CORPORATION LAW

INTRODUCTION

FORMATION AND ORGANIZATION OF CORPORATION

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FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925)

As a general rule, the by-laws of a corporation are valid if they are reasonable and

calculated to carry into effect the objective of the corporation and are not contradictory to the

general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of

stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and

cannot justify an restriction upon the right of sale.

GOVT. OF P.I. V. EL HOGAR

Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares

valid?

No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which

prohibits forced surrender of unmatured stocks except in case of dissolution.

Is a provision in the by-laws fixing the salary of directors valid?

Yes. Since the Corporation Law does not prescribe the rate of compensation, the power

to fix compensation lies with the corporation.

Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares

valid?

Yes. The Corporation Law gives the corporation the power to provide qualifications of

its directors.

CITIBANK, N.A. v. CHUA (220 SCRA 75)

Where the SEC grants a license to a foreign corporation, it is deemed to have approved its

foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are

not valid without SEC approval applies only to domestic corporations.

A board resolution appointing an attorney-in-fact to represent the corporation during pre-

trial is not necessary where the by-laws authorize an officer of the corporation to make

such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681)

ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the

date

of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the

corporation's automatic dissolution.

RULING: No. Failure to file by-laws does not result in the automatic dissolution of the

corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC,

163 SCRA 534) Incorporators must be given the chance to explain their neglect or

omission and remedy the same.

SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631)

A corporation is a juridical person separate and distinct from its stockholders or

members. Accordingly, the property of the corporation is not the property of its stockholders or

members and may not be sold by the stockholders or members without express authorization

from the corporation's Board of Directors.

In this case, the sale of a piece of land belonging to Motorich Corporation by the

corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said

corporate treasurer was authorized to enter into the contract of sale, or that the said contract was

ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her

act could not bind the corporation since she was not the sole controlling stockholder.

STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373)

Properties registered in the name of the corporation are owned by it as an entity separate

and distinct from its members. While shares of stock constitute personal property, they do not

represent property of the corporation. A share of stock only typifies an aliquot part of the

corporation's property or the right to share in its proceeds to that extent when distributed

according to law and equity, but its holder is not the owner of any part of the capital of the

corporation. Nor is he entitled to the possession of any definite portion of its property or assets.

The act of liquidation made by the stockholders of the corp of the latter‘s assets is not and

cannot be considered a partition of community property, but rather a transfer or conveyance of

the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well

as the distribution of the assets, is to transfer their title from the corporation to the stockholders

in proportion to their shareholdings, that transfer cannot be effected without the corresponding

deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to

consider the certificate of liquidation as one in the nature of a transfer or conveyance.

CARAM V. CA (151 SCRA 373; 1987)

The case of the unpaid compensation for the preparation of the project study.

The petitioners were not involved in the initial stages of the organization of the airline.

They were merely among the financiers whose interest was to be invited and who were in fact

persuaded, on the strength of the project study, to invest in the proposed airline.

There was no showing that the Airline was a fictitious corp and did not have a separate

juridical personality to justify making the petitioners, as principal stockholders thereof,

responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its

corporate acts as duly authorized by its officers and directors. Granting that the petitioners

benefited from the services rendered, such is no justification to hold them personally liable

therefor. Otherwise, all the other stockholders of the corporation, including those who came in

late, and regardless of the amount of their shareholdings, would be equally and personally liable

also with the petitioner for the claims of the private respondent.

PALAY V. CLAVE (124 SCRA 640; 1983)

The case of the reliance on a default provision of the contract granting automatic extra-judicial

rescission.

The court found no badges of fraud on the part of the president of the corporation. The

BOD had literally and mistakenly relied on the default provision of the contract. As president

and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp

to defraud private respondent. He cannot, therefore, be made personally liable because he

appears to be the controlling stockholder. Mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient

ground for disregarding the separate corporate personality.

MAGSAYSAY V. LABRADOR (180 SCRA 266)

The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in

SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC.

The words "an interest in the subject," to allow petitioners to intervene, mean a direct

interest in the cause of action as pleaded, and which would put the intervenor in a legal position

to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not

recover.

Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in

sheer expectancy of a right in the management of the corporation and to share in the profits

thereof and in the properties and assets thereof on dissolution, after payment of the corporate

debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the

corp, it does not vest the owner thereof with any legal right or title to any of the property, his

interest in the corporate property being equitable and beneficial in nature. Shareholders are in no

legal sense the owners of corporate property, which is owned by the corp as a distinct legal

person.

Close Corporations

CEASE V. CA (93 SCRA 483; 1979)

The Cease plantation was solely composed of the assets and properties of the defunct

Tiaong plantation whose license to operate already expired. The legal fiction of separate

corporate personality was attempted to be used to delay and deprive the respondents of their

succession rights to the estate of their deceased father.

While originally, there were other incorporators of Tiaong, it has developed into a closed

family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his

instrumentality. It was his business conduit and an extension of his personality. There is not even

a showing that his children were subscribers or purchasers of the stocks they own.

DELPHER TRADES V. CA (157 SCRA 349; 1988)

The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did

was to invest their properties and change the nature of their ownership from unincorporated to

incorporated form by organizing Delpher and placing the control of their properties under the

corporation. This saved them inheritance taxes.

This is the reverse of Cease; however, it does not modify the other cases. It stands on its

own because of the facts.

Q: What is the general rule governing parent-subsidiary relationship? A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity.

Q: When may it be disregarded by the courts?

(1) if the subsidiary was formed for the payment of evading the payment of higher taxes

(2) where it was controlled by the parent that its separate identity was hardly

discernible (3) parent corporations may be held responsible for the contracts as well as the

torts of the subsidiary

Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company?

1. the parent corp. owns all or most of the capital stock of the subsidiary. 2. the parent and subsidiary have common directors and officers 3. the parent finances the subsidiary

4. the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation

5. the subsidiary has grossly inadequate capital 6. the parent pays the salaries and other expenses or losses of the subsidiary 7. the subsidiary has substantially no business except with the parent corp. or no

assets except those conveyed to or by the parent corp.

8. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parent’s own

9. the parent uses the property of the subsidiary as its own 10. the directors or the executives of the subsidiary do not act independently in the

interest of the subsidiary but take their orders from the parent corp. in the latter’s

interest 11. the formal legal requirements of the subsidiary are not observed

(Garrett vs. Southern Railway) (Note: Sir Jack said that we must not stop after we’ve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. We must go further and consider other circumstances which may help determine clearly the true nature of the

relationship. --- Em)

GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)

This case involved a Workers Compensation claim by a wheel moulder employed by

Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which

Parent-Subsidiary Relationship

acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so

completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern.

The general rule is that stock ownership alone by one corporation of the stock of another

does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the

separate corporate existence of the subsidiary is a mere sham, or unless the control of the

subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.

In the case, it was found that there were two distinct operations. There was no evidence

that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the

manager of the subsidiary, was in full control of the operation. He established prices, handled

negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmen‘s

Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of

Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was

bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions

remained in the hands of Marius. Hence, the complaint against Southern Railway was

dismissed.

KOPPEL VS. YATCO (77 Phil. 496; 1946)

This case involved a complaint for the recovery of merchant sales tax paid by Koppel

(Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of

First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all

purposes, it dismissed the complaint saying that in the transactions involved in the case, the

public interest and convenience would be defeated and would amount to a perpetration of tax

evasion unless resort was had to the doctrine of "disregard of the corporate fiction."

The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-

Phil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own

incidental expenses (e.g. Cable expenses) and also those of its ―principal‖. Moreover, K-Phil‘s

share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or

dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be

to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and

the consequent commission of a grave injustice to the Government. Moreover, it would allow

the taxpayer to do by indirection what the tax laws prohibit to be done directly.

LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)

Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation,

98% of the Liddel Inc.‘s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied

the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel

Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare

parts from Liddel Inc. and then sell them to the general public.

To allow the taxpayer to deny tax liability on the ground that the sales were made through

another and distinct corporation when it is proved that the latter is virtually owned by the former

or that they were practically one and the same is to sanction the circumvention of tax laws.

YUTIVO VS. CTA (1 SCRA 160; 1961)

Southern Motors was actually owned and controlled by Yutivo as to make it a mere

subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo

financed principally, if not wholly, the business of Southern Motors and actually exceeded the

credit of the latter . At all times, Yutivo, through the officers and directors common to it and the

Southern Motors exercised full control over the cash funds, policies, expenditures and

obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of

Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in

order to arrive at the true tax liability of Yutivo.

LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953)

The La Campana Gaugau Packing and La Campana Coffee Factory were operating under

one single business although with 2 trade names. It is a settled doctrine that the fiction of law of

having the corporate identity separate and distinct from the identity of the persons running it

cannot be invoked to further the end subversive of the purpose for which it was created. In the

case at bar, the attempt to make the two businesses appear as one is but a device to defeat the

ends of the law governing capital and labor relations and should not be permitted to prevail.

PROMOTER’S CONTRACTS PRIOR TO INCORPORATION

While a corporation could not have been a party to a promoter's contract

since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make

the contracts its own and become bound thereon if, after incorporation, it:

(1) Adopts or ratifies the contract; or (2) Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the

corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.

Liability of Corporation for Promoter’s Contracts

McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)

It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be

expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its

authorized agents, as any similar original contract might be shown.

The right of agents to adopt an agreement originally made by promoters depends upon

the purposes of the corporation and the nature of the agreement. The agreement must be one

which the corporation itself could make and one which the usual agents of the company have

express or implied authority to enter into.

CLIFTON v. TOMB (21 F. 2d 893; 1921)

Whatever may be the proper legal theory by which a corporation may be bound by the

contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by the

corporation), it is necessary in all cases that the corporation should have full knowledge of the

facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the

knowledge of the facts.

CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)

A promoter could not have acted as agent for a corporation that had no legal existence.

A corporation, until organized, has no life therefore no faculties. The corporation had no

juridical personality to enter into a contract.

Also see Caram v. CA

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for:

(1) Specific performance; or

(2) Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)

When the corporation was formed, the incorporators took upon themselves the whole

thing, and ratified all that had been done on its behalf. Though there was no formal assignment

of the contract to the corporation, the acts of the incorporators were an adoption of the contract.

Therefore the corporation has the right to sue for damages for the breach of contract.

Corporate Rights under Promoter’s Contracts

RIZAL LIGHT V. PSC (25 SCRA 285; 1968)

The incorporation of (Morong) and its acceptance of the franchise as shown by this action

in prosecuting the application filed with the Commission for approval of said franchise, not only

perfected a contract between the municipality and Morong but also cured the deficiency pointed

out by the petition. The fact that Morong did not have a corporate existence on the day the

franchise was granted does not render the franchise invalid, as Morong later obtained its

certificate of incorporation and accepted the franchise.

GENERAL RULE: Promoters are personally liable on their contracts made on behalf

of a corporation to be formed.

EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.

RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918)

In this case, the board of directors, before the financial inability of the corporation to

proceed with the project was revealed, had already recognized the contracts as being in existence

and had proceed with the necessary steps to utilize the films. The subsequent action by the

stockholders in not ratifying the contract must be ignored. The functions of the stockholders are

limited of nature. The theory of a corporation is that the stockholders may have all the profits but

shall return over the complete management of the enterprise to their representatives and agents,

called directors. Accordingly, there is little for the stockholders to do beyond electing directors,

making by-laws, and exercising certain other special powers defined by law. In conformity with

this idea, it is settled that contracts between a corporation and a third person must be made by

directors and not stockholders.

LOPEZ VS. ERICTA (45 SCRA 539; 1972)

In this case, the Board of Regents of the University of the Philippines terminated the ad

interim appointment of Dr. Blanco as Dean of the College of Education by not acting on the

matter. In the transcript of the meeting which was latter agreed to be deleted, it was found out

that the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's appointment 3 voted

against, and 4 abstained.

Personal Liability of Promoter on Pre-Incorporation Contracts

The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's

appointment or against it. The SC held that such abstentions be counted as negative vote

considering that those who abstained, 3 of which members of the Screening Committee,

intended to reject Dr. Blanco's appointment.

ZACHARY VS. MILLIN (294 Mic. 622; 1940)

The issue in this case is regarding the validity of the director's meeting at the company's

laboratory on December 8, 1937 wherein Zachary was removed as president of the company.

Zachary that he was not notified of the meeting thus, the action was void. On the other hand, the

defendants contend that the notice requirement was waived by Zachary's presence at the meeting.

The SC held that the validity of the meeting was not affected by the failure to give notice

as required by the by-laws, provided that the parties were personally present. Since all the parties

were present at the meeting of December 8, and understood that the meeting was to be a

directors' meeting, then the action taken is final and may not be voided by any informality in

connection with its being called.

PNB VS. CA (83 SCRA 238; 1978)

The action was brought by the mortgagor (Tapnio) against PNB for damages in

connection with the failure of the latter's board of directors to act expeditiously on the proposed

lease of the former's sugar quota to one Tuazon.

The Supreme Court held that while the PNB has the ultimate authority to approve or

disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot

escape liability for observing, for the protection of the interest of the private respondents, that

degree of care, precaution and vigilance which the circumstances justly demand in approving or

disapproving the lease of the said sugar quota.

FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (January 24, 1996)

The authority of a corporate officer in dealing with third persons may be actual or

apparent. The doctrine of "apparent authority," with special reference to banks, was laid out

in Prudential Bank v. CA (223 SCRA 350) where it was held that:

A bank is liable for the wrongful acts of its officers done in the

interest of the bank or in the course of dealings of the officers in

their representative capacity but not for acts outside the scope of

their authority. A bank holding out its officers and agents as

worthy of confidence will not be permitted to profit by the frauds

they may thus be enabled to perpetrate in the apparent scope of

their employment; nor will it be permitted to shrink from its

responsibility for such frauds, even though no benefit may accrue

to the bank therefrom.

Accordingly, a bank is liable to innocent third persons where the representation is made

in the course of its business by its agent acting within the general scope of his authority even

though, in the particular case, the agent is secretly abusing his authority and attempting to

perpetrate a fraud upon his principal or some other person for his own ultimate benefit.

Application of these principles is especially necessary because banks have a fiduciary

relationship with the public and their stability depends on the confidence of the people in their

honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the

selection and supervision of its employees, resulting in prejudice to their depositors.

YU CHUCK V. KONG LI PO (46 Phil. 608; 1924)

The power to bind a corporation by contract lies with its board of directors or trustees.

Such power may be expressly or impliedly be delegated to other officers and agents of the

corporation. It is also well settled that except where the authority of employing servants or

agents is expressly vested in the board, officers or agents who have general control and

management of the corporation's business, or at least a specific part thereof, may bind the

corporation by the employment of such agents and employees as are usual and necessary in the

conduct of such business. Those contracts of employment should be reasonable. Case at bar:

contract of employment in the printing business was too long and onerous to the business (3-year

employment; shall receive salary even if corp. is insolvent).

THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20 SCRA 987; 1967)

Kalaw was a corporate officer entrusted with general management and control of

NACOCO. He had implied authority to make any contract or do any act which is necessary for

the conduct of the business. He may, without authority from the board, perform acts of ordinary

nature for as long as these redound to the interest of the corporation. Particularly, he contracted

forward sales with business entities. Long before some of these contracts were disputed, he

contracted by himself alone, without board approval. All of the members of the board knew

about this practice and have entrusted fully such decisions with Kalaw. He was never questioned

nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and

by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot

now declare that these contracts (failures) are not binding on NACOCO.

ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928)

A chattel mortgage, although not approved by the board of directors as stipulated in the

by-laws, shall still be valid and binding when the corporation, through the board, tacitly

approved and ratified it. The following acts of the board constitute implied ratification:

1. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the

President, GM, Attorney, Auditor, etc.)

2. Two other directors approved his actions and expressed satisfaction with the advantages

obtained by him in securing the chattel mortgage.

3. The corporation took advantage of the benefits of the chattel mortgage. There were even

partial payments made with the knowledge of the three directors.

ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20

SCRA 526; 1967)

Acuna entered into an agreement with Verano, manager of PROCOMA, in which the

former would be constituted as the latter's agent in Manila. Acuna diligently went about his

business and even used personal funds for the benefit of the corporation. During the face-to-face

meeting with the board, Acuna was assured that there need not be any board approval for his

constitution as agent for it would only be a mere formality. Later on, the board disapproved the

agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of

the corp. proven by these acts:

1. He was assured by the board that no board approval was necessary.

2. He delivered P 20,000, performed his work with the knowledge of the board.

3. Due to acquiescence, the board cannot disown or disapprove the contract.

HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)

In this case, the Executive Committee:

a) removed the Treasurer and appointed a new one

b) fixed the annual salary of the members of the Executive Committee

c) amended the by-laws by giving the President the sole authority to call a stockholder's

meeting and a board of directors meeting

d) amended the composition of the ExeCom by limiting it to just 2 persons.

Was these actions valid?

No, because the Executive Commmittee usurped the powers vested in the board and the

stockholders. If their actions was valid, it would put the corp. in a situation wherein only two

men, acting in their own pecuniary interests, would have absorbed the powers of the entire

corporation. "Full powers" should be interpreted only in the ordinary conduct of business and

not total abdication of board and stockholders' powers to the ExeCom. "FULL POWERS" does

not mean unlimited or absolute power.

BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil.

426; 1959)

Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before

meeting. March 26 posting not enough for March 28 election.

JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160; 1965)

As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nullified

by a subsequent walkout.

However, the proceedings can be nullified if the walkout was for a reasonable and

justifiable cause. In this case, F. Logan Johnston, who owned and/or represented more than 50%

of the corporation's outstanding shares, was prohibited from voting the shares of the Silos family

(which he had validly purchased) and of the minor children of Albert S. Johnston (of whom he

was guardian) on the ground that such shares must first be registered in the names of the wards,

thereby prompting the walkout. The Court of Appeals held that the walkout was neither

unreasonable nor unjustifiable. It noted however that there was no formal declaration of a

quorum before the withdrawal from the meeting by F. Logan Johnston.

PONCE VS. ENCARNACION (94 Phil. 81; 1953)

Upon good cause, such as a Chairman of the Board failing to call a meeting, either by his

absence or neglect, the Court may grant a stockholder the authority to call such a meeting.

DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225; 1968)

The Corporation Law says that every director must own at least one (1) share of the

capital stock of the corporation.

GOKONGWEI VS. SEC (89 SCRA 336; 1979)

Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties, and compensation of its directors.

A stockholder has no vested right to be elected director for he impliedly contracts that the

will of the majority shall govern.

Amended by-laws are valid for the corporation has its inherent right to protect itself.

ROXAS V. DELA ROSA (49 Phil. 609; 1926)

Under the Law, directors can only be removed from office by a vote of the stockholders

representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority.

A director cannot be removed by a mere majority by disguising it as filling a vacancy.

ANGELES V. SANTOS (64 Phil. 697; 1937)

Court may appoint a receiver when corporate remedy is unavailable when board of

directors perform acts harmful to the corporation.

Generally, stockholders cannot sue on behalf of the corporation. The exception is when

the defendants are in complete control of the corporation.

CAMPBELL V. LEOW’S INC. (134 A. 2d 852; 1957)

The stockholders have an implied power to remove a director for cause. Even when there

is cumulative voting, stockholders can still remove directors for cause.

DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969)

A corporation may use its funds to invest in another corporation without the approval of

the stockholders if done in pursuance of a corporate purpose. However, if it is purely for

investment, the vote of the stockholders is necessary.

- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of

widely-held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other SHs that are not parties to the agreement.

Non-voting shares (Sec. 6)

- Preferred or redeemable shares.

ITF shares

And/or shares (Sec. 56)

- Any one of the joint owners can vote said shares or appoint a proxy thereof.

Proxy Device

ROSENFELD V. FAIRCHILD (128 N.E. 2d 291; 1955)

In a contest over policy, as compared to a purely personal power contest, corporate

directors have the right to make reasonable and proper expenditures. Reason: in these days of

giant corporations with vast numbers of SH‘s, if directors are not allowed to authorize reasonable

expenses in soliciting proxies, corporate business may be hampered by difficulty in procuring

quorum; or corporations may be at the mercy of persons seeking to wrest control for their

purposes if the directors may not freely answer their challenge. But corp expense may be

disallowed by courts where money was shown to have been spent for personal power, individual

gain or private advantage, or where fairness and reasonableness of amount spent has been

successfully challenged.

Cumulative voting (see sec. 24)

Methods of Voting

1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall

multiply 100 by five (equals 500) and distribute equally among the five candidates without preference

2. Cumulative voting: If A has 100 shares and there are 5 directors to be elected, he shall (one candidate) multiply 100 by five (equals 500) and he can vote the 500 for only one

candidate.

3. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only

(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the two, giving each one 250 votes.

How to compute votes needed to get a director elected by cumulative voting:

1. Frey’s formula (minimum no. of votes to elect one director)

X= # of shares required Y= # of outstanding votes Z= # of directors to be elected X = _ Y__ + 1 Z + 1

Devices Affecting Control

2. Baker & Cary’s formula (minimum no. of votes needed to elect multiple directors)

X= # of shares required Y= # of shares represented at meeting D= # of directors the minority wants to elect

D’= total # of directors to be elected X = Y x D + 1

D' + 1

NOTES

Levels playing field or at least ensures that the minority can elect at least one representative

to the board of directors (BOD)

Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majority’s control

By-laws cannot provide against cumulative voting since this right is mandated by law in

Section 24.

GOTTSCHALK V. AVALON REALTY (23 N.W. 2d 606; 1946)

Provision granting right to vote to preferred stock previously prohibited from voting, constitutes diminution of the voting power of common stock.

Provision in the articles of incorporation granting holders of preferred stock right to vote in

case of default in payment of dividends after July 1, 1951 was construed as denial by

necessary implication of the right to vote even prior to July 1, 1951.

Device Favorable To: Limitations

Cumulative voting

MINORITY: assures them of representation on the board

Can’t give minority control of corp. affairs

Classification of shares

MINORITY: so long as they hold more common stock as opposed to the majority who holds more preferred stock

Preferred and redeemable stock can still vote on certain matters as provided in Sec. 6 or as may be provided by the corp.

Restriction on transfer of shares

*applicable only to close corporations

MAJORITY: they can choose whether to keep or release

shares and they can prevent opposition from acquiring shares

See Sec. 98

Prescribing qualifications for directors; founder’s shares

MAJORITY: they’re the ones who can prescribe the qualifications in the by-laws

Qualifications must be reasonable and do not deprive minority of representation on the

board

Management contracts

MAJORITY: allows them to delegate certain functions and duties without losing control over the corporation

Cannot exceed five years

BOD must retain control over corp. policies

BOD must have power to recall contract

Unusual voting and quorum requirements

MINORITY: gives them stronger veto power in certain corp. affairs

Subject to the limitations in Sec. 103.

MEETINGS DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS

WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE CORPORATION?

(1) Diligence (2) Loyalty

(3) Obedience Obedience - directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation.

WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS ARISE?

In general, liability of directors, trustees or officers arises when they either:

(1) willfully and knowingly vote for or assent to patently unlawful acts of the

corporation; or (2) are guilty of gross negligence of bad faith in directing the affairs of the

corporation; or (3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

Duties and Liabilities of Directors

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the

profits which would otherwise have accrued to the corporation. (Sec. 31) In addition to this general liability, the Corporation Code provides for specific rules to govern the following situations:

(1) Self-dealing directors (Sec. 32)

(2) Contracts between interlocking directors (Sec. 33) (3) Disloyalty to the corporation (Sec. 34) (4) Watered stocks (Sec. 65)

WHAT IS THE BUSINESS JUDGMENT RULE?

As a general rule, directors and trustees of the corporation cannot be held liable

for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code. (Campos & Campos)

GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the corporation and courts will not interfere. EXCEPTION: When such contracts are so unconscionable and oppressive as

to amount to a wanton destruction of the rights of the minority.

trust.

Duty of Diligence: Business Judgment Rule.

Fixing compensation of directors and officers

GENERAL RULE: Directors as such are not entitled to compensation for performing services ordinarily attached to their office.

EXCEPTIONS: (1) If the articles of incorporation or the by-laws expressly

so provide; (2) If a contract is expressly made in advance. WHO FIXES THE COMPENSATION? The stockholders only (majority of the OCS) EXCEPTION: Per diems, which can be fixed by the directors themselves

APPLICABILITY OF COMPENSATION: Only to future and NOT past services.

MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors

shall not exceed 10% of the net income before income tax of the corporation during the preceding year (Sec. 30)

Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the

stockholders rather than the BoD. So long as this provision continues in effect:

No stockholder’s meeting need be called to elect directors;

Generally, stockholders deemed to be directors for purposes of this Code, unless the context

clearly requires otherwise;

Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed

by the stockholders instead of by the BoD. Further, Sec. 100 provides that for stockholders managing corp. affairs:

They shall be personally liable for corporate torts (unlike ordinary directors liable only upon

finding of negligence)

If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholders-managers

Close Corporations

A SH/director is still entitled to vote in a stockholder’s meeting even if his interest is adverse to a

corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority.

Persons with management control of corporation hold it in behalf of SHs and can not regard such

as their own personal property to dispose at their whim. The ff. acts are legal:

Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale and actual transfer of majority interest or that which constitutes voting control;

Disposal by controlling SH of his stock at any time & at such price he chooses

The ff. are illegal:

Selling corp. office or management control by itself, that is NOT accompanied by stocks or

stocks are insufficient to carry voting control;

Transferring office to persons who are known or should be known as intending to raid the

corporate treasury or otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal);

Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of their stock, above and beyond the price premium

normally attributable to the control stock being sold;

INSURANSHARES CORP. V. NORTHERN FISCAL CORP. (35 F. Supp. 22; 1940)

The corp. is suing its former directors to recover damages as a result of the sale of its

control to a group (corporate raiders) who proceeded to rob it of most of its assets mainly

marketable securities.

Are previous directors who sold corp. control liable? Yes, they are under duty not to sell

to raiders.

Owners of corp. control are liable if under the circumstances, the proposed transfer are

such as to awaken a suspicion or put a prudent man on his guard. As in this case, control was

bought for so much aside from being warned of selling to parties they knew little about, and also

from fair notice that such outsiders indeed intended to raid the corp.

Duty of Controlling Interest

General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp.

If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore

manage its assets with due consideration to the creditor’s interest.

If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.

UICHICO v. NLRC (G.R. No. 121434, June 2, 1997)

In labor cases, particularly, corporate directors and officers are solidarily liable with the

corporation for the termination of employment of corporate employees done with malice or in

bad faith.

In the instant case, there was a showing of bad faith: the Board Resolution retrenching

the respondents on the feigned ground of serious business losses had no basis apart from an

unsigned and unaudited Profit and Loss Statement which had no evidentiary value whatsoever.

CORPORATE BOOKS AND RECORDS AND

THE RIGHT OF INSPECTION

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if they find it

unsatisfactory, they can seek the proper remedy to protect their investment.

WHAT IS THE NATURE OF THE RIGHT TO INSPECT?

PREVENTIVE : deterrent to an ill-intentioned management knowing its acts

Duty to Creditors

Corporate Books and Records

Basis of the Right of Inspection

are subject to scrutiny; and REMEDIAL: A dissatisfied SH may avail of this right as a preliminary

step towards seeking more direct and appropriate

remedies against mismanagement.

1. Records of ALL business transactions

This includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 59)

2. By-laws

These are expressly required to be open to inspection by SH/members during office hours (Sec. 46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway.

3. Minutes of director’s meetings

This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however.

4. Minutes of stockholders' meetings 5. Stock and transfer books

These are records of all stocks in the names of the stockholders alphabetically arranged. contain all names of the stockholders of record. Useful for proxy solicitation for elections.

SEC has however ruled that a SH cannot demand that he be furnished such a list but he is free to examine corp. books.

6. Most recent financial statement

Sec. 75 of the Code provides that within 10 days from the corporation's receipt of

a written request from any stockholder or member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year.

Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation are NOT open to inspection, EXCEPT under the following circumstances:

(1) Upon written consent of concerned depositor (presumably the

corporation); (2) In cases of impeachment;

(3) Upon court order in cases of bribery or dereliction of duty of a public official; and

(4) In cases where the money deposited / invested is the subject matter of litigation (5) Upon order of a competent court in cases of unexplained wealth

What Records Covered

under RA 3019 or the Anti-Graft and Corrupt Practices Act (6) Upon order of the Ombudsman

1. The exercise of this right is subject to reasonable limitations similar to a citizen’s exercise of the right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs.

2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and

46).

3. A corp. may regulate time and manner of inspection but provisions in its by-law which gives

directors absolute discretion to allow or disallow inspection are prohibited.

Limitations as to time and place:

Exercise of right only at REASONABLE HOURS on BUSINESS DAYS.

Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the year. (Pardo v. Hercules Lumber)

4. By-laws cannot prescribe that authority of president must first be obtained. 5. Inspection should be made in such a manner as not to impede the efficient operations 6. Place of inspection: Principal office of the corp. SH cannot demand that such records be taken

out of the principal office.

7. As to purpose:

PRESUMPTION: that SH’s purpose is proper. Corp. cannot refuse on the mere belief

that his motive is improper (sec 74).

BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.

To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the

stockholder as such, and it is not contrary to the interests of the corporation.

Legitimate: inquiry about failure to declare dividends Not legitimate: for mere satisfaction or speculation.

Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded.

If motive can be clearly shown as inimical to corp., right may be denied.

Extent and Limitations on Right

Every director, trustee, stockholder, member may exercise right personally or through an

agent who can better understand and interpret records (impartial source, expert accountant, lawyer).

As to VTA: both voting trustee and transferor

SH of parent corp. over subsidiary:

If the two are operated as SEPARATE entities : NO right of inspection

If they are ONE AND THE SAME with respect

to management and control, and inspection is demanded due to mismanagement of subsidiary by the parent’s directors who are also directors of the subsidiary : With right of inspection

If the subsidiary is wholly-owned by the parent,

and its books & records are in the possession and control of the parent corporation : With right of inspection

(Gokongwei v. SEC)

WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE CORPORATION?

(1) Writ of mandamus.

NOTE: Writ shall not issue where it is shown that the petitioner’s purpose is improper and inimical to the interests of the corporation. Writ should be directed against the corporation. The secretary and the president may be joined as party defendants.

(2) Injunction

(3) Action for damages against the officer or agent refusing inspection. Also, penal sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144) What defenses are available to the officer or agent?

(1) The person demanding has improperly used any information secured

through any prior examination; or (2) Was not acting in good faith; or (3) The demand was not for a legitimate purpose.

Who May Exercise Right

Remedies available if Inspection Refused

PARDO V. HERCULES LUMBER (47 Phil. 965; 1924)

BOD/Officers may deny inspection when sought at unusual hours or under improper

conditions. But they cannot deprive the stockholders of the right altogether. In CAB, by-law

provided that the inspection be made available only for a few days in a year, chosen by the

directors. This is void.

GONZALES V. PNB (122 SCRA 490; 1983)

G acquired 1 share of stock purposely to be able to exercise right to inspection with

respect to transactions before he became a SH. G not in good faith. His obvious purpose was to

arm himself with materials which he can use against the bank for acts done by the latter when G

was a total stranger to the same. Right not available here.

VERAGUTH V. ISABELA SUGAR CO. (57 Phil. 266; 1932)

There was nothing improper in the secretary‘s refusal since the minutes of these prior

meetings have to be verified, confirmed and signed by the directors then present. Hence,

Veraguth has to wait until after the next meeting.

GOKONGWEI V. SEC (April 11, 1979)

The law takes from the SH the burden of showing impropriety of purpose and places

upon the corporation the burden of showing impropriety of purpose and motive.

Considering that the foreign subsidiary is wholly owned by SMC and therefore under its

control, it would be more in accord with equity, good faith and fair dealing to construe the

statutory right of Gokongwei as petitioner as SH to inspect the books and records of such wholly

subsidiary which are in SMC‘s possession and control.

DERIVATIVE SUITS

Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons:

a. Individual suits - wrong done to stockholder personally and not to other stockholders (ex. When right of inspection is denied to a stockholder)

Nature and Basis of derivative suit

b. Class suit - wrong done to a group of stockholders (ex. Preferred stockholders' rights are violated)

c. Derivative suit - wrong done to the corporation itself

Cause of action belongs to the corp. and not the stockholder

But since the directors who are charged with mismanagement are also the

ones who will decide WON the corp. will sue, the corp. may be left without redress; thus, the stockholder is given the right to sue on behalf of the corporation.

An effective remedy of the minority against the abuses of management

An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corp. refuse to sue or

are the ones to be sued or hold the control of the corp.

Suing stockholder is merely the nominal party and the corp. is actually the party in interest.

A SH can only bring suit for an act that took place when he was a stockholder; not before. (Bitong v. CA, 292 SCRA 503)

WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS?

1) Stockholder/ member must have exhausted all remedies within the corp.

2) Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of a stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues and is injurious to the stockholder.

3) Any benefit recovered by the stockholder as a result of bringing derivative suit

must be accounted for to the corp. who is the real party in interest. 4) If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable

expenses including attorneys' fees.

EVANGELISTA VS. SANTOS (86 Phil. 387; 1950)

The injury complained of is against the corporation and thus the action properly belongs

to the corporation rather than the stockholders. It is a derivative suit brought by the stockholder

as a nominal party plaintiff for the benefit of the corporation, which is the real party in interest.

In this case, plaintiffs brought the suit not for the benefit of the corporation's interest, but for

their own. Plaintiffs here asked that the defendant make good the losses occasioned by his

mismanagement and to pay them the value of their respective participation in the corporate assets

on the basis of their respective holdings. Petition dismissed for venue improperly laid.

Requirements Relating to Derivative Suits

REPUBLIC BANK VS. CUADERNO (19 SCRA 671; 1967)

In a derivative suit, the corporation is the real party in interest, and the stockholder

merely a nominal party. Normally, it is the corp. through the board of directors which should

bring the suit. But as in this case, the members of the board of directors of the bank were the

nominees and creatures of respondent Roman and thus, any demand for an intra-corporate

remedy would be futile, the stockholder is permitted to bring a derivative suit.

Should the corporation be made a party? The English practice is to make the corp. a

party plaintiff while the US practice is to make it a party defendant. What is important though is

that the corporation should be made a party in order to make the court's ruling binding upon it

and thus bar any future re-litigation of the issues. Misjoinder of parties is not a ground to

dismiss the action.

REYES VS. TAN (3 SCRA 198; 1961)

The importation of textiles instead of raw materials, as well as the failure of the board of

directors to take actions against those directly responsible for the misuse of the dollar allocations

constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was

committed which justified the suit by a minority stockholder of the corporation.

The claim that plaintiff Justiniani did not take steps to remedy the illegal importation for

a period of two years is also without merit. During that period of time plaintiff had the right to

assume and expect that the directors would remedy the anomalous situation of the corporation

brought about by their wrong-doing. Only after such period of time had elapsed could plaintiff

conclude that the directors were remiss in their duty to protect the corporation property and

business.

BITONG v. CA (292 SCRA 503)

The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that exercises its corporate powers and not in the

president or officer thereof.

It was JAKA's Board of Directors, not Senator Enrile, which had the power to

grant Bitong authority to institute a derivative suit for and in its behalf.

The basis of a stockholder's suit is always one in equity. However, it cannot prosper

without first complying with the legal requisites for its institution. The most

important of these is the bona fide ownership by a stockholder of a stock in his own

right at the time of the transaction complained of which invests him with standing to

institute a derivative action for the benefit of the corporation.

NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)

EXCEPTION: As otherwise provided in the Corporation Code. * No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies,

public utilities, building & loan association (Sec. 6)

STOKES V. CONTINENTAL TRUST CO. (78 N.E. 1090; 1906)

The directors were under the legal obligation to give the SH-plaintiff an opportunity to

purchase at the price fixed before they could sell his property to a third party. By selling to

strangers without first offering to sell to him, the defendant wrongfully deprived him of his

property and is liable for such damages as he actually sustained.

THOM V. BALTIMORE TRUST (148 Atl. 234; 1930)

Independently of the charters, the SHs of a corporation have a preferential right to

purchase new issues of shares, to the proportional extent of their respective interests in the

capital stock then outstanding, when the privilege can be exercised consistently with the object

which the disposition of the additional stock is legally designed to accomplish. In the present

case, every SH of the bank, for each of the shares, was to receive 1 1/2 shares of the stock co.

(share in exchange for property). It would not be feasible to consummate a transfer based upon

such consideration if the preemptive right were to be held enforceable with respect to every new

issue of stock regardless of the object of the disposition.

FULLER V. KROGH (113 N.W. 2d 25; 1962)

Preemptive right is not to be denied when the property is to be taken as consideration for

the stock except in those peculiar circumstances when the corporation has great need for the

particular property, and the issuance of stock is the only practical and feasible method by which

the corp. can acquire it for the best interest of the SHs. Ground: practical necessity. [cf. Sec. 39]

DUNLAY V. M. GARAGE AND REPAIR (170 N.E. 917; 1930)

If the issue of shares is reasonably necessary to raise money to be issued in the business

of the corporation rather than the expansion of such business beyond original limits, the original

SHs have no right to count on obtaining and keeping their proportional part of original stock.

But even if preemptive right does not exist, the issue of shares may still be objectionable

if the directors have acted in breach of trust and their primary purpose is to perpetuate or shift

control of the corporation, or to ‗freeze out‘ minority interest.

ROSS TRANSPORT V. CROTHERS (45 A. 2d 267; 1946)

The doctrine of preemptive right is not affected by the identity of the purchasers. What it

is concerned with is who did not get it. But when officers and directors sell to themselves and

thereby gain an advantage, both in value and in voting power, another situation arises. In the

case at bar, the directors were not able to prove good faith in the purchase and equity of

transaction, since the corp. was a financial success. There was constructive fraud upon the other

SHs.

Borrowings Borrowings are usually represented by promissory notes, bonds or debentures. Oftentimes, a financial institution will be willing to lend large amounts to private corporations only on the condition that such institution will have some representation on the Board of Directors. The role of such representative is to see to it that his institution's

investment is protected from mismanagement or unfavorable corporate policies. Bonds and Debentures BONDS: secured by a mortgage or pledge of corporate property

must be registered with the SEC, as provided by Sec. 38 of the Corporation Code

DEBENTURES: issued on the general credit of the corporation

not secured by any collateral; THEREFORE, are not bonded indebtedness in the true sense, and stockholder approval is NOT required (although it would generally be a good idea to obtain it)

Convertible securities; stock options

NOTE: Under the SEC rules, stock option must first be approved by the SEC. Also, if the stock option is granted to non-stockholders, or to directors,

officers, or managing groups, there must first be SH approval of 2/3 of the OCS before the matter is submitted to the SEC for approval.

Of course it goes without saying that the corporation must set aside enough of the junior securities in case the holders of the option decide to exercise such option.

MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F. 2d 954;

1950)

If the corporation is allowed to declare stock dividends without taking account of the

warrant holders (who have not yet exercised their warrant), the percentage of interest in the

common stock capital of the corporation which the warrant holders would acquire, should they

choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong in

contending that a warrant holder must first exercise his warrant before they may be issued stock

dividend.

Debt Securities

Hybrid securities

Because preferred shares and bonds are created by contract, it is possible to create stock which approximates the characteristics of debt securities. Hybrid securities, as the name implies, therefore combine the features of preferred shares and bonds.

Determining the true nature of the security is crucial for tax purposes. The American courts use the following criteria:

(1) Is the corporation liable to pay back the investor at a fixed maturity date?

(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?

(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate

to them?

WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?

BONDS STOCK

WHAT IS PAID?

Interest

Dividends

TO WHOM PAID?

Creditor-investor

Stockholder

WHEN PAID?

Whether the corporation has profits or not

Only if there are profits

NATURE

Expense

Not an expense

TAXABILITY

Can be deducted for tax purposes

CANNOT be deducted

MATURITY DATE?

Yes

No

RANK ON DISSOLUTION

Ranked together with other corporate creditors

Superior to stockholders, inferior to corporate creditors

JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946)

In the Kelly case, the annual payments made were interest on indebtedness (therefore, a

bond is held) because there were sales of the debentures as well as exchanges of preferred stock

for debentures, a promise to pay a certain annual amount if earned, a priority for the debentures

over common stock and a definite maturity date in the reasonable future.

In the Talbot Mills case, the annual payments made were dividends and not interest

(therefore, shares are held), because of the presence of fluctuating annual payments with a 2%

minimum, and the limitation of the issue of notes to stockholders in exchange only for stock.

Besides, it is the Tax Court which has final determination of all tax issues which are not clearly

delineated by law.

JORDAN CO. VS. ALLEN (85 F. Supp. 437; 1949)

The payments made, regardless of what they are called, are in fact dividends (on stocks)

because of the absence of a maturity date and the right to enforce payment of the principal sum

by legal action, among other factors.

The following criteria should be used in determining whether a payment is for interest or

dividends:

(1) maturity date and the right to enforce collection;

(2) treatment by the parties;

(3) rank on dissolution;

(4) uniform rate of interest payable or income payable only out of profits;

(5) participation in management and the right to vote.

It must be noted that these criteria are not of equal importance and cannot be relied upon

individually. E.g. treatment accorded the issuance by the parties cannot be sufficient as this

would allow taxpayers to avoid taxes by merely naming payments as interest.

The trust indenture

Here, the bond issue usually involves 3 parties:

(1) debtor-corporation

(2) creditor-bondholder

(3) trustee: representative of all the bondholders

ALADDIN HOTEL CO. VS. BLOOM (200 F. 2d 627; 1953)

The rights of bondholders are to be determined by their contract and courts will not make

or remake a contract merely because one of the parties may become dissatisfied with its

provisions. If the contract is legal, the courts will interpret and enforce it.

In the deed of trust and bonds in this case, there are provisions empowering bondholders

of 2/3 of the principal amount or more, by agreement with the company, to modify and extend

the date of payment of the bonds provided such extension affected all bonds alike. When this

was done, the bondholders only followed such provisions in good faith. The company benefited

because of such move, and the bondholders were not necessarily prejudiced, as defendants

Joneses in this case were themselves owners of 72% of the bond issue.

CONSIDERATION FOR ISSUANCE OF SHARES

PRIVATE TRIPLEX SHOE V. RICE & HUTCHINSTC \L 1 "TRIPLEX SHOE V. RICE

& HUTCHINS" (72 A.L.R. 932; 1930)

In this case, the stocks issued to the Dillman faction were no par value shares, the

consideration for which were never fixed as required by law. Hence, their issuance was void.

Moreover, the stocks were issued to the Dillmans for services rendered and to be rendered. Future

services are not lawful consideration for the issuance of stock.

PRIVATE MCCARTY V. LANGDEAUTC \L 1 "MCCARTY V. LANGDEAU" (337 S.W.

2d 407; 1960)

McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the

balance due to be evidenced by a note. McCarty failed to pay a big portion of the balance. The

Court affirmed the judgement against McCarty for the balance due on the contract.

McCarty contends that the contract is void. But the law only prohibits the issuance of stock.

If it is understood that the stock will not be issued to the subscriber until the note is paid, the

contract is valid and not illegal.

If a security such as a note, which is not a valid consideration, is accepted, the law does not

say that such note, or the stock issued for it, shall be void. What is void by express provision of law

is the fictitious increase of stock or indebtedness. The law was designed for the protection of the

corporation and its creditors. It emphasizes the stockholder‘s obligations to make full and lawful

payment in accord with its mandate, rather than furnish him with a defense when he has failed in

that obligation. Its purpose is to give integrity to the corporation‘s capital. None of these objects

would be promoted by declaring a note given by a subscriber for stock uncollectible in the hands of

a bona fide stockholder.

RHODE V. DOCK-HOP CO. (12 A.L.R. 437; 1920)

This case involves an action to collect unpaid balances on par value of shares. It was held

that innocent transferees of watered stock cannot be held to answer for the deficiency of the stocks

even at the suit of the creditor of the company. The creditor‘s remedy is against the original owner

of the watered stock.

PRIVATE BING CROSBY V. EATONTC \L 1 "BING CROSBY V. EATON" (297 P.

2d 5; 1956)

A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for

the balance.

Holders of watered stock are generally held liable to the corporation‘s creditors for the

difference between the par value of the stock and the amount paid in.

Under the misrepresentation theory, the creditors who rely on the misrepresentation of the

corporation‘s capital stock are entitled to recover the ―water‖ from holders of the watered stock.

Reliance of creditors on the misrepresentation is material. However, under the statutory

obligation theory, reliance of creditors on the capital stock of the corporation is irrelevant. (It must

be noted that here in the Philippines, it is the statutory obligation theory which is prevailing.)

x

BITONG V. CA (292 SCRA 503)

Stock issued without authority and in violation of law is void and confers no rights on the

person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of

power in the corporation to issue the stock, neither the corporation nor the person to whom the

stock is issued is estopped to question its validity since an estoppel cannot operate to create stock

which under the law cannot have existence.

VELASCO VS POIZAT (37 Phil. 802; 1918)

Poizat subscribed to 20 shares but only paid for 5. Board made a call for payment

through a resolution. Poizat refused to pay. Corporation became insolvent. Assignee in

insolvency sued Poizat whose defense was that the call was invalid for lack of publication.

It was held that the Board call became immaterial in insolvency which automatically

causes all unpaid subscriptions to become due and demandable.

LINGAYEN GULF ELECTRIC VS BALTAZAR (93 Phil. 404; 1953)

Company‘s president subscribed to shares and paid partially. The Board made a call for

payment through a resolution. However, the president refused to pay, prompting the corporation

to sue. The defense was that the call was invalid for lack of publication.

It was held that the call was void for lack of publication required by law. Such

publication is a condition precedent for the filing of the action. The ruling in Poizat does not

apply since the company here is solvent.

DA SILVA VS ABOITIZ (44 Phil. 755; 1923)

Da Silva subscribed to 650 shares and paid for 200. The company notified him that his

shares will be declared delinquent and sold in a public auction if he does not pay the balance. Da

Silva did not pay. The company advertised a notice of delinquency sale. Da Silva sought an

injunction because the by-laws allegedly provide that unpaid subscriptions will be paid from the

dividends allotted to stockholders.

The Court held that by-laws provide that unpaid subscriptions may be paid from such

dividends. Company has other remedies provided for by law such as a delinquency sale or

specific performance.

NATIONAL EXCHANGE VS DEXTER (51 Phil. 601; 1928)

Dexter subscribed to 300 shares. The subscription contract provided that the shares will

be paid solely from the dividends. Company became insolvent. Assignee in insolvency sued

Dexter for the balance. Dexter's defense was that under the contract, payment would come from

the dividends. Without dividends, he cannot be obligated to pay.

The Court held that the subscription contract was void since it works a fraud on creditors

who rely on the theoretical capital of the company (subscribed shares). Under the contract, this

theoretical value will never be realized since if there are no dividends, stockholders will not be

compelled to pay the balance of their subscriptions.

LUMANLAN VS CURA (59 Phil. 746; 1934)

Lumanlan had unpaid subscriptions. Company‘s receiver sued him for the balance and

won. While the case was on appeal, the company and Lumanlan entered into a compromise

whereby Lumanlan would directly pay a creditor of the company. In exchange, the company

would forego whatever balance remained on the unpaid subscription. Lumanlan agreed since he

would be paying less than his unpaid subscription. Afterwards, the corporation still sued him for

the balance because the company still had unpaid creditors. Lumanlan‘s defense was the

compromise agreement.

The Court held that the agreement cannot prejudice creditors. The subscriptions

constitute a fund to which they have a right to look to for satisfaction of their claims. Therefore,

the corporation has a right to collect all unpaid stock subscriptions and any other amounts which

may be due it, notwithstanding the compromise agreement.

FUA CUN V. SUMMERS (44 Phil. 704; 1923)

Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00, paying the

sum of P25,000.00, 50% of the subscription price. Chua mortgaged the said shares in favor of

plaintiff Fua Cun to secure a promissory note for the sum of P25,000.00. In the meantime, Chua

Soco's interest in the 500 shares were attached and levied upon to satisfy his debt with China

Banking Corp. Fua Cun brought an action to have himself declared to hold priority over the

claim of China Bank, to have the receipt for the shares delivered to him, and to be awarded

damages for wrongful attachment, on the ground that he was owner of 250 shares by virtue of

Chua Soco's payment of half of the subscription price.

The Court held that payment of half the subscription price does not make the holder of

stock the owner of half the subscribed shares. Plaintiff's rights consist in an equity in 500 shares

and upon payment of the unpaid portion of the subscription price he becomes entitled to the

issuance of certificate for the said 500 shares in his favor.

BALTAZAR V. LINGAYEN GULF ELECTRIC POWER (14 SCRA 522; 1965)

Baltazar, et al. subscribed to a certain number of shares of Lingayen Gulf Electric Power.

They had made only partial payment of the subscription but the corporation issued them

certificates corresponding to shares covered by the partial payments. Corporation wanted to deny

voting rights to all subscribed shares until total subscription is paid.

The Court held that shares of stock covered by fully paid capital stock shares certificates

are entitled to vote. Corporation may choose to apply payments to subscription either as: (a) full

payment for corresponding number of stock the par value of which is covered by such payment;

or (b) as payment pro-rata to each subscribed share. The corporation chose the first option, and,

having done so, it cannot unilaterally nullify the certificates issued.

Note: The Camposes are of the opinion that § 64 of Corporation Code makes

the Lingayen Gulf inapplicable at present.

NAVA V. PEERS MARKETING (74 SCRA 65; 1976)

Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at P100.00 a share for a

total of P8,000.00. He, however, paid only P2,000.00 corresponding to 20 shares or 25% of total

subscription. Nava bought 20 shares from Co and sought its transfer in the books of the

corporation. The corporation refused to transfer said shares in its books.

It was held that the transfer is effective only between Co and Nava and does not affect the

corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because, unlike in

Lingayen Gulf, no certificate of stock was issued to Co.

TRANSFER OF SHARES

RURAL BANK OF SALINAS, INC. V. CA (210 SCRA 510)

A corporation, either by its board, its by-laws or the act of its officers, cannot create

restrictions in stock transfers.

TAN V. SEC (206 SCRA 740)

A by-law which prohibits a transfer of stock without the consent or approval of all the

SHs or of the President or Board of Directors is illegal as constituting undue limitation on the

right of ownership and in restraint of trade (citing Fleisher v. Botica Nolasco Co., Inc., 47 Phil.

583)

While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to

determine in the by-laws the "manner of issuing certificates" of shares of stock, however, the

power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right

of SHs to transfer their shares. To uphold the cancellation of a stock certification as null and

void for lack of delivery of the cancelled "mother" certificate whose endorsement was

deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in

violation of the Corporation Code as the only law governing transfer of stocks.

USON V. DIOSOMITO (61 Phil. 535; 1935)

Toribia Uson filed a civil action for debt against Vicente Dioisomito. Upon institution of

said action, an attachment was duly issued and D's property was levied upon, including 75 shares

of the North Electric Co., which stood in his name on the books of the company when the

attachment was levied on 18 January 1932. The sheriff sold said shares at a public auction with

Uson being the highest bidder. Jollye claims to be the owner of said certificate of sock issued to

him by the co. on 13 February 1933.

There is no dispute that Diosomito was the original owner of said shares, which he sold

to Barcelon. However, Barcelon did not present these certificates to the corporation for

registration until 19 months after the delivery thereof by Barcelon, and 9 months after the

attachment and levy on said shares. The transfer to Jollye was made 5 months after the issuance

of a certificate of stock in Barcelon's name.

Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp.,

valid as against a subsequent lawful attachment of said shares, regardless of whether the

attaching creditor had actual notice of said transfer or not.

NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by

the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia

Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of

stock which still stood in the name of Diosomito on the books of the corp. Sec. 35 says that No

transfer, however, is valid, except as between the parties, until the transfer is entered and noted

upon the books of the corporation so as to show the names of the parties to the transaction, the

date of the transfer, the number of the certificate, and the number of shares transferred.

All transfers of shares not so entered are invalid as to attaching or execution creditors of

the assignors, as well as to the corporation and to subsequent purchasers in good faith, and

indeed, as to all persons interested, except the parties to such transfers.

No registration of transfer of unpaid shares No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Sec. 63) Remedy if registration refused

The proper remedy is a petition for a writ of mandamus to compel the corporation

to record the transfer or issue a new certificate in favor of the transferee, as the case may be. The writ will be granted provided it is shown that he transferee has no other plain, speedy and adequate remedy and that there are no unpaid claims against the stocks

whose transfer is sought to be recorded. It must be noted that unless the latter fact is alleged, mandamus will be denied due to failure to state a cause of action. (Campos & Campos)

DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES

IN WHAT FORMS CAN DIVIDENDS BE ISSUED?

1. Cash

2. Property

scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain amount in the future

Form of Dividends

3. Stock dividends

Stock dividends are distribution to the SHs of the company’s own stock.

Stock dividends cannot be declared without first increasing the capital stock

unless unissued shares are available.

New shares are issued to the SHs in proportion to their interest.

No new income unless sold for cash.

Civil fruits belong to the usufructuary and not to the naked owner.

Can only be issued to SHs.

Whenever fractional shares result, corp may pay in cash or issue fractional share

warrants.

DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK DIVIDENDS.

Cash Dividend Stock Dividend

Voting requirements for issuance

Board of Directors

Board of Directors + 2/3 OCS

Effect on delinquent stock

Shall be applied to the unpaid balance on the

subscription plus costs and expenses.

Shall be withheld from the delinquent stockholder

until his unpaid subscription is fully paid.

Can this be issued by Executive Committee?

No. (Sec. 35)

No, since this requires SH approval. (Sec. 35)

NIELSON v LEPANTO (26 SCRA 540; 1968)

Stock dividends are issued only to SHs This is so because only stockholders are entitled

to dividends. A stock dividend really adds nothing to the interest of each stockholder; the

proportional interest of each stockholder remains the same. If a stockholder is deprived of his

stock dividends - and this happens if the shares of stock forming part of the stock dividends are

issued to a non-stockholder - then the proportion of the stockholder's interest changes radically.

Stock dividends are civil fruits of the original investment, and to the owners of the shares belong

the civil fruits.

FROM WHERE CAN DIVIDENDS BE SOURCED?

Dividends can be sourced only out of the unrestricted retained earnings of the

corporation.

Unrestricted retained earnings is defined as "the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends." (SEC Rules Governing Redeemable and Treasury Shares, 1982)

Retained earnings has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms outside the corporation." (Simmons, Smith,

Kimmel, Intermediate Accounting, 1977, ed. P. 635) The term implies the limitation that no corporation can declare dividends unless its legal or stated capital is maintained. It does not include:

premium on par stock i.e. difference between par value and selling price of stock by corp since this is regarded as paid-in capital; but SEC allowed declaration of stock dividends out of such premiums

transactions involving treasury stocks which are considered expansions and contractions of paid-in capital;

donations as additional paid- in capital;

increase in value of existing assets, being merely unrealized capital element

If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is at least equal to the total par value of the subscribed shares, any excess would be surplus or earnings from which dividends may be declared. However, if a deficit exists, subsequent profits must first be applied to cover the deficit.

Restrictions on dividend distribution include:

BOD’s appropriation of certain earnings for certain purposes;

Agreements with creditors, bondholders and preferred SHs requiring retention of certain percent of corporate earnings to protect their interest and to secure redemption of their securities upon maturity;

SEC-imposed restrictions pursuant to law, like those imposed on banks and insurance companies;

Restriction on the retained earnings equivalent to the cost of

treasury shares held by the corporation, which is lifted only after such shares are reissued or retired (Sec. 195, PD 612)

BERKS BROADCASTING v CRAUMER (52 A.2d 571; 1947)

Dividends can only be declared only from the surplus, i.e. the excess in the value of the

assets over the liabilities and the issued capital stock. To do otherwise would be illegal The

object of the prohibition is to protect the creditors in view of the limited liability of the SHs and

also to protect the SHs by preserving the capital so that the purposes of the corp. may be

performed.

Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be

dependent for its existence upon a theoretical estimate of an appreciation in the value of the

company‘s assets.

The prohibition does not apply, however, to stock dividends because creditors and SHs

will not be affected by their declaration since they do not decrease the company‘s assets.

LICH V UNITED STATES RUBBER (39 F. Supp. 675; 1941)

Dividends on non-cumulative preferred stock are payable only out of net profits and for

the years in which said net profits are actually earned.

The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in

the business.

If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes,

such as payment of debts, reduction of deficits and restoration of impaired capital, the right of

non-cumulative preferred stockholders to the payments of dividends is lost. If they are applied

against prior losses and thereby completely absorbed, there are no net profits from which

dividends may be lawfully paid.

SOME RULES ON DIVIDEND DECLARATION:

1. BOD has discretion whether or not to declare dividends and in what form.

Exception: Stock dividends, in which case a 2/3 vote of OCS is necessary.

However, such discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on the excuse that it is needed for expansion or reserves.

2. BOD should declare dividends when surplus profits of the corporation exceed 100% of the corporation's paid-in capital stock.

Exceptions:

(a) When justified by definite corporate expansion projects or programs

approved by the Board; (b) When creditors prohibit dividend declaration without their consent as a

condition for the loan, and such consent has not yet been secured;

(c) When retention is necessary under special circumstances obtaining in the corporation, e.g. when there is a need for special reserve for probable

contingencies. (Sec. 43)

4. The corporation may be subjected to additional tax when it fails to declare dividends,

thereby unreasonably accumulating profits. (See Sec. 25, NIRC)

5. The dividends received are based on stock held whether or not paid. However, if the

stocks are delinquent, the amount will first be applied to the payment of the

delinquency plus costs and expenses; stock dividends will not be given to a delinquent SH.

KEOGH v ST. PAUL MILK (285 N.W. 809; 1939)

The mere fact that a large corporate surplus exists is not enough to warrant equitable

intervention; the test is good faith and reasonableness of the policy of retaining the profits.

However, where dividends are withheld for an unlawful purpose – to deprive a SH of his right to

a just proportion of the corporation's profit, the court may compel the corporation to declare

dividends.

DODGE v FORD MOTOR CO (170 N.W. 668; 1919)

This case involves an action against the Ford Motor Company to compel declaration of

dividends. At the time this complaint was made, Ford had concluded its most prosperous year of

business, and the demand for its cars at the price of the previous year continued. While it had

been the practice, under similar circumstances, to declare larger dividends, the corporation

refused to declare any special dividends. The Board justified its refusal to declare larger

dividends on the expansion plans of the company by erecting a smelting plant, but maintaining

the selling price of its cars (instead of reducing it as had been the practice in previous years).

The plaintiffs contend that such a proposal would be tantamount to the business being conducted

as a semi-eleemosynary (or charitable) institution instead of a business institution.

The court pointed out that a business corporation is organized and carried on primarily

for the profit of SHs. The discretion of the directors is to be exercised in the choice of means to

attain that end and does not extend to a change in the end itself – reduction of profits or to devote

profits to another purpose. While the Court noted the capable management of the affairs of the

corporation and therefore was not convinced that the motives of the directors were prejudicial to

the company's interests, it likewise noted that the annual dividends paid were very small in

relation to the profits that the company had been making. It therefore affirmed the amount fixed

by the lower court to be distributed to the stockholders.

Note: Prof. Jacinto is of the opinion that what happened in this case is

possible under the present Code, even without changing the AOI.

Review discussion under kinds of stock.

WABASH RAILWAY CO. V. BARCLAY (67 A.L.R. 762; 1930)

In the AOI and the certificate of stock of Stock A, it was stated that the holders of said

stocks are entitled to receive to receive preferential dividends of 5% per fiscal year, non-

cumulative, before dividends are paid to other stocks. From 1915 to 1926, no dividends were

declared. The net earnings were instead used for the improvements and additions to property and

equipment. Due to this, the corporation became prosperous and proposed to pay dividends to A

& B common stock. Plaintiffs filed this case in order to collect the dividends for fiscal years

1915-1926 before the other classes of stock are paid.

Were the Class A stockholders entitled to dividends for FY 1915 to 1926?

No, they were not. By the plain meaning of the words in the AOI and the certificates of

stock, the holders are not entitled to dividends unless directors declare so. It is likewise

generally understood that in cases where the company's net earnings are applied for

improvements and no dividend is declared, the claim for such year is gone in case of non-

cumulative stock, and cannot be later asserted.

BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912)

An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to

(1) require the directors to account for all the property and assets of the corporation, (2) declare

such dividends from the net profits of the business of such co. as should have been declared since

1 Jan. 1906, and (3) restrain the officers and directors during the pendency of the action from

paying out any of the money or disposing of the assets of the company except such amounts as

should be necessary to pay the actual necessary current expenses of conducting the business of

the corporation.

The BOD maintained that the corporation's funds were exhausted by expenditures for the

extension of the co‘s plant, hence it was unable to declare dividends. Expenditures were said to

be necessary and for the betterment of the plant.

Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?

The case was remanded to the trial court, with instructions to make further findings to

protect the preferred SHs in their rights.

The fair interpretation of the contract between Ottawa and its SHS is that if in any year

net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the BOD had

absolute discretion when to declare dividends and when not to, when the corporation has funds

for such dividends, would result in temptation to unfair dealing, giving one party the option to

Preference as to Dividends

pay the other or not. In the case at bar, the accumulated profits would be lost forever since the

dividends were non-cumulative.

Preferred SHs, however, are not generally creditors until dividends are declared. In the

case at bar, if dividends should have been declared to such SHs, they are considered creditors

from that time.

WHEN DOES THE RIGHT TO DIVIDENDS VEST?

As soon as the BoD has declared dividends. From this time, it becomes a debt owed by the corporation, and therefore can no longer be revoked (McLaran v.

Crescent Planning). EXCEPTION: If the declaration has not yet been announced or communicated to the stockholders.

NOTE: When no dividends are declared for 3 consecutive years, preferred

SHs are given the right to vote for directors until dividends are declared.

NOTE: The extent of the SH’s share in the dividends will depend on the capital contribution; NOT the number of shares he has.

MCLARAN V. CRESCENT PLANNING MILL CO. (93 S.W. 819; 1906)

CPM Corp., having a surplus of $29,000, declared a 6% cash dividend payable in four

installments. The first installment was paid by the Board after which an error was discovered in

the computation of the assets: from the initial recognized surplus of $29,000 to $6,000. Mainly

for this reason, the Board adopted a resolution rescinding the dividends payable on the three

other installments despite the solvency of the corp and the existence of ample funds to pay said

dividends. The original P was Humber, a SH, and was substituted by McLaran, the administrator

of his estate when he died. The defendant corp maintained that there was no valid declaration of

dividends because the corporation failed to set aside funds to pay for the same.

A cash dividend, properly declared, cannot be revoked by the subsequent action of the

corp. for by its declaration, the corp had become the debtor of the SH and it goes without saying

that the debtor cannot revoke, recall or rescind the debt or otherwise absolve itself from its

payment by a unilateral action or without the consent of the creditor. Thus, the rescission by the

BOD of the subsequent installments was of no force.

Dividends are defined as portions of profits/surplus funds of the corp. which have been

actually set apart by a valid board resolution or by the SH at a corp. mtg. for distribution among

SH according to their respective interests. The mere declaration of the dividend, without more,

by competent authority under proper circumstances, creates a debt against the corporation in

favor of the stockholders the same as any other general creditor of the corporation. By the mere

When Right to Dividends Vests; Rights of Transferee

declaration, the dividend becomes immediately fixed and absolute in the stockholder and from

henceforth the right of each individual stockholder is changed by the act of declaration from that

of partner and part owner of the corporate property to a status absolutely, adverse to every other

stockholder and to the corporation itself, insofar as his pro rata proportion of the dividend is

concerned.

WHAT ARE ILLEGAL DIVIDENDS? Illegal dividends are dividends declared in violation of law.

WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS?

(1) If the directors acted wilfully, or with negligence or in bad faith, they will be

liable to the corporation. If the corporation has become insolvent, they are liable to the corporation's creditors for the amount of dividends based out of capital. (Based on Sec. 31)

(2) If the directors cannot be held liable because they acted with due diligence and in good faith, in the absence of an express provision of law, an innocent stockholder is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment. (Majority view; Campos)

WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS

OWN SHARES? (Sec. 41)

1. unrestricted retained earnings to cover the shares to be acquired; 2. legitimate corporate purpose

FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41)

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Corporation Code (Appraisal Right).

Liability for Illegal Dividends

Purchase by Corporation of its own shares

Appraisal Right (Sec. 81)

WHAT IS THE APPRAISAL RIGHT? The appraisal right refers to the right of a stockholder who dissented and voted against a proposed fundamental corporate action to get out of the corporation by demanding payment of the fair value of his shares.

IN WHAT INSTANCES CAN THE APPRAISAL RIGHT BE EXERCISED? The Corporation Code lists 4 instances:

(1) In case any amendment to the AOI has the effect of changing or restricting

the rights of any SH or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence (Sec. 81);

(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and assets as

provided in this Code (Sec. 81; Sec. 40);

(3) In case of merger or consolidation (Sec. 81);

(4) In case the corporation invests its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized

(Sec. 42)

WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. 82)

(1) SH must have voted against he proposed corporate action; (2) Written demand on the corporation for payment of the fair value of his shares; (3) Such demand must have been made within 30 days after the date on which the

vote was taken; (4) Surrender of the stock certificate/s representing his shares; (5) Unrestricted retained earnings in the books of the corporation to cover such

payment. WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. 83)

All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the Corporation Code, except for the right of the SH to receive payment of the fair value thereof. Such suspension shall be from the time of demand until either:

(1) abandonment of the corporate action involved; or (2) the purchase of the said shares by the corporation.

However, if said dissenting SH is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO THE EXERCISE OF THE APPRAISAL RIGHT?

The dissenting SH must submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares within 10 days after demanding payment for his shares. Failure to do so shall, at the option of the corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86)

WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE

NOTATION THAT THEY REPRESENT DISSENTING SHARES? If the certificates are consequently cancelled, the rights of the transferor as a dissenting SH cease and the transferee has all the rights of a regular stockholder. All dividend contributions which would have accrued on the shares will be paid to the transferee. (Sec. 86)

AMENDMENTS OF CHARTER

The charter of a private corporation consists of its articles of incorporation as well as the

Corporation Code and such other law under which it is organized.

Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to make changes in existing corporations through an

amendment to the Corporation Code.

One of the powers expressly granted by law to all corporations is the power to

amend its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change the basic agreement between the corporation and its stockholders, making such change binding on all the stockholders, subject only to the

right of appraisal, if proper.

WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND?

PURPOSE: must be legitimate

VOTE: 2/3 of OCS / membership

Amendment by Legislature

Amendment by Stockholders

(1) The appraisal right must be recognized in case the amendment has the

effect of changing rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares

of any class, or extending or shortening the term of corporate existence. (2) Extension of corporate term cannot exceed 50 yrs. in any one instance

(3) A copy of the amended articles should be filed with the SEC, and with the

proper governmental agencies, as appropriate (e.g., in the case of banks,

public utilities, etc.)

(4) Original and amended articles should contain all matters required by law to be set out in said articles.

(5) An amendment to increase/decrease capital stock as well as to

extend/shorten corporate term cannot be made under Sec. 16, but must be made under Sec. 37-38, respectively, both of which require a meeting; and

(6) Amendment must be in the form prescribed by the Code

ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS?

The same grounds as for the disapproval of the original articles (Sec. 17):

Not substantially in accordance with the form prescribed by the Code;

Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

Treasurer’s Affidavit concerning amount of capital stock subscribed/paid is false;

Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been complied with as required by the Constitution or existing

laws;

Absence of a favorable recommendation from the appropriate government agency.

Amendment changing stockholder’s rights

The law expressly allows amendments which would change or restrict existing

rights of stockholders or any class of shares. (Sec. 81)

MARCUS V. RH MACY (74 N.E. 2d 228; 1947)

The Board of Directors gave notice to SH that among the matters to be acted upon in its

annual meeting would be a proposal to amend certificate of incorporation to add to the rights of

preferred stockholders, voting rights equal to those of common stockholders. Marcus, objected

and demanded payment for the common stock owned by her.

The Court held that Marcus may invoke her appraisal right. The aggregate number of

shares having voting rights equal to those of common shares was substantially increased and

thereby the voting power of each common share outstanding prior to the meeting was altered or

limited by the resulting pro rata diminution of its potential worth as a factor in the management

of the corporate affairs. Considering that she held diminished voting power; that she notified the

corpo of her objection; that her shares were voted against the amendment—these were sufficient

to qualify her to invoke her statutory appraisal right.

Effectivity of amendment

Amendments take effect only from the approval by the SEC. However, such approval or rejection must be made within six months of filing of amendment; otherwise it shall take effect even w/o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)

Special amendments

Increase of capital stock

After the authorized capital stock has been fully subscribed and the

corporation needs to increase its capital, it will have to amend its articles to increase its capital stock. A corporation does not have the implied power to increase capital stock; such a power can only be granted by law.

The power to increase or decrease capital stock must be exercised in accordance with the provisions of Sec. 38 of the Code.

Reduction of capital stock

Reduction of capital stock is not allowed if it will prejudice the rights of

corporate creditors.

PHILIPPINE TRUST CO. V. RIVERA (44 Phil. 469; 1923)

It is established doctrine that subscriptions to the capital of a corporation constitute a fund

to which creditors have a right to look for satisfaction of their claims and that the assignee in

insolvency can maintain an action upon any unpaid stock subscription in order to realize assets

for the payment of its debts.

A corporation has no power to release an original subscriber to its capital stock from the

obligation of paying for his shares, without valuable consideration for such release; and as

against creditors a reduction of the capital stock can take place only in the manner and under the

conditions prescribed by the statute or charter or the articles of incorporation.

Change in corporate term

The Code allows a corporation not only to extend but also to

shorten its term of existence. As in the case of increase/decrease of capital

stock, change must be approved at a members‘/stockholders‘ meeting by

2/3 of the members/outstanding capital stock.

Amendments in close corporations

To recall, the provisions required to be contained in the AOI of a close corporation:

(1) All issued stock of all classes should be held by not more than 20;

(2) All issued stock shall be subject to one or more specified restrictions on

transfer permitted by law;

(3) Corporation should not be listed in the stock exchange or make any public

offering of its stock.

If any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. Thereafter, it will be governed by the general provisions of the Code. Since such amendment involves a change in the nature of the corporation, even non-voting stocks are given a voice in the

decision. A stockholders’ meeting is required and a 2/3 vote must approve the amendment, unless otherwise provided by the articles of incorporation.

DISSOLUTION

HOW MAY A CORPORATION BE DISSOLVED?

(1) Failure to organize and commence business (Sec. 22);

(2) Cessation of business for 5 years (Continuous inoperation; Sec. 22);

(3) Expiration of original, extended, or shortened term;

(4) Voluntary dissolution (Sec. 118-119);

(a) Where no creditors are affected (Sec. 118)

Modes of Dissolution

This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the special notice requirements.) The copy of the resolution authorizing the dissolution shall be certified by a majority of the BOD and countersigned by the secretary of the corporation. THE

SEC shall thereupon issue the certificate of dissolution.

(b) Where creditors are affected (Sec. 119)

(1) Filing of petition for dissolution with SEC

A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD, verified by the president or secretary or one of the directors, and resolved upon by the affirmative vote of 2/3 of the OCS or members. The petition must set forth all claims and demands against the corporation, and the fact that the dissolution was approved by the SHs with the requisite 2/3

vote. (2) Fixing of date by SEC for filing of objections to petition

If the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections thereto may be filed by any

person.

Date: not less than 30 days nor more than 60 days after the entry of the order

(3) Publication of order

Before the date fixed by the SEC, the SEC order shall be

published and posted accordingly.

Newspaper: Once a week for 3 weeks in a newspaper of general circulation published in the municipality

or city where the corporation's principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the Philippines

Posting: For 3 consecutive weeks in 3 public places in the

city or municipality where the corporation's principal office is situated

(4) Hearing of the petition for dissolution

Upon 5 days notice, given after the date on which the

right to file objections to the order has expired, the SEC shall proceed to hear the petition and try any issue made by the objections filed. If no objection is sufficient, and the material allegations are true, the SEC shall render judgment dissolving the

corporation and directing such disposition of its assets as justice requires.

Note: The SEC may appoint a receiver to collect such

assets and pay the debts of the corporation.

(3) Involuntary dissolution (Sec. 121):

(a) Revocation of Certificate of Registration by SEC (Sec. 121)

A corporation may be dissolved by the SEC upon filing of a

verified complaint and after proper notice and hearing on grounds

provided by existing laws, rules and regulations.

(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of

Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation. Under the Securities Regulation Code or RA 8799, however, the jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been transferred to the

Regional Trial Courts.

The grounds for involuntary dissolution of a corporation under quo warranto proceedings are:

(1) When the corporation has offended against a

provision of an act for its creation or renewal; (2) When it has forfeited its privileges and franchises by

non-user;

(3) When it has committed or omitted an act which

amounts to a surrender of its corporate rights, privileges or franchises;

(4) When it misused a right, privilege or franchise

conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law

(PNB v. CFI, 209 SCRA 294; 1992)

(4) Shortening of corporate term (Sec. 120)

NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate term and waiting for such term to expire.

Dissolution of close corporations

In close corporations, any stockholder may, by written petition to the SEC, compel the dissolution of such corporation when:

(1) Any of the acts of the directors, officers, or those in control of the corporation is:

Illegal;

Fraudulent;

Dishonest;

Oppressive or unfairly prejudicial to the corporation

or any other SH;

(2) Corporate assets are being misapplied or wasted. (Sec. 105)

WHAT ARE THE EFFECTS OF DISSOLUTION?

Corporation ceases to be a juridical person and consequently can no longer

continue transacting its business.

Corporate existence continues for 3 years following dissolution for the ff.

purposes only:

(a) winding up of affairs; and

(b) liquidation of corporate assets.

Corporation can no longer continue its business, except for winding up.

Corporation CANNOT even be a de facto corporation.

Corporate existence may be subject to COLLATERAL attack.

NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers. (Sec. 145)

Loss of juridical personality

NATIONAL ABACA V. PORE (2 SCRA 989; 1961)

Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a

sum of money advanced to her for the purchase of hemp. She moved to dismiss the complaint

by citing the fact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950.

Plaintiff objected to such by saying that it shall nevertheless be continued as a corporate body for

a period of 3 years from the effective date of said order for the purpose of prosecuting and

defending suits by or against it and to enable the Board of Liquidators to close its affairs.

Can an action commenced within 3 years after the abolition of plaintiff corporation be continued

by the same after the expiration of said period?

Effects of Dissolution

The Corp. Law allows a corporation to continue as a body for 3 years after the time when

it would have been dissolved for the purposes of prosecuting and defending suits by or against

it. But at any time during the 3 years, the corporation should convey all its property to trustees so

that the latter may be the ones to continue on with such prosecution, with no time limit on its

hands. Since the case against Pore was strong, the corp.'s amended complaint was admitted and

the case was remanded to the lower court.

CLEMENTE V. CA (242 SCRA 717)

The termination of the life of a juridical entity does not by itself cause the extinction or

diminution of the right and liabilities of such entity nor those of its owners and creditors. If the

3-year extended life has expired without a trustee or receiver having been expressly designated

by the corporation itself within that period, the board of directors or trustees itself may be

permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.

In the absence of a board of directors or trustees, those having any pecuniary interest in the

assets, including not only the shareholders but likewise the creditors of the corporation, acting

for and in its behalf, might make proper representations with the SEC, which has primary and

sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the

corporate concerns.

Executory contracts

The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of the Code states that "No right or remedy in favor of or against any corporation….nor any liability incurred……shall be removed or impaired either by the subsequent dissolution of said corp. or by any subsequent amendment or repeal of this Code or of any part thereof."

WHAT IS LIQUIDATION? (Sec. 122) Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract,

on the basis of their respective interests. WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE LIQUIDATION OF A CORPORATION?

1. Liquidation by the corporation itself through its board of directors

Although there is no express provision authorizing this method, neither is there any provision in the Code prohibiting it.

Liquidation

2. Conveyance of all corporate assets to trustees who will take charge of liquidation.

If this method is used, the 3-year limitation will not apply provided the

designation of the trustees is made within said period. There is no time limit within which the trustee must finish liquidation, and he may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)

3. Liquidation is conducted by the receiver who may be appointed by the

SEC upon its decreeing the dissolution of the corp.

As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights.

FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN? Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after the time when it would have so dissolved. (Sec.

122) However, it was held in the case of Clemente v. CA (supra) that if the 3-year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.

WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION? (Sec. 122)

(1) Collection of corporate assets and property; (2) Conveyance of all corporate property to trustees for the benefit of SHs,

members, creditors, and other persons in interest; (3) Payment of corporation's debts and liabilities;

(4) Distribution of assets and property

Distribution of assets after payment of debts

GENERAL RULE: No corporation shall distribute any of its assets or property

except upon lawful dissolution and after payment of all its debts and liabilities. (Sec. 122)

EXCEPTION: In cases of decrease of capital stock, and as otherwise allowed

by the Corporation Code

WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON ENTITLED TO IT? Any asset distributable to any creditor or stockholder or member who is unknown or

cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122)

CHINA BANKING V. MICHELIN & CIE. (58 Phil. 261; 1933)

The appointment of a receiver by the court to wind up the affairs of the corporation upon

petition of voluntary dissolution does not empower the court to hear and pass on the claims of

the creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver

of an insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a

corporation consists of adjusting the debts and claims, that is, of collecting all that is due the

corporation, the settlement and adjustment of claims against it and the payment of its just debts,

all claims must be presented for allowance to the receiver or trustees or other proper persons

during the winding-up proceedings within the 3 years provided by the Corporation Law as the

term for the corporate existence of the corporation, and if a claim is disputed so that the receiver

cannot safely allow the same, it should be transferred to the proper court for trial and allowance,

and the amount so allowed then presented to the receiver or trustee for payment. The rulings of

the receiver on the validity of claims submitted are subject to review by the court appointing

such receiver though no appeal is taken to the latter ruling, and during the winding-up

proceedings after dissolution, no creditor will be permitted by legal process or otherwise to

acquire priority, or to enforce his claim against the property held for distribution as against the

rights of other creditors.

Note: Under the Corporation Code, it is the SEC which may

appoint the receiver.

RP V. MARSMAN DEVELOPMENT COMPANY (44 SCRA 418; 1972)

Defendant corp. was a timber license holder with concessions in Camarines Norte.

Investigations led to the discovery that certain taxes were due on it. BIR assessed Marsman 3

times for unpaid taxes. Atty. Moya, in behalf of the corp., received the first 2 assessments. He

requested for reinvestigations. As a result, corp. failed to pay within the prescribed period.

Numerous BIR warnings were given. After 3 years of futile notifications, BIR sued the corp.

Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however

bars an action for recovery of corporate debts against the liquidators. In fact, the 1st assessment

was given before dissolution, while the 2nd and 3rd assessments were given just 6 months after

dissolution (within the 3-year rule). Such facts definitely established that the Government was a

creditor of the corp. for whom the liquidator was supposed to hold assets of the corp.

TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)

The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund,

once they pass into the hands of the stockholders. The dissolution of a corp. does not extinguish

the debts due or owing to it.

An indebtedness of a corp. to the government for income and excess profit taxes is not

extinguished by the dissolution of the corp. The hands of government cannot, of course, collect

taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had

been due from the corporation, and to collect them from persons, who by reason of transactions

with the corporation hold property against which the tax can be enforced and that the legal death

of the corporation no more prevents such action than would the physical death of an individual

prevent the government from assessing taxes against him and collecting them from his

administrator, who holds the property which the decedent had formerly possessed. Thus,

petitioners can be held personally liable for the corporation's taxes, being successors-in-interest

of the defunct corporation.

Distribution of assets of non-stock corporations WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec. 94-95)

(1) All liabilities and obligations of the corporation shall be paid, satisfied, and

discharged, or adequate provision shall be made therefor. (2) Assets held by the corporation upon a condition requiring return, transfer

or conveyance, and which condition occurs by reason of the dissolution,

shall be returned, transferred or conveyed in accordance with such requirements.

(3) Assets received and held by the corporation subject to limitations

permitting their use only for charitable, religious, benevolent, education or similar purposes, but not subject to condition (2) above, shall be transferred

or conveyed to one or more corporations, societies or organization engaged in activities in the Philippines substantially similar to those of the dissolving corp. according to a plan of distribution adopted pursuant to Sec. 95 of the Code.

(4) Assets other than those mentioned in preceding paragraphs shall be

distributed in accordance with the AOI or by-laws.

(5) In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to Sec. 95.

* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and approval of 2/3 of the members having voting rights present or represented by proxy at the meeting during which said plan is adopted.

It must be noted that the plan of distribution of assets must not be inconsistent

with the provisions of Title XI of the Code.

CORPORATE COMBINATIONS

WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?

(1) Merger (A + B = A)

(2) Consolidation (A + B = C)

(3) Sale of substantially all corporate assets and purchase thereof by another

corporation;

(4) Acquisition of all / substantially all of the stock of one corporation from its

SHs in exchange for the stock of the acquiring corporation

WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION?

(1) Board of Directors of the constituent corporations must prepare and approve

a plan of merger or consolidation.

(2) 2/3 vote of OCS of the constituent corporations.

(3) Execution of the Articles of Merger/Consolidation, to be signed by the

Pres/VP and certified by the secretary / assistant secretary.

(4) Submission to the SEC for approval.

WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. 80)

(1) The constituent corporation shall become a single corporation:

If merger: the surviving corporation designated in the plan of

merger If consolidation: the consolidated corporation designated in the plan of

Consolidation.

(2) The separate existence of the constituent corporations shall cease, except

that of the surviving or consolidated corporation.

Techniques to achieve corporate combinations

Merger or Consolidation

(3) The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Corporation Code.

(4) The surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations;

(5) All property (real or personal) and all receivables due on whatever account

(including subscriptions to shares and other choses in action) , and all and

every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or consolidated corporation without further act or deed.

(6) The surviving or consolidated corporation shall be responsible and liable for

all the liabilities and obligations of each of the constituent corporations in the

same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. (Note: The merger or consolidation does not impair the rights of creditors or liens upon the property of any such constituent corporations.)

LOZANO V. DE LOS SANTOS (274 SCRA 452)

Consolidation becomes effective not upon mere agreement of the members but only upon

issuance of the certificate of consolidation by the SEC. There can be no intra-corporate nor

partnership relation between 2 jeepney drivers' and operators' associations whose plans to

consolidate into a single common association is still a proposal.

WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? (Sec. 132)

A foreign corporation authorized to transact business in the Philippines may merge or consolidate with any domestic corporation if such is permitted under Philippine law and by the law of its incorporation.

The requirements on merger or consolidation as provided in the Corporation Code must be complied with.

Whenever a foreign corporation authorized to transact business in the

Philippines is a party to a merger or consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or consolidation with the SEC and the appropriate government agencies within 60 days after such merger or consolidation becomes effective. Such copy of the articles must be duly authenticated by the proper officials of the country

or state under the laws of which merger or consolidation was effected.

If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business in the Philippines, it shall file a petition for withdrawal of its license in accordance with Sec. 136.

WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY

ALL THE CORPORATE PROPERTY AND ASSETS?

If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. (Sec. 40)

WHAT ARE THE REQUIREMENTS? (Sec. 40)

(1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose;

(2) Compliance with the laws on illegal combinations and monopolies

Note, however, that after such approval by the SHs, the BOD may nevertheless, in

its discretion, abandon such sale or other disposition without further action or approval by the SHs. This, of course, is subject to the rights of third parties under any contract relating thereto.

WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?

(1) If the disposition is necessary in the usual and regular course of business; or

(2) If the proceeds of the disposition be appropriated for the conduct of its

remaining business (Sec. 40)

IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS? Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of the selling corporation, not the purchasing corporation. (It can

be argued, though, that in instances wherein the purchase constitutes an investment in a purpose other than its primary purpose, stockholders' approval of such investment is necessary, and anyone who objects thereto will have the appraisal right under Sec. 42. )

In this method, all or substantially all the stockholders of the "acquired"

corporation are made stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses under a single corporation as in merger and sale of assets, from the point of view of the acquiring (parent) corporation, there is hardly any difference between owing the acquired corporation's business directly and operating it through a controlled subsidiary. In fact, the parent

corporation would have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination. (Campos & Campos)

Sale of substantially all corporate assets

Exchange of stocks

FOREIGN CORPORATIONS

WHAT IS A FOREIGN CORPORATION? (Sec. 123)

A corporation formed and organized under laws other than those of the Philippines, regardless of the citizenship of the incorporators and stockholders. Such corporation must have been organized and must operate in a country which allows

Filipino citizens and corporations to do business there.

In times of war: For purposes of security of the state, the citizenship of

the controlling stockholders determines the corporation’s nationality.

IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?

(1) Wholly-owned subsidiary; or (2) Branch office; or

(3) Joint venture with a local partner.

100% EQUITY: Mass media, except recording The practice of a profession (law, medicine, etc.) Operation of rural banks

Cooperatives

Private security agencies Small-scale mining Utilization of marine resources

Ownership, operation, and management of cockpits; Manufacture, repair, stockpiling of nuclear, biological, chemical,

and radiological weapons;

Note: Retail trade is no longer required to be 100% Filipino-owned on account

of the Retail Trade Liberalization Act.

75%-25% EQUITY: Inter-island shipping (R.A. 1937, Sec. 8) Private recruitment

Contracts for construction and repair of locally-funded public works

Except: Public works that would fall under the Build-

Operate-Transfer Law, as well as those that are foreign-funded

Permitted areas of investment

70%-30% EQUITY: Advertising

60%-40% EQUITY: Other industries.

WHAT IS THE SO-CALLED "GRANDFATHER RULE"?

Where a domestic corporation which has both Philippine and foreign

stockholders is an investor in another domestic corporation which has also both Philippine and foreign stockholders, the so-called "grandfather rule" is used to determine whether or not the latter corporation is qualified to engage in a partially

nationalized business, i.e. by determining the extent of Philippine equity therein. Under present SEC rules, if the percentage of Filipino ownership in the

first corporation is at least 60%, then said corporation will be considered as a Philippine national and all of its investment in the second corporation would be treated as Filipino equity. On the other hand, if the Philippine equity in the first

corporation is less than 60%, then only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in Opinion # 18, Series of 1989, Department of Justice, dated 19 January 1989.)

NOTE: The reader would be well-advised to cross-reference this

definition of the "grandfather rule" with a trusted commentary.

Documentary Requirements (Sec. 125)

(1) BOI certificate

The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the foreign corp. will contribute to the sound and balanced development of the national economy on a self-sustaining basis. (See Omnibus Investments Code, Sec. 48-49)

NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered automatically approved! (Art. 53, Omnibus Investments Code)

(2) SEC license to do business (Sec. 125)

Application under oath setting forth the information specified in Sec. 125; Additional information as may be necessary or appropriate to enable the

SEC to determine whether the corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable;

Legal Requirements Prior to Transaction of Business

Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation, attesting to the fact that the laws of the

country of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing;

Statement under oath of the president or any other person authorized by the

corporation showing that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within 1 year immediately prior to the application.

(3) Certificate from appropriate government agency

NOTE: Certain sectors such as banking, insurance, etc. require prior approval from the government agencies concerned. (Sec. 17)

Deposit requirement (Sec. 126)

Within 60 days after the issuance of the license, the licensee shall deposit with the SEC

securities with an actual market value of at least P 100,000.00. These securities are for the benefit of present and future creditors, and shall consist of any of the following:

Bonds or other evidence of indebtedness of the Government or its

instrumentalities, etc.; Shares of stock in "registered enterprises" as defined in R.A. 5186; Shares of stock in domestic corporations registered in the stock exchange; Shares of stock in domestic insurance companies and banks.

Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine government.

Note: Foreign banking and insurance corporations are the exceptions to this requirement.

Designation of a resident agent (Sec. 128) The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the Philippines. WHO: A resident of the Philippines.

PURPOSE: To be served any summons and other legal processes which

may be served in all actions or other legal proceedings against such corporation. Service upon such resident shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.

Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and regulations applicable to domestic corporations of the same class.

Exceptions: (1) As regards the creation, formation, organization or dissolution

of the corporation; (2) As regards the fixing of relations, liabilities, responsibilities, or

duties of stockholders, members, or officers or corporations to each other or to the corporation (Sec. 129)

WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?

(1) The corporation will not be permitted to maintain agency in the Philippines;

(2) The corporation will be subject to penalties and fines;

(3) The corporation will not be permitted to maintain or intervene in any action before

Philippine courts or administrative agencies; it can be SUED.

Isolated transactions MARSHALL WELLS V. ELSER (46 Phil. 71; 1924)

Marshall Wells, a corporation organized under the State of Oregon, sued a domestic corp.

for the unpaid balance on a bill of goods. Defendant demurred to the complaint on the ground

that it did not show that plaintiff had complied with the law regarding corp. desiring to do

business in the Phil., nor that the plaintiff was authorized to do business in the Phil.

The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was

to subject the foreign corp. doing business in the Phil. to the jurisdiction of its courts. The object

of the statute was not to prevent it from performing single acts but to prevent it from acquiring a

domicile for the purpose without taking the steps necessary to render it amenable to suit in the

local courts. The implication of the law is that it was never the purpose of the Legislature to

exclude a foreign corp. which happens to obtain an isolated order for business from the Phil.,

from securing redress in Phil. Courts, and thus, in effect to permit persons to avoid their contract

made with such foreign corporation.

Laws applicable to foreign corporations

Effects of Failure to Secure SEC License

ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)

A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it

is duly licensed. If a foreign corp. is not engaged in business in the Phil., it can maintain such

suit if the transaction sued upon is singular and isolated, in which no license is required. In either

case, the fact of compliance with the requirement of license, or the fact that the suing corp. is

exempt therefrom, as the case may be, cannot be inferred from the mere fact that the party suing

is a foreign corp. The qualifying circumstance, being an essential part of the element of the

plaintiff‘s capacity to sue, must be affirmatively pleaded. In short, facts showing foreign

corporation‘s capacity to sue should be pleaded.

Curing of defect

HOME INSURANCE V. EASTERN SHIPPING (123 SCRA 424; 1983)

A contract entered into by a foreign insurance corp. not licensed to do business in the

Phil. is not necessarily void and the lack of capacity to sue at the time of execution of the

contract is cured by its subsequent registration.

Protection of intellectual property rights

GENERAL GARMENTS CORP. V. DIR. OF PATENTS (41 SCRA 50; 1971)

Domestic corporation General Garments registered ―Puritan‖ trademark for its men‘s

wear. US corporation Puritan Sportswear petitioned the Phil. Patent Office for cancellation of

said trademark, alleging its ownership and prior use in the Phil.

The Supreme Court held that a foreign corp. which does not do business in the Phil. and

is unlicensed but is widely known in the Phil. through the use of its products here has legal right

to maintain an action to protect its reputation, corporate name and goodwill. The right to use the

corporate name is a property right which the corp. may assert and protect in any of the courts of

the world.

LE CHEMISE LACOSTE V. FERNANDEZ (129 SCRA 377; 1984)

A foreign corporation not doing business in the Phil. needs no license to sue in the Phil.

for trademark violations.

Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack

of capacity to sue of injured foreign corp. becomes immaterial (because a criminal offence is

essentially an act against the State).

NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any foreign national or juridical person who meets the requirements of Sec. 3 of the Act (i.e., is a national or is domiciled in a country party to any convention, treaty or agreement relating to intellectual property rights or

the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to Philippine nationals by law) and does not engage in business in the Philippines may bring a civil or administrative action for opposition, cancellation, infringement, unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing laws.

WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE LICENSING REQUIREMENT?

Mere investment as a shareholder and the exercise of the rights as such

investor;

Having a nominee director or officer represent the foreign investors’ interests;

Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own account

Example: Rustan’s exclusive distributorship of Lacoste t-shirts

Publication of a general advertisement;

NOTE: Under the Code of Commerce, the publication of an ad is prima facie evidence (or at least creates a presumption) of doing

business in the Philippines.

Maintaining stock of goods for processing by another entity in the Philippines;

Consignment of equipment to be used in processing products for export;

Collecting information in the Philippines;

Performing services incidental to an isolated contract of sale Example: Installing machinery sold by a foreign corporation to a Philippine buyer

WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES? Whether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (Metholatum v. Mangaliman)

What Constitutes Transacting Business

MENTHOLATUM V. MANGALIMAN (72 Phil. 525; 1941)

The true test as to whether a foreign corporation is doing business in the Philippines

seems to be whether the foreign corp. is continuing the body or substance of the business for

which it was organized or whether it has substantially retired from it and turned it over to

another. The term implies a continuity of dealings and arrangements and contemplates

performance of acts/works or the exercise of the functions normally incident to and in

progressive prosecution of the purpose and object of its organization.

FACILITIES MANAGEMENT CORP. V. DE LA OSA (89 SCRA 131; 1979)

The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to

pay Dela Osa his overtime compensation, swing shift and graveyard shift premiums. FMC filed

a petition for review on certiorari on the issue of whether the CIR can validly affirm a judgment

against persons domiciled outside and not doing business in the Phil. and over whom it did not

acquire jurisdiction.

The Supreme Court held that the petitioner may be considered as doing business in the

Philippines within the scope of Sec. 14, Rule 14 of the Rules of Court:

Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp.,

or a non-resident joint stock corporation or association, doing business in the

Phil., service may be made on its resident agent, on the government official

designated by law to the effect, or to an y of its officers or agents within the

Philippines.

FMC had appointed Jaime Catuira as its agent with authority to execute Employment

Contracts and receive, on behalf of the corp., legal services from, and be bound by processes of

the Phil. Courts, for as long as he remains an employee of FMS. If a foreign corp. not engaged

in business in the Phil., through an Agent, is not barred from seeking redress from courts in the

Phil., that same corp. cannot claim exemption done against a person or persons in the Phil..

NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term

"doing business" has been replaced with the phrase "has transacted business," thereby allowing suits based on isolated transactions.

MERRILL LYNCH FUTURES INC. V. CA (211 SCRA 824)

Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the

recovery of a debt. MLF is a non-resident foreign corp. not doing business in the Phil.,

organized under the laws of Delaware, USA. It is a futures commission merchant duly licensed

to act as such in the futures markets and exchanges in the US, essentially functioning as a broker

executing orders to buy and sell futures contract received from its customers on US futures

exchanges. (Futures contract is a contractual commitment to buy and sell a standardized

quantity of a particular item at a specified future settlement date and at a price agreed upon with

the purchase or sale being executed on a regulated futures exchange.)

The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no

legal capacity to sue because (1) MLF is doing business in the country without a license; and (2)

the transactions were made with Merrill Lynch Pierce, Fenner and Smith and not with plaintiff

MLF.

Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses in

light of the undeniable fact that it had transacted business without a license?

Legal capacity to sue may be understood in two senses: (1) That the plaintiff is

prohibited or otherwise incapacitated by law to institute suit in the Phil. Courts, or (2) although

not otherwise incapacitated in the sense just stated, that it is not a real party in interest.

The Court finds that the Laras were transacting with MLF fully aware of its lack of

license to do business in the Phils., and in relation to those transactions had made payments and

the spouses are estopped to impugn MLF's capacity to sue them. The rule is that a party is

estopped to challenge the personality of a corp after having acknowledged the same by entering

into a contract with it. The principle is applied to prevent a person contracting with a foreign

corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases

where such person has received the benefits of the contract.

PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)

This is an action instituted by the plaintiff, a foreign corporation, against the defendant to

recover a sum of money for damages suffered by the plaintiff as a consequence of the failure of

the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff.

Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to

transact business in the Phil and, consequently, it had no personality to file an action.

Has appellant transacted business in the Philippines in contemplation of law?

Contrary to the findings of the trial court, the copra in question was actually sold by the

defendant to the plaintiff in the US, the agreed price to be covered by an irrevocable letter of

credit to be opened at the Bank of California, and delivery to be made at the port of destination.

It follows that the appellant corporation has not transacted business in the Phil in contemplation

of Sec. 68 and 69 which require any foreign corporation to obtain a license before it could

transact business, or before it could have personality to file a suit in the Phil.. It was never the

purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated

order of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to

permit persons to avoid their contracts made with such foreign corp.. The lower court erred in

holding that the appellant corporation has no personality to maintain the present action.

AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635; 1977)

Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the

loss of Linen & Cotton piece goods due to pilferage and damage amounting to US$2,300.00.

PSL contends that Aetna has no license to transact insurance business in the Philippines as

gathered from the Insurance Commission and SEC . It also argues that since said company has

filed 13 other civil suits, they should be considered as doing business here and not merely having

entered into an isolated transaction.

Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that

Aetna is not transacting business in the Philippines for which it needs to have a license. The

contract was entered into in New York and payment was made to the consignee in the New York

branch. Moreover, Aetna was not engaged in the business of insurance in the Philippines but was

merely collecting a claim assigned to it by consignee. Because it was not doing business in the

Philippines, it was not subject to Sec. 68-69 of the Corporation Law and therefore was not barred

from filing the instant case although it had not secured a license to transact insurance business in

the Philippines.

TOPWELD MANUEL VS. ECED (138 SCRA 120; 1985)

Topweld entered into 2 separate contracts with foreign entities: a license and technical

assistance agreement with IRTI, and a distributor agreement with ECED, SA. When Topweld

found out that the foreign corporations were looking into replacing Topweld as licensee and

distributor, the latter went to court to ask for a writ of preliminary injunction to restrain the

foreign corporations from negotiating with 3rd parties as violative of RA 5445 (4).

Although IRTI and ECED were doing business in the Philippines, since they had not

secured a license from BOI, the foreign corporations were not bound by the requirement on

termination and Topweld could not invoke the same against the former. Moreover, it was

incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to

engage in such agreements. The Supreme Court held that both parties were guilty of violating

RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed for.

ANTAM CONSOLIDATED VS. CA (143 SCRA 289; 1986)

Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and

Unicorn for the collection of a sum of money for failure to deliver 500 tons of crude coconut oil.

Antam et al asked for dismissal of case on ground that Stokely was a foreign corporation not

licensed to do business in the Philippines and therefore had no personality to maintain the suit.

The SC held that the transactions entered into by Stokely with Antam et al (3

transactions, either as buyer or seller) were not a series of commercial dealings which signify an

intent on the part of the respondent to do business in Philippines but constitute an isolated

transaction. The records show that the 2nd and 3rd transactions were entered into because Antam

wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude oil

under the first transaction and in order to give the latter a chance to make good on their

obligation. There was only one agreement between the parties, and that was the delivery of the

500 tons of crude coconut oil.

As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident agent. If there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the same to them by registered mail within 10 days. This will

complete the service of the summons. Summons can also be served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.) Note that if there is a designated agent, summons served upon the government official is not deemed a valid process.

Johnlo Trading case holds that the service on the attorney of an FC who was also

charged with the duty of settling claims against it is valid since no other agent was duly appointed.

Service on Officers or Agents of an foreign corporation’s domestic subsidiary will

only vest jurisdiction if there is sufficient ground to disregard the separate personalities.

GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE (87

Phil. 313; 1950)

General Corporation and Mayon investment sued Union Insurance and Firemen‘s Fund

Insurance (FFI) for the payment of 12 marine insurance policies. The summons was served on

Union which was then acting as FFI‘s settling agent in the country. At that time, it was not yet

registered and authorized to transact business in the Philippines.

Issue: Did the trial court acquire valid jurisdiction over FFI?

Yes. The service of summons for FFI on its settling agent was legal and gave the court

jurisdiction upon FFI. Section 14, Rule 7 of ROC embraces Union in the phrase, ―or agents

within the Philippines‖. The law does not make distinctions as to corporations with or without

authority to do business in the Philippines. The test is whether a foreign corporation was

actually doing business here. Otherwise, a foreign corporation doing business illegally because

of its refusal or neglect to obtain the corresponding authority to do business may successfully

though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the

jurisdiction of the courts.

How Courts Acquire Jurisdiction over Foreign Corporations

(Sec. 136)

HOW: By filing a petition for withdrawal of license REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL:

(1) All claims which have accrued in the Philippines have been paid,

compromised and settled; (2) All taxes, imposts, assessments, and penalties, if any, lawfully due to the

Philippine Government or any of its agencies or political subdivisions have been paid; and

(3) The petition for withdrawal of license has been published once a week for 3

consecutive weeks in a newspaper of general circulation in the Philippines.

(Sec. 134)

WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN CORPORATION?

(1) Failure to file its annual report or pay any fees as required by the

Corporation Code; (2) Failure to appoint and maintain a resident agent in the Philippines as

required;

(3) Failure, after change of resident agent or of his address, to submit to the SEC a statement of such change;

(4) Failure to submit to the SEC an authenticated copy of any amendment to

its AOI or by-laws or of any articles of merger or consolidation within the time prescribed by the Code;

(5) A misrepresentation of any material matter in any application, report,

affidavit or other document submitted by such corporation pursuant to Title XV;

(6) Failure to pay any and all taxes, imposts, assessments or penalties, if any,

lawfully due to the Philippine government or any of its agencies or political subdivisions;

(7) Transacting business in the Philippines outside of the purpose/s for which

such corporation is authorized under its license; (8) Transacting business in the Philippine as agent of or acting for and in

behalf of any foreign corporation or entity not duly licensed to do business

in the Philippines; or (9) Any other ground as would render it unfit to transact business in the

Philippines.

Withdrawal of Foreign Corporation

Revocation and Suspension of License

SPECIAL AND MISCELLANEOUS PROVISIONS

(Sec. 106-108)

Educational corporations other than government-run institutions are governed first by

special laws, second, by the special provisions of the Corporation Code, and lastly, by the general provisions of the Corporation Code. (Sec. 106)

At least 60% of the authorized capital stock of educational corporations must be owned by Filipino citizens, and Congress may require increased Filipino equity participation therein. (With the exception of educational institutions established by religious groups and mission boards, which are not subject to this equity requirement.) However, control and administration of educational institutions must

be vested exclusively in citizens of the Philippines. (Art. XIV, Sec. 4 (2), 1987 Constitution) This means that no alien may be elected as a member of the BOD nor appointed as Principal or officer thereof.

Once a school, college or university has been granted government recognition by

the DECS, it must incorporate within 90 days from the date of such recognition, unless it is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it must file a copy of its AOI and by-laws with the DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or approve such articles. (Sec. 107, Corporation Code)

(Sec. 109-116)

Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and

by the general provisions of the Code on non-stock corporations insofar as they may be applicable. (Sec. 109) Corporation sole (Sec. 110-115)

A corporation sole is an incorporated office, composed of a single individual who may be a bishop, priest, minister or presiding officer of a religious sect, denomination or church. Its purpose is to administer and manage as trustee the property and affairs of such religious sect, denomination or church, within the territorial jurisdiction of such office. (Sec. 110; Sec. 111 (3)) In case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation sole. The property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation he represents. On the other hand, he is the person authorized by law as the administrator thereof and the court may take judicial notice of such fact and of the fact that the parish priests have no

control over such property. In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural lands, the Supreme Court has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the

Educational corporations

Religious corporations

office, which must be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be registered in the name of the corporation sole, although the holder of the office is an alien. This ruling is based on the fact that the corporation sole is not the owner but merely the administrator of the property, and that he holds it in trust for the faithful of the diocese

concerned. (See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947) Religious societies (Sec. 116)

In contrast to a corporation sole, religious societies are composed of more than one person. The requirements for incorporation of such societies are set forth in Sec. 116 of the Code.

(Sec. 96-105)

WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)

A close corporation, within the meaning of the Corporation Code, is one whose

articles of incorporation provide that:

(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding 20;

(2) All the issued stock of all classes shall be subject to one or

more specified restrictions on transfer permitted by Title XII of the Code; and

(3) The corporation shall not list in any stock exchange or make any

public offering of any of its stock of any class.

Notes:

A narrow distribution of ownership does not, by itself, make a close

corporation. (San Juan Structural and Steel Fabricators v. CA, 296 SCRA 631)

A corporation shall not be deemed a close corporation when at least 2/3

of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.

CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE CORPORATION?

YES, provided that said corporation owns less than 2/3 of voting stock or

voting rights.

WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? (Sec. 96)

Mining Oil Stock Exchange

Close Corporations

Bank Insurance Public Utilities Educational Institutions Corporations declared vested with public interest

DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS.

Close Corporation "Regular" Corporation No. of stockholders

Not more than 20 (Sec. 96)

No limit

Management

Can be managed by the

stockholders (Sec. 97)

Managed by Board of

Directors Meetings

May be dispensed with (Sec. 101)

Actual meetings are required.

Quorum and Voting

Greater quorum and voting requirements allowed. (Sec. 97)

Pre-emptive right

Extends to all stock, including treasury shares (Sec. 102)

Does not extend to treasury shares.

Buy-back of shares

Must be > par value (Sec. 105)

May be < par value

Resolution of deadlocks

SEC has the power to arbitrate disputes in case of deadlocks,

upon written petition by any stockholder. (Sec. 104) This includes the power to appoint a provisional director, as well as to dissolve the corporation.

Dissolution

May be petitioned by any

stockholder whenever any of the acts of the directors or officers or those in control of the corporation is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or

any stockholder, or whenever corporate assets are being misapplied or wasted. (Sec. 105)

Generally requires a 2/3 vote

of the stockholders and a majority vote of the BOD. (Note however that in case of involuntary dissolution under Sec. 121, a

corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing.)

WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104)

A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose qualifications, if any, may be determined by the SEC. He is not a receiver of the

corporation and does not have the title and powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. (Sec. 104)

COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. (Sec. 105)

Withdrawal Right Appraisal Right

Type of corporation involved

Close corporation

"Regular" corporation

When availed of

For any reason (Sec. 105)

Only the grounds enumerated in Sec. 81 and Sec. 42

Fair value of shares

Must be > par or issued value (Sec. 105)

May be < par or issued value

(Sec. 137-149)

The SEC has the power to issue rules and regulations reasonably necessary to

enable it to perform its duties under the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (Sec. 143)

Whenever the SEC conducts any examination of the operations, books and records

of any corporation, the results thereof must be kept strictly confidential, unless the law requires them to be made public or where they are necessary evidence before any court. (Sec. 142)

All domestic and foreign corporations doing business in the Philippines must submit

an annual report to the SEC of its operations, with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec. 141)

No right or remedy in favor of or against, nor any liability incurred by, any

corporation, its stockholders, members, directors, trustees or officers, may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. (Sec. 145)

Violations of the Corporation Code not otherwise specifically penalized therein are

punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)

Miscellaneous Provisions