed
with the Commission. A l l respondents shall be furnished w i t h copies of the
pleadings, except the complaint w h i c h shall be furnished by the Commission
to the respondent as an attachment to the summons. Except for the initiatory
pleading, there shall be filed as m a n y additional signed copies of the said
pleadings as there m a y be respondents.
No pleading shall be accepted by the Commission unless it conforms to the

formal requirements provided for in these Rules.
SEC. 3-9. Verified C o m p l a i n t . — The complaint shall contain the following
information: (a) the names and residences of the parties; (b) a concise statement
of the ultimate facts constituting the complainant's cause(s) of action; (c) a brief
statement of the right(s) sought to be enforced; (d) the law, rule or regulation
on which the complaint is based; (e) a s u m m a r y of the complainant's claims; (f)
a statement of the issues to be resolved; (g) the affidavits of witnesses, copies of
documentary and other pieces of evidence; and (h) the relief(s) sought.
This rule notwithstanding, the Commission may, motu yrovrio, accept and
take cognizance of a complaint filed under a different f o r m in the interest of
public service and social justice, or to protect the investing public.
SEC. 3-10. Capacity. — The facts showing the capacity of a party to sue
or be sued, or the authority of a party to sue or be sued in a representative
capacity, or the legal existence of an organized association of persons that is
made a party to an action must be averred. A party desiring to raise an issue
on the legal existence of any party or the capacity of any party to sue or be
sued in a representative capacity shall do so by specific denial and shall be
THE 2006 RULES OF PROCEDURE OF THE SECURTTTES 1083
Appendix N
supported by evidence that is w i t h i n his knowledge. Failure to comply w i t h

this requirement shall be deemed a waiver of the right to question the capacity
or authority of a party to sue or be sued.
SEC. 3-11. A n s w e r . — W i t h i n fifteen (15) days from the service of summons,

the respondent shall file his answer to the complaint and serve a copy thereof
to the complainant. The answer shall contain the affidavits of witnesses and
copies of documentary evidence, if any.
SEC. 3-12. Effect of Failure to Answer. — If the respondent fails to answer

the complaint w i t h i n the abovestated period, he shall be considered as in
default. The H e a r i n g Panel or Officer shall, motu proprio, proceed to render
judgment granting the complainant such relief as the complaint m a y warrant,
unless the H e a r i n g Panel or Officer determines that the complainant should be
required to submit ex parte additional evidence.
SEC. 3-13. R e p l y a n d Rejoinder. — W i t h i n ten (10) days from the service

of the answer, the complainant m a y rebut any n e w matter raised in the answer
by w a y of a reply. A rejoinder to the reply m a y be submitted by the respondent
w i t h i n five (5) days f r o m receipt of the reply. The reply and rejoinder shall
likewise contain the affidavits of witnesses and supporting documentary
evidence, if any. The H e a r i n g Panel or Officer m a y disallow the filing of a
reply and rejoinder if in i t s / h i s opinion the same are not necessary under the
circumstances.
SEC. 3-14. A f f i d a v i t s , D o c u m e n t s a n d O t h e r Evidence. — The affidavits

of the parties' respective witnesses, documents, and other supporting evidence
shall be attached to the appropriate pleading.
Supporting affidavits shall be m a d e on personal knowledge, shall set forth
such facts as w i l l be admissible in evidence, and shall show affirmatively that
the affiant is competent to testify on the matters stated therein.
SEC. 3-15. D o c k e t Fee. — A docket fee shall be assessed by the Operating
Department concerned for any pleading filed under these Rules in accordance
w i t h the Schedule of Fees that shall f o r m part of these Rules, and which fee
1
shall be paid u p o n the filing of the subject pleading.
SEC. 3-16. Proof of Service. — Proof of service shall consist of a written
admission of the party served, or the official return of the server, or the affidavit
of the party serving, containing a full statement of the date, place and manner
of service. If the service is by ordinary mail, proof thereof shall consist of an
affidavit of the person w h o undertook the mailing of facts showing compliance
w i t h Section 7, Rule 13 of the Rules of Court. If service is made by registered
mail, proof shall be made by such affidavit and the registry receipt issued by
the mailing office. The registry return card shall be filed immediately upon its
receipt by the sender, or in lieu thereof the unclaimed letter together with the
certified or sworn copy of the notice given by the postmaster to the addressee.
'See p. 1094.
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If the service is by facsimile or by any other electronic means in accordance

with existing laws, proof of service shall be made in w r i t i n g by the designated
server setting forth the manner, place and date of service, or a written admission
of the party served.
RULE IV
SUMMONS
SEC. 4-1. Summons. — U p o n the filing of the complaint and payment of

filing fees, and determination by the Director of the Operating Department's
jurisdiction over it and its sufficiency in f o r m and substance, the proper
summons to the respondent shall be issued by the Director not later than ten
(10) days from the date of filing of the complaint.
SEC. 4-2. Contents. — The summons shall be directed to the respondent
under the seal of the Commission and shall contain:
a. The names of the parties to the action;

b. An order to the respondent to answer w i t h i n the time fixed by these
Rules; and
c. A notice that if the respondent fails to file its answer w i t h i n the
prescribed period, a judgment by default m a y be rendered in favor of the
complainant and the relief(s) applied for m a y be granted.
SEC. 4-3. Alias S u m m o n s . — If the summons is returned unserved on any

or all of the respondents or is lost, the Director at the instance of the complainant,
may issue one (1) alias summons in the same f o r m as the original summons.
SEC. 4-4. By W h o m S u m m o n s M a y Be Served. — The summons m a y be
served by the designated server of the Commission.
SEC. 4-5. R e t u r n of S u m m o n s . — W h e n the service has been completed,

the designated server shall return the summons, together w i t h the proof of
service, to the originating Operating Department.
SEC. 4-6. Personal Service of S u m m o n s . — The summons shall be served

by handing a copy thereof to the respondent in person or, if he refuses to receive
it, by tendering it to h i m . If the respondent is a corporation, partnership or
association, service shall be m a d e on its president, managing partner, general
manager, corporate secretary, treasurer, or in-house counsel.
SEC. 4-7. Substituted Service. — If, for justifiable reasons, the respondent
cannot be served personally w i t h the summons as provided in the preceding
section, service m a y be effected either (a) by leaving a copy of the summons at
the respondent's dwelling house or residence where some person of suitable
age and discretion is residing, or (b) by leaving a copy at the respondent's
principal office or regular place of business where some competent person is
in charge.
SEC. 4-8. Service U p o n Private Foreign Entities. — If the respondent is

a foreign corporation doing business in the Philippines, service m a y be m a d e
Appendix N
on its resident agent designated in accordance w i t h existing law for that

purpose, or, if there is no such agent, the Commission shall transmit a copy of
the summons to the home office of said foreign entity by registered mail, by
facsimile or by any other electronic means in accordance w i t h existing laws.
The period to answer shall be thirty (30) days f r o m receipt of the summons by
the home office, w i t h the expenses that m a y be incurred by the Commission for
such service paid in advance by the parties at whose instance the service was
made.
SEC. 4-9. Service by Publication. — If the address of a respondent is

u n k n o w n or, even if k n o w n , his whereabouts cannot be ascertained by diligent
inquiry, service of summons may, by leave of the Director of the Operating
Department concerned, be effected on h i m by publication of the complaint
once in a newspaper of general circulation and in such places, including the
Commission's website (www.sec.gov.ph). and for such time as the Director m a y
order. The publication expenses shall be for the complainanf s account.
If the respondent does not reside or is not found in the Philippines,

service may, by leave of the Director be effected out of the Philippines by
personal service in the manner provided for in Section 4-8 of these Rules; or by
publication of the complaint once in a newspaper of general circulation in the
Philippines a n d / o r the country where respondent m a y be found and in such
places as the Director m a y order such as but not limited to, the Commission's
website. A copy of the complaint and the order granting such leave shall be sent
by registered m a i l to the last k n o w n address of the respondent.
A n y order granting such leave shall specify a reasonable time w i t h i n

which the respondent must answer, which shall not be less than thirty (30) days
from the date of last publication, in the case of a resident respondent whose
address is u n k n o w n or whose whereabouts cannot be ascertained; and not less
than sixty (60) days from the date of the last publication, in the case of a non-
resident respondent.
A n y application for leave to effect service of summons by publication shall

be made by motion in writing and supported by an affidavit of the complainant
or some person on his behalf, setting forth the grounds for the application.
SEC. 4-10. Proof of Service. — The proof of service of a summons shall be

made in writing by the designated server setting forth the manner, place and
date of service. It shall specify the papers served w i t h the summons and the
name of the person w h o received them, and shall be sworn to when made by a
person other than the server of the Commission.
Service by publication on a resident respondent whose address is unknown
or whose whereabouts cannot be ascertained may be proven by the affidavit
of the newspaper editor, or business/advertising manager or SEC website
administrator and to which affidavit a copy of the publication shall be attached.
Service by publication on a non-resident respondent may be proven, aside
from the affidavit of the editor, business/advertising manager, or SEC website
administrator, by the affidavit of the server stating that a copy of the complaint
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and the order of the Commission was sent by registered mail to the last k n o w n
address of the respondent.
The respondent's voluntary appearance before the Commission shall be
equivalent to service of summons for purposes of acquiring jurisdiction over
his person, unless he makes an express reservation regarding on the nature of
his appearance therein.
RULE V
P R O C E E D I N G S BEFORE T H E H E A R I N G P A N E L O R O F F I C E R
SEC. 5-1. Preliminary Conference. — In any action and u p o n assignment

by the Director of the Operating Department concerned, the Hearing Panel
or Officer shall, in compliance w i t h the existing rules on alternative dispute
resolution, set the case for conference w i t h i n ten (10) days after the last pleading
allowed under Section 3-13 is filed or u p o n expiration of the period w i t h i n
which to file the reply or rejoinder mentioned therein. The parties a n d / o r their
counsels, the latter w i t h the requisite special power-ofattorney in the absence
of his client, shall be directed to appear before the H e a r i n g Panel or Officer on
the date set in the notice to consider the following actions:
a. The possibility of an amicable settlement w h i c h includes referral to

mediation and other forms of Alternative Dispute Resolution ( A D R ) ;
b. The simplification of the issues; and
c. Such other matters that m a y aid in the just and speedy disposition of
the case. The Hearing Panel or Officer shall terminate the conference stage if
after t w o (2) conferences, the parties fail to settle their differences.
SEC. 5-2. A m i c a b l e Settlement. — D u r i n g the conference, the H e a r i n g

Panel or Officer shall ensure that the parties exhaust all available means
to arrive at a fair and reasonable settlement of the case. The parties, w i t h or
without the assistance of counsel, shall submit during the conference specific
proposals or counter-proposals to arrive at an amicable settlement of the case.
Amicable settlement shall be encouraged at any stage of the proceedings,

provided it is not prejudicial to the public interest or third parties, or contrary
to law, rules or regulations of the Commission, or against good morals or public
policy. The amicable settlement shall be reduced into w r i t i n g , d u l y signed by
the parties a n d / o r their counsels, and shall be the basis of the appropriate
Order or Decision of the H e a r i n g Panel or Officer.
SEC. 5-3. Failure to A p p e a r at the Conference. — The failure of the

complainant to appear at the conference shall result in the dismissal of the
complaint, unless it involves public interest whereby the H e a r i n g Panel or
Officer may, motu proprio, reset the case for conference w i t h i n five (5) days from
receipt of proof of service of new summons. The respondent w h o appears in
the absence of the complainant shall be entitled to judgment based on the facts
alleged and relief(s) prayed for in the answer.
Appendix N
If the sole respondent fails to appear, the complainant shall be entitled to

judgment in accordance w i t h the immediately preceding paragraph. However,
this rule shall not apply if one or more respondents w h o have been sued under
a common cause of action and w h o have pleaded a common defense appear at
the conference.
No other conferences, other than the circumstance mentioned in the first

paragraph of this section, shall be called in the event any of the parties to the
action is absent or fails to attend the first conference called for this purpose,
except for valid reasons as determined by the H e a r i n g Panel or Officer.
SEC. 5-4. Conference Order. — After the conference, the Hearing Panel
or Officer shall issue an Order stating the action taken d u r i n g the conference,
the stipulations m a d e by the parties on any of the matters considered, and the
evidence the parties have agreed u p o n .
RULE VI
DECISION
SEC. 6-1. Decision. — The H e a r i n g Panel or Officer shall decide the
complaint w i t h i n thirty (30) days f r o m its submission for resolution. The
Decision shall contain a clear statement of the facts proven or admitted by the
parties and the l a w on w h i c h the resolution is based. The Decision shall be
signed by the Director of the Operating Department concerned and be served
on the parties not later than ten (10) days after its promulgation.
SEC. 6-2. Finality of Decision. — The Decision of the Hearing Panel or
Officer, in the absence of a timely appeal, shall become final and executory
u p o n entry in the Book of Entry of Judgment.
SEC. 6-3. Clarificatory Conference. Notwithstanding the immediately
preceding section, at any time after the case has been submitted for resolution,
the hearing panel/officer may, in his discretion, require a further clarificatory
examination of documents, or submission of additional documentation to
ascertain factual issues pertinent and necessary to the resolution/decision of
the case. N o t h i n g herein shall be construed to extend the period for decision
stated in Sec. 6-1 above.
RULE VII
CONTEMPT
SEC. 7-1. Direct Contempt. — The Commission or the Hearing Panel or

any authorized officer may summarily pass judgment on acts of direct contempt
committed in the presence of, or so near, the Chairman or any Commissioner or
Hearing Panel or Officer as to obstruct or interrupt the proceedings, including
disrespect towards the Hearing Panel or Officer, offensive acts towards others,
and other contumacious acts. Those found to be in direct contempt shall be
punished in accordance with the penalties prescribed by the Rules of Court. The
Hearing Panel or Officer may, through the O G C , request the law enforcement
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agencies of the locality where the hearing or investigation is being conducted

to assist in the exercise of this disciplinary authority.
SEC. 7-2. Indirect Contempt. — The Commission or the Hearing Panel
or Officer may, after observance of due process, cite or punish any person for
indirect contempt on any of the grounds prescribed under the Revised Rules
of Court.
RULE VIII
SUBPOENA AND SUBPOENA DUCES TECUM
SEC. 8-1. When Issued. — If the attendance of a witness or the production
of specified documents is necessary, any Operating Department or any party
can request the issuance of a subpoena or subpoena duces tecum in the course of
any investigation or in any proceeding of the Commission. Provided, however,
that the C E D may, motu proyrio, issue a subpoena pursuant to an investigation.
RULE IX
PRODUCTION OR INSPECTION OF DOCUMENTS OR THINGS
SEC. 9-1. Motion for Production or Inspection Order. — U p o n motion
of any party showing good cause therefor, the H e a r i n g Panel or Officer m a y
(a) order any party to produce and permit the inspection and copying or
photographing, by or on behalf of the requesting party, of any designated
documents, papers, books, accounts, letters, photographs, objects or tangible
things, not otherwise privileged, w h i c h constitute or contain evidence material
to any matter involved in the complaint and are in his possession, custody or
control; or (b) order any party to permit entry into a designated place or other
property in his possession or control for the purpose of inspecting, measuring,
surveying, or photographing the property or any designated relevant object of
operation in the premises.
The order shall specify the time, place and manner of the inspection
and taking of copies and photographs, and m a y prescribe other terms and
conditions that are justified by the circumstances; Provided, however, That the
request for production or inspection of documents or things shall be m a d e
before or during the conference and only for documents and things previously
referred to in the complaint, answer or other pertinent pleadings.
RULEX
CEASE AND DESIST ORDER
SEC. 10-1. Who May Apply. — A verified complaint m a y be filed by the
aggrieved party w i t h the Commission, through the C E O , for the issuance of a
Cease and Desist Order ( C O O ) pursuant to the provisions of Section 64 of the
SRC.
SEC. 10-2. Issuance of a C O O . — T h e Commission, through the O G C ,

• proper investigation or verification by the C E O , motu proprio, or u p o n
Appendix N
verified complaint, m a y issue a C D O w i t h o u t the necessity of a prior hearing if

in its j u d g m e n t the act or practice, unless restrained, w i l l operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice
to the investing public.
For other cases however, the Commission En Bane m a y issue an order for
the grant of a C D O as it m a y d e e m necessary and warranted in accordance w i t h
its powers under existing laws. The C D O shall also be available in the case of
anonymous complaints or based on information that has come to its attention
w h i c h requires immediate action to protect the interests of the public.
SEC. 10-3. Lifting of coo. — A party against w h o m a C D O was issued may,

w i t h i n a non-extendible period of five (5) business days from receipt of the
order, file a f o r m a l request or motion for the lifting thereof w i t h the O G C . Said
motion or request shall be set for hearing by the O G C not later that fifteen (15)
days f r o m its filing and the resolution thereof shall be m a d e not later than ten
(10) days f r o m the termination of the hearing.
SEC. 10-4. Who May Issue a Provisional Remedy.—A provisional remedy

m a y be issued by the Director of the C E O on the basis of his initial evaluation
of the issue, or u p o n the recommendation of the H e a r i n g Panel or Officer, as
the case m a y be.
The Commission En Banc, however, m a y issue an order for the grant of a

C D O as it m a y d e e m necessary and warranted in accordance w i t h its powers
under existing laws. The C O O shall also be available in the case of anonymous
complaints or based on information that has come to its attention which
requires immediate action to protect the interests of the public.
SEC. 10-5. Failure to File Motion to Lift. — (a) If the respondent fails to
file a motion to lift C O O w i t h i n the prescribed period, the Director of the C E O
m a y file w i t h the Commission a motion to make the C O O permanent, attaching
thereto a draft Order m a k i n g the C O O permanent. The Order shall contain the
following:
i. a brief and procedural history of the case;
ii. a statement declaring the C D O as permanent;
iii. a statement ordering the respondent to appear before the
Commission w i t h i n fifteen (15) days to file its Comment and to show cause
w h y the stated penalty should not be imposed.
(b) The Commission may conduct hearing within fifteen (15) business
days from the filing of the motion to make the C D O permanent. After the
termination of the hearing, the Commission shall resolve the motion within ten
(10) business days.
SEC. 10-6. Dissemination of the coo. — U p o n the issuance of a C D O ,

the C E O shall (a) serve it on the respondent/s or any of its authorized
representatives; (b) post copies of the order at the entrance of the main office
and / or branches, if any, of the respondent / s; and (c) post it in the Commission's
Internet website. The C D O may, as determined by the Director of the CEO and
at the discretion of the Commission, be published in newspapers of general

circulation or other media outlets.
SEC. 10-7. Automatic Lifting of the coo. — (a) I n the event that the motion
or request to lift the C D O is not resolved w i t h i n the prescribed period, the C O O
shall be automatically lifted.
SEC. 10-8. Prohibitions. — N o pleading, motion or submission in any form
that may prevent the resolution of an application for a C D O by the Commission
shall be entertained except under Rule X I I herein. A C D O , w h e n issued, shall
not be the subject of an appeal and no appeal from it w i l l be entertained;
Provided, however, that an order by the Director of the Operating Department
denying the motion to lift a C D O m a y be appealed to the Commission En Banc
through the O G C .
SEC. 10-9. Settlement Offers. — A settlement offer i n accordance w i t h

Sec. 55 of the SRC and SRC Rule 55.1, shall be made in w r i t i n g and signed
by the party making the offer at any stage of the proceedings, provided, that
no settlement offer shall be accepted after an (3rder shall have become final
and executory, provided further, that if the respondent is a juridical person, the
necessary board resolution shall also be attached to the offer.
SEC. 10-10. Criteria for Settlement Offer. — (a) I n recommending the

approval or if the Operating Department's recommendation is unfavorable b u t
the proposer so requests that the offer be presented to the Commission En Banc,
the Director of the C E O , after consultation w i t h the handling l a w y e r / t e a m ,
shall prepare a m e m o r a n d u m for the Commission, taking into consideration
the following:
i. The gravity of the offense;

ii. The amount and time spent by the Commission;
iii. The chances of a favorable decision if the case were to go to trial;
iv. Whether the respondent has previously violated any provision of
any law being administered by the Commission;
v. The total imposable penalty;
vi. The damage caused, if any;
vii. Whether the settlement is in the public interest.

viii. Other pertinent matters.
(b) No settlement offer that is less than fifteen (15%) percent of the total
imposable penalty or damage caused shall be accepted.
RULE XI
APPEALS FROM DECISIONS OR ORDERS OF
OPERATING DEPARTMENTS
SEC. 11-1. O r d i n a r y A p p e a l . — An appeal to the Commission En Banc
may be taken from a decision, order, or resolution issued by an Operating
A N D EXCHANGE COMMISSION
Appendix N
Department if there are questions of fact, of law, or mixed questions of fact and
law.
SEC. 11-2. H o w A p p e a l is T a k e n . — A p p e a l m a y be taken by serving

u p o n the adverse party a n d filing w i t h the Commission En Banc w i t h i n fifteen
(15) days f r o m notice of Decision, O r d e r or Ruling, a Notice of Appeal and a
M e m o r a n d u m on A p p e a l and paying the corresponding docket fee therefor.
Provided, that no appeal shall be given due course unless it includes a
certification of non-filing of multiple petitions and complaints provided for in
Section 3-5 hereof.
SEC. 11-3. Perfection of A p p e a l . — The appeal shall be deemed perfected

u p o n the filing of the M e m o r a n d u m on A p p e a l and payment of the required
docket fee w i t h i n the period provided for in these Rules.
SEC. 11-4. M e m o r a n d u m on A p p e a l ; F o r m a n d Contents of A p p e a l . The

M e m o r a n d u m on A p p e a l shall specify the parties to the appeal; designate the
Decision, Order or Ruling or part thereof appealed from; and shall indicate the
material dates to show that the appeal was seasonably filed.
The full names of all the parties to the proceedings shall be stated in the
caption of the M e m o r a n d u m on A p p e a l and shall include the decision, order
or ruling f r o m w h i c h the appeal is taken, and, in chronological order, copies
of any such pleadings, petition, motions and all interlocutory orders as are
related to the appealed decision, order or ruling and necessary for the proper
understanding of the issues involved, together w i t h such date as w i l l show that
the appeal was perfected on time. The M e m o r a n d u m on Appeal in seven (7)
copies shall contain a concise statement of facts and issues involved, the errors
assigned, the grounds relied u p o n for the appeal and the arguments in support
thereof.
SEC. 11-5. R e p l y M e m o r a n d u m . — The appellee shall file seven (7)

copies of the reply m e m o r a n d u m w i t h the Commission En Banc, furnishing
copies thereof to the appellant w i t h i n ten (10) days from receipt of the Order
to file reply m e m o r a n d u m . Failure to file the reply memorandum within the
prescribed period in the Order shall be construed as a waiver to file the same.
SEC. 11-6. Dismissal of A p p e a l for Non-Compliance. — The appeal may

be dismissed by the Commission En Banc for failure to comply with these
Rules, or failure to perfect the appeal w i t h i n the prescribed period.
SEC. 11-7. W h e n A p p e a l D e e m e d Submitted for Decision. — Upon the
filing of the reply m e m o r a n d u m w i t h the Commission En Banc, or after the
expiration of the period to file the same and no such memorandum has been
filed, the appeal shall be deemed submitted for decision, unless the Commission
En Banc motu proprio, or upon motion and for special reason, sets the case for
oral arguments.
SEC. 11-8. Review Standard. — Findings of fact by the Operating
Department shall not be disturbed by the Commission En Banc unless serious
errors of fact have been committed.
1092
SEC. 11-9. Disposition of the A p p e a l . — The Commission En Banc may

affirm, reverse or modify the Decision, Order or ruling appealed from, or direct
further proceedings to be taken thereon. No motion for reconsideration of the
Decision of the Commission En Banc shall be entertained.
RULE XII
P E T I T I O N FOR REVIEW O N CERTIORARI
SEC. 12-1. Petition for R e v i e w on C e r t i o r a r i . — W h e n any H e a r i n g Officer /

Panel of the Commission, has acted w i t h o u t or in excess of its jurisdiction, or
with grave abuse of discretion and there is no appeal, nor any plain, speedy
and adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition w i t h the Commission En Banc alleging the facts w i t h
certainty and praying that judgment be rendered annulling or m o d i f y i n g the
proceedings, order or ruling of such H e a r i n g Officer or Panel and granting such
relief as the applicable laws m a y require.
The Petition shall be accompanied by a certified true copy of the Judgment,

Order or Ruling subject thereof, together w i t h the copies of all pleadings and
documents relevant thereto. Provided that no petition for review on certiorari
shall be given due course unless it includes a certification of non-filing of
multiple petitions and complaints provided for in Section 3-5 hereof.
SEC. 12-2. W h e r e p e t i t i o n filed. The petition shall be filed w i t h the
Commission En Banc in seven (7) copies, w i t h i n ten (10) days f r o m receipt of
the order or ruling subject of the petition, furnishing a copy thereof to the party
interested in sustaining the order and the H e a r i n g Officer / P a n e l w h o issued
the same.
SEC. 12-3. Parties Respondent. W h e n the Petition filed relates to the acts
or omission of a H e a r i n g Officer of the Commission, the petitioner shall join,
as parties respondent, the person or persons interested in sustaining the order;
and it shall be the duty of such person or persons to defend the questioned
order or ruling.
SEC. 12-4. O r d e r to Answer. If the Petition is sufficient in f o r m a n d

substance to justify such process, the Commission En Banc shall issue an order
requiring the respondent/s to answer the petition w i t h i n ten (10) days f r o m
receipt of a copy thereof. Such order shall be served to the respondent in such
manner as the Commission En Banc m a y direct.
SEC. 12-5. Expediting Proceedings. The Commission En Banc m a y issue

any and all orders that shall expedite the proceedings.
SEC. 12-6. S u m m a r y Proceedings. The proceedings before the Commission

En Banc shall be summary in nature. U p o n receipt of the verified petition, the
Commission En Banc may either dismiss the petition if it is not sufficient in
form and substance or if it is filed manifestly for delay or if from its face there
is no showing that in issuing the questioned O r d e r or Ruling, the H e a r i n g
Officer/Panel acted without or in excess of jurisdiction, or w i t h grave abuse
of discretion. It m a y require the party or parties interested in sustaining the
Appendix N
questioned Order or Ruling, to C o m m e n t or A n s w e r thereon w i t h i n ten (10)

days from notice u p o n the filing of w h i c h the petition is deemed submitted for
resolution, unless the Commission En Banc sets the case for oral arguments.
SEC. 12-7. Stay of the Action. N o petition for review or certiorari shall
stay the progress of the action in the m a i n case unless the Commission En Banc
orders otherwise. The Commission En Banc m a y also issue a status quo Order
for the preservation of the rights of the parties d u r i n g the pendency of the
proceedings.
RULE XIII
EFFECTIVITY
SEC. 13-1. Transitory Provisions. — A l l matters pending resolution before
the Commission under other rules of procedure that have been submitted for
resolution at the time of the approval of these Rules shall be decided under the
said rules. In all other cases, these Rules shall apply.
SEC. 13-2. Repeal and Separability. — A l l existing rules, regulations or

orders or any part thereof that are inconsistent w i t h these Rules are hereby
repealed, amended or modified accordingly. If any part or provision of these
Rules is declared unconstitutional or illegal, the other parts or provisions shall
remain valid.
SEC. 13-3. Effectivity. — These Rules shall take effect fifteen (15) days after
publication in t w o (2) newspapers of general circulation.
M a n d a l u y o n g City, December 21, 2006.
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THE
CORPORATION C O D E
O F THE PHILIPPINES
ANNOTATED
By
HECTOR S. DE LEON
LL.B., University of the Philippines
Author: Philippine Constitutional Law: Principles and Cases (2 Vols.);
Comments and Cases on Succession; Comments and Cases on Sales and Lease; etc.
Co-Author: Comments and Cases on Property; Comments and Cases
on Obligations and Contracts; The Insurance Code of the Philippines Annotated; etc.
Comments and Cases on Torts and Damages;
Comments and Cases on Credit Transactions;
Administrative Law: Text and Cases; The Law on Public Officers and Election Law;
The Insurance Code of the Philippines Annotated; The Philippine
Negotiable Instruments Law (and Allied Laws) Annotated;
The Fundamentals of Taxation; The Law on Income Taxation;
The Law on Transfer and Business Taxation;
The National Internal Revenue Code Annotated (2 vols.); etc.
and
HECTOR M. DE LEON, JR.

A.B., LL.B., University of the Philippines
LL.M., University of Michigan
Partner, Sycip Salazar Gatmaitan & Hernandez
Co-Author: Comments and Cases on Property; Comments and Cases
on Obligations and Contracts; Comments and Cases on Torts and Damages
Comments and Cases on Credit Transactions;
The Insurance Code of the Philippines Annotated; etc.
Administrative Law: Text and Cases;
The Law on Public Officers and Election Law; The Insurance Code of the
Philippines Annotated; The Philippine
Negotiable Instruments Law (and Allied Laws) Annotated;
The Fundamentals of Taxation; The Law on Income Taxation;
The Law on Transfer and Business Taxation; and
The National Internal Revenue Code Annotated (2 vols.)
Tenth Edition
2010
Published & Distributed by

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Philippine Copyright 2010
HECTOR S. DE LEON
AND
H E C T O R M . D E LEON, J R .
ISBN 978-971-23-5667-4
No portion of this book may be copied or

reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, copied
in different electronic devices or in any other form, for
distribution or sale, without the written permission of
either of the authors except brief passages in books,
articles, reviews, legal papers, and judicial or other
official proceedings with proper citation.
Any copy of this book without the correspond-

ing number and the signature of either of the authors
on this page either proceeds from an illegitimate
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to dispose of the same.
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B Y T H E A U T H O R S
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PREFACE
This humble work which is now on its tenth edition, is in-

tended primarily as a textbook for law students in Private Corpo-
rations. However, members of the Bench and the Bar will find the
book a useful reference.
In its preparation, the authors have endeavored to make the
discussion comprehensive for our corporation law, which is em-
bodied in the new Corporation Code of the Philippines, covers
a very wide field, and yet, brief by avoiding as much as pos-
sible repetition and redundancy for the course must be studied
in school within the allotted time. The applicable rulings in im-
portant and leading cases, as well as commentaries of recognized
writers on the subject, including advisory opinions of the Securi-
ties and Exchange Commission amplifying and explaining the
law involved or supporting directly or by implication statements
or conclusions made by the author are cited or quoted under the
pertinent sections of the Corporation Code. Whenever necessary,
the purpose or rationale of the legal provisions, particularly the
new ones, is given and illustrations showing their practical ap-
plication in specific situations are utilized for such manner of
presentation greatly facilitates understanding of the meaning of
the law.
The authors would like to express their appreciation to for-

mer Associate Justice Catalino R. Castafieda, Jr. of the Sandigan-
bayan; former Dean Jose R. Sundiang (San Beda); former Dean
Domingo M. Navarro (San Beda); and Benjamin B. Festin (UP),
for their helpful suggestions on some of the materials treated in
the book which they gladly accepted.
HECTOR S. DE LEON
HECTOR M. DE LEON, JR.
June 2010
iii
MNU TAS2ILARAK
COLLEGlCSSMY
CONTENTS
THE CORPORATION CODE OF

THE PHILIPPINES
(BJ.Blg.68.)
INTRODUCTION
Different Forms of Business Organization; Theories as to origin of

Corporations; Rise and Development of Corporations
Title I
GENERAL PROVISIONS
Section 1 — Title of the Code — Historical Background of our

Corporation Code; Scope of the Code 10-13
Section 2 — Corporation Defined—Statutory Definition of Corporation-
Judicial Definitions of Corporation; Attributes of a Corporation;
Corporation as an Artificial Personality; Corporation as a Person,
Resident, or Citizen; Corporation as a Collection of Individuals;
Doctrine of Piercing the Veil of Corporate Entity; Instances
W h e r e Doctrine A p p l i e d ; Application of the "Instrumentality"
or "Alter Ego" rule; Corporation as a Creation of L a w or by
Operation of L a w ; Right of Succession of a Corporation; Powers,
Attributes, and Properties of a Corporation; Distinctions
Between a Partnership and a Corporation; Similarities Between
a Partnership and a Corporation; Corporation as a Partner;
Advantages of a Business Corporation; Disadvantages of a
Business Corporation 13-55
Section 3 — Classes of Corporations — Classification of Corporations
under the Code; Other Classifications of Corporations; Important
Distinctions Between Public and Private Corporations; Dual
Status of Public Corporations 55-64
Section 4 — Corporations Created by Special Laws or Charters —
Incorporation of a Private Corporation by a Special Act;
Governing Law; Government as a Member of a Corporation .... 64-66
v
Section 5 — Corporators and Incorporators, Stockholders and Members —
Components of a Corporation; Three Other Classes; Agreement
or Contract with a Corporation 66-69
Section 6 - Classification of Shares - Power to Classify Shares; W h e n
Classification of Shares M a y Be M a d e ; Classification to Comply
with Constitutional or Legal Requirements; Shares Presumed to
be Equal in A l l Respects; Capital Stock and Capital Explained;
Capital Stock and Capital Distinguished; Capital Stock and
Legal Capital Distinguished; Stock or Share of Stock Defined;
Capital Stock and Share of Stock Distinguished; N a t u r e of
Share of Stock; Certificate of Stock Defined; Share of Stock and
Certificate of Stock Distinguished; Situs of Shares of Stock for
Certain Purposes; Classes of Shares in General; Par Value Share;
No Par Value Share; Voting Share; Non-voting Share; C o m m o n
Share; Preferred Share; Promotion Shares; Share in Escrow;
Convertible Share; Convertibility of Shares; N a t u r e of Par
Value/Book V a l u e / M a r k e t Value; Presumption as to Value of
Corporate Stock; Statutory Restrictions Regarding the Issuance
of No Par Value Shares; Consideration for No Par Value Shares;
Advantages of Par Value Shares; Disadvantages of Par Value
Shares; Advantages of No Par Value Shares; Disadvantages
of No Par Value Shares; Kinds of Preferred Shares; Preference
A m o n g Preferred Shares; Preferred Stockholders N o t Creditors
of Corporation; Limitations Regarding Issuance of Preferred
Shares; Authority of Board of Directors to Fix Terms and
Conditions of Preferred Shares; Kinds of Preferred Shares as to
Dividends 69-102
Section 7 — Founders' Shares — Founders' Shares 102-104
Section 8 — Redeemable Shares — Redeemable Shares 104-108
Section 9 — Treasury Shares — Treasury Shares 108-113
Title II
INCORPORATION AND ORGANIZATION
SectionlO — Number and Qualifications of Incorporators — Incorporation

of a Private Corporation a M e r e Privilege; Advantages of the
Corporate Form; Corporations and Associations Distinguished;
Concept of Franchise; Primary Franchise and Secondary
Franchise Defined and Distinguished; Transferability of
Franchise; Steps in the Creation of a Corporation; Promotion of
Corporations; Promoters of Corporation; Stages in Corporate
Promotion; Nature of Relations of Promoters; Liability of
Corporation for Promotion Fees; Liability of Corporation on
Promoter's Contracts; Liability of Promoters for Failure to
Organize Corporation; U n d e r w r i t i n g Agreements; Incorpora-
vi
tion Distinguished from Creation; Incorporation Distinguished
from Corporation; Steps in Incorporation; Substantial
Compliance w i t h Requirements; Incorporators: N u m b e r and
Qualifications; Requirement Regarding M i n i m u m N u m b e r of
Incorporators M a n d a t o r y
Section 11 — Corporate Term — Term of Corporate Existence; Extension

of Corporate Term; Period of Corporate Existence a Matter of
Public Interest
Section 12 — Minimum Capital Stock Required of Stock Corporations

— Capital Stock Requirement; Filipino Percentage Ownership
Requirement Regarding Corporate Capital
Section 13 — Amount of Capital Stock to be Subscribed and Paid for
Purposes of Incorporation — M i n i m u m Subscription and Paid-
up Capital; C o m p u t a t i o n of the 25% Subscription Requirement;
Subscription of Corporations
Section 14 — Contents of Articles of Incorporation

Section 15 — Form of Articles of Incorporation — M e a n i n g of Articles of
Incorporation; Contents a n d F o r m of Articles of Incorporation-
Filing of the Articles of Incorporation; Power of Securities and
Exchange Commission to Reject Articles of Incorporation; N a m e
of the Corporation; Purpose or Purposes of the Corporation-
Purpose or Purposes M u s t Be L a w f u l ; Purpose or Purposes
M u s t Be Stated W i t h Sufficient Clarity; Primary Purpose M u s t Be
Stated; Purposes M u s t Be Capable of Being L a w f u l l y Combined;
Reasons for Statement of Purpose or Purposes; Effect Where
Primary Purpose/Secondary Purposes Unauthorized; Effect
W h e r e Corporation Engages in Its Secondary Instead of Its
Primary Purpose; Place W h e r e Principal Office of Corporation
Located; Incorporating Directors or Trustees; Capital Stock/
Capital a n d Subscribers /Contributors; W h e r e Shares w i t h Par
Value; W h e r e Shares W i t h o u t Par Value; Where Shares w i t h Par
Value and W i t h o u t Par Value; W h e r e Business of Corporation
Reserved for Filipino Citizens; Acknowledgment, Signature and
Verification
Section 16 — Amendment of Articles of Incorporation — M e a n i n g of

Corporate Charter; Distinguished from Franchise; Components
of Corporate Charter; N a t u r e of Corporate Charter; Reserved
Power of State to A m e n d Corporate Charter; Power of
Stockholders or Members to A m e n d Articles of Incorporation;
Necessity of Stockholders' or Members' Meeting for A m e n d -
ment; Limitations on Power of Corporation to A m e n d
Section 17 — Grounds When Articles of Incorporation or Amendment
May Be Rejected or Disapproved — Grounds for Rejection of
Articles of Incorporation or Amendment Thereto; Suspension
or Revocation of Certificate of Registration of Corporations
vii
Section 18 — Corporate Name — Limitations U p o n Use of Corporate
Name; Remedy of Corporation Whose N a m e Has Been Adopted
by Another; Change of Corporate N a m e ; Use of Changed or
Abandoned Corporate Names; Misnomer of a Corporation 182-195
Section 19 — Commencement of Corporate Existence — Acquisition of
Juridical Personality 196-197
Section 20 — De Facto Corporations — De Jure C o r p o r a t i o n / D e Facto
Corporation Denned; Requisites of a De Facto Corporation;
Existence of Law; Bona Fide Attempt to Incorporate; Colorable
Compliance w i t h the Law; User of Corporate Powers in
Good Faith; Basis of De Facto Doctrine; Questioning Validity
of Corporate Existence; Direct Attack/Collateral Attack of
Corporate Existence Defined; Rule Against Collateral Attach-
Where Organization N o t Even a De Facto Corporation; Proof
of Corporate Existence; Powers and Liabilities of a De Facto
Corporation; Liabilities of Officers and Members of a De Facto
Corporation 197-208
Section 21 — Corporation by Estoppel — Estoppel to D e n y Corporate
Existence; Corporation by Estoppel W i t h o u t De Facto Existence;
Estoppel of Persons Dealing w i t h a Corporation; Persons Liable
as General Partners 208-215
Section 22 — Effects of Non-use of Corporate Charter and Continuous

Inoperation of a Corporation — Statutory Requirements Before
and After Incorporation; M a n d a t o r y and Directory Provisions
Explained; Conditions Precedent Explained; Conditions Subse-
quent Explained; Formal Organization and Commencement of
business 215-219
Title III
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
Section 23 — The Board of Directors or Trustees — Structure of the Cor-

porate Organization; Corporate Powers Exercised by Board of
Directors or Trustees; Reason for the Rule; N a t u r e of Powers of
Board of Directors or Trustees; Limitations on Powers of Board
of Directors or Trustees; Powers Exercised by Board of Direc-
tors or Trustees as a Board; Reasons for the Rule; Exceptions to
the Rule; Power of Directors or Trustees to Delegate Authority;
Term of Office of Directors or Trustees; N u m b e r of Directors or
Trustees to be Elected; Election of Less T h a n the Required N u m -
ber; Qualifications of Directors or Trustees; N a t u r a l persons
contemplated by law; Citizenship Requirement; Stock O w n -
ership Requirement; Reason for the Requirement; A d d i t i o n a l
Qualifications in the By-Laws; Effect of Want of Eligibility 220-242
Section 24 - Election of Directors or Trustees - Election of Directors

or Trustees; Where Directors or Trustees M e r e l y Designated;
viii
Time of A n n u a l Election; Postponement of the Election;
Methods of Voting; Right of Stockholder to Use Cumulative
Voting; Situations Involving C u m u l a t i v e Voting; Arguments
for C u m u l a t i v e Voting; Arguments Against Cumulative Voting;
Voting in a Non-stock Corporation; Separate Voting by Zones or
Regions N o t A l l o w e d 242-256
Section 25 — Corporate Officers, Quorum — Corporate Officers; Cor-

porate Employees; Election of Officers by the Board; Compen-
sation, Terms of Office, and Removal; Positions Concurrently
H e l d by Same Person; Acceptance of Office and Taking of Oath
of Office; Sources of Powers or Authority of Corporate Officers;
Extent of Powers or A u t h o r i t y of Corporate Officers; Classifi-
cation of Powers or A u t h o r i t y of Corporate Officers; Extent of
A u t h o r i t y of Particular Officers; Requisites for Board Meeting;
Q u o r u m ; Proxy a n d Constructive Presence N o t A l l o w e d ; A n -
other Corporation as Director or Trustee 256-282
Section 26 — Report of Election of Directors, Trustees and Officers —

Report of Elections and Vacancies 282-284
Section 27 — Disqualification of Directors, Trustees or Officers — Dis-
qualification of Directors/Trustees or Officers; De Facto D i -
rectors/Trustees or Officers; Powers and Rights of De Facto
Officers, in General; Validity of Contracts and Acts of De Facto
Officers 284-287
Section 28 — Removal of Directors or Trustees — Power of Stockholders
or M e m b e r s to Remove Directors or Trustees; Power of the
Board to Remove a M e m b e r ; Power of Court to Remove
Directors or Trustees; Requisites for Removal of Directors or
Trustees; Requirement of Notice of Meeting; Resignation of
Directors or Trustees; A b a n d o n m e n t of Office and Failure to
Attend Meetings 287-294
Section 29 — Vacancies in the Office of Director or Trustee — Vacancies
in the Office of Director or Trustee; Filling of Vacancies 294-297
Section 30 — Compensation of Directors — Compensation of Directors
or Tustees; Directors Without Authority to Grant Themselves
Compensation; L i m i t to Compensation; Per Diems of Directors;
Compensation of Corporate Officers 297-302
Section 31 - Liability of Directors, Trustees or Officers — Nature of
Directors'/Trustees' Position; Cases W h e n Directors/Trustees
or Officers Liable for Damages; Liability of Directors/Trustees
or Officers for Bad Faith or Gross Negligence; Liability of
Directors / Trustees or Officers for Secret Profits 302-307
Section 32 — Dealings of Directors, Trustees or Officers with the
Corporation — Self-dealing Directors / Trustees or Officers 307-309
Section 33 — Contracts Between Corporations with Interlocking Directors
— Contracts Between Corporations w i t h Interlocking Directors;
Evils of Interlocking Directorates 309-312
ix
Section 34 - Disloyalty of a Director — Doctrine of "Corporate
Opportunity"; W h e n Doctrine N o t Applicable; Ratification by
Stockholders of Disloyal Act 312-315
Section 35 — Executive Committee — Executive Committee 316-319
Title I V
POWERS OF C O R P O R A T I O N
Section 36 — Corporate Powers and Capacity — M e a n i n g of Powers

of a Corporation; Distinguished from Its Franchise and
Objects; Relative Powers of N a t u r a l Persons/Partnerships and
Corporations; Classification of Corporate Powers; Detenruning
Whether an Act or Contract W i t h i n Scope of Corporate Powers;
Express Powers Explained; I m p l i e d Powers Explained; I m p l i e d
Powers Classified; Express Powers Distinguished f r o m I m p l i e d
Powers; Incidental or Inherent Powers Explained; Construction
of Powers Granted; Ratification of Corporate Acts; Effect of
Ratification Retroactive; M o d e of Exercising Powers; Power to
Sue and be Sued; Power to A d o p t and Use a Corporate Seal;
Power to Acquire and Convey Property; Power to Acquire
Shares or Securities; Corporation as Stockholder or M e m b e r ;
Power to Contribute to Charity; Power to Establish Pension,
Retirement and Other Plans; Power to Act as Guarantor 320-344
Section 37 — Power to Extend or Shorten Corporate Term — Power

to Extend or Shorten Corporate Term; Appraisal Right of
Dissenting Stockholders 344-346
Section 38 — Power to Increase or Decrease Capital Stock; Incur,
Create or Increase Bonded Indebtedness — P o w e r to Increase or
Decrease Capital Stock; Limitations on the Power; Necessity
for Increasing Capital Stock; Necessity of N e w Subscription
for Increase; Effectivity of Increase or Decrease; Over-issue of
Shares; Unauthorized Increase of Capital Stock; Subscription
Requirement in Case of Increase of Capital Stock; Ways of
Increasing (Decreasing) Authorized Capital Stock; Increase by
Way of Stock Dividends; Par Value or No Par Value Shares for
the Authorized Increase; Reduction of Capital Stock; Effect of
Reduction on Liability for U n p a i d Subscription; Distribution of
Surplus on Reduction; Persons Entitled to Question Increase or
Decrease of Capital Stock; Power to Incur, Create, or Increase
Bonded Indebtedness; W h e n Obligations Constitute Bonded
Indebtedness; The Corporate Bond Contract; Bond Terminology;
Types of Bonds 346-367
Section 39 — Power to Deny Pre-emptive Right — Right of Pre-emption

of Stockholders; Reason for the Grant of Right; Power to D e n y
Pre-emptive Right; Shares to W h i c h Right N o t Available;
Offering of Remaining Unsubscribed Shares; Tune W i t h i n
x
W h i c h the Right M a y Be Exercised; Pre-emptive Right as to
Treasury Shares; Price of N e w Stock Offerings; Availability of
Right to A d d i t i o n a l Issue of Originally Authorized Shares 367-375
Section 40 — Sale or Other Disposition of Assets — Powers to Sell, Lease,
etc. A l l or Substantially A l l Corporate Assets; Authority of the
Board; Appraisal Right of Dissenting Stockholder; Liability of
purchasing corporation for debts of selling corporation 375-379
Section 41 — Power to Acquire Own Shares — Power to Acquire O w n
Shares; Conditions for the Exercise of the Power; Trust Fund
Doctrine; Effects of Purchase on Corporate Creditors; Effects of
Purchase on Remaining Stockholders 379-387
Section 42 — Power to Invest Corporate Funds in Another Corporation
or Business or for Any Other Purpose — Power to Invest Funds in
Other Corporations or for Other Purposes; Purpose Other T h a n
the Primary Purpose; Ratification of Defective Investment 387-391
Section 43 — Power to Declare Dividends — Concept of Dividends;
Concept of Profits; D i v i d e n d s Distinguished from Profits or
Earnings; Power to Declare Dividends; Dividends Payable O u t
of Unrestricted Retained Earnings; Reasons for the Rule; Rule as
to N o Par Value Stock; D i v i d e n d s from Property in W h i c h Capital
Is Invested; Unrestricted Retained Earnings Explained; Items
Effecting Unrestricted Retained Earnings; Existence of Actual
Profits or Earnings; Deduction of Expenses; Distribution of
P a i d - i n Surplus as Cash Dividends; Distribution of Revaluation
Surplus as Dividends; Declaration of Dividends; Discretion of
the Board of Directors to Declare Dividends; Limit on Retained
Earnings; Action to Enforce Declaration of Dividends; Time for
Declaration of Dividends; Validity of D i v i d e n d Determined at
Time of Declaration; Payment of Subscription from Dividends;
Liability of Stockholders and Directors for Illegally Received
Dividends; Remedies of Corporate Creditors; Persons Entitled
to Dividends; Right of Stockholders After Declaration of
Dividends; Time for Payment of Dividends; Equal Participation
in the Distribution of Dividends; Total Subscription Basis of
Share in Dividends; Other Modes of Division of Dividends;
Classes of Dividends; Ordinary and Extraordinary Dividends;
Effect of Declaration of Cash D i v i d e n d ; Effect of Declaration
of Stock D i v i d e n d ; Tax Treatment of Stock Dividends; Effect of
Declaration of Bond or Scrip D i v i d e n d ; Distinctions Between
Cash D i v i d e n d and Stock D i v i d e n d ; Stock D i v i d e n d from Issue
of Additional Shares; Distribution or Re-issue of Treasury Stocks;
Stock Splits; Distinction Between Distribution in Liquidation
and Ordinary D i v i d e n d 391-437
Section 44 — Power to Enter into Management Contract — Power to

Enter into Management Contract; Limitations on the Power 437-440
Section 45 — Ultra Vires Acts of Corporations — Ultra Vires and Intra
Vires Acts Explained; Ultra Vires Acts Distinguished from Other
xi
Acts; Ratification of Ultra Vires Acts; Effects of Ultra Vires Acts
Which Are N o t Illegal; Contracts Ultra Vires in Part Only; Acts
Presumed to be Within Corporate Powers; Ultra Vires Acts as the
Acts of the Corporation; W h o M a y Invoke Ultra Vires; Estoppel
to Deny Corporate Power to Contract; Corporate Liability for
Torts, Crimes, and Other Violations 440-454
Title V
BY-LAWS
Section 46 — Adoption of By-Laws — M e a n i n g of By-Laws; Power to
Adopt By-Laws; Function of By-Laws; Necessity of A d o p t i n g
By-Laws; Time and Procedure for the A d o p t i o n of By-Laws;
Effect of Failure to File By-Laws; Construction, Application,
and Effectivity of By-Laws; Validity of By-Laws; M u s t Be
Consistent w i t h Law; Must Be Consistent w i t h Public Policy;
Must N o t Impair Obligation of Contracts; M u s t Be General
and N o t Directed Against Particular Individuals; M u s t Be
Consistent w i t h the Charter or Articles of Incorporation; M u s t
Be Reasonable; Binding Effect of By-Laws; Waiver of B y - L a w s . . 455-468
Section 47 — Contents of By-Laws — Contents of B y - L a w s 468-472
Section 48 — Amendments to By-Laws — A m e n d m e n t and Repeal
of By-Laws and A d o p t i o n of N e w By-Laws; Revocation of
Delegated Power of Board of Directors or Trustees; By-Laws
and Resolutions Distinguished; Resolution A d o p t e d as a By-
Law; Articles of Incorporation and By-Laws Distinguished;
Filing and Effectivity of A m e n d e d or N e w By-Laws 472-478
Title VI
MEETINGS
Section 49 — Kinds of Meetings 479
Section 50 — Regular and Special Meetings of Stockholders or Members
— Kinds of Meetings; Necessity of Meetings; Exceptions to
the Rule; Requisites for a Valid M e e t i n g of Stockholders o r .
Members 479-482
Section 51 — Place and Time of Meetings of Stockholders or Members
— Place and Tune of Meetings of Stockholders or Members;
Proper Person to Call M e e t i n g ; Notice of Every M e e t i n g
Required; Statement of Purpose of M e e t i n g ; Requisites of
Notice of Meeting; Effect of Failure to C o m p l y w i t h Requisites
for Meeting 482-488
Section 52—Quorum in Meetings - Q u o r u m Required in Stockholders'
and Members' Meetings; Postponement of Stockholders' or
Members' A n n u a l Meeting; Payment of Compensation for
Attendance at Stockholders' or Members' Meetings; Matters in
xii
W h i c h the L a w Requires M i n i r n u m N u m b e r of Votes; Greater
Voting Requirement 488-494
Section 53 — Regular and Special Meetings of Directors or Trustees —

Place and Tune of Meetings of Directors or Trustees; Notice of
Every M e e t i n g Required 494-495
Section 54 — Who shall Preside at Meetings — Presiding Officer at

Meetings 495-496
Section 55 — Right to Vote of Pledgors, Mortgagors, and Administrators

— Right to Vote in Stock Corporations; Right to Vote in N o n -
stock Corporations; M a n n e r of Voting; Representative Voting;
Voting Rights for Shares of Stock of a Deceased Stockholder 496-504
Section 56 — Voting in Case of Joint Ownership of Stock—Voting W h e r e

Share O w n e d by T w o or M o r e Persons 504-505
Section 57 — Voting Right for Treasury Shares — Voting Right for

Treasury Shares 505
Section 58 — Proxies — M e a n i n g of Proxy; Purpose and Use of

Proxies; Voting by Proxy; W h o M a y Be a Proxy; Nature of
Proxies; Limitations on Proxies of Stockholders or Members;
F o r m and Execution of Proxies; Extent of Authority of Proxy;
D e n i a l of Right to Vote by Proxy in the By-Laws; Restrictions on
Right to Vote by Proxy in the By-Laws; Proxy G i v e n to T w o or
M o r e Persons; Revocation of Proxies; D u r a t i o n of Proxy 505-515
Section 59 — Voting Trusts — Corporate Control Devices; Combina-
tion and Pooling Agreements A m o n g Stockholders; Voting and
Other Rights U n d e r a Voting Trust Agreement; Voting Trust Cer-
tificates; Powers or Rights of Voting Trustees; Purpose of Voting
Trust Agreement; Limitations on Voting Trust Agreement; Proxy
and Voting Trust Distinguished 515-525
Title V I I
STOCKS A N D STOCKHOLDERS
Section 60 — Subscription Contract — H o w Participation in a

Corporation Acquired; Subscription Contract; Kinds of
Subscription; Subscription and Purchase of Stock; Stock
Option; Rules Governing Grant of Stock Options; Liability of
Stockholders on U n p a i d Subscriptions to Corporate Creditors;
Release of Subscriber from Liability for U n p a i d Subscription;
Refund of Subscription Payments in Excess of That Stated
in Call; Refund Where Proposed Increase in Capital Stock
Abandoned 526-537
Section 61 — Pre-incorporation Subscription — Pre-incorporation Sub-
scription Mandatory; Revocability of Pre-incorporation Sub-
scription Contract; Effect of Filing of Articles of Incorporation... 537-539
xiii
Section 62 — Consideration for Stocks — Sources of Corporate Capital;
Power to Issue Stock; Approval of Stockholders for Issue of
Shares; Approval of Securities and Exchange Commission
for Issue of Shares; Different Modes by W h i c h Shares M a y Be
Issued; Original Issue of Stock Contemplated; Consideration for
Issue of Stocks; Amount of Consideration; Consideration Other
Than Cash; Nature of Property W h i c h M a y Be Taken for Stock;
Services as Consideration for Stock; Issuance of Stock to Offset
Corporation's Indebtedness; Issuance of Stocks in Consideration
of Profits; Fixing of Issued Price of No Par Shares; Consideration
for Issue of Bonds; Registration and Sale of Securities 539-557
Section 63 — Certificate of Stock and Transfer of Shares — N a t u r e of

a Certificate of Stock; Issuance of Certificate of Stock; Delivery
Essential to Issuance of Certificate; Remedies of Stockholders
Where Corporation Refuses To Issue Certificate; Effect of
Over-issuance of Shares; Unauthorized or Forged Certificates;
Requirements for Transfer of Stock; Right to Transfer Fully Paid
Shares of Stock; Sale of Subscription Rights; Restrictions on
Transfer of Stock; O p t i o n to Purchase Shares Offered for Sale;
Modes of Stock Transfer; Validity of Stock Transfer; Reasons for
Requiring Registration of Stock Transfer; Right of Corporation
to Refuse Registration of Transfer; Basis of Transferee's Right
to Registration; Remedy of Stockholder W h e r e Corporation
Refuses to Register Transfer; O n l y Absolute Transfers N e e d Be
Registered; Effects of an Unregistered Transfer of Shares; N o n -
transferability of U n p a i d Stock on Corporate Books 557-584
Section 64 — Issuance of Stock Certificates — Full Payment of Subs-

cription Required for Issuance of Certificate of Stock; Purpose
of Prohibition in Section 64; N a t u r e of Relation of Stockholder
to the Corporation; Rights and Remedies of Stockholders
in General; Rights of Heirs Deceased Stockholders; Rights
of Stockholders M a y Be Changed or Restricted; Rights of
Dissenting M i n o r i t y ; Actions by Stockholders or Members;
Derivative Suit Explained; N a t u r e of Derivative Suit; Importance
of Derivative Suits; Type of W r o n g Contemplated; Requisites
for Bringing Derivative Suit; Exhaustion of Intra-corporate
Remedies; Reasons G i v e n for not A l l o w i n g Direct I n d i v i d u a l
Suit; Individual Suit Explained; Derivative Suit and I n d i v i d u a l
Suit Distinguished; Representative Suit Explained; Derivative
Suit and Representative Suit Distinguished; Jurisdiction Over
I n t r a c o r p o r a t e Controversies; Liabilities of Stockholder 584-605
Section 65 - Liability of Directors for Watered Stocks — Watered Stock
Defined; Issue of Watered Stock Prohibited; Basis or Theory
of Liability; Prohibition Refers to Original Issue; Liability for
Watered Stock; Suit by the State 605-610
Section 66 - Interest on Unpaid Subscriptions - Liability of Stock-
holder for Interest on U n p a i d Subscriptions 610
xiv
Section 67 — Payment of Balance of Subscription — Remedies to Enforce
Payment of Stock Subscription; Statutory Sanctions on Stock
Delinquency; Remedies L i m i t e d to Delinquent Subscription;
Payment of U n p a i d Subscription or Percentage Thereof; Call
and Assessment D e n n e d and Distinguished; Requisites for a
V a l i d C a l l ; Power of Board of Directors to M a k e Call; Necessity
and Purpose of C a l l ; W h e n Call not Necessary; Payment
W i t h o u t Call; Necessity of Notice of Call 610-618
Section 68 — Delinquency Sale — Procedure for the Sale of Delinquent

Stocks; M e a n i n g of Highest Bidder; Right of Corporation to
Reject Highest Bid; Purchase by Corporation of Delinquent
Stock; Forfeiture of Delinquent Stock N o t Authorized; Shares to
be Sold in Case of Delinquency 618-623
Section 69 — When Sale May Be Questioned — Recovery of Stock

U n l a w f u l l y Sold 623-624
Section 70 — Court Action to Recover Unpaid Subscription — Judicial
R e m e d y to Recover U n p a i d Subscription 624-625
Section 71 — Effects of Delinquency — Effects of Stock Delinquency;
Denial of Voting Rights 625-627
Section 72 — Rights of Unpaid Shares — Rights of U n p a i d Shares 627-628
Section 73 — Lost or Destroyed Certificates — Lost, Stolen, or Destroyed
Stock Certificates; W h e n Publication Requirement M a y Be
Dispensed W i t h 628-631
Tide VIII
CORPORATE BOOKS AND RECORDS
Section 74 — Books to be Kept; Stock Transfer Agent — Books a n d Records

to be Kept by Corporations; Practical Necessity of Keeping
Books; Entries to be M a d e in Stock and Transfer Book; Books
and Records, and Entries therein as Evidence; Persons Given
the Right to Inspect Corporate Books; Remedies and Sanctions
for Enforcement of Right; Basis and Purpose of Right to Inspect
Corporate Books; Right to Inspection N o t Absolute; Extent of
the Right of Inspection; Right of Stockholder to D e m a n d a List
of Stockholders; Right of Stockholder to D e m a n d a Detailed
A u d i t i n g of Business Operations; Right of Stockholder to
Examine Books of Corporation's Subsidiary 632-648
Section 75 - Rights to Financial Statements — Right of Stockholder
or M e m b e r to Financial Statements; D u t y of Board to Present
A n n u a l Financial Report 648-651
Title LX
MERGER AND CONSOLIDATION
<r52
Section 76 — Plan of Merger or Consolidation
xv
Section 77 — Stockholders' or Members' Approval 652
Section 78 — Articles of Merger or Consolidation 653
Section 79 — Securities and Exchange Commission's Approval and
Effectivity of Merger or Consolidation — Corporate Combinations
in General; C o m m o n Forms of Corporate Combinations;
Advantages of Stock Acquisition Over Asset Acquisition;
Procedure for Effecting a Plan of Merger or Consolidation 654-665
Section 80 — Effects of Merger or Consolidation — Legal Effects of Merger
and Consolidation; Merger and Consolidation Distinguished
from Sale of Assets; Reorganization of a Corporation; Quasi-
reorganization of a Corporation 665-674
TideX
APPRAISAL RIGHT
Section 81 — Instances of Appraisal Right — Appraisal Right of a Stock-
holder; Instances W h e n Appraisal Right Available; A m e n d m e n t
of Articles of Incorporation Changing Stockholders' Rights;
Limitations on the Exercise of Appraisal Right 675-677
Section 82 — How Right Is Exercised — Procedure for Exercise of
Right; Determination of Fair Value of Shares 678-679
Section 83 — Effect of Demand and Termination of Right — Effect of
Exercise of Right; Payment of Shares 680
Section 84 — When Right to Payment Ceases — Extinguishment of
Right to Payment 680-681
Section 85 — Who Bears Costs of Appraisal — Liability for Costs a n d
Expenses of Appraisal 681-682
Section 86 — Notation on Certificate(s); Right of Transferee — N o t a t i o n
on Certificate(s) of Shares of Dissenting Stockholder; Transfer of
Dissenting Shares 682-683
Title XI
Section 87 - Definition 684
Section 88 — Purposes — Definition of Non-stock Corporation; Power

to M a k e Profits and Engage in Business; Applicable Provisions. 684-687
Chapter I — MEMBERS
Section 89 - Right to Vote 687
Section 90 - Nontransferability of Membership 687

Section 91 - Termination of Membership 687
xvi
Chapter II — TRUSTEES AND OFFICERS
Section 92 — Election and Term of Trustees 5g7
Section 93 — Place of Meetings ggg
Chapter III — DISTRIBUTION OF

ASSETS IN NON-STOCK CORPORATIONS
Section 94 — Rules for Distribution 588
Section 95 — Plan of Distribution of Assets — Rules Applicable O n l y to

Non-stock Corporations; M e m b e r s h i p in a Non-stock Corpora-
tion 689-698
Title XII
CLOSE CORPORATIONS
Section 96 — Definition and Applicability of Title — Definition of Close
Corporation; Peculiarity of a Close Corporation; M e a n i n g of
Term U n d e r the Code; Applicable Provisions; N e e d for Special
Rules for Close Corporations 699-704
Section 97 — Articles of Incorporation — Permissible Provisions in

Articles of Incorporation 704-706
Section 98 — Validity of Restrictions on Transfer of Shares — Restrictions
on Transfer of Shares; Right of First Refusal; N e e d for
Stock Transfer Restrictions in Close Corporations; Scope of
Restrictions 706-710
Section 99 — Issuance or Transfer of Stock of a Close Corporation in Breach
of Qualifying Conditions — Issuance or Transfer of Stock in Breach
of Qualifying Conditions 710-712
Section 100 — Agreements by Stockholders — Valid Agreements by
Stockholders 712-713
Section 101 — When Board Meeting is Unnecessary or Improperly Held
— Action Taken By Directors Without Meeting or at Improperly
Called Meeting 713-714
Section 102 — Pre-emptive Right in Close Corporations — Pre-emptive
Right of Stockholders 714-715
Section 103 — Amendment of Articles of Incorporation — Amendment
of the Articles of Incorporation
Section 104 — Deadlocks — Arbitration of Intra-corporate Deadlocks
by the Securities and Exchange Commission; Dissolution in the
Event of Deadlock 716-718
Section 105 — Withdrawal of Stockholder or Dissolution of Corporation —
Right of Stockholder to W i t h d r a w or to H a v e the Corporation
Dissolved
xvii
Title XIII
SPECIAL CORPORATIONS
Chapter I — EDUCATIONAL CORPORATIONS
Section 106 - Incorporation — Educational Corporation Defined;
Laws Applicable 720-721
Section 107 — Prerequisites to Incorporation — Incorporation 721
Section 108 - Board of Trustees — Board of Trustees or Directors 722-723
Chapter II — RELIGIOUS CORPORATIONS

Section 109 — Classes of Religious Corporation 723
Section 110 — Corporation Sole 723
Section 111 — Articles of Incorporation 723-724
Section 111 — Submission of the Articles of Incorporation 724-725
Section 113 — Acquisition and Alienation of Property 725
Section 114 — Filling of Vacancies 725
Section 115 — Dissolution 726
Section 116 — Religious Societies — Definition of Religious Corpora-
tion; Applicable Provisions; Classes of Religious Corporations;
Corporation Sole 726-734
Tide xrv
DISSOLUTION
Section 117 — Methods of Dissolution — M e a n i n g of Dissolution; P o w e r
to Dissolve Corporation; De Jure and De Facto Dissolution; T w o
Legal Steps in Corporate Dissolution; M e t h o d s or Causes of
Corporate Dissolution; Methods Exclusive 735-738
Section 118 — Voluntary Dissolution Where No Creditors Are Affected —
Voluntary Dissolution of Corporations; Voluntary Dissolution
Where No Creditors A r e Affected; Sale of Assets in Anticipation
of Voluntary Dissolution; Right of M i n o r i t y Stockholders to
Oppose Dissolution 738-742
Section 119 — Voluntary Dissolution Where Creditors Are Affected —
Voluntary Dissolution W h e r e Creditors A r e Affected 742-743
Section 120 — Dissolution by Shortening Corporate Term — Dissolution
by Shortening of Term; Dissolution by Expiration of Term;
Dissolution by Legislative Enactment; Dissolution by Failure
to Formally Organize and Commence Transaction of Business;
Effect of Change of N a m e on Corporate Existence; Effect of
Insolvency or Bankruptcy on Corporate Existence; Effect of
Alienation of A l l Assets on Corporate Existence; Effect of
zviii
Death, etc. of Stockholders or Members on Corporate Existence;
Effect of Want of Officers on Corporate Existence; Effect of
Concentration of Stock on Corporate Existence 743-751
Section 121 — Involuntary Dissolution — Dissolution by Order of
the Securities and Exchange Commission; Dissolution by Q u o
Warranto Proceedings; Right of M i n o r i t y Stockholders to Sue
for Dissolution; Effects of Dissolution 751-759
Section 122 — Corporate Liquidation — M e a n i n g of Liquidation;
N a t u r e of Liquidation; Methods of Corporate Liquidation;
Liquidation by the Corporation Itself; Liquidation by a
Receiver; A p p o i n t m e n t of Receiver Discretionary; Liquidation
by a Trustee; Effect of Dissolution on Corporate Power to
Enter Into Contracts; Distribution of Corporate Assets; Priority
of Application of Assets; Refund to Stockholders of Their
Investment 759-774
Title X V
FOREIGN CORPORATIONS
Section 123 — Definition and Rights of Foreign Corporations —

Definition of Foreign Corporation; Corporation M a y Operate
W i t h i n Jurisdiction of Another State; Objectives of Regulation
of Foreign Corporations; License and Certificate of Authority
Required of Foreign Corporations; Nationality of Corporations
w i t h Foreign Equity 775-784
Section 124 — Application to Existing Foreign Corporations — W h e r e
License Issued Before Effectivity of the Code 784-785
Section 125 — Application for a License 785
Section 126 — Issuance of a License 786
Section 127 — Who May Be a Resident Agent 788
Section 128 — Resident Agent; Service of Process — Application for
and Issuance of License; Conditions Subsequent to Issuance of
License; Licensing of Regional or Area Headquarters; Licensing
of Regional Operating Headquarters; Resident Agent; Purpose
of L a w in Requiring License; M e a n i n g of "Transacting Business";
M e a n i n g of Phrase U n d e r Investment Laws 788-811
Section 129 — Law Applicable - Laws Applicable to Foreign

Corporations; Powers of a Foreign Corporation Subject to
Philippine Laws 812-813
Section 130 — Amendments to Articles of Incorporation or By-Laws of
Foreign Corporations — A m e n d m e n t of Articles of Incorporation
and By-Laws 813-815
Section 131 — Amended License — When Amended License
8 1 5 8 1 6
Required "
xix
Section 132 — Merger or Consolidation Involving a Foreign Corporation
Licensed in the Philippines — Merger or Consolidation Involving
a Foreign Corporation 816-817
Section 133 — Doing Business Without a License — Effects of D o i n g
Business Without a License; Suit by an Unlicensed Foreign
Corporation; Suit Against an Unlicensed Foreign Corporation;
Facts Showing Capacity to Sue; Validity of Contracts of
Unlicensed Foreign Corporations 817-828
Section 134 — Revocation of License 828

Section 135 — Issuance of Certificate of Revocation — Revocation of
License of Foreign Corporation; Effects of Revocation 829-830
Section 136 — Withdrawal of Foreign Corporation — W i t h d r a w a l of a
Foreign Corporation; Suits Against a Foreign Corporation That
Has Ceased to Do Business 830-832
Title X V I
MISCELLANEOUS PROVISIONS
Section 137 — Outstanding Capital Stock Defined — Outstanding

Capital Stock Defined; Distinguished f r o m Issued and
Subscribed Shares 833-835
Section 138 — Designation of Governing Boards — Designation of
Governing Boards 835
Section 139 — Incorporation and Other Fees — Collection of Fees 835-836
Section 140 — Stock Ownership in Certain Corporation — L i m i t a t i o n of
Stock Ownership in Corporations Vested w i t h Public Interest;
Illegal Monopolies and Combinations in Restraint of Trade 836-841
Section 141 — Annual Report of Corporations — T h e Securities a n d
Exchange Commission; Powers and Functions of the C o m m i s -
sion; Jurisdiction of Commission over Corporations; I n d e m n i -
fications and Responsibilities of Commissioners; Jurisdiction
over Cases Transferred to O r d i n a r y Courts; Submission of
Annual Report to the Commission; Corporations Covered by
the Requirement - 841-858
Section 142 — Confidential Nature of Examination Results —

Visitorial Power in General; Visitorial Power Granted Certain
Governmental Agencies; Judicial Supervision, Generally 858-862
Section 143 — Rule-Making Power of the Securities and Exchange Com-
mission — R u l e - M a k i n g Power of the Securities and Exchange
Commission. 862-864
Section 144 - Violations of the Code - General Penalty 864-865

Section 145 — Amendment or Repeal — Limitations on Legislative
Power to A m e n d or Repeal 865-866
Section 146 — Repealing Clause — Former Corporation L a w Repealed;
Repeal of Other Laws 866-867
Section 147 — Separability of Provisions 868
Section 148 — Applicability to Existing Corporations — Applicability of
Code to Existing Corporations 868-869
Section 149 — Effectivity — Effectivity of the Code 869
APPENDIX
A P P E N D I X A — T H E S E C U R I T I E S R E G U L A T I O N C O D E (R.A. N o .
8799) 870
A P P E N D I X B — RULES OF PROCEDURE ON CORPORATE

REHABILITATION 924
A P P E N D I X C — I N T E R I M RULES OF PROCEDURE G O V E R N I N G
I N T R A - C O R P O R A T E C O N T R O V E R S I E S U N D E R R.A. N O .
8799 949
APPENDIX D — GUIDELINES I N THE FORMATION
A N D O R G A N I Z A T I O N OF A PRIVATE STOCK
CORPORATION 968
A P P E N D I X E — GUIDELINES FOR N O N - S T O C K
CORPORATIONS 971
A P P E N D I X F — G U I D E L I N E S FOR Q U A S I-
REORGANIZATION
A P P E N D I X G — C O N S O L I D A T E D S C H E D U L E OF FEES
A N D CHARGES
A P P E N D I X H — C O N S O L I D A T E D S C A L E OF F I N E S
A P P E N D I X I — S C A L E OF F I N E S F O R N O N - C O M P L I A N C E
W I T H F I N A N C I A L REPORTING REQUIREMENTS
OF THE COMMISSION
A P P E N D I X J — REVISED G E N E R A L I N F O R M A T I O N W 3 7
S H E E T
1 0 4 8
A P P E N D I X K — PUBLIC F O R M TYPE MASTERLIST
A P P E N D I X L — COPIES OF REPORTS A N D O T H E R F I L I N G S 1055
W I T H T H E SEC
A P P E N D I X M — R E V I S E D C O D E OF C O R P O R A T E 1060
GOVERNANCE
A P P E N D I X N — T H E 2006 RULES OF P R O C E D U R E OF T H E 1078
SECURITY E X C H A N G E C O M M I S S I O N
— oOo —
xxi

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THE CORPORATION CODE

(2) Partnership. — The partnership is the first step towards

larger enterprises, which, so far as the United States is concerned,

(5) Business trust. — Another form of business organization

(7) Other business forms. — They arise where different enter-

"Organization and Control," in 3 Modern Business [1919], pp.

Theories as to origin of corporations.

permitted the formation of private corporations for certain

banking institutions spread rapidly over the country so that the

commercial entities, most nearly approached the concept of a

ed affecting corporations. Among them are laws creating

DEFINITIONS AND CLASSIFICATIONS

Section 1. Title of the Code. — This Code shall be known

and were given the "option to either continue business as such

"This bill is intended to supplant the present Corporation

porations. Government-owned or -controlled corporations

Sec. 2. Corporation defined. — A corporation is an

Statutory definition of corporation.

statutory definition refers only to private corporations or to cor-

Judicial definitions of corporation.

sive changes by death or otherwise in the corporation or mem-

itself without violating the fundamental principle that a cor-

(d) For the same reason, the President and manager of

The separate personality of a corporation is a shield against

anguish to a corporation unlike in the case of a natural

a corporation has a personality separate and distinct from

(d) The mere fact that one is president of a corporation does

The participation by the general manager of a corporation

(1) As a person. — Persons are divided into natural and arti-

therefore, as a general rule, includes corporations (18 Am. Jur. 2d

(e) But a corporation comes within the protection of

Doctrine of piercing t h e veil of corporate

Instances w h e r e doctrine applied.

pierced the veil of corporate entity, considering the corporation

by the same or single stockholder or by another corporation,

regarded if it is shown that it is designed as a means to per-

and followed a single system of compulsory retirement, with

493 [2006].), or 2) a common director sits on the boards of

officers of the two corporations are substantially the same or

stocks of another corporation, taken alone is not sufficient

[1986]; see A.C. Ransom Labor Union CCLU vs. National

doctrine of corporate entity was envisaged for convenience and

Application of the "instrumentality" or

(b) The parent and subsidiary corporations have com-

was not privy to the loan contracts entered into by respondents

Corporation as a creation of law

by the State through the legislature, either by a special incorpo-

the individual stockholders or members and regardless of the

(7) Also, a corporation which is engaged, among others, in

Distinctions between a partnership

agreement of the parties, while a corporation is created by law or

transferee a partner without the consent of all the other exist-

(5) Like a partnership, a corporation can be organized only

(c) Furthermore, such an arrangement would permit the

partnership to be appointed jointly by the partners from

"Under this condition, a partnership of corporations should be organized as a

to enter into partnership agreement and the nature of the

involved in the management of the investee corporation with

(8) They are not general agents of the business; and