corpo reviewer miravite

8/19/2019 Corpo Reviewer Miravite

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PART FOUR

CORPORATION LAWS

CHAPTER IX

LAW ON PRIVATE CORPORATIONS

I.

Effectivity and Effect on Prior Laws

A.

The New Corporation Code of the Philippines

The New Corporation Code was approved on May 1,1980 and under its Sec. 149, took effect also onthe said date, as Batas Pambansa Blg. 68.

B.

Effect on Existing Corporations

Corporations lawfully existing and doing business in the Philippines on May 1, 1980 (date ofeffectivity of the Code), and therefore authorized, licensed or registered with the SEC, are deemed to have been authorized, licensed or registered with the SEC. However, if an existing corporation is affected bythe new requirements of the Code, it is given a period up to May 1, 1982 within which to comply. (Sec.148, N.C.C.)

II.

New and/or Modified Concepts, Introduced by the Code

The Code has created and/or modified certain existing concepts of the old law (Act 1459), important andsubstantial among them being the following:

1. New statutory classes of corporations, the close corporation, de facto corporation, andcorporation by estoppels, are created (Secs. 96-105, 20 and 21);

2. Three new statutory classes of corporations, the close corporation, de facto corporation, andcorporation by estoppel, are created (Secs. 7, 8 and 9);

3. The initial corporate life of 50 years may be extended by amendment of the articles done not earlierthan 5 years prior to the expiry of the original or extended period (Sec. 11);

4. For incorporation purposes, subscription requirement is at least 25% of the authorized capital stock,and paid in requirement is at least 25% of the subscription; paid in capital for incorporation purposes,shall not be less than P5,000 (Sec 13);

5. The purpose clause should separate the primary from the secondary purposes. (Sec. 14)

6. The grounds, on the basis of any of which, the SEC may reject or disapprove registration of thearticles or its amendments are enumerated as follow: (1) Improper form; (2) Illegal purpose; (3)Treasurer’s certificate false, and (4) Filipino ownership percentage limitations violated (Sec. 17);

7. The corporate name adopted must not be identical, or deceptively or confusingly similar to the nameof another corporation, or other protected name. (Sec. 25);


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8. The statutory officers of a corporation now are the president, the treasurer, and the secretary. (Sec.25);

9. Directors may now be paid salaries by the vote of stockholders provided said total salaries shall notexceed 10% of the net income of the immediately preceding year before income tax, of the corporation(Sec. 30);

10. A director’s liability for voting for patently unlawful acts, for disloyalty, for unfair dealings by himwith his corporation, and for fraudulent dealings with another corporation where he also is a director, isexpressly provided for (Secs. 31, 32, 33 and 34).

Bar Question: (A) What is the so-called “doctrine of corporate opportunity”? What is the underlying philosophy upon which such doctrine rests (1985 Bar, 17-A).

Answer: (A) The doctrine of corporate opportunity is a rule expressly provided for by the CorporationCode making a director account to his corporation, gains and profits from any transaction entered intohim or by another competing corporation or entity where he has a substantial interest, which should have been a transaction undertaken by his corporation.

The doctrine rests fundamentally on the unfairness occasioned by the said director or officer taking personal advantage of a business opportunity, which properly appertains to the corporation, in breachtherefore of the fiduciary posture he is supposed to observe in relation to his corporation and itsstockholders. He cannot possibly serve two masters.

11. The by-laws may create an executive committee composed of not less than three directors, to act onmatters within the competence of not less than three directors, to act on matters within the competence ofthe board except the following: (1) matters needing stockholders’ approval, (2) filling up of boardvacancies, (3) amendment, repeal or adoption of by-laws (4) amendment of an irrepealable boardresolution, and (5) cash dividend declaration. (Sec. 35);

12. The number and kind of incidental powers under the law, have been modified by the deletion of four powers, and the inclusion of five new specific powers (Sec. 36);

13. The preemptive right of stockholders to stock issues has been expanded to include all issues, unlessdenied by the articles. (Sec. 39);

14. Dividend declaration is made of compulsory retained surplus profit exceeds 100% of paid in capitalstock (Sec. 43)

15. A management contract with another corporation, may be entered into for the management of thecorporation (Sec. 44);

16. By laws may be adopted and filed simultaneously with the original articles incorporation (Sec. 46);

17. Meetings of stockholders of a coporation within any Metro Manila specified town or city as principal place of business, may be held in any town or city in Metro Manila (Sec. 51);

18. Stockholder’s proxies in stock corporations are valid for periods not exceeding five years at anyone time (Sec. 68);

19. Pre-incoporation subscriptions are irrevocable for a period of at least 6 months (Sec. 61);


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20. Consideration for the issues of the stocks has been increased in number from three to six, the sixnow being; (1) cash, (2) property, (3) labor or services rendered, (4) prior corporate obligations, (5) stockdividends and (6) outstanding shares exchanged in reclassification or conversion (Sec. 62);

21. A modified version of R.A. 201 on reconstitution of lost or destroyed certificates is now included inthe Code (Sec. 73);

22. New stockholder’s rights are created: (a) right to financial statements (Sec. 75; (b) appraisal right(Secs. 81-86);

24. Proxy voting in non-stock corporations may be outlawed; voting may be by mail or similar means(Sec. 89); its board of directors or trustees may consist of mor ethan 15 members; they may have 3 yearterms, and the annual elections may be held at least to elect 1/3 only of the total number of directors; theofficers may be elected directly by the members (Sec. 92); annual meetings of members may be heldanywhee in the Philippines, not necessarily its principal place of business (Sec. 93);

25. How the assets of a dissolving non-stock corporation are distributed is subject to express rules(Secs. 94 and 95);

26. The methods of dissolving a corporation are reduced to two: voluntary and involuntary (Sec. 117 to122);

27. Foreign corporations issued a license to transact business in the Philippines , are requires to depositinitially P100,000 worth of securities, and ad annually 2% computed on its net income exceeding P5million, for the benefit of present and future creditors of said corporation in the Philippines (Sec. 126);

28. Nine grounds for revoking the license of a foreign corporation operating in the Philippines areexpressly provided for by the Code (Sec. 134); and

29. Reservation is made for the legislature to declare certain corporationsas vested with a publicinterest, and maximum limits to stock ownership therein by close relatives, or close business interestsmay be set (Sec. 140);

III.

Nature of Private Corporation

A.

Defined

Bar Question: Define corporation. (1952 Bar, Va., 1954 Bar, Ixa).

Answer : It is an artificial being created by operation of law having the right of succession, and thepowers, attributes and properties expressly authorized by law and incident to its existence.

Author’s note: This is the statuatoru definition of a corporation even under the code. (Sec. 2)

B.

Advantages of Incorporation

1.

Easier to raise capital;

2.

Easier to attract stockholders because of limited liability;

3.

Easier to organize for big scale endeavors;


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4.

Attribute of succession;

5.

Facility in stock transfers;

6.

Management by a board of directors.

C.

Differentiated:

1.

From Partnerships

Bar Question: Give the differences between a corporation and a partnership. (1953 Bar, Va).

Answer : The four differences betweeb a corporation and a partnership are:

1.

How created: corporations — by law; partnerships — by agreement.2.

Powers: corporations can exercise only those in powers expressly granted, or fairly inferrablefrom those granted to them; partnerships can exercise any power except thos prohibited bylaw, morals, good customs and public policy.

3.

How Managed: corporations, though a board of directors; partnership — by all partners, orthough a managing partner.

4.

Number of partners of incoporators: corporations – 5 to 15 persons; partnerships – 2 or more persons.

5.

Extent of liability: corporations-stockholders’ liability up to unpaid subscription; partnerships-liability of general partners up to private properties.

6.

Effect of death, withdrawal or resignation of stockholder or partner: corporations-no effect; partnerships-dissolved.

7.

Duration: corporations- 50 years renewable for periods of 50 years; partnerships-indefinite period.

8.

Transfer of interest: corporations-transferable without consent of others; partnerships-consent of other partners required

2. From SociedadesAnonimas

Bar question: Five Spanish residents of Manila decide to go into business together want legal adviceon whether they should from a corporation or a partnership. They want to have a limited personalliability, and being more familiar with “sociedadesaninimas” (anonymous associations) under theCode of Commerce, they express preference for that form of organization and are disposed to adopt itif they can legally do so.

What legal advice should be given them? Give your reasons. (1959 Bar, Ib).

Answer : I will inform them that they can no longer form a “sociodadanonima” under our laws because of the provisions of the Corporation law prohibiting the creation of “sociedadanonima.”

I will advise them to form instead a private stock corporation because they are five in number,and because on corporations, the stockholders are limited in their liability up to their stocksubscriptions, which fits into their plans.

Author’s note: Answer still valid under N.C.C

3. From Other Business Organizations


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a.

Sole Proprietorship

Bar Question: Jose Abello wishes to invest P100,000 in the business of buying and selling sugar butdoes not want to risk his properties in the said business. (1) What kind of legal entity should becreated to suit Jose Abello’s plans? (2). If he does not care to manage the business, and wishes toleave the management to his nephew; (3) If he insists in keeping for himself the management and

control of the business. (1949 Bar, VIIc).

Answer: (1) As he does not want to risk his other properties, he can organize a private stockcorporation where his liability will be limited to his stock subscription.

(2) If he does not want to manage the business, and wants his new nephew to manage, he can forma partnership with his new nephew, with himself as capitalist partner, and his nephew, as industrial partner or he can form a stock corporation, make his nephew a director and President or GeneralManager, and let the latter run the business with the board.

(3.) If he wants to manage and control the business, then he should from a sole proprietorship.

Author’s note: Answer still valid under N.C.C.

Bar Question: (1) A, B, C, D & E decided to form Alphabet, Inc., a corporation dealing with themanufacture and sale of school supplies, with an authorized capital stock of P1M. The five equallysubscribed to 25% of the authorized capital stock or P50,000.00 each. Even before they could pay the25% of their total subscription, however, they entered into a contract with Manila College to deliverdesks worth P2M. For lack of funds, however, they failed to fulfill the contract with Manila College.Determine the liability of A, B, C, D & E and Alphabet, Inc. vis-à-vis Manila College. (1989 Bar, V-I).

Answer : A, B, C, D and E have not in effect organized a corporation, although they had that intention.They will be governed in their relations towards each other and towards the third persons by the rules

on partnership.

If they have incurred any liability at all to Manila College, that liability will be equally divided between them - their obvious intention even in the contemplated corporation being to equally share incapitalization, and consequently also equally sharing in liabilities.

b. Different Business Purposes

Bar Question: Jose Santos owns and operates a fleet of ten buses plying a route extending fromManila to Tarlac. He also owns a store dealing in clothing materials, shoes, etc., situated in Makati,Rizal. About P250,000 is invested in the transportation business and P100,000 in the store. He nowseeks your counsel as to whether or not it is advisable for him to incorporate these businesses or tocontinue operating them as single proprietorships.

(1)

What factors or information would you consider relevant in dealing with the problem?

(2)

What advice would you give? State your reasons. (1970 Bar, IV-c)

Answer: (1) The factors or information I would consider as relevant in dealing with the problem are:

a.

The speculative nature of each or both of the businesses;


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b.

The amount of additional capital intended to be invested in each or in both of the businesses;c.

The tax angle;d.

The proximity of the places of operation of the businesses;e.

Whether existing laws would allow the joinder of the diverse purposes of the proposedcorporation;

(2) I will advise against the joining of the two businesses the transportation business, and theclothing business, for the following reasons:

a.

Under the law, a corporation engaged in transportation cannot engage in any other businessalien to transportation;

b.

The operation of a transportation business opens the operator to the risk of liability to passengers injured or killed in accidents. This liability might encroach on the investment inthe clothing business if joined with the transportation business.

It will therefore be advisable to incorporate the transportation business separately from theclothing business. The latter can remain as a sole proprietorshipbusiness, as the minimal capitalwill not give much benefit to the owner eve if he incorporates.

The Problem: Some businessmen with an available starting capital totaling only P100 000.00 askyou to help organize a business firm. Subject to legal limitations, they have future plans to invite alieninvestors who are agreeable t rendering financial assistance by way of direct investments and/or loans.Your professional assistance is solicited on the following various questions that may arise:

Bar Question: Considering the above problem, state the form of business organization which yourecommend should be created for the purpose, explaining specifically and briefly;

(a)

Its advantages and disadvantages;

Answer: I will recommend that they organize a corporation to engage in an industry which is not

nationlalized under the constitution or existing laws.

(a)

The advantages of a corporation over the other forms o business organizations (sole proprietorship and partnerships) are the following:

1)

It is easier to rise capital and to attract other persons as investors.2)

It has the attribute of perpetual succession and a juridical personality independentfrom its stockholders.

3)

It is managed by a group of persons call the board of directors.4)

Transfer of interest is easier and will not dissolve the enterprise.

The disadvantages are:

1)

It takes time to organize;2)

Business decisions may be stalemated by differences of opinion among the boardmembers.

c.

CooperativesCooperatives exercise some rights given to corporations, but are different from corporations inthe following:

1)

Coop members run the cooperative. The employees of a corporation run it.


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2)

Coop members are entitled to one vote each. Stockholders vote according to thenumber of shares they hold.

3)

A coop member employee cannot assert collective bargaining. The employees ofcorporation can. (Benguet Electric Coop. vs. Calleja, 180 SCRA 740).

d. Joint Ventures

A joint venture is a business organization between two corporations where the participantsdeviate from traditional matters of corporate management in the following manner:

1)

The required vote may be greater than a mere majority;2)

A group of stockholders may be given the power to elect a specified number ofdirectors;

3) The stockholders control the selection and selection of employees;

4) The venture may set up a procedure for settling disputes by arbitration.

A corporation may enter into a joint venture with another, but not a partnership, although the twoare governed in their joint venture relation by the rules on partnership. (Aurbachvs Sanitary Wares, 180SCRA 130).

D. Attributes

1. In General

a. Personality distinct from the persons composing it;

b. Perpetual succession;

c. Acquisition of property, contraction obligations, bringing of suits;

d. Receipt and enjoyment in common of privileges and immunities.

2. Particular Attributes

a. Distinct Personality – A corporation as known to Philippine jurisprudence is a creaturewithout any existence until it has received the imprimatur of the state acting according to law. It islogically inconceivable therefore that it will have rights and privileges of a higher priority than of itscreator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs,certainly not excluding the judiciary, whenever called upon to do so.

A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual

stockholders. (Tayong vs. Benguet Consolidated, Inc., 26 SCRA 243)

Shareholders are not owners of corporate property which are owned by the corporation.(Magsaysay-Labrador Company vs. CA 180 SCRA 266)

Being an officer or a stockholder does not make one’s property, the propertyalso of thecorporation, for they are separate entities. (Traders Royal Bank vs. CA 177 SCRA788)


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Bar Question: In the complaint filed by XYZ Corporation, its President alleged that he suffered mentalanguish, fright, social humiliation and serious anxiety as a result of the tortious acts of ABCCorporation. In its counterclaim, ABC Corporation claimed to have suffered moral damages dueto besmirched reputation or goodwill.

(1)

May XYZ Corporation recover moral damages based on the allegations in the complaint?

(2)

May ABC Corporation recover moral damages? Give reasons for your answer. (1978 Bar, 7b) Answer: (1) XYZ Corporation, by reason of its being a juridical person, cannot possibly experience a

physical suffering, mental anguish, fright, serious anxiety, wounded feelings, moral shockdamages, because the above consequences can be suffered , inflicted or experienced by natural persons only. Hence, XYZ Corporation cannot recover moral damages for the sufferings of itsPresident.

This is without prejudice to the President of XYZ Corporation filing a suit in his ownright and behalf, for recovery of moral damages against ABC Corporation for the latter’s tortiousacts.(3)

On the other hand, a corporation may have established a reputation of its own, andcreated goodwill in the course of its business operations over the years. These are its assets,accruing to it as a juridical person. Hence, if they get besmirched, the corporation has a cause of

action against the offender.I submit therefore, that ABC Corporation may file a counterclaim for moral damages, due

to its besmirched reputation and goodwill.

Note: Answer still valid under N.C.C.

Bar Question: In a complaint for damages, Zebra Corporation alleged that its President, Anton Molina,suffered mental anguish, social humiliation and serious anxiety as a result of the tortious acts ofOmega Corporation. In its answer with counterclaim, Omega Corporation alleged that it suffered besmirched reupation because of the unfounded suit of Zebra Corporation and accordinglyclaimed for the award of moral damages.

(A)

May Zebra Corporation recover moral damages based on its allegation in the complaint? Discuss.

(B) May Omega Corporation recover moral damages on its counterclaim?Reasons.(1955 Bar, 9).

Answer: (A) Zebra corporation cannot claim damages for the mental anguish, social humiliation, andserious anxiety of its President. Assuming that this can be proved, the moral damages are personal toZebra’s President, which cannot be the basis for a cause of action by Zebra corporation— the personalityof the corporation being distinct and separate from that of its President.

(B) Omega corporation, on the allegation that its reputation (as a corporation) has been besmirched because of the unfounded suit filed against it by Zebra corporation, has a cause of action fordamages.

A corporation may have established a reputation of its own, and created goodwill in the course of

its business operations over the years. These are its assets accruing to it as a juridical person. If they get besmirched, the corporation has a cause of action against the offender.

I submit therefore that Omega corporation has a cause of action for moral damages against Zebracorporation.

1) Doctrine of Piercing the Veil of Corporate Fiction

a) When Applied:


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The veil of corporate fiction may be pierced in the following cases:

1) When used as a cloak to cover fraud, illegality, or results in injustice (Soriano vs. CA, 174 SCRA 195);where necessary to achieve equity or to protect creditors;

2) Where two factories are made to appear as one and used as a device to defeat the ends of law, or as a

shield to confuse legitimate issues (Reynolds vs. CA, 169 SCRA 220);

3) Where the parent corporation assumes complete control of its subsidiary’s business (Phil. VeteransIntegrated Investments vs. CA, 181 SCRA 178).

b) When not Applied:

The veil cannot be pierced when a director has no participation to a representation made by thePresident, and the execution of a promissory note with “we” as maker, has a reference to the corporationand not to the directors. (Remo vs. IAC, 127 SCRA 403).

The mere fact that the businesses of two or more corporations are interrelated is not a justificationfor disregarding their separate personalities, absent a sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights. (Umali et al vs. CA, et al,G.R. 89561, Sept. 13, 1990).

Bar question: (B) What is the doctrine of “piercing the veil of corporate entity” and in what cases did theSupreme Court apply the said doctrine? (1985 Bar, 10 B).

Answer : (B) The doctrine of piercing the veil of corporate fiction allows the state to disregard for certain justifiable reasons, the fiction of a juridical personality for the corporation, separate and distinct from the persons composing it.

The Supreme Court applied this doctrine in the following cases and instances:

(1) When the corporation was used as an alter ego or business conduit for the sole benefit of thestockholders;

(2) When one corporation is a mere subsidiary, instrumentality or department of another corporation;

(3) When the corporation is used as a shield to an end subversive to justice;

(4) When the corporation is used to perpetuate fraud or confuse legitimate issues;

(5) When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, ordefend crime.

Bar question: What facts and circumstances must be proved in order that the stockholders may be heldliable for the obligations contracted by the corporation. (1962 Bar, VIIa).

Answer : While a corporation has a personality separate and distinct from the stockholders composing it,this veil of corporate fiction may be disregarded, and the stockholders and the corporation considered asone person, in the following instances:

1. When the stockholders created the corporation to evade taxes, violate laws, commit fraud,evade just obligations; and


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2. When the corporation is owned by the stockholder and his dummies, and/or the immediatemembers of his family.

Bar Question: What is a “one-man” corporation? Do such corporations enjoy the attributes ofcorporations? What should be done to assure this? (1970 Bar, V-a).

Answer : A one man corporation is a corporate entity where one person holds directly or indirectlyall or substantially all of the stocks of the corporation.

This form of corporation enjoys all of the attributes of a corporation, although it alwaysfaces the risk of its corporate existence being attacked if the said corporate fiction is utilized for unlawful

purposes under the doctrine of “Piercing the Veil of Corporate Fiction.”

To assure that the corporation will continue to enjoy the attributes, the corporation shouldhave a duly constituted board which should meet regularly to pass upon the problems of the corporation.The stockholder who holds substantial stocks should consider his holdings as merely investment purposes.

Where a second corporation was created as a means to prevent a first corporation from

paying obligations to employee, the veil of corporate fiction must be pierced (NUAFLU vs. Ople 143SCRA 124).

Bar Question: C, a Steel and Neil Company, Inc., owned by X had financial obligations to itsemployees. C ceased operations and was immediately succeeded on the next day by, and all its assetsturned over to, the E Steel Corporation, 90% of the subscribed shares of which were also owned by X.May the E Steel Corporation be held liable for the financial obligation of the C Steel and Neil Company,Inc. to its employees?

Decide. Give reasons. (1978 Bar, 8a).

Answer : Yes, E Steel Corporation can be held liable for the financial obligation of C Steel and Neil Company, Inc. to its employees.

Under the doctrine of piercing the veil of the corporation fiction, when the stockholderscreate a corporation for the purpose of evading just obligations, the State may disregard the separate personality of the corporation and regard the corporation and the stockholder(s) as one person.

In the problem, X, who is the owner of C. Steel & Neil Company, Inc. stopped itsoperations, and created another one, E Steel Corporation, for the purpose of evading the obligation of Ccorporation to its employees. As E Steel Corporation is also substantially owned by X, both C and Ecorporations will be considered as one in so far as C’s liability to its employees is concerned.

Bar Question: Tantalus Corporation, of which 97% of the issued and outstanding shares of stockwere owned by Roger Mano, had financial obligation to its employees by way of unpaid wages and

allowances. Tantalus Corporation was dissolved by shortening its corporate life and all its assets turnedover to Suceso Corporation, of which 95% of the subscribed shares were held by Roger Mano and hiswife. Then, Tantalus Corporation created to operate.

(A)

May theemployees of Tantalus Corporation proceed against the Suceso Corporation torecover unpaid claims? Discuss. (1985 Bar, 10 A).

Answer: (A) The employees if Tantalus Corporation may proceed against Suceso Corporation torecover unpaid claims.


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The grant of judicial personality to a group of persons is an act of magnanimity by the state,which should not be abused by the grantee. Hence, the privilege should not be used by the grantee toevade payment of taxes, to further an end subversive to justice, perpetuation of frauds or confuselegitimate issues. In these cases, the state may withdraw such privilege and consider the corporation andits principal stockholders as one and the same person.

In the case at bar, Tantalus Corporation was dissolved, and in its place, Suceso Corporation wascreated by almost the same stockholders. Obvious therefore is the objective of Tantalus Corporation of preventing its employees from proceeding with their claim for unpaid wages against the dissolvedcorporation. The state will pierce the doctrine of corporate fiction, consider Tantalus and SucesoCorporation as one and the same, and allow the unpaid employees of Tantalus Corporation to proceedwith their claim against Suceso Corporation.

The doctrine can only come into play if summons is served on the corporation through any

one of the persons named in Sec. 13, Rule 14 of the Rules of the Court. (Filmerco vs. IAC, 149

SCRA 193).

c.) Consequences if Veil is Pierced

The consequences where the veil is pierced are: (1) if only one corporation is involved todisregard its existence as an association of persons; and (2) if two corporations participate to merge themand consider them only as one entity. (Remo vs. IAC, 172 SCRA 405).

b. Perpetual Succession

1) Defined: A continued corporate existence irrespective of death or withdrawal of its componentmembers, limited in duration to the period stated in its charter.

The maximum period the articles of incorporatiob may provide is 50 years, but under Rep. Act 3531, the period may be extended for durations not exceeding 50 years per extension by amendment of the articlesmade before the lapse of the original period. The amendment of the articles to effect this extension cannot

be made after the lapse of the three-year period although the amendment is still during the three-yearstatutory period for liquidation. (Alhambra Cigar vs. SEC, 24 SCRA 269).

Bar Question: A corporation is organized for a period of 25 years. Stockholders holding more than two-thirds of the voting stock desire to extend this period for another 25-year term in a special meeting of

stockholders to be called for the purpose. As a lawyer, what would you inform your client? Explain fully.(1953 Bar, Vb).

Answer: As a lawyer, I would inform my client that the move by the stockholders is allowable under the provision of Rep. Act 3531, by amendment of the articles of incorporation before the lapse of the existing period, the extension being for durations not exceeding 50 years each.

Bar Question: "A", a corporation, was organized for a term of 50 years, expiring December, 1969.Outline the steps to be taken in order that it may extend its corporate life. (1968 Bar IIa).

Author's Note: This question was asked in October 1968.

Answer: The steps to be taken, all of which should be completed before the end of December 1969, are as

follows:

1. The board by majority vote, should approve the amendment to extend the life of the corporation.


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2. The stockholders by a vote of at least 2/3 of the subscribed capital stock must approve said amendment.

3. A copy of the amended articles must be certified by the President, secretary and a majority of the

board.

4. The certified copy of the amended articles should be filled with the SEC, paying the proper fees.

E. Nationality of Corporations

Bar Question: What determines the nationality of a corporation? For what matters are foreigncorporations doing business in the Philippines subject to the laws, rules and regulations of the country oftheir creation? (1957 Bar, Ib).

Answer: The country where the corporation was incorporated determines the nationality of acorporation. This is called as the domiciliary test.

In times of war or national emergency, another test is used -- the control test. Under this test, if the

controlling stock of a corporation is owned by citizens of a particular country which is at war with the

Philippines, then that corporation, although organized in the Philippines, is a foreign corporation.

Foreign corporations classifed under the domiciliary test are subject to the laws of the countryoc their

creation on the following matters:

1. Creation, formation, organization or dissolution of corporations;

2. Relations, liabilities, responsibilities and duties of members, stockholders, or officers of corporations

to each other or to the corporation.

Bar Question: May a domestic corporation organized and registered in the Philippines be composedentirely of aliens? (1950 Bar, Ia).

Answer: Except in the nationalized corporations where citizenship of all or som

2) Rural banks except that Filipino-controlled domestic banks and corporations organized primarily toinvest in rural banks may now become rural bank investors (Sec. 4, R.A. 720, as amended by .P. 651);

3) Mass media ownership and operation (1986 Constitution);

4) Rice and Corn Industry (P.D. 194).

Under the Security Agency Law (R.A. 5487), security agencies must be 100% Filipino-owned.(American president Lines vs. Clave, 114 SCRA 826)

b. 75% Filipino Owned

1) Awardees of government supplies purchases (C.A. 138);

2) Contract awardees for repair of public works and national defense projects (R.A.76);

3) Coastwise Trade (P.D. 761)

c. 70% Filipino Owned


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1) Domestic banks except rural banks (R.A. 337);

2) Awardees of government public works contracts (R.A. 76)

d. 60% Filipino Owned

1) Public utility corporations (C.A. 146);

2) Corporations to utilize, develop or exploit natural resources (1986 Constitution); fishinglicenses (P.D. 704); geothermal energy permits (R.A. 5092);

3) Beneficiaries of Philippine Overseas Shipping Act (R.A. 1407); domestic air commerce (R.A.776); financing companies (R.A. 5980); awardees of supplies contracts for government owned orcontrolled corporations (R.A. 5183);

4) Educational institutions (1986) Constitution)

e. Majority Owned by Filipinos

1) Investment houses (P.D. 129 as amended by P.D. 590)

Bar Question: Can a corporation engaged in the lumber business elect an American or a Chinese as amember of its board of directors? (1969 Bar, Vc).

Answer : Yes, an American or a Chinese citizen may become a member of the Board of Directors of acorporation engaged in the lumber business. These is no law prohibiting a foreigner from becoming astockholder, and consequently from becoming a director of a corporation engaged in the lumber business,irrespective of whether the lumber utilized is taken from private forest lands or from timber lands of the public domain, provided that in the latter case at least 60% of the capital of said corporation is owned byFilipinos.

The corporation cannot however engage in the retailing of lumber.


Bar Question: May a corporation composed entirely of aliens be organized and incorporated in thePhilippines? Explain. (1970 Bar, Vla).

Answer : Yes, a corporation composed entirely of aliens may be organized in the Philippines. TheCorporation Law, in general, only requires a majority of the incorporators to be residents, not necessarilycitizens, of the Philippines.

However, in the nationalized corporations (retail trade, agriculture, mining, transportation,shipping), no aliens or some but not all, can form the corporation depending on whether it is totally or partially nationalized.


Answer : Yes, a Japanese corporation engaged in steel manufacturing may, within certain limits, purchasestock in Philippine mining corporations.

Under a 1967 amendment to the Corporation Law, a foreign or domestic corporation organizedfor any purpose other than mining may acquire and hold not more than 30% of the capital stock of not


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more than three corporations organized for the purpose of engaging in mining in the Philippines. Thestock however, should be held by the corporation solely for investment, and not for the purpose of bringing about a combination to exercise control of such corporation, or to violate the mining and publicland laws.

F. Classes of Corporation

Bar Question: What are the classes of corporations? Differentiate (1954 Bar, IXa).

Answer: The first general classification of corporations is into Public and Private. Public corporations areorganized by the state to perform functions to govern portions of the state, and functions properly belonging to the state but are non-governmental in nature. Private corporations, on the other hand, arecorporations organized by private persons or by the government or by both for private ends, aims, benefitor purpose. The two are differentiated from each other as follows:

a.

As to organizers;a.

Public – by the state; b.

Private – private, usually profit making functions b.

As to functions;

a.

Public – governmental and other public functions; b.

Private – private, usually profit making functionsc.

As to governing law;a.

Public – special laws; b.

Private – Law on Private Corporations.

Author’s note: The N.C.C. classifies corporations into stock and non-stock (Sec. 3), and into those created by special laws and those incorporated under the N.C.C. (Sec. 4).

The N.C.C. in scattered sections also provides for close corporations (Secs. 96-105); specialcorporations of which there are two: educational corporations (Secs. 106 to 108), and religiouscorporations (Secs. 109 to 116); foreign corporations (Secs. 123 to 136); de facto corporations (Sec. 20);

and corporations by estoppel (Sec. 21).

No mention is made by the N.C.C. of public corporations.

1. Government owned and/or Controlled Corporations

Government owned and/or controlled corporations with original charters refer to corporationschartered by special laws, as distinguished from corporations organized under the CorporationCode. (Lumanta vs. NLRC, 170 SCRA 79).

A private corporation, which is not owned nor controlled by the government, is entirely private, and cannot be organized by special Presidential Decree (P.D. 1717), but under the provisions of the Corporation Law (now Corporation Code). (National Dev. Company and New

Agrix, Inc. vs. Phil Veterans Bank, et al, G.R. 84132-33, Dec. 10, 1990).

When the government enters into commercial business, it abandons its sovereign capacity andis to be treated like any other corporation. (PNRR vs. Union de Maquinistas, 84 SCRA 223).

By engaging in a particular business through the instrumentality of a corporation, thegovernment divests itself pro hac vice of its sovereign character, so as to render the corporationsubject to the rules of law governing private corporations. (PNB vs. Pabalan, 83 SCRA 595).


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When the government enters into a commercial business, it abandons its sovereign capacityand is to be treated like any private corporation, so as to render the corporation subject to therules of law governing private corporations. It therefore cannot invoke immunity from suits brought against it. (Malong vs. PNRR, 138 SCRA 63).

Government owned and controlled corporations have a personality of their own, separate and

distinct from the government, and their funds, therefore, although considered to be public incharacter, are not exempt from garnishment. (PNB vs. Pabalan, 83 SCRA 595; PNB vs. Court ofIndustrial Relations, 81 SCRA 314).

Bar Question;

Bar Question: Distinguish between a corporation that is “going public” and a corporation thatis “going private.” What provisions would you expect to find in the articles of incorporation of a

corporation that organizes itself under the narrow concept of “going private”? (1986 Bar, 1).

Answer: The following are the distinctions between a corporation “going public” and acorporation “going private”:

1.

A corporation “going public” allows its stocks to be issued to persons other than itsregistered stockholders; a corporation “going private” restricts the issue of its stocks toits registered stockholders only, and prevents the transfers by stockholders of theirstocks without first giving the corporation and/or its registered stockholders the firstopportunity of acquiring the same;

2. A corporation “going public” may allow its stocks to be sold in stock exchanges; a

corporation “going private” may not allow its stocks already issued to be traded instock exchanges;

3. The articles of incorporation and/or bylaws of a corporation “going private” usually containsthe “right of first refusal” clause giving the corporation and/or its registered stockholders, preference, asagainst non-stockholders in the acquisition of stocks. The articles and/or bylaws of a corporation “going

public” would not contain the “right of first refusal clause”.

If a corporation is organized under the concept of “going private”, the usual provision which will be found in its articles and/or bylaws will be the “right of first refusal” clause.

2. PUBLIC AND PRIVATE

a. Public Corporation are divided into:

1) Municipal corporations – corporations organized by the State for the purpose of governing portionsof the state. Examples: City of Manila, Province of Rizal, and Municipality of Makati.

2) Public- quasi corporations – corporations organized by the State to perform functions admittedlygovernmental, but which have nothing to do with the government of portions of the state. Example: National Development Company.

b. Private Corporations are divided into:

1) Stock Corporations, which are corporations which have capital stock divided into shares, and areauthorized to distribute profits on the basis of the shares thus held.


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Stock corporations are in turn divided into:

a) Par value stock corporations where the par value of shares issued is stated in the articles

and which value remains generally unchangeable. b)

No par value stock corporations, which have stocks where the issue value, which changesfrom time to time, is left to the discretion of the corporation to determine.

Bar Question: May “no par value” shared in the same corporation be issued at different prices?How? How would such a circumstance affect the rights of stockholders? (1970 Bar, V-b)

Answer : Yes, no par value shares in the same corporation may be issued at different prices. TheCorporation Law does not require the articles to state the issue value of the no par value stocks,hence, they may be issued from time to time at different prices.

A holder of one share of no par value stock is entitled to the same rights (voting, dividend, etc.) asanother holder of one share of no par value stock irrespective of the difference in issue values ofthe two shares.


3. Aggregate and Sole

a. Aggregate – a corporation, with incorporators not less than five (5) nor more than fifteen (15),in stock corporations, or up to more than 15 in non-stock corporations.

b. Sole

By its incorporation, a corporation sole is vested with the right to purchase and hold real and personal property. (Republic vs. IAC, 168 SCRA 155)

Bar Question: Define corporation sole? (1954 Bar, IXa)

Answer : It is a special form of corporation, associated with the clergy, consisting of one persononly and his successors to give him legal capacities and advantages for and in behalf of the churchrepresented by him.


4. Ecclesiastical and Lay

a. Ecclesiastical where the members are spiritual persons like bishops and priests.

b. Lay includes all non-ecclesiastical corporations and may be:

1. Eleemosynary corporations which are charitable institutions; and

2. Civil corporations which are organized for profit.


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Bar Question: Explain briefly (1) Eleemosynary corporation. (1967 Bar, VIIIa-1)

Answer : An eleemosynary corporation is a non-religious corporation organized for charitable purposes.


5. Domestic and Foreign

a. Domestic – a corporation organized according to Philippine laws.

GABITO, Ma. Patrice Garlade

12

b. Foreign – A corporation formed, organized, or existing under laws other than those of thePhilippines and where the laws of said country allow Filipino citizens and corporations to do business in its own country or state. They are granted licenses to transact business in the

Philippines. (Sec 123, N.C.C.).

6. De Jure, De Facto, By Estoppel, by Prescription.

a. De jure Corporation – a corporation formed with all of the requirements of law.

b. De facto Corporation – a corporation defectively formed from a bona fide attempt toincorporate under existing laws, and which exercise corporate powers. (Sec. 20, N.C.C.).

Where a person convinces others to form a corporation, which however was not formed at all, the parties are partners inter se and are governed by the Law on Partnerships. The relationship is not that of ade facto corporation. (Pioneer Insurance vs. CA, 175 SCRA 668).

Bar Question: Mamuhunan was invited by his friends to invest in Adelantado Corporation, anewly organized firm engaged in money market and financing operations. Because of his

heavy investments, Mamuhunan became the firm’s President and, as such, purchased a big number of computers, typewriters, and other equipment from Taktak Corporation oninstallment basis. Adelantado Corporation paid the downpayment and TaktakCorporation issued the corresponding receipt. To his chagrin, Mamuhunan discoveredthat the articles of incorporation had not been filed by his friends at that late date so hehurriedly attended to the matter. No sooner had the certificate of incorporation been


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issued by the Securities and Exchange Commission when three months later, AdelantadoCorporation became bankrupt.

Upon being sued by Taktak Corporation in his personal capacity, Mamuhunanraised among his defenses the doctrines of de facto corporation and corporation byestoppel.

Can the two defenses be validly raised by Mamuhunan? Explain. (1986 Bar,10).

Answer : The doctrine of defacto corporation cannot be validly raised by Mamuhunan because atno insurance in the life of Adelantado Corporation was it a de facto corporation.

For a corporation to be considered as a de facto corporation, it is necessary thatthe corporation should be defectively formed from a bonafide attempt to incorporateunder existing laws, and which body exercises corporate powers.

Adelantado corporation could not be said to have been defectively formed because at the time it purchased the office equipment, it was not at all formed; neithercould it be said that there was a bonafide attempt to incorporate at the time the purchase

was made because no attempt was at all made even to file the required documents withthe Securities and Exchange Commission.

However, it was a corporation by estoppel at that time it made purchases withTaktakcorporation. Adelantadocorporation held itself as a corporation when it enteredinto a purchase contract with Taktak corporation, and it was on the strength of thatappearance that Taktak corporation entered into a contract with Adelantado corporation.

The principle (corporation by estoppel) cannot however be invoked byMamuhunan, who in effect misrepresented the corporation as duly organized becauseonly the victim (Taktak corporation in the problem) not the one who made themisrepresentation (Adelantado corporation) can invoke the principle.

Hence, Mamuhunan can be made personally liable for the obligations ofAdelantadocorporation.

Bar Question: Seven persons form a corporation by registering their articles of incorporationwith the Securities and Exchange Commission. But after the certificate of incorporationhas been issued, it is discovered that only five of the seven incorporators haveacknowledged the articles of incorporation before a notary public.

Is the corporation legally formed? Reason out your answer.

Answer : The corporation is a de facto corporation. Although defectively formed as not to be de jure, it may nevertheless exercise corporate powers validly until the state dissolves it by

quo warranto proceedings. Author’s note: Answer still valid under N.C.C.

The Problem: Some businessmen with an available starting capital totaling only P100,000.00 askyou to help organize a business firm. Subject to legal limitations, they have future plansto invite alien investors who are agreeable to rendering financial assistance by way ofdirect investments and/or loans. Your professional assistance is solicited on the followingvarious questions that may arise:


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Bar Question: Considering the above problem, state the form of business organization which yourecommend should be created for the purpose explaining specifically and briefly.

(a) X xx(b) X xx

(c) Whatever be the form of organization chosen, give instances when it may be sued as a legal

person even if irregularly organized. Give legal reasons (1973 Bar. I-c)

Answer:

(a) X xx

(b) X xx(c) A corporation, although irregularly organized, may be sued as a legal person, under the

principle of estoppel. A group of persons representing themselves to have been organized as a

corporation, and third persons,believing in said representation, transact with said group, can be sued as a corporation, and cannot later on deny that the group is not a corporation. This is acorporation by estoppel.

A defectively formed corporation organized in good faith under a valid law under which it could

have validly incorporated and proceeds to do business for the purpose for chich it was organizedmay sue and be sued. This is called as a de facto corporation.

The reason in both cases allowing these defectively formed corporations to be sued is to give

protection to innocent third persons transacting business with these entities.

Author’s note: Answer still valid under N.C.C. See also Secs. 20 and 21, N.C.C.

Corporation by Estoppel – a corporation by estoppel is a group of persons which holds itself out as acorporation and enters into a contract with third persons on the strength of such appearance. It cannot be permitted to deny its existence in an action under said contract.

Conversely, a person who contracts with a group of persons in such a way as to recognize and in

effect admit the legal existence of the group as a corporation, cannot be permitted to deny its corporateexistence in any action from solid dealing.

The principle can be invoked by the victim but not by one who misrepresented the corporation asduly organized as against the victim of said misrepresentation. (Albert vs. University Publishing, 13SCRA 84)

The person making such misrepresentation as to the valid incorporation of a corporation assumesthe obligation and becomes personally liable for contracts entered into, performed as such agent. (Albertvs. University Publishing, supra).

Where a third person enters into a contract with an association which represented itself to be a

corporation, the association is estopped from denying its corporate capacity. (Christian Children’s Fundvs. NLRC, 174 SCRA 681)

Bar Question: Give examples illustrating the distinction between de facto corporations, andcorporations by estoppel. (1955 Bar, Via)

Answer: Fiver persons including one minor filed articles of incorporation with the SEC and wereissued a certificate of incorporation, the minor eventually finding out that he lacked the requisite ageon


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information furnished by his parents. This is a de facto corporation and it can continue performingcorporate functions until stopped by the state by quo warranto proceedings.

A person, believing a group of persons to be a duly organized corporation because ofrepresentations the group made, entered into a contract with said group. The group cannot invoke non-

corporate status in a suit to enforce the contract. This is a corporation by estoppel.

Author’s Note: Answer still valid under N.C.C .

Corporation by Prescription

Bar Question: What is a corporation by prescription? Give an example of such corporation.(1964, Bar VIIb)

Answer: A corporation by prescription is a body which though not lawfully organized as acorporation, has been recognized by immemorial usage as a corporation, with rights and dutiesmaintainable at law. Example: The Roman Catholic Archbishop of Manila before the law on corporation

sole took effect was considered as a corporation by prescription, it having antedated the state.


A corporation is authorized to prescribe qualifications for its directors. (Gokongwei vs. SEC, 89SCRA 336).

A director stands in a fiduciary relation to the corporation and its stockholders. Thedisqualification of a competitor from being elected to the board is a reasonable exercise of corporateauthority. (Gokongwei vs SEC, supra).

Bar Question: The Board of Directors of “C” Corporation, engaged in the manufacture and saleof food products, acting on standing authority of the stockholders to amend the By-Laws,amended its By-Laws so as to disqualify any stockholder, who is also a stockholder anddirector of a competitor, from being elected to its Board of Directors.

“S”, a stockholder holding sufficient shares to ensure him a seat in the Board.Filed a petition with the Securities & Exchange Commission for a declaration of nullityof the amended By-Laws and the cancellation of the Certificate of Filing Amended By-Laws. He alleged, among others, that as a stockholder, he had acquired rights inherent instock ownership, such as the right to vote and be voted upon in the election of directors.

Reason out the merits of the stockholder’s petition. (5%) (1961 Bar, 10).

Answer: The petition of S should be denied.

It is within the authority of the stockholders of a corporation to enact by-lawswhich would disqualify as a candidate for director, any of its stockholders who holds a

substantial equity in a competing corporation.

Matters taken up in board meeting could involve trade secrets which ought not togo out of the board room for the protection of the corporation’s business interests. The presence as a member of the Board of Directors of a person, who holds a substantialinterest in competing corporation, can destroy that secrecy on many business matters.

b. Number of Directors


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Bar Question: How many directors may ordinary stock corporations have? (1948 Bar, II-a)

Answer: A stock corporation may have not less than five nor more than fifteen directors.

Note: Answered under provision of the N.C.C.

c. Liability of Directors

Bar Question: What liability, if any, may a director of a corporation incur for the misconduct ordishonesty of his co-directors or other officers of the corporation? (1968 Bar, Ia).

Answer: Generally, a director is not liable for the misconduct or dishonesty of his co-directors orother officers of the corporation, because a director is not an insurer of the fidelity ofagents of the corporation.

He may be held liable if it is shown that he neglected his duty to supervise the business with attention or to use proper care in the appointment of agents.

6. The Executive Committee

The by-laws may create an executive committee composed of not less than threedirectors, appointed by the board. By majority vote, the committee can act on matters within thecompetence of the board of as may be delegated to it by the by-laws or by the board. It cannothowever act on the following: (1) matter needing stockholder’s approval, (2) filling up of boardvacancies, (3) amendment, repeal, or adoption of by-laws, (4) amendment of an irrepealable board resolution, and (5) cash dividend declaration.

7. Officers of the Corporation

The statutory officers of the corporation are the president, the treasurer and the secretary.The corporation, in its by-laws, may provide for the corporate officers.

A suit for damages for illegal ouster of a corporate officer prescribes in four years.

An officer appointed at the pleasure of the Board, per the corporate by-laws, may beterminated at any time (Tavera vs. Phil. Tuberculosis, 112 SCRA 243)

A stockholder or officer of a corporation is not personally liable for the consequences ofthe termination of services of its employees. (Sunio vs. NLRC, 127 SCRA 89) unless tainted withmalice or bad faith (Garcia vs. NLRC, 153 SCRA 639)

Where a loan was procured for the corporate purposes, and an official signed for and in behalf of the corporation, solidarily with himself in his personal capacity, both the corporationand the official are solidarily liable. (de Asis and Co., Inc., et al, vs, CA, et al., 136 SCRA 599)

There is no law which prohibits a corporate officer from binding himself personally to answer for acorporate debt. While the limited liability doctrine is intended to protect a stockholder by immunizinghim from personal liability for corporate debts, he may nevertheless divest himself of this protection byvoluntarily binding himself to the payment of corporate debts. (Garcia et al vs. CA, et al, G.R. 80201, Nov. 20, 1990)


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a. The President

-

The President must be a director and his function primarily involves the implementation of boardresolution and policies.

b. The Treasurer

-

The Treasurer may or may not be a director of the corporation. His principal function involves thecustody of funds and other properties of the corporation.

c. The Secretary

-

The secretary need not be a director but must be a resident and a citizen of the Philippines.

Without the signature of the corporate secretary, the minutes allegedly taken by a mere clerk haveneither probative value nor credibility. (NATU vs. Sec. of Labor, 109 SCRA 139).

Bar Question: Can a Spanish citizen be (1) President, (2) director, (3) secretary, (4) manager of a

corporation? Can an American citizen occupy any of the above positions? (1946 Bar, VIIb).

Answer : (1) A Spanish citizen can be President of a corporation provided he is a director thereof. Inthe 100% nationalized corporations like those engaged in retail trade, and rural banking, a Spanish citizencannot be a stockholder, hence, cannot be a director and/or President thereof.

(2) A Spanish citizen can be a director of a corporation, except in 100%

(3) A Spanish citizen cannot be a secretary of a corporation, as the Corporation Law requires acorporate secretary not only to be a resident, but also to be citizen of the Philippines.

(4) He can be a manager of a corporation, except in the nationalized corporations.

An American citizen can be president, director or manager of a corporation except in the nationalizedcorporations. He cannot be corporate secretary, as Filipino citizenship is a requirement for that position.

IV. Capital Structure of Stock Corporations

A. Important Concepts Defined

1. Capital Stock

- Capital stock is the amount stated in the articles of incorporation of a corporation, divided into shares

of stock, and made available for subscription.

The capital stock of a par value stock corporation is called “authorized capital stock”, while that of ano par value stock corporation is called “stated capital”.

2. Capital

- Capital is the actual property or estate of a corporation, whether in property or in money, includingsurplus and undivided profits.


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Bar Question: Distinguish capital stock from capital of a corporation. (1946 Bar VIIIa; 1957 Bar, Ia-2).

Answer : Capital stock is distinguished from capital as follows:

(a) Capital stock is the amount of money stated in the articles of incorporation to be subscribed and paidin; capital represents the actual property of a corporation;

(b) Capital stock remains fixed unless changed by proper amendment of articles; capital varies accordingto the results of the business operations of a corporation.


3. Share of Stock

A share of stock is a unit of capital stock representing the proportionate interest of its owner in themanagement, dividends, and assets on liquidation of the corporation.

B. Prerequisites to Incorporation

1. Capital Stock

The capital stock of a corporation is stated in its articles of incorporation. This capital stock isdivided into shares, with par value indicated, if the corporation is a par value stock corporation; and withno mention of the par value per share if the corporation is a no par value stock corporation.

While no-par value stocks have no fixed value per share for all the number of shares stated in thearticles, the corporation fixes the issue for a consideration which shall not be less than five pesos (₱5.00) per share. These issued shares shall be deemed fully paid and non-assessable and the holder of suchshares shall not be liable to the corporation or to its creditors in respect thereto. The entire considerationreceived by the corporation for these shares shall be treated as capital and shall not be available fordistribution as dividends. (Sec. 6, 3rd par. N.C.C.)

Bar question: The articles of incorporation to be registered in the Securities and ExchangeCommission contained the following provision -

(a) "First Article. The name of the corporation shall be

Toho Marketing Corporation."

(b) "Third Article. The principal office of the corporation shall be located in Region III,in such municipality therein as its Board of Directors may designate."

(c) "Seventh Article. The capital stock of the corporation is One Million Pesos(₱1,000,000.00) Philippine Currency."

What are your comments, and suggested changes to the proposed articles? (1990Bar, I).

Answer: My comments to the provisions stated above are:

(a) The name of the corporation should contain the word "Incorporated" or"Corporation."


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The suggested change is:

"First Article: The name of the corporation shall be TOHOMARKETING CORPORATION."

(b) The principle office of the corporation should mention the town and province, or the

city where it is located.

The board by resolution cannot designate the principal office of the corporation, orchange the same from time to time.


"Third Article: The principal office of the corporation shall be located in CabanatuanCity."

(c) The Seventh Article should not only mention the amount of capital stock, but also the number ofshares into which said capital stock, but also the number of shares into which said capital stock isdivided, and the par value for each share, if the shares are of the par value type.


"Seventh Article: The capital stock of the corporation is One Million Pesos (₱1,000,000),Philippine currency, divided into ten thousand (10,000) common shares, each with par value of OneHundred Pesos (₱100.00).

Bar Question: A client asks you what is the difference between "par value' and"no par value" shares of stock. Explain it as simply as you can. (1980 Bar, IIa).

Answer: A par value share is one where the subscription or issue value of the share is fixed by the articlesof incorporation, at which amount all such shares are issued by the corporation.

A no-par value share is one which gives to the corporation a leeway to fix different issue valuesevery time the shares are allowed to be issued. The issue value shares of the corporation may thereforevary at every issue of the stock by the corporation.

Author's note: Answer is still valid under N.C.C.

Bar Question: The same client now tells you that he and his associates have ₱500,000 which they wish toinvest in a factory for the manufacture of shoes. He asks for your opinion as to whether they shouldorganize a corporation with "par value" stock. What will you tell him? (1950 Bar, IIb).

Answer: I will first ask my client whether he and his associates have intentions to invite other investorsafter incorporation. If he says yes, then I will advise him to organize a no-par value stock corporation,otherwise, I will suggest a par value stock corporation. Reason: If the corporation is a no par value stock

corporation, and it succeeds, subsequent issues of stock may be at book value, to give protection tothe pioneer incorporators; if it fails, then subsequent issues may be at values less than the originalissue value, to attract outsiders. This reason will not hold if my client and his associates intend tolimit stock ownership to themselves, in which case shares with par value would be the ideal set-up.

Bar Question: What private corporat ions may not i ssue no-par val ue sh are s ofs to c k a n d w ha t s ha r es o f st o c k ma y no t be Issued without a stated par value? (1959 Bar, IIIb;1958 Bar, IXb-2).


25/94

Answer : The following private corporations may not issue no par-value shares: (1) banks, (2) insurancecompanies, (3) building and loan associations, and (4) public utility companies without approval of any ofthe appropriate boards created to replace the PSC.

The following shares of stock may not be issued without a stated par value (1) preferred shares ofany corporation, (2) shares issued by the above-stated corporations.

Author’s note: Under Sec. 6, 1st par. Of the N.C.C., trust companies also cannot issue no par-value shares.Public utilities also cannot issue said shares even with the approval of the appropriate supervisory boards.

Bar Question: Explain the nature, and reason for no par value shares of stock. (1958 Bar, IXb).

Answer : No par value shares are shares issued by a corporation at issue values varying with every issue.

No par value shares are issued to allow flexibility in the price at which they may be issued, theissue value being usually, pegged to their book value.

2. Subscribed Capital

Subscribed capital stock means the capital stock or a portion of it which has been issued orsubscribed and paid for, in part or in whole.

For purposed of corporation, the law requires that at least twenty five per centum of theauthorized shares of capital stock has been subscribed. (Sec. 14, 2nd par., N.C.C)

a.

Trust Fund Doctrine

The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment ofthe debts to look up to, for the satisfaction of their credits. Hence, the corporation cannot dissipateit to prejudice its creditors.

It is an established doctrine that subscriptions to the capital stock of a corporation constitute afund to which creditors have a right to look up to for satisfaction of their claims, and that theassignee in insolvency can maintain an action upon any unpaid stock subscription in order torealize assets for the payment of its debts. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

A corporation has no power to release a subscription to its capital stock, without valuableconsideration for such release, and as against creditors, a reduction of the capital stock can take place onlyin the manner and under the conditions prescribed by the statute or the charter or the articles ofincorporation. (PNB vs. Bitulok, supra).

A stockholder may be sued directly by creditors to the extent of their unpaid subscriptions to thecorporation. (Keller vs. COB Marketing. 141 SCRA 861)

Bar Question: A subscribed to 100 shares of stock of corporation X with par value of P100.00 each, paying P1,500.00 on his subscription. Subsequently, A asked B, the president of the corporation, torelease him from his subscription. B consented provided that A forfeits to the company what he hasalready paid. A agreed and B gave him a certificate of release. Not long afterwards, Y went intoinsolvency and an assignee was appointed. The assignee now seeks to collect from A the unpaid balanceof his subscription. Decide the dispute with reasons. (1979 Bar, VIIA).


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Answer: Yes, the assignee of the insolvent corporation may collect from A the unpaid balance of hiscorporation.

Under the trust fund doctrine, subscriptions to the capital stock of a corporation constitute a fundto which creditors have a right to look up to, for satisfaction of their claims. The corporation, whetherthrough its board, or any of its officers, like the President, in the problem, cannot in any manner dissipate

said fund, or condone the stockholder’s obligations, or release A from the payment of his subscription, allof which are illegal, violating the trust fund doctrine. A therefore can be made to pay by the assignee ofthe insolvent corporation for the unpaid balance of his subscription.

Author’s note: Under the New Corporation Code, the trust fund doctrine is maintained.

Bar Question: After five years of operation, “P. INC.” became insolvent Corporate creditors bought suitagainst both the corporation and its stockholders. Against the latter, on the ground that all of them hadaccounts remained unpaid on their subscriptions to the capital stock. Will a cause of action in their favorof corporate creditors lie as against stockholders for their unpaid subscriptions? Give reasons for youranswer. (1960 Bar, Vb).

Answer : Yes, a cause of action will lie against the stockholders for their unpaid subscriptions.Under the trust fund doctrine, the subscribed capital stock of a corporation is considered as atrust fund for the payment of its debts, and to which the creditors have a right to look up to,for the satisfaction of their credits.


Bar Question: X corporation was organized by five individual incorporators, whosubscribed to the whole authorized capital stock of ₱1 million and who paid in ₱500,000.00.The incorporators, all members of the board of directors, agreed among themselves that theunpaid balance of their subscription will be paid out of expected cash dividends. However,no dividends were declared. The board of directors decided to condone and cancel the

unpaid subscriptions. This action of the Board was ratified by the stockholders byunanimous vote of the stockholders at a proper meeting.

The creditors of the corporation sued the subscribers for their unpaid subscription.Can the creditors recover? Reason (1971 Bar, IV-1).

Answer : Yes, the creditors of the corporation can recover from the subscribers their unpaidsubscription, which the board condoned at which the stockholders unanimously ratified.

Under the trust fund doctrine, subscribed capital stock is a trust fund for the payment of debts by the corporation and to which the creditors have the right to look up to,for the satisfaction of their credits. The corporation, through its board or stockholders, cannotdissipate, must less condone, unpaid subscriptions to said subscribed capital stock.


Bar Question: The “Manila Cigar Company” was organized with a capital stock of ₱50,000,

divided into 500 shares of ₱100 a share. “X” subscribed for 20 shares and paid ₱500 uponhis subscription leaving unpaid account thereof the sum of ₱1,500. Five years later, thecompany was declared insolvent and “A” was duly appointed assignee, who upon assuminghis position, found that “X” has an unpaid subscription in the amount of ₱1,500. Prior to the


27/94

company’s declaration of insolvency, its board of directors, by resolution, released “W”(another subscriber) from the payment of his (W’s) remaining unpaid subscription. The

assignee brought action to recover from “X” the amount representing his unpaidsubscription.

Questions (a) Is the action properly filed although there was no prior call made

pursuant to sections 37 and 38 of the Corporation Law?

(b) Has X been released from his obligation to pay because the board ofdirectors had previously released another stockholder (W) from the payment of his unpaidsubscription? Reason out your answer: (1961 Bar, III).

Answer : (a) Yes, the action to recover the unpaid subscription of A is proper, inspiteof the lack of a prior call. Reason: In case a corporation is insolvent, no call is necessary tocollect the unpaid subscriptions.

(b) X is not released from his obligation for unpaid subscription just becauseanother stockholder (W) was released by board resolution from the payment of his unpaid

subscription. The release of W by the board is null and void hence, X could not use it as anargument for excusing himself from paying his unpaid subscription.


The trust fund doctrine is also applicable in case the appraisal right of a withdrawing stockholderis involved. The corporation is prohibited from paying the withdrawing stockholder if the rights ofcreditors are affected. Only unrestricted retained earnings of the corporation are available for said payment. (Boman Environmental vs. CA, 167 SCRA 540).

3.

Paid-up CapitalPaid-up capital is the amount actually paid in money or property on account of the subscribed

capital stock.

For purposes of incorporation, at least 25% of the subscribed capital stock must be paid in byincorporators.

The paid-in amount should however not be less than ₱5,000.00 (Sec. 14, 2nd par., N.C.C.)

Bar Question: Explain the difference between “authorized capital,” “subscribed capital” and“paid up capital” of a corporation. (1964 Bar, VIIa).

Answer : Authorized capital is a stated amount in the articles of incorporation of a corporationrepresenting the maximum amount the corporation can collect from its stockholders onaccount of the stocks issued to them.

Subscribed capital is the capital stock or a portion of it, issued by the corporation toits stockholders, paid for, or promised to be paid by the latter.

Paid-up capital is the actual amount of money paid, or property delivered to the corporation onaccount of the subscription of the stockholder.

For purposes of the incorporation, the law requires at least 20% of the capital stock to besubscribed, and at least 25% of such subscription to be paid up by the incorporators.


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Author’s note: Subscription requirement for purposes of incorporation is now 25% of the authorizedcapital. (Sec. 14, 2nd par. N.C.C.).

Bar Question: While the incorporation papers of XYZ, Inc. Were pending before the Securities andExchange Commission (SEC) for approval, A, the designated Treasurer in the Articles of Incorporationheld real estate property worth P20,000.00 which E turned over for shares he (E) purchased in XYZ, Inc.

Before the certificate of incorporation for XYZ, Inc. could be issued, H, who claims to be the owner ofthe said real estate property, filed an action against XYZ, Inc. for recovery or possession of the same.

Will H’s suit prosper? Give reasons. (1978 Bar, 6-b).

Answer: The action of H will not prosper. Properties turned over by an incorporator to the Treasurer of acorporation to pay a subscription pending issuance of its certificate of incorporation by the Securities andExchange Commission, are received and held in trust by said Treasurer for the benefit of the corporation pending issue of its certificate of incorporation; hence, being trust property, the treasurer of thecorporation cannot dispose of the same in any manner.

Author’s Note: Answer still valid under N.C.C.

The Problem: Some businessmen with an available starting capital totalling only P100,000.00 ask you tohelp organize a business firm. Subject to legal limitations, they have future plans to invite alien investorswho are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise.

Bar Question: Assume that you want to be a participant in the business independently of your being itslegal counsel, and that more investors are expected after the firm is formally organized. Explain brieflywith legal reasons:

(a)

Citing the proper law or laws, how may you lawfully charge your fees and apply them to the payment of your share in the capital if the firm?

(b)

x x x

(c)

x x x (1973 Bar, Ila)

Answer: (a) Under the Corporation Law, stocks are paid in actual cash or in exchange for property in anamount equal to the par value of the shares issued.

A lawyer who has already rendered service to the corporation is entitled to be paid for such service whichcredit is considered as property the value of which is ascertainable. Stocks may be issued for this purpose.

(b) x x x

(c) x x x

Author’s note: Under Sec. 62, N.C.C, services actually rendered to the corporation is a lawfulconsideration for the issuance of stocks.

C. Increase or Decrease of Capital Stock

1. Required Vote


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The capital stock of a corporation may be increased or dec reased at a stockholder’s meetingcalled for the purpose wherein two thirds of the outstanding capital stock shall favour such increase ordecrease, after prior approval by a majority vote of the board of directors. (Sec. 39, N.C.C.)

2. Procedure

Bar Question: Explain the steps to be taken for increasing the capital stock of a corporation. (1947 Bar,VIII)

Answer: The following steps are taken for increasing the capital stock of a corporation:

1.

Notice to stockholders specifying the purpose of the meeting,

2.

Affirmative vote of 2/3 of the entire corporate capital stock.

3.

Certificate signed by a majority of the directors and countersigned by the chairman and secretaryof the stockholders’ meeting.

4. Treasurer’s certificate that 20% of the increase has been subscribed and 25% of such subscription

paid-up.

Author’s note: Under the N.C.C. prior board approval is required. Also, subscription requirement is atleast 25% of the authorized capital stock.

Bar Question: “X” Realty, Inc., a corporation engaged in the subdivision business, has an authorizedcapital of P800,000.00, all of which has been fully subscribed. At a special meeting of the board ofdirectors, the majority vote decided, on the basis of the recommendation of its Executive Committee, thatthe cor-

2) The Non-voting Shares

No share shall be deprived of voting rights except those classified and issued as “preferred” or

redeemable (Ibid). Treasury shares also are non-voting (Sec. 9).

a)

Preferred Shares

Preferred shares, issued only with a par value, may be given preference in the distribution of assets inliquidation and in the payment of dividends, or such other preferences as may be stated in the articles ofincorporation. If authorized by the corporate articles, the board may fix the terms and conditions of the preferred shares or any series thereof, which take effect upon the fitting of a certificate thereof, with theSEC (Sec. 6, 2nd par., N.C.C.).

b) Redeemable Shares

Redeemable shares, issuable only if expressly provided for in the corporate articles, have to be purchased or taken up by the corporation on the expiration of the period specified in said shares. The purchase takes place whether or not the corporation has unrestricted retained earnings when the expirationdate arrives (Sec. 8, N.C.C.).

c)

Treasury Stocks

Treasury shares are stocks previously issued by the corporation, fully paid for, and reacquired by it bylawful means. The board, after fixing a reasonable price for them, may dispose of these shares (Sec. 9, N.C.C.).


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Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore issued shares. But being in the treasurythey do not have the status of outstanding shares (Com. of Int. Rev. vs. Manning et al., 66 SCRA 14).

d)

Voting Rights Exercisable by Owners of Non-Voting Shares

Except for treasury stocks which cannot be voted upon on any corporate matter (Sec. 57, N.C.C.) holdersof other non-voting

Shares shall nevertheless be entitled to vote on the following corporate matters: (1) amendment of thearticles, (2) adoption and amendment of the by-laws, (3) sale or other disposition of all or substantially allof the corporate property, (4) incurring , creating or increasing bonded indebtedness, (5) increase ordecrease of capital stock, (6) merger or consolidation with other corporations, (7) investment of funds inanother corporation or for a different purpose, and (8) corporate dissolution (Sec. 6, par. 6, N.C.C.)

b. The Par Value and No-Par Value Shares

All shares of a corporation may have a par value or have no par value, as stated in the corporatearticles, except that banks, trust companies, insurance companies, public utilities, and building and loanassociations cannot issue no-par value shares.

Shares issued without par value are deemed fully paid and non-assessable, and their holders are notliable to the corporation or to its creditors in respect thereto. They cannot be issued for a considerationless than P5.00 per share, and payments thereon, are treated as capital and are therefore not available fordividend distribution (Sec. 6, par. 3, N.C.C.).

The price at which no-par value shares may be issued may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders at a meeting duly called for the purpose representingat least a majority of the outstanding capital stock (Sec. 62, 4th par., N.C.C.)

Bar Question: Name the different classes of shares of stock and briefly discuss at least two of saidclasses (1961 Bar, IIIa).

Answer : Shares of stocks may be common, preferred or deferred; no par value and par value shares;watered stock, over-issued stock.

A common stock is stock entitling the holder to proportionate rights in voting, dividends and assets inliquidation, along with other common stockholders.

A preferred stock is stock issued entitling the holder to a preference in (1) dividends up to a stated percentage, and/or (2) assets in liquidation, with generally no voting rights.

Author’s note: The principal N.C.C. classification of stocks is into the voting and the non-voting. (Seesupra) .

Bar Question: Mention two kinds of preferences that may be given to preferred shares. (1949 Bar, Via).

Answer: The preferences may be (1) on dividends up to a stated percentage, and/or (2) on assets inliquidation.


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Preferred stockholders with preference on dividend declarations are paid first before commonstockholders are paid their dividends, if there are surplus profits left for the purpose.

On liquidation, preferred stockholders are refunded their investments, after the creditors are paid, but ahead of refunds, if any, to common stockholders.


Bar Question: What is meant by preferred cumulative participating share of stock? (1950 Bar, Ic).

Answer: A preferred cumulative participating share of stock is a share entitling its holder to preference inthe payment of dividends ahead of the common stockholders,, to be paid the specified rate of dividendsfor prior years, if unpaid, and to participate with the common stockholders in further dividenddeclarations in excess of the rate stated in the preferred stock certificates.


2. Other Classifications

a. Promotion Stock

Promotion stock is stock issued by the corporation usually a mining company to (1) owners of themining ground deeded to the corporation, (2) promoters and the other persons for services rendered beforeincorporation.

b. Escrow Stock

Escrow stock is stock deposited with a third person to be delivered to the stockholder or hisassigns after complying with certain conditions, usually the payment of the full subscription price.

c. Over-issued Stock

Over-issued stock is stock issued in excess of the authorized amount or number of shares of thecapital stock, hence, null and void.

d. Watered Stock

Watered stocks are stocks issued by a corporation (1) gratuitously, (2) for money or property lessthan par value, (3) services less than par value, (4) in the form of dividends, when no surplus profit exists.(See also Sec. 64, N.C.C.)

E. Issues and Transfer of Shares

1. I

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