San Beda College of Law: Corporation Code

San Beda College of Law 85
MEMORY AID IN COMMERCIAL LAW
CORPORATION CODE
(B.P. Blg. 68, effective May 1, 1980)
I. GENERAL PROVISIONS liabilities. (Creese vs. CA, 93

CORPORATION SCRA 483)
F An artificial being created by 2. Right to bring actions – may
operation of law having the right of bring civil and criminal actions in
succession, and the powers, attributes its own name in the same
and properties expressly authorized by manner as natural persons. (Art.
law and incident to its existence. (Sec. 46, Civil Code)
2) 3. Right to acquire and possess
property – property conveyed to
ATTRIBUTES OF A CORPORATION or acquired by the corporation is
1. It is an artificial being. in law the property of the
2. It is created by operation of law. corporation itself as a distinct
3. It enjoys the right of succession. legal entity and not that of the
4. It has the powers, attributes and stockholders or members. (Art.
properties expressly authorized by 44(3), Civil Code)
law or incident to its existence. 4. Acquisition of court of
jurisdiction – service of summons
THEORIES ON THE FORMATION OF A may be made on the president,
CORPORATION: general manager, corporate
1. Concession Theory – espouses that a secretary, treasurer or in-house
corporation is an artificial creature counsel. (Sec. 11, Rule 14, Rules
without any existence until it has of Court).
received the imprimatur of the state 5. Changes in individual
acting according to law, through the membership – remains
SEC. (Tayag vs. Benguet Consolidated, unchanged and unaffected in its
Inc., 26 SCRA 242) identity by changes in its
2. Theory of corporate enterprise or individual membership. (The
economic unit – espouses that the Corporation Code of the
corporation is not merely an artificial Philippines Annotated, Hector
being, but more of an aggregation of de Leon, 2002 ed.)
persons doing business, or an underlying 6. Entitlement to constitutional
business unit. (Philippine Corporate guaranties:
Law, Cesar Villanueva, 2001 ed.) a. Due process (Albert vs.
3. Genossenschaft Theory – treats a University Publishing, 13
corporation as “ the reality of the group SCRA 84)
as a social and legal entity, independent b. Equal protection of the law
of state recognition and concession”. (Smith, Bell & Co. vs.
(Tayag vs. Benguet Consolidated, Inc., Natividad, 40 Phil. 136)
26 SCRA 242) c. Protection against
unreasonable searches and
DOCTRINE OF SEPARATE PERSONALITY seizures. (Stonehill vs.
F A corporation has a juridical Diokno, 20 SCRA 383)
personality separate and distinct from F A corporation is not
that of its stockholders or members. entitled to invoke the right
F Used for purposes of convenience and against self-incrimination.
to subserve the ends of justice. (Bataan Shipyard vs. PCGG)
F Consequences/significance: 7.Liability for torts – a corporation
1. Liability for acts or contracts – is liable whenever a tortuous act
obligations incurred by a is committed by an officer or
corporation, acting through its agent under the express
authorized agents are its sole direction or authority of the
stockholders or members acting
COMMERCIAL LAW COMMITTEE

&CHAIRPERSON: Garny Luisa Alegre & ASST. CHAIRPERSON:Jayson O’S Ramos &EDP: Beatrix I. Ramos &SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario (Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula (Banking Laws);
Robespierre CU (Law on Intellectual Property)
86 2005 CENTRALIZED BAR OPERATIONS
as a body, or, generally, from the affected transaction

the directors as the governing and the mere proof of
body. (PNB vs. CA, 83 SCRA 237) control of the
8. A corporation is not entitled to corporation by itself
moral damages because it has no would not authorize
feelings, no emotions, no senses. piercing.
(ABS-CBN vs. Court of Appeals) b. The main action should
9. Liability for Crimes – since a seek for the
corporation is a mere legal enforcement of
fiction, it cannot be held liable pecuniary claims
for a crime committed by its pertaining to the
officers, since it does not have corporation against
the essential element of malice; corporate officers or
in such case the responsible stockholders.
officers would be criminally 2. Alter Ego Cases – when the
liable. (People vs. Tan Boon corporate entity is merely a farce
Kong, 54 Phil.607) since the corporation is an alter ego,
business conduit or instrumentality
DOCTRINE OF PIERCING THE VEIL OF of a person or another corporation.
CORPORATE ENTITY F Rules:
F Requires the court to see through the a. It applies because of the
protective shroud which exempts its direct violation of a central
stockholders from liabilities that they corporate law principle of
ordinarily would be subject to, or separating ownership from
distinguishes a corporation from a management.
seemingly separate one, were it not for b. If the stockholders do not
the existing corporate fiction. (Lim vs. respect the separate entity,
CA, 323 SCRA 102) others cannot also be
F Rules: (Philippine Corporate Law, expected to be bound by the
Cesar Villanueva, 2001 ed.) separate juridical entity.
1. has only a res judicata effect c. Applies even when there are
2. to prevent wrong or fraud and no monetary claims sought
not available for other purposes to be enforced.
3. judicial prerogative only 3. Equity cases – when piercing the
4. must be with necessary and corporate fiction is necessary to
with factual basis achieve justice or equity.
? When directors and officers are
unable to compensate a party for a INSTRUMENTALITY / ALTER EGO RULE
personal obligation, it is far-fetched to F Where one corporation is so organized
allege that a corporation is perpetuating and controlled and its affairs are
fraud or promoting injustice, and conducted so that it is, in fact, a mere
thereby could be held liable therefor by instrumentality or adjunct of the other,
piercing the corporate veil. (Francisco the fiction of the corporate entity of the
Motors, Inc. vs. CA, G.R. No. 100812, “instrumentality” may be disregarded.
June 25, 1999) F Requisites:
1. There must be control, not mere
3 CLASSES OF PIERCING (Philippine majority or complete stock
Corporate Law, Cesar Villanueva, 2001 control, but complete
ed.) domination, not only of finances,
but of policy, and business
1. Fraud Cases – when a corporation is practice in respect to the
used as a cloak to cover fraud, or to transaction attacked so that the
do wrong. corporate entity as to this
F Rules: transaction had, at that time, no
a. There must have been separate mind, will or existence
fraud or evil motive in of its own (control);
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda Tolentino(VC-Acads), Jennifer
Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law), Charmaine Torres (Taxation Law),
Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal
Ethics)
2. Such control must have been be in the name of

used by the defendant to commit the corporation
fraud or wrong, to perpetrate
the violation of a statutory or 7. Right of succession
other positive duty, or dishonest Partnership has no Corporation has
right of succession right of succession
and unjust act in contravention
of plaintiff’s legal rights (breach 8. Extent of liability to third persons
of duty); and Partners are liable Stockholders are
3. Such control and breach of duty personally and liable only to the
must proximately cause the subsidiarily extent of the
injury to the plaintiff. (Concept (sometimes shares subscribed
Builders, Inc. vs. NLRC, 257 solidarily) for by them
SCRA, 149) partnership debts to
third persons
Partnership Corporation 9. Transferability of interest
Partner cannot Stockholder has
1. Creation transfer his interest generally the right
Created by mere Created by law or in the partnership so to transfer his
agreement of the by operation of law as to make the shares without
parties transferee a partner prior consent of
2. Number of incorporators without the the other
May be organized by Requires at least unanimous consent of stockholders
at least two persons five incorporators all the existing because
(except a partners because the corporation is not
corporation sole) partnership is based based on this
on the principle of principle
3. Commencement of juridical delectus personarum
personality
Acquires juridical Acquires juridical 10. Term of existence
personality from the personality from partnership may be corporation may
moment of execution the date of established for any not be formed for
of the contract of issuance of the period of time a term in excess of
partnership certificate of stipulated by the 50 years extendible
incorporation by partners to not more than
the Securities and 50 years in any one
Exchange instance
Commission 11. Firm name
4. Powers Limited partnership corporation may
Partnership Corporation can is required by law to adopt any name
may exercise any exercise only the add the word “Ltd.” provided it is not
power authorized by powers expressly To its name the same as or
the partners granted by law or similar to any
(provided it is not implied from those registered firm
contrary to law, granted or incident name
morals, good to its existence
12. Dissolution
customs, public
may be dissolved at can only be
order, public policy)
any time by any or all dissolved with the
5. Management
of the partners consent of the
When management is The power to do
State
not agreed upon, business and
every partner is an manage its affairs
agent of the is vested in the 13. Governing Law
partnership board of directors governed by the Civil governed by the
or trustees Code Corporation Code
6. Effect of mismanagement
A partner as such can The suit against a
sue a co-partner who member of the
mismanages board of directors
or trustees who
mismanages must

ADVANTAGES VIS-À-VIS who compose the

DISADVANTAGES OF A BUSINESS corporation.
CORPORATION (The Corporation Code of
the Philippines Annotated, Hector de
Cannot be sold or May be sold or
Leon, 2002 ed.)
transferred because transferred; subject
it is inseparable to sale on execution,
ADVANTAGES DISADVANTAGES from the corporation subject to levy.
1. has a legal 1. complica- itself.
capacity to act and ted in formation
contract as a distinct and management CLASSES OF CORPORATION
unit in its own name 2. high cost
1. AS TO ORGANIZERS
2. continuity of of formation and
existence operations a. public – by State only; and
3. its credit is 3. its credit is b.private – by private persons alone
strengthened by its weakened by the or with the State.
continuity of existence limited liability 2. AS TO FUNCTIONS
4. centralized feature a. public – government of a portion
management in the 4. lack of of the territory; and
board of directors. personal element. b. private – usually for profit-
5. its creation, 5. greater making
management, degree of
3. AS TO GOVERNING LAW
organization and governmental
dissolution are supervision a. public – Special Laws; and
standardized as they 6. manage- b. private – Law on Private
are governed under ment and control Corporations
one general are separated from 4. AS TO LEGAL STATUS
incorporation law. ownership. a. De jure corporation – organized
6. limited 7. Stockhol- in accordance with the
liability ders have little requirements of law.
7. shareholders voice in the b. De facto corporation – organized
are not the general conduct of the
with a colorable compliance with
agents of the business business.
8. transferability of the requirements of a valid law.
shares Its existence cannot be inquired
collaterally. Such inquiry may be
FRANCHISES OF CORPORATION made by the Solicitor General in
1. Primary or corporate a quo warranto proceeding.
franchise/General Franchise (Sec. 20)
F The right or privilege granted by the F Requisites:
State to individuals to exist and act as a 1. The existence of a valid law
corporation after its incorporation. under which it may be
2. Secondary or special franchise incorporated;
F The special right or privilege 2. A bona fide attempt in good
conferred upon an existing corporation faith to incorporate under
to the business for which it was created. such law;
Example, use of the streets of a 3. Actual use or exercise in
municipality to lay pipes or tracks, or good faith of corporate
operation of a messenger and express powers; and
delivery service. 4. Issuance of a certificate of
incorporation by the SEC as
PRIMARY SECONDARY a minimum requirement of
Refers to the Refers to the exercise continued good faith.
franchise of being or of rights. Example: F The only difference
existing as a right of eminent between a de facto
corporation domain corporation and a de jure
Vested in the Vested in the corporation is that a de jure
individuals who corporation after its corporation can successfully
compose the incorporation and not resist a suit by a state
corporation upon the individuals brought to challenge its
Ethics)
existence; a de facto d. Parent and Subsidiary

corporation cannot sustain Corporation - separate entities
its right to exist. with power to contract with
c. Corporation by estoppel – group each other. The board of
of persons that assumes to act as directors of the parent company
a corporation knowing it to be determines its representatives to
without authority to do so, and attend and vote in the
enters into a transaction with a stockholder’s meeting of its
third person on the strength of subsidiary. The stockholders of
such appearance. It cannot be the parent company demand
permitted to deny its existence representation in the board
in an action under said meetings of its subsidiary.
transaction. (Sec. 21) It is 7. AS TO PLACE OF INCORPORATION
neither de jure nor de facto. a. Domestic corporation- a
d. Corporation by prescription – corporation formed, organized,
one which has exercised or existing under Philippine laws.
corporate powers for an b. Foreign corporation – a
indefinite period without corporation formed, organized,
interference on the part of the or existing under any laws other
sovereign power, e.g. Roman than those of the Philippines.
Catholic Church. (Sec. 123)
5. AS TO EXISTENCE OF SHARES OF
STOCK ONE-MAN CORPORATION
a. Stock corporation – a corporation F A corporation wherein all or
(1) whose capital stock is divided substantially all of the stocks is held
into shares and (2) which is directly or indirectly by one person.
authorized to distribute to However, it should still follow the formal
shareholders dividends or requirements of a corporation (e.g.
allotments of the surplus profits number of incorporators, board of
on the basis of the shares held. directors composed of stockholders
(Sec. 3) owning shares in a nominal capacity) in
b. Non-stock corporation – does not order to validly enjoy the attributes of
issue stocks nor distribute the corporation, so as to avoid the
dividends to their members. application of the doctrine of piercing
6. AS TO RELATIONSHIP OF the veil of corporate entity.
MANAGEMENT AND CONTROL
a. Holding Corporation - it is one TESTS TO DETERMINE NATIONALITY OF
which controls another as a CORPORATIONS
subsidiary by the power to elect 1. INCORPORATION TEST – determined
management. It is one that holds by the state of incorporation, regardless
stocks in other companies for of the nationality of the stockholders.
purposes of control rather than 2. DOMICILE TEST – determined by the
for mere investment. state where it is domiciled.
b. Subsidiary Corporation - one F The domicile of a corporation is the
which is so related to another place fixed by the law creating or
corporation that the majority of recognizing it; in the absence thereof, it
its directors can be elected shall be understood to be the place
directly or indirectly by such where its legal representation is
other corporation. (The established or where it exercise its
Corporation Code of the principal functions. (Art. 51, NCC)
Philippines Annotated, Hector 3. CONTROL TEST – determined by the
de Leon, 2002 ed.) nationality of the controlling
c. Affiliates - company which is stockholders or members. This test is
subject to common control of a applied in times of war. Also known as
mother holding company and the WARTIME TEST.
operated as part of the system.

“PHILIPPINE NATIONAL” UNDER THE c. Stockholders – owners of shares of

FOREIGN INVESTMENT ACT OF 1991 stock in a stock corporation
(R.A. No. 7042): d. Members – corporators of a
1. A corporation organized under the corporation which has no capital stock
laws of the Philippines of which at least
60% of the outstanding capital stock INCORPORATORS CORPORATORS
entitled to vote is owned and held by signatory to the stockholder (stock
Filipino citizens; Articles of corporation) or
2. A foreign corporation licensed as Incorporation member (non-stock
doing business in the Philippines of corporation)
which 100% of the outstanding capital fait accompli; they may cease to
stock entitled to vote is wholly owned by accomplished fact be such if they
(the Articles of subsequently lose
Filipinos; and Incorporation cannot their qualifications
F However, it provides that where a be amended to
corporation and its non-Filipino replace them)
stockholders own stocks in a SEC- number is limited to no restriction as to
registered enterprise, at least 60% of the 5-15 number
capital stock outstanding and entitled to must have contractual may be such
vote of both corporations and at least capacity through a guardian
60% of the members of the board of
directors of both corporations must be OTHER COMPONENTS
Filipino citizens (double 60% rule). a. Promoter - A person who, acting alone
NOTE: The law applies the control test or with others, takes initiative in
both with respect to the ownership of founding and organizing the business or
shares entitled to vote and the enterprise of the issuer and receives
membership in the board of directors. consideration therefor.
FHe is an agent of the incorporators but
COMPONENTS OF A CORPORATION not of the corporation.
a. Corporators – those who compose a FContracts by the promoter for and in
corporation, whether as stockholders or behalf of a proposed corporation
members generally bind only him, subject to and
b. Incorporators - They are those to the extent of his representations, and
mentioned in the Articles of not the corporation, unless and until
Incorporation as originally forming and after these contracts are ratified,
composing the corporation, having expressly or impliedly, by its Board of
signed the Articles and acknowledged Directors/Trustees.
the same before a notary public. They b. Subscriber – persons who have agreed
have no powers beyond those vested in to take and pay for original, unissued
them by the statute. shares of a corporation formed or to be
F Qualifications: formed.
1. natural person; c. Underwriter – a person who
2. not less than 5 but not more guarantees on a firm commitment and/
than 15; or declared best effort basis the
3. of legal age; distribution and sale of securities of any
4. majority must be residents of king by another company. (Sec. 3 R.A.
the Philippines; and 8799)
5. each must own or subscribe to at
least one share. (Sec. 10) CLASSIFICATION OF SHARES
þGENERAL RULE: Only natural persons 1. COMMON SHARES
can be incorporators. F The basic class of stock ordinarily and
þEXCEPTION: When otherwise allowed usually issued without extraordinary
by law, e.g., Rural Banks Act of 1992, rights and privileges, and the owners
where incorporated cooperatives are thereof are entitled to a pro rata share
allowed to be incorporators of rural in the profits of the corporation and in
banks. Note: However, it is undeniable its assets upon dissolution and, likewise,
that corporations can be corporators.
Ethics)
in the management of its affairs without reversion of the shares to the

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

vote on the following fundamental F Shares with a value fixed in the

matters: Key: A2 SI2 MID certificates of stock and the articles of
a. amendment of Articles of incorporation.
Incorporation 12. NO PAR VALUE SHARES
b. adoption and amendment of F Shares having no par value but have
by-laws; issued value stated in the certificate or
c. sale or disposition of all or articles of incorporation.
substantially all of corporate F Limitations:
property; a. No par value shares cannot have
d. incurring, creating or an issued price of less than P5.00;
increasing bonded b. The entire consideration for its
indebtedness; issuance constitutes capital so that no
e. increase or decrease of capital part of it should be distributed as
stock dividends;
f. merger or consolidation of c. They cannot be issued as
capital stock preferred stocks;
g. investments of corporate funds d. They cannot be issued by banks,
in another corporation or trust companies, insurance
another business purpose; and companies, public utilities and
h. corporate dissolution building and loan association;
e. The articles of incorporation
8. ESCROW STOCK must state the fact that it issued no
F Deposited with a third person to be par value shares as well as the
delivered to a stockholder or his assign number of said shares;
after complying with certain conditions, f. Once issued, they are deemed
usually payment of full subscription fully paid and non-assessable. (Sec.
price. 6)
9. OVER-ISSUED STOCK 13. STREET CERTIFICATE
F Stock issued in excess of the F A stock certificate endorsed by the
authorized capital stock. It is also known registered holder in blank and transferee
as spurious stock. Its issuance is can command its transfer to his name
considered null and void. from the issuing corporation.
10. WATERED STOCK 14. CONVERTIBLE SHARE
F A stock issued not in exchange for its F A share that is changeable by the
equivalent either in cash, property, stockholder from one class to another at
share, stock dividends, or services. a certain price and within a certain
F “Water” in the stock represents the period.
difference between the fair market 15. FRACTIONAL SHARE
value at the time of the issuance of the F A share with a value of less than one
stock and the par or issued value of said full share.
stock. Both par and no par stocks can
thus be watered stocks. DOCTRINE OF EQUALITY OF SHARES
FIt includes stocks: F Where the articles of incorporation do
a. Issued without consideration. not provide for any distinction of the
b. Issued as fully paid when the shares of stock, all shares issued by the
corporation has received a lesser sum of corporation are presumed to be equal
money than its par or issued value. and enjoy the same rights and privileges
c. Issued for a consideration other than and are also subject to the same
actual cash, the fair valuation of which liabilities. (Sec. 6)
is less than its par or issued value.
d. Issued as stock dividend when there DEFINITION OF TERMS:
are no sufficient retained earnings to 1. CAPITAL STOCK OR LEGAL STOCK OR
justify it. STATED CAPITAL - The amount fixed in
11. PAR VALUE SHARES the corporate charter to be subscribed
and paid in cash, kind or property at the
organization of the corporation or
Ethics)
afterwards and upon which the compliance in order that a corporation

corporation is to conduct its operation. may legally continue as such.
2. CAPITAL – The value of the actual F Formal organization:
property or estate of the corporation 1. Adoption of By-Laws and filing of the
whether in money or property. Its net same with the SEC;
worth (or stockholder’s equity) is its 2. Election of board of
assets less liabilities. directors/trustees, and officers;
3. AUTHORIZED CAPITAL STOCK - The 3. Establishment of principal office;
capital stock divided into shares with par 4. Providing for subscription and
values. Par value stocks are required in payment of capital stock.
the case of corporations issuing
preferred shares, as well as in the case TERM OF CORPORATE EXISTENCE
of banks, trust companies, insurance F Limitations:
companies, building and loan a. The term shall not exceed 50 years in
associations, and public utilities. It is the any one instance.
total amount in the charter, which may b. The amendment is effected before
be raised by the corporation for its the expiration of corporate term, for
operations. after dissolution by expiration of the
4. SUBSCRIBED CAPITAL STOCK - The corporate term there is no more
total amount of the capital stock corporate life to extend.
subscribed whether fully paid or not. c. The extension cannot be made earlier
5. OUTSTANDING CAPITAL STOCK - The than 5 years prior to the expiration date
portion of the capital stock issued to unless there are justifiable reasons as
subscribers except treasury stocks. determined by the SEC.
6. STATED CAPITAL – The capital stock
divided into no par value shares. CAPITAL STOCK REQUIREMENT
7. PAID-UP CAPITAL – The amount paid F General Rule: No minimum authorized
by the stockholders on subscriptions capital stock as long as the paid-up
from unissued shares of the corporation. capital is not less than P5,000.00
Except:
II. INCORPORATION AND ORGANIZATION a. as provided for by special law
1. F Domestic Insurance
STEPS IN THE CREATION OF A Corporations - P500T capital
CORPORATION stock; 50% subscribed and the
a. PROMOTION – a number of business balance payable in 12 months.
operations peculiar to the commercial 2. Private Development Banks
world by which a company is generally - P4M for class A
brought into existence. (18 Am. Jur. 2d - P2M for class B
647, cited in de Leon p. 116) - P1M for class C
b. INCORPORATION 3. Investment Companies – paid up
F Steps: at least P500T
1. Drafting and execution of Articles of 4. Savings and Loan Corporation –
Incorporation by the incorporators and to be fixed by the Monetary
other documents required for Board, but not less than P100T
registration of the corporation 5. Financing Companies
2. Filing with the SEC of the articles of Paid up: - P2M for Metro Manila
incorporation - P1M for Cities
3. Payment of filing and publication fees - P500T for others
4. Issuance by the SEC of the certificate b. provided that at least 25% of the
of incorporation authorized capital stock has been
c. FORMAL ORGANIZATION AND subscribed and at least 25% of the total
COMMENCEMENT OF THE TRANSACTION subscription must be paid-up
OF BUSINESS
F These are conditions subsequent,
which may be satisfied by substantial

F FILIPINO PERCENTAGE OWNERSHIP 10. Manufacture, repair, stockpiling

REQUIREMENT and/or distribution of biological,
chemical and radiological weapons
NO FOREIGN EQUITY and anti-personnel mines (Various
treaties to which the Philippines is a
1. Mass Media except recording (Art. signatory and conventions supported
XVI, Sec. 11 of the Constitution; by the Philippines)
Presidential Memorandum dated 04 11. Manufacture of firecrackers and
May 1994) other pyrotechnic devices (Sec. 5 of
2. Practice of all professions RA 7183)
a) Engineering
b) Medicine and Allied Professions Up to Twenty Percent (20%) Foreign
c) Accountancy Equity
d) Architecture
e) Criminology 12. Private radio communications
f) Chemistry network (RA 3846)
g) Customs Brokerage
h) Environmental Planning Up to Twenty-Five Percent (25%)
i) Forestry Foreign Equity
j) Geology
k) Interior Design 13. Private recruitment, whether for
l) Landscape Architecture local or overseas employment (Art.
m) Law 27 of PD 442)
n) Librarianship 14. Contracts for the construction and
o) Marine Deck Officers repair of locally-funded public works
p) Marine Engine Officers (Sec. 1 of CA 541, LOI 630) except:
q) Master Plumbing a) infrastructure/development
r) Sugar Technology projects covered in RA 7718; and
s) Social Work b) projects which are foreign
t) Teaching funded or assisted and required
u) Agriculture to undergo international
v) Fisheries competitive bidding (Sec. 2a of
3. Retail trade enterprises with paid-up RA 7718)
capital of less than 15. Contracts for the construction of
US$2,500,000(Sec. 5 of RA 8762) defense-related structures (Sec. 1 of
4. Cooperatives (Ch. III, Art. 26 of RA CA 541)
6938)
5. Private Security Agencies (Sec. 4 of Up to Thirty Percent (30%) Foreign
RA 5487) Equity
6. Small-scale Mining (Sec. 3 of RA
7076) 16. Advertising (Art. XVI, Sec. 11 of the
7. Utilization of Marine Resources in Constitution)
archipelagic waters, territorial sea,
and exclusive economic zone as well Up to Forty Percent (40%) Foreign
as small-scale utilization of natural Equity
resources in rivers, lakes, bays, and 17. Exploration, development and
lagoons (Art. XII, Sec. 2 of the utilization of natural resources (Art.
Constitution) XII, Sec. 2 of the Constitution)
8. Ownership, operation and 18. Ownership of private lands (Art. XII,
management of cockpits (Sec. 5 of Sec. 7 of the Constitution; Ch. 5,
PD 449) Sec. 22 of CA 141; Sec. 4 of RA 9182)
9. Manufacture, repair, stockpiling 19. Operation and management of public
and/or distribution of nuclear utilities (Art. XII, Sec. 11 of the
weapons (Art. II, Sec. 8 of the Constitution; Sec. 16 of CA 146)
Constitution) 20. Ownership/establishment and
administration of educational

Ethics)
institutions (Art. XIV, Sec. 4 of the F Contents: (Sec. 14)

Constitution) 1. name of corporation;
21. Culture, production, milling, 2. purpose/s, indicating the
processing, trading excepting primary and secondary purposes;
retailing, of rice and corn and 3. place of principal office;
acquiring, by barter, purchase or 4. term of existence;
otherwise, rice and corn and the by- 5. names, citizenship and
products thereof (Sec. 5 of PD residences of incorporators;
194;Sec. 15 of RA 8762 6. number, names, citizenship and
22. Contracts for the supply of materials, residences of directors or trustees;
goods and commodities to 7. names, nationalities, and
government-owned or controlled residences of the persons who shall
corporation, company, agency or act as directors or trustees until the
municipal corporation (Sec. 1 of RA first regular ones are elected and
5183) qualified;
23. Project Proponent and Facility 8. if a stock corporation, the
Operator of a BOT project requiring a amount of its authorized capital
public utilities franchise (Art. XII, stock, number of shares and in case
Sec. 11 of the Constitution; Sec. 2a the shares are par value shares, the
of RA 7718) par value of each share;
24. Operation of deep sea commercial 9. names, residences, number of
fishing vessels (Sec. 27 of RA 8550) shares, and the amounts subscribed
25. Adjustment Companies (Sec. 323 of and paid by each of the original
PD 612 as amended by PD 1814) subscribers which shall not be less
26. Ownership of condominium units than 25% of authorized capital stock;
where the common areas in the 10. if non-stock, the amount of
condominium project are co-owned capital, the names, residences, and
by the owners of the separate units amount paid by each contributor,
or owned by a corporation (Sec. 5 of which shall not be less than 25% of
RA 4726) total subscription;
11. name of treasurer elected by
Up to Sixty Percent (60%) Foreign subscribers; and
Equity 12. if the corporation engages in a
nationalized industry, a statement
27. Financing companies regulated by that no transfer of stock will be
the Securities and Exchange allowed if it will reduce the stock
Commission (Sec. 6 of RA 5980 as ownership of Filipinos to a
amended by RA 8556) percentage below the required legal
28. Investment houses regulated by the minimum.
SEC (Sec. 5 of PD 129 as amended by
RA 8366) AMENDMENT OF ARTICLES OF
INCORPORATION
ARTICLES OF INCORPORATION (AI) F Limitations:
F The document prepared by the 1. The amendment of any provision or
persons establishing a corporation and matters stated in the articles of
filed with the SEC containing the matters incorporation is not allowed when it will
required by the Code. be contrary to the provisions or
F Significance: requirement prescribed by the Code or
1. The issuance of a certificate of by special law or changes any provision
incorporation signals the birth of the in the articles of incorporation stating an
corporation’s juridical personality; accomplished fact
2. It is an essential requirement for 2. It must be for legitimate purposes
the existence of a corporation, even 3. It must be approved by the required
a de facto one. vote of the board of directors or trustees
and the stockholders or members

4. The original articles and amended Filipino citizens has not been complied
articles together must contain all with
provisions required by law to be set out
in the articles of incorporation GROUNDS FOR SUSPENSION OR
5. Such articles, as amended, must be REVOCATION OF CERTIFICATE OF
indicated by underscoring the changes REGISTRATION (Pres. Decree No. 902-A)
made, and a copy thereof duly certified 1. Fraud in procuring its certificate of
under oath by the corporate secretary incorporation
and a majority of the directors or 2. Serious misrepresentation as to what
trustees stating that the amendments the corporation can do or is doing to the
have been duly approved by the required great prejudice of, or damage to, the
vote of the stockholders or members general public
must be submitted to the SEC 3. Refusal to comply with or defiance of
6. The amendments shall take effect a lawful order of the SEC restraining the
only upon their approval by the SEC commission of acts which would amount
7. If the corporation is governed by to a grave violation of its franchise
special law, the amendments must be 4. Continuous inoperation for a period of
accompanied by a favorable at least 5 years
recommendation of the appropriate 5. Failure to file the by-laws within the
government agency. required period
6. Failure to file required reports
NON-AMENDABLE FACTS IN THE
ARTICLES OF INCORPORATION III. BOARD OF DIRECTORS/TRUSTEES
F Those matters referring to facts F Qualifications:
existing as of the date of the 1. For a stock corporation, ownership of
incorporation such as: at least 1 share capital stock of the
1. Names of incorporators; corporation in his own name, and if he
2. Names of original subscribers to ceases to own at least one share in his
the capital stock of the own name, he automatically ceases to
corporation and their subscribed be a director. (Sec. 23) For a non-stock
and paid up capital; corporation, only members of the
3. Treasurer elected by the original corporation can be elected to seat in the
subscribers; Board of Trustees.
4. Members who contributed to the F In order to be eligible as a director,
initial capital of a non-stock what is material is the legal title to, not
corporation; beneficial ownership of the stocks
5. Date and place of execution of appearing on the books of the
the articles of incorporation; corporation
6. Witnesses to the signing and 2. A majority of the directors/trustees
acknowledgment of the articles. must be residents of the Philippines.
(Sec. 23)
GROUNDS FOR REJECTION OF ARTICLES 3. He must not have been convicted by
OF INCORPORATION OR AMENDMENT final judgment of an offense punishable
THERETO by imprisonment for a period exceeding
1. The articles or its amendment is not 6 years or a violation of the Corporation
substantially in accordance with the Code, committed within five years from
form prescribed the date of his election. (Sec. 27)
2. The purposes of the corporation are 4. Only natural persons can be elected
patently unconstitutional, illegal, directors/trustees.
immoral, or contrary to government F In case of corporate stockholders or
rules and regulations members, their representation in the
3. The Treasurer’s Affidavit concerning board can be achieved by making their
the amount of capital stock subscribed individual representatives trustees of the
and/or paid is false shares or membership to make them
4. The required percentage of ownership stockholders/members of record.
of the capital stock to be owned by
Ethics)
5. Other qualifications as may be the corporation, the final say will

prescribed in the by-laws of the have to be with the board, whose
corporation. approval will finalize the
6. Must be of legal age transaction. A corporation can only
exercise its powers and transact its
CORPORATE OFFICERS business through its board of
1. President – must be a director; directors and through its officers and
2. Treasurer – may or may not be a agents when authorized by a board
director; as a matter of sound corporate resolution or by its by-laws. (Spouses
practice, must be a resident Constantine Firme vs. Bukal
3. Secretary – need not be a director Enterprises and Development
unless required by the by-laws; must be Corporation, G.R. No. 146608,
a resident and citizen of the Philippines; October, 23, 2003)
and
4. Such other officers as may be LIMITATIONS ON POWERS OF BOARD OR
provided in the by-laws. DIRECTORS/TRUSTEES
1. Limitations imposed by the
CORPORATE CORPORATE Constitution, statutes, articles of
OFFICER EMPLOYEE incorporation or by-laws.
Position is provided Employed by the 2. Cannot perform constituent or those
for in the by-laws or action of the involving fundamental changes in the
under the managing officer of corporation requiring the approval of
Corporation Code the corporation stockholders or members.
RTC has jurisdiction NLRC has jurisdiction 3. Cannot exercise powers not possessed
in case of labor in case of labor
by the corporation. (The Corporation
dispute disputes
Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
BOARD OF DIRECTORS/TRUSTEES AS
REPOSITORY OF CORPORATE POWERS
NATURE OF POWERS OF BOARD OF
þGENERAL RULE: The corporate powers
DIRECTORS/TRUSTEES (The Corporation
of the corporation shall be exercised, all
Code of the Philippines Annotated,
business conducted and all property of
Hector de Leon, 2002 ed.)
such corporation controlled and held by
a. Under the Theory of Original Power,
the board of directors or trustees. (Sec.
the powers of the board of directors or
23)
trustees are ORIGINAL and
þEXCEPTIONS:
UNDELEGATED. The stockholders or
1. In case of an Executive
members do not confer, nor can they
Committee duly authorized in the
revoke those powers.
by-laws;
b. They are DERIVATIVE only in the sense
2. In case of a contracted manager
of being received from the State in the
which may be an individual, a
act of incorporation.
partnership, or another corporation.
Note: In case the contracted
BUSINESS JUDGMENT RULE
manager is another corporation, the
FA resolution or transaction pursued
special rule in Sec. 44 applies.
within the corporate powers and
3. In case of close corporations, the
business operations of the corporation,
stockholders may manage the
and passed in good faith by the board of
business of the corporation instead
directors, is valid and binding, and
by a board of directors, if the
generally the courts have no authority to
articles of incorporation so provide.
review the same and substitute their
own judgment, even when the exercise
? The power to purchase real property of such power may cause losses to the
is vested in the board of directors or corporation or decrease the profits of a
trustees. While a corporation may department. (Philippine Corporate Law,
appoint agents to negotiate for the Cesar Villanueva, 2001 ed.)
purchase of real property needed by

FConsequences: corporation, thereby obtaining profits

a. Resolutions and transactions entered which should belong to the corporation,
into by the Board within the powers of he must account to the latter for all such
the corporation cannot be reversed by profits by refunding the same (Sec. 34)
the courts not even on the behest of the
stockholders. ELECTION OF DIRECTORS/TRUSTEES
b. Directors and officers acting within FLimitations:
such business judgment cannot be held a. At any meeting of stockholder or
personally liable for such acts. members called for the election of
(Philippine Corporate Law, Cesar directors or trustees, there must be
Villanueva, 2001 ed.) present either in person or by
representative authorized to act by
THREE-FOLD DUTIES OF DIRECTORS: written proxy, the owners of the
(Philippine Corporate Law, Cesar majority of the outstanding capital stock
Villanueva, 2001 ed.) or majority of the members entitled to
1. Duty of Obedience vote.
F To direct the affairs of the b. The election must be by ballot if
corporation only in accordance with the requested by any voting member or
purposes for which it was organized. stockholder.
F Legal Basis: The directors or trustees c. A stockholder cannot be deprived in
and officers to be elected shall perform the articles of incorporation or in the by-
the duties enjoined on them by law and laws of his statutory right to use any of
the by-laws (Sec. 25) the methods of voting in the election of
2. Duty of Diligence directors.
F Legal Basis: Directors or trustees who d. No delinquent stock shall be voted.
willfully and knowingly vote for or assent e. The candidates receiving the highest
to patently unlawful acts of the number of votes shall be declared
corporation or who are guilty of gross elected.
negligence or bad faith in directing the
affairs of the corporation shall be liable METHODS OF VOTING
jointly and severally for all damages a. Straight Voting – every stockholder
resulting therefrom suffered by the may vote such number of shares for as
corporation, its stockholders or members many persons as there are directors to
and other persons (Sec. 31) be elected.
3. Duty of Loyalty b. Cumulative voting for one candidate –
F Legal Basis: Directors or trustees who a stockholder is allowed to concentrate
acquire any pecuniary or personal his votes and give one candidate, as
interest in conflict with their duty as many votes as the number of directors to
such directors or trustees shall be liable be elected multiplied by the number of
jointly and severally for all damages his shares shall equal.
resulting therefrom. (Sec. 31) c. Cumulative voting by distribution - a
When a director or trustee stockholder may cumulate his shares by
attempts to acquire or acquires in multiplying the number of his shares by
violation of his duty, any interest the number of directors to be elected
adverse to the corporation in respect of and distribute the same among as many
any matter which has been reposed in candidates as he shall see fit.
him in confidence as to which equity
imposes a liability upon him to deal in LIMITATIONS ON THE STOCKHOLDER’S
his own behalf, he shall be liable as RIGHT TO VOTE
trustee for the corporation and must 1. Where the articles of incorporation
account for all the profits which provides for classification of shares
otherwise would have accrued to the pursuant to Sec. 6, non-voting shares are
corporation (Sec. 31, 2nd par.) not entitled to vote except as provided
Where a director, by virtue of for in the last paragraph of Sec. 6.
his office, acquires for himself a business
opportunity which should belong to the
Ethics)
2. Preferred or redeemable shares may within the scope of an apparent

be deprived of the right to vote unless authority, it holds him out to the public
otherwise provided in the Code. as possessing the power to do those acts;
3. Fractional shares of stock cannot be and thus, the corporation will, as against
voted. anyone who has in good faith dealt with
4. Treasury shares have no voting rights it through such agent, be estopped from
as long as they remain in the treasury. denying the agent’s authority. (LapuLapu
5. Holders of stock declared delinquent Foundation Inc., vs. Court of Appeals, et
by the board of directors for unpaid al., G.R. No. 126006, January 29, 2004,
subscription are not entitled to vote or Callejo, J.)
to a representation at any stockholder’s
meeting. PERSONAL LIABILITY OF DIRECTORS
6. A transferee of stock cannot vote if 1. Willfully and knowingly voting for
his transfer is not registered in the stock and assenting to patently unlawful
and transfer book of the corporation. acts of the corporation; (Sec. 31)
2. Gross negligence or bad faith in
REMOVAL OF DIRECTORS/TRUSTEES directing the affairs of the
FLimitations: corporation; (Sec. 31)
a. Vote of the stockholders representing 3. Acquiring any personal or pecuniary
at least 2/3 of the outstanding capital interest in conflict of duty; (Sec. 31)
stock 2/3 of the members entitled to 4. Consenting to the issuance of
vote watered stocks, or, having
b. At a regular or special meeting after knowledge thereof, failing to file
proper notice is given objections with the secretary;(Sec.
c. Removal may be with or without 65)
cause. 5. Agreeing or stipulating in a contract
d. A minority director elected through to hold himself liable with the
cumulative voting cannot be removed corporation; or
without cause. (Sec. 28) 6. By virtue of a specific provision of
law
EXTENT OF POWERS OR AUTHORITY OF
CORPORATE OFFICERS DOCTRINE OF DOCTRINE OF
1. The authority which he has by virtue LIMITED LIABILITY IMMUNITY
of his office;
2. The authority which is expressly F Shields the F Protects a
conferred upon him or is incidental to corporators from person acting for
the effectualness of such express corporate liability and in behalf of the
authority; beyond their agreed corporation from
3. As to third persons dealing with him contribution to the being himself
capital or shareholding personally liable
without notice of any restriction thereof,
in the corporation. for his authorized
the authority which the corporation actions
holds the officer out as possessing or is
estopped to deny. REMEDIES IN CASE OF MISMANAGEMENT
4. The nature of the corporate business 1. Receivership;
must also be taken into consideration; 2. Injunction, if the act has not yet
and been done;
5. The nature act of an officer though 3. Dissolution if the abuse amounts to a
originally unauthorized, may become ground for quo warranto but the
upon the corporation by a subsequent Solicitor General refuses to act; and
ratification. (The Corporation Code of 4. Derivative suit or complaint filed
the Philippines Annotated, Hector de with SEC.
Leon, 2002 ed.)
@ It is a familiar doctrine that if a

corporation knowingly permits one of it
officers, or any other agent, to act

SPECIAL RULES ON CONTRACTS 3. Contracts of interlocking directors

ENTERED INTO BY F Contracts entered into between
DIRECTORS/TRUSTEES OR OFFICERS: corporations with interlocking directors
1. Doctrine of Corporate Opportunity (interest of said directors is
F Unless his act is ratified, a director “substantial”, i.e. exceeding 20% of the
shall refund to the corporation all the outstanding capital stock).
profits he realizes on a business F They are valid, provided that:
opportunity which: a. The contract is not fraudulent;
1. The corporation is financially able to and
undertake; b. The contract is fair and
2. From its nature, is in line with reasonable under the circumstances.
corporations business and is of
practical advantage to it; and @ If the interlocking director’s interest
3. The corporation has an interest or a in one corporation or corporations is
reasonable expectancy. “nominal” (not exceeding 20% of the
F The rule shall be applied outstanding capital stock), then all the
notwithstanding the fact that the conditions prescribed in Sec. 32 on self-
director risked his own funds in the dealing directors must be present with
venture. (Sec. 34) respect to the corporation in which he
has nominal interest. (Sec. 33)
2. Contracts of self-dealing directors
F Contracts which are entered into by COMPENSATION OF DIRECTORS OR
the corporation with one or more of its TRUSTEES
own directors/trustees, or officers. (Sec. General Rule: They shall be entitled to
32) reasonable per diems only
F They are voidable, unless: Except:
a) The presence of such a. when their compensation is fixed in
director/trustee in the board the by-laws
meeting approving the contract was b. when granted by the vote of
not necessary to constitute a quorum stockholders representing at least a
for such meeting; majority of the outstanding capital stock
b) The vote of such director/trustee in at a regular or special meeting
the board meeting approving the c. when they are also officers of the
contract was not necessary for the corporation
approval of the contract;
c) The contract is fair and reasonable EXECUTIVE COMMITTEE
under the circumstances; F A body created by the by-laws and
d) In the case of an officer, there was composed of some members of the board
previous authorization by the board which, subject to the statutory
of directors. limitations, has all the authority of the
@ Although not all said conditions are board to the extent provided in the
present, the corporation may elect not board resolution or by-laws. (The
to attack or question the validity of the Corporation Code of the Philippines
contract, without prejudice, however, to Annotated, Hector de Leon, 2002 ed.)
the liability of the director/trustee for F Must be provided for in the by laws
damages under Sec. 31. and composed of not less than 3
@ Where any of the first two conditions members of the board appointed by the
is absent, said contract must be ratified board.
by the vote of the stockholders F May act by a majority vote of all of its
representing at least 2/3 of the members.
outstanding capital stock or 2/3 of the
members in a meeting called for the
purpose, provided that full disclosure of
the adverse interest of the director/
trustee involved is made at such
meeting. (Sec. 32)
Ethics)
Limitations on the Powers of the 8. To enter into merger or

Executive Committee (Sec. 35) consolidation;
F It cannot act on the following: 9. To make reasonable donations for
1. Matters needing stockholder public welfare, hospital, charitable,
approval; cultural, scientific, civic or similar
2. Filling up of board vacancies; purposes, provided that no donation
3. Amendment, repeal or adoption of is given to any (i) political party, (ii)
by-laws; candidate and (iii) partisan political
4. Amendment or repeal of any activity.
resolution of the Board which by its 10. To establish pension, retirement,
express terms is not amendable or and other plans for the benefit of its
repealable; and directors, trustees, officers and
5. Cash dividend declaration. employees.
11. To exercise other powers essential or
IV. POWERS OF THE CORPORATION necessary to carry out its purposes.
1. Express Powers - granted by law,
Corporation Code, and its Articles of SPECIAL/SPECIFIC POWERS (Secs. 37-
Incorporation or Charter 44)
2. Inherent/Incidental Powers – not 1. Power to extend or shorten
expressly stated but are deemed to be corporate term;
within the capacity of corporate entities 2. Increase or decrease corporate
3. Implied/Necessary Powers – exists stock;
as a necessary consequence of the 3. Incur, create, or increase bonded
exercise of the express powers of the indebtedness;
corporation or the pursuit of its purposes 4. Sell, dispose, lease, encumber all or
as provided for in the Charter substantially all of corporate assets;
FClassification: 5. Purchase or acquire own shares
1. Acts in the usual course of business provided:
2. Acts to protect debts owing to the a.there is an unrestricted
corporation retained earnings, and
3. Acts which involve embarking in a b. it is for a legitimate purpose.
different business usually to collect 6. Invest corporate funds in another
debts out of profits corporation or business for other
4. Acts to protect or aid employees purpose other than primary purpose;
5. Acts to increase business (The 7. Power to declare dividends out of
Corporation Code of the Philippines unrestricted retained earnings;
Annotated, Hector de Leon, 2002 ed.) 8. Enter into management contract
with another corporation (not with
GENERAL POWERS AND CAPACITY (Sec. an individual or a partnership-within
36) general powers) whereby one
1. To sue and be sued; corporation undertakes to manage
2. Of succession; all or substantially all of the business
3. To adopt and use of corporate seal; of the other corporation for a period
4. To amend its Articles of not longer than 5 years for any one
Incorporation; term.
5. To adopt its by-laws;
6. For stock corporations: issue and sell CORPORATE ACTS (see ANNEX for
stocks to subscribers and treasury procedure and requisites)
stocks; for non-stock corporations: 1. Power to extend or shorten corporate
admit members; term
7. To purchase, receive, take or grant, F May be used as means to voluntarily
hold, convey, sell, lease, pledge, dissolve a corporation
mortgage and deal with real and 2. Power to increase or decrease capital
personal property, securities and stock
bonds

FWAYS OF INCREASING/DECREASING d. To acquire treasury shares

THE CAPITAL STOCK e. Redeemable shares regardless of
a. By increasing/decreasing the number existence of retained earnings
of shares and retaining the par value; f. To effect a decrease of capital stock
b. By increasing/decreasing the par g. In close corporations, when there is a
value of existing shares without deadlock in the management of the
increasing/decreasing the number of business
shares; Note: In letters a-c, there must be
c. By increasing/decreasing the number unrestricted retained earnings
of shares and increasing/decreasing the 6. Invest corporate funds in another
par value. corporation or business for other purpose
FTOOLS AVAILABLE TO THE other than primary purpose
STOCKHOLDERS TO REPLENISH CAPITAL F The other purposes for which the
a. Additional subscription to shares of funds may be invested must be among
stock of the corporation by stockholders those enumerated as secondary purposes
or by investors; and must further comply with the
b. Advances by the stockholders to the requirements of Section 42.
corporation; 7. Power to declare dividends out of
c. Payment of unpaid subscription by the unrestricted retained earnings
stockholders; and F RETAINED EARNINGS = ASSETS –
d. Loans from third persons. LIABILITIES AND LEGAL CAPITAL
3.Incur, create or increase bonded F “UNRESTRICTED” – if the retained
indebtedness earnings have not been reserved or set
F Corporate bond – an obligation to pay aside by the board of directors for some
a definite sum of money at a future time corporate purpose
at fixed rate of interest DIVIDENDS
F Corporate profits set aside, declared,
BONDED DEBENTURE and ordered to be paid by the directors
INDEBTEDNESS for distribution among shareholders at a
F Secured by a F Serial obligations fixed time.
mortgage on or notes issued on F Forms:
corporate property. . the basis of the a. Cash
(Philippine general credit of the b. Property
Corporate Law, corporation. Hence, c. Stock
Cesar Villanueva, they are not bonded
F While cash dividends due on
2001 ed.) indebtedness
delinquent shares can be applied to the
4. Sell, dispose, lease, encumber all or payment of the unpaid balance, stock
substantially all of corporate assets; dividends cannot be applied as payment
F No ratificatory vote needed: for unpaid subscription.
a. If it is necessary in the usual and F The right to dividends is based on duly
regular course of business recorded stockholdings; accordingly, the
b. if the proceeds of the sale or other corporation is prohibited from entitling
disposition of such property and assets thereto anyone else.
be appropriated for the conduct of the FGeneral Rule: Stock corporations are
remaining business prohibited from retaining surplus profits
5. Power to acquire own shares in excess of 100% of their paid-in capital
F Instances: stock
a. To eliminate fractional shares out of Except:
stock dividends a. When justified by definite corporate
b. To collect or compromise an expansion projects approved by the
indebtedness to the corporation, arising board of directors
out of unpaid subscription, in a b. When the corporation is prohibited
delinquency sale and to purchase under any loan agreement with any
delinquent shares sold during said sale financial institution or creditor from
c. To pay dissenting stockholders declaring dividends without its/his

Ethics)
consent and such consent has not yet 1) liquidating dividends; and 2)
been secured dividends from investments in wasting
c. When it can be clearly shown that asset corporation.
such retention is necessary under special F It permits corporations solely or
circumstances obtaining in the principally engaged in the exploitation
corporation, such as when there is a of “wasting assets” to distribute the
need for special reserve for probable net proceeds derived from
contingencies. exploitation of their holdings such as
F Sources of dividends: mines, oil wells, patents and
þGENERAL RULE: Dividends can only be leaseholds, without allowance or
declared and paid out of actual and bona deduction for depletion.
fide unrestricted retained earnings. f. Profits realized from sale of treasury
þSPECIAL RULES: shares are part of capital and cannot
a. Where a corporation sold its real be declared as cash or stock dividend
property, which is not being used for as purchase and sale of such shares are
business, at a gain, the income derived regarded as contractions and
therefrom may be availed of for expansions of paid-in capital.
dividend distribution. g. Money cannot be borrowed for the
b. Increase in the value of a fixed asset payment of dividends because
as a result of its revaluation is not indebtedness is not a retained earning
retained earning. However, increase in of the corporation.
the value of fixed assets as a result of h. Corporate earnings which have not yet
revaluation (“Revaluation surplus”) been received even though they
may be declared as cash or stock consist in money which is due, cannot
dividends provided that the company: be included in the profits out of which
(i) Has sufficient income from dividends may be paid.
operations from which the
depreciation on the appraisal increase CASH DIVIDENDS STOCK
was charged DIVIDENDS
(ii) Has no deficit at the time the 1. Involves a 1. Does not involve
depreciation on the appraisal increase disbursement to the any disbursement
was charged to operations; and stockholders of
(iii) Such depreciation on appraisal accumulated earnings
2. When declared and 2. Since it is still
increase previously charged to
paid becomes the part of corporate
operations has not been impaired by absolute property of property, may be
losses. the stockholder and reached by
c. Dividends can be declared out of the cannot be reached by corporate creditors
amount received in excess of the par creditors of the
value of shares (“paid-in surplus”) corporation in the
when: absence of fraud
(i) That they be declared only as 3. Declared only by 3. Declared by the
stock dividends and not cash; the board of directors board with the
(ii) No creditors are prejudiced; and at its discretion concurrence of the
stockholders
(iii) There is no impairment of
representing at
capital. least 2/3 of the
F Note that unlike par value outstanding capital
shares, when no par value shares stock at a
are sold at a premium, the entire regular/special
consideration paid is considered meeting
capital; hence the same cannot be 4. Does not increase 4. Corporate
declared as dividends. the corporate capital capital is increased
d. Reduction surplus can be a source of 5. Its declaration 5. No debt is
dividends. Rule on paid-in surplus is creates a debt from created by its
the corporation to declaration
applicable.
each of its
e. No dividends can be declared out of stockholders
capital except only in two instances:

TRUST FUND DOCTRINE (TFD) managerial power.

F The subscribed capital stock of the (The Corporation
corporation is a trust fund for the Code of the
payment of debts of the corporation Philippines
Annotated, Hector
which the creditors have the right to
de Leon, 2002 ed.)
look up to satisfy their credits, and
which the corporation may not dissipate.
The creditors may sue the stockholders ULTRA VIRES (“beyond powers”) ACT
directly for the latter’s unpaid
F An act which is beyond the conferred
subscription. powers of a corporation or the purposes
F Application of the TFD: or objects for which it is created as
1. Where the corporation has
defined by the law of its organization.
distributed its capital among the (Republic vs. Acoje Mining Co., Inc. 7
stockholders without providing for SCRAS 361)
the payment of creditors;
F An act done by a corporation outside
2. Where it had released the of the express and implied powers
subscribers to the capital stock from vested in it by its charter and by the
their subscriptions; law. (Bar Review Materials in
3. Where it has transferred the Commercial Law, Jorge Miravite, 2002
corporate property in fraud of its
ed.)
creditors; and F Types: (Philippine Corporate Law,
4. Where the corporation is insolvent.
Cesar Villanueva, 2001 ed.)
F Coverage of the TFD:
1. Acts done beyond the powers of
1. If the corporation is solvent, the TFD the corporation as provided
extends to the capital stock represented in the law or its articles of
by the corporation’s legal capital. incorporation;
2. If the corporation is insolvent, the
2. Acts or contracts entered into in
TFD extends to the capital stock of the
behalf of a corporation by
corporation as well as all of its property persons who have no corporate
and assets.
authority (Note: This is
F Exceptions to the TFD: technically ultra vires acts of
1. Redemption of redeemable shares officers and not of the
(Sec. 8)
corporation); and
2. In close corporation, when there 3. Acts or contracts, which are per
should be a deadlock and the SEC orders
se illegal as being contrary to
the payment of the appraised value of law.
the stockholder’s share. (Sec. 104)
? An ultra vires act may be that of:
a. The corporation;
8. Power to enter into management
b. The Board of Directors; and
contract
c. The corporate officers.
F Effects of ultra vires act on:
EXECUTIVE MANAGEMENT
a. Executed contract – courts will
COMMITTEE CONTRACT
not set aside or interfere with such
1. Its creation must 1. Express power of
contracts;
be provided for in a corporation b. Executory contracts – no
the by-laws enforcement even at the suit of
either party (void and
2. A governing body 2. Management unenforceable);
which functions as company must c. Part executed and part executory
the board itself. always be subject to – principle of “no unjust enrichment
(The Corporation the superior power at expense of another” shall apply;
Code of the of the board to give and
Philippines specific directions
d. Executory contracts apparently
Annotated, Hector from time to time or
de Leon, 2002 ed.) to recall the authorized but ultra vires – the
delegation of principle of estoppel shall apply.

Ethics)
ULTRA VIRES ACTS AND ILLEGAL ACTS F Functions:

F Ultra vires (“beyond powers”) refers a. Supplement the articles of
only to an act outside or beyond incorporation
corporate powers, including those that b. Provide for details not important
may ostensibly be within such powers enough to be stated in the articles of
but are, by general or special laws, incorporation
either prohibited or declared illegal. It is c. Continuing rule for the government of
in this context that the Code has used the corporation and the individuals
the term. composing it
d. Define the rights and duties of
ULTRA VIRES ACTS ILLEGAL ACTS corporate officers and directors/trustees
Not necessarily Unlawful; against and of stockholders/members towards
unlawful, but outside law, morals, public the corporation and among themselves
the powers of the policy, and public e. Source of authority for corporate
corporation order officers and agents of the corporation
Can be ratified Cannot be ratified F Requisites for validity:
Can bind the parties Cannot bind the a. Must not be contrary to law nor
if wholly or partly parties
with the Corporation Code
executed
b. Must not be contrary to morals
and public policy;
? TEST whether or not a corporation
c. Must not impair obligations and
may perform an act: consider the
contracts;
logical and necessary relation between
d. Must be general and uniform;
the act questioned and the corporate
e. Must be consistent with the
purpose expressed by law or in the
charter or articles of incorporation;
charter. If the act is lawful in itself and
and
not prohibited, and is done for the
f. Must be reasonable, not arbitrary
purpose of serving corporate ends, and
or oppressive.
reasonably contributes to the promotion
F Binding effect:
of those ends in a substantial and not in
a. As to members and corporation
a remote and fanciful sense.
F They have the force of contract
(Montelibano vs. Bacolod-Murcia Milling
between the members themselves.
Co., Inc., 5 SCRA 36)
F They are binding only upon the
corporation and on its members and
REMEDIES IN CASE OF ULTRA VIRES
those having direction, management and
ACTS
control of its affairs.
1. State
b. As to third persons
a. Obtain a judgment of forfeiture; or
F They are not bound to know the by-
b. The SEC may suspend or revoke the
laws which are merely provisions for the
certificate of registration
government of a corporation and notice
2. Stockholders
to them will not be presumed.
a. Injunction; or
? Reason: By-laws have no extra-
b. Derivative suit
corporate force and are not in the
3. Creditors
nature of legislative enactments so far
a. Nullification of contract in fraud of
as third persons are concerned.
creditors
CONTENTS OF BY-LAWS
V. BY-LAWS
a. Time, place and manner of calling and
F Rules of action adopted by a
conducting regular or special meetings of
corporation for its internal government
directors or trustees
and for the regulation of conduct and
b. Time and manner of calling and
prescribe the rights and duties of its
conducting regular or special meetings of
stockholders or members towards itself
the stockholder or members
and among themselves in reference to
c. The required quorum in meeting of
the management of its affairs.
stockholders or members and the
manner of voting therein

d. The form for proxies of stockholders by the stockholders/ may be delegated

and members and the manner of voting members to the board by the 2/3 of the
them of directors/ trustees outstanding capital
e. The qualification, duties and stock or 2/3 of the
members in the
compensation of directors or trustees,
case of non-stock
officers and employees corporation
f. Time for holding the annual election
of directors or trustees and the mode or VI. MEETINGS
manner of giving notice thereof
g. Manner of election or appointment STOCKHOLDERS/MEMBERS MEETING
and the term of office of all officers
other than directors or trustees
WHEN:
h. Penalties for violation of the by-laws 1. REGULAR - held on the date fixed
i. In case of stock corporations, the in the by-laws or if not fixed on any
manner of issuing certificates
date in April;and
j. Such other matters as may be 2. SPECIAL - held at any time
necessary for the proper or convenient deemed necessary or as so provided
transaction of its corporate business and in the by-laws.
affairs WHERE:
F In the city or municipality where the
ARTICLES OF BY-LAWS principal office of the corporation is
INCORPORATION located, and if practicable, in the
Condition precedent in Condition principal office of the corporation.
the acquisition of subsequent; its
corporate existence; absence merely
? However, in the case of non-stock
furnishes a ground corporations, the by-laws may provide
for the revocation of that meetings may be held at any place
the franchise even outside the principal place of the
Essentially a contract For the internal corporation. (Sec. 93)
between the government of the
corporation and the corporation but has BOARD MEETING (Sec. 53)
stockholders/ the force of a WHEN:
members; between contract between 1. REGULAR - held monthly, unless
the stockholders/ the corporation and
otherwise provided in the by-laws;
member inter se, and the stockholders/
between the members, and
and
corporation and the between the 2. SPECIAL - held at any time upon
State; stockholders and the call of the president.
members; WHERE:
Executed before May be executed F May be held anywhere in or outside of
incorporation after incorporation. the Philippines.
Sec. 46 allows the
filing of the by-laws PROXY
simultaneously with FLimitations:
the Articles of
a. It must be in writing and signed by
Incorporation
the stockholder or member (as principal)
Amended by a May be amended by
majority of the a majority vote of and filed before the scheduled meeting
directors/ trustees the BOD and with the corporate secretary, and given
and stockholders majority vote of to another person (as agent) authorizing
representing 2/3 of outstanding capital such person to exercise the voting rights
the outstanding stock or a majority of the former.
capital stock, or 2/3 of the member in b. Unless otherwise provided in the
of the members in non-stock proxy, it shall be valid only for the
case of non-stock corporation meeting for which it is intended.
corporations
c. No proxy shall be valid and effective
Power to Power to amend or
for a longer period than five years at any
amend/repeal articles repeal by-laws or
cannot be delegated adopt new by-laws one time. (Sec. 58)

Ethics)
F The right to vote by proxy may be automatically expire at the end of the
exercised in any of the following agreed period
instances:
1. Election of the board of directors or VOTING TRUSTS PROXY
trustees; The trustee votes as The proxy holder
2. Voting in case of joint ownership of owner rather than as votes as agent
stock; mere agent
3. Voting by trustee under voting trust The trust may vote in The proxy must vote
agreement; person or by proxy in person
4. Pledge or mortgage of shares; unless the agreement
provides otherwise
5. As provided for in its by-laws.
Note: Stockholders or members may Trustee acquires Proxy has no legal
attend and vote in their meetings by legal title to the title to the shares of
proxy (Sec. 58); directors cannot do so. shares of the the principal
Directors must always act in person. transferring
stockholder
(Sec. 25).
The agreement must Proxy need not be
F EXTENT OF AUTHORITY be notarized notarized
a. GENERAL PROXY – confers a general The agreement is Revocable anytime
discretionary power to attend and vote irrevocable except one with
at annual meeting. interest
b. LIMITED PROXY – restrict the authority Trustee is not limited Proxy can only act at
to vote to specified matters only and to act at any a specified
may direct the manner in which the vote particular meeting stockholder’s
shall be cast meeting (if not
continuing)
VOTING TRUST A trustee can vote A proxy can only vote
and exercise all the in the absence of the
F An agreement whereby one or more
rights of the owners of the stock
stockholders transfer their shares of stockholder even
stocks to a trustee, who thereby when the latter is
acquires for a period of time the voting present
rights (and/or any other rights) over such An agreement must A proxy is usually of
shares; and in return, trust certificates not exceed 5 years at shorter duration
are given to the stockholder/s, which any one time except although under Sec.
are transferable like stock certificates, when the same is 58 it cannot exceed
subject, however, to the trust made a condition of 5 years at any one
a loan. time
agreement.
The voting right is The right to vote is
FLimitations:
divorced from the inherent in or
a. Cannot be entered into for a period ownership of stocks inseparable from the
exceeding 5 years at any one time right to ownership of
except when it is a condition in a loan stock
agreement or for the purpose of
circumventing the law against VII. STOCKS AND STOCKHOLDERS
monopolies and illegal combinations
b. The agreement must not be used for SUBSCRIPTION CONTRACT - any
purposes of fraud contract for the acquisition of unissued
c. It must be in writing and notarized stock in an existing corporation or a
and specify the terms and conditions corporation still to be formed shall be
thereof deemed a subscription. (Sec. 60)
d. A certified copy of the agreement @ The subscribed shares need not be
must be filed with the corporation and paid in full in order that the subscription
with the SEC may be valid. The subscription contract
e. The agreement shall be subject to is a consensual contract that is perfected
examination by any stockholder of the upon the meeting of the minds of the
corporation parties. The name of the subscriber is
f. Unless expressly renewed, all rights recorded in the stock and transfer book,
granted in the agreement shall and from that time, such subscriber

becomes a stockholder of record future, evidenced by a Warrant

entitled to all the rights of a Certificate, whether detachable or not,
stockholder. Until the stocks are fully which may be sold or offered for sale to
paid, it continues to be a subsisting the public.
liability that is legally enforceable.
PRE-INCORPORATION SUBSCRIPTION
? In Ong Yong, et.al, vs. David Tiu, the AGREEMENTS (PISA)
Court did not allow the rescission of the F Subscription of shares of stock of a
Pre-Subscription agreement since the corporation still to be formed shall be
action was filed by the Tius in their irrevocable for a period of at least 6
personal capacities. It ruled that it was months from date of subscription,
the corporation who had the legal unless:
personality to file the suit, it being the 1. All of the other subscribers
real party in interest. consent to the revocation;
2. The incorporation of said
UNDERWRITING AGREEMENT corporation fails to materialize
F An agreement between a corporation with said period or within a
and a third person, termed the longer period as may be
“underwriter”, by which the latter stipulated in the contract of
agrees, for a certain compensation, to subscription; provided that no
take a stipulated amount of stocks or pre-incorporation subscription
bonds, specified in the underwriting may be revoked after the
agreement, if such securities are not submission of the articles of
taken by those to whom they are first incorporation to the SEC. (Sec.
offered. 61)
UNDERWRITING STOCK MODES OF ISSUANCE OF SHARES

AGREEMENT SUBSCRIPTION a. By subscription before and after
AGREEMENT incorporation to original, unissued stock
The signers obligate The obligation of the b. By sale of treasury stock after
themselves to take signer to the incorporation for money, property or
the shares of stock purchasers and to service
which cannot be the public is c. By subscription to new issues of stock
sold. absolute. in case of an increase in the capital
Underwriters are There is no stock
given commission. commission.
d. By making a stock dividend
The signer can He becomes a
refuse to become a stockholder of the
stockholder/ company and is VALID CONSIDERATIONS IN
member of the liable to pay the SUBSCRIPTION AGREEMENT (Sec. 62)
company. amount due on the 1. Cash actually received;
stock. 2. Property, tangible or intangible,
actually received AND necessary or
convenient for its use and lawful
STOCK OPTION purposes;
F A privilege granted to a party to FRequisites;
subscribe to a certain portion of the a. Necessary or proper in
unissued capital stock of a corporation carrying on the
within a certain period and under the corporate business
terms and conditions of the grant b. Ascertainable pecuniary
exercisable by the grantee at any time value
within the period granted. c. Capable of being
WARRANT transferred and applied
F A type of security which entitles the to payment of debts
holder the right to subscribe to, the 3. Labor or services actually rendered
unissued capital stock of a corporation to the corporation;
or to purchase issued shares in the
Ethics)
4. Previously incurred corporate CAPITAL STOCK SHARES OF STOCK

indebtedness; Amount paid in or Interest or right
5. Amounts transferred from secured to be paid which the
unrestricted retained earning to in by the stockholder has in
stated capital, stockholders upon the management of
6. Outstanding shares in exchange for which the the corporation, and
corporation is to its surplus profits,
stocks in the event of reclassification
conduct its and upon a
or conversion. operation. It is the dissolution, in all of
Note: Shares of stock shall not be issued property of the its assets remaining
in exchange for promissory notes or corporation itself after payment of
future services. Note that there is no (monetary value). corporate debts.
prohibition on the use of checks, bills or
notes in payment of the “cash” SHARES OF STOCK CERTIFICATE OF
consideration. STOCK
Unit of interest in a Evidence of the
SHARES OF STOCK corporation holder’s ownership
F Interest or right which owner has in of the stock and of
the management of the corporation, and his right as a
its surplus profits, and, on dissolution, in shareholder
all of its assets remaining after the Incorporeal or Concrete and
payment of its debt. intangible property tangible
May be issued by the May be issued only
corporation even if if the subscription is
CERTIFICATE OF STOCK
the subscription is fully paid.
F The document evidencing the not fully paid.
ownership of shares of stocks by a
stockholder and the full payment of its
issue or subscription price. REQUIREMENTS FOR TRANSFER OF
@ It is not essential to the ownership STOCK
and/or existence of the share of stock. a. In case of shares covered by a
@ Where the certificate of stock reflects certificate, the indorsement of the
a greater volume of shares than the owner or his agent coupled with delivery
actual number of shares issued or to be is essential
issued, the following rules may be b. Where no certificate has been issued
considered: or for some reason it is not in the
1. To the extent that there is an possession of the stockholder, it may be
overissue, the excess issuance (over transferred by means of a deed of
the authorized capital stock or the assignment duly recorded in the books of
stated capital) shall be void as being the corporation
ultra vires. c. To be valid against the corporation
2. If there is no overissue, but no and third persons, the transfer must be
payment has been made to cover the recorded in the stock and transfer book
par or stated value of the excess d. The transferee must present the
shares, the latter would constitute indorsed certificate to the corporate
“watered” stocks. secretary who shall effect the transfer in
3. If there is no overissue and the corporate books, issue a new stock
watering of stocks, the corporation certificate in favor of the transferee and
may be bound to honor the certificate cancel the former certificate.
(if duly signed and released by its @ Only absolute transfers need be
authorized officers) in the hands of a registered. The pledge or mortgage itself
holder in good faith, reserving a right need not be recorded in the stock and
of recourse that an aggrieved party transfer book, but a chattel mortgage
may pursue against the culpable or must comply with the Chattel Mortgage
unjustly enriched party. Law, and a pledge would require the
shares to be placed in the possession of
the creditor/pledgee. The agreement
must appear in a public instrument to

take effect against third persons. 2. If no date is fixed in the subscription

(Chemphil vs. CA, 251 SCRA 257) contract, the board of directors can
make the call for payment, and
EFFECTS OF UNREGISTERED TRANSFER specify the due date. The notice of
OF SHARES call is mandatory. The failure to pay
a. It is valid and binding as between the on such date shall render the entire
transferor and the transferee balance due and payable with
b. It is invalid as to the corporation interest. Thirty days therefrom, if
except when notice is given to the still unpaid, the shares become
corporation for purposes of registration delinquent, as of the date of call,
c. It is invalid as against corporate and subject to sale, unless the board
creditors and the transferor is still liable declares otherwise. (Sec. 67)
to the corporation
d. It is invalid as to the attaching or F Effect:
executing creditors of the transferor, as A. Upon the stockholder
well as subsequent purchasers in good 1. Accelerates the entire amount of
faith without notice of the transfer. the unpaid subscription;
2. Subjects the shares to interest,
ISSUANCE OF CERTIFICATE OF STOCK expenses and costs;
FNo certificate of stock shall be issued 3. Disenfranchises the shares from
until the full amount of the subscription any right that inheres to a
is paid. Basis: Doctrine of Individuality shareholder, except the right to
of Subscription that espouses that the dividends (but which shall be
subscription is one, entire, indivisible, applied to any amount due on
and whole contract, which cannot be said shares or, in the case of
divided into portions. (SEC Opinion) stock dividends, to be withheld
by the corporation until full
COLLECTION OF UNPAID SUBSCRIPTION payment of the delinquent
1. Voluntary payment shares. (Sec. 43)
a. Upon the date specified in the B. Upon the director owning delinquent
subscription contract shares
b. Upon call by the Board of 1. He can continue serving in that
Directors capacity unless and until said shares are
2. Involuntary payment totally bidded away, he continues to be
a. Extra-judicial the owner thereof and in the interim he
i. Delinquency sale is not disqualified.
ii. Application of dividends 2. A delinquent stockholder seeking to
b. Judicial action be elected as director may not be a
Note: The prescriptive period in case of candidate for, nor be duly elected to,
subscription of shares begins to run only the board.
from the time the board of directors ? No delinquency stock shall be voted
declares that the balance are due and for or be entitled to vote or
payable. It does not begin to run from representation at any stockholders
the date of the subscription. (Garcia vs. meeting, nor shall the holder be entitled
Suarez, 67 Phil. 441) to any of the rights of a stockholder
except the right to dividends in
DELINQUENCY accordance with the provisions of this
1. If the subscription contract fixes the Code until and unless he pays the
date for payment, failure to pay on amount due on his subscription with
such date shall render the entire accrued interest, and the cost and
balance due and payable with expenses of advertisement, if any. (Sec.
interest. Thirty days therefrom, if 71)
still unpaid, the shares become
delinquent, as of the due date, and
subject to sale, unless the board
declares otherwise.
Ethics)
PROCEDURE FOR THE SALE OF PROCEDURE FOR ISSUANCE OF NEW

DELINQUENT STOCKS (Sec. 68) CERTIFICATE OF STOCK IN LIEU OF
1. Call by resolution demanding LOST, STOLEN OR DESTROYED ONES
payment of the balance. However, if (Sec. 73)
the contract of subscription 1. Filing with the corporation an
prescribes the date of payment, no affidavit in triplicate by the registered
call is necessary. owner setting forth the circumstances as
2. Notice of the board resolution given to how the certificate was lost, stolen or
to the stockholders by the corporate destroyed, the number of shares, serial
secretary, either personally or by number of the certificate and the name
registered mail. Publication of notice of the corporation that issued the same.
of call is not required. 2. Publication of notice of loss by the
3. Failure of the stockholder to pay corporation in a newspaper of general
within a grace period of 30 days circulation in the place of the principal
from the date specified in the office, once a week for 3 consecutive
contract of subscription or in the weeks.
call, the stocks shall be declared 3. After the lapse of 1 year from the
delinquent and shall be subject to date of the last publication, if no contest
sale. has been presented, the corporation
4. Notice of delinquency served on the shall cancel in its books the certificate
subscribers either personally or of stock, which has been lost, stolen or
registered mail and publication in a destroyed, and issue in lieu thereof a
newspaper of general circulation in new certificate of stock.
the province or the city where However, if the registered owner
principal office is located for once a files a bond or other securities as may be
week for 2 consecutive weeks. necessary to the board, the new
Notice shall state the amount due on certificate of stock may be issued even
each subscription plus accrued before the expiration of one (1) year
interest, and the date, time and period.
place of the sale which shall not be ? The prescribed procedure does
less than 30 days nor more than 60 not apply to a case where the
days from the date the stocks certificates are in the company’s
become delinquent. possession when mislaid which thereby
5. Sale of the delinquent shares at obligates the corporation, not the
public auction. stockholder, to suffer the consequences.
(SEC Opinion)
HIGHEST BIDDER IN A DELINQUENCY
SALE RIGHTS OF STOCKHOLDERS (Pandect of
a. The person participating in the Commercial Law and Jurisprudence,
delinquency sale who offers to pay the full Justice Jose Vitug, 1997 ed.)
amount of the balance of the subscription 1. MANAGERIAL RIGHTS
together with the accrued interest, costs a. Voting rights; and
of advertisement and expenses of sale, b. Right to remove directors
for the smallest number of shares. In 2. PROPRIETARY RIGHTS
other words, the amount of the bid does a. Right to dividends;
not vary but only the number of shares to b. Right to issuance of stock
be bought changes and determines the certificate for fully paid shares;
highest bidder. c. Proportionate participation in
b. If there is no bidder as mentioned the distribution of assets in
above, the corporation may bid for the liquidation;
same, and the total amount due shall be d. Right to transfer of stocks in
credited as paid in full in the books of corporate books;
the corporation. Such shares shall be e. Right to recover stocks
considered as treasury shares. unlawfully sold for delinquent
payment of subscription
f. Preemptive right

PREEMPTIVE RIGHT OF STOCKHOLDERS of law also granted under

F It is the shareholders’ preferential the provisions on
right to subscribe to all issues or Close Corporation
dispositions of shares of any class in Pertains to Exercisable against
proportion to their present unsubscribed another stockholder
portion of the of the corporation of
stockholdings.
authorized capital his shares of stock
F Purpose: to enable the shareholder to stock. A right that
retain his proportionate control in the may be claimed
corporation and to retain his equity in against the
the surplus. corporation
F Extends to treasury shares in case of
their reissuance. 3. REMEDIAL RIGHTS
F If the shares preferentially offered to a. Individual suit – a suit instituted
a stockholder are not subscribed or by a shareholder for his own
purchased by him, it does not follow that behalf against the corporation;
said shares shall again be re-offered on a b. Representative suit – a suit filed
pro rata basis to stockholders who by a shareholder in his behalf
already exercised their preemptive and in behalf likewise of other
rights. There is no preemptive right with stockholders similarly situated
respect to the share to be re-offered. and with a common cause
F In case additional issues of originally against the corporation; and
authorized shares: c. Derivative suit – a suit filed in
þ GENERAL RULE: There is no behalf of the corporation by its
preemptive right. This is on the theory shareholders (not creditors
that when a corporation at its inception whose remedies are merely
offers its first shares, it is presumed to subsidiary such as accion
have offered all of those which it is subrogatoria and accion
authorized to issue. pauliana) upon a cause of action
þ EXCEPTION: When a corporation at its belonging to the corporation, but
inception offers only a specified portion not duly pursued by it, against
of its authorized capital stock for any person or against the
subscription. If subsequently, it offers directors, officers and/or
the remaining unsubscribed portion, controlling shareholders of the
there would be preemptive right as to corporation.
the remaining portion thus offered for FRequisites:
subscription. (i) An existing cause of action in
F When pre-emptive right not available: favor of the corporation
a. When denied by the article of (ii) The stockholder/member
incorporation must first make a demand upon
b. Shares requiring stock offering or the corporation or the
minimum stock ownership by the public management to sue unless such a
c. Shares to be issued in good faith with demand would be futile
the approval of the stockholders (iii) The stockholder/member
representing 2/3 of the outstanding must be such at the time of the
capital stock, in exchange for property objectionable acts or
needed for corporate purposes or in transactions unless the
payment of a previously contracted debt transactions are continuously
injurious
PRE-EMPTIVE RIGHT vis-à-vis RIGHT OF (iv) The action must be brought
FIRST REFUSAL (Philippine Corporate in the name of the corporation
Law, Cesar Villanueva, 2001 ed.) F The number of shares of the
PRE-EMPTIVE RIGHT OF FIRST stockholder is immaterial since
RIGHT REFUSAL he is not suing in his own behalf
May be exercised Arises only by virtue Note: The mere trustee of
even when there is of contractual shares registered in his name
no express provision stipulations but is cannot file a derivative suit for
Ethics)
he is not a stockholder in his own absorbed by another a new corporation

right. (Bitong vs. CA, 292 SCRA corporation which called the
304) survives and consolidated
continues the corporation.
combined business.
LIABILITIES OF STOCKHOLDERS
a. Liability to the corporation for unpaid
subscription
PROCEDURE:
b. Liability to the corporation for
a. The board of directors or trustees of
interest on unpaid subscription
each corporation shall approve a plan of
c. Liability to creditors of the
merger or consolidation
corporation on the unpaid subscription
b. The plan shall be submitted for
d. Liability for watered stock
approval by the stockholders or members
e. Liability for dividends unlawfully paid
of each of such corporation at separate
f. Liability for failure to create
corporate meetings duly called for the
corporation
purpose
c. The articles of merger or
VIII. CORPORATE BOOKS AND RECORDS
consolidation shall be executed by each
INSPECTION RIGHTS
of the constituent corporations
F Limitations:
d. Submission to the SEC for approval
a. The right must be exercised
e. The SEC may or may not conduct a
during reasonable hours on
hearing
business days;
f. Issuance of certificate of merger or
b. The person demanding the right
consolidation by the SEC
has not improperly used nay
information obtained through
EFFECTS OF MERGER OR
any previous examination of the
CONSOLIDATION (Sec. 80)
books and records of the
1. The constituent corporations shall
corporation; and
become a single corporation which, in
c. The demand is made in good
case of merger shall be the surviving
faith or for a legitimate purpose.
corporation and, in the case of
(Sec. 74)
consolidation, shall be the consolidated
F The right extends, in consonance with
corporation;
equity, good faith, and fair dealing, to a
2. The separate existence of the
foreign subsidiary wholly-owned by the
constituent corporation shall cease,
corporation.
except that of the surviving corporation;
F Books required to be kept by the
3. The surviving or consolidated
corporation:
corporation shall possess all rights,
1. Book of Minutes
privileges, immunities and powers and
a. minutes of stockholder or
subject to all the duties and liabilities of
members meetings; and
a corporation;
b. minutes of board meetings.
2. Book of all business transactions;
corporation shall thereafter possess all
3. Stock and transfer book, in case
the rights, privileges, immunities and
of stock corporations.
franchises of each of the constituent
F Corporate records required by the SEC
corporations;
to be kept and/or registered:
5. All property, real or personal, and all
1. Books of Account;
receivables due to, and all other interest
2. List of Stockholders or Members;
of each constituent corporation, shall be
and
deemed transferred to and vested in
3. Financial Records.
such surviving or consolidated
corporation without further act or deed;
IX. MERGER AND CONSOLIDATION
MERGER CONSOLIDATION
corporation shall be responsible for all
F A union whereby F The union of two
one or more existing or more existing
the liabilities and obligations of each of
corporations are corporations to form the constituent corporations;

7. Any claim, action or proceeding enterprise and of the ordinarily

pending by or against any of the stockholders contemplates a
constituent corporations may be liquidation of the
prosecuted by or against the surviving or enterprise
consolidated corporations; and 4. Title to the assets 4. Transfer of title is
are transferred by by virtue of contract
8. The rights of the creditors or lien
operation of law
upon the property of any of each 5. The constituent 5. The selling
constituent corporation shall not be corporations are corporation is not
impaired by such merger or automatically dissolved by the
consolidation. dissolved mere transfer of all
its property
þGENERAL RULE: When one corporation
buys all the shares of another TYPES OF ACQUISITIONS (Philippine
corporation, this will not operate to Corporate Law, Cesar Villanueva, 2001
dissolve the other corporation and as the ed.)
two corporations still maintaining their a. “ASSETS-ONLY” LEVEL
separate corporate entities, one will not F The purchaser is interested only in
answer for the debts of the other. the raw assets and properties of the
þEXCEPTIONS AS TO NON-ASSUMPTION business. He is not interested in the
OF LIABILITIES: entity of the corporate owner of the
1. If there is an express assumption of assets nor of the goodwill and other
liabilities; factors relating to the business itself.
2. If there is a consolidation or merger; F The transferee would not be liable for
3. If the purchase was in fraud of the debts and liabilities of his transferor
creditors; and since there is no privity of contract over
4. If the purchaser is merely a debt obligations between the transferee
continuation of the seller. and the transferor’s creditors
b. “BUSINESS-ENTERPRISE” LEVEL
DE FACTO MERGER F The transferee merely continues the
F One corporation acquiring all or same business of the transferor since he
substantially all of the properties of obtains the earning capability of the
another corporation in exchange for venture
shares of stock of the acquiring F The transferee is liable for the debts
corporation. The acquiring corporation and liabilities of the transferor
would end-up with the business c. “EQUITY” LEVEL
enterprise of the selling corporation F The purchaser takes control and
whereas the latter would end up with ownership of the business by purchasing
basically its remaining assets being the the shareholdings of the corporate
shares of stock of the acquiring owner. What the purchaser actually
corporation and may then distribute it as purchased is the ability to elect the
liquidating dividend to its stockholders. members of the board of the corporation
(Philippine Corporate Law, Cesar who run the business.
Villanueva, 2001 ed.)
X. APPRAISAL RIGHT
MERGER and SALE OF ASSETS
CONSOLIDATION APPRAISAL RIGHTS
1. Sale of assets is 1.merger/consolidati F The right to withdraw from the
always involved on is not always corporation and demand payment of the
involved fair value of his shares after dissenting
2. There is automatic 2. Purchasing from certain corporate acts involving
assumption of corporation is not fundamental changes in corporate
liabilities generally liable for structure, namely: Key: ASIM
the debts and
liabilities of the
1. An amendment to the articles
selling corporation that has the effect of a)
3. There is 3. The selling changing or restricting the rights
continuance of the corporation of shareholders or of authorizing
Ethics)
preferences over those of 3. The stockholder must make a written

outstanding shares, or b) demand within 30 days from the date
changing the term of corporate that the vote was taken.
existence; 4. The price must be based on the fair
2. Sale, encumbrance or other value of the shares as of the day prior
dispositions of all or to the date in which the vote was
substantially all of the corporate taken.
property or assets. (Sec. 81) 5. Payment of the shares must be made
3. Merger or consolidations; and only out of the unrestricted retained
4. Investment of corporate funds in earnings of the corporation.
another corporation or in a 6. Upon payment, the stockholder must
purpose other than the primary transfer his shares to the corporation.
purpose; (Sec. 42)
F Other instances when right available: Effect of the Exercise of the Right:
5. When a corporation invest its funds a. All rights accruing to the such shares
in another corporation or business shall be suspended
for any purpose other than its b. The dissenting stockholder shall be
primary purpose entitled to receive payment of the
6. In a close corporation, a fair value of his shares as agreed upon
stockholder for any reason between him and the corporation or
compel the corporation to as determined by the appraisers
purchase his shares when the chosen by them.
corporation has sufficient assets
in its books to cover its debts þGENERAL RULE: A dissenting
and liabilities exclusive of stockholder who demands payment of his
capital stock shares is no longer allowed to withdraw
from his decision
PROCEDURE þExcept when:
a. The dissenting stockholder shall make 1. The corporation consents to the
a written demand on the corporation withdrawal
within 30 days after the date on which 2. The proposed corporate action is
the vote was taken for the payment of abandoned or rescinded by the
the fair value of his shares. Failure to do corporation
so, shall be deemed a waiver of his a 3. The proposed corporate action is
waiver of his appraisal right disapproved by the SEC where its
b. If the proposed corporate action is approval is necessary
implemented or effected, the 4. The Commission determines that such
corporation shall pay to such stockholder is not entitled to
stockholder, upon surrender of the appraisal right.
corresponding certificate of stock within
10 days after demanding payment of his XI. NON-STOCK CORPORATION
shares F A corporation organized for an
c. Upon payment of the agreed or eleemosynary purpose, and no part of
awarded price, the stockholder shall whose income is, during its existence,
transfer his shares to the corporation distributable as dividends to its
members, trustees, or officers, subject
LIMITATIONS ON THE EXERCISE OF to the provisions of the Corporation Code
APPRAISAL RIGHT on dissolution. (Sec. 87)
1. Any of the instances provided for by F Any profit which it may obtain as an
law for the exercise of the right must incident to its operations shall,
be present. whenever necessary or proper, be used
2. The dissenting stockholder must have for the furtherance of the purpose or
voted against the proposed corporate purposes for which it was organized.
action.

F Eleemosynary purposes: charitable, Cumulative voting is Cumulative voting

religious, educational, professional, available in the not available unless
cultural, recreational, fraternal, election of directors otherwise provided
literary, scientific, social, civic service, in the articles or by-
laws
or similar purposes, like trade, industry,
Directors cannot Trustees may exceed
agricultural. (Sec. 88)
exceed 15 in number 15 in number
F They are governed by the same rules The term of a The term of a trustee
established for stock corporations, director is 1 year is 3 years; 1/3 of the
whenever pertinent, subject, however, Board shall be
to a number of special features. elected annually
Stockholders may Members may be
RULES ON CONVERSION (SEC Opinion) vote by proxy deprived of the right
1. Stock to non-stock corporation to vote by proxy in
F Conversion may be made by mere the articles or by-
amendment of the articles of laws
incorporation. Officers are elected Officers may be
by the Board of directly elected by
2. Non-stock to stock corporation
Directors the members unless
F The corporation must first be otherwise provided
dissolved; mere amendment of the in the articles or by-
articles of incorporation would not laws
suffice because the conversion would Stockholders and Members may be
change the corporate nature from non- directors must act in allowed by the by-
profit to monetary gain. a meeting, except laws to vote by mail
? The conversion without dissolving it where a mere or other similar
first would be tantamount to distribution written assent is means
sufficient or a formal
of its assets or income to its members
meeting unnecessary
inasmuch as after its conversion, the
asset of the non-stock corporation would
RULES FOR DISTRIBUTION OF ASSETS IN
now be treated as payment to the
CASE OF DISSOLUTION (SEC. 94)
subscriptions of the members who will
1. All liabilities and obligations of the
now become stockholders of the
corporation shall be paid, satisfied and
corporation.
discharged or adequate provision shall
be made therefor
RIGHTS OF MEMBERS
2. Assets held by the corporation upon a
1. To be entitled to 1 vote unless
condition requiring return, transfer or
otherwise provided in the
conveyance, and which condition occurs
articles or by-laws
by reason of dissolution, shall be
2. To vote by proxy unless
returned, transferred or conveyed in
otherwise provided in the
accordance with such requirements
articles or by-laws
3. Assets received and held by the
3. To transfer membership if
corporation subject to limitations
allowed by the articles or by-
permitting their use only for charitable,
laws
religious, benevolent, educational or
4. To be elected as trustee
similar purposes but not held upon a
condition requiring return, transfer or
conveyance by reason of dissolution,
STOCK NON-STOCK
shall be transferred or conveyed to one
Has capital stock Does not have shares
divided into shares and may not or more corporations, societies or
and with authority to distribute profits to organizations engaged in activities in the
distribute dividends its members Philippines substantially similar to those
to its stockholders of the dissolving corporation pursuant to
Stockholders may Members cannot a plan of distribution
transfer their shares transfer their 4. Other assets, if any, shall be
membership unless distributed in accordance with the
allowed by the
articles or by-laws
Ethics)
provisions of the articles of incorporation 7. Deadlocks in board are settled

or the by-laws by the SEC, on the written
5. In any other case, assets may be petition by any stockholder; and
distributed to such persons, societies, 8. Stockholder may withdraw and
organizations or corporations, whether avail of his right of appraisal.
or not organized for profit, as may be Note: Special rules are provided for
specified in a plan of distribution. close corporations because it is
F The plan of distribution shall be essentially an incorporated partnership.
approved by a majority vote of the board (The Corporation Code of the Philippines
of trustees and by 2/3 of the members Annotated, Hector de Leon, 2002 ed.)
having voting rights at a meeting
F The following cannot be a close
XII. CLOSE CORPORATION corporation:
F A special kind of stock corporation: a. mining companies;
1. whose articles of incorporation b. oil companies;
should provide that: c. stock exchanges;
a.the number of stockholders d. banks;
shall not exceed 20; e. insurance companies;
b. issued stocks are subject f. public utilities;
to transfer restrictions, with a g. education institutions;
right of preemption in favor of h. other corporations declared to be
the stockholders or the vested with public interest. (Sec.
corporation; and 96)
c. the corporation shall not be
listed in the stock exchange or ORDINARY STOCK CLOSE
its stocks should not be publicly CORPORATION CORPORATION
offered; AND Its articles of Its articles must
2. whose at least 2/3 of the voting incorporation need contain the special
stocks or voting rights should not be only contain the matters prescribed by
owned or controlled by another general matters Sec. 97, aside from
corporation which is not a close enumerated in Sec. the general matters
14 of the Code. in Sec. 14. Failure to
corporation. (Sec. 96)
do so precludes a de
F Characteristics: jure close
1. Stockholders may act as corporation status.
directors without need of Its status as an 2/3 of its voting stock
election and therefore are liable ordinary stock or voting rights must
as directors; corporation is not not be owned or
2. Stockholders who are involved in affected by the controlled by another
the management of the ownership of its corporation which is
corporation are liable in the voting stock or not a close
same manner as directors are. voting rights. corporation.
Its articles cannot Its articles may
3. Quorum may be greater than
classify its directors. classify its directors.
mere majority;
Business of the Business of the
4. Transfers of stocks to others, corporation is corporation may be
which would increase the managed by the managed by the
number of stockholders to more board of directors. stockholders if the
than the maximum are invalid; articles so provide,
5. Corporate actuations may be but they are liable as
binding even without a formal directors.
board meeting, if the The corporate Its articles may
stockholder had knowledge or officers and provide that any or
ratified the informal action of employees are all of the corporate
elected by a officers or employees
the others; majority vote of all may be elected or
6. Preemptive right extends to all the members of the appointed by the
stock issues; board of directors. stockholders.

The pre-emptive The pre-emptive F A favorable recommendation of the

right is subject to right is subject to no DECS is essential for the approval of its
the exceptions found exceptions unless articles and by-laws.
in Sec. 39. denied in the articles F It is primarily governed by special
The appraisal right may The appraisal right may
be exercised by a be exercised and
laws and suppletorily by the provisions of
stockholder only in the compelled against the the Code.
cases provided in Secs. corporation by a
81 and 42 of the Code. stockholder for any NON-STOCK EDUCATIONAL
reason.
EDUCATIONAL CORPORATION
Except as regards In case of an
redeemable shares, arbitration of an CORPORATION
the purchase by the intra-corporate A non-stock A special corporation
corporation of its deadlock by the SEC, corporation which may a stock or
own stock must the corporation may non-stock
always be made from be ordered to Governed by the Governed by special
the unrestricted purchase its own provisions on non- laws and by the
retained earnings. shares from the stock corporations general provisions of
stockholders and suppletorily by the Corporation Code
regardless of the the provisions on
availability of stock corporations
unrestricted retained The number of board The number of the
earnings. of trustees may be board of trustees
Arbitration of intra- Arbitration of intra- more than 15 should not be less
corporate deadlock corporate deadlock than 5 but not more
by the SEC is not a by the SEC is an than 15.
remedy in case the available remedy in The term of office of The term of office of
directors or case the directors or the board of trustees the board of trustees
stockholders are so stockholders are so shall be 3 years shall be 5 years
divided respecting divided respecting
the management of the management of 2. RELIGIOUS CORPORATION
the corporation. the corporation. F A corporation composed entirely of
spiritual persons and which is organized
POWERS OF THE SEC IN CASE OF for the furtherance of a religion or for
DEADLOCK IN CLOSE CORPORATIONS perpetuating the rights of the church or
1. Cancel or alter any provision in the for the administration of church or
articles of incorporation or bylaws religious work or property. It is different
2. Cancel, alter or enjoin any from an ordinary non-stock corporation
resolution of the corporation organized for religious purposes.
3. Direct or prohibit any act of the F Kinds:
corporation a) CORPORATION SOLE
4. Require the purchase at their fair - A special form of corporation,
value of shares of any stockholder usually associated with the clergy,
either by any stockholder or by the consisting of one person only and his
corporation regardless of the successors, who is incorporated by
availability of unrestricted retained law to give some legal capacities and
earnings. advantages; and
5. Appoint a provisional director b) RELIGIOUS SOCIETIES
6. Dissolve the corporation - A non-stock corporation
7. Granting such other relief as the governed by a board but with religious
circumstances may warrant. purposes. It is incorporated by an
aggregate of persons, e.g. religious
XIII. SPECIAL CORPORATIONS order, diocese, synod, sect, etc.
1. EDUCATIONAL CORPORATION
F A stock or non-stock corporation
organized to provide facilities for
teaching or instruction.

Ethics)
XIV. DISSOLUTION AND WINDING UP EFFECTS OF DISSOLUTION

(LIQUIDATION) a. Transfer of legal title to corporate
property to the stockholders who
DISSOLUTION become co-owners thereof
F Extinguishment of the franchise of a b. Continuation of corporate business
corporation and the termination of its merely as an association without
corporate existence. juridical personality
c. Conveyance by the stockholders of
F Modes: their respective shareholdings toward
1. Voluntary the creation of a new corporation to
a) Application for dissolution with the continue the business of the old
SEC d. Reincorporation of the dissolved
i. Where no creditors are corporation by refilling new articles of
affected incorporation and by-laws
ii. Where creditors are affected e. The corporation continues as a body
b) Shortening of the corporate term corporate for 3 years for purposes of
by amending the articles of winding up
incorporation. f. Cessation of corporate existence for
2. Involuntary all purposes upon the expiration of the
a) Expiration of the corporate term; winding up period of 3 years. (The
b) Failure to organize and commence Corporation Code of the Philippines
business within 2 years from the date Annotated, Hector de Leon, 2002 ed.
of issuance of the certificate of
incorporation (Note: However, the LIQUIDATION
SEC has opined that the dissolution in F The process by which all the assets of
this case is not automatic. The the corporation are converted into liquid
corporation continues to exist as assets (cash) in order to facilitate the
such, notwithstanding its non- payment of obligations to creditors, and
operational status until the SEC the remaining balance, if any, is to be
orders its dissolution after notice and distributed to the stockholders or
hearing.) members.
c) Legislative dissolution; F Methods:
d) Quo warranto suit against a de 1. By the corporation itself through its
facto corporation; board of directors/trustees;
e) Minority stockholders’ suit for 2. By a trustee to whom the corporate
dissolution on justifiable grounds; or assets have been conveyed; and
f) SEC dissolution, upon complaint 3. By a management committee or
and after notice and hearing, on the rehabilitation receiver appointed by the
following grounds: SEC.
i. The corporation was illegally Note: The 3-year period of liquidation
organized; does not apply to Methods 2 and 3 as
ii. Continuous inactivity long as the trustee or the receiver is
(subsequent to incorporation, appointed within the said period.
organization and ? The termination of the life of a
commencement of business) juridical entity does not by itself cause
for at least 5 years; the extinction or diminution of the rights
iii. Serious dissension in the and liabilities of such entity nor those of
corporation; or its owners and creditors alike (see Sec.
iv. Commission by the 145).
corporation of illegal or ultra ? The word “trustee” as sued in
vires acts or violations of the the corporation statute must be
Code. understood in its general concept which
could include the counsel to whom was
entrusted the prosecution of the suit
filed by the corporation. (Spouses
Gelano vs. CA)

LIQUIDATION REHABILITATION 6. The names and addresses of the

Connotes a winding Connotes a reopening present directors and officers of the
up or settling with or reorganization corporation
creditors and debtors 7. A statement of its authorized
Winding up process Contemplates a capital stock
so that assets may be continuance of
corporate life in an 8. A statement of its outstanding
distributed to those capital stock
effort to restore the
entitled
corporation to its 9. A statement of the amount actually
former successful paid in
operation
10. Such additional information as may
be necessary to enable the SEC to
XV. FOREIGN CORPORATION determine whether such corporation
F A corporation formed, organized or
is entitled to license
existing under any law other than those
of the Philippines, and whose laws allow
GROUNDS FOR REVOCATION OF
Filipino citizens and corporations to do
LICENSE
business in its own country or state.
1. Failure to file annual reports
(Sec. 123)
required by the Code;
F The definition espouses the
2. Failure to appoint and maintain a
incorporation test and the reciprocity resident agent;
rule and is significant for licensing
3. Failure to inform the SEC of the
purposes.
change of residence of the resident
F It is not permitted to “transact or do
agent;
business in the Philippines” until it has
4. Failure to submit copy of amended
secured a license for that purpose from
articles or by-laws or articles of merger
the SEC and a certificate of authority
or consolidation;
from the appropriate government 5. A misrepresentation in material
agency. matters in reports;
6. Failure to pay taxes, imposts and
RESIDENT AGENT
assessments;
F An individual, who must be of good
7. Engage in business unauthorized by
moral character and of sound financial
SEC;
standing, residing in the Philippines, or a
8. Acting as dummy of a foreign
domestic corporation lawfully
corporation; and
transacting business in the Philippines, 9. Not licensed to do business in the
designated in a written power of
Philippines. (Sec. 134)
attorney by a foreign corporation
authorized to do business in the TEST OF “DOING OR TRANSACTING
Philippines, on whom any summons and
BUSINESS IN THE PHILIPPINES”:
other legal processes may be served in
F The Corporation Code does not define
all actions or other legal proceedings
the phrase “doing or transacting
against the foreign corporation. (Sec.
business.”
127-128)
A. Jurisprudential Tests (Philippine
Corporate Law, Cesar Villanueva, 2001
CONTENTS FOR APPLICATION OF
ed.)
LICENSE 1. Twin characterization test
1. Date and term of incorporation
a) Whether the foreign corporation is
2. The address of the principal office in maintaining or continuing in the
the country of incorporation Philippines the body or substance of
3. The name and address of resident
the business for which it was
agent organized or whether it has
4. The place in the Philippines where substantially retired from it and
it intends to operate
turned it over another (Substance
5. The specific purpose or purposes
Test); and
b) Whether there is continuity of
commercial dealings and
Ethics)
arrangements, contemplating to business in its own name and for

some extent the performance of acts its own account;
or works or the exercise of some c) Publication of a general
functions normally incident to and in advertisement through any print
progressive prosecution of, the or broadcast media;
purpose and object of its d) Maintaining a stock of goods in
organization (Continuity Test). the Philippines solely for the
2. Contract Test purpose of having the same
F Whether the contracts entered processed by another entity in
into by the foreign corporation, or the Philippines;
by an agent acting under the control e) Consignment by the foreign
and direction of the foreign corporation of equipment with a
corporation, are consummated in the local company to be used in the
Philippines. processing of products for
export;
B. Statutory Tests f) Collecting information in the
1. Foreign Investment Act of 1991 Philippines; and
(R.A. No. 7042) g) Performing services auxiliary to
F Acts constituting “doing business”: an existing isolated contract of
a) Soliciting orders, service sale which are not on a
contracts, opening offices, continuing basis.
whether called “liaison” offices
or branches; C. Jurisprudential Rules
b) Appointing representatives or 1. Doctrine of Isolated Transactions
distributors domiciled in the F Foreign corporations, even
Philippines or who in any unlicensed ones, can sue or be sued on a
calendar year stay in the country transaction or series of transactions set
for a period or periods totaling apart from their common business in the
180 days or more; sense that there is no intention to
c) Participating in the engage in a progressive pursuit of the
management, supervision or purpose and object of business
control of any domestic business, transaction. (Eriks Pte.Ltd vs. CA, 267
firm or entity or corporation in SCRA 567)
the Philippines; and 2. In Pari Delicto Rule
d) Any other act or acts that imply FIn the case of Top-Weld Manufacturing
a continuity of commercial vs. ECED, S.A., the Court denied the
dealings or arrangements, and relief prayed for by petitioner when it
contemplate to that extent the ruled that the very purpose of the law
performance of acts or works, or was circumvented and evaded when the
the exercise of some of the petitioner entered into the said
functions normally incident to, agreements despite the prohibition
and in progressive prosecution contained in the questioned law. The
of, commercial gain or of the parties were considered as being in pari
purpose of the business delicto because they equally violated
organization. R.A. 5455
2. Implementing Rules of R.A. No. 7042 3. Estoppel Rule
F Acts not constituting “doing F A party is estopped from questioning
business”: the capacity of a foreign corporation to
a) Mere investment as a institute an action in our courts where it
shareholder in a domestic had obtained benefits from its dealings
corporation and/or the exercise with such foreign corporations and
of rights as such investor; thereafter committed a breach or sought
b) Appointing a representative or to renege on its obligations. (European
distributor domiciled in the Resources vs. Ingnieburo)
Philippines which transacts

EFFECTS OF LACK OF LICENSE SECURITIES AND EXCHANGE

A. On suits COMMISSION REORGANIZATION DECREE
1. Foreign corporation doing business in (P.D. No. 902-A)
the Philippines:
a) may not sue or intervene in any ORIGINAL AND EXCLUSIVE
action in any court or JURISDICTION OF THE RTC (Sec. 5 in
administrative agency of the relation to Sec. 5.2 OF RA 8799):
Philippines; but 1. Fraudulent devices and schemes
b) may be sued on any valid cause of employed by directors detrimental
action recognized in the to the public interest and to other
Philippines (under the doctrine of firms;
quasi-estoppel by acceptance of 2. Intra-corporate disputes;
benefits). (Sec. 133) 3. Disputes with the state in relation to
2. Foreign corporation not doing business their franchise and right to exist as
in the Philippines: such;
a) Generally, it may not sue and be 4. Controversies in election,
sued in any court or appointment of directors or trustees;
administrative agency of the 5. Petition to be declared in a state of
Philippines; suspension of payments;
b) However, it may sue and be sued 6. Petition for rehabilitation; and
for isolated transactions, as well 7. Appointment of rehabilitation
as for those which are casual or receiver or management committee
incidental thereto. (provisional remedies).
B. On contracts
F The contracts contemplated are those Note: A corporate officer’s dismissal is
that satisfy the “contract test” or those always a corporate act and/or an intra-
that make a foreign corporation as one corporate controversy. However, the
“doing business in the Philippines.” corporate officers contemplated are
þ GENERAL RULE: The contracts are those whose offices are created by the
unenforceable. They are enforceable Corporation Code or the by-laws.
only upon securing a license.
þ EXCEPTION: However, the contracts INTRA-CORPORATE DISPUTE
are null and void if they are contrary to F Elements:
law, morals, good customs, public order 1. Status or relationship of the parties –
and public policy. controversy must be between and
among corporators, between
INSTANCES WHEN A FOREIGN corporators and the corporation
CORPORATION MAY SUE IN THE 2. Nature of the question – intrinsic
PHILIPPINES WHETHER OR NOT connection with the regulation or
LICENSED TO DO BUSINESS THEREAT the internal affairs of the
1. To seek redress for an isolated corporation
business transaction; F Examples:
2. To protect its corporate reputation, 1. Action by a corporate officer to
name, and goodwill; recover compensation from the
3. To enforce a right not arising out of a corporation
business transaction, e.g. tort that 2. Action by a stockholder to compel
occurred in the Philippines; issuance of certificate of stocks
4. When the parties have contractually 3. Action for recovery of corporate
stipulated that Philippines is the venue funds
of actions; and Note: Allegations in the complaint
5. When the party sued is barred by the determines jurisdiction.
principle of estoppel and/or principle of
unjust enrichment from questioning the
capacity of the foreign corporation.

Ethics)
GROUNDS FOR SUSPENSION OR i. affidavit of general financial

CANCELLATION OF CERTIFICATE OF condition;
REGISTRATION (SEC. 6[L]) j. at least 3 nominations for
1. fraud in procuring registration; rehabilitation receiver;
2. serious misrepresentation as to k. certificate under oath that
objectives of corporation; directors and stockholders have
3. refusal to comply with lawful order irrevocably approved/ consented
of SEC; to all actions/matters necessary
4. continuous inoperation for at least 5 under the rehabilitation plan.
years; 3. The court shall issue the stay order
5. failure to file by-laws within not later than 5 days from the filing of
required period; the petition, which among others, shall:
6. failure to file reports; and a. appoint a rehabilitation receiver;
7. Others similar grounds. b. stay all actions for claims against
the debtor, which shall cover
INTERIM RULES OF PROCEDURE ON both secured and unsecured
CORPORATE REHABILITATION (effective creditors;
December 15, 2000) c. set an initial hearing for the
petition (not earlier than 45 days
CORPORATE REHABILITATION but not later than 60 days from
F A process to try to conserve and filing of the petition); and
administer the corporation’s assets in d. direct the creditors to file their
the hope that it may eventually be able verified comment or opposition
to return from financial stress to not later than 10 days before the
solvency. initial hearing; their failure to do
F Nature: in rem, summary, and non- so would bar them from any
adversarial participating in the proceedings.
F Applicability: These Rules apply to 4. Publication of the stay order in a
petitions for rehabilitation filed by newspaper of general circulation once a
corporations, partnerships and week for 2 consecutive weeks;
associations pursuant to P.D. 902-A 5. Referral of rehabilitation plan to
F Steps: rehabilitation receiver;
1. Filing verified petition with the 6. Meetings between corporate debtor
appropriate RTC by: with creditors. Discussions on the
a. corporate debtor who foresees rehabilitation plan;
the impossibility of meeting its 7. Submission of final rehabilitation plan
debts when they respectively fall to the RTC for approval;
due; or 8. The petition shall be dismissed (which
b. creditors holding at least 25% of results into the automatic lifting of the
the debtor’s total liabilities; stay order unless RTC ordered otherwise)
2. The following shall be annexed to the if no rehabilitation plan is approved
petition: after 180 days from initial hearing;
a. audited financial statements at 9. Approval or disapproval of the
end of its last fiscal year; rehabilitation plan by RTC.
b. interim financial statement;
c. schedule of debts and liabilities; REHABILITATION RECEIVER
d. inventory of assets; F A person appointed by the RTC, in
e. rehabilitation plan; behalf of all the parties for the purpose
f. schedule of payments and of preserving and conserving the
disposition of assets effected property and preventing its possible
within 3 months preceding the destruction or dissipation, if it were left
filing of the petition; in the possession of any of the parties.
g. schedule of cash flow for the last ? He acts in a fiduciary capacity and
3 months’ with impartiality towards all interested.
h. statement of possible claims; ? He does not take over the
management and control of the debtor,

but shall closely oversee and monitor the Corporation, G.R. No. 154049, August
operations of the debtor during the 28, 2003)
pendency of the proceedings. (Bar
Review Materials in Commercial Law, ?RA 8799 effectively amended Sec. 5 of
Jorge Miravite, 2002 ed.) PD 902-A, jurisdiction over intra-
corporate disputes is now vested in the
POWERS AND FUNCTIONS OF RTCs. However, while Sec. 5 was
MANAGEMENT COMMITTEE OR amended, there is no repeal of Sec. 6
REHABILITATION RECEIVER (Sec. 6[d], thereof declaring that the fraudulent
P.D. 902-A) acts or schemes, which the SEC shall
1. To take custody of, and control over, exclusively investigate and prosecute,
all the existing assets and property are those in violation of any law or rules
of such entities under management; and regulations administered and
2. To evaluate the existing assets and enforced by the SEC alone. The filing of
liabilities, earnings and operations of civil/intra-corporate case before SEC
such corporations, partnerships or does not preclude the simultaneous and
other associations; concomitant filing of a criminal action
3. To determine the best way to before the regular courts; such that a
salvage and protect the interest of fraudulent act may give rise to liability
the investors and creditors; for violation of the rules and regulations
4. To study, review and evaluate the of the SEC cognizable by the SEC itself,
feasibility of continuing operations as well as criminal liability for violation
and structure and rehabilitate such of the Revised Penal Code cognizable by
entities if determined to be feasible the regular courts, both charges to be
by the RTC; filed and proceeded independently, and
5. To report and be responsible to the may be simultaneously with the other.
RTC until dissolved; and (Fabia vs. CA, G.R.No. 132684.
6. May overrule or revoke the actions of September 11, 2002.)
the previous management and board
of directors of the entity under Automatic Stay
management, notwithstanding any F Effect of appointment of a
provision of law, articles of management committee or rehabilitation
incorporation or by-laws to the receiver
contrary. F All actions for claims against the
corporation shall be suspended
@ Mere disagreement among accordingly.
stockholders as to the affairs of the F Purpose/justification: To enable the
corporation would not in itself suffice as management committee or the
a ground for the appointment of a rehabilitation receiver to effectively
management committee. At least where exercise its powers free from any
there is no imminent danger of loss of judicial or extrajudicial interference
corporate property or of any other injury that might unduly hinder or prevent the
to stockholders, management of rescue of the debtor company.
corporate business should not be (Rubberworld v. NLRC)
wrested away from duly elected officers, F No definite duration; deemed to apply
who are prima facie entitled to during the entire period that the
administer the affairs of the corporation, corporate debtor is under management
and placed in the hands of the committee or the rehabilitation
management committee. However, receiver. (BF Homes v. CA)
where the dissension among stockholders
is such that the corporation cannot
successfully carry on its corporate
functions the appointment of a
management committee becomes
imperative. (Ramon Jacinto and Jaime
Colayco vs. First Women’s Credit
Ethics)
SECURITIES REGULATION CODE (SRC) 12. Civil liabilities arising from false
(R.A. No. 8799) statement in the registration
statement (Section 56)
PURPOSES: 13. Civil liabilities arising from false
1. To establish a socially conscious, statements or omissions in the
free market that regulates itself prospectus, communications and
2. To encourage the widest reports (Section 57)
participation of ownership in 14. Protection against manipulation of
enterprises security prices, manipulative and
3. To enhance the democratization deceptive devices (Section 59), fraud
of wealth in pre-need plans and commodities
4. To promote the development of futures contracts (Section 60),
the capital market fraudulent transactions (Section 58),
5. To protect investors and insider trading (Section 61);
6. To ensure full and fair disclosure 15. Establishment of trust funds to
about securities compensate investors for
7. To minimize if not totally extraordinary losses or damage they
eliminate insider trading and may suffer due to business failure or
other fraudulent or manipulative fraud or mismanagement of the
devices and practices which persons with whom they transact
create distortions in the free (Section 36.5[a]).
market. (Sec. 2)
POWERS AND FUNCTIONS OF THE SEC
FEATURES WHICH ARE INTENDED TO 1. Supervision over corporations,
PROTECT THE INVESTING PUBLIC partnerships, and grantees of primary
1. All securities are required to be franchise;
registered before they can be sold to 2. Approve, reject registration
the public (Section 8); statements/licensing applications;
2. Rejection and revocation of 3. Suspend, revoke, after notice and
registration of securities (Section hearing primary franchise on grounds;
13); 4. Regulate/supervise activities of
3. Regulation of pre-need plans. persons to ensure compliance;
(Section 16); 5. Supervise monitor, suspend or take
4. Protection of shareholder interests over, exchanges, clearing agencies and
(Section 19); SROs;
5. Prohibition on fraud, manipulation 6. Recommend policies, advise,
and insider trading (Sections 24, 25, propose legislation to Congress on
26 and 27); securities market;
6. Regulations of Securities Market 7. Prepare, approve, amend or repeal
Professionals (Section 28); rules, regulations, issue opinions
7. Revocation, refusal or suspension of 8. Enlist the aid and support of and/or
registration of brokers, dealers and deputize any and all enforcement
salesmen and associated persons agencies of the Government as well as
(Section 29); any private institution, corporation,
8. Restrictions on “over-the-counter” firm, association or person in the
markets (Section 32); implementation of its powers;
9. Self-regulation of associations of 9. Issue cease and desist orders to
securities brokers, dealers and other prevent fraud or injury;
securities related organizations 10. Punish for contempt of the
(Section 29); Commission;
10. Registration of clearing agencies 11. Compel the officers of any
(Section 42); registered corporation or association to
11. Limitations on margin trading or the call meetings of stockholders or
amount of credit that may be members;
extended on any security (Section
49)

12. Issue subpoena duces tecum and predetermined price, called the
summon witnesses to appear in any exercise or strike price, on or before
proceedings of the Commission; and a predetermined date, called the
13. Exercise such other powers as may expiry date, which can only be
be provided by law which are necessary extended in accordance with
or incidental to the carrying out its Exchange rules.
express powers. (Sec. 5) 2. WARRANTS – rights to subscribe or
purchase new shares or existing
SECURITIES shares in a company, on or before a
F Shares, participation or interest in a predetermined date, called the
corporation or in a commercial expiry date, which can only be
enterprise or profit-making ventures and extended in accordance with
evidenced by a certificate, contract, Exchange rules. Warrants generally
instrument whether written or electronic have a longer exercise period than
in character. (Sec. 3) options. (SRC Rule 3.1-1)
F Kinds:
1. Shares of stocks, bonds, debentures, REGISTRATION OF SECURITIES
notes, evidence of indebtedness, þ GENERAL RULE: A registration
asset-backed securities; statement duly filed and approved by
2. Investment contracts, certificates of the SEC is necessary before securities
interest or participation in a profit- may be sold and offered for sale or
sharing agreement, certificates of distribution within the Philippines. Prior
deposit for a future subscription to any sale, information on the
3. Fractional undivided interests in oil, securities, in such form and substance
gas, or other mineral rights; prescribed by the SEC, shall be made
4. Derivatives like options and warrants; available to each prospective purchaser.
5. Certificates of assignments and (Sec. 8)
participation, trust certificates, þ EXCEPTIONS:
voting trust certificates or similar 1. Exempt securities; and
instruments; 2. Exempt transactions.
6. Proprietary or non-proprietary
membership certificates in EXEMPT SECURITIES (Sec. 9)
corporations; 1. Any security issued or guaranteed by
7. Other instruments as may in the the Government of the Philippines, or
future be determined by the SEC. by any political subdivision or agency
(Sec. 3) thereof, or by any person controlled
F Classes: by and acting as an instrumentality of
1. Exempt securities and securities said Government.
covered by exempt transactions; and 2. Any security issued or guaranteed by
2. Securities that are not exempt or the the government of any country with
sale of which is not an exempt which the Philippines maintains
transaction. diplomatic relations, or by any state,
province or political subdivision or
DERIVATIVE agency thereof on the basis of
F A financial instrument, including reciprocity.
options and warrants, whose value 3. Certificates issued by a receiver or by
depends on the interest in or a trustee in bankruptcy duly approved
performance of an underlying security, by the proper adjudicatory body.
but which does not require any 4. Any security or its derivatives the sale
investment of principal in the underlying or transfer of which, by law, is under
security. the supervision and regulation of the
F Kinds: Office of the Insurance Commission,
1. OPTIONS – contracts that give the Housing and land Use Regulatory
buyer the right, but not the Board, or the Bureau of Internal
obligation, to buy or sell an Revenue.
underlying security at a
Ethics)
5. Any security issued by a bank except made between or among the person
its own shares of stock. and one or more sellers;
6. Any securities added by the SEC by b. The person intends to acquire 30% or
rule or regulation after public more of the equity shares of a public
hearing. company within a period of 12
months; or
EXEMPT TRANSACTIONS (Sec. 10) c. The person intends to acquire shares
1. Judicial sale by executor, that would result in ownership of
administrator, guardian/receiver in more than 50% of the equity shares of
insolvency or bankruptcy. a public company. (SRC Rule 19)
2. Sale of pledged or mortgaged security F Tender offer is made:
to liquidate a bona fide debt. 1. By filing with the SEC a declaration
3. Sale on isolated transactions by to make a tender offer;
owner. 2. By furnishing the issuer or the
4. Distribution of stock dividends. originator of the security a
5. Sale of capital stock exclusively to statement containing such
stockholders where no commission is information required under Sec. 17
paid. of the SRC:
6. The issuance of bonds or notes i. Annual Report (includes balance
secured by mortgage upon real estate sheet, profit and loss statement);
or tangible personal property, where and
the entire mortgage are sold to a ii. Periodical reports for interim fiscal
single purchaser at a single sale. periods; and
7. Issuance of security in exchange of 3. By publishing all requests or
any security from same issuer invitations for tender, or materials,
pursuant to right of conversion. making a tender offer or requesting
8. Broker’s transactions or inviting letters of such a security.
9. Pre-incorporation subscription and
subscription pursuant to an increase PUBLIC COMPANY
of the ACS. 1. Any corporation with a class of equity
10. Exchange of securities by issuer with securities listed on an Exchange; or
existing security holders exclusively 2. Any corporation with assets in excess
11. Sale to less than 20 persons during of P50M and having 200 or more holders,
any 12- month period at least 200 of which are holding at least
12. Sale of securities to banks, 100 shares of a class of its equity
registered investment house, securities.
insurance companies, pension fund or
retirement plan maintained by the UNLAWFUL ACTS
government or other persons 1. For any beneficial owner, director, or
authorized by the BSP to engage in officer to sell any security if the
trust functions. seller or his principal does not own or
does not deliver it within 20 days
TENDER OFFER from sale. (Sec. 23.3)
F A publicly announced intention by a 2. Manipulation of security prices. (Sec.
person acting alone or in concert with 24.1)
other persons to acquire equity 3. Employment of manipulative or
securities of a “public company.” deceptive device or contrivance in
F It is mandatory to make a tender connection with purchase and sale of
offer for equity shares of a public authorities. Execution of “short sale”,
company in an amount equal to the “stop-loss order” not in accordance
number of shares that the person intends with SEC rules. (Sec. 24.2)
to acquire in the following 4. For any member of Exchange directly
circumstances: or indirectly endorse or guarantee the
a. The person intends to acquire 15% or performance of any “put”, “call”,
more of the equity shares of a public “straddle”, “option” or “privilege” in
company pursuant to an agreement

relation to any security registered. 7. SHORT SWING TRANSACTION - One

(Sec. 25) where a person buys securities and sells
5. Fraudulent transactions in the sale of the same within a period of six months.
securities. (Sec.26) 8. FLOOR TRADER - A professional
6. Insider trading (Sec. 27) trader in securities who acts for himself
7. For an insider to communicate and not for the account of others,
material non-public information about hence, receives no commission at all.
the issuer or security. (Sec. 27.3) 9. HYPE AND DUMP –Engaging in buying
8. Unlawful Tender Offer. (Sec 27.4) activity at increasingly higher prices and
9. Use of Extensive Credit. (Sec 48.1) then selling securities in the market at
higher securities.
DEFINITION OF TERMS: 10. BOILER ROOM SALES –The use of
1. SHORT SALE – A contract for sale of high-pressure sales tactics to promote
shares of stock which the seller does not purchases and sales of securities.
own, or certificates which are not within 11. “OVER THE COUNTER TRANSACTION”
his control, so as to be available for Transactions which are not made at the
delivery at the time when delivery must stock exchange, but directly between
be made. the broker and the customer.
2. STOP-LOSS ORDER – The direction by a 12. “OVER-THE-COUNTER” MARKET
customer to his broker that if the F A market created other than a
commodity touches the price named, the registered stock exchange for both the
broker shall close the trade at the best purchase and sale of any security.
available price.
3. PUT – An option that, in consideration INSIDER TRADING
of a premium paid, gives the purchaser F The selling or buying of a security by
the right to make the seller take from an insider while in possession of material
him a given number of shares of a named non-public information with respect to
stock between a given time at a the issuer or the security. It is
stipulated price which is usually below considered unlawful unless:
the prevailing market price of the stock 1. The insider proves that the
at the time the “put” is purchased. information was not gained from such
4. CALL - An option that, in relationship, or
consideration of a premium paid, 2. If the other party selling to or buying
entitles the buyer the right to compel from the insider (or his agent) is
the seller to deliver to him a certain identified, the insider proves:
number of shares within a given time at a. that he disclosed the information
a stipulated price which is usually higher to the other party, or
than the prevailing market price at the b. that he had reason to believe
time the “call” is bought. “Call” is the that the other party otherwise is
reverse of “put.” also in possession of the
5. STRADDLE – The double privilege of a information. (Sec. 27.1)
“put” and a “call,” and secures to the
holder the right to demand of the seller INSIDER
at a certain price within a certain time a F A person who, with respect to a
certain number of shares of specified particular security, may be any of the
stock, or to require him to take, at the following:
price within the same time, the same 1. The issuer;
shares of stock. 2. The director or officer of, or a person
6. WASH SALE – The operation of controlling the issuer;
simultaneously buying and selling the 3. A person whose relationship or former
same stock. It is any transaction in any relationship to the issuer gives him
security which involves no change in the access to material information about the
beneficial ownership thereof. It is the issuer or the security that is not
reverse of “MATCHED ORDERS” wherein generally available to the public;
there is a change in the ownership of the 4. A government employee, or director,
securities. or officer of an exchange, clearing
Ethics)
agency and/or self-regulatory F The credit extended must be for an

organization who has access to material amount not greater than whichever is
information about an issuer or a security higher of:
that is not generally available to the 1. 65% of current market price of
public; or the security
5. A person who learns such information 2. 100% of the lowest market price
by a communication from any of the of security during the preceding
foregoing insiders. (Sec. 3.8) 36 calendar months, but not
greater than 75% of the current
MATERIAL NON-PUBLIC INFORMATION market price. (Sec. 48)
(formerly Fact of Special Significance)
a. Information about the issuer or the Margin
security which has not been generally F Sum of money, or its equivalent,
disclosed to the public and would placed in the hands of a broker by
likely affect the market price of the principal or persons on whose account
security after being disseminated to the purchase is to be made, as a security
the public and the lapse of a to the former against losses to which he
reasonable time for the market to may be exposed by a subsequent
absorb the information; or depression in the market value of the
b. Information about the issuer or the stock.
security which would be considered
by a reasonable person important Margin Call
under the circumstances in F Demand made by the broker on the
determining his course of action to investor to deposit money or securities
buy, sell or hold security. (Sec. 27.2) with the broker when a purchase is made
or when the investor’s equity in a margin
MARGIN TRADING account falls below a minimum standard
F A kind of trading that allows a broker set by the exchange or broker.
to advance for the customer/investor
part of the purchase price of a security
and to keep it as a collateral for such
advance.


San Beda College of Law: Corporation Code

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San Beda College of Law 85

MEMORY AID IN COMMERCIAL LAW

I. GENERAL PROVISIONS liabilities. (Creese vs. CA, 93

COMMERCIAL LAW COMMITTEE

as a body, or, generally, from the affected transaction

MEMORY AID IN COMMERCIAL LAW

2. Such control must have been be in the name of

COMMERCIAL LAW COMMITTEE

ADVANTAGES VIS-À-VIS who compose the

MEMORY AID IN COMMERCIAL LAW

existence; a de facto d. Parent and Subsidiary

COMMERCIAL LAW COMMITTEE

“PHILIPPINE NATIONAL” UNDER THE c. Stockholders – owners of shares of

MEMORY AID IN COMMERCIAL LAW

in the management of its affairs without reversion of the shares to the

COMMERCIAL LAW COMMITTEE

vote on the following fundamental F Shares with a value fixed in the

MEMORY AID IN COMMERCIAL LAW

afterwards and upon which the compliance in order that a corporation

COMMERCIAL LAW COMMITTEE

F FILIPINO PERCENTAGE OWNERSHIP 10. Manufacture, repair, stockpiling

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN COMMERCIAL LAW

institutions (Art. XIV, Sec. 4 of the F Contents: (Sec. 14)

COMMERCIAL LAW COMMITTEE

MEMORY AID IN COMMERCIAL LAW

5. Other qualifications as may be the corporation, the final say will

COMMERCIAL LAW COMMITTEE

FConsequences: corporation, thereby obtaining profits

MEMORY AID IN COMMERCIAL LAW

2. Preferred or redeemable shares may within the scope of an apparent

@ It is a familiar doctrine that if a

COMMERCIAL LAW COMMITTEE

SPECIAL RULES ON CONTRACTS 3. Contracts of interlocking directors

MEMORY AID IN COMMERCIAL LAW

Limitations on the Powers of the 8. To enter into merger or

COMMERCIAL LAW COMMITTEE

FWAYS OF INCREASING/DECREASING d. To acquire treasury shares

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN COMMERCIAL LAW

COMMERCIAL LAW COMMITTEE

TRUST FUND DOCTRINE (TFD) managerial power.

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN COMMERCIAL LAW

ULTRA VIRES ACTS AND ILLEGAL ACTS F Functions:

COMMERCIAL LAW COMMITTEE

d. The form for proxies of stockholders by the stockholders/ may be delegated

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT CHAIRPERSONS

MEMORY AID IN COMMERCIAL LAW

COMMERCIAL LAW COMMITTEE

becomes a stockholder of record future, evidenced by a Warrant

UNDERWRITING STOCK MODES OF ISSUANCE OF SHARES

MEMORY AID IN COMMERCIAL LAW

4. Previously incurred corporate CAPITAL STOCK SHARES OF STOCK

COMMERCIAL LAW COMMITTEE

take effect against third persons. 2. If no date is fixed in the subscription

MEMORY AID IN COMMERCIAL LAW

PROCEDURE FOR THE SALE OF PROCEDURE FOR ISSUANCE OF NEW

COMMERCIAL LAW COMMITTEE