REVIEWER IN COMMERCIAL LAW Table of Contents

CORPORATION LAW

CHAPTER I. INTRODUCTION 74 Commencement of 82

A. Definition 74 Business 82
B. Attributes of a Corporation 74 C. De Facto Corporation
1. Artificial being 74 1. Requisites of De Facto 82
2. Created by operation of law 74 Corporation 83
3. Has the right of succession 74 2. De Jure vs. De Facto
4. Has the powers, attributes Corporation 85
and properties expressly D. Corporation by Estoppel
authorized by law or
incident to its existence 74 CHAPTER IV. THE CORPORATE
C. Jurisdiction 75 ENTITY 86
D. Other Types of Business A. The Doctrine of Separate
Organizations 75 Juridical Entity 86
B. Piercing the Corporate Veil
CHAPTER II. CLASSIFICATION Doctrine 86
OF CORPORATIONS 77 1. An Equitable Remedy
A. Stock corporation 77 2. Extent of Legal Effects
B. Non-Stock corporation 77 3. Application of Piercing
C. Other classifications 77 Doctrine
1. Public corporation 4. Parent-Subsidiary
2. Private Relationship
3. Close C. Nationality 87
4. Educational 1. Place of Incorporation Test
5. Religious sole and 2. The Grandfather Rule
aggregate 3. Control Test

CORPORATION LAW
6. Eleemosynary 4. War-time Test
7. Domestic 5. Investment Test
8. Foreign
9. Corporation created by CHAPTER V. CORPORATE 89
special laws or charters POWERS 89
10. Subsidiary A. Express Powers
11. Parent 1. General Powers
2. Special/Specific Powers 89
CHAPTER III. FORMATION OF B. Inherent/Incidental Powers 89
CORPORATIONS 78 C. Implied Powers 89
A. Components of a Corporation 78 D. Ultra Vires Acts
1. Incorporators 78 1. Definition
2. Corporators 78 2. Types
3. Foreign incorporators / 3. Effects
corporators 78 4. Remedies
B. Steps in the Formation of a
Corporation 79 CHAPTER VI. INTERNAL
1. Promotion 79 ORGANIZATION OF THE
a. Liability of corporation CORPORATION 91
on promoters’ contracts A. By-laws 91
b. Personal liability of 1. Definition
promoters 2. Adoption
c. Compensation of 3. Requirements
promoters 4. Effectivity
2. Drafting the Articles of 5. Amendment or repeal
Incorporation 80 B. Directors/Trustees 91
a. Definition of Terms 1. Qualifications
b. Contents of Articles of 2. Election of
Incorporation Directors/Trustees
3. Filing with SEC and 3. Methods of Voting
payment of fees 82 4. Exercise of Corporate
4. Issuance of Certificate of Powers
Incorporation 82 5. Meetings of the Board
5. Internal Organization and 6. Removal of Directors /

Page 71 of 278
REVIEWER IN COMMERCIAL LAW Table of Contents
Trustees 93 subscription
7. Executive Committee D. Consideration for Issuance of 106
C. Corporate Officers Shares
1. Who are Corporate Officers 1. Forms of consideration
2. Disqualifications 94 2. Limitations on 106
3. Authority of Corporate Consideration
Officers E. Watered Stocks
D. Stockholders or Members 1. Definition
1 Rights of Stockholders 2. Liability of Directors or 106
2 Obligations of Stockholders Officers
3 Stockholders’/Members’ F. Delinquent Shares
Meeting 1. Definition 107
4 Corporate Acts Requiring 2. Effects of Delinquency
Approval of ALL G. Enforcement of Payment
stockholders/members 1. Delinquency Sale
5 Other instances requiring 2. Court Action
Stockholders’/Members’ 3. Collection from Cash
Action Dividends and Withholding 107
6 Limitations on Right to Vote of Stock Dividends
7 Appraisal Right H. Rights and Obligations of
Holders of Unpaid but Non- 108
CHAPTER VII. MANAGEMENT delinquent Stock 108
AND CONTROL 98 I. Certificate of Stock 108
A. Devices Affecting Control 98 J. Lost or Destroyed Certificate
1. Proxy K. Tender Offer
2. Voting Trust Agreement
3. Pooling and Voting CHAPTER IX. DIVIDENDS AND

CORPORATION LAW
Agreements PURCHASE OF CORPORATION
B. Duties and Liabilities of 99 OF ITS OWN SHARES 109
Directors A. Forms of Dividends 109
1. Three-fold Duties of B. Other Classes of Dividends 109
Directors C. Source of Dividends 109
2. Self-dealing Director D. Declaration of Dividends 110
3. Fixing the Compensation of E. Treasury Shares 111
Directors and Officers 1. Definition
4. Interlocking Directors 2. Instances When Corporation
5. Seizing Corporate 101 May Acquire its Own Shares
Opportunity 101 3. Remedies in Case of
6. Using Inside Information Improper Purchase
C. Duties and Liabilities of Officers 101
D. Duties of Controlling 101 CHAPTER X. TRANSFER OF
Stockholders 102 SHARES 112
E. Remedies in Case of A. Manner of Transfer 112
Mismanagement B. Registration of Transfer 112
F. Right of Inspection 1. Effects of Lack of
G. Derivative Suits Registration
2. Remedy if Registration is
CHAPTER VIII. CAPITAL refused 112
STRUCTURE 103 C. Restrictions on Transfer
A. Classification of Shares 103 1. Validity of Restrictions
B. Subscription Contract 105 2. Presumptions 112
1. Status as a Shareholder D. Unauthorized Transfers
2. Types of subscription 1. Certificates Indorsed in
contract Blank 113
3. Interest on unpaid 2. Forged Transfers
subscription 105 E. Collateral Transfers
C. Pre-emptive Right
1. Definition CHAPTER XI. AMENDMENTS OF
2. Limitations on the Exercise CORPORATE CHARTER 114
of Preemptive Right A. General 114
3. Interest on unpaid B. Specific 114

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REVIEWER IN COMMERCIAL LAW Table of Contents
1. Increase in Capital Stock C. “Doing Business Under the
2. Decrease of Capital Stock Foreign Investment Act 122
3. Change in Corporate Name D. Jurisprudential Rules on “Not
C. Grounds for Disapproving Doing Business in the 122
Amendment 115 Philippines”
E. Requisites for the Issuance of 123
CHAPTER XII. DISSOLUTION 116 License to Do Business
A. Voluntary Dissolution 116 F. Power to Sue and Be Sued of 123
1. Expiration of term Foreign Corporations
2. Voluntary dissolution when G. Laws Applicable on Foreign 123
no creditors are affected Corporations
3. Voluntary dissolution when
creditors are affected
4. Dissolution by minority in
close corporations
5. Failure to organize; CHAPTER XV. CLOSE
cessation of business for 5 CORPORATIONS 124
years 117 A. Requirements 124
B. Involuntary Dissolution B. Characteristics 124
1. Revocation of certificate of C. Restrictions on Transfer of 124
Registration Shares
2. Quo Warranto Proceedings 117 1. Validity of Restrictions
C. Effects of Dissolution 2. Presumptions 124
1. Loss of Juridical Personality D. Deadlocks
2. Executory Contracts 1. Requisites
3. Winding Up and Liquidation 2. Power of SEC
D. The Trust Fund Doctrine and 119 E. Distinctions Between Close and 125

CORPORATION LAW
the Distribution of Assets Regular Corporations

CHAPTER XIII. CORPORATE CHAPTER XVI. NON-STOCK

COMBINATIONS 120 CORPORATIONS 128
A. Definition 120 A. Purposes 128
B. Procedure 120 B. Rights of Members 128
C. Effects of Merger/Consolidation 120 C. Conversion 128
D. Effectivity of Merger/ D. Order of Distribution of Assets
Consolidation 120 Upon Dissolution 128
E. De Facto Merger 121
F. Sale of All or Substantially All CHAPTER XVII. SPECIAL
Assets 121 CORPORATIONS 129
A. Educational Corporations 129
CHAPTER XIV. FOREIGN B. Religious Corporations 129
CORPORATIONS 122 1. Corporation Sole
A. Definition of Terms 122 2. Religious Societies
B. Tests of “Doing Business in the
Philippines” 122

Page 73 of 278
 Corporation Law
FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Gwen Grecia-de Vera COMMERCIAL LAW LECTURES

FACULTY EDITOR
Krizelle Poblacion
Edel Cruz
Christina Ortua
ACADEMICS COMMITTEE HEAD
SUBJECT EDITORS

Samantha Poblacion CORPORATION LAW Jason Mendoza

DIRECTOR FOR ACADEMICS DEPUTY HEAD
EDITOR-IN-CHIEF Krystal Uy
Reizl Tanchico Malds Menzon
Rania Joya LEAD WRITERS LOGISTICS, HR
DEPUTY DIRECTOR FOR ACADEMICS
LAYOUT HEAD Jan Barcena --------
JR Santos Leo Zulueta
-------- WRITERS LOGO, COVER AND TEMPLATE DESIGN
Kae Guerrero
PRINTING AND DISTRIBUTION

Chapter I. Introduction Medical and Educational Center

(2005).
A. DEFINITION
B. ATTRIBUTES OF A CORPORATION  Criminal Liability – Since a corporation
1. ARTIFICIAL BEING as a person is a mere legal fiction, it
2. CREATED BY OPERATION OF LAW cannot be proceeded against crimi-
3. HAS THE RIGHT OF SUCCESSION nally because it cannot commit a
4. HAS THE POWERS, ATTRIBUTES AND crime in which personal violence or
PROPERTIES EXPRESSLY malicious intent is required. Criminal
AUTHORIZED BY LAW OR INCIDENT
TO ITS EXISTENCE
action is limited to the corporate
C. JURISDICTION agents guilty of an act amounting to a
D. OTHER TYPES OF BUSINESS crime and never against the corpora-
ORGANIZATIONS tion itself (West Coast Life Ins. Co. vs.
Hurd [1914], Time Inc. vs. Reyes
A. Definition [1971]).

A corporation is an artificial being 2. Created by operation of law

created by operation of law, having the
right of succession and the powers, Mere consent of the parties to form a cor-
attributes, and properties expressly poration is not sufficient. The State must
authorized by law or incident to its give its consent either through a special
existence. (Sec. 2, Corporation Code) law (in case of government corporations)
or a general law (i.e., Corporation Code in
case of private corporations).
B. Attributes of a Corporation
3. Has the right of succession
1. An artificial being
Its continued existence during its stated
term cannot be affected by any change in
A corporation exists by fiction of law,
the members or stockholders or by any
hence, it can act only through its direc-
transfer of shares by a stockholder to a 3 rd
tors, officers and employees.
person.
 Moral Damages – cannot be awarded
4. Has the powers, attributes and
in favor of corporations because they
properties expressly authorized by
do not have feelings and mental state.
law or incident to its existence
They may not even claim moral dam-
ages for besmirched reputation
As a mere creature of law, it can exercise
(NAPOCOR vs Philipp Brothers Oceanic,
only such powers as the law may choose
2001). However, a corporation can re-
to grant it, either expressly or impliedly.
cover moral damages under Art 2219
(7) if it was the victim of defamation
Pilipinas Broadcasting Network vs. Ago C. Jurisdiction
 (Asked in 91 and 96) of which they are stockholders, mem-
bers or associates, respectively;
According to the Interim Rules of
Procedure for Intra-Corporate 3. Controversies in the Election or
Controversies (A.M. No. 01-2-04-SC), appointment of directors, trustees, offi-
which took effect on April 1, 2001, the cers, or managers of corporations,
Regional Trial Court has jurisdiction over partnerships, or associations;
cases involving the following: (FIEDI)
4. Derivative suits; and
1. Devices or schemes employed by,
or any act of, the BOD, business asso- 5. Inspection of corporate books.
ciates, officers or partners, amounting
to Fraud or misrepresentation which Unlad Resources Development Corp. vs.
may be detrimental to the interest of Dragon (2008, Nachura):
the public and/or of the stockholders,
partners or members of any corpora- Q: Who has jurisdiction on cases involving
intra-corporate controversies?
tion, partnership, or association;
A: Under Sec. 5.2 of RA 8799, SEC’s
2. Controversies arising out of Intra- jurisdiction over all cases enumerated under
corporate, partnership, or association Sec. 5, PD 902-A was transferred to the
relations, between and among stock- Regional Trial Court which has jurisdiction
holders, members or associates; and over the principal office of the corporation,
between, any or all of them and the partnership or association concerned
corporation, partnership, or association

D. Other Types of Business Organizations

1. Sole Proprietorship – is composed of 2. Partnership – two or more persons

the proprietor himself and his bind themselves to contribute money,
employees but it has no personality property, or industry to a common
separate and distinct from the fund with the intention of dividing the
proprietor. profits among themselves (Art 1767).

 Partnership and Corporation Distinguished

Partnership Corporation
Creation created by mere agreement of the created by
parties operation of law

may be organized by only two

persons
requires at least 5 incorporators
Extent of partners are personally liable for stockholders are liable only to the
Liability partnership debts extent of their
investment/subscription
Manageme (in the absence of an agreement) management is centralized in a board
nt every partner is an agent of the of directors or trustees
partnership
Powers A partnership may exercise any A corporation can exercise only the
power authorized by the partners powers expressly granted by law or
provided it is not contrary to law, implied from those granted or incident
morals, customs, public order or to its existence
public policy (Art. 1306, CC)
Nature of based on mutual trust and has more stability since a corporation
Relation- confidence (delectus personae) - has right of succession; dissolution
ship its existence is precarious since needs consent of the State (SEC)
death or unilateral act of a partner
may bring about dissolution
3. Joint Account (Asked in 00) - an may agree upon, and participating in
arrangement whereby merchants may the favorable and unfavorable results
interest themselves in the transaction thereof in the proportion they may
of other merchants, contributing determine.
thereto the amount of capital they

 Joint Account and Partnership Distinguished (Asked in 00)

Joint Account Partnership

Juridical No juridical personality Has personality separate and
Personality distinct from the partners
Business No commercial name common to all Can adopt a partnership
Name participants can be adopted (Art 241, Code name
of Commerce)
Management ONLY the ostensible partner manages and ALL general partners are
transacts business in his own name and managers
under his individual liability (Art 241, Code
of Commerce)
Parties in Only the ostensible partner – the person ALL general partners may be
cases carrying on the joint business – can be sued liable even up to the extent of
by and is liable to other persons their personal properties

4. Business Trust – a legal relation 6. Cooperative – duly registered

whereby one person, called the association or persons, with common
trustor, conveys a property to another, bond of interest, who have voluntarily
called the trustee, for the benefit of a joined together to achieve lawful
person called the beneficiary (Art. common social or economic end,
1440 CC). making equitable contributions to the
capital required and accepting a fair
5. Joint Venture – an association of share of the risks and benefits. (Sec. 3,
persons or companies jointly RA 6938 or The Cooperative Code of
undertaking some commercial the Philippines)
enterprise; generally all contribute
assets and share risks (Kilosbayan vs.
Guingona, 1994)
REVIEWER IN COMMERCIAL LAW Chapter II. Classification of Corporations

Chapter II. Classification of C. Other Classifications

Corporations
1. Public corporation
A. STOCK CORPORATION (Asked in 04) One formed or organized
B. NON-STOCK CORPORATION for the government or a particular
C. OTHER CLASSIFICATIONS state. Its purpose is for the general
good and welfare.
A. Stock Corporation 2. Private corporation
(Asked in 01 and 04) (Asked in 04) One formed for some pri-
vate purpose, benefit, aim or end.
 One which has a capital stock divided 3. Close corporation
into shares and is authorized to (Sec. 96)
distribute to the holders of such 4. Educational
shares dividends or allotments of the corporation - One organized for
surplus profits (i.e., retained earnings educational purposes (Sec. 106).
on the basis of the shares held (Sec. 3) 5. Religious
 It is organized for profit. corporations
 The governing body of a stock a. Corporation sole is one formed for
corporation is usually the Board of the purpose of administering and
Directors (except in certain instances, managing, as trustee, the affairs,
e.g. close corporations). property and temporalities of any
religious denomination, sect, or
B. Non-Stock Corporation church, by the chief archbishop,
(Asked in 04) bishop, priest, rabbi, or other
presiding elder of such religious
denomination, sect or church (Sec.

CORPORATION LAW
 All other corporations are non-stock
corporations (Sec. 3) 110).
 One where no part of the income is b. Corporation aggregate is a
distributable as dividends to its religious corporation incorporated
members, trustees, or officers, subject by more than one person.
to the provisions of the Code on 6. Eleemosynary corpo-
dissolution. ration – One organized for a charitable
 Not organized for profit. purpose
 Its governing body is usually the Board
of Trustees. 7. Domestic corporation
– A domestic corporation is one
CIR vs. Club Filipino de Cebu (1962): formed, organized, or existing under
the laws of the Philippines.
There are two elements for a stock
corporation to exist: 8. Foreign corporation –
1) Capital stock divided into shares, and One formed, organized or existing un-
2) An authority to distribute to the holders der any laws other than those of the
of such shares, dividends or allotments of the Philippines and whose law allows Fil-
surplus profits on the basis of shares held. ipino citizens and corporations to do
(Test of WON stock corporation) business in its own country and state
(Sec. 123).
Even if there is a statement of capital stock,
the corporation is still NOT a stock corporation 9. Corporation created
if dividends are NOT supposed to be declared, by special laws or charter (Sec. 4)
that is, there is no distribution of retained - Corporations which are governed pri-
earnings.
marily by the provisions of the special
law or charter creating them. Corpora-
 Under Sec. 43 of the Corporation Code, tion Code has suppletory application.
a corporation is deemed to have the
power to declare dividends. Thus, so 10. Subsidiary
long as the corporation has capital corporation – one in which control,
stock and there is no prohibition in its usually in the form of ownership of
Articles of Incorporation or in its by- majority of its shares, is in another
laws for it to declare dividends, such corporation (the parent corporation).
corporation is a stock corporation.
REVIEWER IN COMMERCIAL LAW Chapter II. Classification of Corporations
11. Parent corporation –
its control lies in its power to elect the
subsidiary’s directors thus controlling
its management policies.

CORPORATION LAW
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations

Chapter III. Formation of 3. Foreign

Corporations Incorporators/Corporators
(Asked in 05)
A. COMPONENTS OF A CORPORATION
1. INCORPORATORS General Rule: All incorporators/
2. CORPORATORS corporators may be foreigners.
3. FOREIGN
INCORPORATORS/CORPORATORS Exceptions: Fully or partly
B. STEPS IN THE FORMATION OF A nationalized corporations.
CORPORATION
1. PROMOTION
A. LIABILITY OF CORPORATION ON
a. Where NO foreign stockholder is
PROMOTERS’ CONTRACTS allowed.
B. PERSONAL LIABILITY OF  Mass media except recording
PROMOTERS (Art. XVI, Sec. 11 of the
C. COMPENSATION OF PROMOTERS Constitution; Presidential
2. DRAFTING THE ARTICLES OF Memorandum dated 04 May
INCORPORATION 1994)
A. DEFINITION OF TERMS  Retail trade enterprises with
B. CONTENTS OF ARTICLES OF paid-up capital of less than
INCORPORATION
US$2.5 Million (Sec. 5 of RA
3. FILING WITH SEC AND PAYMENT OF
FEES 8762)
4. ISSUANCE OF CERTIFICATE OF  Private security agencies (Sec.
INCORPORATION 4 of RA 5487)
5. INTERNAL ORGANIZATION AND  Small-scale mining (Sec. 3 of
COMMENCEMENT OF BUSINESS RA 7076)
C. DE FACTO CORPORATION  Utilization of natural resources
1. REQUISITES OF DE FACTO (Art. XII, Sec. 2 of the

CORPORATION LAW
CORPORATION Constitution)
2. DE JURE VS. DE FACTO
 Ownership, operation and
CORPORATION
D. CORPORATION BY ESTOPPEL management of cockpits (Sec. 5
of PD 449)
 Manufacture, repair, stockpiling
A. Components of a Corporation
and/or distribution of nuclear
weapons (Art. II, Sec. 8 of the
1. Incorporators - are those Constitution)
stockholders or members mentioned in  Manufacture, repair, stockpiling
the articles as originally forming and and/or distribution of biological,
composing the corporation and who chemical and radiological
are signatories thereof. weapons and anti-personnel
mines (Various treaties to
Requirements: which the Philippines is a
a. Natural persons signatory and conventions
b. Of legal age supported by the Philippines)
c. Must own or subscribe to at least  Manufacture of firecrackers and
one share of stock of the other pyrotechnic services (Sec.
corporation (Genuine interest) 5 of RA 7183)
d. 5-15 incorporators who must sign
the articles of incorporation b. Up to 20% foreign equity.
e. Majority of the incorporators must  Private radio communications
be residents of the Philippines network (RA 3846)

Original subscribers c. Up to 25% foreign equity.

Persons whose names are mentioned  Private recruitment, whether for
in the Articles, but not as local or overseas, employment
incorporators; they do not sign the (Art. 27 of PD 442)
Articles.  Construction and repair of
locally funded works (Sec. 1 of
2. Corporators - are stockholders or CA 541, LOI 630)
members who join the corporation  Construction of defense-related
after its incorporation. structures (Sec. 1 of CA 541)
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations
d. Up to 40% foreign equity. B. Steps in the Formation of a
 Exploration, development and Corporation
utilization of natural resources
(Art. XII, Sec. 2 of the * Promotion
Constitution).
 Realty companies and other
corporations that own private
lands (Art. XII, Sec. 7 of the Drafting the
Constitution; Ch. 5, Sec. 22 of Articles of Incorporation
corporate name
CA 141; Sec. 4 of RA 9182). purpose clause
 Operation and management of principal office
public utilities (Art. XII, Sec. 11 term of existence
of the Constitution; Sec. 16 of incorporators & directors
CA 146) capital stock; subscription
 Culture, production, milling, treasurer-in-trust
processing, trading except treasurer’s affidavit
retail of rice and corn and by- other matters
products (Sec. 5 of PD 194; Sec.
15 of RA 8762).
 Adjustment companies (Sec. Filing with SEC;
323 of PD 612 as amended by Payment of the filing and
PD 1814). publication fees
 Sauna and steam bath
bathhouses, massage clinics
and similar activities. Issuance of the Certificate of
Incorporation by the SEC (if,
e. Up to 60% foreign equity. after examination, all the papers

CORPORATION LAW
 Financing companies regulated filed are in order)
by SEC (Sec. 6 of RA 5980 as
amended by RA 8556)
 Investment houses (Sec. 5 of Internal Organization
PD 129 as amended by RA (by-laws, election of officers)
8366) & Commencement of business
operations

1. Promotion

Promoters – are persons who, acting

alone or with others, take initiative in
founding and organizing the business
or enterprise of the issuer and receives
consideration therefor (RA 8799, The
Securities Regulation Code).

a. Liability of corporation on
promoters’ contracts

General Rule: A corporation is

NOT bound by the contract. Since
the corporation did not yet exist at
the time of the contract, it could
not have had an agent who could
legally bind it.

Exceptions: A corporation may be

bound by the contract if it makes
the contract its own by:
1. Adoption or ratification of the
ENTIRE contract.
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations
2. Acceptance of benefits under LEON, Corporation Code of the
the contract with knowledge of Philippines)
the terms thereof. 3. Capital Stock is an amount fixed in
the AOI (where shares are with par
b. Personal liability of promoters value) and is unaffected by profits
and losses. It limits the maximum
General Rule: The promoter amount or number of shares that
binds himself PERSONALLY & may be issued without formal
assumes the responsibility of amendment of the articles of
looking to the proposed corp. for incorporation (See Sec. 38).
reimbursement.
4. Authorized Capital Stock - is
Exceptions: Any express or synonymous with capital stock
implied agreement to the contrary, where the shares of the corporation
or novation of the contract have par value. If the shares of
stock have no par value, the
c. Compensation of Promoters corporation has no ACS, but it has
capital stock the amount of which
General Rule: The corporation is is not specified in the AOI as it
NOT liable to pay compensation cannot be determined until all the
because this would be an shares have been issued. In this
imposition on innocent investors. case, the two terms are not
(Ballantine) synonymous (DE LEON).

Exceptions: 5. Subscribed Capital Stock - It is the

1. If after it is formed, corporation amount of the capital stock
expressly promises to do so subscribed whether fully paid or

CORPORATION LAW
2. Services done partly before and not. It connotes an original
partly after incorporation and subscription contract for the
the corporation takes the acquisition by a subscriber of
benefits thereof unissued shares in a corporation
(Secs. 60 and 61)
Note: The Securities Act authorizes a
promotion fee IF it is provided for in the 6. Outstanding Capital Stock - it is
registration statement of the securities the total shares of stock issued
involved. under the binding subscription
agreements to subscribers or
stockholders, whether or not fully
2. Drafting the Articles of or partially paid, except treasury
Incorporation (AOI) shares (Sec. 137). It is broader
than “subscribed” capital stock.
a. Definition of Terms
7. Paid-up Capital - Portion of the
1. Articles of Incorporation - authorized capital stock which has
constitutes the charter of the been subscribed and paid (See Sec.
corporation and defines the 13).
contractual relationships between
the State and the corporation, the 8. Unissued Capital Stock - It is that
stockholders and the State, and the portion of the capital stock that is
corporation and the stockholders. not issued or subscribed. It does
not vote and draws no dividends.
2. Capital - It is used broadly to
indicate the entire property or 9. Legal Capital - It is the amount
assets of the corporation. In the equal to the aggregate par value
strict sense, it refers to that portion and/or issued value of the
of the net assets paid by the outstanding capital stock (DE
stockholders as consideration for LEON).
the shares issued to them, which is
utilized for the prosecution of the
business of the corporation (DE
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations

b. Contents of Articles of registered (Chua Gan vs.

Incorporation Samahang Magsasaka, 1935).

1. Corporate name 4. Term of existence

 Must not be identical or  Maximum life of 50 years.
deceptively or confusingly Extendible for a period not
similar to that of any existing exceeding 50 years at any one
corporation or to any other instance. No extension,
name already protected by law however, can be made earlier
or is patently deceptive, than 5 years before the end of
confusing or contrary to the term. (Sec. 11)
existing laws (Sec. 18).  Extension requires an
 Must include the word amendment of the AOI. Any
“Corporation” or “Inc” dissenting stockholder may
 Change of corporate name exercise his appraisal right
requires the amendment of the (Sec. 37).
AOI: majority vote of the board
and the vote or written assent 5. Names, citizenship and residences
of stockholders holding 2/3 of of incorporators
the outstanding capital stock
(Sec. 16). 6. Number, names, citizenship and
residences of directors/trustees.
Republic Planters Bank vs. CA (Asked in 05 and 08)
(1992):  “Directors” is used for stock
corporations, “trustees” for
Amendment of a corporation’s AOI non-stock corporations.
changing its corporate name does  General Rule: not less than 5

CORPORATION LAW
not extinguish the personality of the but not more than 15
original corporation. It is the same
directors/trustees
corporation with a different name,
and its character is not changed.
Exception: In non-stock
Consequently, the “new” corporation corporations, the articles or by-
is still liable for the debts and laws may provide for more than
obligations of the “old” corporation. 15 trustees (Sec. 92).
 In educational non-stock
2. Purpose clause corporations, trustees may NOT
 Must indicate the PRIMARY and exceed 15. Number of trustees
SECONDARY purposes if there shall be in multiples of 5 (Sec.
are more than one purpose, 108).
which should not contradict or  In nationalized industries, aliens
change the nature of the may be directors of a
corporation (Sec. 14(2)) corporation only in such
 Must not be patently number as may be proportional
unconstitutional, illegal, to their allowable ownership of
immoral, and contrary to shares.
government rules and
regulations (Sec. 17 (2)). 7. If stock corporation, amount of
 Must not be for the purpose of authorized capital stock, number of
practicing a profession shares
 AOI must state the authorized
3. Principal office capital stock in lawful money of
 Must be within the Philippines the Philippines, the number of
(Sec. 14 (3)) shares into which the ACS is
 AOI must specify both province divided, and the par value of
or city or town where it is each par value shares (Sec.
located 14(8), Sec. 15(7)).
 Important in (1) determining
venue in an action by or against 8. In par value stock corporations, the
the corporation (2) determining par value of each share.
the province where a chattel
mortgage of shares should be 9. Number of shares and amounts of
subscription of subscribers which
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations
shall not be less than 25% of 4. Issuance of Certificate of
authorized capital stock. Incorporation by SEC
 The SEC shall give the
10. Amount paid by each subscriber on incorporators reasonable time to
their subscription, which shall not correct or modify the objectionable
be less than 25% of subscribed portions of the articles or
capital and shall not be less than amendment (Sec. 17).
P5,000.  Grounds for disapproving AOI: (Sec.
17)
11. Name of treasurer elected by the  AOI does not SUBSTANTIALLY
subscribers. comply with the form
prescribed
12. Other matters.  Purpose is patently
 Classes of shares, as well as the unconstitutional, illegal,
preferences or restrictions on immoral, contrary to
any such class (Sec. 6). government rules and
 Denial or restriction of pre- regulations
emptive right (Sec.39).  Treasurer’s Affidavit concerning
 Prohibition against transfer of the amount of capital
stock which would reduce stock subscribed and or paid is false
ownership to less than the  Required percentage of
required minimum in the case ownership of Filipino citizens
of a nationalized business or has not been complied with.
activity (Sec. 15(11)).  REMEDY in case of rejection of AOI
- petition for review in accordance
with the Rules of Court (§6, last
3. Filing with SEC and payment of par., PD 902-A)

CORPORATION LAW
fees  Commencement of corporate
existence and juridical
Documents to be filed with SEC personality – upon issuance of
(Asked in 02): certificate of Incorporation
a. Articles of Incorporation (Sec. 19)
b. Treasurer’s Affidavit certifying that  REVOCATION of certificate of
25% of the total authorized capital incorporation – if incorporators are
stock has been subscribed and at found guilty of fraud in procuring
least 25% of such has been fully the same after due notice and
paid in cash or property. hearing (Sec. 6(I), PD 902-A)
c. Bank certificate covering the paid-
up capital.
d. Letter authority authorizing the 5. Internal Organization and
SEC to examine the bank deposit Commencement of Business
and other corporate books and Operations – includes the adoption
records to determine the existence of by-laws and election officers
of paid-up capital.
e. Undertaking to change the
corporate name in case there is C. De Facto Corporation
another person or entity with same (Asked in 04)
or similar name that was previously
registered.
1. Requisites of De Facto
f. Certificate of authority from proper
government agency whenever Corporation
appropriate like BSP for banks and
Insurance Commission for a. Valid statute - There can be no
insurance corporations. de facto corporation under a
(SUNDIANG AND AQUINO, statute subsequently declared
Reviewer on Commercial Law) unconstitutional. (Mun. of
Balabagan vs. Benito, 1969)

b. User of corporate powers in

GOOD FAITH - there is transaction
of business in some way as if it
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations
were a corporation (e.g., taking (SUNDIANG AND
subscriptions to and issuing shares AQUINO).
of stock, buying lot, constructing,
and leasing a building)

c. Substantial or Colorable
compliance in GOOD FAITH – A
corporation must have been issued
a certificate of incorporation to
be able to claim “in good faith”
that it is a de facto corporation.
(Hall vs. Piccio, 1950)

2. De Jure vs. De Facto

Corporations

DE JURE DE FACTO
One created in strict One which actually
or substantial exists for all practical
conformity with the purposes as a
statutory corporation but which
requirements for has no legal right to
incorporation. corporate existence
as against the State.
Right to exist cannot Right to exercise
be successfully powers cannot be

CORPORATION LAW
attacked even in a inquired into
direct proceeding by collaterally in any
the State private suit. But such
inquiry may be made
by the State in a quo
warranto proceeding
 DI RE M
RE Q A
CT UI N
OR SI DA
Y TE TO
S RY
No
Com No Subs
plian Co tanti
ce m al
pli Com
an plian
ce ce
No No No
effe co eff
ct m

CORPORATION LAW
ect
pli
an
If the following ce
are present:
Apparently valid
law
Colorable DE
JU DE NO DE
attempt in GOOD
RE FA N JUR
FAITH to
CT EN E
incorporate
O TIT
User in GOOD
Y
FAITH of
corporate powers
Chapter III. Formation of Corporations REVIEWER IN COMMERCIAL LAW
REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations
alleged corporation on the contract even if he
did not know of the defective incorporation. 3rd
D. Corporation by Estoppel party is considered to have admitted the
(Asked in 04) existence of a corporation by the fact that
he dealt with it as a corporation.
 It is a status acquired by persons who  the alleged corporation - when a third
assume to act as a corporation person has entered into a contract with an
knowing it to be without authority. association which represented itself to be a
Such persons shall be liable as general corporation, the association is estopped
partners for all debts, liabilities and from denying its corporate capacity in a
damages incurred or arising as a result suit against it by such 3rd person. It cannot
thereof (Sec. 21). allege lack of personality to be sued to evade
responsibility on a contract it has entered into
and by virtue of which it has received
 When such ostensible corporation is
advantages and benefits
sued on any transaction entered by it
as a corporation or any tort committed  associates as partners - when business
by it as such, it shall not be allowed to associates fraudulently misrepresents the
use as a defense its lack of corporate existence of a corporation and the 3 rd party
personality (Sec. 21). contacts with the association as a corporation
without knowing the serious defects in its
 One who assumes an obligation to an incorporation, such 3rd party may sue
ostensible corporation as such, cannot associates as general partners. Where
both the associates and the 3rd party were
resist performance thereof on the
ignorant of the defective incorporation, 3 rd
ground that there was in fact no party can’t hold the associates liable since they
corporation (Sec. 21). were in good faith. If 3rd party knew of defects
in incorporation and still dealt with the
NOTE: An unincorporated corporation corporation, he must be deemed to have

CORPORATION LAW
is not barred from transacting business chosen to deal with the corporation as such
before the commencement of and should be limited in his recovery to the
corporate existence. Limit: the corporate assets.
persons acting as such shall be
personally liable.

Lozano vs. delos Santos (1997):

Q: Action involving two incorporated drivers’

associations that decided to unite and elect
one set of officers to be given authority to
collect the daily dues of the drivers who are
members of the consolidated association.

A: Doctrine of estoppel applies when persons

assume to form a corporation and exercise
corporate functions and enter into business
relations with third persons. Where there are
no third persons involved and the conflict
arises only among those assuming to
form a corporation, who therefore know
that it has not been registered, there is
no corporation by estoppel.

International Express Travel v. CA, (2000):

Q. In what instances and to whom does the

doctrine of estoppel applies?

A: The doctrine of corporation by estoppel

may apply to:

 a third party - a 3rd party who had dealt

with an unincorporated association as a
corporation may be precluded from denying its
corporate existence on a suit brought by the
REVIEWER IN COMMERCIAL LAW Chapter IV. The Corporate Entity

Chapter IV. The Corporate

Entity B. Piercing the Corporate Veil
Doctrine
I. THE CORPORATE ENTITY (Asked in 91, 01 and 04)
A. THE DOCTRINE OF SEPARATE JURIDICAL
ENTITY 1. An Equitable Remedy - Piercing the
B. PIERCING THE CORPORATE VEIL veil of corporate entity is merely an
DOCTRINE equitable remedy, and may be
1. AN EQUITABLE REMEDY awarded only in cases when the
2. EXTENT OF LEGAL EFFECTS corporate fiction is used to defeat
3. APPLICATION OF PIERCING
DOCTRINE
public convenience, justify wrong,
4. PARENT-SUBSIDIARY RELATIONSHIP protect fraud or defend crime or where
C. NATIONALITY the corporation is a mere alter ego or
1. PLACE OF INCORPORATION TEST business conduit of a person.
2. THE GRANDFATHER RULE
3. CONTROL TEST 2. Extent of Legal Effects - The
4. WAR-TIME TEST application of the piercing doctrine to
5. INVESTMENT TEST a particular case does not deny the
corporation of legal personality for any
and all purposes, but only for the
A. The Doctrine of Separate particular transaction or instance
Juridical Entity for which the doctrine was applied.
(Asked in 95, 96, 99 and 00) (Koppel Phil. Inc. vs. Yatco, 1946)

1. Concept - A corporation has a 3. Application of Piercing Doctrine

personality separate and distinct  If done to defraud the government
from that of its stockholders and of taxes due it.

CORPORATION LAW
members and is not affected by the  If done to evade payment of civil
personal rights, obligations, and liability.
transactions of the latter.  If done by a corporation which is
merely a conduit or alter ego of
2. Property - SHs have no claim on another corporation.
corporate property as owners, but  If done to evade compliance with
mere expectancy or inchoate right to contractual obligations.
the same upon dissolution of the  If done to evade financial obligation
corporation after all corporate to its employees.
creditors have been paid. Such right is
limited only to their equity interest Seaoil vs Autocorp Group ( 2008, Nachura):
(doctrine of limited liability). Although
stockholder’s interest in the Q: Is a corporation liable for the individual acts
corporation may be attached by his of its stockholders or members? Is there an
personal creditor, corporate property exception to the general rule?
cannot be used to satisfy his claim
(Wise & Co. vs. Man Sun Lung, 1940). A: It is settled that a corporation has a
personality separate and distinct from its
individual stockholders or members, and is not
3. Liability for torts - as a separate affected by the personal rights, obligations and
juridical personality, a corporation can transactions of the latter. The corporation may
be held liable for torts committed by not be held liable for the obligations of the
its officers for corporate purpose (PNB persons composing it, and neither can its
vs. CA, 1978). stockholders be held liable for its obligation.
Of course, this Court has recognized
4. Constitutional Rights - Corporate instances when the corporation’s separate
entities are entitled to due process, personality may be disregarded. However, we
have also held that the same may only be done
equal protection, and protection
in cases where the corporate vehicle is being
against unreasonable searches and used to defeat public convenience, justify
seizures. However, a corporation is wrong, protect fraud, or defend crime.
not entitled to the privilege against Moreover, the wrongdoing must be clearly and
self-incrimination (Bataan Shipyard & convincingly established. It cannot be
Eng’g Co. vs. PCGG, 1987) presumed.
REVIEWER IN COMMERCIAL LAW Chapter IV. The Corporate Entity
The corporation is a national of the
4. Parent-subsidiary relationship country under whose laws it is organized
General Rule: The mere fact that a or incorporated (Sec. 123)
corporation owns all or substantially all a. Domes
of the stocks of another corporation is tic corporations – organized and
NOT sufficient to justify their being governed under and by Philippine laws
treated as one entity. b. Foreig
n corporations – organized under laws
Exceptions: The subsidiary is a mere other than those of the Philippines an
instrumentality of the parent can operate only in the territory of the
corporation, given the following state under whose laws it was formed.
circumstances (PNB vs. Ritratto Group, However, they may be licensed to do
2001): business here.
 The parent corporation
owns all or most of the subsidiary’s 2. The
capital stock. Grandfather Rule
 The parent and subsidiary  It is a method of determining the
corporations have common nationality of a corporation which in
directors or officers. turn is owned in part by another
 The parent corporation corporation by breaking down the
finances the subsidiary. equity structure of the shareholder
 The parent corporation corporation.
subscribes to all the capital stock  It involves the computation of Filipino
of the subsidiary or otherwise ownership of a corporation in which
causes its incorporation. another corporation of partly Filipino
 The subsidiary has grossly and partly foreign equity owns capital
inadequate capital. stock. The percentage of shares held

CORPORATION LAW
 The parent corporation pays by the second corporation in the first is
the salaries and other expenses or multiplied by the latter’s own Filipino
losses of the subsidiary. equity, and the product of these
 The subsidiary has percentages is determined to be the
substantially no business except ultimate Filipino ownership of the
with parent corporation or no subsidiary corporation (SEC Opinion re;
assets except those conveyed to or Silahis International Hotel, 4 May
by the parent corporation. 1987).
 In the papers of the parent
corporation or in the statements of 3. Control Test
its officers, the subsidiary is  A corporation shall be considered a
described as a department or Filipino corporation if the Filipino
division of the parent corporation ownership of its capital stock is at least
or its business or financial 60%, and where the 60-40 Filipino-
responsibility is referred to as the alien equity ownership is NOT in doubt
parent corporation’s own. (SEC Opinion dated 6 November 1989;
 The parent corporation uses DOJ Opinion No. 18, s. 1989).
the property of the subsidiary as its  Therefore, its shareholdings in another
own. corporation shall be considered to be
 The directors or executives of Filipino nationality when computing
of the subsidiary do not act the percentage of Filipino equity of
independently in the interest of the that second corporation (SEC Opinion
subsidiary but take their orders dated 23 November 1993).
from the parent corporation in the  Control test is applied in the following:
latter’s interest. a. Exploit
 The formal ledger ation of natural resources - “Only
requirements of the subsidiary are Filipino citizens or corporations
not observed. whose capital stock are at least
60% owned by Filipinos can qualify
to exploit natural resources.” (Sec.
C. Nationality of Corporation 2, Art. XII, Consti.)
b. Public
1. Place of Incorporation test
Utilities - “xxx no franchise,
certificate or any other form of
REVIEWER IN COMMERCIAL LAW Chapter IV. The Corporate Entity
authorization for the operation of a
public utility shall be granted
except to citizens of the Philippines
or to corporations or associations
organized under the laws of the
Philippines at least 60% of whose
capital is owned by such citizens. “
(Sec. 11, Art. XII, Consti.)

4. War-time
Test
If the controlling stockholders are
enemies, then the nationality of the
corporation will be based on the
citizenship of the majority stockholders in
times of war (Filipinas Compania de
Seguros v Christian Huenfeld, 1951).

5. Investment
Test
A “Philippine National” is a corporation
organized under the laws of the
Philippines of which at least 60% of the
capital stock outstanding and entitled to
vote is owned and held by citizens of the
Philippines, or a trustee of the funds for
pension or other employee retirement or

CORPORATION LAW
separation benefits, where the trustee is a
Philippine national and at least 60% of the
fund will accrue to the benefit of Philippine
nationals. (Sec. 3(a) and (b), Foreign
Investments Act of 1991, RA7042)
REVIEWER IN COMMERCIAL LAW Chapter V. Corporate Powers

Chapter V. Corporate Powers a. Extend or shorten the corporate

(Asked in 02 and 07) Term (Sec. 37)
b. Increase or decrease Capital stock
A. EXPRESS POWERS (Sec. 38)
1. GENERAL POWERS c. Incur, create or increase Bonded
2. SPECIAL/SPECIFIC POWERS indebtedness (Sec. 38)
B. INHERENT/INCIDENTAL POWERS d. Deny Preemptive right (Sec. 39)
C. IMPLIED POWERS e. Sell or otherwise Dispose of
D. ULTRA VIRES ACTS substantially all its assets
1. DEFINITION f. Acquire its own shares (Sec. 41)
2. TYPES
3. EFFECTS
g. Invest in another corporation or
4. REMEDIES business (Sec. 42)
h. Declare dividends (Sec. 43)
i. Enter into Management contracts
A. Express Powers
(Sec. 44)
Granted by law, Corporation Code, and its
Notes: 2 general restrictions on the power
Articles of Incorporation or Charter
of the corporation to acquire and hold
properties:
1. General Powers of Corporations
 property must be reasonably and
(Sec. 36)
necessarily required by the business
a. Sue and be sued in its corporate
 that the power shall be subject to the
name;
limitations prescribed by other special
b. Succession;
laws and the constitution (corporation
c. Adopt and use a corporate seal;
may not acquire more than 30% of
d. Amend its Articles of Incorporation;
voting stocks of a bank; corporations
e. Adopt by-laws;
are restricted from acquiring public

CORPORATION LAW
f. For stock corporations - issue or
lands except by lease of not more than
sell stocks to subscribers and sell
1000 hectares)
treasury stocks; for non-stock
corporation - admit members to the
corporation;
g. Purchase, receive, take or grant, B. Inherent/Incidental Powers
hold, convey, sell, lease, pledge,
mortgage and otherwise deal with Not expressly stated but are deemed to be
such real and personal property, within the capacity of corporate entities
pursuant to its lawful business;
h. Enter into merger or consolidation
with other corporations as provided C. Implied/Necessary Powers
in the Code;
i. Make reasonable donations, These powers are deemed to exist
including those for the public because of the following provisions:
welfare or for hospital, charitable,  “Except such as are necessary or
cultural, scientific, civic, or similar incidental to the exercise of the
purposes: Provided, no powers so conferred” (Sec. 36)
corporation, domestic or foreign,  “Such powers as are essential or
shall give donations in aid of any necessary to carry out its purpose or
political party or candidate or for purposes as stated in the AOI” – catch-
purposes of partisan political all phrase (Sec. 45)
activity;
j. Establish pension, retirement, and
other plans for the benefit of its D. The Ultra Vires Acts (Sec. 45)
directors, trustees, officers and
employees; and 1. Definition
k. Exercise such other powers as may Ultra Vires acts are those acts which a
be essential or necessary to carry corporation is not empowered to do or
out its purposes. perform because they are not
conferred by its AOI or by the
2. Special/Specific Powers (Sec. 37-44) Corporation Code, or not necessary or
TCB PDA IDM (DIP CAB MDT) incidental to the exercise of the
powers so conferred.
REVIEWER IN COMMERCIAL LAW Chapter V. Corporate Powers
1. Injunction
2. Derivative suit
c. Creditors
2. Types of Ultra Vires Acts 1. Nullification of contract in fraud
a. Acts done beyond the powers of of creditors
the corporation as provided in
the law or its articles of
incorporation;
b. 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);
c. Acts or contracts, which are per se
illegal as being contrary to law.
(VILLANUEVA, Philippine
Corporate Law)

3. Effects of Ultra Vires Acts

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);

CORPORATION LAW
c. Part executed and part
executory – principle of “no unjust
enrichment at expense of another”
shall apply;
d. Executory contracts apparently
authorized but ultra vires – the
principle of estoppel shall apply.

ULTRA VIRES ACTS ILLEGAL ACTS

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

Seaoil vs Autocorp Group (2008, Nachura):

An ultra vires act is distinguished from

illegal act, the former being voidable which
may be enforced by performance,
ratification, or estoppel, while the latter is
void and cannot be validated.

4. Remedies in Case of Ultra Vires

Acts
a. State
1. Forfeiture by judgment of Court
2. Suspension or revocation of the
certificate of registration by the
SEC
b. Stockholders
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation

Chapter VI. Internal By-laws may be required by law for an orderly

governance and management of corporations
Organization of the but they are not essential to corporate birth.
Corporation Therefore, failure to file them within the period
required by law by no means tolls the
A. BY-LAWS automatic dissolution of a corporation
1. DEFINITION
2. ADOPTION 3. Requirements (Sec. 46)
3. REQUIREMENTS  Must be approved by the
4. EFFECTIVITY
affirmative vote of the stockholders
5. AMENDMENT OR REPEAL
B. DIRECTORS/TRUSTEES representing the majority of the
1. QUALIFICATIONS outstanding capital stock or
2. ELECTION OF DIRECTORS/TRUSTEES majority of members (if filed prior
3. METHODS OF VOTING to incorporation, approved and
4. EXERCISE OF CORPORATE POWERS signed by all incorporators)
5. MEETINGS OF THE BOARD  Must be kept in the principal office
6. REMOVAL OF DIRECTORS/TRUSTEES of the corporation; subject to
7. EXECUTIVE COMMITTEE inspection of stockholder or
C. CORPORATE OFFICERS
member during office hours (Sec.
1. WHO ARE CORPORATE OFFICERS
2. DISQUALIFICATIONS
74)
3. AUTHORITY OF CORPORATE
OFFICERS 4. Effectivity of By-Laws
D. STOCKHOLDERS OR MEMBERS  ONLY from the issuance of SEC of
1. RIGHTS OF STOCKHOLDERS certification that bylaws are not
2. OBLIGATIONS OF STOCKHOLDERS inconsistent with the Code
3. STOCKHOLDERS’/MEMBERS’  CANNOT bind stockholders or
MEETING
corporation pending approval
4. CORPORATE ACTS REQUIRING

CORPORATION LAW
APPROVAL OF ALL
STOCKHOLDERS/MEMBERS 5. Amendment or Repeal (Sec. 48)
5. OTHER INSTANCES REQUIRING  Majority vote of the members of
STOCKHOLDERS’/MEMBERS’ ACTION the Board and majority vote of the
6. LIMITATIONS ON RIGHT TO VOTE OCS or members, in a meeting duly
7. APPRAISAL RIGHT called for the purpose
 Delegation to the BOD of power to
A. By-Laws amend or repeal by-laws by vote of
(Asked in 98, 00 and 01) stockholders representing 2/3 of
the OCS or 2/3 of the members
1. Definition  Revocation of the delegated power
By-laws are mere internal rules among by majority vote only
stockholders and cannot affect or
prejudice 3rd persons who deal with
the corporation unless they have B. Directors/Trustees
knowledge of the same (China Banking
Corp v CA, 1997) 1. Qualifications
a. If STOCK, director must own at
2. Adoption of by-laws (Sec. 46) least 1 share of the capital stock,
 Within 1 month after receipt of which stock shall stand in his own
official notice of the issuance of its name (Sec. 23). If NON-STOCK,
certificate of incorporation by the trustee must be a member.
SEC. B. Majority of the directors/trustees
 Prior to incorporation - approved must be residents.
and signed by all the incorporators C. Not have been convicted by final
& submitted to SEC together with judgment of an offense punishable
AOI by imprisonment for a period
exceeding 6 years or a violation of
Loyola Grand Villas Homeowners Assn vs. CA
the Corporation Code, committed
(1997):
within five years from the date of
Q: What happens when there is failure to file his election. (Sec. 27)
the By-laws on time? d. Natural person
A: Failure to file the by-laws within that period e. Of Legal Age
does not imply the "demise" of the corporation.
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
F. Other qualifications as may be The corporate powers of the
prescribed in the by-laws of the corporation shall be exercised, all
corporation. business conducted and all
2. Election of Directors/Trustees property of such corporation
a. There must be present, in person controlled and held by the board of
or by proxy, the owners of majority directors or trustees. (Sec. 23)
of the OCS or majority of the Exceptions:
members entitled to vote in the 1. Executive Committee duly
meeting. authorized in the by-laws;
b. Election may be by ballot if 2. A contracted manager which
requested. may be an individual, a
c. A stockholder cannot be deprived partnership, or another
in the articles of incorporation or in corporation.
the by-laws of his statutory right to Note: In case the contracted
use any of the methods of voting in manager is another
the election of directors. corporation, the special rule in
d. No delinquent stock shall be voted. Sec. 44 applies.
e. The candidates receiving the 3. In case of close corporations,
highest number of votes shall be the stockholders may manage
declared elected. the business of the corporation
instead by a board of directors,
if the articles of incorporation
3. Methods of Voting so provide.
a. Straight Voting
b. Cumulative voting for one Spouses Constantine Firme vs. Bukal
candidate – a stockholder is Enterprises and Development Corporation
allowed to concentrate his votes (2003):

CORPORATION LAW
and give one candidate as many
The power to purchase real property is vested
votes as the number of directors to in the board of directors or trustees. While a
be elected multiplied by the corporation may appoint agents to negotiate
number of his shares shall equal. for the purchase of real property needed by the
Illustration: If there are 5 directors corporation, the final say will have to be with
to be elected and Pedro, as the board, whose approval will finalize the
shareholder, has 100 shares, Pedro transaction.
can give 500 (5 x 100 shares)
votes to just one candidate. b. Requisites of a VALID
c. Cumulative voting by Corporate Act by the Board of
distribution - a stockholder may Directors
cumulate his shares by multiplying 1. The Board must act as a BODY
the number of his shares by the in a meeting.
number of directors to be elected 2. There must be a VALIDLY
and distribute the same among as constituted meeting.
many candidates as he shall see fit. 3. There act must be supported by
Illustration: In the illustration a MAJORITY OF THE QUORUM
above, Pedro may choose to give duly assembled (Exception:
100 votes to candidate 1, 100 Election of officers requires a
votes to candidate 2, 100 votes to vote of majority of all the
candidate 3, 150 votes to members of the board)
candidate 4, and 50 votes to
4. The act must be within the
candidate 5.
powers conferred on the Board.

4. Exercise of Corporate Powers 5. Meetings of the Board of

(Asked in 93 and 98)
Directors/Trustees
a. Board as Repository of
a. When? (Sec.53)
Corporate Powers
Regular meetings of directors or
trustees shall be held monthly,
General Rule:
unless the by-laws provide
otherwise.
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
OCS or the members entitled to
Special meetings of the board of vote
directors or trustees may be held b. At a regular or special meeting
at any time upon the call of the after proper notice is given
president or as provided in the by- 7. Executive Committee
laws. A body created by the by-laws and
composed of some members of the
board which, subject to the statutory
b. Where? (Sec. 53) limitations, has all the authority of the
Meetings of directors or trustees of board to the extent provided in the
corporations may be held board resolution or by-laws (See Sec.
anywhere in or outside of the 35).
Philippines, unless the by-laws
provide otherwise.
Limitations:
c. Who May Attend? a. Must be provided for in the by-laws
The members of the Board and composed of not less than 3
themselves; directors in Board members of the board appointed
meetings cannot be represented or by the board.
voted by proxies. b. Must act by a majority vote of all of
its members.
d. Who Presides? (Sec. 54) c. CANNOT act on the following:
The president, unless the by-laws 1. Matters needing stockholder
provide otherwise. approval (Sec. 35);
2. Filling up of board vacancies;
e. Notice Requirements (Sec. 53) 3. Amendment, repeal or adoption
Notice of regular or special of by-laws (Sec. 35);

CORPORATION LAW
meetings stating the date, time 4. Amendment or repeal of any
and place of the meeting must be resolution of the Board which
sent to every director or trustee at by its express terms is not
least one (1) day prior to the amendable or repealable (Sec.
scheduled meeting, unless 35);
otherwise provided by the by-laws. 5. Cash dividend declaration (Sec.
35); and
Notice of meeting is subject to 6. Acts which would render the
waiver BOD powerless and free from
all responsibilities imposed on it
f. Quorum Requirements (Sec. 25) by law (CAMPOS, The
General Rule: Majority of the Corporation Code:
number of directors or trustees as Comments, Notes and
fixed in the articles of Selected Cases).
incorporation.
Exception: Unless the articles of
incorporation or the by-laws C. Corporate Officers
provide for a greater majority, or in
case of election of officers where a 1. Who are Corporate Officers
vote of a majority of all the (POST)
members of the board is needed. a. President – must be a director;
b. Treasurer – may or may not be a
6. Removal of Directors/Trustees director; as a matter of sound
(Asked in 91 and 01) corporate practice, must be a
General Rule: Removal may be with resident and citizen of the Phil (SEC
or without cause. opinion)
Exception: A minority director c. Secretary – need not be a director
elected through cumulative voting unless required by the by-laws;
cannot be removed without cause must be a resident and citizen of
(Sec. 28) the Philippines; and
d. Other officers as may be provided
Other requisites: in the by-laws.
a. Vote of the stockholders
representing at least 2/3 of the
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
Notes: a. Direct or indirect participation in
 Any two (2) or more positions may management (Sec. 6)
be held concurrently by the same b. Voting rights (Sec. 6)
person, EXCEPT that no one shall c. Right to remove directors (Sec. 28)
act as president and secretary or d. Proprietary rights
as president and treasurer at the 1. Right to dividends (Secs. 43
same time. and 71 )
 Additional qualifications of officers 2. Appraisal right (Sec. 81)
may be provided for in the by-laws 3. Right to issuance of stock
(Sec. 47(5)). certificate for fully paid shares
(Sec. 64)
4. Proportionate participation in
2. Disqualifications (Sec. 27) the distribution of assets in
a. Convicted by final judgment of an liquidation (Sec. 122)
offense punishable by 5. Right to transfer of stocks in
imprisonment for a period corporate books (Sec. 63)
exceeding six (6) years 6. Pre-emptive right (Sec. 39)
b. Convicted by final judgment of a e. Right to inspect books and records
violation of the Corporation Code (Sec. 74)
committed within five (5) years f. Right to be furnished with the most
prior to the date of his election or recent financial
appointment statements/financial report (Sec.
75)
g. Right to recover stocks unlawfully
3. Authority of Corporate Officers sold for delinquent payment of
A person dealing with a corporate subscription (Sec. 69)
officer is put on inquiry as to the scope h. Right to file individual suit,

CORPORATION LAW
of the latter’s authority but an representative suit and derivative
innocent person cannot be prejudiced suits
if he had the right to presume under
the circumstances the authority of the
acting officers. 2. Obligations of Stockholders
a. Liability to the corporation for
Associated Bank vs. Pronstroller (2008, unpaid subscription (Sec. 67)
Nachura): b. Liability to the corporation for
interest on unpaid subscription if so
Q: What is the Doctrine of Apparent Authority? required by the by-laws (Sec. 66)
c. Liability for watered stocks (Sec.
A: If a corporation knowingly permits one of its 65)
officers, or any other agent, to act within the
d. Liability for dividends unlawfully
scope of an apparent authority, it holds him out
to the public as possessing the power to do paid (Sec. 31 and 43)
those acts; the corporation will, as against e. Liability for assuming to act as a
anyone who has in good faith dealt with it corporation knowing it to be
through such agent, be estopped from denying without authority (Sec. 21)
the agent’s authority.

CORPORATE CORPORATE 3. Stockholders’ or Members’

OFFICER EMPLOYEE Meeting
Position is provided Employed by the action (Asked in 93)
for in the by-laws or of the managing officer
under the of the corporation General Rule:
Corporation Code
Stockholders or members approval is
RTC has jurisdiction NLRC has jurisdiction in
in case of labor case of labor disputes expressed in a meeting duly called and
dispute held for the purpose.

Exception:
D. Stockholders or Members Referendum or written assent of the
stockholders or members in case of
amendment of AOI (Sec. 16)
1. Rights of Stockholders
(Asked in 96)
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
a. When? (Sec. 50) e. Notice Requirements (Sec. 50)
Regular meetings of stockholders  Regular Meeting—written notice
or members shall be held annually sent to all SH or members at
on a date fixed in the by-laws, or if least 2 weeks prior to the
not so fixed, on any date in April of meeting, unless a different
every year as determined by the period is required by the by-
board of directors or trustees. laws
b. Where?  Special Meeting—written notice
Stock: City or municipality where sent at least 1 week prior to the
the principal office of the meeting, unless otherwise
corporation is located, or, if provided in the by-laws.
practicable, in the principal office  Subject to waiver, expressly or
of the corporation: Provided, Metro impliedly (i.e., attendance
Manila shall be considered a city or despite no notice)
municipality. (Sec. 51)  Failure to give notice would
render a meeting VIODABLE at
Non-stock: Any place even the instance of an absent
outside the place where the stockholder, who was not
principal office is located, in case of notified of the meeting (Board
non-stock corporations (Sec. 93) v. Tan, 1959).

c. Who May Attend and Vote? f. Quorum Requirements (Sec. 52)

 Stockholders, either in person 1. General: stockholders
or by proxy representing majority of the
 Pledgors or mortgagors (Sec. OCS or majority of the
55) members
 Pledgee or mortgagee, IF Exception: the Code or the by-

CORPORATION LAW
expressly given such right by laws provide otherwise
the pledgor or mortgagor in
writing which is recorded on the 2. Where quorum is present at the
corporate books. start of a lawful meeting,
 Executors, administrators, stockholders present cannot
receivers, and other legal without justifiable cause break
representatives duly appointed the quorum by walking out from
by the court, without need of said meeting so as to defeat
any written proxy. the validity of any act proposed
 ALL joint owners of stocks, or and approved by the majority.
any one of them with the (Thus, stockholders can break
consent of ALL the co-owners, the quorum for justifiable
unless there is a written proxy, causes.) (Johnston vs. Johnston,
signed by all the co-owners 1965 CA decision)
 Any one of the joint owners of
shares owned in an "and/or" g. Improperly Held Meetings
capacity or a proxy thereof All proceedings & transactions at
any meeting of the stockholders or
d. Who Presides? members, if within the powers or
 The president, unless the by- authority of the corporation, shall
laws provide otherwise. (Sec. be VALID even if the meeting be
54) improperly held or called, provided
 Any petitioning stockholder or all the stockholders or members of
member upon order of the SEC the corporation are present or duly
when there is no person represented at the meeting. (Sec.
authorized to call a meeting. 51)
Such petitioning stockholder or
member shall preside thereat
until at least a majority of the 4. Corporate Acts Requiring
stockholders or members Approval of ALL Stockholders
present have chosen one of or Members
them as presiding officer. (Sec.
50) General Rule:
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
Vote necessary to approve a particular h. Merger and Consolidation
corporate act as provided in this Code i. Dissolution of the Corporation
shall be deemed to refer only to stocks
with voting rights
5. Other instances requiring
Exceptions: stockholders’ action (voting
Voting and non-voting shares shall be shares only)
entitled to vote in the following cases: a.
a. Amendment of Articles of Declaration of Stock Dividends
Incorporation b.
b. Extend or Shorten Corporate Term Management Contracts (Sec. 44)
c. Increase or Decrease of Capital Any contract whereby a
Stock corporation undertakes to manage
d. Incurring, Creating or Increasing or operate ALL OR SUBSTANTIALLY
Bonded Indebtedness ALL of the business of another
e. Sale, Lease, Mortgage or Other corporation for a period NOT longer
Disposition of Substantially all than 5 years
corporate assets
f. Investment of funds in another  Approval by the BOD
corporation or business or for any  Approval by SH owning at least
purpose other than the primary the majority of the OCS or the
purpose for which it was organized members of BOTH the
Requisites (Asked in 95): managing and the managed
 Approval of majority of the corporation (at meeting duly
board of directors or trustees called)
 Ratification by the stockholders  2/3 vote required of the
representing at least 2/3 of the managed corporation when:

CORPORATION LAW
OCS or the members at a  Where a SH/s
meeting duly called for the representing the same
purpose interest of both the
 Written notice addressed to managing and the managed
each stockholder or member at corporations own or control
his place of residence as shown more than 1/3 of the total
on the books of the corporation OCS entitled to vote of the
 Appraisal right available to managing corporation; or
dissenting stockholders or  Where a majority of the
members members of the BOD of the
managing corporation also
NOTES: constitute a majority of the
 If it is the same purpose or members of the BOD of the
incidental or related to its managed corporation
PRIMARY purpose, the board
can invest the corporate fund c.
WITHOUT the consent of the Fixing the Consideration of No-par
stockholders. No appraisal shares (Sec. 62)
right. d.
 If the investment is in another Fixing the Compensation of Directors
corporation of different (Sec. 30)
business or purpose BUT in
pursuance of the SECONDARY
purpose, the affirmative vote of 6. Limitations on Right to Vote
majority of the board consented a. Non-voting shares are not
by stockholders/ members is entitled to vote except as
required. provided for in the last
 If the investment is OUTSIDE paragraph of Sec. 6.
the purpose/s for which the b. Preferred or redeemable shares
corporation was organized, AOI may be deprived of the right to
must be amended first. vote
c. Fractional shares of stock cannot
g. Adoption, Amendment and Repeal be voted.
of By-Laws (Sec. 48)
REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation
d. Treasury shares have no voting
rights as long as they remain in c. Effect of demand
the treasury. (Sec. 83)
e. No delinquent stock shall be  ALL rights accruing to such
voted (Sec. 71) shares, including voting and
f. A transferee of stock cannot dividend rights, shall be
vote if his transfer is not suspended
registered in the stock and  EXCEPT the right of such
transfer book of the stockholder to receive
corporation. payment of the fair value
thereof
 Immediate RESTORATION of
7. Appraisal Right voting and dividend rights if
(Asked in 99 and 07) the dissenting stockholder is
not paid the value of his
Right to withdraw from the corporation shares within 30 days after
and demand payment of the fair value the award.
of the shares after dissenting from
certain corporate acts involving d. Extinguishment
fundamental changes in corporate of appraisal right (Sec. 84)
structure (Sec. 81).  Withdrawal of demand by
the stockholder WITH
a. Instances of CONSENT of the corporation
appraisal right (Sec. 81)  Abandonment of the
1. Extension or reduction or proposed action
corporate term (Sec. 11)  Disapproval by SEC of the
2. Change in the rights of proposed action

CORPORATION LAW
stockholders, authorize
preferences superior to
those stockholders, or
restrict the right of any
stockholder (Sec. 81)
3. Investment of corporate
funds in another business or
purpose (Sec. 42)
4. Sale or disposal of all or
substantially all assets of
the corporation (Sec. 81)
5. Merger or consolidation
(Sec. 81)

b. Requirements for
exercise of appraisal
right(Secs. 82, 86)
 Stockholder must have
voted against the corporate
act.
 Stockholder must make a
written demand on the
corporation within 30 days
after the vote was taken for
payment of the fair value of
his shares on the said date.
 Stockholder must submit
the certificates to the
corporation for notation
within ten (10) days after
demand for payment.
Otherwise, right to appraisal
may be terminated at the
option of corporation.
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control

Chapter VII. Management G. DERIVATIVE SUITS

and Control
A. DEVICES AFFECTING CONTROL
1. PROXY
2. VOTING TRUST AGREEMENT
3. POOLING AND VOTING AGREEMENTS
B. DUTIES AND LIABILITIES OF DIRECTORS
1. THREE-FOLD DUTIES OF DIRECTORS
2. SELF-DEALING DIRECTOR
3. FIXING THE COMPENSATION OF
DIRECTORS AND OFFICERS
4. INTERLOCKING DIRECTORS
5. SEIZING CORPORATE OPPORTUNITY
6. USING INSIDE INFORMATION
C. DUTIES AND LIABILITIES OF OFFICERS
D. DUTIES OF CONTROLLING
STOCKHOLDERS
E. REMEDIES IN CASE OF MISMANAGEMENT
F. RIGHT OF INSPECTION

A. Devices Affecting Control Stockholders and members may vote in

person or by proxy in all meetings of
General Rule: Extent of control is stockholders or members (Sec. 58).
proportional to the number of shares
owned by the SH 2. Voting Trust Agreement(Asked in
92)
Exceptions: proxy device, voting trust An arrangement created by one or more
agreements, pooling and voting stockholders for the purpose of conferring
agreements, cumulative voting,

CORPORATION LAW
upon a trustee or trustees the right to vote
classification of shares, restriction on and other rights pertaining to the shares
transfer of shares, additional qualifications for a period not exceeding five (5) years at
for directors, founder’s shares, any time (Sec. 59).
management contracts, and unusual
quorum and voting requirements 3. Pooling and Voting Agreements
Agreement between 2 or more
stockholders to vote their shares in the
same way. It does NOT involve a transfer
of stocks but is merely a private
1. Proxy agreement.

PROXY TRUSTEE POOLING AND VOTING

AGREEMENTS
Principal –agent Trustee-beneficiary Consensual
Proxy can’t exceed The only limit to authority is that Merely an agreement to vote in the
delegated authority. the act must be for the benefit of same way.
trustee. (fiduciary obligation)
Valid so long as they are not
fraudulent or do not limit BOD
discretion (except in close
corporations).
Must be in writing Must be in writing and notarized No formalities required
Copy must be filed with the Copy must be filed with SEC and Merely a contract between SHs.
corporation. the corporation.
No transfer. Transfer of legal title to trustee. No transfer.
Proxy exercises voting Trustee exercises absolute voting Owner still exercises voting rights.
rights only for a specific rights continuously, subj only to
mtg (unless otherwise fiduciary duty.
provided)
Proxy cannot be director Trustee can be director Owner can be director.
Revocable at will in any Irrevocable, as long as no Revocable by consent or mutual
manner, EXCEPT if coupled misconduct or fraud. termination. If unilateral
with an interest. termination, liable for damages.
Max of 5 yrs at a time Max of 5 yrs at a time (unless No maximum period.
coterminus with loan)
SEC can pass on validity
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control

B. Duties and Liabilities of a. That the presence of such

Directors director or trustee in the board
meeting in which the contract was
1. Three-fold Duties of Directors approved was not necessary to
constitute a quorum for such meeting;
Duty Violation under Sec. 31 b. That the vote of such
Obedience Willfully and knowingly director or trustee was not necessary
vote for or assent to for the approval of the contract;
patently unlawful acts of c. That the contract is fair and
the corporation reasonable under the circumstances;
Diligence Guilty of gross negligence and
or bad faith in directing the d. That in case of an officer,
affairs of the corporation the contract has been previously
Loyalty Acquire any personal or
authorized by the board of directors.
pecuniary interest in
conflict with their duty as
such directors or trustees Ratification: In case of absence of the
(VILLANUEVA) first two conditions above, contract may
be ratified if:
a. Duty of Obedience a. Stockholders representing at
Directors must direct the affairs of the least 2/3 of the outstanding capital
corporation only in accordance with stock or at least 2/3 of the members in
the purposes for which it was a meeting called for the purpose voted
organized. to ratify the contract.
b. Full disclosure of the adverse
b. Duty of Diligence interest of the directors or trustees
Directors are expected to possess at involved is made at such meeting.
least ordinary knowledge and skill to c. Contract is fair and reasonable

CORPORATION LAW
enable them to make sound business under the circumstances.
decision and to exercise reasonable
care in the management of the
corporation 3. Fixing the Compensation of
Directors and Officers (Sec. 30)
Business Judgment Rule (Asked in 91)

General Rule: Directors cannot be held liable General rule: Directors are only entitled
for mistakes or errors in the exercise of their to per diems, which are reasonable
business judgment if they acted in good
faith, with due care & prudence. Contracts
intra vires entered into by the board of
Exception: When AOI, by-laws, or an
directors are binding upon the corp. & courts advance contract provides for
will not interfere. compensation

Exception: If the contracts are so Western Institute of Technology vs. Salas

unconscionable & oppressive as to amount (1997):
to a wanton destruction of the rights of the
minority. The position of being chairman and Vice-
Chairman, like that of treasurer and
c. Duty of Loyalty secretary, are not considered directorship
Directors should not attempt to positions but officership positions that would
acquire or acquire an interest adverse entitle the occupants to compensation.
to their duties as such directors. Likewise, the limitation placed under Sec. 30
of the Corporation Code that directors
cannot receive compensation exceeding
10% of the net income of the corporation
2. Self-dealing Director (Sec. 32) would not apply to the compensation given
to such positions since it is being given in
General: A contract of the corporation their capacity as officers of the corporation
with one or more of its directors or and not as board members.
trustees is VOIDABLE, at the option of
such corporation.
4. Interlocking directors (Sec. 33)
Exception: Such contract is VALID if all of (Asked in 95 and 96)
the following conditions are present:
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control
representing at least two-thirds (2/3) of
a. If the interests of the interlocking the outstanding capital stock.
director in the corporations are both
substantial (stockholdings exceed 20%
of outstanding capital stock).

General rule: A contract between two

or more corporations having
interlocking directors shall not be Doctrine of Corporate Opportunity
invalidated on that ground alone.
If there is presented to a corporate officer or
Exception: If contract is fraudulent or director a business opportunity which:
a. corp
not fair and reasonable.
oration is financially able to undertake
b. from
b. If the interest of the interlocking its nature, is in line with corporation’s
director in one of the corporations is business and is of practical advantage to
nominal (stockholdings 20% or less) it; and
while substantial in the other, the c. one
contract shall be VALID, if the following in which the corporation has an interest
conditions are met: or a reasonable expectancy.
1. The presence of such director or
By embracing the opportunity, the self-
trustee in the board meeting in
interest of the officer or director will be
which the contract was approved brought into conflict with that of his
was NOT necessary to constitute a corporation. Hence, the law does not permit
quorum for such meeting him to be seize the opportunity even if he
2. That the vote of such director or will use his own funds in the venture.
trustee was not necessary for the (SUNDIANG AND AQUINO)

CORPORATION LAW
approval of the contract
3. That the contract is fair and
reasonable under the 6. Using inside information
circumstances. (Secs. 3.8, 23.2, 27, 61, 71.2,
Securities Regulation Code)
Where (1) and (2) are absent, the (Asked in 94 and 04)
contract can be ratified by the vote of
the stockholders representing at least  The fiduciary position of insiders1,
2/3 of the outstanding capital stock or directors, and officers prohibits them
at least 2/3 of the members in a from using confidential information
meeting called for the purpose voted relating to the business of the
to ratify the contract, provided that: corporation to benefit themselves or
1. full disclosure of the adverse any competitor corporation in which
interest of the directors/trustees they may have a mere substantial
involved is made on such meeting; interest.
2. the contract is fair and reasonable  Since loss and prejudice to the
under the circumstances. corporation is not a requirement for
liability, the corporation has a cause of
action as long as there is unfair use of
5. Seizing corporate opportunity inside information
(Sec. 34)  It is inside information if it is not
(Asked in 01 and 05) generally available to others and is
1
General Rule: Where a director, by virtue “Insider” means: (a) the issuer; (b) a director or
officer (or person performing similar functions) of, or
of his office, acquires for himself a a person controlling the issuer; (c) a person whose
business opportunity which should belong relationship or former relationship to the issuer gives
to the corporation, thereby obtaining or gave him access to material information about the
profits to the prejudice of such issuer or the security that is not generally available
to the public; (d) a government employee, or
corporation, he must account to the latter director, or officer of an exchange, clearing agency
for all such profits by refunding the same and/or self-regulatory organization who has access to
material information about an issuer or a security
Exception: His act has been ratified by a that is not generally available to the public; or (e) a
person who learns such information by a
vote of the stockholders owning or communication from any of the foregoing insiders
(§3.8, Sec Regulations Code)
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control
acquired because of the close corporation, its stockholders or other
relationship of the director or officer of persons;
the corporation  He consents to the issuance of
 General rule: (Majority view) watered stocks or who, having
Directors owe no fiduciary duty to knowledge thereof, does not forthwith
stockholders but they may deal with file with the corporate secretary his
each other at fair and reasonable written objection thereto;
 He agrees to hold himself
terms, as if they were unrelated. No
personally and solidarily liable with the
duty to disclose facts known to the corporation; or
director or officer.  He is made, by a specific
 Exception: provision of law, to personally answer
Special Facts Doctrine: Conceding for his corporate action
the absence of a fiduciary relationship
in the ordinary case, courts
nevertheless hold that where special
circumstances or facts are present
which make it inequitable for the
director to withhold information from
the stockholder, the duty to disclose D. Duties of Controlling
arises and concealment is fraud Stockholders
(Strong vs. Repide, 1909).
 A majority stockholder is
subject to the duty of good faith when
C. Duties and Liabilities of he acts by voting at a stockholders’
meeting with respect to a matter in
Officers
which he has a personal interest
 Controlling stockholders may
The provisions on seizing corporate

CORPORATION LAW
dispose of their shares at any time and
opportunity and disloyalty (Secs. 31 and
at such price as they choose provided
34) shall also apply to corporate officers
they do not pervert these prerogatives
by transferring office to persons who
Note: Members of the BOD who are also
are known as intending to raid the
officers are held to a more stringent
corporate treasury or otherwise
liability because they are in-charge of day-
improperly benefit themselves.
to-day activities (CAMPOS).
 It is fraudulent for a stockholder
to buy from another stockholder
DOCTRINE OF DOCTRINE OF
LIMITED LIABILITY IMMUNITY without disclosing his identity
Shields the corporators Protects a person  Principal stockholders are
from corporate liability acting for and in likewise prohibited from using inside
beyond their agreed behalf of the information in the purchase and sale of
contribution to the corporation from equity security
capital or shareholding being himself
in the corporation. personally liable for
his authorized E. Remedies in Case of
actions
Mismanagement

Tramat Mercantil, Inc. vs. CA, (1994), 1. Receivership

reiterated in Atrium Management Corp. v. 2. Injunction if the act has not been
CA, (2001): done
Liability of Director, Trustee or Officer
3. Dissolution if the abuse amounts to
(Asked in 96 and 97) a ground for quo warranto but the
Solicitor General refuses to act
Personal liability of a corporate director, 4. Derivative suit filed with the RTC
trustee or officer along (although not
necessarily) with the corporation may so
validly attach, as a rule, only when: F. Right of Inspection
 He assents (a) to a patently
unlawful act of the corporation, or (b)
1. Basis of Right
for bad faith or gross negligence in
directing its affairs, or (c) for conflict of As the beneficial owners of the
interest, resulting in damages to the business, the stockholders have the
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control
right to know the financial condition as such and not contrary to the interests of the
and management of corporate affairs. corporation.

2. Records/Books to be Kept (Sec. 5. Remedies when inspection is

74) refused
a. Books that record all business a. Mandamus
transactions of the corporation b. Injunction
which shall include contract, c. Action for damages
memoranda, journals, ledgers, etc; d. File an action under Sec. 144 to
b. Minute book for meetings of the impose a penal offense by fine
SHs/members; and/or imprisonment
c. Minute book for meetings of the
board/trustees;
d. Stock and transfer book.
stock transfer agent - One engaged
principally in the business of
registering transfers of stocks in
behalf of a stock corporation
(licensed by the SEC). The
corporate secretary is the one duly
authorized to make entries in the
stock and transfer book. G. Derivative Suits
(Asked in 93)
Torres et al vs. CA (1997)
Suits of stockholders based on wrongful or
It is the corporate secretary's duty and fraudulent acts of directors or other
obligation to register valid transfers of persons.

CORPORATION LAW
stocks and if said corporate officer refuses to
comply, the transferor-stockholder may 1. Requisites of Derivative Actions
rightfully bring suit to compel performance. a. That the stockholder or member at
the time the acts or transactions
3. Financial Statements (Sec. 75) subject of the action occurred and
Within 10 days from written request, the time the action was filed;
the corporation shall furnish its most b. That the stockholder exerted all
recent financial statement (balance reasonable efforts, and alleges the
sheet and profit or loss statement as of same with particularity in the
last taxable year) complaint, to exhaust all remedies
available under the AOI, by-laws,
4. Requirements for the exercise of laws or rules governing the
the right of inspection (Sec. 74) corporation or partnership to obtain
a. It must be exercised at reasonable the relief he desires.
hours on business days and in the c. That there is no appraisal right
place where the corporation keeps available for the act(s) complained
all its records (i.e., principal office). of; and
b. The stockholder has not improperly d. That the suit is not a nuisance or
used any information he secured harassment suit. (Rule 8, Interim
through any previous examination. Rules of Procedure for Intra-
c. Demand is made in good faith or Corporate Controversies)
for a legitimate purpose. If the
corporation or its officers contest Bitong vs. CA (1998):
such purpose or contend that there
is evil motive behind the The power to sue and be sued in any court
inspection, the burden of proof is by a corporation even as a stockholder is
with the corporation or such officer lodged in the BOD that exercises its
to show the same. corporate powers and not in the president or
officer thereof. But where corporate
Gokongwei vs. SEC (1979): directors are guilty of a breach of trust, not
of mere error of judgment or abuse of
TEST to determine whether the purpose is discretion, and intra-corporate remedy is
legitimate – A legitimate purpose is one which futile or useless, a SH may institute a
is germane to the interests of the stockholder derivative suit in behalf of himself and other
REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control

SHs and for the benefit of the corporation, to

bring about a redress of the wrong inflicted
directly upon the corporation and indirectly
upon the stockholders.

2. Jurisdiction over derivative suits

lies with the RTC (Sec. 5.2,
Securities Regulation Code)

3. Other suits by
stockholders/members
a. Individual Actions – those brought
by the shareholder in his own name
against the corporation when a
wrong is directly inflicted against
him.
b. Representative or Class Actions –
those brought by the stockholder in
behalf of himself and all other
stockholders similarly situated
when a wrong is committed against
a group of stockholders.

CORPORATION LAW
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure

Chapter VIII. Capital Structure General Rule: No share may be deprived

of voting rights
A. CLASSIFICATION OF SHARES Exceptions:
B. SUBSCRIPTION CONTRACT 1. Preferred or
1. STATUS AS A SHAREHOLDER 2. Redeemable shares,
2. TYPES OF SUBSCRIPTION CONTRACT 3. Provided by the Code
3. INTEREST ON UNPAID SUBSCRIPTION
C. PRE-EMPTIVE RIGHT There shall always be a class/series of
1. DEFINITION shares which have a COMPLETE VOTING
2. LIMITATIONS ON THE EXERCISE OF
PREEMPTIVE RIGHT
RIGHTS
3. INTEREST ON UNPAID SUBSCRIPTION
D. CONSIDERATION FOR ISSUANCE OF Doctrine of Equality of Shares
SHARES Each share shall be EQUAL in ALL respects
1. FORMS OF CONSIDERATION to every other share, except as otherwise
2. LIMITATIONS ON CONSIDERATION provided in the AOI and stated in the
E. WATERED STOCKS certificate of stock (Sec. 6)
1. DEFINITION
2. LIABILITY OF DIRECTORS OR 1. Common Shares
OFFICERS
The most common type of shares
F. DELINQUENT SHARES
1. DEFINITION which enjoy no preference but the
2. EFFECTS OF DELINQUENCY owners thereof are entitled to
G. ENFORCEMENT OF PAYMENT management of the corporation and to
1. DELINQUENCY SALE equal pro-rata division of profits after
2. COURT ACTION preference.
3. COLLECTION FROM CASH DIVIDENDS
AND WITHHOLDING OF STOCK 2. Preferred Shares
DIVIDENDS Stocks which are given preference by

CORPORATION LAW
H. RIGHTS AND OBLIGATIONS OF HOLDERS
the issuing corporation in dividends
OF UNPAID BUT NON-DELINQUENT
STOCK and the distribution of assets of the
I. CERTIFICATE OF STOCK corporation in case of liquidation or
J. LOST OR DESTROYED CERTIFICATE such other preferences as may be
K. TENDER OFFER stated in the AOI which are not
violative of the Corporation Code.
Sources of Financing
1. Contributions by stockholders (Equity) Limitations:
2. Loans or advances from creditors a. Preferred shares can only
(Borrrowing) be issued with par value.
3. Profits that the business may earn b. Preferred shares must be
stated in the Articles of
Incorporation and in the certificate
A. Classification of Shares (Sec. 6) of stock.
c. The BOD may fix the terms
Shares of stock of stock corporations may and conditions only when so
be divided into classes or series of shares authorized by the AOI and such
or both. Each class or series of shares terms and conditions shall be
may have rights, privileges or restrictions, effective upon filing a certificate
as stated in the AOI. thereof with the SEC.

Classification of shares: 3. Par value shares

1. Common shares These are shares with a stated value
2. Preferred shares set out in the AOI. This remains the
3. Par value shares same regardless of the profitability of
4. No-par value shares the corporation. This gives rise to
5. Founder’s shares financial stability and is the reason
6. Redeemable shares why banks, trust corporations,
7. Treasury shares insurance companies and building and
8. Convertible shares loan associations must always be
9. Non-voting shares organized with par value shares.
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure
Par value is minimum issue price of a. Redeemable shares may be issued
such share in the AOI which must be only when expressly provided for in
stated in the certificate the AOI (Sec. 8).
4. No-par value shares b. The terms and conditions affecting
These are shares without a stated said shares must be stated both in
value. the AOI and in the certificate (Sec.
8).
Limitations: c. Redeemable shares may be
a. No-par value shares deprived of voting rights in the AOI,
cannot have an issue price of less unless otherwise provided in the
than P5.00 per share (Sec. 6). Code.
b. They shall be d. The corporation is required to
deemed fully paid and non- maintain sinking fund to answer for
assessable and the holders of such redemption price if the corporation
shares shall not be liable to the is required to redeem.
corporation or to its creditors in e. The redeemable shares are
respect thereto (Sec. 6). deemed retired upon redemption
c. Entire consideration unless otherwise provided in the
received by the corporation for its AOI.
no-par value shares shall be f. Unrestricted retained earnings is
treated as capital and shall not be NOT necessary before shares can
available for distribution as be redeemed but there must be
dividends (Sec. 6). sufficient assets to pay the
d. AOI must state the creditors and to answer for
fact that the corporation issues no- operations (Republic Planters
par shares and the number of Banks vs. Agana, 1997).
shares. Redemption cannot be made if

CORPORATION LAW
e. Banks, insurance such redemption will result in
companies, trust companies, insolvency or inability of the
building and loan associations, and corporation to meet its obligations
public utilities cannot issue no-par (SEC Opinion, 24 Aug 1987).
value shares (Sec. 6).
f. The issued price may 7. Treasury Shares
be fixed in the AOI, or by the BOD These are shares which have been
pursuant to authority conferred issued and fully paid for, but
upon it by the AOI, and by majority subsequently re-acquired by the
vote of the outstanding shares in a issuing corporation by purchase,
meeting called for the purpose redemption, donation or through some
(Sec. 62). other lawful means. Such shares may
again be disposed of for a reasonable
5. Founder’s Shares (Sec. 7) price fixed by the BOD (Sec. 9).
 These are shares, classified as such
in the AOI, which are given certain Note: Delinquent stocks, which are
rights and privileges not enjoyed stocks that have not been fully paid,
by the owners of other stocks. (§7) may become treasury stocks upon bid
 Where exclusive right to vote and of the corporation in absence of other
be voted for in the election of bidders (Sec.68).
directors is granted, such right
must be for a limited period not to 8. Convertible shares
exceed 5 years subject to approval A type of preferred stock that the
by SEC. 5 year period shall holder can exchange for a
commence from date of approval predetermined number of common
by SEC. (Ibid) shares at a specified time.

6. Redeemable Shares 9. Non-voting shares (Sec. 6)

These are shares which permit the General Rule: Non-Voting Shares are
issuing corporation to redeem or not entitled to vote.
purchase its own shares (Sec. 8).
Exceptions:
Limitations: a. Amendment of the AOI
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure
b. Adoption and amendment of by- It is entered into after the
laws incorporation.
c. Sale, lease, exchange, other
disposition of all or substantially all 3. Interest on unpaid subscription
of the corporate property
d. Incurring, creating or increasing General Rule: Stockholder is NOT liable
bonded indebtedness to pay interest on his unpaid subscription.
e. Increase or decrease of capital
stock Exception: Such rate as may be fixed in
f. Merger and consolidation the by-laws or the legal rate (Sec. 66).
g. Investment of corporate funds in
another corporation or business Notes:
h. Dissolution of the corporation Transfer for consideration of treasury
B. Subscription Contract shares is a sale by the corporation (not
subscription). A transfer of previously
Sec. 60. Subscription contract. Any contract issued shares by a stockholder to a third
for the acquisition of unissued stock in an person is a sale. Transfer of unissued
existing corporation or a corporation still to shares is subscription.
be formed shall be deemed a subscription
contract within the meaning of this Title, Shareholders are not creditors of the
notwithstanding the fact that the parties
corporation with respect to their
refer to it as a purchase or some other
contract. shareholdings thereto and the principle of
compensation or set-off has no
1. Status as Shareholder application.
A person becomes a shareholder the
moment he: Subscription contract is NOT required to
be in writing.

CORPORATION LAW
a. enters into a subscription contract
with an existing corporation (he is
a stockholder upon acceptance of
the corporation of his offer to C. Pre-emptive Right (Sec. 39, 102)
subscribe whether the (Asked in 99, 01 and 04)
consideration is fully paid or not).
b. purchases treasury shares from the 1. Definition
corporation Pre-emptive right is an option privilege
c. acquires shares from existing of an existing stockholder to subscribe
shareholders by sale or any other to a proportionate part of shares
contract (SUNDIANG AND subsequently issued by the
AQUINO) corporation before the same can be
disposed of in favor of others; this right
2. Types of subscription contracts includes all issues and disposition of
a. Pre-incorporation subscription shares of any class
It is a subscription for shares of
stock of a corporation still to be SHs of a stock corporation shall enjoy
formed. pre-emptive right to subscribe to ALL
 Irrevocable for a period of at ISSUES OR DISPOSITIONS of shares of
least 6 months from the date of any class, in proportion to their
subscription, or after the respective shareholdings.
submission of the AOI to the
SEC. 2. Limitations to exercise of pre-
 Revocable only when all of the emptive right (Sec. 39):
other subscribers consent to a. Such pre-emptive
the revocation, or when the right shall not extend to shares to
incorporation fails to be issued in compliance with laws
materialize within six (6) requiring stock offerings or
months or within a longer minimum stock ownership by the
period as my be stipulated in public;
the contract of subscription. b. It shall NOT
extend to shares to be issued in
b. Post-incorporation subscription good faith with the approval of the
stockholders representing two-
thirds (2/3) of the outstanding
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure
capital stock, in exchange for
property needed for corporate Notes:
purposes or in payment of a Promissory notes and future
previously contracted debt service may be used as
c. It shall not take consideration provided that
effect if denied in the AOI or an certificates of stock will be issued
amendment thereto. only after actual encashment of
promissory note or performance of
3. Remedies in case of unwarranted such services.
denial:
a. Injunction Same consideration applies for the
b. Mandamus issuance of bonds by the
The suit should be individual and corporation.
not derivative because the wrong
done is to the stockholders
E. Watered Stocks
individually
c. SEC can cancel shares if the third
1. Definition
party is not innocent
These are shares issued as fully paid-
up when in fact the consideration
D. Consideration for issuance of agreed to and accepted by the
shares directors of the corporation was
something known to be much less than
1. Forms of Consideration (Sec. 62) the par value or issued value of the
a. Actual cash shares. These include the following
b. Property, tangible or (See Sec. 65):
intangible, actually received by the a. Issued without consideration
corporation and necessary or

CORPORATION LAW
(bonus share)
convenient for its use and lawful b. Issued as fully paid when the
purposes at a fair valuation equal corporation has received less sum
to the par or issued value of the of money than its par or issued
stock issued value (discounted share)
c. Issued for consideration other than
Valuation is initially determined by actual cash (i.e., property or
the incorporators or the board of services), the fair valuation of
directors, subject to approval by which is less than its par or issued
the SEC. value
d. Issue stock dividend when there
Note: Property should not be are no sufficient retained earnings
encumbered. Otherwise, it would or surplus to justify it.
impair the consideration
Note:
c. Labor performed for or Subsequent increase in the value of
services actually rendered to the the property used in paying the stock
corporation; does not do away with the water in the
d. Previously incurred stock. The existence of such water is
indebtedness of the corporation; determined at the time of issuance of
e. Amounts transferred from the stock.
unrestricted retained earnings to
stated capital (declaration of stock 2. Liability of directors or officers
dividends); and Any director or officer of a corporation
f. Outstanding shares consenting to the issuance of stocks or
exchanged for stocks in the event who, having knowledge thereof, does
of reclassification or conversion. not forthwith express his objection in
writing and file the same with the
2. Limitations on Consideration: corporate secretary shall be
a. Stocks shall not be issued for a SOLIDARILY liable with the stockholder
consideration less than the par or concerned to the corporation and its
issued price thereof. creditors for the difference in value
b. Shares of stock shall not be issued (Sec. 65).
in exchange for promissory notes
or future service.
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure

F. Delinquent Shares much the SH has paid. Such

stocks will pertain to the
1. Definition corporation as fully paid
These are shares for which the treasury stocks.
corresponding subscription or balance
remains unpaid after a grace period of b. Irregularities in the
30 days from the date specified in the delinquency sale (Sec. 69)
contract of subscription or from the 1. Action to recover delinquent
date stated in the call made by the stock must be on the ground of
BOD. irregularity or defect in the
notice of sale.
2. Effects of stock delinquency 2. Party seeking to recover must
a. No delinquent stock shall be voted first pay or tender to the party
for or be entitled to vote or to holding the stock the sum for
representation at any stockholers’ which the same was sold, with
meeting interest from the date of sale at
b. The holder thereof shall NOT be the legal rate.
entitled to any of the rights of a 3. The action shall be commenced
stockholder except the right to within six months from the date
dividends. of sale.
c. Such shares shall be subject to
delinquency sale.

G. Enforcement of Payment 2. Court Action (Sec. 70)

(Asked in 97) General Rule: A valid call is a
prerequisite to liability where court
1. Delinquency sale action is the remedy chosen. (Da Silva

CORPORATION LAW
a. Procedure for delinquency sale v. Aboitiz, 1923).
(Sec. 68)
1. Call for payment made by the Exceptions:
BOD. a. The subscription contract
2. Notice of call served on each specifies a date of payment.
stockholder. b. The corp. has become insolvent
3. Notice of delinquency issued by All unpaid subscriptions are
the BOD upon failure of the immediately recoverable in a court
stockholder to pay within 30 action by the assignee in
days from date specified. insolvency (Velasco vs. Poizat,
4. Service of notice of delinquency 1918)
on the non-paying subscriber,
PLUS publication in a Defense: The SH may contend that
newspaper of general the subscription was induced by
circulation in the province or fraudulent misrepresentation, provided
city where the principal office of he is not barred by ratification, or
the corporation is located, once guilty of laches.
a week for two (2) consecutive
weeks. 3. Collection from cash dividends and
Note: withholding of stock dividends
Requirements on notice and CASH DIVIDENDS due on delinquent
publication are mandatory. stock shall first be applied to the
Lacking such requirements, the unpaid balance on the subscription
stockholder may question the plus costs and expenses (Sec. 43).
sale as provided under Sec. 69.
STOCK DIVIDENDS shall be withheld
5. Public auction - the highest from the delinquent stockholder until
bidder is one who is willing to his unpaid subscription is fully paid
pay the balance of the (Sec. 43).
subscription for the least
number of shares. If there are
no bidders, the corporation
must bid for the whole number
of shares regardless of how
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure

H. Rights and Obligations of the practice of the corporation to issue

Holders of Unpaid Non- certificates of stock to its individual SHs
Delinquent Stock for unpaid shares of stock and to give full
voting power to shares fully paid.
Sec. 72.Rights of unpaid shares. Holders of
subscribed shares not fully paid which are
not delinquent shall have ALL the rights of a J. Lost or Destroyed Certificate
stockholder. (Sec. 73)

1. Holders of unpaid subscribed shares Procedure for re-issuance in case of loss,

which are not delinquent shall have stolen or destroyed certificates:
ALL the rights of a stockholder (Sec. 1. Registered owner to file an affidavit of
72) loss with the corporation.
2. Such holders shall not be charged with 2. Publication of notice of loss in a
interest unless otherwise stipulated newspaper of general circulation
(Sec. 66). published in the place where the
3. No certificate of stock shall be issued corporation has its principal office,
to such holders until the full amount of once a week for 3 consecutive weeks
their subscription, together with the at the expense of the owner of the
interest and expenses if any, has been certificate of stock
paid (Sec. 64) 3. Cancellation of the certificate in the
4. No shares of stock against which the books of the corporation and issuance
corporation holds any unpaid claim of new certificates, after the expiration
shall be transferable in the books of of 1 year from the date of the last
the corporation (Sec. 63). publication and there is no contest.
The right to make such contest shall
Notes: be barred after the expiration of the

CORPORATION LAW
A subscription contract is unconditional one-year period.
(i.e., obligation to pay must not be 4. Issuance of new certificates before 1
subject to any contingencies) and year period if the registered owner
indivisible (as to the amount and files a bond and there is no pending
transferability—Fua Cun v. Summers, contest regarding the ownership of
1923). Hence, if the subscriber paid said certificates.
20% of his subscription, he is not
entitled to the issuance of certificates Note: Except in cases of fraud, bad
corresponding to 20% of the shares. faith, or negligence on the part of the
corporation and its officers, no action
Unpaid claim refers to any unpaid may be brought against the
subscription and not to any corporation which shall have issued
indebtedness which a subscriber may certificates of stock in lieu of those
owe the corporation rising from any lost, stolen or destroyed pursuant to
other transaction (China Banking Corp. the above procedure.
vs. CA, 1997).

K. Tender Offer (Asked in 02)

I. Certificate of Stock
It is a publicly announced intention of a
A certificate of stock is the best evidence person acting alone or in concert with
of the rights and status of a SH (not a other persons to acquire equity securities
condition precedent to the acquisition of of a public company (Rule 19, Amended
such rights). IRR of The Securities Regulation Code
published on 13 Feb 2004).
General rule: The entire subscription
must be paid first before the certificates of Instances where tender offer is required to
stock can be issued. Partial payments are be made:
to be applied pro rata to each share of 1. Any person or group of persons acting
stock subscribed. (Nava v Peers Mktg in concert intends to acquire 35% or
Corp and Fua Cun v Summers, 1923). more of equity shares in a public
company.
Exception: In the Baltazar v Lingayen 2. Any person or group of persons acting
Gulf Electric Power Company case, it was in concert intends to acquire 35% or
REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure
more of equity shares in a public
company in one or more transactions
within a period of 12 months.
3. Any acquisition of even less than 35%
results in ownership of over 51% of the
total outstanding equity securities of a
public company.

CORPORATION LAW
REVIEWER IN COMMERCIAL LAW Chapter IX. Dividends and Purchase of Corporation of Its Own Shares

Chapter IX. Dividends and each of its SHs

Liability to corporate creditors
Purchase of Corporation of When declared and Since it is still part of
Its Own Shares paid becomes corporate property,
absolute property of may be reached by
A. FORMS OF DIVIDENDS the SH and cannot corporate creditors
B. OTHER CLASSES OF DIVIDENDS be reached by
C. SOURCE OF DIVIDENDS corporation’s
D. DECLARATION OF DIVIDENDS creditors in the
E. TREASURY SHARES absence of fraud
1. DEFINITION
2. INSTANCES WHEN CORPORATION
MAY ACQUIRE ITS OWN SHARES B. Other Classes of Dividends
3. REMEDIES IN CASE OF IMPROPER
PURCHASE 1. Optional Dividend—dividend which
gives the stockholder an option to
A. Forms of Dividends receive cash or stock dividend.
2. Composite Dividend—dividend
1. Cash partly in cash and partly in stocks.
2. Property 3. Preferred or preferential dividend—
3. Stock dividend payable to one class of SHs in
Stock dividends are distributions of the priority to that to be paid to another
corporation’s own stocks to stockhold- class.
ers. It involves a transfer of earnings to 4. Cumulative Dividend—dividend
capital stock and does not represent which is contracted to be paid at a
income on the part of the SH. certain rate at stated times and if net
earnings at any dividend period are
Limitations on the issue of stock NOT sufficient to pay the contract

CORPORATION LAW
dividends: dividend, it is to be made out of
a. There must be unissued subsequent net earnings.
shares of the corporation. If there 5. Scrip dividend—dividend in the
are none, there must be an form of a writing or certificate issued
increase in capital stock first, which to a SH entitling him to the payment of
requires an amendment of the AOI. money, stock or other benefit at some
b. There must be future time inasmuch as the
unrestricted retained earnings. corporation at the time such dividends
c. Stock dividends should are declared does not have sufficient
not be issued to non-stockholders cash.
even for services rendered (Nielson 6. Bond Dividend—dividend
v. Lepanto Consolidated Mines, distributed in bonds of the corporation
1968). to the SHs
7. Liquidating Dividends—dividends
Cash Dividends Stock Dividends which are actually distributions of the
Authority to declare assets of the corporation upon
Declared only by the Declared by the dissolution.
board of directors at board with the
its discretion concurrence of the
SHs representing at
least 2/3 of the OCS C. Source of Dividends
at a regular/special
meeting Unrestricted retained earnings (URE)
Disbursement of funds are the undistributed earnings of the
Involves a Doesn’t involve any corporation which have not been allocated
disbursement to the disbursement of for any managerial, contractual or legal
SHs of accumulated funds purposes and which are free for
earnings
distribution to the SHs as dividends.
Corporate capital
Does not increase Corporate Capital is
the corporate capital increased Should there be any capital deficit,
Creation of debts subsequent profits, if any, during
Its declaration No debt is created by succeeding periods must 1st be applied to
creates a debt from its declaration cover the deficit, and only the profits
the corporation to
REVIEWER IN COMMERCIAL LAW Chapter IX. Dividends and Purchase of Corporation of Its Own Shares
remaining after eliminating the deficit, can Q: Can dividends be distributed out of
be considered as URE. Revaluation or Re-appraisal Surplus?

General Rule: Dividends cannot be A: No. Revaluation surplus or the increase in

declared out of capital since the trust fund the value of assets cannot be considered
earning of the corporation. They are by nature
doctrine will be violated.
subject to fluctuations
Exception: the SEC allows distribution of the
portion of the increase in the value of fixed
TRUST FUND DOCTRINE assets as a result of revaluation after the
(Asked in 07) assets are depreciated and the depreciation is
charged against the operation provided:
Boman Environmental Development 1. the company has sufficient income from the
Corporation vs. CA (1988): operations from which the depreciation on the
appraisal increase is charged
Trust Fund Doctrine means that the capital 2. the company has no deficit at the time the
stock, properties and other assets of a depreciation on the reappraisal increase was
corporation are regarded as equity in trust for charged to operations
the payment of corporate creditors. Stated 3. such depreciation on the appraisal increase
simply, the trust fund doctrine states that all previously charged to operations is not erased
funds received by the corporation in payment or impaired by subsequent losses, otherwise,
of the shares of stock shall be held in trust for only that portion not impaired by subsequent
the corporate creditors and other stockholders losses is available for dividend (SEC Opinion
of the corporation. Under such doctrine no dated March 18, 1992 and August 22, 1991)
fund shall be used to buy back the issued
shares of stock except only in instances Q: Can dividends be distributed on Gains on
specifically allowed by the Corporation Code. sale of real property?

A: Yes. Gains on sale of the corporation’s real

CORPORATION LAW
Exceptions: properties are part of retained earnings.
1. liquidating dividends Retained earnings include not only earnings
2. dividends from investments in wasting realized from the ordinary course of business of
asset corporation the corp but also transactions not associated
Wasting asset corporation is a with but incidental to or necessary in keeping
corporation solely or principally the business for which the corporation was
engaged in the exploitation of wasting organized.
assets to distribute the net proceeds
HOWEVER, there must be surplus profits. The
derived from exploitation of their
corporation cannot distribute gains from the
holdings i.e. mines, oil well, patents, sale as dividends if the remaining assets after
leaseholds distribution is less than the amount of legal or
stated capital and liabilities (SEC Opinion dated
Q: Can dividends be distributed out of PAID-IN May 9, 1990)
SURPLUS?

A: NO. Paid-in surplus is the difference

between the par value and the issued value or D. Declaration of Dividends
selling price of the shares, and are not (Asked in 91, 01 and 05)
considered profits earned in the conduct of the
business of the corporation. They are  WHO?
considered part of capital (SEC Opinions April 1. Board of Directors alone—cash,
18, 1988) property dividends.
2. Board of Directors with approval of
Exception: The SEC allows the distribution of stockholders representing not less
paid-in surplus if:
than 2/3 of the OCS—stock
1. They be declared only as stock
dividends dividends.
2. No creditor is prejudiced
3. No resulting impairment of capital  CAN BOD BE COMPELLED TO
(SEC Opinion dated October 19, 1989) DECLARE?
Applicable also to reduction surplus—those General Rule: Declaration of
arising from the reduction of the par value of dividends is discretionary upon the
the issued shares of stocks (SEC Opinion dated BOD. It is payable only when there are
August 8, 1991) profits earned by the corporation and
even if there are existing profits, the
BOD has discretion to determine WON
REVIEWER IN COMMERCIAL LAW Chapter IX. Dividends and Purchase of Corporation of Its Own Shares
it should be declared (Republic E. Treasury Shares
Planters Bank v Agana, 1997) (Asked in 05)

Exceptions: 1. Definition
1. When the decision is tainted Treasury shares are shares of stocks
w/ bad faith, fraud or gross which have been issued and fully paid
negligence for, but subsequently reacquired by
2. If the court finds, upon the issuing corporation by purchase,
complaint of a SH, that profits were redemption, donation or through some
accumulated in excess of 100% of other lawful means (Sec. 9).
the corporation’s paid-in capital
stock, it may order the corporation Notes:
to distribute dividends Treasury shares may be issued as
property dividends provided that the
Exceptions to the exception: retained earnings has not been
a. when justified subsequently impaired by losses.
by definite corporate expansion
projects or programs approved by Treasury shares do not have voting
the board of directors; or rights so long as they remain as such
b. when the (Sec. 57).
corporation is prohibited under any
loan agreement with any financial
institution or creditor, whether 2. Instances when corporation may
local or foreign, from declaring acquire its own shares
dividends without its/his consent, a. A corporation must
and such consent has not yet been have unrestricted retained
secured; or earnings in acquiring own shares

CORPORATION LAW
c. when it can be except:
clearly shown that such retention is 1. shares are acquired in the
necessary under special redemption of redeemable
circumstances obtaining in the shares (Sec. 8)
corporation, such as when there is 2. shares are re-acquired to
need for special reserve for effect a decrease in capital
probable contingencies (Sec. 43). stock approved by the SEC
(Sec. 38)
 WHEN RIGHT TO DIVIDEND VESTS? 3. shares are reacquired by a
General rule: Upon lawful declaration close corporation pursuant to
by the BOD, dividends become a debt the order of the SEC acting to
owing to the SH. No revocation can be arbitrate a deadlock (Sec. 104)
made. b. The acquisition
must be for a legitimate purpose,
Exceptions: such as the following:
1. Dividends are revocable 1. To eliminate fractional
if NOT yet announced or shares arising out of stock
communicated to the stockholders. dividends
2. Stock dividends even if 2. To collect or compromise an
already declared may be revoked indebtedness to the
prior to actual issuance since these corporation, arising out of
are not distributions but merely unpaid subscription, in a
represent changes in the capital delinquency sale, and to
structure. purchase delinquent shares
sold during said sale
Note: 3. To pay dissenting or
Right to dividends vests upon withdrawing stockholders
declaration so whoever owns the stock entitled to payment for their
at such time also owns the dividends. shares under the provisions of
Subsequent transfer of stock would not this Code (appraisal right, Sec.
carry with it right to dividends UNLESS 81).
agreed upon by the parties.
3. Remedies in case of Improper
Purchase
REVIEWER IN COMMERCIAL LAW Chapter IX. Dividends and Purchase of Corporation of Its Own Shares
a. Creditors prejudiced by the
repurchase can go after the selling
SHs to recover what was paid to
them.
b. Directors who were negligent or in
BF for approving the repurchase
can be held personally responsible.
c. Prejudiced SH can also go after
BOD who approved purchase
(when their dividends are reduced,
remaining assets can’t cover debts,
etc).

CORPORATION LAW
REVIEWER IN COMMERCIAL LAW Chapter X. Transfer of Shares

Chapter X. Transfer of Shares Endorsement is a mandatory requirement of

(Asked in 96, 97, 01 and 04) law for an effective transfer.

A. MANNER OF TRANSFER B. Registration of Transfer

B. REGISTRATION OF TRANSFER
1. EFFECTS OF a. Effects of lack
LACK OF REGISTRATION of registration
2. REMEDY IF
a.
REGISTRATION IS REFUSED
C. RESTRICTIONS ON TRANSFER Transferee cannot vote
1. VALIDITY OF b.
RESTRICTIONS Transferee cannot be voted for
2. PRESUMPTIO c.
NS Transferee cannot prevail over rights
D. UNAUTHORIZED TRANSFERS of a subsequent attaching creditor
1. CERTIFICATES INDORSED IN BLANK (Uson v. Diosomito, 1935).
2. FORGED TRANSFERS d.
E. COLLATERAL TRANSFERS
Transferee not entitled to dividends.
e.
A. Manner of Transfer Stockholder of record has the right to
participate in meetings.
Shares of stock represented by certificates
may be transferred as follows (Sec. 63): Notes:
1. Delivery of the certificate and Until registration is accomplished, the
2. Indorsement by the owner or his transfer though valid between the
attorney-in-fact or other person legally parties CANNOT be effective against
authorized to make the transfer the corporation.
3. Recording of the transfer in the books

CORPORATION LAW
of the corporation to be VALID against Nevertheless, the stockholder can still
third parties transfer his interest in the corporation
by way of a Deed of Assignment.
If not represented by certificates:
1. Shares may be transferred by b. Remedy if
means of a deed of assignment. registration is refused
2. Such transfer is duly recorded Transferee may petition the court for a
in the books of the corporation. writ of mandamus to compel the
corporation to do so (Price v. Sulu
Rural Bank of Salinas vs. CA (1992) Development Corp., 1933)
Is registration in corporate books necessary for
transfer of shares of stock?
NO. Shares of stock are personal property and
may be transferred by delivery. Registration in C. Restrictions on Transfer
corporate books is not necessary. The
corporation may not impose any restriction on General Rule:
such transfer. The right of transferee/assignee Shares of stock so issued are personal
to have stocks transferred to his name is property and may be transferred (Sec.
inherent right, duty of the corporation to 63). (FREE TRANSFERABILITY OF SHARES)
register the transfer is ministerial.
Exception:
Razon vs. IAC (1992): In CLOSE corporations, restrictions on the
How to transfer Shares of Stock? right to transfer shares may be provided in
a) Shares of stock is transferred the AOI, by-laws and certificates (Sec. 98).
by delivery and endorsement of the stock
certificate
b) Such mode of transfer is not
D. Unauthorized Transfers
complied with in this case
c) In the books of the corporation, 1. Certificates indorsed in blank –
Chudian is still the owner of the stocks. He (Theory of Quasi-Negotiability) where
was even elected member of the board the stockholder indorses his certificate
which proves that he is a stockholder in blank in such a manner as to clothe
d) One who claims ownership whoever may be in possession of it
should show that the same was transferred with apparent authority to deal with
to him in accord with the valid mode of the shares as the latter’s own, he will
transfer. This petitioner failed to show.
REVIEWER IN COMMERCIAL LAW Chapter X. Transfer of Shares
be estopped from claiming the shares
as against a bonafide purchaser. Attachment or mortgage of shares of stock
(Santamaria v. Hongkong & Shanghai need not be registered in the corporation’s
Bank, 1951) stock and transfer books as a chattel mortgage
over shares of stock doesn’t involve a ‘transfer
or shares’ and only absolute transfers of shares
2. Forged transfers – if the corporation
are required to be recorded in the stock and
should issue a new certificate pursuant transfer book to have force and effect as
to a forged transfer, it incurs no against 3rd persons.
liability to the person in whose favor it
issued it and may demand its return
for cancellation.

But with respect to a subsequent

purchaser in good faith and for value,
the corporation is estopped from
denying the validity of the newly
issued certificate because by issuing
such, it has represented that the
person named therein is a stockholder
of the corporation.

An exception is when the recognition

of the original and new subscriber will
result to an overissue of shares. In
such case, the new SH would now have
the right to damages against the
corporation and the latter against

CORPORATION LAW
those who made false representation
(Hodges vs. Lezama, 1965).

E. Collateral Transfers

Shares of stock being personal property

may be the subject matter of pledge or
chattel mortgage. Such collateral trans-
fers need NOT be registered since Sec. 63
of the Code applies only to absolute trans-
fer (Monserrat vs. Ceron, 1933). Thus, the
registration in the corporate books of
pledges and chattel mortgages of shares
CANNOT have any legal effect.

Lim Tay v CA (1998):

Q: Will pledged shares automatically entitle

the pledgee to record transfer in the books?

A: NO. Corporate secretary cannot be com-

pelled to record transfer. The duty of a corpo-
rate secretary to record transfers of stocks is
ministerial. However, he cannot be compelled
to do so when the transferees title to said
shares has no prima facie validity or is uncer-
tain. Mandamus will not issue to establish a
right but only to enforce one already estab-
lished. Pledgee failed to establish a legal right.
He is not owner of the shares without foreclo-
sure and purchase at auction. He is merely a
pledgee.

Chempil Export & Import Corp vs. CA (1995)

REVIEWER IN COMMERCIAL LAW Chapter XI. Amendments of Corporate Charter

Chapter XI. Amendments of 3. By increasing the number of

Corporate Charter shares and increasing the par
value
A. GENERAL
b.
B. SPECIFIC Requirements
1. INCREASE IN CAPITAL STOCK 1. Approval by a majority vote of
2. DECREASE OF CAPITAL STOCK the board of directors
3. CHANGE IN CORPORATE NAME 2. Ratification of stockholders
C. GROUNDS FOR DISAPPROVING representing 2/3 of the OCS at
AMENDMENT a meeting duly called for the
purpose
A. General 3. Filing with the SEC a certificate
of increase of capital stock
1. Proce 4. Filing with the SEC a
dure Treasurer’s Affidavit showing
Majority vote of directors or trustees and that 25% of the increased
the vote or written assent of the capital stock (should be
stockholders representing 2/3 of increase in capital stock) is
outstanding capital stock or 2/3 or subscribed and 25% thereof
members of non-stock corporations (Sec. paid.
16). 5. Issuance by the SEC of a
certificate of filing. From and
2. Effecti after such issuance, the capital
vity stock shall stand increased.
Upon approval of SEC or from the date of
filing if not acted upon by SEC within 6 Note: The above requirements also
months from the date of filing provided apply in reduction of capital stock.

CORPORATION LAW
that delay cannot be attributed to the
corporation. c.
Appraisal Right
3. Congress Appraisal right may be exercised
The passage of statutes amending the when the increase in capital stock
Corporation Code or special laws may has the effect of creating shares
result in the amendment of the AOI with preferences superior to those
provided that no vested rights are of existing ones (Sec. 81).
impaired (Sec. 145).
2. Reduction of capital stock
a. Ways of Decreasing Capital
B. Specific Amendments Stock
1. By decreasing the number of
General Rule: Amendment of the AOI shares and retaining the par
may be approved by the required number value
of stockholders/members by mere 2. By decreasing the par value of
referendum or written assent. (Sec. 16) existing shares without
changing the number of shares
Exceptions: Stockholders’/members’
approval of the amendment should be 3. By decreasing the number of
made in a meeting duly called for the shares and decreasing the par
purpose in the following instances: value

1. Increase of capital stock (Sec. b. Limitation on the reduction

38) (Asked in 99 and 01) No decrease of the capital stock
a. shall be approved by the
Ways of Increasing Capital Stock Commission if its effect shall
1. By increasing the number of prejudice the rights of corporate
shares and retaining the par creditors (Sec. 38).
value
2. By increasing the par value of c.
existing shares without Appraisal Right
changing the number of shares Appraisal right may be exercised if
the reduction of capital stock has
REVIEWER IN COMMERCIAL LAW Chapter XI. Amendments of Corporate Charter
the effect of altering the rights of
any stockholder or class of stock-
holders (Sec. 81).

d.
Exception to the Trust Fund Doc-
trine
Except by decrease of capital stock
and as otherwise allowed by this
Code, no corporation shall distrib-
ute any of the assets or property
except upon lawful dissolution and
after payment of all its debts and li-
abilities (Sec. 122).

3. Change in corporate term

(Sec. 37)
a. Requirements
1. Approved by a majority vote of
the board of directors or
trustees and
2. Ratified at a meeting by the
stockholders representing at
least two-thirds (2/3) of the
outstanding capital stock or by
at least two-thirds (2/3) of the
members in case of non-stock

CORPORATION LAW
corporations.
b. Appraisal right may be exercised
(Sec. 81)

C. Grounds for disapproving

amendment (Sec. 17) (NUTO)

1. Amendment is not
substantially with the form
prescribed
2. Purpose patently
unconstitutional, illegal, immoral,
contrary to government rules and
regulations
3. Treasurer’s Affidavit
concerning the amount of capital
stock subscribed and/or paid is
false
4. Percentage requirement of
ownership by Filipino citizens as
required by the Constitution not
complied with

Note:
The SEC shall give the incorporators a
reasonable time within which to correct or
modify the objectionable portions of the
articles or amendment.
REVIEWER IN COMMERCIAL LAW Chapter XII. Dissolution

Chapter XII. Dissolution directors/trustees and approved by

(Asked in 02) the stockholders representing at
least 2/3s of the OCS or 2/3 of
A. VOLUNTARY DISSOLUTION members.
1. EXPIRATION OF TERM e. A copy of the resolution shall be
2. VOLUNTARY DISSOLUTION WHEN NO certified by the majority of the
CREDITORS ARE AFFECTED directors or trustees and
3. VOLUNTARY DISSOLUTION WHEN countersigned by the secretary.
CREDITORS ARE AFFECTED f. The signed and countersigned copy
4. DISSOLUTION BY MINORITY IN CLOSE will be filed with the SEC and the
CORPORATIONS
5. FAILURE TO ORGANIZE; CESSATION
latter will issue the certificate of
OF BUSINESS FOR 5 YEARS dissolution.
B. INVOLUNTARY DISSOLUTION
1. REVOCATION OF CERTIFICATE OF Note:
REGISTRATION Thus, except for the expiration of its
2. QUO WARRANTO PROCEEDINGS term , no dissolution can be effective
C. EFFECTS OF DISSOLUTION without some act of the state
1. LOSS OF JURIDICAL PERSONALITY (Daguhoy Enterprises v. Ponce, 1954)
2. EXECUTORY CONTRACTS
3. WINDING UP AND LIQUIDATION
3. Voluntary dissolution when
D. THE TRUST FUND DOCTRINE AND THE
DISTRIBUTION OF ASSETS creditors are affected (Sec. 119)
a. Approval of the
Dissolution of a corporation is the stockholders representing at least
extinguishment of its franchise and the 2/3 of the OCS or 2/3 of members
termination of its corporate existence. in a meeting called for that
purpose.
b. Filing of a petition

CORPORATION LAW
with the SEC signed by majority of
A. Voluntary Dissolution
directors or trustees or other
officers having the management of
1. Expiration of term its affairs verified by the President
 Once the period expires, the or Secretary or Director. Claims
corporation is automatically and demands must be stated in the
dissolved without any other petition.
proceeding and it cannot thereafter c. If the petition is
be considered a de facto sufficient in form and substance,
corporation. the SEC shall issue an order fixing
 A voluntary dissolution may be a hearing date for objections.
effected by amending the AOI. d. A copy of the order
Upon approval of the amended AOI shall be published at least once a
or the expiration of the shortened week for 3 consecutive weeks in a
term, as the case may be, the newspaper of general circulation,
corporation shall be deemed or if there is no newspaper in the
dissolved without any further city or municipality of the principal
proceedings (Sec. 120). office, posting for 3 consecutive
weeks in 3 public places is
2. Voluntary dissolution when no sufficient.
creditors are affected (Sec. 118) e. Objections must be
a. A meeting must be held on the call filed no less than 30 days nor more
of directors or trustees. than 60 days after the entry of the
b. Notice of the meeting should be Order.
given to the stockholders by f. After the expiration
personal delivery or registered mail of the time to file objections, a
at least 30 days prior to the hearing shall be conducted upon
meeting. prior 5 day notice to hear the
c. The notice of meeting should also objections.
be published for 3 consecutive g. Judgment shall be
weeks in a newspaper published in rendered dissolving the corporation
the place. and directing the disposition of
d. The resolution to dissolve must be assets. The judgment may include
approved by the majority of the appointment of a receiver.
REVIEWER IN COMMERCIAL LAW Chapter XII. Dissolution
(Sec. 121)
4. Dissolution by minority in close A corporation may be dissolved by the
corporations (Sec. 105) SEC, upon a verified complaint and
Any stockholder of a close corporation after proper notice and hearing, on the
may, by written petition to the SEC, following grounds (Sec. 6, par i, PD
compel the dissolution of such 902-A):
corporation: a. Fraud in procuring its certificate of
a. registration
whenever any of the acts of the b. Serious misrepresentation as to
directors, officers or those in what the corporation can or is
control of the corporation is illegal, doing to the great prejudice of or
or fraudulent, or dishonest, or damage to the general public
oppressive or unfairly prejudicial to c. Refusal to comply or defiance of
the corporation or any stockholder any lawful order of the Commission
b. restraining commission of acts
whenever corporate assets are being which would amount to a grave
misapplied or wasted. violation of its franchise
d. Continuous inoperation for a period
5. Failure to organize and commence of at least five years
business; cessation of business for e. Failure to file by-laws within the
5 years (Sec. 22) required period
a. Failure to formally f. Failure to file required reports in
organize and commence the appropriate forms as determined
transaction of its business or by the Commission within the
construction of its works within two prescribed period
years - its corporate powers shall g. Other grounds
cease and the corporation is

CORPORATION LAW
deemed dissolved Other grounds:
 Transacting a. Violation by the corporation of any
business implies a continuity of provision of the Corporation Code
acts or dealings in the (Sec. 144 BP 68)
accomplishment of the purpose b. In case of a deadlock in a close
for which the corporation was corporation, and the SEC deems it
formed (Mentholatum vs. proper to order the dissolution of
Mangaliman, 1946) the corporation as the only
 Formal practical solution to the dispute
organization includes not only (Sec. 104 BP 68)
the adoption of the by-laws but
also the establishment of the 2. Quo
body which will administer the Warranto Proceedings (Sec. 2,
affairs of the corporation and Rule 66 ROC)
exercise its powers Grounds:
b. Failure to operate a. When it has offended against a
for at least 5 consecutive years provision of an Act for its creation
after commencement of business - and renewal
ground for suspension or b. When it has forfeited its privileges
revocation of its corporate and franchises by nonuser
franchise or certificate of c. When it has committed or omitted
incorporation. an act which amounts to a
surrender of its corporate rights,
Note: privileges or franchise
The corporation may show that the d. When it has misused a right,
failure to commence its business or privilege, or franchise conferred
to continuously operate is due to upon it by law or when it has
causes beyond its control (Sec. 22). exercised a right, privilege or
franchise in contravention of law

B. Involuntary Dissolution
C. Effects of Dissolution
1. Revoc
ation of certificate of registration 1. Loss of juridical personality
REVIEWER IN COMMERCIAL LAW Chapter XII. Dissolution
 Corporation loses its juridical legal interest vests in the
personality and can no longer trustees, and the beneficial
lawfully continue its business interest in the stockholders,
except for the purpose of winding members, creditors or other
up. For this purpose, it may sue persons in interest.
and be sued, although upon the 3. By management committee or
expiration of three years, all rehabilitation receiver
pending actions by or against the However, the mere
dissolved corporation abate appointment of a receiver,
(National Abaca Corp. vs. Pore, without anything more does not
1961) result in the dissolution of the
 It cannot even be a de facto corporation nor bar it from the
corporation, hence subject to existence of its corporate rights
collateral attack (Buenaflor vs. (Leyte Asphalt & Mineral Oil Co.
Camarines Sur Industry Corp., Ltd., v. Block Johnston &
1960) Breenbrawn, 1928)
 It cannot enter into new contracts
which would have the effect of b.
continuing the business (Cebu Port Period of Liquidation
Labor Union vs. States Marine Co, General Rule: A corporation
1957) whose corporate existence has
been terminated shall be continued
2. Executory contracts for 3 years after the time when it
General Rule: Executory contracts would have been so dissolved.
remain valid and existing. Under Sec. Exceptions:
145 of the Code, no right or remedy in  In case the corporate assets are
favor of or against the corporation, its conveyed to a trustee or a

CORPORATION LAW
stockholders, members, directors, receiver appointed by the SEC,
trustees, or officers shall be removed the three year limitation will
or impaired by the subsequent NOT apply (Sumera v. Valencia,
dissolution of said corporation.) 1939)
Exception: Contracts for personal  Even if no trustee or receiver
services such as employment was appointed and the 3-year
contracts of officers and employees period has already expired, the
where the dissolution is involuntary or following were considered as
the result of merger or consolidation. trustees:
1. Counsel of record with
3. Winding Up and Liquidation (Asked respect to the matter in
in 97, 00 and 01) litigation (Gelano vs. CA,
Liquidation is the process by which all 1981)
the assets of the corporation are 2. BOD itself may be deemed
converted into liquid assets (cash) in “trustees” by legal
order to facilitate the payment of implication to complete the
obligations to creditors, and the corporate liquidation
remaining balance if any is to be (Clemente vs. CA, 1995)
distributed to the stockholders. It is a 3. Those with pecuniary
proceeding in rem. interest in the assets, such
as stockholders and
a. creditors (Ibid)
Modes of Liquidation
1. By Board of Directors c.
2. Through a trustee to whom the Escheat
properties are conveyed Any asset distributable to any
From and after any such creditor/SH/member who is
conveyance by the corporation unknown or cannot be found shall
of its property in trust for the be escheated to the city or
benefit of its municipality where such assets are
SH/members/creditors and located.
others in interest, all interest
which the corporation had in Phil. Veterans Bank v. Employees Union (2001):
the property terminates, the
REVIEWER IN COMMERCIAL LAW Chapter XII. Dissolution
Q: What is the difference between Liquidation
and Rehabilitation?

A: Liquidation is the winding up of a

corporation so that assets are distributed to
those entitled to receive them. It is the process
of reducing assets to cash, discharging
liabilities and dividing surplus or loss. On the
other hand, rehabilitation contemplates a
continuance of corporate life and activities in
an effort to restore and reinstate the
corporation to its former position of successful
operation and solvency. Both cannot be
undertaken at the same time.

D. The Trust Fund Doctrine and

the Distribution of Assets

General rule: A corporation CANNOT

distribute any of its assets or property
except upon lawful dissolution and only
after payment of all its debts and liabilities
(last par., Sec. 122).

Exceptions:
1. Decrease in capital stock
resulting in a surplus which can then

CORPORATION LAW
be distributed to stockholders provided
no creditors are prejudiced (Sec. 122)
2. As otherwise allowed by
the Code:
a. Deadlock in a close
corporation (Sec. 104)
b. Redemption of redeemable
shares (Sec. 8)

Note: The TRUST FUND DOCTRINE is

embodied in the last paragraph of Sec.
122. As held in Phil. Trust Co. vs. Rivera
(1923), the capital stock, property and
other assets of the corporation are
regarded as equity in trust for the
payment of the corporate creditors. The
subscribed capital stock of the corporation
is a trust fund for the payment of the
debts of the corporation which the
creditors have the right to look up to
satisfy their credits. Corporation may not
dissipate this and the creditors may sue
stockholders directly for the unpaid
subscription.
REVIEWER IN COMMERCIAL LAW Chapter XIII. Corporate Combinations

Chapter XIII. Corporate 5. Submission of Four (4) copies of the

Combinations Articles of Merger or Articles of
Consolidation to the SEC for approval.
A. DEFINITION
6. If necessary, the SEC shall set a
B. PROCEDURE hearing, notifying all corporations
C. EFFECTS OF MERGER/CONSOLIDATION concerned at least 2 weeks before.
D. EFFECTIVITY OF MERGER/ 7. Issuance of certificate of merger or
CONSOLIDATION consolidation.
E. DE FACTO MERGER
F. SALE OF ALL OR SUBSTANTIALLY ALL
ASSETS C. Effects of Merger or
Consolidation (Sec. 80)
A. Definition
1. The constituent corporations shall
Merger – a corporation absorbs the other become a single corporation.
and remains in existence while the others 2. The separate existence of the
are dissolved. constituents shall cease, except that of
the surviving or the consolidated
Consolidation – a new corporation is corporation.
created, and consolidating corporations 3. The surviving or the consolidated
are extinguished corporation shall possess all the rights,
privileges, immunities and powers and
B. Procedure (Secs. 76-79) shall be subject to all the duties and
liabilities of a corporation.
1. The board of each corporation shall 4. The surviving or the consolidated
draw up a plan of merger or corporation shall possess all rights,
consolidation setting forth: privileges, immunities and franchises

CORPORATION LAW
a. Names of the corporation involved; of each constituent corporation and
b. Terms and mode of carrying it; the properties shall be deemed
c. Statement of changes, if any, in the transferred to the surviving or
present articles of the surviving consolidated corporation.
corporation to be formed in the 5. All liabilities of the constituents shall
case of consolidation. pertain to the surviving or the
2. Plan for merger or consolidation shall consolidated corporation.
be approved by majority vote of each 6. Any claim, action or proceeding
of the board of the concerned pending by or against any of the
corporations at separate meetings, constituent corporations may be
and a vote of 2/3 of the members or of prosecuted by or against the surviving
stockholders representing 2/3 of the or consolidated corporation; and
outstanding capital stock. 7. The rights of the creditors or lien upon
3. Any amendment to the plan must be the property of any of each constituent
approved by the majority vote of the corporation shall not be impaired by
board members or trustees of the such merger or consolidation.
constituent corporations and
affirmative vote of 2/3 of the
outstanding capital stock or members. D. Effectivity of Merger or
4. Articles of Merger or Articles of Consolidation
Consolidation shall be executed by (Asked in 99)
each of the constituent corporations,
signed by the president or vice- Upon issuance of the certificate of merger
president, and certified by the or consolidation, such merger or
secretary or assistant secretary setting consolidation shall become effective (Sec.
forth: 79).
a. Plan of merger or consolidation;
b. For stock corporation, the number PNB v. Andrada Electric & Engr. Co., Inc.
of shares outstanding; for non- (2002): Merger or consolidation does not
stock, the number of members; become effective by mere agreement of
c. As to each corporation, number of the constituent corporations. The approval
shares or members voting for and of the SEC is required.
against such plan respectively.
REVIEWER IN COMMERCIAL LAW Chapter XIII. Corporate Combinations

E. De Facto Merger 4. Distinctions between Sale of

Assets and Merger/ Consolidation
One corporation acquires all or
substantially all of the properties of Merger and Sale of Assets
another corporation in exchange for Consolidation
shares of stock of the acquiring 1.Sale of assets is 1. Merger/consolidation is
corporation. The acquiring corporation always involved not always involved
would end-up with the business enterprise 2.There is 2.Purchasing corporation
of the selling corporation whereas the automatic is not generally liable
latter would end up with basically its assumption of for the debts and
liabilities liabilities of the selling
remaining assets being the shares of stock
corporation
of the acquiring corporation and may then
3.There is 3.The selling corporation
distribute it as liquidating dividend to its continuance of ordinarily contemplates
stockholders. (VILLANUEVA) the enterprise a liquidation of the
and of the enterprise
stockholders
F. Sale of All or Substantially All 4.Title to the 4.Transfer of title is by
Assets assets are virtue of contract
(Asked in 96) transferred by
operation of law
5.The constituent 5.The selling corporation
1. Requisites corporations are is not dissolved by the
a. Approval of majority of the automatically mere transfer of all its
directors or trustees dissolved property
b. Assent of stockholders
representing 2/3 of OCS or 2/3 of
members in a meeting duly called
for the purpose after written notice

CORPORATION LAW
c. Compliance with the formalities of
the Bulk Sales Law.

2. When covered
A sale or other disposition shall be
deemed to cover substantially all
corporate property and assets if
thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose
for which it was incorporated Sec 40).

3. Effect on creditors

General Rule: Where one sells or

otherwise transfers ALL of its assets to
another corporation, the latter is not
liable for the debts and liabilities of the
transferor.

Exceptions:
a. Purchaser agrees to assume such
debts;
b. Transaction amounts to merger or
consolidation;
c. Purchasing corporation is merely a
continuation of selling corporation;
and
d. Fraudulent transactions (Edward J.
Nell Co. v. Pacific Farms Inc.,
1965).
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations

Chapter XIV. Foreign (Mentholatum vs. Mangaliman,

Corporations 1941)
2. Contract test
A. DEFINITION OF TERMS
A foreign corporation is doing business
B. TESTS OF “DOING BUSINESS IN THE in the Philippines if the contracts
PHILIPPINES” entered into by the foreign corporation
C. “DOING BUSINESS UNDER THE FOREIGN or by an agent acting under the control
INVESTMENT ACT and direction of the foreign corporation
D. JURISPRUDENTIAL RULES ON “NOT are consummated in the Philippines
DOING BUSINESS IN THE PHILIPPINES” (Pacific vegetable Oil vs. Singson,
E. REQUISITES FOR THE ISSUANCE OF 1955).
LICENSE TO DO BUSINESS
F. POWER TO SUE AND BE SUED OF
FOREIGN CORPORATIONS
G. LAWS APPLICABLE ON FOREIGN C. “Doing Business” Under the
CORPORATIONS Foreign Investment Act of 1991
(RA 7042)
A. Definition of Terms (Asked in 98 and 02)

 Foreign Corporation 1. Doing Business

One formed, organized, or existing under a. Soliciting orders, service contracts,
any laws other than those of the or opening offices;
Philippines and whose laws allow Filipino b. Appointing representatives,
citizens and corporations to do business in distributors domiciled in the
its own country or state (Sec. 123). Philippines or who stay for a period
or periods totalling 180 days or
 Resident Agent more;
c. Participating in the management,

CORPORATION LAW
An individual, who must be of good moral
character and of sound financial standing, supervision, or control of any
residing in the Philippines, or a domestic domestic business, firm, entity, or
corporation lawfully transacting business corporation in the Philippines;
in the Philippines, designated in a written d. Any act or acts that imply a
power of attorney by a foreign corporation continuity of commercial dealings
authorized to do business in the or arrangements, and contemplate
Philippines, on whom any summons and to some extent the performance of
other legal processes may be served in all acts or works r the exercise of
actions or other legal proceedings against some functions normally incident
the foreign corporation (Sec. 127-128). to and in progressive prosecution
of , the purpose and object of its
organization.
B. Tests of “Doing Business in the
Philippines” 2. Not Doing Business
(Asked in 98 and 02) a. Mere investment as shareholder
and exercise of rights as investor;
1. Twin Characterization Test b. Having a nominee director or
a. Under the Continuity Test, doing officer to represent its interest in
business implies a continuity of the corporation;
commercial dealings and c. Appointing a representative or
arrangements, and contemplates distributor which transacts
to some extent the performance of business in its own name and for
acts or works or the exercise of its own account.
some functions normally incident
to and in progressive prosecution
of the purpose and object of the D. Jurisprudential Rules on “Not
organization. Doing Business in the
b. Under the Substance Test, a Philippines”
foreign corporation is doing
business in the country if it is 1. Products manufactured off-shore and
continuing the body or substance returned back to foreign corporation
of the enterprise of business for (Agilent Tech. Singapore Ltd. v.
which it was organized
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations
Integrated Silicon Tech. Phils. Corp., its successors or assigns, shall be permitted to
2004) maintain or intervene in any action, suit, or
proceeding in any court or administrative
2. Single isolated transaction (Marshall- agency of the Philippines; but such corporation
may be sued or proceeded against before
Wells Co. v. Henry Eiser & Co, 1924).
Philippine courts or administrative tribunals on
Multiple transactions are still any valid cause of action recognized under
considered a single transaction where Philippine laws.
there are constantly failed attempts in Instances when Unlicensed Foreign
complying with the same by one of the Corporations can Sue:
contracting parties (Antam 1. Isolated transactions;
Consolidated v. CA, 1986). 2. Action to protect good name, goodwill,
and reputation of a foreign
3. Trademark
corporation;
protection; foreign corporations not
3. The subject contracts provide that
doing business are merely protecting
Philippine courts will be the venue to
their property rights (General
controversies;
Garments v. Director of Patents, 1971).
4. A license subsequently granted
4. A foreign firm which does enables the foreign corporation to sue
business through middlemen acting on on contracts executed before the grant
their own names shall not be deemed of the license;
doing business in the Philippines. (Le 5. Recovery of misdelivered property;
Chemise Lacoste v. Fernandez, 1984). 6. Where the unlicensed foreign
corporation has a domestic
corporation.
E. Requisites for the Issuance of
Agilent Tech. Singapore Ltd. vs. Integrated
License to Do Business Silicon Tech. Phils. Corp., (2004):

CORPORATION LAW
1. The foreign corporation should file a
The principles on the right of a foreign
verified application containing and
corporation to bring suit in Philippines:
together with the following (See Sec. 1. if a foreign corporation does business in the
125): Philippines without a license, it cannot sue
a. Designated resident agent who will before Philippine courts;
receive summons and notices for 2. if a foreign corporation is not doing business
in the Philippines, it needs no license to sue
the corporation; a special power of before Philippine courts on an isolated
attorney should also be submitted transaction or on a cause of action entirely
for such purpose independent of any business transaction;
b. An agreement that if it ceases to 3. if a foreign corporation does business in the
Philippines without a license, a Philippine
transact business or if there is no citizen or entity which has contracted with
more resident agent, summons said corporation may be estopped from
shall then be served through the challenging the foreign corporation’s
SEC corporate personality in a suit brought before
Philippine courts; and
c. Oath of Reciprocity stating that the 4. If a foreign corporation does business in the
foreign corporation’s country Philippines with the required license, it can
allows Filipino citizens and sue before Philippine courts on any
corporations to do business in said transaction.
country
2. Within 60 G. Laws applicable on foreign
days from issuance of license, the corporation
corporation should deposit at least
P100,000 (cash, property, bond) for General Rule: Any foreign corporation
the benefit of creditors subject to lawfully doing business in the Philippines
further deposit every six months (See shall be bound by all laws, rules and
Sec. 126). regulations applicable to domestic
corporations of the same class.
F. Power to Sue and Be Sued of
Foreign Corporations Exceptions: Foreign law shall govern on
the following matters:
Sec. 133. Doing business without a 1. Creation, formation, organization or
license. No foreign corporation transacting dissolution of corporations or
business in the Philippines without a license, or
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations
2. Chapter XV. the option to
responsibilities, or duties of Close purchase the
stockholders, members, or officers of shares.
corporations to each other or to the
Corporations
corporation. 3. The stocks
A. REQUIREMEN cannot be
TS listed in the
B. CHARACTERI stock
STICS
C. RESTRICTION
exchange nor
S ON be publicly
TRANSFER offered.
OF SHARES
1. VALIDITY 4. The
OF corporation
RESTRIC must NOT be
TIONS mining
2. PRESUMP company,
TIONS stock
D. DEADLOCKS exchange, oil
1. REQUISIT
company,
ES
2. POWER bank,
OF SEC insurance
E. DISTINCTION company,
S BETWEEN public utility,
CLOSE AND educational
REGULAR institution or
CORPORATIO other
NS

CORPORATION LAW
corporation
declared to
A. Requireme be vested
nts for with public
Close interest.
Corporatio
ns (Sec. 96) 5. At least 2/3 of
its voting
1. The AOI must stock or
state that the voting rights
number of must NOT be
stockholders owned or
shall not controlled by
exceed 20. another
corporation
2. The AOI must which is not a
contain close
restriction on corporation.
the transfer of
issued stocks
(which must B. Characteris
appear in the tics
AOI, by-laws
and 1. The
certificate of stockholders
stock) themselves
can directly
Restriction on manage the
the transfer corporation
must NOT be and perform
more onerous the functions
than granting of directors
the existing without need
SH or of election
corporation (Sec. 97):
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations
a. When of stock; tion, the presumed
they otherwise, purchaser to have
manage, the same or trans- notice of
stockhold shall not feree is the
ers are be binding CONCLU- restriction
liable as on any SIVELY , he can
directors; purchaser presumed prove the
b. There is thereof in to have contrary.
no need to good faith. notice of
call a b. Restric- the re-
meeting tions shall striction, D. Deadlocks
to elect not be provided (Asked in 95):
directors; more this ap-
c. The onerous pears in 1. Requisites
stockhold than the AOI. a. The
ers are granting b. Where a directors
liable for the exist- conclusive or
tort. ing stock- presumpti stockhold
holders or on of ers are so
2. Despite the the corpo- notice divided
presence of ration the arises, the respecting
the requisites, option to corporatio the
the purchase n may, at managem
corporation the shares its option, ent of the
shall not be within a refuse to corporatio
deemed a specified register n's
close period. Af- the business

CORPORATION LAW
corporation if ter expira- transfer, and affairs
at least 2/3 of tion of unless b. The
the voting said pe- (1) all the votes
stocks or riod and stock- required
voting rights upon fail- hold- for any
belong to a ure of the ers corporate
corporation existing have action
which is not a stockhold- con- cannot be
close ers or the sented obtained
corporation corpora- to the that the
(Sec. 96). tion to trans- business
C. Restriction purchase fer, or and affairs
s on said (2) the AOI of the
Transfer of shares, has corporatio
Shares the trans- been n can no
ferring prop- longer be
1. Validity of stock- erly conducted
Restrictions holder amend to the
(AO) (Sec. may sell ed to advantage
98) his shares re- of the
a. Restric- to any move stockhold
tions must third per- the re- ers
appear in son. stric- generally
the arti- tion.
cles of 2. Presump- c. If it 2. Powers of
incorpo- tions (Sec. appears in the SEC in
ration 99): the case of
and in a. If the certificate, Deadlock in
the by- stock cer- but NOT Close
laws as tificate CONSPICU Corporation
well as in CONSPIC- OUSLY, s
the cer- UOUSLY then a. Cancel or
tificate shows the although alter any
restric- he may be provision
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations
in the ed CLOSE CORPORATIONS R
articles of retained
provisions of this Code
incorporat earnings. The stockholders of the corporation shall be
ion or e. Appoint a subject to all liabilities of directors.
bylaws provisiona  Officers
 The articles of incorporation may likewise
b. Cancel, l director Director
provide that all officers or employees or that
alter or f. Dissolve specified officers or employees shall be
enjoin any the elected or appointed by the stockholders,
resolution corporatio instead of by the board of directors.
of the n
corporatio g. Granting 2. Meetings  The dir
n such other individua
c. Direct or relief as  Unless the by-laws provide otherwise, any lawful m
prohibit the action by the directors of a close corporation discussio
without a meeting shall nevertheless be them. C
any act of circumsta
deemed valid if: board re
the nces may except w
corporatio warrant. 1. Before or after such action is taken, board h
n written consent thereto is signed by all contract
d. Require the directors; or
the  Absence
purchase 2. All the stockholders have actual or not ratif
at their implied knowledge of the action and meeting
fair value make no prompt objection thereto in ratificati
writing; or
of shares
 Express
of any 3. The directors are accustomed to take Resoluti
stockhold informal action with the express or
er either implied acquiescence of all the  Implied

CORPORATION LAW
by any stockholders; or of bene
stockhold having k
er or by 4. All the directors have express or implied
the knowledge of the action in question and  Failure t
corporatio none of them makes prompt objection voidable
thereto in writing.
n
 Attendan
regardless  If a director's meeting is held without proper will be d
of the call or notice, an action taken therein within
availabilit the corporate powers is deemed ratified by a  All pro
y of director who failed to attend, unless he transact
unrestrict promptly files his written objection with the or mem
secretary of the corporation after having of the c
E. Distinctions Between Close and knowledge thereof. meeting
all the
Regular Corporations corporat
the mee
CLOSE CORPORATIONS
1. Management / Board Authority 3. Voting / Quorum  No shar
 There can be classification of directors into except P
one or more classes, each of whom may be  The AOI may provide for a classification of otherwis
voted for and elected solely by a particular directors into one or more classes, each of
 There sh
class of stock; and which may be voted for and elected solely
which ha
by a particular class of stock.
 The articles of incorporation of a close  EACH S
corporation may provide that the business of RESPECT
the corporation shall be managed by the otherwis
stockholders of the corporation rather than  The AOI may provide for a greater quorum or
voting requirements in meetings of  For Boar
by a board of directors. So long as this
stockholders or directors than those provide
provision continues in effect:
provided in this Code.  For stoc
No meeting of stockholders need be called
different
to elect directors
Unless the context clearly requires 4. Pre-emptive Right  Limitatio
otherwise, the stockholders of the right:
 The pre-emptive right of stockholders in
corporation shall be deemed to be
close corporations shall extend to all stock to a. Such p
directors for the purpose of applying the
be issued, including reissuance of treasury shares
REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations

CLOSE CORPORATIONS
shares, whether for money, property or
personal services, or in payment of
corporate debts, unless the articles of
incorporation provide otherwise.

5. Transferability
 Restrictions on the right to transfer shares
must appear in the AI and in the by-laws as
well as in the certificate of stock otherwise
the same shall not be binding on any
purchaser thereof in good faith
6. Withdrawal Right

 Any stockholder of a close corporation may,

for any reason, compel the said corporation
to purchase his shares at their fair value,
which shall not be less than their par or
issued value, when the corporation has
sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock

CORPORATION LAW
 Any stockholder of a close corporation may,
by written petition to the SEC, compel the
dissolution of such corporation whenever:
Any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation
or any stockholder, or
Corporate assets are being misapplied or
wasted.
REVIEWER IN COMMERCIAL LAW Chapter XVI. Non-Stock Corporations

Chapter XVI. Non-Stock then organize a stock corporation.

Corporations However, there is a resulting new
corporation (SEC Opinion, May 13,
A. PURPOSES
1992)
B. RIGHTS OF MEMBERS
C. CONVERSION 3. A stock corporation may be converted
D. ORDER OF DISTRIBUTION OF ASSETS into a non-stock corporation by mere
UPON DISSOLUTION amendment provided all the
requirements are complied with. Its
A. Purposes of Non-stock rights and liabilities will remain.
Corporations

1. Charitable D. Order of Distribution of Assets

2. Religious Upon Dissolution of Close
3. Educational Corporation
4. Professional
5. Cultural 1. All its creditors shall be paid.
6. Fraternal 2. Assets held subject to return on
7. Literary dissolution shall be delivered back to
8. Scientific the givers.
9. Social 3. Assets held for charitable, religious
10. Civic services purposes, etc., without a condition for
11. Similar purposes, such as chambers or their return on dissolution, shall be
combinations trade, industry or conveyed to one or more organizations
agriculture engaged in similar activities as
dissolved corporation
4. All other assets shall be distributed to

CORPORATION LAW
B. Rights of Members members, as provided in the AOI pr by-
laws.
1. Right to Vote
A member is entitled to one vote.
However, such right may be
broadened, limited, or denied in the
AOI or by-laws (Sec. 89).

2. Right to Transfer Membership

General Rule: A member cannot
transfer his membership (and the
rights arising therefrom) in a non-stock
corporation.
Exception: AOI or by-laws may
provide for their transferability (Sec.
90).

C. Conversion

1. A non-stock corporation cannot be

converted into a stock corporation
through mere amendment of its AOI.
This would violate Sec. 87 which
prohibits distribution of income as
dividends to members. Giving the
members shares is tantamount to
distribution of its assets or income
(SEC Opinion, March 20, 1995).

2. A non-stock corporation can be

converted into a stock corporation only
if the members dissolve it first and
REVIEWER IN COMMERCIAL LAW Chapter XVII. Special Corporations

Chapter XVII. Special

Corporations
E. EDUCATIONAL CORPORATIONS
F. RELIGIOUS CORPORATIONS
1. CORP
ORATION SOLE
2. RELI
GIOUS SOCIETIES

A. Educational Corporations

 Stock or non-stock corporations

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.

B. Religious Corporations

CORPORATION LAW
1. Corporation Sole (Asked in 04)
 A special form of corporation,
usually associated with clergy and
consists of one person only and his
successors, who are incorporated
by law to give some legal
capacities and advantages.
 A corporation sole does not have
any nationality but for purposes of
applying our nationalizations laws,
nationality is determined by the
nationality of the members (Roman
Catholic Apostolic Church vs. Land
Registration Commission, 1957).
 A registered corporation sole can
acquire land if its members
constitute at least 60% Filipinos
(SEC Opinion, 8 August 1994).

2. Religious Societies
Non-stock corporation formed by a
religious society, group, diocese,
synod, or district of any religious
denomination, sect, or church after
getting the approval of 2/3 of its
members.
REVIEWER IN COMMERCIAL LAW Chapter XVII. Special Corporations
- end of Corporation Law -

CORPORATION LAW