CORPORATION CODE OF THE PHILIPPINES (BP 68)

GENERAL PROVISIONS
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. (Sec. 2)

Attributes of a Corporation(CARP)
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attribute and properties expressly authorized by law or incident to its existence.

Theories on the Formation of a Corporation:

1. Concession theory – a corporation is an artificial creature without any existence until it has received the
imprimatur of the state acting according to law, through the SEC.
2. Theory of corporate enterprise or economic unit – the corporation is not merely an artificial being, but
more of an aggregation of persons doing business, or an underlying business unit.
3. Genossenschall theory – treats the corporation as the reality of the group as a social and legal entity
independent of state recognition and “concession.”

Doctrine of Separate Personality

 A corporation has a juridical personality separate and distinct from that of its stockholders or members.
 Consequences:
1. Liability for acts or contracts- obligations incurred by a corporation, acting through its authorized
agents are sole its sole liabilities
2. Right to bring actions – may bring civil and criminal actions in is own name in the same manner
as natural persons.
3. Right to acquire and possess property – property conveyed to or acquired by the corporation
is in law the property of the corporation itself as a distinct legal entity and not that of the
stockholders or members.
4. Acquisition of court of jurisdiction – service of summons may be mad on the president, general
manager, corporate secretary, treasure or in-house counsel (Sec 11, Rule 14, Rules of Court)
5. Changes in individual membership - Remains unchanged and unaffected in its identity by
changes in its individual membership
6. Entitlement to constitutional guarantees:
 Due Process
 Equal protection of the law
 Protection against unreasonable searches and seizures
Note: A corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard
vs PCGG)
7. Liability for torts – a corporation is liable whenever a tortuous act is committed by an officer or
agent under the express direction or authority of the stockholders or members acting as a body
or generally, from the directors as the governing body.
8. A corporation is not entitled to moral damages because it has no feelings, no emotions, no
senses (ABS-CBN vs CA)
9. Liability for crimes – since a corporation is a mere legal fiction, it cannot be held liable for a
crime committed by its officers, since it does not have the essential element of malice; in such
case the responsible officers would be criminally liable (People vs Tan Boon Kong, 54 Phil 607)

Doctrine of Piercing the Veil of Corporate Entity

 Requires the court to see through the protective shroud which exempts its stockholders from liabilities
that they ordinarily would be subject to, or distinguishes a corporation from a seemingly separate one,
were it not for the existing corporate fiction (Lim vs CA, 323 SCRA 102)
 Extent: The application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance for which the
doctrine was applied (Koppel v. Yatco 77 Phil. 496)
 Rules:
1. has only a res judicata effect
2. to prevent wrong or fraud and not available for other purposes;
3. judicial prerogative only;
4. must be with necessary and factual basis

QUESTION (Q): XYZ Corp. owns a beach resort with several cottages. A, the President of XYZ
Corp. occupied one of the cottages for residential purposes. After A’s term expired, XYZ wanted to
recover possession of the cottage. A refused to surrender the cottage, contending that as a
stockholder and former President, he has the right to enjoy the properties of the corporation. Is A’s
contention correct? Explain.

SUGGESTED ANSWER (SA): A’s contention is not correct. A may own shares of stock of XYZ
Corp. but such ownership does not entitle him to the possession of any specific property of the
corporation or a definite portion thereof. Neither is he a co-owner of corporate property. Properties
registered in the name of the corporation are owned by it as an entity separate and distinct from
that of its stockholders. Stockholders like A can only own shares of stock in the corporation. Such
shares of stock do not represent specific corporate property. (Rebecca Boyer-Roxas vs. CA, 211
SCRA 470)

3 Classes of Piercing: (FAE)

1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong.
2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or another corporation
3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity.
Instrumentality / Alter Ego Rule
 Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact,
a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality”
may be disregarded.
 Requisites:
1. There must be control, not mere majority or complete stock control, but complete domination, not
only of finances, but of policy, and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had, at that time, no separate mind, will or existence of
its own (control);
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the
violation of a statutory or other positive duty, or dishonest and unjust act in contravention of
plaintiff’s legal rights (breach of duty); and
3. Such control and breach of duty must proximately cause the injury to the plaintiff. (proximate cause)

Distinctions between Corporation and Partnership

CORPORATION PARTNERSHIP
1. Creation
Created by operation of law; Created by agreement of the parties;

2. Numbers of incorporators
2. Requires at least 5 incorporators; 2. Requires at least 2 partners;

3. Commencement of juridical personality

Acquires juridical personality from the Acquires juridical personality form the
date of issuance of the certificate of moment of execution of the contract of
incorporation by the Securities and partnership
Exchange Commission
 4. Powers
Corporation can exercise only the Partnership may exercise any power
powers expressly granted by law or authorized by the partners (provided it is not
implied from those granted or incident contrary to law, morals, good customs, public
to its existence order, public policy)

5. Management
The power to do the business and When management is not agreed upon,
manage its affairs is vested in the every partner is an agent of the partnership
board of directors and trustees

6. Effect of mismanagement
The suit against a member of the board A partner as such can sue a co-partner who
of directors or trustees who mismanages
mismanages must be in the name of the
corporation
7. Right of succession
Has right of succession Has no right of succession

8. Extent of liability to third persons

Stockholders are liable only to the Partners are liable personally and
extent of the shares subscribed by them subsidiarily (sometimes solidarily) for
partnership debts to third persons

9. Transferability of interests
Stockholder has generally the right to Partner cannot transfer his interest in the
transfer his shares without prior partnership so as to make the transferee a
consent of the other stockholders partner without the unanimous consent of all
because a corporation is not based on existing partners because the partnership is
this principle based on the principle of delectus
personarum

10. Term of existence

May not be formed for a term in excess May be established for any period of time
of 50 years extendible to no more than stipulated by the partners
50 years in any one instance

11. Firm name

May adopt any name provided it is not Limited partnership is required by law to add
the same as or similar to any registered the word “Ltd” to its name
firm name
12. Dissolution
Can only be dissolved with the consent May be dissolved at any time by or all of the
of the State partners
13. Governing Law
Governed by the Corporation Code Governed by the Civil Code

Franchises of Corporations:
1. Primary or corporate franchise
 The right or privilege granted by the State to individuals to exist and act as a corporation after its
incorporation.
2. Secondary or special franchise
  The special right or privilege conferred upon an existing corporation to the business for which it
was created. Example, use of the streets of a municipality to lay pipes or tracks, or operation of a
messenger and express delivery service.

PRIMARY SECONDARY
1. Refers to the franchise of being or 1. Refers to the exercise of rights. Example: right of
existing as a corporation eminent domain
2. Vested in the individuals who 2. Vested in the corporation after its incorporation and
compose the corporation not upon the individuals who compose it
3. It cannot be sold or transferred 3. It may be sold or transferred; subject to sale on
because it is inseparable from the execution, subject to levy
corporation itself.

Classes of Corporations:
1. AS TO ORGANIZERS:
a. Public – by State only; and
b. Private – by private persons alone or with the State.
2. AS TO FUNCTIONS:
a. Public – government of a portion of the territory; and
b. Private – usually for profit-making
c. Quasi-public – those private corps. which have accepted from the state the grant of a franchise or
contact involving the performance of public duties.
3. AS TO GOVERNING LAW:
a. Public – Special Laws; and
b. Private – Law on Private Corporations
4. AS TO LEGAL STATUS:
a. De jure corporation – organized in accordance with the requirements of law.
b. De facto corporation – organized with a colorable compliance with the requirements of a valid law.
Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in
a quo warranto proceeding.
 Requisites:
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law;
3. Actual use or exercise in good faith of corporate powers; and
4. Issuance of certificate of incorporation by the SEC as a minimum requirement of
continued good faith
Note: The only difference between a de facto corporation and a de jure corporation is that a de
jure corporation can successfully resist a suit by a state brought to challenge its existence; a de
facto corporation cannot sustain its right to exist.
c. Corporation by estoppel – group of persons that assumes to act as a corporation knowing it to be
without authority to do so, and enters into a transaction with a third person on the strength of such
appearance. It cannot be permitted to deny its existence in an action under said transaction. It is
neither de jure nor de facto.
d. Corporation by prescription – one which has exercised corporate powers for an indefinite period
without interference on the part of the sovereign power, e.g. Roman Catholic Church.
5. AS TO EXISTENCE OF SHARES OF STOCK:
a. Stock corporation – a corporation:
1. whose capital stock is divided into shares and
2. which is authorized to distribute to shareholders dividends or allotments of the surplus
profits on the basis of the shares held.
b. Non-stock Corporation – does not issue stocks nor distribute dividends to their members.
6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL:
a. Holding corporation - it is one which controls another as a subsidiary by the power to elect
management.
 b. Subsidiary corporation
1. Majority-owned subsidiary – where one corporation owns 51% to 94% of the capital stock of
another corporation.
2. Wholly-owned subsidiary – where one corporation holds 95% to 100% of the capital stock of
another corporation.
c. Affiliates - company that is subject to common control of a mother holding company and operated
as part of the system.
d. Parent and Subsidiary Corporation - separate entities with power to contract with each other.
 The board of directors of the parent company determines its representatives to attend and vote
in the stockholder’s meeting of its subsidiary.
 The stockholders of the parent company demand representation in the board meetings of its
subsidiary.
7. AS TO PLACE OF INCORPORATION:
a. Domestic corporation - a corporation formed, organized, or existing under Philippine laws.
b. Foreign corporation – a corporation formed, organized, or existing under any laws other than those
of the Philippines.

Quasi-Corporation Public Corporation

1. Possesses only some corporate powers, 1. A full corporation;
therefore, not a full corp.

2. Organized to aid the state in some public or 2. Organized for the government of a portion of
state work other than the government of a the state.
portion thereof.

Quasi-Corporation Quasi-Public Corporation

1. Not a full corp.; 1. A full corp.;

2. An instrumentality of the state. 2. An instrumentality of private individuals.

De Facto Corporation Corporation by Estoppel

1. Has a real existence in law; 1. No real existence in law but it is a mere fiction
existing only for a particular case;

2. May exist even if there are no dealings 2. Cannot exist unless there are dealings
between the parties on a corporate basis. between the parties on a corporate basis.

Concept of Going Public and Going Private

A corporation is deemed to be ‘going public’ when it decides to list its shares in the stock exchange. These
include corporations that will make initial public offering of its shares. A corporation is said to be ‘going
private’ when it would restrict the shareholders to a certain group. In a sense, these also include closed and
closely held corporation. (Phil. Corporate Law Compendium, T. Aquino, 2005 ed.)
One Man Corporation
 A corporation wherein all or substantially all of the stocks is held directly or indirectly by one person.
However, it should still follow the formal requirements of a corporation (e.g. number of incorporators,
board of directors composed of stockholders owning shares in a nominal capacity) in order to validly
enjoy the attributes of the corporation, so as to avoid the application of the doctrine of piercing the veil
of corporate entity.

Tests to Determine Nationality of Corporation

1. INCORPORATION TEST – determined by the state of incorporation, regardless of the nationality of the
stockholders.
2. DOMICILE TEST – determined by the state where it is domiciled.
 The domicile of a corporation is the place fixed by the law creating or recognizing it; in the absence
thereof, it shall be understood to be the place where its legal representation is established or where it
exercise its principal functions.
3. CONTROL TEST – determined by the nationality of the controlling stockholders or members. This test
is applied in times of war. Also known as the WARTIME TEST.

“Philippine National” under the Foreign Investment Act (R.A. No. 7042):
1. A corporation organized under the laws of the Philippines of which at least 60% of the outstanding capital
stock entitled to vote is owned and held by Filipino citizens;
2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding
capital stock entitled to vote is wholly owned by Filipinos; and
 However, it provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations
and at least 60% of the members of the board of directors of both corporations must be Filipino citizens
(double 60% rule).
NOTE: The law applies the control test both with respect to the ownership of shares entitled to vote and
the membership in the board of directors.

Components of a Corporation
a. Corporators – those who compose a corporation, whether as stockholders or members
b. Incorporators - They are those mentioned in the Articles of Incorporation as originally forming and
composing the corporation, having signed the Articles and acknowledged the same before a notary public.
They have no powers beyond those vested in them by the statute.
 Qualifications:
1. natural person;
2. not less than 5 but not more than 15;
3. of legal age;
4. majority must be residents of the Philippines; and
5. each must own or subscribe to at least one share.
General Rule: Only natural persons can be incorporators.
Exception: When otherwise allowed by law, e.g., Rural Banks Act of 1992, where incorporated cooperatives
are allowed to be incorporators of rural banks.
Note: However, it is undeniable that corporations can be corporators.
c. Stockholders – owners of shares of stock in a stock corporation
d. Members – corporators of a corporation which has no capital stock

INCORPORATORS CORPORATORS
signatory to the Articles of Incorporation stockholder (stock corporation) or member (non-
stock corporation)
fait accompli; accomplished fact (the Articles of they may cease to be such if they subsequently
Incorporation cannot be amended to replace them) lose their qualifications
number is limited to 5-15 no restriction as to number

must have contractual capacity may be such through a guardian

Other Components
a. Promoter - A person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor.
 He is an agent of the incorporators but not of the corporation.
 Contracts by the promoter for and in behalf of a proposed corporation generally bind only him, subject
to and to the extent of his representations, and not the corporation, unless and until after these contracts
are ratified, expressly or impliedly, by its Board of Directors/Trustees.
b. Subscriber – persons who have agreed to take and pay for original, unissued shares of a corporation
formed or to be formed.
c. Underwriter – a person who guarantees on a firm commitment and/ or declared best effort basis the
distribution and sale of securities of any king by another company. (Sec. 3 R.A. 8799)

Classification of Shares
1. COMMON SHARES
 The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and
the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon
dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.
2. PREFERRED SHARES
 Those issued with par value, and preferences either with respect to (a) assets after dissolution, (b)
distribution of dividends, or both, and other preferences.
 Limitations:
a. If deprived of voting rights, it shall still be entitled to vote on matters enumerated in Section 6 paragraph
6.
b. Preference must not be violative of the Code.
c. May be issued only with a stated par value.
d. The board of directors may fix the terms and conditions only when so authorized by the articles of
incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC.
3. REDEEMABLE SHARES
 Those which permit the issuing corporation to redeem or purchase its own shares.
 Limitations:
a. Redeemable shares may be issued only when expressly provided for in the articles of incorporation;
b. The terms and conditions affecting said shares must be stated both in the articles of incorporation
and in the certificates of stock representing such shares;
c. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless
otherwise provided in the Code.
 Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings
(Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover
debts and liabilities inclusive of capital stock.
4. TREASURY SHARES
 Shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation
by purchase, donation, and redemption or through some lawful means. (Sec. 9)
 If purchased from stockholders: The transaction in effect is a return to the stockholders of the value of
their investment in the company and a reversion of the shares to the corporation. The corporation must
have surplus profits with which to buy the shares so that the transaction will not cause an impairment
of the capital.
 If acquired by donation from the stockholders: The act would amount to a surrender of their stock
without getting back their investments that are instead, voluntarily given to the corporation.
 Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable,
provided it is reasonable. When treasury shares are sold below its par or issued value, there can be no
watering of stock because such watering contemplates an original issuance of shares.
 Treasury shares have no voting rights as long as they remain in treasury (uncalled and subject to
reissue). Reason: A corporation cannot in any proper sense be a stockholder in itself and equal
distribution of voting rights will be effectively lost.
 Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a
corporation to itself.
5. FOUNDERS' SHARE
 Shares issued to organizers and promoters of a corporation in consideration of some supposed right
or property.
 Shares classified as such in the articles of incorporation which may be given special preference in
voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is
granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of
approval.
6. VOTING SHARES
- Shares with a right to vote.
7. NON-VOTING SHARES
 Shares without right to vote.
 The law only authorizes the denial of voting rights in the case of redeemable shares and preferred
shares, provided that there shall always be a class or series of shares which have complete voting
rights.
 These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental matters: (A2 SI2 MID)
a. amendment of Articles of Incorporation
b. adoption and amendment of by-laws;
c. sale or disposition of all or substantially all of corporate property;
d. incurring, creating or increasing bonded indebtedness;
e. increase or decrease of capital stock
f. merger or consolidation of capital stock
g. investments of corporate funds in another corporation or another business purpose; and
h. corporate dissolution

8. ESCROW STOCK
 Deposited with a third person to be delivered to a stockholder or his assign after complying with certain
conditions, usually payment of full subscription price.
9. OVER-ISSUED STOCK
 Stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance
is considered null and void.
10. WATERED STOCK
 A stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or
services.
 “Water” in the stock represents the difference between the fair market value at the time of the issuance
of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered
stocks.
 It includes stocks:
a. Issued without consideration.
b. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued
value.
c. Issued for a consideration other than actual cash, the fair valuation of which is less than its par or issued
value.
d. Issued as stock dividend when there are no sufficient retained earnings to justify it.
11. PAR VALUE SHARES
 Shares with a value fixed in the certificates of stock and the articles of incorporation.
12. NO PAR VALUE SHARES
 Shares having no par value but have issued value stated in the certificate or articles of incorporation.
 Limitations:
a. No par value shares cannot have an issued price of less than P5.00;
b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed
as dividends;
c. They cannot be issued as preferred stocks;
d. They cannot be issued by banks, trust companies, insurance companies, public utilities and
building and loan association;
e. The articles of incorporation must state the fact that it issued no par value shares as well as the
number of said shares;
f. Once issued, they are deemed fully paid and non-assessable.
13. STREET CERTIFICATE
 A stock certificate endorsed by the registered holder in blank and transferee can command its transfer
to his name from the issuing corporation.
14. CONVERTIBLE SHARE
 A share that is changeable by the stockholder from one class to another at a certain price and within a
certain period.
15. FRACTIONAL SHARE
 A share with a value of less than one full share.
Doctrine of Equality of Shares
 Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are
also subject to the same liabilities.
Definition of Terms
1. CAPITAL STOCK OR LEGAL STOCK OR STATED CAPITAL - The amount fixed in the corporate charter
to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and
upon which the corporation is to conduct its operation.
2. CAPITAL – The value of the actual property or estate of the corporation whether in money or property.
Its net worth (or stockholder’s equity) is its assets less liabilities.
3. AUTHORIZED CAPITAL STOCK - The capital stock divided into shares with par values. Par value stocks
are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust
companies, insurance companies, building and loan associations, and public utilities. It is the total amount
in the charter, which may be raised by the corporation for its operations.
4. SUBSCRIBED CAPITAL STOCK - The total amount of the capital stock subscribed whether fully paid or
not.
5. OUTSTANDING CAPITAL STOCK - The portion of the capital stock issued to subscribers except
treasury stocks.
6. STATED CAPITAL – The capital stock divided into no par value shares.
7. PAID-UP CAPITAL – The amount paid by the stockholders on subscriptions from unissued shares of the
corporation.

INCORPORATION AND ORGANIZATION

Steps in the Creation of a Corporation
a. PROMOTION – a number of business operations peculiar to the commercial world by which a company
is generally brought into existence. (18 Am. Jur. 2d 647, cited in de Leon p. 116)
b. INCORPORATION
 Steps:
1. Drafting and execution of Articles of Incorporation by the incorporators and other documents required for
registration of the corporation
2. Filing with the SEC of the articles of incorporation
3. Payment of filing and publication fees
4. Issuance by the SEC of the certificate of incorporation
c. FORMAL ORGANIZATION AND COMMENCEMENT OF THE TRANSACTION OF BUSINESS
 These are conditions subsequent, which may be satisfied by substantial compliance in order that a
corporation may legally continue as such.
 Formal organization:
1. Adoption of By-Laws and filing of the same with the SEC;
2. Election of board of directors/trustees, and officers;
3. Establishment of principal office;
4. Providing for subscription and payment of capital stock.

Term of Existence
 Limitations:
a. The term shall not exceed 50 years in any one instance.
b. The amendment is effected before the expiration of corporate term, for after dissolution by expiration of
the corporate term there is no more corporate life to extend.
c. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable
reasons as determined by the SEC.

Capital Stock Requirement

 General Rule: No minimum authorized capital stock as long as the paid-up capital is not less than
P5,000.00
Except:
a. as provided for by special law
 1.  Domestic Insurance Corporations - P500T capital stock; 50% subscribed and the balance
payable in 12 months.
2. Private Development Banks
- P4M for class A
- P2M for class B
- P1M for class C
3. Investment Companies – paid up at least P500T
4. Savings and Loan Corporation – to be fixed by the Monetary Board, but not less than P100T
5. Financing Companies
Paid up: - P2M for Metro Manila
- P1M for Cities
- P500T for others
b. provided that at least 25% of the authorized capital stock has been subscribed and at least 25% of the
total subscription must be paid-up

Filipino Percentage Ownership Requirement

No Foreign Equity
1. Mass Media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated
04 May 1994)
2. Practice of all professions
3. Retail trade enterprises with paid-up capital of less than US$2,500,000(Sec. 5 of RA 8762)
4. Cooperatives (Ch. III, Art. 26 of RA 6938)
5. Private Security Agencies (Sec. 4 of RA 5487)
6. Small-scale Mining (Sec. 3 of RA 7076)
7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as
well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons (Art. XII, Sec. 2
of the Constitution)
8. Ownership, operation and management of cockpits (Sec. 5 of PD 449)
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the
Constitution)
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons
and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions
supported by the Philippines)
11. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)

Up to Twenty Percent (20%) Foreign Equity

12. Private radio communications network (RA 3846)

Up to Twenty-Five Percent (25%) Foreign Equity

13. Private recruitment, whether for local or overseas employment (Art. 27 of PD 442)
14. Contracts for the construction and repair of locally-funded public works (Sec. 1 of CA 541, LOI 630)
except:
a) infrastructure/development projects covered in RA 7718; and
b) projects which are foreign funded or assisted and required to undergo international competitive
bidding (Sec. 2a of RA 7718)
15. Contracts for the construction of defense-related structures (Sec. 1 of CA 541)

Up to Thirty Percent (30%) Foreign Equity

16. Advertising (Art. XVI, Sec. 11 of the Constitution)

Up to Forty Percent (40%) Foreign Equity

17. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution)
18. Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA
9182)
19. Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146)
20. Ownership/establishment and administration of educational institutions (Art. XIV, Sec. 4 of the
Constitution)
21. Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring, by
barter, purchase or otherwise, rice and corn and the by-products thereof (Sec. 5 of PD 194;Sec. 15 of
RA 8762
22. Contracts for the supply of materials, goods and commodities to government-owned or controlled
corporation, company, agency or municipal corporation (Sec. 1 of RA 5183)
23. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise (Art. XII,
Sec. 11 of the Constitution; Sec. 2a of RA 7718)
24. Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550)
25. Adjustment Companies (Sec. 323 of PD 612 as amended by PD 1814)
26. Ownership of condominium units where the common areas in the condominium project are co-owned
by the owners of the separate units or owned by a corporation (Sec. 5 of RA 4726)

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the Securities and Exchange
Commission (Sec. 6 of RA 5980 as amended by RA 8556)
28. Investment houses regulated by the SEC (Sec. 5 of PD 129 as amended by RA 8366)

Articles of Incorporation (AI)

 The document prepared by the persons establishing a corporation and filed with the SEC containing
the matters required by the Code.
 Significance:
1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality;
2. It is an essential requirement for the existence of a corporation, even a de facto one.
 Contents:
1. name of corporation;
2. purpose/s, indicating the primary and secondary purposes;
3. place of principal office;
4. term of existence;
5. names, citizenship and residences of incorporators;
6. number, names, citizenship and residences of directors or trustees;
7. names, nationalities, and residences of the persons who shall act as directors or trustees until the
first regular ones are elected and qualified;
8. if a stock corporation, the amount of its authorized capital stock, number of shares and in case the
shares are par value shares, the par value of each share;
9. names, residences, number of shares, and the amounts subscribed and paid by each of the original
subscribers which shall not be less than 25% of authorized capital stock;
10. if non-stock, the amount of capital, the names, residences, and amount paid by each contributor,
which shall not be less than 25% of total subscription;
11. name of treasurer elected by subscribers; and
12. if the corporation engages in a nationalized industry, a statement that no transfer of stock will be
allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal
minimum.
Amendment of AI
 Limitations:
1. The amendment of any provision or matters stated in the articles of incorporation is not allowed when it
will be contrary to the provisions or requirement prescribed by the Code or by special law or changes any
provision in the articles of incorporation stating an accomplished fact
2. It must be for legitimate purposes
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 underscoring the 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 amendments have been duly approved by the required vote of the stockholders or members must be
submitted to the SEC
6. The amendments shall take effect only upon their approval by the SEC
7. If the corporation is governed by special law, the amendments must be accompanied by a favorable
recommendation of the appropriate government agency.
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators
Vote or written assent of 2/3 of OCS/ members

Non-Amendable Facts in the AI

 Those matters referring to facts existing as of the date of the incorporation such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid
up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock corporation;
5. Date and place of execution of the articles of incorporation;
6. Witnesses to the signing and acknowledgment of the articles.

Grounds for rejection of AI or amendments thereto

1. The articles or its amendment is not substantially in accordance with the form prescribed
2. The purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations
3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false
4. The required percentage of ownership of the capital stock to be owned by Filipino citizens has not been
complied with

Grounds for Suspension or Revocation of Certificate of Incorporation

1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or
damage to, the general public
3. Refusal to comply with or defiance of a lawful order of the SEC restraining the commission of acts which
would amount to a grave violation of its franchise
4. Continuous inoperation for a period of at least 5 years
8. Failure to file the by-laws within the required period
9. Failure to file required reports

BOARD OF DIRECTORS/TRUSTEES
Qualifications:
1. For a stock corporation, ownership of at least 1 share capital stock of the corporation in his own name,
and if he ceases to own at least one share in his own name, he automatically ceases to be a director. (Sec.
23) For a non-stock corporation, only members of the corporation can be elected to seat in the Board of
Trustees.
 In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of the
stocks appearing on the books of the corporation
2. A majority of the directors/trustees must be residents of the Philippines. (Sec. 23)
3. He must not have been convicted by final judgment of an offense punishable by imprisonment for a
period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date
of his election. (Sec. 27)
4. Only natural persons can be elected directors/trustees.
 In case of corporate stockholders or members, their representation in the board can be achieved by
making their individual representatives trustees of the shares or membership to make them
stockholders/members of record.
5. Other qualifications as may be prescribed in the by-laws of the corporation.
6. Must be of legal age
Corporate Officers
1. President – must be a director;
2. Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a resident
3. Secretary – need not be a director unless required by the by-laws; must be a resident and citizen of the
Philippines; and
4. Such other officers as may be provided in the by-laws.
CORPORATE OFFICER CORPORATE EMPLOYEE
Position is provided for in the by-laws or under Employed by the action of the managing officer of the
the Corporation Code corporation
RTC has jurisdiction in case of labor dispute NLRC has jurisdiction in case of labor disputes

BOD/BOT as Repositary of Powers

General Rule: The corporate powers of the corporation shall be exercised, all business conducted and all
property of such corporation controlled and held by the board of directors or trustees. (Sec. 23)
Exceptions:
1. In case of an Executive Committee duly authorized in the by-laws;
2. In case of a contracted manager which may be an individual, a partnership, or another corporation.
Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies.
3. In case of close corporations, the stockholders may manage the business of the corporation instead
by a board of directors, if the articles of incorporation so provide.
 The power to purchase real property is vested in the board of directors or trustees. 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, whose approval will finalize the transaction. A corporation can only
exercise its powers and transact its business through its board of directors and through its officers and
agents when authorized by a board resolution or by its by-laws. (Spouses Constantine Firme vs. Bukal
Enterprises and Development Corporation, G.R. No. 146608, October, 23, 2003)

Limitations on Powers of BOD/BOT

1. Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws.
2. Cannot perform constituent or those involving fundamental changes in the corporation requiring the
approval of stockholders or members.
3. Cannot exercise powers not possessed by the corporation. (The Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Nature of Powers of BOD/BOT (The Corporation Code of the Philippines Annotated, Hector de Leon,
2002 ed.)
a. Under the Theory of Original Power, the powers of the board of directors or trustees are ORIGINAL and
UNDELEGATED. The stockholders or members do not confer, nor can they revoke those powers.
b. They are DERIVATIVE only in the sense of being received from the State in the act of incorporation.

Business Judgment Rule

 A resolution or transaction pursued within the corporate powers and business operations of the
corporation, and passed in good faith by the board of directors, is valid and binding, and generally the courts
have no authority to review the same and substitute their own judgment, even when the exercise of such
power may cause losses to the corporation or decrease the profits of a department. (Philippine Corporate
Law, Cesar Villanueva, 2001 ed.)

Consequences:
a. Resolutions and transactions entered into by the Board within the powers of the corporation cannot be
reversed by the courts not even on the behest of the stockholders.
b. Directors and officers acting within such business judgment cannot be held personally liable for such
acts. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)

3-Fold Duties of Directors (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
1. Duty of Obedience
 To direct the affairs of the corporation only in accordance with the purposes for which it was organized.
 Legal Basis: The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws (Sec. 25)
2. Duty of Diligence
 Legal Basis: 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 shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons (Sec. 31)
3. Duty of Loyalty
 Legal Basis: Directors or trustees who acquire any pecuniary or personal interest in conflict with their
duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom.
(Sec. 31)
 When a director or trustee 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 liability upon him to deal in his own behalf, he shall be liable as trustee for the
corporation and must account for all the profits which otherwise would have accrued to the corporation
(Sec. 31, 2nd par.)
 Where a director, by virtue of his office, acquires for himself a business opportunity which should belong
to the corporation, thereby obtaining profits which should belong to the corporation, he must account
to the latter for all such profits by refunding the same (Sec. 34)

Elections of Directors/Trustees
 Limitations:
a. At any meeting of stockholder or members called for the election 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 outstanding capital stock or majority of the members entitled to vote.
b. The election must be by ballot if requested by any voting member or stockholder.
c. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to
use any of the methods of voting in the election of directors.
d. No delinquent stock shall be voted.
e. The candidates receiving the highest number of votes shall be declared elected.

Methods of Voting
a. Straight Voting – every stockholder may vote such number of shares for as many persons as there are
directors to be elected.
b. Cumulative voting for one candidate – 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.
c. Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying 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.

Limitations on the Stockholder’s Right to Vote

1. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non-voting
shares are not entitled to vote except as provided for in the last paragraph of Sec. 6.
2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the
Code.
3. Fractional shares of stock cannot be voted.
4. Treasury shares have no voting rights as long as they remain in the treasury.
5. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled
to vote or to a representation at any stockholder’s meeting.
6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the
corporation.

Removal of Directors/Trustees
 Limitations:
a. Vote of the stockholders representing at least 2/3 of the outstanding capital stock, or 2/3 of the members
entitled to vote
b. At a regular or special meeting after proper notice is given
c. Removal may be with or without cause.
d. A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28)

Extent of Powers or Authority of Corporate Officers

1. The authority which he has by virtue of his office;
2. The authority which is expressly conferred upon him or is incidental to the effectualness of such express
authority;
3. 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.
4. The nature of the corporate business must also be taken into consideration; and
5. The nature act of an officer though originally unauthorized, may become upon the corporation by a
subsequent ratification. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
Note: It is a familiar doctrine that if a corporation knowingly permits one of it officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as possessing the power to do
those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority. (2004, 2006 Bar Exams; LapuLapu Foundation Inc.,
vs. Court of Appeals, et al., G.R. No. 126006, January 29, 2004.)

Personal Liability of Directors

1. Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; (Sec. 31)
2. Gross negligence or bad faith in directing the affairs of the corporation; (Sec. 31)
3. Acquiring any personal or pecuniary interest in conflict of duty; (Sec. 31)
4. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections
with the secretary;(Sec. 65)
5. Agreeing or stipulating in a contract to hold himself liable with the corporation; or
6. By virtue of a specific provision of law

DOCTRINE OF LIMITED LIABILITY DOCTRINE OF IMMUNITY

Shields the corporators from corporate liability Protects a person acting for and in behalf of the
beyond their agreed contribution to the capital or corporation from being himself personally liable for his
shareholding in the corporation. authorized actions

Remedies in case of Mismanagement

1. Receivership;
2. Injunction, if the act has not yet been done;
3. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act;
and
4. Derivative suit or complaint filed with SEC.

Special Rules on Contracts Entered Into by Directors, Trustees or Officers

1. Doctrine of Corporate Opportunity
 Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business
opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporation’s business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable expectancy.
 The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture.
2. Contracts of self-dealing directors
 Contracts which are entered into by the corporation with one or more of its own directors/trustees, or
officers. (Sec. 32)
 They are voidable, unless:
a) The presence of such director/trustee in the board meeting approving the contract was not necessary
to constitute a quorum for such meeting;
b) The vote of such director/trustee in the board meeting approving the contract was not necessary for
the approval of the contract;
c) The contract is fair and reasonable under the circumstances;
d) In the case of an officer, there was previous authorization by the board of directors.
 Although not all said conditions are present, the corporation may elect not to attack or question the
validity of the contract, without prejudice, however, to the liability of the director/trustee for damages
under Sec. 31.
 Where any of the first two conditions is absent, said contract must be ratified by the vote of the
stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a
meeting called for the purpose, provided that full disclosure of the adverse interest of the director/
trustee involved is made at such meeting.
3. Contracts of interlocking directors
 Contracts entered into between corporations with interlocking directors (interest of said directors is
“substantial”, i.e. exceeding 20% of the outstanding capital stock).
 They are valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under the circumstances.
 If the interlocking director’s interest in one corporation or corporations is “nominal” (not exceeding 20%
of the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors
must be present with respect to the corporation in which he has nominal interest.

Q: A, the President of XYZ Corp., wrote a letter to B, offering to sell to the latter 5000 bags of
cement at P100 per bag. B signed his conformity to the letter offer, and paid a down payment of
50000. A few days later, C the Corporate Secretary of XYZ Corp. informed B of the decision of the
Board of Directors not to ratify the letter offer. However, since B had already paid the down
payment, XYZ Corp. delivered 500 bags of cement which B accepted. XYZ Corp. made it clear that
the delivery should be considered as an entirely new transaction. Thereafter, B sought to enforce
the letter-offer. Is there a binding contract for the 5000 bags of cement?
SA: NO. There is no binding contract for the 5000 bags of cement. First, the facts do not indicate
that A, the President , was authorized by the Board of Directors to enter into the contract or that he
was empowered to do so under some provision of the by-laws of XYZ Corp. The facts do not
indicate that A has been clothed with the apparent power to execute the contracts or agreements
similar to it. Second, XYZ Corp. has specifically informed B that it has not ratified and that the
delivery to B of the 500 bags, which A accepted, is an entirely new transaction (Yao Ka Sin Trading
vs. CA, 209 SCRA 763).

Compensation of Directors or Trustees

General Rule: They shall be entitled to reasonable per diems only
Exception:
a. when their compensation is fixed in the by-laws
b. when granted by the vote of stockholders representing at least a majority of the outstanding capital stock
at a regular or special meeting
c. when they are also officers of the corporation

Executive Committee
 A body created by the by-laws and composed of some members of the board which, subject to the
statutory limitations, has all the authority of the board to the extent provided in the board resolution or
by-laws.
 Must be provided for in the by laws and composed of not less than 3 members of the board appointed
by the board.
 May act by a majority vote of all of its members.

Limitations on the Powers of the Executive Committee

It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or
repealable; and
5. Cash dividend declaration.

POWERS OF THE CORPORATION

1. Express Powers - granted by law, Corporation Code, and its Articles of Incorporation or Charter
2. Inherent/Incidental Powers – not expressly stated but are deemed to be within the capacity of corporate
entities
3. Implied/Necessary Powers – exists as a necessary consequence of the exercise of the express powers
of the corporation or the pursuit of its purposes as provided for in the Charter
Classification:
1. Acts in the usual course of business
2. Acts to protect debts owing to the corporation
3. Acts which involve embarking in a different business usually to collect debts out of profits
4. Acts to protect or aid employees
5. Acts to increase business

General Powers
1. To sue and be sued;
2. Of succession;
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its by-laws;
6. For stock corporations: issue and sell stocks to subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and
personal property, securities and bonds
8. To enter into merger or consolidation;
9. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar
purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan
political activity.
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees.
11. To exercise other powers essential or necessary to carry out its purposes.

Special/Specific Powers
1. Power to extend or shorten corporate term;
2. Increase or decrease corporate stock;
3. Incur, create, or increase bonded indebtedness;
4. Sell, dispose, lease, encumber all or substantially all of corporate assets;
5. Purchase or acquire own shares provided:
a. there is an unrestricted retained earnings, and
b. it is for a legitimate purpose.
6. Invest corporate funds in another corporation or business for other purpose other than primary purpose;
7. Power to declare dividends out of unrestricted retained earnings;
8. Enter into management contract with another corporation (not with an individual or a partnership-within
general powers) whereby one corporation undertakes to manage all or substantially all of the business
of the other corporation for a period not longer than 5 years for any one term.

Corporate Acts

1. Power to extend or shorten corporate term

 May be used as means to voluntarily dissolve a corporation
2. Power to increase or decrease capital stock

Ways of Increasing/Decreasing the Capital Stock

a. By increasing/decreasing the number of shares and retaining the par value;
b. By increasing/decreasing the par value of existing shares without increasing/decreasing the number of
shares;
c. By increasing/decreasing the number of shares and increasing/decreasing the par value.
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members

Tools Available to the Stockholder to Replenish Capital

a. Additional subscription to shares of stock of the corporation by stockholders or by investors;
b. Advances by the stockholders to the corporation;
c. Payment of unpaid subscription by the stockholders; and
d. Loans from third persons.

3.Incur, create or increase bonded indebtedness

Corporate bond – an obligation to pay a definite sum of money at a future time at fixed rate of interest

BONDED INDEBTEDNESS DEBENTURE

Secured by a mortgage on corporate Serial obligations or notes issued on the basis of the
property. general credit of the corporation. Hence, they are not
bonded indebtedness

Salient Points:
 Meeting is required
 Non-voting shares can vote
 No appraisal right
 Notice is required
 Registration of bonds with the SEC is necessary
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members

4. Sell, dispose, lease, encumber all or substantially all of corporate assets;

No ratificatory vote needed:
a. If it is necessary in the usual and regular course of business
b. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct
of the remaining business
Salient Points:
 Majority can vote
 Non-voting shares can vote
 Appraisal right is available
 Notice is required
 If sale is abandoned, director’s action is sufficient, no need for ratification by stockholders
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members

5. Power to acquire own shares

Instances:
a. To eliminate fractional shares out of stock dividends
b. 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
c. To pay dissenting stockholders
d. To acquire treasury shares
e. Redeemable shares regardless of existence of retained earnings
f. To effect a decrease of capital stock
g. In close corporations, when there is a deadlock in the management of the business
Note: In letters a-c, there must be unrestricted retained earnings.

Number of Votes for BOD:

Director’s action

6. Invest corporate funds in another corporation or business for other purpose other than primary purpose
The other purposes for which the funds may be invested must be among those enumerated as secondary
purposes and must further comply with the requirements of Section 42.
Salient Points:
 Non-voting shares can vote
 Appraisal right available
 Notice is required
 Investment in the secondary purpose is covered
 Stockholder’s ratification is not necessary if the investment is incidental to primary purpose
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members

7. Power to declare dividends out of unrestricted retained earnings

RETAINED EARNINGS = ASSETS – LIABILITIES AND LEGAL CAPITAL

“Unrestricted” – if the retained earnings have not been reserved or set aside by the board of directors for
some corporate purpose.

Number of Votes for BOD:

Majority of the quorum
Number of Votes of Corporators:
2/3 of OCS/ members

Dividends (2001, 2005 Bar Exams)

 Corporate profits set aside, declared, and ordered to be paid by the directors for distribution among
shareholders at a fixed time.
 Forms:
a. Cash
b. Property
c. Stock
 While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance,
stock dividends cannot be applied as payment for unpaid subscription.
 The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is
prohibited from entitling thereto anyone else.
 General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their
paid-in capital stock
Exceptions:
a. When justified by definite corporate expansion projects approved by the board of directors
b. When the corporation is prohibited under any loan agreement with any financial institution or creditor
from declaring dividends without its/his consent and such consent has not yet been secured
 c. 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.
 Sources of dividends:
General Rule: Dividends can only be declared and paid out of actual and bona fide unrestricted retained
earnings.
Special Rules:
a. Where a corporation sold its real property, which is not being used for business, at a gain, the income
derived therefrom may be availed of for dividend distribution.
b. Increase in the value of a fixed asset as a result of its revaluation is not retained earning. However,
increase in the value of fixed assets as a result of revaluation (“Revaluation surplus”) may be declared
as cash or stock dividends provided that the company:
(i) Has sufficient income from operations from which the depreciation on the appraisal increase was
charged
(ii) Has no deficit at the time the depreciation on the appraisal increase was charged to operations;
and
(iii) Such depreciation on appraisal increase previously charged to operations has not been impaired
by losses.
c. Dividends can be declared out of the amount received in excess of the par value of shares (“paid-in
surplus”) when:
(i) That they be declared only as stock dividends and not cash;
(ii) No creditors are prejudiced; and
(iii) There is no impairment of capital.
Note: unlike par value shares, when no par value shares are sold at a premium, the entire consideration
paid is considered capital; hence the same cannot be declared as dividends.
d. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable.
e. No dividends can be declared out of capital except only in two instances: 1) liquidating dividends;
and 2) dividends from investments in wasting asset corporation.
Note: It permits corporations solely or principally engaged in the exploitation of “wasting assets” to
distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents
and leaseholds, without allowance or deduction for depletion.
f. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or
stock dividend as purchase and sale of such shares are regarded as contractions and expansions of
paid-in capital.
g. Money cannot be borrowed for the payment of dividends because indebtedness is not a retained
earning of the corporation.
h. Corporate earnings which have not yet been received even though they consist in money which is
due, cannot be included in the profits out of which dividends may be paid.

CASH DIVIDENDS STOCK DIVIDENDS

1. Involves a disbursement to the stockholders of 1. Does not involve any disbursement

accumulated earnings
2. When declared and paid becomes the absolute 2. Since it is still part of corporate property, may be
property of the stockholder and cannot be reached by reached by corporate creditors
creditors of the corporation in the absence of fraud

3. Declared only by the board of directors at its 3. Declared by the board with the concurrence of the
discretion stockholders representing at least 2/3 of the
outstanding capital stock at a regular/special
meeting
4. Does not increase the corporate capital 4. Corporate capital is increased
5. Its declaration creates a debt from the corporation 5. No debt is created by its declaration
to each of its stockholders
Trust Fund Doctrine
 The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits, and which the corporation may not
dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.
 Application of the TFD:
1. Where the corporation has distributed its capital among the stockholders without providing for the
payment of creditors;
2. Where it had released the subscribers to the capital stock from their subscriptions;
3. Where it has transferred the corporate property in fraud of its creditors; and
4. Where the corporation is insolvent.
 Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation’s legal
capital.
2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its
property and assets.
 Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised
value of the stockholder’s share. (Sec. 104)

8. Power to enter into management contract

EXECUTIVE COMMITTEE MANAGEMENT CONTRACT

1. Its creation must be provided for in the by-laws 1. Express power of a corporation

2. A governing body which functions as the board 2. Management company must always be subject to
itself. the superior power of the board to give specific
directions from time to time or to recall the delegation
of managerial power.

Ultra Vires (“beyond powers”) Act

 An act which is beyond the conferred powers of a corporation or the purposes or objects for which it is
created as defined by the law of its organization.
 An act done by a corporation outside of the express and implied powers vested in it by its charter and
by the law.
 Types:
1. Acts done beyond the powers of the corporation as provided in the law or its articles of
incorporation;
2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority
(Note: This is technically ultra vires acts of officers and not of the corporation); and
3. Acts or contracts, which are per se illegal as being contrary to law.
 An ultra vires act may be that of:
a. The corporation;
b. The Board of Directors; and
c. The corporate officers.
 Effects of ultra vires act on:
a. Executed contract – courts will not set aside or interfere with such contracts;
b. Executory contracts – no enforcement even at the suit of either party (void and unenforceable);
c. Part executed and part executory – principle of “no unjust enrichment at expense of another” shall
apply; and
d. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

Ultra Vires Acts and Illegal Acts

Ultra vires (“beyond powers”) refers only to an act outside or beyond corporate powers, including those that
may ostensibly be within such powers but are, by general or special laws, either prohibited or declared
illegal. It is in this context that the Code has used the term.

Ultra Vires Acts Illegal Acts

Not necessarily unlawful, but outside the Unlawful; against law, morals, public policy, and
powers of the corporation public order
Can be ratified Cannot be ratified
Can bind the parties if wholly or partly executed Cannot bind the parties

TEST whether or not a corporation may perform an act: consider the logical and necessary relation
between the act questioned and the corporate purpose expressed by law or in the charter. If the act is lawful
in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense.
(Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36)

Remedies in Case of Ultra Vires Acts

1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors
a. Nullification of contract in fraud of creditors

BY-LAWS
 Rules of action adopted by a corporation for its internal government and for the regulation of conduct
and prescribe the rights and duties of its stockholders or members towards itself and among themselves
in reference to the management of its affairs.
 Functions:
a. Supplement the articles of incorporation
b. Provide for details not important enough to be stated in the articles of incorporation
c. Continuing rule for the government of the corporation and the individuals composing it
d. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members
towards the corporation and among themselves
e. Source of authority for corporate officers and agents of the corporation
Requisites for validity:
a. Must not be contrary to law nor with the Corporation Code
b. Must not be contrary to morals and public policy;
c. Must not impair obligations and contracts;
d. Must be general and uniform;
e. Must be consistent with the charter or articles of incorporation; and
f. Must be reasonable, not arbitrary or oppressive.
Binding effect:
a. As to members and corporation
They have the force of contract between the members themselves.They are binding only upon the
corporation and on its members and those having direction, management and control of its affairs.
b. As to third persons
They are not bound to know the by-laws which are merely provisions for the government of a
corporation and notice to them will not be presumed.
Reason: By-laws have no extra-corporate force and are not in the nature of legislative enactments so
far as third persons are concerned.
Contents of By-Laws
a. Time, place and manner of calling and conducting regular or special meetings of directors or trustees
b. Time and manner of calling and conducting regular or special meetings of the stockholder or members
c. The required quorum in meeting of stockholders or members and the manner of voting therein
d. The form for proxies of stockholders and members and the manner of voting them
e. The qualification, duties and compensation of directors or trustees, officers and employees
f. Time for holding the annual election of directors or trustees and the mode or manner of giving notice
thereof
g. Manner of election or appointment and the term of office of all officers other than directors or trustees
h. Penalties for violation of the by-laws
i. In case of stock corporations, the manner of issuing certificates
j. Such other matters as may be necessary for the proper or convenient transaction of its corporate business
and affairs

Articles of Incorporation By-Laws

Condition precedent in the acquisition of corporate Condition subsequent; its absence merely furnishes a
existence; ground for the revocation of the franchise

Essentially a contract between the corporation and For the internal government of the corporation but has
the stockholders/ members; between the the force of a contract between the corporation and
stockholders/ member inter se, and between the the stockholders/ members, and between the
corporation and the State; stockholders and members;

Executed before incorporation May be executed after incorporation. Sec. 46 allows

the filing of the by-laws simultaneously with the
Articles of Incorporation
Amended by a majority of the directors/ trustees May be amended by a majority vote of the BOD and
and stockholders representing 2/3 of the majority vote of outstanding capital stock or a
outstanding capital stock, or 2/3 of the members in majority of the member in non-stock corporation
case of non-stock corporations
Power to amend/repeal articles cannot be Power to amend or repeal by-laws or adopt new by-
delegated by the stockholders/ members to the laws may be delegated by the 2/3 of the outstanding
board of directors/ trustees capital stock or 2/3 of the members in the case of
non-stock corporation

MEETINGS
Stockholders/Members Meeting
WHEN:
1. REGULAR - held on the date fixed in the by-laws or if not fixed on any date in April;and
2. SPECIAL - held at any time deemed necessary or as so provided in the by-laws.
WHERE:
 In the city or municipality where the principal office of the corporation is located, and if practicable,
in the principal office of the corporation.
 However, in the case of non-stock corporations, the by-laws may provide that meetings may be
held at any place even outside the principal place of the corporation.
Board Meeting
WHEN:
1. REGULAR - held monthly, unless otherwise provided in the by-laws; and
2. SPECIAL - held at any time upon the call of the president.
WHERE:
May be held anywhere in or outside of the Philippines.

Proxy
 Limitations:
a. It must be in writing and signed by the stockholder or member (as principal) and filed before the
scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such
person to exercise the voting rights of the former.
b. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended.
c. No proxy shall be valid and effective for a longer period than five years at any one time.
 The right to vote by proxy may be exercised in any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Note: Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); directors cannot
do so. Directors must always act in person. (Sec. 25).
Extent of Authority
a. GENERAL PROXY – confers a general discretionary power to attend and vote at annual meeting.
b. LIMITED PROXY – restrict the authority to vote to specified matters only and may direct the manner in
which the vote shall be cast

Voting Trust - An agreement whereby one or more stockholders transfer their shares of stocks to a trustee,
who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and
in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates,
subject, however, to the trust agreement.
 Limitations:
a. Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a
loan agreement or for the purpose of circumventing the law against monopolies and illegal combinations
b. The agreement must not be used for purposes of fraud
c. It must be in writing and notarized and specify the terms and conditions thereof
d. A certified copy of the agreement must be filed with the corporation and with the SEC
e. The agreement shall be subject to examination by any stockholder of the corporation
f. Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the
agreed period

VOTING TRUSTS PROXY

The trustee votes as owner rather than as mere The proxy holder votes as agent
agent
The trust may vote in person or by proxy unless The proxy must vote in person
the agreement provides otherwise
Trustee acquires legal title to the shares of the Proxy has no legal title to the shares of the principal
transferring stockholder
The agreement must be notarized Proxy need not be notarized
The agreement is irrevocable Revocable anytime except one with interest
Trustee is not limited to act at any particular Proxy can only act at a specified stockholder’s meeting (if
meeting not continuing)
A trustee can vote and exercise all the rights of A proxy can only vote in the absence of the owners of the
the stockholder even when the latter is present stock
An agreement must not exceed 5 years at any one A proxy is usually of shorter duration although under Sec.
time except when the same is made a condition of 58 it cannot exceed 5 years at any one time
a loan.
The voting right is divorced from the ownership of The right to vote is inherent in or inseparable from the right
stocks to ownership of stock

STOCKS AND STOCKHOLDERS

Subscription Contract - any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription.
 The subscribed shares need not be paid in full in order that the subscription may be valid. The
subscription contract is a consensual contract that is perfected upon the meeting of the minds of the
 parties. The name of the subscriber is recorded in the stock and transfer book, and from that time, such
subscriber becomes a stockholder of record entitled to all the rights of a stockholder. Until the stocks
are fully paid, it continues to be a subsisting liability that is legally enforceable.
 In Ong Yong, et.al, vs. David Tiu, the Court did not allow the rescission of the Pre-Subscription
agreement since the action was filed by the Tius in their personal capacities. It ruled that it was the
corporation who had the legal personality to file the suit, it being the real party in interest.

Underwriting Agreement - an agreement between a corporation and a third person, termed the
“underwriter”, by which the latter agrees, for a certain compensation, to take a stipulated amount of stocks
or bonds, specified in the underwriting agreement, if such securities are not taken by those to whom they
are first offered.

Underwriting Agreement Stock Subscription Agreement

The signers obligate themselves to take The obligation of the signer to the
the shares of stock which cannot be sold. purchasers and to the public is absolute.
Underwriters are given commission. There is no commission.
The signer can refuse to become a He becomes a stockholder of the
stockholder/ member of the company. company and is liable to pay the amount
due on the stock.

Pre-Incorporation Subscription Agreements (PISA) - Subscription of shares of stock of a corporation

still to be formed shall be irrevocable for a period of at least 6 months from date of subscription, unless:
1. All of the other subscribers’ consent to the revocation;
2. The incorporation of said corporation fails to materialize with 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 SEC. (Sec. 61)

Modes of issuance of Shares

a. By subscription before and after incorporation to original, unissued stock
b. By sale of treasury stock after incorporation for money, property or service
c. By subscription to new issues of stock in case of an increase in the capital stock
d. By making a stock dividend

Valid Considerations in Subscription Agreement

1. Cash actually received;
2. Property, tangible or intangible, actually received AND necessary or convenient for its use and lawful
purposes;
Requisites;
a. Necessary or proper in carrying on the corporate business
b. Ascertainable pecuniary value
c. Capable of being transferred and applied to payment of debts
3. Labor or services actually rendered to the corporation;
4. Previously incurred corporate indebtedness;
5. Amounts transferred from unrestricted retained earning to stated capital,
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Note: Shares of stock shall not be issued in exchange for promissory notes or future services. There is no
prohibition on the use of checks, bills or notes in payment of the “cash” consideration.

Shares of Stock
Interest or right which owner has in the management of the corporation, and its surplus profits, and, on
dissolution, in all of its assets remaining after the payment of its debt.

Certificate of Stock (1996, 2001 Bar Exams)

 The document evidencing the ownership of shares of stocks by a stockholder and the full payment of
its issue or subscription price.
 It is not essential to the ownership and/or existence of the share of stock.
 Where the certificate of stock reflects a greater volume of shares than the actual number of shares
issued or to be issued, the following rules may be considered:
1. To the extent that there is an overissue, the excess issuance (over the authorized capital stock or
the stated capital) shall be void as being ultra vires.
2. If there is no overissue, but no payment has been made to cover the par or stated value of the excess
shares, the latter would constitute “watered” stocks.
3. If there is no overissue and watering of stocks, the corporation may be bound to honor the certificate
(if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a
right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party.

Capital Stock Shares of Stock

Amount paid in or secured to be paid in by the Interest or right which the stockholder has in the
stockholders upon which the corporation is to management of the corporation, and its surplus
conduct its operation. It is the property of the profits, and upon a dissolution, in all of its assets
corporation itself (monetary value). remaining after payment of corporate debts.

SHARES OF STOCK CERTIFICATE OF STOCK

Unit of interest in a corporation Evidence of the holder’s ownership of the stock and
of his right as a shareholder
Incorporeal or intangible property Concrete and tangible

May be issued by the corporation even if the May be issued only if the subscription is fully paid.
subscription is not fully paid.

Requirements for Validity of Transfers of Stocks

a. In case of shares covered by a certificate, the indorsement of the owner or his agent coupled with delivery
is essential
b. Where no certificate has been issued or for some reason it is not in the possession of the stockholder, it
may be transferred by means of a deed of assignment duly recorded in the books of the corporation
c. To be valid against the corporation and third persons, the transfer must be recorded in the stock and
transfer book
d. The transferee must present the indorsed certificate to the corporate secretary who shall effect the
transfer in the corporate books, issue a new stock certificate in favor of the transferee and cancel the former
certificate.
Note: Only absolute transfers need be registered. The pledge or mortgage itself need not be recorded in
the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a
pledge would require the shares to be placed in the possession of the creditor/pledgee. The agreement
must appear in a public instrument to take effect against third persons. (Chemphil vs. CA, 251 SCRA 257)

Effects of Unregistered Transfer of Stocks

a. It is valid and binding as between the transferor and the transferee
b. It is invalid as to the corporation except when notice is given to the corporation for purposes of registration
c. It is invalid as against corporate creditors and the transferor is still liable to the corporation
d. 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.

Issuance of Certificate of Stock

No certificate of stock shall be issued until the full amount of the subscription is paid. Basis: Doctrine of
Individuality of Subscription that espouses that the subscription is one, entire, indivisible, and whole
contract, which cannot be divided into portions.

Collection of Unpaid Subscription

1. Voluntary payment
a. Upon the date specified in the subscription contract
 b. Upon call by the Board of Directors
2. Involuntary payment
a. Extra-judicial
i. Delinquency sale
ii. Application of dividends
b. Judicial action
Note: The prescriptive period in case of subscription of shares begins to run only from the time the board
of directors declares that the balance are due and payable. It does not begin to run from the date of the
subscription. (Garcia vs. Suarez, 67 Phil. 441)

DELINQUENCY
1. If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire
balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become
delinquent, as of the due date, and subject to sale, unless the board declares otherwise.
2. If no date is fixed in the subscription contract, the board of directors can make the call for payment, and
specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the
entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become
delinquent, as of the date of call, and subject to sale, unless the board declares otherwise.
Effect:
A. Upon the stockholder
1. Accelerates the entire amount of the unpaid subscription;
2. Subjects the shares to interest, expenses and costs;
3. Disenfranchises the shares from any right that inheres to a shareholder, except the right to
dividends (but which shall be applied to any amount due on said shares or, in the case of stock
dividends, to be withheld by the corporation until full payment of the delinquent shares.
B. Upon the director owning delinquent shares
1. He can continue serving in that capacity unless and until said shares are totally bidded away, he
continues to be the owner thereof and in the interim he is not disqualified.
2. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly elected
to, the board.
Note: No delinquency stock shall be voted for or be entitled to vote or representation at any stockholders
meeting, nor shall the holder 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 cost and expenses of advertisement, if any.

Procedure for the Sale of Delinquent Stocks

Call by resolution demanding payment of the balance. However, if the contract of subscription prescribes
the date of payment, no call is necessary.
Notice of the board resolution given to the stockholders by the corporate secretary, either personally or by
registered mail. Publication of notice of call is not required.
Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of
subscription or in the call, the stocks shall be declared delinquent and shall be subject to sale.
Notice of delinquency served on the subscribers either personally or registered mail and publication in a
newspaper of general circulation in the province or the city where principal office is located for once a
week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued
interest, and the date, time and place of the sale which shall not be less than 30 days nor more than
60 days from the date the stocks become delinquent.
Sale of the delinquent shares at public auction.

Highest Bidder in Delinquency Sale

a. The person participating in the delinquency sale who offers to pay the full amount of the balance of the
subscription together with the accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares. In other words, the amount of the bid does not vary but only the number of
shares to be bought changes and determines the highest bidder.
b. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Such shares shall be considered as treasury
shares.

Procedure for Issuance of New Certificate of Stock in lieu of Lost, Stolen or Destroyed Ones
1. Filing with the corporation an affidavit in triplicate by the registered owner setting forth the circumstances
as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate
and the name of the corporation that issued the same.
2. Publication of notice of loss by the corporation in a newspaper of general circulation in the place of the
principal office, once a week for 3 consecutive weeks.
3. After the lapse of 1 year from the date of the last publication, if no contest has been presented, the
corporation shall cancel in its books the certificate of stock, which has been lost, stolen or destroyed, and
issue in lieu thereof a new certificate of stock.
However, if the registered owner files a bond or other securities as may be necessary to the board, the
new certificate of stock may be issued even before the expiration of one (1) year period.

Rights of Stockholders
1. Managerial Rights
a. Voting rights; and
b. Right to remove directors
2. Proprietary Rights
a. Right to dividends;
b. Right to issuance of stock certificate for fully paid shares;
c. Proportionate participation in the distribution of assets in liquidation;
d. Right to transfer of stocks in corporate books;
e. Right to recover stocks unlawfully sold for delinquent payment of subscription
f. Preemptive right

Preemptive Right of Stockholders (1999, 2001, 2004 BAR EXAMS)

 It is the shareholders’ preferential right to subscribe to all issues or dispositions of shares of any class
in proportion to their present stockholdings.
 Purpose: to enable the shareholder to retain his proportionate control in the corporation and to retain
his equity in the surplus.
 Extends to treasury shares in case of their reissuance.
 If the shares preferentially offered to a stockholder are not subscribed or purchased by him, it does not
follow that said shares shall again be re-offered on a pro rata basis to stockholders who already
exercised their preemptive rights. There is no preemptive right with respect to the share to be re-offered.
 In case additional issues of originally authorized shares:
 General Rule: There is no preemptive right. This is on the theory that when a corporation at its inception
offers its first shares, it is presumed to have offered all of those which it is authorized to issue.
Exception: When a corporation at its inception offers only a specified portion of its authorized capital
stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be
preemptive right as to the remaining portion thus offered for subscription.
 When pre-emptive right not available:
a. When denied by the article of incorporation
b. Shares requiring stock offering or minimum stock ownership by the public
c. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding
capital stock, in exchange for property needed for corporate purposes or in payment of a previously
contracted debt

PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

May be exercised even when there is no Arises only by virtue of contractual stipulations but is
express provision of law also granted under the provisions on Close
Corporation
 Pertains to unsubscribed portion of the Exercisable against another stockholder of the
authorized capital stock. A right that may be corporation of his shares of stock
claimed against the corporation

3. Remedial Rights
a. Individual suit – a suit instituted by a shareholder for his own behalf against the corporation;
b. Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise of other
stockholders similarly situated and with a common cause against the corporation; and
c. Derivative suit – a suit filed in behalf of the corporation by its shareholders (not creditors whose
remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of
action belonging to the corporation, but not duly pursued by it, against any person or against the
directors, officers and/or controlling shareholders of the corporation.
 Requisites:
(i) An existing cause of action in favor of the corporation
(ii) The stockholder/member must first make a demand upon the corporation or the management
to sue unless such a demand would be futile
(iii) The stockholder/member must be such at the time of the objectionable acts or transactions
unless the transactions are continuously injurious
(iv) The action must be brought in the name of the corporation
 The number of shares of the stockholder is immaterial since he is not suing in his own behalf
Note: The mere trustee of shares registered in his name cannot file a derivative suit for he is not
a stockholder in his own right. (Bitong vs. CA, 292 SCRA 304)

Liabilities of Stockholders
a. Liability to the corporation for unpaid subscription
b. Liability to the corporation for interest on unpaid subscription
c. Liability to creditors of the corporation on the unpaid subscription
d. Liability for watered stock
e. Liability for dividends unlawfully paid
f. Liability for failure to create corporation

CORPORATE BOOKS AND RECORDS

Inspection Rights
Limitations:
a. The right must be exercised during reasonable hours on business days;
b. The person demanding the right has not improperly used nay information obtained through any
previous examination of the books and records of the corporation; and
c. The demand is made in good faith or for a legitimate purpose. (Sec. 74)
 The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-
owned by the corporation.
 Books required to be kept by the corporation:
1. Book of Minutes
a. minutes of stockholder or members meetings; and
b. minutes of board meetings.
2. Book of all business transactions;
3. Stock and transfer book, in case of stock corporations.
 Corporate records required by the SEC to be kept and/or registered:
1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.

MERGER AND CONSOLIDATION

Merger
A union whereby one or more existing corporations are absorbed by another corporation which survives
and continues the combined business.
Consolidation
The union of two or more existing corporations to form a new corporation called the consolidated
corporation.

Procedure:
a. The board of directors or trustees of each corporation shall approve a plan of merger or consolidation
b. The plan shall be submitted for approval by the stockholders or members of each of such corporation at
separate corporate meetings duly called for the purpose
c. The articles of merger or consolidation shall be executed by each of the constituent corporations
d. Submission to the SEC for approval
e. The SEC may or may not conduct a hearing
f. Issuance of certificate of merger or consolidation by the SEC.

Effects of Merger and Consolidation

1. The constituent corporations shall become a single corporation which, in case of merger shall be the
surviving corporation and, in the case of consolidation, shall be the consolidated corporation;
2. The separate existence of the constituent corporation shall cease, except that of the surviving
corporation;
3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and
subject to all the duties and liabilities of a corporation;
4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities
and franchises of each of the constituent corporations;
5. All property, real or personal, and all receivables due to, and all other interest of each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without
further act or deed;
6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each
of the constituent corporations;
7. Any claim, action or proceeding pending by or against any of the constituent corporations may be
prosecuted by or against the surviving or consolidated corporations; and
8. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be
impaired by such merger or consolidation.

General Rule: When one corporation buys all the shares of another corporation, this will not operate to
dissolve the other corporation and as the two corporations still maintaining their separate corporate entities,
one will not answer for the debts of the other.
Exceptions as to Non-assumption of Liabilities:
1. If there is an express assumption of liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser is merely a continuation of the seller.

De Facto Merger
One corporation acquiring all or substantially all of the properties of another corporation in exchange for
shares of stock of the acquiring corporation. The acquiring corporation would end-up with the business
enterprise of the selling corporation whereas the latter would end up with basically its remaining assets
being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to
its stockholders.
Merger and Consolidation Sale of Assets
1. Sale of assets is always involved 1.merger/consolidation is not always involved
2. There is automatic assumption of 2. Purchasing corporation is not generally liable for the debts
liabilities and liabilities of the selling corporation
3. There is continuance of the enterprise 3. The selling corporation ordinarily contemplates a
and of the stockholders liquidation of the enterprise
 4. Title to the assets are transferred by 4. Transfer of title is by virtue of contract
operation of law
5. The constituent corporations are 5. The selling corporation is not dissolved by the mere
automatically dissolved transfer of all its property

Types of Acquisitions
a. “ASSETS-ONLY” LEVEL
The purchaser is interested only in the raw assets and properties of the business. He is not interested in
the entity of the corporate owner of the assets nor of the goodwill and other factors relating to the business
itself.
The transferee would not be liable for the debts and liabilities of his transferor since there is no privity of
contract over debt obligations between the transferee and the transferor’s creditors
b. “BUSINESS-ENTERPRISE” LEVEL
The transferee merely continues the same business of the transferor since he obtains the earning capability
of the venture
The transferee is liable for the debts and liabilities of the transferor
c. “EQUITY” LEVEL
The purchaser takes control and ownership of the business by purchasing the shareholdings of the
corporate owner. What the purchaser actually purchased is the ability to elect the members of the board of
the corporation who run the business.

APPRAISAL RIGHT

Appraisal Right
The right to withdraw from the corporation and demand payment of the fair value of his shares after
dissenting from certain corporate acts involving fundamental changes in corporate structure, namely:
(ASIM)
1. An amendment to the articles that has the effect of a) changing or restricting the rights of
shareholders or of authorizing preferences over those of outstanding shares, or b) changing the
term of corporate existence;
2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or
assets. (Sec. 81)
3. Merger or consolidations; and
4. Investment of corporate funds in another corporation or in a purpose other than the primary
purpose;
 Other instances when right available:
5. When a corporation invest its funds in another corporation or business for any purpose other than
its primary purpose
6. In a close corporation, a stockholder for any reason compel the corporation to purchase his shares
when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of
capital stock

Procedure
a. The dissenting stockholder shall make a written demand on the corporation within 30 days after the date
on which the vote was taken for the payment of the fair value of his shares. Failure to do so, shall be
deemed a waiver of his appraisal right
b. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder,
upon surrender of the corresponding certificate of stock within 10 days after demanding payment of his
shares
c. Upon payment of the agreed or awarded price, the stockholder shall transfer his shares to the corporation

Conditions on the Exercise of Appraisal Rights

1. Any of the instances provided for by law for the exercise of the right must be present.
2. The dissenting stockholder must have voted against the proposed corporate action.
3. The stockholder must make a written demand within 30 days from the date that the vote was taken.
4. The price must be based on the fair value of the shares as of the day prior to the date in which the vote
was taken.
5. Payment of the shares must be made only out of the unrestricted retained earnings of the corporation.
6. Upon payment, the stockholder must transfer his shares to the corporation.

Effect of the Exercise of the Right:

a. All rights accruing to the such shares shall be suspended
b. The dissenting stockholder 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.

General Rule: A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw
from his decision
Exceptions:
1. The corporation consents to the withdrawal
2. The proposed corporate action is abandoned or rescinded by the corporation
3. The proposed corporate action is disapproved by the SEC where its approval is necessary
4. The Commission determines that such stockholder is not entitled to appraisal right.

NON-STOCK CORPORATION

Non-Stock Corporation –a corporation organized for an eleemosynary purpose, and no part of whose
income is, during its existence, distributable as dividends to its members, trustees, or officers, subject to
the provisions of the Corporation Code on dissolution. (Sec. 87)
 Any profit which it 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 it was organized.
 Eleemosynary purposes: charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural.
(Sec. 88)
 They are governed by the same rules established for stock corporations, whenever pertinent, subject,
however, to a number of special features.
Rules on Conversion (2001 Bar Exam)
1. Stock to non-stock corporation
Conversion may be made by mere amendment of the articles of incorporation.
2. Non-stock to stock corporation
 The corporation must first be dissolved; mere amendment of the articles of incorporation would not
suffice because the conversion would change the corporate nature from non-profit to monetary
gain.
 The conversion without dissolving it first would be tantamount to distribution of its assets or income
to its members inasmuch as after its conversion, the asset of the non-stock corporation would now
be treated as payment to the subscriptions of the members who will now become stockholders of
the corporation.

Rights of Members
1. To be entitled to 1 vote unless otherwise provided in the articles or by-laws
2. To vote by proxy unless otherwise provided in the articles or by-laws
3. To transfer membership if allowed by the articles or by-laws
4. To be elected as trustee

Distinctions between Stock Corp and Non-Stock Corp

Stock Non-Stock
Has capital stock divided into shares and with  Does not have shares and may not distribute
authority to distribute dividends to its profits to its members
stockholders
 Stockholders may transfer their shares  Members cannot transfer their membership
unless allowed by the articles or by-laws
Cumulative voting is available in the election of  Cumulative voting not available unless
directors otherwise provided in the articles or by-laws
Directors cannot exceed 15 in number  Trustees may exceed 15 in number
The term of a director is 1 year  The term of a trustee is 3 years; 1/3 of the
Board shall be elected annually
Stockholders may vote by proxy  Members may be deprived of the right to
vote by proxy in the articles or by-laws
Officers are elected by the Board of Directors  Officers may be directly elected by the
members unless otherwise provided in the articles or
by-laws
Stockholders and directors must act in a  Members may be allowed by the by-laws to
meeting, except where a mere written assent is vote by mail or other similar means
sufficient or a formal meeting unnecessary

Rules for Distribution of Assets in case of Dissolution

All liabilities and obligations of the corporation shall be paid, satisfied and discharged or adequate
provision shall be made therefor
1. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which
condition occurs by reason of dissolution, shall be returned, transferred or conveyed in accordance with
such requirements
2. Assets received and held by the corporation subject to limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes but not held upon a condition requiring return,
transfer or conveyance by reason of dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in the Philippines substantially similar to
those of the dissolving corporation pursuant to a plan of distribution
3. Other assets, if any, shall be distributed in accordance with the provisions of the articles of incorporation
or the by-laws
4. 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.
Note: The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of
the members having voting rights at a meeting

CLOSE CORPORATION
Definition:
A special kind of stock corporation:
1. whose articles of incorporation should provide that:
a. the number of stockholders shall not exceed 20;
b. issued stocks are subject to transfer restrictions, with a right of preemption in favor of the
stockholders or the corporation; and
c. the corporation shall not be listed in the stock exchange or its stocks should not be publicly
offered; AND
2. whose at least 2/3 of the voting stocks or voting rights should not be owned or controlled by another
corporation which is not a close corporation.
Characteristics:
1. Stockholders may act as directors without need of election and therefore are liable as directors;
2. Stockholders who are involved in the management of the corporation are liable in the same manner
as directors are.
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase the number of stockholders to more than the
maximum are invalid;
5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had
knowledge or ratified the informal action of the others;
6. Preemptive right extends to all stock issues;
 7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and
8. Stockholder may withdraw and avail of his right of appraisal.
Note: Special rules are provided for close corporations because it is essentially an incorporated
partnership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)

The following cannot be a close corporation:

a. mining companies;
b. oil companies;
c. stock exchanges;
d. banks;
e. insurance companies;
f. public utilities;
g. education institutions;
h. other corporations declared to be vested with public interest.

Ordinary Stock Corporation Close Corporation

Its articles of incorporation need only contain Its articles must contain the special matters prescribed by
the general matters enumerated in Sec. 14 of Sec. 97, aside from the general matters in Sec. 14. Failure
the Code. to do so precludes a de jure close corporation status.
Its status as an ordinary stock corporation is 2/3 of its voting stock or voting rights must not be owned
not affected by the ownership of its voting stock or controlled by another corporation which is not a close
or voting rights. corporation.
Its articles cannot classify its directors. Its articles may classify its directors.
Business of the corporation is managed by the Business of the corporation may be managed by the
board of directors. stockholders if the articles so provide, but they are liable
as directors.
The corporate officers and employees are Its articles may provide that any or all of the corporate
elected by a majority vote of all the members officers or employees may be elected or appointed by the
of the board of directors. stockholders.
The pre-emptive right is subject to the The pre-emptive right is subject to no exceptions unless
exceptions found in Sec. 39. denied in the articles
The appraisal right may be exercised by a The appraisal right may be exercised and compelled
stockholder only in the cases provided in Secs. against the corporation by a stockholder for any reason.
81 and 42 of the Code.
Except as regards redeemable shares, the In case of an arbitration of an intra-corporate deadlock by
purchase by the corporation of its own stock the SEC, the corporation may be ordered to purchase its
must always be made from the unrestricted own shares from the stockholders regardless of the
retained earnings. availability of unrestricted retained earnings.
Arbitration of intra-corporate deadlock by the Arbitration of intra-corporate deadlock by the SEC is an
SEC is not a remedy in case the directors or available remedy in case the directors or stockholders are
stockholders are so divided respecting the so divided respecting the management of the corporation.
management of the corporation.

Powers of the SEC in case of DEADLOCK in Close Corporations

1. Cancel or alter any provision in the articles of incorporation or bylaws
2. Cancel, alter or enjoin any resolution of the corporation
3. Direct or prohibit any act of the corporation
4. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by
the corporation regardless of the availability of unrestricted retained earnings.
5. Appoint a provisional director
6. Dissolve the corporation
7. Granting such other relief as the circumstances may warrant.
 SPECIAL CORPORATIONS

1. Educational Corporation
 A stock or non-stock corporation organized to provide facilities for teaching or instruction.
 A favorable recommendation of the DECS is essential for the approval of its articles and by-laws.
 It is primarily governed by special laws and suppletorily by the provisions of the Code.

NON-STOCK EDUCATIONAL EDUCATIONAL CORPORATION

CORPORATION
A non-stock corporation A special corporation which may a stock or non-stock
Governed by the provisions on non-stock Governed by special laws and by the general
corporations and suppletorily by the provisions provisions of the Corporation Code
on stock corporations
The number of board of trustees may be more The number of the board of trustees should not be
than 15 less than 5 but not more than 15.
The term of office of the board of trustees shall The term of office of the board of trustees shall be 5
be 3 years years

2. Religious Corporation
 A corporation composed 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. It is different from an ordinary non-stock corporation organized for religious purposes.
 Kinds:
a) CORPORATION SOLE
- A special form of corporation, usually associated with the clergy, consisting of one person only and
his successors, who is incorporated by law to give some legal capacities and advantages; and
b) RELIGIOUS SOCIETIES
- A non-stock corporation governed by a board but with religious purposes. It is incorporated by an
aggregate of persons, e.g. religious order, diocese, synod, sect, etc.

DISSOLUTION AND WINDING UP (LIQUIDATION)

Dissolution
Extinguishment of the franchise of a corporation and the termination of its corporate existence.
Modes:
1. Voluntary (2002 Bar Exam)
a) Application for dissolution with the SEC
i. Where no creditors are affected
ii. Where creditors are affected
b) Shortening of the corporate term by amending the articles of incorporation.
2. Involuntary
a) Expiration of the corporate term;
b) Failure to organize and commence business within 2 years from the date of issuance of the certificate
of incorporation
c) Legislative dissolution;
d) Quo warranto suit against a de facto corporation;
e) Minority stockholders’ suit for dissolution on justifiable grounds; or
f) SEC dissolution, upon complaint and after notice and hearing, on the following grounds:
i. The corporation was illegally organized;
ii. Continuous inactivity (subsequent to incorporation, organization and commencement of
business) for at least 5 years;
iii. Serious dissension in the corporation; or
iv. Commission by the corporation of illegal or ultra vires acts or violations of the Code.
Effects of Dissolution
a. Transfer of legal title to corporate property to the stockholders who become co-owners thereof
b. Continuation of corporate business merely as an association without juridical personality
c. Conveyance by the stockholders of their respective shareholdings toward the creation of a new
corporation to continue the business of the old
d. Reincorporation of the dissolved corporation by refilling new articles of incorporation and by-laws
e. The corporation continues as a body corporate for 3 years for purposes of winding up
f. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years.
(The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.

Liquidation (1997, 2000, 2001 Bar Exams)

The process by which all the assets of the corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to
the stockholders or members.
Methods:
1. By the corporation itself through its board of directors/trustees;
2. By a trustee to whom the corporate assets have been conveyed; and
3. By a management committee or rehabilitation receiver appointed by the SEC.
Note: The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or the
receiver is appointed within the said period.
 The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the
rights and liabilities of such entity nor those of its owners and creditors alike (see Sec. 145).
 The word “trustee” as sued in the corporation statute must be understood in its general concept which
could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation.
(Spouses Gelano vs. CA 103 SCRA 90)

Liquidation Rehabilitation
Connotes a winding up or settling with creditors Connotes a reopening or reorganization
and debtors
Winding up process so that assets may be Contemplates a continuance of corporate life in
distributed to those entitled an effort to restore the corporation to its former
successful operation

Q: XYZ Corp. shortened its corporate life by amending its articles of incorporation. It has no debts
but owns several real estate properties in Metro Manila. How would said property be liquidated
among the 5 stockholders of said corporation. Discuss the two methods of liquidation.
SA: The real estate properties of XYZ Corp. can be liquidated among the five stockholders after
the property has been conveyed by the corporation to the 5 stockholders, by dividing or partitioning
it among themselves in any of the following ways: (1) physical division or partition based on the
proportion of the value of their stockholdings; or (2) selling the property to a 3rd person and dividing
the proceeds among the 5 stockholder in proportion to their stockholdings; or (3) after determination
of the value of the property, by assigning or transferring the property to one stockholder with the
obligation on the part of the said stockholder to pay the other four stockholders the amount in
proportion to the value of the stockholdings of each.

FOREIGN CORPORATION
Definition: A corporation formed, organized or existing under any law other than those of the Philippines,
and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec.
123)
 The definition espouses the incorporation test and the reciprocity rule and is significant for licensing
purposes.
 It is not permitted to “transact or do business in the Philippines” until it has secured a license for that
purpose from the SEC and a certificate of authority from the appropriate government agency.

Resident Agent
An individual, who must be of good moral character and of sound financial standing, residing in the
Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a
written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom
any summons and other legal processes may be served in all actions or other legal proceedings against
the foreign corporation.

Grounds for Revocation of License

1. Failure to file annual reports required by the Code;
2. Failure to appoint and maintain a resident agent;
3. Failure to inform the SEC of the change of residence of the resident agent;
4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation;
5. A misrepresentation in material matters in reports;
6. Failure to pay taxes, imposts and assessments;
7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation; and
9. Not licensed to do business in the Philippines. (Sec. 134)

Test of “Doing or Transacting Business in the Philippines” (1998, 2002 Bar Exams)
The Corporation Code does not define the phrase “doing or transacting business.”
A. Jurisprudential Tests
1. Twin characterization test
a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance
of the business for which it was organized or whether it has substantially retired from it and turned it
over another (Substance Test); and
b) Whether there is continuity of commercial dealings and arrangements, contemplating to some extent
the performance of acts or works or the exercise of some functions normally incident to and in
progressive prosecution of, the purpose and object of its organization (Continuity Test).
2. Contract Test
Whether the contracts entered into by the foreign corporation, or by an agent acting under the control
and direction of the foreign corporation, are consummated in the Philippines.
B. Statutory Tests
1. Foreign Investment Act of 1991 (R.A. No. 7042)
Acts constituting “doing business”:
a) Soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totaling 180 days or more;
c) Participating in the management, supervision or control of any domestic business, firm or entity or
corporation in the Philippines; and
d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent 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 of the purpose of the
business organization.
2. Implementing Rules of R.A. No. 7042
Acts not constituting “doing business”:
a) Mere investment as a shareholder in a domestic corporation and/or the exercise of rights as such
investor;
b) Appointing a representative or distributor domiciled in the Philippines which transacts business in
its own name and for its own account;
c) Publication of a general advertisement through any print or broadcast media;
d) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed
by another entity in the Philippines;
e) Consignment by the foreign corporation of equipment with a local company to be used in the
processing of products for export;
f) Collecting information in the Philippines; and
g) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing
basis.
C. Jurisprudential Rules
1. Doctrine of Isolated Transactions
Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions
set apart from their common business in the sense that there is no intention to engage in a progressive
pursuit of the purpose and object of business transaction. (Eriks Pte.Ltd vs. CA, 267 SCRA 567)

2. In Pari Delicto Rule

In the case of Top-Weld Manufacturing vs. ECED, S.A., the Court denied the relief prayed for by petitioner
when it ruled that the very purpose of the law was circumvented and evaded when the petitioner entered
into the said agreements despite the prohibition contained in the questioned law. The parties were
considered as being in pari delicto because they equally violated R.A. 5455
3. Estoppel Rule
 A party is estopped from questioning the capacity of a foreign corporation to institute an action in our
courts where it had obtained benefits from its dealings with such foreign corporations and thereafter
committed a breach or sought to renege on its obligations.

Effects of Lack of License

A. On suits
1. Foreign corporation doing business in the Philippines:
a) may not sue or intervene in any action in any court or administrative agency of the Philippines; but
b) may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasi-
estoppel by acceptance of benefits). (Sec. 133)
2. Foreign corporation not doing business in the Philippines:
a) Generally, it may not sue and be sued in any court or administrative agency of the Philippines;
b) However, it may sue and be sued for isolated transactions, as well as for those which are casual or
incidental thereto.
B. On contracts
The contracts contemplated are those that satisfy the “contract test” or those that make a foreign
corporation as one “doing business in the Philippines.”
General Rule: The contracts are unenforceable. They are enforceable only upon securing a license.
Exception: However, the contracts are null and void if they are contrary to law, morals, good customs,
public order and public policy.

Instances when a Foreign Corp may sue in the Philippines whether or not Licensed to do Business
thereat
1. To seek redress for an isolated business transaction;
2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the Philippines;
4. When the parties have contractually stipulated that Philippines is the venue of actions; and
5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from
questioning the capacity of the foreign corporation.