3rd meeting - formation of corporation

B. FORMATION OF CORPORATIONS

1. Organizing the Corporation

a. Promoters: - a person, who acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor.- Promoters, as the visionaries or trailblazers in

founding corporate enterprises, are certainly not in the same category as carpetbaggers. Their activities are deemed beneficial to society and therefore are regulated by law. No formal recognition is accorded to promoter’s contracts in the Corporation Code, except under Section 60 and 61 thereof, on pre-incorporation subscriptions.

REVISED SECURITIES ACT (B.P. 178): (r) "Promoter" includes (1) any person who, acting alone or in conjunction with one or more other persons, directly or indirectly, takes initiative in founding and organizing the business or enterprise of an issuer; or (2) any person who, in connection with the founding and organizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services or property ten (10%) per centum or more of any class of securities of the issuer or ten (10%) per centum or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely as consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)

Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.

POST-INCORPORATION RATIFICATION AS THE BASIS TO HOLD THE CORPORATION LIABLE

In Cagayan Fishing Dev. Co. v. Teodoro Sandiko, four parcels of land were sold to a corporation in the process of incorporation, under specific terms whereby the outstanding mortgage loan on the properties would have to be fully paid by the corporation. Later, the corporation was incorporated, but the mortgage was not paid. However, the parcels of land were sold in the name of the corporation to Sandiko with the condition that the latter would shoulder the mortgage debts. When Sandiko failed to comply with his obligation, the corporation filed a recovery suit. In dismissing the case, the trial court held the contract to be void since it was entered into with a corporation that had no corporate existence at that time the properties were transferred to it. The Court upheld the dismissal of the case holding –

“That a corporation should have a full and complete organization and existence as an entity before it can enter any kind of contract or transact any business, would seem to be self-evident.. a corporation, until organized, has no being, franchises, or faculties. Nor do those engaged in bringing it into being have any power to bind t by contract, unless so authorized by the charter. Until organized as authorized by the charter there is not a corporation, nor does it possess franchises or faculties for it or other to exercise, until it acquires a complete existence.”

More importantly, while the Court conceded that there are circumstances where “the acts of promoters of a corporation [may] be ratified by the corporation if and when subsequently organized.. but under the peculiar facts and circumstances of the present case, [the Court] decline[s] to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.” The Court elaborated thus”

Boiled down to its naked reality, the contract here was entered into not only between Manuel Tabora and a non-existent corporation but between Manuel Tabora as owner of four parcels of land on the hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporation on the other hand. For reasons that are self-evident, these promoters could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere.

It would seem that the ration in Cagayan Fishing s that ratification is the key element in upholding the validity and enforceability of promoter’s contacts. Without ratification by a corporation after it due incorporation, a contract entered into in behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation. The Court found significant, the fact that the

Heidi Jean I. Montaos

transactions involving the properties were not treated as corporate assets but as the personal assets of the Taboras, supported by the fact that the titles of the parcels of land were not even registered in the name of the corporation.

In Rizal Light & Ice Co. v. Municipality of Morong, Rizal, a franchise awarded in favor of a corporation was sought to be annulled on the ground that at the time the application was filed, the corporation was then only in the process of incorporation. In dismissing the action, the Court held that although a franchise may be treated as a contract, the subsequent incorporation of the applicant corporation after the grant of the franchise, “and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contact between the respondent municipality and Morong Electric but cured the deficiency pointed out by the petitioner in the application of Morong Electric.

The Court also clarified in Rizal Light that in deciding Cagayan Fishing “this Court did not say in that case that the rules is absolute and that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contact made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized.”

DIFFERENCE BETWEEN CAGAYAN FISHING AND RIZAL LIGHTIn Rizal Lights, quoting from American Corporate authorities McQuillin, Fletcher and Thompson, emphasized that a company is not completely incorporated at the time a secondary franchise or a license is given, does not affect the validity of the grant, but what is essential is that at the time of the grant, the “corporation is organized” or that the company’s “organization is complete.” This emphasizs the principles under the business enterprise doctrine that what is essential for commencement of a corporation is the existence of the business organization upon which a license or grant is pursued.

While in Cagayan Fishing, it seemed that event at the tim of litigation, the juridical entity has not been formally organized into a business enterprise, and even the third-party (Sandiko) was well aware that the subject titles to the parcels of land were still not registered in the name of the corporate entity.

PROMOTER PERSONALLY LIABLE IN THE EVENT THE CORPORATION IS NOT DULY INCORPORATED

In Caram, Jr. v. CA, although the decision stated at the onset that “[f]or purposes of resolving this case before [the Court], it is not necessary to determine whether it is

the promoters of the proposed corporation, or the corporation itself after its organization, that shall be responsible for the expenses incurred in connection with such organization,” the Court nevertheless rules that investors who were not the “moving spirit” behind the organization of the corporation, but who were merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken, are not liable personally with the corporation for the cost of such feasibility study: “The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in later, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioners for the claims of the private respondents.” In fact, the Court took pains to point out that the majority investing incorporators were not included in the definition of “promoter,” thus –

The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Barreto as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners 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.

If indeed, the question of whether or not one is a promoter is irrelevant in determining one’s liability for the pre-organization expenses, then it would have been unnecessary in Caram, Jr. to determine that the majority investing incorporators were not promoters in order to absolve them from any liability on the pre-organizational expenses.

Also significant in Caram, Jr. is the Court’s finding that since there was no representation that the corporation was fictitious, there was no justification to hold the stockholders thereof personally liable. This is a doctrine that has an effect similar to the doctrine of corporation by estoppels, thus:

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation 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 corporation, the Flipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors.


CAGAYAN FISHING DEVELOPMENT v. SANDIKO

Facts: Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of two loans, Manuel Tabora, executed in favor of PNB two mortgages over the four parcels of land between August, 1929, and April 1930. Later, a third mortgage on the same lands was executed also on April, 1930 in favor of Severina Buzon to whom Tabora was indebted.

On May, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation. The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry only on October, 1930 (Exhibit 2).

A year later, the board of directors of said company adopted a resolution authorizing its president to sell the four parcels of lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale where the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land. Exhibit C is a promissory note drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed where the four parcels of land were given a security for the payment of the promissory note, Exhibit C.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum stated in the promissory note. After trial, the court rendered judgment absolving the defendant. Plaintiff presented a motion for new trial, which motion was denied by the trial court. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.

Issue: Whether Exhibit B, the deed of sale executed in favor of Teodoro Sandiko, was valid.

Held: NO. Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was not even a de facto corp at the time, thus not being in legal existence it does not yet possess juridical capacity to enter into contracts. The Tabora contract was entered into not only between him and a non-existent corporation, but between him as owner and the same Tabora, his wife and others, as mere promoters of the corporation. They could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. The SC refused to extend the doctrine of ratification which would result in the commission of injustice or fraud to third parties. Tabora owned a majority of the shares subscribed and paid. Tabora was also one of the directors, and title remained under Tabora’s name. Sandiko the

buyer dealt with Tabora directly and considered him as the owner. Even PNB treated Tabora as the owner, not the corporation. Thus Cagayan Fishing never really purchased the lands, and thus it did not have the right to dispose by sale to Sandiko.

RIZAL LIGHT & ICE CO. V. MUNICIPALITY

Facts: Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of respondent Public Service Commission cancelling and revoking the certificate of public convenience and necessity and forfeiting the franchise of Rizal, and(2) to review and set aside the decision of the Commission granting a certificate of public convenience and necessity to respondent Morong Electric Co., Inc to operate an electric light, heat and power service in the municipality of Morong, Rizal. Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. The Commission, in its decision dated March 13, 1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. The Commission found that Morong Electric is a corporation duly organized and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality.

Held: The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into


being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17,1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in essence is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission.

Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct.The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be considered asDe facto corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. — “The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized.” — “While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized.” — “An ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions.” The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong EIectric. Thus, the Commission did not err in denying petitioner's motion to dismiss said application and in proceeding to hear the same. The

efficacy of the franchise, however, arose only upon its approval by the Commission on March 13, 1963. The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko, where it was held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized. — Although a franchise may be treated as a contract, the eventual incorporation after the grant of the franchise and its acceptance thereof, as well as the efforts made to prosecute the application not only perfected a contract but cured the deficiency — Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or accept a contract made by promoters in behalf of the corporation before its incorporation

Personal liability of promoter on pre-incorporate contracts.3 possible situations between the promoter and the other party to a pre-incorporation contract:

1. promoter makes a continuing offer in behalf of corp. If accepted, contract perfecteda. promoter no personal liability

2. promoter makes contract binding himself. If accepted or adopted, he is relieved of liability3.promoter binds himself personally, but seeks reimbursement from corporation.

GR: promoter is personally liable for contracts made by him in behalf of the proposed corporation.Exception: express or implied agreement to the contrary Adoption or ratification of the contract does not release him from responsibility, unless a novation was intended.

b. Subscription Contracts

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)

Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.


the essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed..

TRILLANA V. QUEZON COLLEGE

Facts: Damasa Crisostomo sent the following letter to the board of Trustees of the Quezon College: “Gentlemen:“Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay makapaghuli ng isda) pesos as my initial payment and the balance payable in accordance with law and the rules and regulations of the Quezon College. x x x”

Damasa Crisostomo died on October 26, 1948. As no payment appears to have been made on the subscription mentioned in the foregoing letter, the Quezon College, Inc. presented a claim before the CFI of Bulacan in her estate proceeding, for the collection of P20,000, representing the value of the subscription to the capital stock of the Quezon College, Inc.

This claim was opposed by the administrator of the estate, and the court after hearing, issued an order dismissing the claim of Quezon College, Inc.

Held: It appears that the application sent by Crisostomo to the College was written on a general form indicating that an applicant will enclose an amount as initial payment and will pay the balance in accordance with law and the rules or regulations of the College.

On the other hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be entered) not only did not enclose any initial payment but stated that “babayaran kong lahat pagkatapos na ako ay makapanghuli ng isda.”There is nothing in the record to show that the Quezon College, Inc. accepted the term of payment suggested by Crisostomo, or that if there was any acceptance the same came to her knowledge during her lifetime.

The relation between Crisostomo and the College had only thus reached the preliminary stage whereby the latter offered its stock for subscription on terms stated in the form letter, and Damasa applied for subscription fixing her own plan of payment,-- a relation, in the absence as in the present case of acceptance by the College of the counter offer of Crisostomo, that had not ripened into an enforceable contract.

Indeed, the need for express acceptance on the part of the College becomes the more imperative, in view of the proposal of Crisostomo to pay the value of the subscription after she had harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, rendering the obligation void under the Civil Code.

1. Purchase Agreement (e.g. contract of sale, contract of encumbrance)

BAYLA V. SILANG TRAFFIC CO., INC.

Facts: Petitioners Bayla et. al paid the respondent corporation for shares of stock they agreed to take under certain specified terms and conditions. The agreement provides that the shares shall be paid in installment; failure to pay the same shall mean forfeiture of payment and shares shall revert to the seller. Petitioner defaulted in the payment and so the BOD of respondent corporation issued a resolution regarding forfeiture of subject shares/subscription. Subsequently, petitioners filed an action to recover the amount they paid. The lower court absolved the corporation and declared them the owner of the shares of stock in question. CA reversed the said decision declaring that petitioners’ subscription is not cancelled/forfeited in favor of the corporation. Both parties filed an appeal.

Issue:Whether the agreement is a contract of subscription or of sale.

Held: SC held that the agreement between the parties is a contract of sale because of the ff. reasons: 1.agreement is entitled “Agreement for Installment Sale of Shares; 2.contract was entered into before the incorporation and organization of the corporation.The contract did not expressly provide that failure of the purchaser to pay any installment would give rise to forfeiture and cancellation without necessity of demand from the seller. Further, Had it been the intention of the parties to provide for automatic forfeiture/cancellation, the provision regarding interest on deferred payments should not have been inserted. Since the contract in question is one of sale, rescission can be done by agreement of the parties. Respondent Corporation was ordered to refund the petitioners of the amount they paid.

Note: Distinction between contract of sale and subscription. Contract of sale/purchase-is an independent agreement between the individual and the corporation to buy shares of stock from it at a stipulated price.

Contract of subscription-is the mutual agreement of the subscribers to take and pay for the stock of a corporation.

2. Pre-Incorporation Subscription (Sec. 61) – subscription contract is VOID.Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from


the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n)

a. Offer Theory - construes subscription agreement as only a continuing offer to a proposed corporation, which offer does not ripen into a contract until accepted by the corporation when organized;

it allows withdrawal of subscriber at least before the corporation comes into existence and accepts the offer

b. Contract Theory – a subscription agreement among several persons to take shares in a proposed corporation becomes a binding contract and is irrevocable from the time of subscription, unless cancelled by all the parties before acceptance by the corporation.

3. Release from Subscription Obligation

VELASCO V. POIZAT

Facts: The plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of said company. The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining shares. Defendant was a stockholder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and another 15 shares owned by Jose R. Infante. On July 13, 1914, the company in a proposition was to effect that Juan [Jean] M. Poizat, who was absent, should be required to pay the amount of his subscription upon the 15 shares for which he was still indebted to the company. The resolution further provided that, in case he should refuse to make such payment, the management of the corporation should be authorized to undertake judicial proceedings against him. Poizat questioned the resolution claiming that his decision not to pay was based on poor opinion which he entertain of the business and the faint hope of ever recovering any money invested. He also claimed that, he cannot be compelled to pay because the board failed to make a call. At the hearing of the Court of First Instance, judgment was rendered in favor of the defendant, and the complaint was dismissed. From this

action the plaintiff has appealed.

Issue: Whether Poizat is liable upon his subscription?

Held: YES. The Court held him to be liable. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The provisions of the Corporation Law (Act No. 1459) given recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. The other remedy is by action in court.

When the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of suits to collect unpaid balances on subscription. It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of the officers of the corporation to perform their duty in making a call; and when the original model of making the call becomes impracticable, the obligation must be treated as due upon demand. When insolvency supervenes all unpaid subscriptions become at once due and enforceable. The defendant is liable for P1,500, the amount of his subscription upon the unpaid shares. Under section 36 of the Corporation Law he is also liable for interest at the lawful rate from the date of his subscription, unless relieved from this liability by the by-laws of the company.

PNB V. BITULOK SAWMILL, INC.

Facts: President Roxas organized the Philippine Lumber Distributing Agency for the purpose of insuring the steady supply of lumber to enable the war sufferers to rehabilitate their devastated homes. Roxas convinced the lumber producers to form a lumber cooperative and to pool their resources together. The President promised and agreed to finance the agency by making the government


invest P9.00 for every peso the members would invest. Relying on the assurance, Bitulok and several others subscribed to the stocks of Philippine Distributing Agency. The legislature was not able to appropriate the counterpart fund to be put up by the government, hence, President Roxas instructed PNB to grant loan to the Philippine Distributing Agency. The loan was not paid as a consequence, PNB filed a suit on their subscriptions to the Philippine Distributing Agency.

Issue: May PNB collect the balance on the subscription in spite of the conditions attached thereto which were not fulfilled?

Held: YES. The Court held that it is a well-settled principle that with all the vast powers lodged in the President, he is still devoid of the prerogative of suspending the operation of any statute or any of its terms. The power of suspending laws is lodged with the Legislature, which has indicated that the obligation for the payment of subscription by the defendants shall be governed by the Corporation Law. The President could not suspend the effectivity of the Corporation Law; therefore, the defendants remain liable to the balance of their subscription.

This case gives the essence of a subscription contract. It is indeed a species of the Law on Contracts, but the principles in Corporate Law prevail. One of the principles in Corporate law is that, when one enters into a subscription agreement, one cannot deny the obligation to pay, even when the corporation becomes insolvent.

When one enters into a subscription agreement, the principles of Corporate Law become part and parcel of the contract. The cases therefore hold that any contradiction to modify the condition of the obligation to pay is essentially void. It does not avoid the subscription agreement but avoids the condition. The obligation to pay then becomes a purely simple obligation.

The lumber producers are therefore liable for the balance of their respective subscriptions.

Decision reversed and cases remanded to lower court for judgment.

2. FORMALITIES IN ORGANIZING

a. Generally

GOVERNMENT OF THE PHILIPPINE ISLANDS V. MANILA RAILROAD

FACTS: This is a petition in the Supreme Court of the extraordinary legal writ of mandamus presented by the Government of the Philippine Islands, praying that the writ be issued to compel the Manila Railroad Company and

Jose Paez, as its manager, to provide and equip the telegraph poles of said company between the municipality of Paniqui, Province of Tarlac, and the Municipality of San Fernando, Province of La Union, with crosspieces for six telegraph wires belonging to the Government, which, it is alleged, are necessary for public service between said municipalities.

The present poles and crosspieces between said municipalities are sufficient to carry four telegraph wires and that they do now carry four telegraph wires, by virtue of an agreement between the respondents and the Bureau of the Posts of the Philippine Government. It is admitted that the poles and not sufficient to carry six telegraph wires.

Petitioner’s contention - under said section 84 the defendant company is required to erect and maintain posts for its telegraph wires, of sufficient length and strength, and equipped with sufficient crosspieces to carry the number of wires which the Government may consider necessary for the public service, and that six wires are now necessary for the public service.

Respondents answer – in their special defense they contend that section 84 of Act No. 1459 has been repealed by section 1, paragraph 8 of Act No. 1510 of the United States Philippine Commission, and that under the provisions of said Act No. 1510 the Government is entitled to place on the poles of the company four wires only. Act No. 1510 is the charter of the Manila Railroad Company.

ISSUE: W/N section 84 of Act No. 1459 is applicable to the Manila Railroad Company, or

W/N the manila Railroad Company is governed by section 1, paragraph 8, of Act No. 1510.

HELD: Act No. 1459 is a general law applicable to corporations generally, while Act No. 1510 is the charter of the Manila Railroad Company and constitute a contract between it and the Government.

From a reading of the said charter or contract it would be seen that there is no indication that the Government intended to impose upon said company any other conditions as obligations not expressly found in said charter or contract. If that is true, then certainly the Government cannot impose upon said company any conditions or obligations found in any general law, which does not expressly modify said contract

Section 84 of the Corporation Law (Act No. 1459) was intended to apply to all railways in the Philippine Islands which did not have a special charter contract. Act No. 1510 applies only to the Manila Railroad Company, one of the


respondents, and being a special charter of said company, its adoption had the effect of superseding the provisions of the general Corporation Law which are applicable to railroads in general. The special charter (Act No. 1510) had the effect of superseding the general Corporation Law upon all matters covered by said special charter. Said Act, inasmuch as it contained a special provision relating to the erection of telegraph and telephone poles, and the number of wires which the Government might place thereon, superseded the general law upon that question

Act No. 1510 is a special charter of the respondent company. It constitutes a contract between the respondent company and the state; and the state and the grantee of a charter are equally bound by its provisions. For the state to impose an obligation or a duty upon the respondent company, which is not expressly provided for in the charter (Act No. 1510), would amount to a violation of said contract between the state and the respondent company. The provisions of Act No. 1459 relating to the number of wires which the Government may place upon the poles of the company are different and more onerous than the provisions of the charter upon the same question. Therefore, to allow the plaintiff to require of the respondent company a compliance with said section 84 of Act No. 1459, would be to require of the respondent company and the performance of an obligation which is not imposed upon it by its charter.

The charter of a corporation is a contract between three parties: (a) it is a contract between the state and the corporation to which the charter is granted; (b) it is a contact between the stockholders and the state and (c) it is also a contract between the corporation and its stockholders.

RURAL BANK OF SALINAS V. CA

Facts: Clemente Guerrero President of Rural Bank of Salinas executed a Special Power of Attorney in favour of his wife and herein private respondent Melania Guerrero giving and granting the later full power and authority to sell or otherwise dispose and/or mortgage 473 shares of stock of the bank registered in his name. Melenia then executed deed of assignment pursuant to the SPA in favor of four persons (472 shares out of the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares) distributing unto them the shares of the bank. When Clemente died, melenia request the bank to cancel the shares of stock named under Clemente and issue new stocks in favour of the four persons. The bank refused to do so and Melenia seek the help of the SEC filing therein an action for mandamus for the same reason. Maripol Guerrero daughter of Clemente filed an intervention.

Issue: Whether the bank can refuse to cancel the stocks named under Clemente and issue new stocks in favour of the four persons.

Held: The SC held that the SEC is correct in ordering the Bank to cancel the stocks under the name of Clemente and to issue new stocks in favour of the four persons. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because:

. . . Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. Nolasco, Supra).

Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit:

Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation

The corporation's obligation to register is ministerial.In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. (Fletcher, Sec. 5528, page 434).The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause, it may be compelled to do so by


mandamus. (See. 5518, 12 Fletcher 394)

b. Articles of Incorporation1. Procedure and Documentary

Requirements

As to contents & forms: considered by law to be so important and jurisdictional

Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where more than one stated purpose, state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;

3. Principal office of the corporation is to be located, which must be within the Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, not less than (5) nor more than (15);

7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified

8. If stock corporation, the amount of its authorized capital stock, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law .

SEC shall only accept the articles of incorporation of any stock corporation if accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at (25%) of the authorized capital stock of the corporation has been subscribed, and at (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least (25%) of the said subscription, such paid-up capital being not less (P5,000.00) pesos.

Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the ff. form:

ARTICLES OF INCORPORATION OF __________________________

KNOW ALL MEN BY THESE PRESENTS:

The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines;

AND WE HEREBY CERTIFY:

FIRST: That the name of said corporation shall be "_____________________, INC. or CORPORATION";

SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes);

THIRD: That the principal office of the corporation is located in the City/Municipality of ________________________, Province of _______________________, Philippines;

FOURTH: That the term for which said corporation is to exist is _____________ years from and after the date of issuance of the certificate of incorporation;


FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows:

NAME NATIONALITY RESIDENCE_________________ ___________________ ________________________________ ___________________ _______________

SIXTH: That the number of directors or trustees of the corporation shall be _______; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows:

NAME NATIONALITY RESIDENCE_________________ ___________________ ________________________________ ___________________ _______________

SEVENTH: That the authorized capital stock of the corporation is ______________________ (P___________) PESOS in lawful money of the Philippines, divided into __________ shares with the par value of ____________________ (P_____________) Pesos per share.

(In case all the share are without par value):

That the capital stock of the corporation is ______________ shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of _____________ shares of which ______________ shares are of the par value of _________________ (P____________) PESOS each, and of which _________________ shares are without par value.

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows:

Name of Subscriber Nationality No of Shares Amount

Subscribed _________________ ___________________ _______________NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows:

Name of Subscriber Amount Subscribed Total Paid-In_________________ ___________________ ________________________________ ___________________ _______________

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.)

TENTH: That _____________________ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members.

ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation."

IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this __________ day of ________________, 19 ______ in the City/Municipality of ____________________, Province of ________________________, Republic of the Philippines.

_______________________ ______________________________________________ _______________________

________________________________


(Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF:

_______________________ _______________________

(Notarial Acknowledgment)

As to Corporate Name a corporation has the power of succession by its corporate name; the name of a corporation is therefore essential to its existence; it cannot change its name except in the manner provided by the statute; by that name alone is it authorized to transact business, and it is by the name that a corporation can sue and be sued, and perform all other legal acts.

Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n)

GUIDELINES ON CORPORATE NAMES UNDER SEC:1. Shall contain the word corporation, corp., incorporated, or inc.2. Descriptive terms shall be indicative of the primary purpose3. Shouldn’t be identical, misleading or confusingly similar to one already registered4. Buss. Or tradename different from its corporate name shall be indicated5. Tradename or trademark registered with the IPO cannot be used without consent6. Name or surname of a person may only be used upon consent7. Meaning of initials shall be disclosed in writing8. Name containing a term descriptive of a buss. Different from the buss. Of a registered company whose name also bears similar term(s) used by the former may be allowed9. Name should not be patently deceptive, confusing or contrary to existing laws10. Identical words in a registered name shall not be allowed if already coined11. International name of a known corp. may not be used without consent12. Term “Philippines” when used as part of the name of a subsidiary corp. of a foreign corp. shall be in parenthesis

13. The following words shall not be used as part of a corporate names:

Finance, Financing, Investment, Engineer, Engineering, Bank, Banking etc if not engaged in such business

UN in full or abbreviation

Bonded for corporations with unlicensed warehouse

National by all stock corporations

ASEAN, CALABARZON14. Name of dissolved firm shall not be used within 3 years after dissolution15. Registrant corporations shall submit a letter undertaking to change their corporate name in case another person or firm has acquired a prior right to its use

TREASURER'S AFFIDAVITREPUBLIC OF THE PHILIPPINES )CITY/MUNICIPALITY OF ) S.S.PROVINCE OF )

I, ____________________, being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code.

____________________

(Signature of Treasurer)

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of ___________________ Province of _____________________, this _______ day of ___________, 19 _____; by __________________ with Res. Cert. No. ___________ issued at _______________________ on ____________, 19 ______

NOTARY PUBLIC


My commission expires on _________, 19 _____

Doc. No. _________;Page No. _________;Book No. ________;Series of 19____ (7a)

RED LINE TRANSIT V. RURAL TRANSIT

Facts: Red Line Transportation Co. filed an opposition to the application of the Rural Transit Co. for the grant of new service between Tuguegarao and Manila, contending that they already holds the certificate of public convenience and is rendering adequate and satisfactory service and the granting of the application for Rural Transit would constitute a ruinous competition for their route. The Public Service Commission approved the application of Rural Transit, then the oppositor Red Liner filed a motion and called the attention of the Commission to the fact that there was a pending application for the voluntary dissolution of Rural Transit.

At the trial in the Public Service Commission, an issue was raised as to who was the real party in interest, whether the Rural transit Company, Ltd. as appeared on the face of the application or the Bachrach Motor Company, Inc. using the name of the Rural Transit Company, Inc. as a trade name. The hearing proceeded without the participation of Bachrach Motor Co. and the Pubic Service Commission rendered decision in favor of the Rural Transit and authorizing the Bachrach to continue using the name of Rural Transit.as its trade name.

Issue: Whether the Public Service Commission has the jurisdiction to authorize one corporation to assume the name of another as a trade name?

Held: The order of the Commission authorizing the Bachrach to assume the name of the Rural Transit is void on the ground that the rural Transit is not the real party in interest and its application was fictitious.

We know of no law that empowers the Public Service Commission or any court in this jurisdiction to authorize one corporation to assume the name of another corporation as a trade name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very law of their creation and continued existence requires each to adopt and certify a distinctive name. The incorporators "constitute a body politic and corporate under the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation has the power "of succession by its corporate name." (Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change its name except in the manner provided by the statute. By

that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated: still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. The policy of the law expressed in our corporation statute and the Code of Commerce is clearly against such a practice.

PHILIPPINE INSURANCE V. HARTIGAN

Facts: According to the complaint, plaintiff was originally organized as an insurance corporation under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.' The articles of incorporation originally presented before the Security and Exchange Commissioner and acknowledged before Notary Public Mr. E. D. Ignacio on June 1, 1953 state that the name of the corporation was 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.' On May 26, 1961 the articles of incorporation were amended pursuant to a certificate of the Board of Directors dated March 8, 1961 changing the name of the corporation to 'Philippine First Insurance Co., Inc.'. The complaint alleges that the plaintiff Philippine First Insurance Co., Inc., doing business under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.' signed as co-maker together with defendant Maria Carmen Hartigan, CGH, a promissory note for P5,000.00 in favor of the China Banking Corporation payable within 30 days after the date of the promissory note and signed an indemnity agreement in favor of plaintiff in case Hartigan fails to pay the PN. Defendant Hartigan failed to pay the amount of the PN, hence, this action for collection of sum of money. Defendants in their defense denies the allegations and claim that plaintiff has no cause of action against them considering that it was not alleged in the complaint that Yek Tong and Phil. First Insurance is one and the same.

Issue: Whether the change of corporate name of plaintiff is valid.

Held: Section 18 of the Corporation Code does not only authorize corporations to amend their charter; it also lays down the procedure for such amendment; and, what is more relevant to the present discussion, it contains provisos restricting the power to amend when it comes to the term of their existence and the increase or decrease of the capital stock. There is no prohibition therein against the change of name. The inference is clear that such a change is allowed, for if the legislature had intended to enjoin corporations from changing names, it would have expressly stated so in this section or in any other provision of the law.


As correctly pointed out by appellant, the approval by the stockholders of the amendment of its articles of incorporation changing the name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd." to "Philippine First Insurance Co., Inc." on March 8, 1961, did not automatically change the name of said corporation on that date. To be effective, Section 18 of the Corporation Law, earlier quoted, requires that "a copy of the articles of incorporation as amended, duly certified to be correct by the president and the secretary of the corporation and a majority of the board of directors or trustees, shall be filed with the Securities & Exchange Commissioner", and it is only from the time of such filing, that "the corporation shall have the same powers and it and the members and stockholders thereof shall thereafter be subject to the same liabilities as if such amendment had been embraced in the original articles of incorporation." It goes without saying then that appellant rightly acted in its old name when on May 15, 1961, it entered into the indemnity agreement, Annex A, with the defendant-appellees; for only after the filing of the amended articles of incorporation with the Securities & Exchange Commission on May 26, 1961, did appellant legally acquire its new name; and it was perfectly right for it to file the present case In that new name on December 6, 1961. Such is, but the logical effect of the change of name of the corporation upon its actions.

UNIVERSAL MILLS V. UNIVERSAL TEXTILE

Facts: Universal Textile Mills, Inc. was organ on December 29, 1953, as a textile manufacturing firm for which it was issued a certificate of registration on January 8, 1954.

The Universal Mills Corporation, on the other hand, was registered in the SEC on October 27, 1954, under its original name, Universal Hosiery Mills Corporation, having as its primary purpose the "manufacture and production of hosieries and wearing apparel of all kinds.”On May 24, 1963, it filed an amendment to its articles of incorporation changing its name to Universal Mills Corporation, its present name, for which this Commission issued the certificate of approval on June 10, 1963.

The immediate cause of this present complaint, however, was the occurrence of a fire which gutted respondent's spinning mills in Pasig, Rizal. Petitioner alleged that as a result of this fire and because of the similarity of respondent's name to that of herein complainant, the news items appearing in the various metropolitan newspapers carrying reports on the fire created uncertainty and confusion among its bankers, friends, stockholders and customers prompting petitioner to make announcements, clarifying the real Identity of the corporation whose property was burned.

On the other hand, respondent's position is that the names of the two corporations are not similar and even if

there be some similarity, it is not confusing or deceptive; that the only reason that respondent changed its name was because it expanded its business to include the manufacture of fabrics of all kinds; and that the word 'textile' in petitioner's name is dominant and prominent enough to distinguish the two. It further argues that petitioner failed to present evidence of confusion or deception in the ordinary course of business; that the only supposed confusion proved by complainant arose out of an extraordinary occurrence — a disastrous fire.

Upon these premises, the Commission held:From the facts proved and the jurisprudence on the matter, it appears necessary under the circumstances to enjoin the respondent Universal Mills Corporation from further using its present corporate name. Judging from what has already happened, confusion is not only apparent, but possible. It does not matter that the instance of confusion between the two corporate names was occasioned only by a fire or an extraordinary occurrence. It is precisely the duty of this Commission to prevent such confusion at all times and under all circumstances not only for the purpose of protecting the corporations involved but more so for the protection of the public. . The word “textile” in Universal Textile Mills, Inc.’ cannot possibly assure the exclusion of all other entities with similar names from the mind of the public especially so, if the business they are engaged in are the same, like in the instant case.

Issue: Whether the order of the Commission enjoining petitioner to its corporate name constitutes, in the light of the circumstances found by the Commission, a grave abuse of discretion.

Held: The corporate names in question are not Identical, but they are indisputably so similar that even under the test of "reasonable care and observation as the public generally are capable of using and may be expected to exercise" invoked by appellant, We are apprehensive confusion will usually arise, considering that under the second amendment of its articles of incorporation on August 14, 1964, appellant included among its primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which respondent had been engaged for more than a decade ahead of petitioner. Factually, the Commission found existence of such confusion, and there is evidence to support its conclusion. Since respondent is not claiming damages in this proceeding, it is, of course, immaterial whether or not appellant has acted in good faith, but We cannot perceive why of all names, it had to choose a name already being used by another firm engaged in practically the same business for more than a decade enjoying well earned patronage and goodwill, when there are so many other appropriate names it could possibly adopt without arousing any suspicion as to its motive and, more importantly, any degree of confusion in the mind of the


public which could mislead even its own customers, existing or prospective. Premises considered, there is no warrant for our interference.

2. As to Purpose

Sec. 14 [2] The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;

confers as well as limits the powers which a corporation may exercise; other reasons for indicating purpose in the charter of the corporation so that:

Prospective investors shall know the kind of business the corporation deals with

Management shall know the limits of its actions

A 3rd party can know whether his dealings with the corporation are with corporate functions and powers

- In Uy Siuliong v. Director of Commerce, it was held that statement of primary purpose is to protect shareholders so they will know the main path of business of the corporation and they may file derivative suits if the corporation deviates from the primary purpose.

UY SIULIONG V. ANTILLON

Facts: Petitioners had been associated together as partners, which partnership was known as a “mercantile regular colectiva”. That the petitioners desired to dissolve said partnership and to form a corporation composed of the same persons as incorporators. That the purpose of said corporation is to acquire the business of the partnership and to continue said business with some of its objects or purposes.

While the articles of incorporation states that its purpose is to acquire and continue the business, with some of its objects or purposes, it will be found upon an examination of the purposes enumerated in the articles of incorporation that some of the purposes of the original partnership have been omitted. For example, the articles of partnership of “Siuliong y Cia”, gave said company the authority to purchase and sell all classes or rural and city estate” as well as the right to act as agents for the establishment of any other business which it might esteem convenient for the interests of the company.

The respondent in his argument in support of the demurrer contends (a) that the proposed articles of incorporation presented for file and registry permitted the petitioners to engage in a business which had for its end more than one purpose; (b) that it permitted the petitioners to engage in the banking business, and (c) to deal in real estate, in violation of the Act of Congress of July 1, 1902.

The petitioners, in reply to said argument of the respondent, while insisting that said proposed articles of incorporation do not permit it to enter into the banking business nor to engage in the purchase and sale of real estate in violation of said Act of Congress, expressly renounced in open court their right to engage in such business under their articles of incorporation, even though said articles might be interpreted in a way to authorize them to so to do. That renouncement on the part of the petitioners eliminates from the purposes of said proposed corporation (of "Siuliong y Cia., Inc.") any right to engage in the banking business as such, or in the purchase and sale of real estate.

Issue: Whether a corporation organized for commercial purposes can be organized for more than one purpose.

Held: Referring again to be proposed articles of incorporation, it will be seen that the only purpose of said corporation are those enumerated in subparagraphs (a), (b), (c), (d), (e) and ( f ) of paragraph 4 above. While said articles of incorporation are somewhat loosely drawn, it is clear from a reading of the same that the principal purpose of said corporation is to engage in a mercantile business, with the power to do and perform the particular acts enumerated in said subparagraphs above referred to.

We are of the opinion and so decide that a corporation may be organized under the laws of the Philippine Islands for mercantile purposes, and to engage in such incidental business as may be necessary and advisable to give effect to, and aid in, the successful operation and conduct of the principal business.1awphi1.net

In the present case we are fully persuaded that all of the power and authority included in the articles of incorporation of "Siuliong y Cia., Inc.," enumerated above in paragraph 4 (Exhibit A) are only incidental to the principal purpose of said proposed incorporation, to wit: "mercantile business."

While we have arrived at the conclusion that the proposed articles of incorporation do not authorize the petitioners to engage in a business with more than one purpose, we do not mean to be understood as having decided that corporations under the laws of the Philippine Islands may not engage in a business with more than one purpose. Such an interpretation might work a great injustice to


corporations organized under the Philippine laws. Such an interpretation would give foreign corporations, which are permitted to be registered under the laws here and which may be organized for more than one purpose, a great advantage over domestic corporations. We do not believe that it was the intention of the legislature to give foreign corporations such an advantage over domestic corporations.

Considering the particular purposes and objects of the proposed articles of incorporation which are specially enumerated above, we are of the opinion that it contains nothing which violates in the slightest degree any of the provisions of the laws of the Philippine Islands, and the petitioners are, therefore, entitled to have such articles of incorporation filed and registered as prayed for by them and to have issued to them a certificate under the seal of the office of the respondent, setting forth that such articles of incorporation have been duly filed in his office.

3. As to principal office - Section 14 [3] The place where the principal office of

the corporation is to be located, which must be within the Philippines;

although the corporation may hold office in a place other than the place indicated in the articles of incorporation, for jurisdictional purpose, the place indicated in the articles of incorporation is binding.

Thus, the rules is well-established in our jurisprudence that the residence of a corporation is the place where its principal office is located, as stated in the articles of incorporation.

a corporation in a metaphysical sense is a resident of the place where its principal office is located as stated in the articles of incorporation and cannot be allowed to file a personal action in a place other than that place.

- In Clavecilla v. Antillon, held that the residence of a corporation is the place where its principal office is established; it can be sued in that place, not in the place where its branch office is located.

CLAVECILLA V. ANTILLON

Facts: It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against the Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message, addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its branch office at Cagayan de Oro:

“NECAGRO CAGAYAN DE ORO (CLAVECILLA)

REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE SHALL SHIP LATER REPLY POHANG”

The Cagayan de Oro branch office having received the said message omitted, in delivering the same to the New Cagayan Grocery, the word "NOT" between the words "WASHED" and "AVAILABLE," thus changing entirely the contents and purport of the same and causing the said addressee to suffer damages. After service of summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the grounds that it states no cause of action and that the venue is improperly laid.

However, the appellee maintain that with the filing of the action in CDO, venue was properly laid on the principle that the appellant may also b served with summon in that city where it maintains a branch office.

Issue: Whether Clavecilla Radio System may be sued in its branch office in Cagayan.Held: NO. Settled is the principle in corporation law that the residence of a corporation is the place where its principal office is established. Since it is not disputed that the Clavecilla Radio System has its principal office in Manila, it follows that the suit against it may properly be filed in the City of Manila. . As any other corporation, the Clavecilla Radio System maintains a residence which is Manila in this case, and a person can have only one residence at a time. The fact that it maintains branch offices in some parts of the country does not mean that it can be sued in any of these places. To allow an action to be instituted in any place where a corporate entity has its branch offices would create confusion and work untold inconvenience to the corporation.

4. As to Corporate TermSection 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

- The corporation may virtually have a perpetual lifespan renewable every fifty years. The limit of a fifty-year term emphasizes the contractual nature of the corporation: people would be discouraged from investing it the period could last forever. Likewise, management would theoretically be more honest – a renewal of the


corporate term would be a vote of confidence by the stockholders or members.

- Benguet Consolidated Mining Co. v. Pineda, discussed the importance of the corporate term as it is co-terminous with its possession of an independent legal personality, distinct from that of its component members: “The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute.. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; and, particularly, that it be not abused in fraud and to the detriment of other parties; and for this reason it has been ruled that “the limitation of (corporate existence) to a definite period is an exercise of control in the interest of the public.”

ALHAMBRA CIGAR & CIGARETTE V. SEC

Facts: Petitioner Alhambra Corporation’s corporate existence is to expire on Jan. 15, 1962. On the said date, the corporation ceased transacting business and was in a state of liquidation. On June 20, 1963 R.A. 3531 was enacted. The said law empowered private corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a term not to exceed 50 years (prior to enactment of RA 3531 the maximum non-extendible term of corporations was 50 years).

On October 28, 1963, Alhambra filed with SEC their amended articles of incorporation seeking for extension of another 50 years. SEC denied their application holding that Alhambra Corporation cannot avail the extension granted by RA 3531 since its term of existence had already expired when the law took effect, and such has no retroactive effect.

Issue: Whether a corporation may extend its life by amendment of its articles of incorporation effected at the time its original term of existence had already expired.

Held: NO. SC affirmed the SEC’s decision denying the extension sought by the Corporation. It ruled that the privilege given to prolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of incorporation. Further, Section 77 of the Corporation Law provides that no corporation in a state of liquidation can act in any way, much less amend its articles, for the purpose of continuing the business for which it was established.

BENGUET C0NSOLIDATED V. PINEDA

Facts: The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed “Benguet” for short), was organized on June 24,1903, as a sociedad anonima regulated by Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the Philippines. The articles of association

expressly provided that it was organized for a term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act 1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical entities known as corporation, to take effect on April 1, 1906. Prior to the expiration of its corporate term, petitioner filed with the SEC an alternative registration, extending its term of existence for another 50 years and reformation or reorganization of the corporation in accordance with the Corporation Code. Respondent herein, Securities and Exchange Commissioner denied the registration relying mainly upon the opinion of the Sec. of Justice on the ground that petitioner has no right to extend the original term of its corporate existence as stated in the Articles of Incorporation being a sociedad anonima.

Issue: Whether petitioner has the right to extend the term of its corporate existence in accordance with the Corporation Code.

Held: Petitioner Benguet (and here lies the second issue in this appeal) that the possibility to extend its corporate life under the Code of Commerce constituted a right already vested when Act No. 1459 was adopted. At that time, Benguet’s existence was well within the 50 years period set in its articles of association; and its members had not entered into any agreement that such period should be extended. It is safe to say that none of the members of Benguet anticipated in 1906 any need to reach an agreement to increase the term of its corporate life, barely three years after it had started. The prorogation was purely speculative; a mere possibility that could not be taken for granted. It was as yet conditional, depending upon the ultimate decision of the members and directors. They might agree to extend Benguet’s existence beyond the original 50 years; or again they might not. It must be remembered that in 1906, the success of Benguet in its mining ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years set in its articles. The records of this Court show that Benguet ran into financial difficulties in the early part of its existence, to the extent that, as late as 1913, ten years after it was found, 301,100 shares of its capital stock (with a par value of $1 per share) were being offered for sale at 25 centavos per share in order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was merely a possibility in futuro, a contingency that did not fulfill the requirements of a vested right entitled to constitutional protection.

Since there was no agreement as yet to extend the period of Benguet’s corporate existence (beyond the


original 50 years) when the Corporation Law was adopted in 1906, neither Benguet nor its members had any actual or vested right to such extension at that time. Therefore, when the Corporation Law, by section 18, forbade extensions of corporate life, neither Benguet nor its members were deprived of any actual or fixed right constitutionally protected.

The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is evidence, not only by its failure, from 1906 to 1953, to adopt the alternative to transfer its corporate interests to a new corporation, as required by section 75; chan roblesvirtualawlibraryit also appears from positive acts. Thus around 1933, Benguet claimed and defended in court its acquisition of shares of the capital stock of the Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was not a corporation within the purview of the laws prohibiting a mining corporation from becoming interested in another mining corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings, Benguet has urged its right to amend its original articles of association as “sociedad anonima” and extend its life as such under the provisions of the Spanish Code of Commerce. Such appeals to privileges as “sociedad anonima” under the Code of 1886 necessarily imply that Benguet has rejected the alternative of reforming under the Corporation Law.

The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of the original articles, was intended to apply, and does apply, to sociedades anonimas already formed, organized and existing at the time of the effectivity of the Corporation Law (Act No. 1459) in 1906.

A sociedad anonima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its enactments, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of Act No. 1459.

5. As to number and residency of Incorporators

Section 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a)

only natural persons can be incorporators. However, the law does not preclude corporations

and partnerships from becoming stockholders or members as long as they are not incorporators. if only 2 incorporators are resident of the Philippines, a corporation still exists – a de facto corporation provided that at least 5 incorporators signed an incorporator will always retain his status as the incorporator – he may cease to be a stockholder or member, he may lose all his rights and interest in the corporation, but he will always be known as the incorporator.

6. As to minimum capitalization

Section 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section.

in normal practice, SEC will not allow a corporation to be organized with P5,000 minimum paid-up capital because it is too thinly capitalized. fixes the minimum number of authorized shares to be subscribed and paid for purposes of incorporation – however, the general incorporation law does not intend to fix the minimum amount of capital for operational purposes because this belongs exclusively to the business judgment of the incorporators and directors

Maximum Capitalization is required to be indicated to protect the stockholders – limits the issuance of the capital stock and extent of voting power or capacity of a stockholder; it is also important in delineating the pre-emptive rights of stockholders in the future issuance of shares of stocks.

7. As to subscription and paid-up requirements

Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n)


Capital Stock is the amount fixed in the articles of corporation procured to be subscribed and paid-in. It is settled that shares issued in excess of the authorized capital stock is void.

Outstanding Capital Stock is the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares.

Subscribed Capital Stock is that portion of the capital stock subscribed (i.e. procured to be paid) whether or not fully paid

Subscription is the mutual agreement of the corporation and the subscriber to take and pay for the stock of a corporation

> Issuance of Par Value shares of stock: “Par Value Share” is one in the certificate of stock which appears an amount in pesos as the nominal value of shares. Such par value must appear in the articles of incorporation – it cannot be less than P5.00 for each.

The articles of incorporation, the board of directors, the majority of the stockholders may fix the consideration for which no-par value shares may be issues.

If no par value shares will be issued by the corporation, such fact must be stated in the articles, and the consideration of their issuance cannot be less than the issued value, which in turn cannot be less than P5.00 each.

The consideration for which no-par value shares may be issued is referred to as its “issued value”, may be fixed in any of 3 ways:

(a) By the articles of incorporation;(b) By the board of directors when so

authorized by said articles or by the by-laws; or

(c) By the stockholders representing at least a majority of the outstanding capital stack.

Some corporations cannot issue no-par value shares: banks, public utilities, insurance companies, building and loan associations. The reason behind such a prohibition is there are certain businesses or activities vested with public interests and proper accountability is served if nominal amounts are assigned to their shares

which would be the basis of their capital structure.

However, businesses vested with public interests and proper accountability cannot issue no-par value shares.

8. Ground for Disapproval

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n)

ASUNCION V. DE YRIATE

Facts: The chief of the division of archives, the respondent, refused to file the articles of incorporation, hereinafter referred to, upon the ground that the object of the corporation, as stated in the articles, was not lawful and


that, in pursuance of section 6 of Act No. 1459, they were not registerable.

The proposed incorporators began an action in the Court of First Instance of the city of Manila to compel the chief of the division of archives to receive and register said articles of incorporation and to do any and all acts necessary for the complete incorporation of the persons named in the articles. The court below found in favor of the defendant and refused to order the registration of the articles mentioned, maintaining ad holding that the defendant, under the Corporation Law, had authority to determine both the sufficiency of the form of the articles and the legality of the object of the proposed corporation. This appeal is taken from that judgment.

Issue: Whether the chief of the division or archives has authority, under the Corporation Law, on being presented with the articles of incorporation for registration, to decide not only as to the sufficiency of the form of the articles, but also as to the lawfulness of the purposes of the proposed corporation.

Whether or not the purposes of the corporation as stated in the articles of incorporation are lawful within the meaning of the Corporation Law.

Held:

1) Although the duties of the official concerned happened to be ministerial, it does not necessarily follow that he may not, in the administration of his office, determine questions of law. It is his duty to determine whether the objects of the corporation as expressed in the articles of incorporation are lawful pursuant to the then Corporation Law. And just because the articles of incorporation are perfect in form, it does not mean that the division of the archives must accept and register them and issue the corresponding certificate of incorporation no matter, as what the corporation’s purpose is. It is not only the right but also the duty of the appropriate government agency to determine the lawfulness of the objects and purpose of the corporation before it issues a certificate of incorporation.

2) Where the purpose in the articles of incorporation sought to take possession and control of municipal property within a barrio and administer the same exclusively for the benefit of the residents of the barrio, said articles of incorporation showed the object of incorporation to be unlawful in that it sought to deprive the municipality in which that barrio was situated of its property and its citizens of the right of enjoying the same and would, if

permitted, disrupt and destroy the government of the municipalities of the State and abrogate the laws relating to the formation and government of municipalities. The articles were denied outright registration. The court held that when on the face of the articles of incorporation presented for registration it is shown that it is organized for a purpose contrary to law or public policy, the same may be denied outright registration.

9. Commencement of Corporate Existence

Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n)

c. By-Laws

it is recognized by all authorities that every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves. Essentially, by-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions, they are always subject to the charter of the corporation under one theory, since by-law provisions are intramural in nature – it is not meant to bind parties outside the corporate family

REQUISITES OF VALID BY-LAWS:1. It cannot contravene law2. It cannot contravene the charter3. it must be reasonable and cannot discriminate

LOYOLA GRAND VILLAS V. CA

Facts: Loyola Grand Villas Homeowners Association (LGVHAI) was organized as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of HIGC, as the sole homeowners' organization in the said subdivision. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the


LGVHAI tried to register its by-laws. They failed to do so. To the officers' dismay, they discovered that there were two other organizations within the subdivision — the Loyola Grand Villas Homeowners (North) Association Incorporated and the Loyola Grand Villas Homeowners (South) Association Incorporated. According to Emden Encarnaction and Horatio Aycardo, a non-resident and Soliven himself, respectively headed these associations. They also discovered that these associations had 5 registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while 3 members of LGVHAI were listed as members of the South Association. The North Association was registered with the HIGC on 13 February 1989. It submitted its by-laws on 20 December 1988. In July 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the South Association with the HIGC on 27 July 1989. It filed its by-laws on 26 July 1989. These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. After due notice and hearing, Encarnacion and Aycaydo obtained a favorable ruling from HIGC recognizing the LGVHAI as the duly registered and existing homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of Registration of North and South Associations as revoked or cancelled, among others.

The South Association appealed to the Appeals Board of the HIGC. In its Resolution, the Board dismissed the appeal for lack of merit. Rebuffed, the South Association in turn appealed to the Court of Appeals. However, the Court of Appeals affirmed the Resolution of the HIGC Appeals Board. The South Association filed the petition for review on certiorari.

Issue: Whether the LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation.

Held: Automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature. Moreover, even without resorting to the records of deliberations of the Batasang Pambansa, the law itself

provides the answer to the issue. Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum), Section 46 reveals the legislative intent to attach a directory, and not mandatory, meaning for the word ''must" in the first sentence thereof. The second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws "within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: "In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid." Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. And even if such omission has been rectified by Presidential Decree 902-A, and under the express grant of power and authority to the SEC, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. PD 902-A, which took effect immediately after its promulgation on 11 March 1976, is very much apposite to the Code. The Corporation Code and PD 902-A are statutes in pari materia. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence. As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate


birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation.

PMI COLLEGES V. NLRC

Facts: On July 7, 1991, petitioner, an educational institution offering courses on basic seaman’s training and other marine-related courses, hired private respondent as contractual instructor with an agreement that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the description of load subjects and on the schedule for teaching the same. Pursuant to this engagement, private respondent then organized classes in marine engineering.

Initially, private respondent and other instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown to private respondent, he stopped receiving payment for the succeeding rendition of services. This claim of non-payment was embodied in a letter dated March 3, 1992, written by petitioner’s Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor, calling attention to and appealing for the early approval and release of the salaries of its instructors including that of private respondent. It appeared further in said letter that the salary of private respondent corresponding to the shipyard and plant visits and the ongoing on-the-job training of Class 41 on board MV “Sweet Glory” of Sweet Lines, Inc. was not yet included. This request of the Acting Director apparently went unheeded. Repeated demands having likewise failed, private respondent was soon constrained to file a complaint before the National Capital Region Arbitration Branch on September 14, 1993 seeking payment for salaries earned from the following: (1) basic seaman course Classes 41 and 42 for the period covering October 1991 to September 1992; (2) shipyard and plant visits and on-the-job training of Classes 41 and 42 for the period covering October 1991 to September 1992 on board M/V “Sweet Glory” vessel; and (3) as Acting Director of Seaman Training Course for 3-1/2 months.

The corporation sought to avoid liability under a contract of service which was not signed by the Chairman of the Board as clearly mandated under the corporation’s by-laws.

Issue: Whether the corporation is liable under the said contract of service.

Held: Such contract cannot be held as invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the Corporation’s by laws, “since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons

who deal with the corporation, unless they have knowledge of the same. In fact, petitioner itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there is such a provision.

PENA V. CA

Facts: [Pampanga Bus Co.] PAMBUSCO, original owners of the lots in question under TCT Nos. 4314, 4315 and 4316, mortgaged the same to the Development Bank of the Philippines (DBP) on January 3, 1962.. This mortgage was foreclosed. In the foreclosure sale under Act No. 3135 held on October 25, 1974, the said properties were awarded to Rosita Peña as highest bidder. A certificate of sale was issued in her favor by the Senior Deputy Sheriff of Pampanga, Edgardo A. Zabat, upon payment of the sum of P128,000.00 to the Office of the Provincial The certificate of sale was registered on October 29, 1974.

On November 19, 1974, the board of directors of PAMBUSCO, through three (3) out of its five (5) directors, resolved to assign its right of redemption over the aforesaid lots and authorized one of its members, Atty. Joaquin Briones. Consequently, on March 18, 1975, Briones executed a Deed of Assignment of PAMBUSCO's redemption right over the subject lots in favor of Marcelino Enriquez . The latter then redeemed the said properties and a certificate of redemption dated August 15, 1975 was issued in his favor by Sheriff Zabat upon payment of the sum of one hundred forty thousand, four hundred seventy four pesos P140,474.00) to the Office of the Provincial Sheriff of Pampanga.Section 4, Article III of the amended by-laws of respondent PAMBUSCO, provides as follows:Sec. 4. Notices of regular and special meetings of the Board of Directors shall be mailed to each Director not less than five days before any such meeting, and notices of special meeting shall state the purpose or purposes thereof Notices of regular meetings shall be sent by the Secretary and notices of special meetings by the President or Directors issuing the call. No failure or irregularity of notice of meeting shall invalidate any regular meeting or proceeding thereat; Provided a quorum of the Board is present, nor of any special meeting; Provided at least four Directors are present.In the meeting of November 19, 1974 when the questioned resolution was approved, the three members of the Board of Directors of PAMBUSCO who were present were Jesus Domingo, Joaquin Briones, and Salvador Bernardez The remaining 2 others, namely: Judge Pio Marcos and Alfredo Mamuyac were both absent therefrom.

Issue: Whether the act of the Board of Directors on November 19, 1974 is void pursuant to Section 4, Article 3 of its by laws?

Held: YES. The act is void. The decision of the CA was


reversed and the CFI’s decision in invalidating the decision of the Board of Directors’s decision on November 19,1974 was affirmed. The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect, written, into the charter. In this sense they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply. Apparently, only three (3) out of five (5) members of the board of directors of respondent PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of a special meeting. There was no quorum to validly transact business since, under Section 4 of the amended by-laws hereinabove reproduced, at least four (4) members must be present to constitute a quorum in a special meeting of the board of directors of respondent PAMBUSCO. Under Section 25 of the Corporation Code of the Philippines, the articles of incorporation or by-laws of the corporation may fix a greater number than the majority of the number of board members to constitute the quorum necessary for the valid transaction of business. Any number less than the number provided in the articles or by-laws therein cannot constitute a quorum and any act therein would not bind the corporation; all that the attending directors could do is to adjourn Moreover, the records show that respondent PAMBUSCO ceased to operate as of November 15, 1949 as evidenced by a letter of the SEC to said corporation dated April 17, 1980. Being a dormant corporation for several years, it was highly irregular, if not anomalous, for a group of three (3) individuals representing themselves to be the directors of respondent PAMBUSCO to pass a resolution disposing of the only remaining asset of the corporation in favor of a former corporate officer. As a matter of fact, the three (3) alleged directors who attended the special meeting on November 19, 1974 were not listed as directors of respondent PAMBUSCO in the latest general information sheet of respondent PAMBUSCO filed with the SEC dated 18 March 1951. Similarly, the latest list of stockholders of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors were among the stockholders of respondent PAMBUSCO. It is also undisputed that at the time of the passage of the questioned resolution, respondent PAMBUSCO was insolvent and its only remaining asset was its right of redemption over the subject properties. Since the disposition of said redemption right of respondent PAMBUSCO by virtue of the questioned resolution was not approved by the required number of stockholders under the law, the said resolution, as well as the subsequent assignment executed on March

8, 1975 assigning to respondent Enriquez the said right of redemption, should be struck down as null and void.

a. Adoption Procedure failure to adopt and file the by-laws do not automatically dissolve a corporation, but is considered a ground by which SEC may seek the corporation’s dissolution.

Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

- Loyola Grand Villas Homeowner (South) Association, Inc. v. CA, held that section 46 of the Corporation Code, which that the corporation “must” adopt a set of by-laws within one month after receipt of notice of the issuance of the certificate of incorporation by SEC, reveals the legislative intent to attach a


directory, and not mandatory, obligation on the part of the corporation, since the second paragraph of the section allows the filing of the by-laws even prior to incorporation. It necessarily follows that failure to file the by-laws within that period does not imply “demise” of the corporation, but merely constitutes a ground by which the SEC may seek forfeiture of the franchise of the corporation as provided in by Pres. Decree 902-A.

b. Contents

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein;

4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and employees;

6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officers other than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock certificates; and

10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)

c. Amendments

Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt

new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting.

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

The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)


3rd meeting - formation of corporation

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