corpo law Ladia Transcripts Finals

1 CORPORATION LAW

This is a modified transcript of Atty. Ladias Audio Lecture in Corporation Law covering only the finals part. Transcribed and modified by Duke Sucgang. For educational purposes only.

Meetings

2 types of meetings:

1. Stockholders

2. Directors

2 kinds:

1. Regular

2. Special

5 essential requisites for a valid SHs meeting:

1. It must be held on the date fixed by the by-laws or in

accordance with law (if there is no date fixed, it may be

held on any date on April as may be fixed by the BOD)

2. Prior notices must be given (posted or sent at least 2

weeks prior to the meeting [regular/annual]; and 1

week [special]); unless the by-laws requires a different

period. The by-laws may extend or shorten the sending

out of notices.

Directors vs. Tan the by-laws provided for a 5 day

notice rule which upheld its validity, nonetheless, it

posted 2 days prior to the meeting, thus the court held

that the meeting and resolution passed was not valid

for want of notice.

Failure to give notice in accordance therwith would

render the resolution made thereunder voidable at the

option of the SH/members who was not notified.

A SH/member who is present and participated without

objection in a meeting cannot complaint of failure to

give notice or defects in the notice. (waives the defect)

The notice of meeting must state the agenda or

business matter that may be taken up before the

meeting otherwise i t may become voidable

3. Must be held at the proper place/venue.

As far as practicable, in the province or

municipality where the principal office is located

[stock]; meetings may held anywhere in the

Philippines provided that proper notices shall be

posted/sent [non-stock]

Metro Manila is considered as one municipality

4. It must be called by the proper person or officer.

By the president or the secretary on orders of the

president, unless the by-laws provide for a

different person

If there is a person who authorize to call the

meeting but neglects or fails to call one, the court

is not authorized to grant the SH may not be

granted to call one, the proper remedy is

mandamus

Whenever, for any cause, there is no person

authorized to call a meeting, the SEC, upon

petition of a SH/Members, and showing good

cause thereof, may issue an order to the

petitioning SH/members directing him to call a

meeting of a corporation by giving proper notice

required in the by-laws.

The petitioning SH/members shall preside until at

least a majority of the SH/members present have

chosen one of their number as presiding officer.

5. The quorum and voting requirements must be met.

Majority of the SH/members owning or

representing at least a majority of the outstanding

capital stock is the requisite quorum, unless the

law requires a higher voting percentage)

For instance in the voting for amendment of AOI,

the vote requires 2/3 of the outstanding capital

stock, but only majority of SH representing OCS,

there is a quorum if there is a majority SH but

cannot amend the AOI because the vote required

is 2/3 as provided by the law.

Amendment of the by-laws majority

Amendment of the AOI 2/3

Non-voting shares are not including in determining the

voting requirement, unless they are nonetheless

entitled to vote in the penultimate paragraph of Sec. 6.

(in amendments of AOI, can vote;

If 1M ACS, 20% NVS, 800k VS, election of directors

(quorum requirement is 400k), amendments of AOI

include NVS because they are entitled to vote. 2/3 will

be based on 1M shares.

The effect of a SHs meeting improperly held or called,

the resolutions passed will not be necessarily be

without force and effect. It shall nonetheless be valid if

all of the SHs/members are present or duly

represented (proxy).

During annual meetings of the SH, the audited financial

statement is presented to SH for their perusal. Thats

why the law choose the date of April (if no provision in

the by-law) because it is the time when the financial

statement is audited (fi l ing of the Income Tax).

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GR: The SH/members have no power to act as or for the

corporation

EXCEPTION: at a corporate meeting called and conducted

according to law if there is a need to protect the SH by providing

them, with notice of meeting and giving opportunity to attend

the meeting, discuss the issue and vote.

EXCEPTION TO THE EXCEPTION: in case of ordinary amendment

of AOI where the vote/written assent of SH/members

representing 2/3 OCS could pass a valid amendment

Directors/Trustees meetings (S53 and S54)

Regular or Special

Regular held monthly or provided for in the by-laws

Special called at any time upon call of the president

or provided in the by-laws

Venue is anywhere within or outside the

Philippines, unless provided in the by-laws. For

purposes of convenience.

SMC acquired brewery in HK, SMBHI they

went to see the facil ity in HK before they

acquired the property. They held a meeting

and decided to purchase the property in HK.

The court ruled that they can hold their

meetings anywhere for their convenience

The quorum requirement is fixed. Majority of the

number is fixed in the AOI is the quorum

requirement.

If 9, the quorum is 5. If 2 died, the quorum

requirement is sti l l 5.

The vote of the majority of those present at which

there is a quorum will pass a valid corporate act.

Except in the case of election in the other

corporate officers the vote requires of the entire

membership of the board; or unless the AOI or By-

laws provided greater requirement.

9 members, 5 present there is a quorum. Of

the 5, 3 voted of a particular corporate act is

sti l l valid, 3 of 9 quorum

SH meetings, proxy is matter of right; in members

and directors meetings (s25)

, proxy may be denied.

If they vote by proxy, they have abdicated the

powers granted to them.

But if a director but it is a SHs meeting, may send

a proxy but if directors meeting, no.

A directors meeting improperly held/call,

generally, it would be without force and effect. But

they may be ratified, express or implied or by way

of estoppel.

Lopez realty vs Fontecha Dirs meeting was

called granting employees incentive benefits.

One of them was abroad and not notified but

evidence presented that she knew of the

resolution taken by the board in the meeting

improperly held and she did not interpose any

objections and signed the two vouchers and

resolutions. The Court held that that director

is in estoppel.

Express if it is in a subsequent formal meeting

of the same board. Implied from the acts of

the responsible corporate officers.

The president shall preside at all meetings of the

directors/trustees meeting as well as of the SH/members

unless the by-laws otherwise provides.

SH/members right to vote and manner of voting it is

inherent and incidental to the ownership of corporate stock

and such it is a property right.

Exceptions:

1. Non-voting shares are not entitled to vote except provided

in the penultimate paragraph of section 6 (only preferred

and redeemable shares may be deprived of the right to

vote)

2. Treasury shares

3. Delinquent shares

4. Unregistered transferees of shares of stock

Exception to the exception: may vote through

proxy/VTA/executor/administrator/receiver or other

representatives

In case of pledged/mortgaged shares, the

pledgor/mortgagor/administrator is entitled to attend

and vote at SHs meeting unless the pledgee/mortgagee

is expressly given by the pledgor/mortgagor such right in

writing which is recorded on the appropriate books .

If shares are owned jointly, the consent of all co-owners

are necessary unless there is a written proxy signed by all

co-owners. When shares are owned in an and/or

capacity of the holders thereof, any of the joint owners

can vote said shares or appoint a proxy.

PROXY AND OTHER REPRESENTATIVE VOTING

The authority given by the SH/m to another to vote for

him at a SHs/ms meeting

3 CORPORATION LAW


Should be in writing, signed by the SH and fi led before

the scheduled meeting with the corporate secretary

Shall be valid only for the meeting which it is intended

unless otherwise provided in the proxy

No proxy shall be valid and effective for a period longer

than 5 years at any one time

2 TYPES OF PROXY

1. General gives a general discretionary power-of-

attorney to vote for directors and all ordinary matters

that may properly come before the meeti ng

2. Limited restricts the authority to vote on specified

matters only and may direct the manner in which the

vote will be cast

Revocable unless coupled with an interest and

revocation need not be made by formal notice in writing.

May be express to the proxy holder by subsequent proxy

to another or by sale of the shares.

Need not be notarized

If executed by the corporation, it shall be in the form of a

board reso duly certified by the corpo sec or in a proxy

form executed by a duly authorized corpo officer

accompanied by a corpo secs certificate quoting the

board reso authorizing the proxy.

VOTING TRUST

one created by an agreement between a group of SH and a

trustee whereby it is provided that for a term of years, or

period contingent upon certain event or until agreement is

terminated, control over the stock owned by such SH, shall

be lodged in the trustee, either with or without reservation

to the owners or persons designated by them the power to

direct how such control shall be iss ued.

VTA results in the separation of the VR of a SH from his

other rights such as right to receive dividend, inspect the

books, sell certain interests and other rights to which a SH

may be entitled until the liquidation of the corporation.

REQUISITES:

1. Must be in writing, notarized and specify the terms and

conditions thereof

2. Certified copy must be fi led with SEC and corporation

otherwise such agreement is ineffective and

unenforceable

3. The certificate of stocks covered by VTA shall be

cancelled and new ones shall be issued in the name of

the trustee

4. It shall be noted in the books of the corporation that

the transfer in the name of trustee is made in

pursuance to said VTA

Please know the difference of Voting trust vs. Proxy (it

is asked in the recitation and exam)

Chapter 10: Stocks and Stockholders

3 ways in which a person may become a stockholder: 1. By a contract of subscription with the corporation; 2. By the purchase of treasury shares from the corporation; and 3. By purchase or acquisition of shares from existing

stockholders (includes purchase from the stock exchange). Subscription Contract

Subscription the mutual agreement of the subscribers to take and pay for the stocks of a corporation.

Subscription contract any contract for the acquisition of unissued stock in an existing corporation or a corporation stil l to be formed, not withstanding the fact that the parties refer to it

as a purchase or some other contract. A subscription contract is not required to be written; an

oral contract for subscription is valid and enforceable. The statutes of fraud do not apply to a subscription contract because such subscription does not fall under the statutory

definition of a sale. Conditional subscription one made upon a condition precedent, does not make the subscriber a stockholder, or

render him to pay the amount of his subscription, until the performance or fulfi l lment of the condition.

Subscription upon special terms an absolute subscription, making the subscriber a stockholder, and rendering him liable as such, as soon as the subscription is accepted, the special term being an independent stipulation.

In case of doubt, a subscription shall be considered one

upon special terms in order to protect the creditors and other subscribers.

General rule: Conditional subscriptions are valid. Exceptions: 1. The charter or enabling act prohibits the same; or

2. The conditions are such as to render their performance beyond the powers of the corporation or in violation of law or contrary to public policy.

An application for subscription which is at variance with the

terms evidenced in a general form of subscription must be

4 CORPORATION LAW


accepted by the corporation to create a binding contract.

(Tril lana vs. Quezon College, Inc.)

A condition facultative as to the debtor renders the whole

obligation void. (Tril lana vs. Quezon College, Inc.)

PRE-INCORPORATION SUBSCRIPTIONS

2 types of subscription as to time of execution:

1. Pre-incorporation subscriptions subscriptions

for shares of stock of a corporation stil l to be

formed; and

2. Post-incorporation those made or executed

after the formation or organization of the

corporation

GR: a subscription for shares of stock of a

corporation stil l to be formed is irrevocable

EXCEPTIONS: Lapse of a period of 6 months from

the date of subscription; all subcribers consent to

the revocation; or the incorporation of said

corporation fails to materialize within 6 months

or within a longer period as may be stipulated in

the contract of subscription.

EXCEPTION TO THE EXCEPTION: No pre-

incorporation subscription may be revoked after

the submission of the AOI to the SEC

Pre-incorporation subscriptions are mandatory

which mandates that a corporation may be

registered as such only if at least 25% of its ACS

has been subscribed and that at least 25% of the

total subscription has been paid.

Stocks shall not be issued for a consideration less

than the par or issued price thereof.

S62 CONSIDERATION FOR STOCKS:

1. Actual cash paid

2. Property, tangible or intangible, actually received

by the corporation

3. Labor/services actually rendered to the

corporation

4. Previously incurred indebtedness

5. Amounts transferred from URE to stated capital

(Stock Dividends)

The corporation makes profits and instead

distributing cash to SH, it will issue SD. The

consideration will be the URE of the corporation

6. Outstanding stocks exchange for stocks in the

event for reclassification

Stocks shall not be issued in exchange of

promissory notes or future services. Their

realization is uncertain

Issue the making of a share contract or contract of subscription; transaction by which a person becomes the owner of shares and by which new share contracts are

created. The issuance of shares is not dependent on the

delivery of a certificate of stock.

Par or issue price indicates the amount which the original subscribers are supposed to contribute to the corporate capital as the basis of the privilege of profit

sharing with l imited liability.

Two theories in the valuation of property or services: 1. True value rule the motives or intent of those

making the valuation are disregarded and the sole

and decisive factor or question is whether or not the property or services are in fact worth the value placed on them.

2. Good faith rule the value of the property or services

is a matter about which there can be an honest difference of opinion. Therefore, if the parties have acted in good faith without fraud or intentional over-valuation, the transaction cannot be overturned even

if the later becomes evident that the property or services were in fact worth much less than the value fixed on them initially.

i .e. Founders shares because it may be granted

rights and privileges not accorded to other SH.

Such as Exclusive right to vote or be voted upon

from the period of 5 years with approval of the

SEC and after the 5 yr period the holders thereof

shall surrender the founders shares and be

converted to common stock. The amount paid

will be the same consideration of the common

shares by virtue of reclassification

The consideration for the issuance of s tocks of a

corporation may consist of any of the six forms

indicated in S62 or combination of two or more

of them.

A corporation is allowed to issue its stocks, in

exchange of properties tangible or intangible,

which must be: 1. Actually received by the

5 CORPORATION LAW


corporation; 2. Necessary and convenient for its

use and lawful purposes; 3. The value of the

property should be at least equal to the par or

issued value of the stocks.

Valuation of properties given as a consideration for issuance of stock:

1. Tangible properties (particularly real properties): a. Appraisal report of an independent appraiser; b. Zonal valuation as certified by the BIR; or

c. Market value indicated in the Real Estate Tax Declaration.

2. Intangible properties (such as patents or copyrights): a. Initial determination by the incorporators or the

board of directors subject to the approval of the SEC; or

b. Appraisal report of an independent appraiser.

Labor performed or services actually rendered to the corporation must be capable of valuation and in fact fairly valued.

S64- Issuance of Certificate of Stocks

Certificate of stock the piece of paper or document which evidences the ownership of shares and a convenient instrument for the transfer of the title.

Requisites for the issuance of a certificate of stock: 1. It must be signed by the president or vice-president

and countersigned by the secretary or assistant secretary;

2. It must be sealed with the corporate seal; and 3. The full amount of subscription together with interest

and expenses (in case of delinquent shares) if any is due, has been paid.

Transfer refers to absolute and unconditional conveyance of the title and ownership of a share of stock to warrant registration in the books of the corporation in

order to bind the latter and other third persons. (Monserrat vs. Ceron)

CS cannot be issued unless it is fully paid

CS cannot be issued for the corresponding

number of shares which the subscribers may

have already been paid for

subscribed 1M shares, 500k paid, the

corporation cannot issue CS unles s fully

paid

Stock subscriptions are indivisible.

Transferability of shares of stock in the

corporate form of business. The CS may be

transferred by the delivery of the stock

certificates endorsed by the owner/atty-in-

fact.

No transfer shall be valid except as between

the parties, until the transfer is recorded in

the books of the corporation. If not

recorded, insofar as the parties are

concerned, the transfer shall be valid

For a valid transfer of shares of stocks may

transferred when endorsed and delivery of the

certificate of stocks.

Endorsement without delivery is not a valid

and effective mode of the transfer of stocks

(embassy farms vs ca)

Delivery alone without endorsement is also

ineffective mode of transferring shares.

(Razon vs IAC)

Other modes of transferring shares of

stocks:

1. Duly notarized deed (Rural Bank of Salinas vs

CA)

A transfer set in a notarized deed is

equivalent to the delivery of the thing

itself. (Upiaco case)

When the corporation has not yet issued

certificates of stocks

2. But when a certificate of stock has already

been issued to the owner thereof, a mere

notarized deed may not be sufficient for a

valid transferred share of stocks . It must be

coupled with delivery avoid fraudulent or

fictitious transfers of shares. (Rural Bank vs.

CA)

3. Exception to the exception: Even without a

delivery/endorsement of Stock Cert which

have already been issued, transfer is valid if

the transferor is in estoppel

Tan vs SEC- the transferee is the brother

of the transferor, the transferee already

exercised his right as a director and was

elected as such during the time the

transferor was the president of the

corporation. The court ruled that

6 CORPORATION LAW


endorsement/delivery is not essential

where the person sought to be

considered as a SH is an officer of the

corporation and has the custody of the

stock and transfer book. He is

considered as an estoppel.

Are certificates of stocks negotiable instruments?

NO. they are merely quasi -negotiable but non-

negotiable. The transferee takes it without

prejudice to all the rights and defenses which the

true and lawful owner may have and obtaining in

a particular set of circumstances subject to the

rules governing estoppel. (delos santos vs

mcgruise)

No matter how innocent the purchaser

may be, if there is no endorsement and

delivery, no valid and effective transfer,

because it is subject to all defenses and

rights in which the true owner may

have.

General rule: A certificate of stock is not a negotiable instrument. A bona-fide purchaser of a certificate of stock will acquire no better title to the shares than his

transferor had and will be subject to all rights, remedies and defenses which the true and lawful owner may have.

Exception: When the general principles of estoppel apply. Thus, if the legal owner thereof, by his act or negligence, is estopped from claiming ownership, (as when he clothes another with apparent title or authority to dispose of the

same) a purchaser in good faith and without notice will acquire a better title as against the owner so estopped.

Shares of stock are personal properties and the owners thereof have the unbridled right to transfer the same to anyone they please subject only to reasonable charter provisions.

Registration of the transfer in the stock and

transfer book must be had in order to be valid

and binding to third parties even to corporation

and even subsequent creditors.

No transfer shall be valid, except as between

the parties, until the transfer is recorded in

the books of the corporation. Failure or refusal to record such transfer,

the remedy is mandamus.

(Rural bank of Salinas vs. CA) the right of

the assignee/transferee to have the

stocks transferred in his name in the

books of the corporation is his inherit

right flowing from his ownership of

shares of stock. The court ruled that

when a corpo refuses the transfer,

mandamus will issue to compel the

officer to transfer the said stocks in the

books of the corporation. The duty of

the corporation to record the transfer of

shares of stock in the stock and transfer

book is ministerial . If refused without

good cause, may be compelled to do so

by mandamus.

Exception: in order that mandamus may

issue, the alleged transferee must have a

clear and legal right to the thing

demanded. It is the imperative duty of

the Corporation to perform the act

required. It neither confers nor imposes

duties and never issued in doubtful

cases.

TAY vs CA creditor sought to compel

the corporation to record the transfer,

the debtor SH pledged his share to the

creditor certain amount of money. SH

failed to pay, the creditor sought the

recording of the shares of stocks in his

name in the books by failure of the SH to

pay pursuant to contract of pledged.

Corporation refused. The Court denied

the mandamus because the owner of

the thing pledged remains to be the

owner thereof until a sale of public

auction has made under the Civil Code.

The creditor never failed to do so, thus

he has no clear and legal right. The

pledgor remains the owner of the thing

unless sold in public auction

Reasons for the necessity of the registration of transfers of stock:

1. To enable the corporation to know who its stockholders are;

2. To enable the transferee to exercise his rights as a

stockholder;

7 CORPORATION LAW


3. To afford the corporation an opportunity to object or refuse registration of the transfer in cases allowed by

law (as when it has unpaid claims on the shares transferred);

4. To avoid fictitious and fraudulent transfers; and 5. To protect creditors who have the right to look upon

stockholders, in case of non-payment or watered shares, for the satisfaction of their claims.

The duty of the corporate secretary to record a valid transfer of shares of stock is ministerial. Thus, he may be compelled by mandamus.

The duty of the corporate secretary to register a

valid transfer of shares is ministerial. Therefore,

mandamus will l ie to compel registration in case

the corporation or the corporate secretary

refuses registration. (Rural Bank of Salinas vs. CA)

However, the transferee has no such right when

his title to said shares has no prima facie validity

of is uncertain.

The right to transfer shares of stock may not be unreasonably restricted or prohibited. Every owner of corporate shares has the same uncontrollable right to alienate them and is

under no obligation from selling them at his sacrifice and for the welfare and benefit of the corporation and other stockholders. (Padgett vs.

Bobcock & Templeton; Fleischer vs. Botica Nolasco)

However, the right Transfer shares of stock may

be restricted or regulated by law or agreement of

the parties.

Restrictions:

1. The corporation cannot be

compelled to record transfers of

shares if it has unpaid claims over

the shares sought to be transferred

in the books. (S63)

Unpaid Claim is the unpaid

portion of the subscriptions

(CBC case)

2. May be imposed by Special Laws

(Nationalization laws)

3. Imposed by the Corporation Code,

63, 96 (close corporation)

Close corporation, it must

contain all the three

provisions, all of which

shares of stocks of any

class shall be subjected to

one or more specified

restrictions allowed by the

code. All close to provide

restrictions in the transfers

of shares.

All shares of stocks,

exclusive of treasury

shares, shall be held of

record by not more than 20

specified persons

If the transferee is not one

of those specified person,

cannot transfer or have the

transfer recorded in the

books of the corporation.)

Unpaid subscription or any percentage thereof,

together with interest if required by the by-laws

or contract of subscription, shall be paid either:

1. On the date or dates fixed in the contract of

subscription

2. On the date or dates that may be specified

by the BOD pursuant to a call declaring any

or all unpaid portion thereof to be so

payable.

Trust Fund Doctrine subscriptions to the capital of a

corporation constitute a fund to which creditors have the

right to look up to for the satisfaction of their claims.

The minimum requirement of capital structure is

at least 25 % of the ACS must be subscribed and

25% of the subscription must be paid.

(remedies to enforce payment):

a. By way of a delinquency sale (S67-

68)

b. Direct action in court (S70)

(S67-70) The unpaid portion of the subscription

may be payable or demandable upon call made

by the board of directors for the payment of the

unpaid portions thereof fixing the date when

they are to pay the same, failure to do so, the

shares will become delinquent and would subject

8 CORPORATION LAW


the shares to a delinquency sale. The shares will

be subjected to an auction sale not earlier 30

days and not later than 60 days.

It will be sold to the bidder who tenders

to pay the full amount of the balance of

the subscription + cost and expenses

FOR THE LEAST NUMBER OF SHARES.

X subscribed 1M shares, 500k

paid out of subscriptions, the

corpo incurs loses and needs

money, in order to raise money,

it calls to the unpaid portions of

the subscribers and specified

the date when they are due. X

did not pay on the date

specified on the call. The

corporation may now proceed

to sell the same at a

delinquency sale (30-60 days)

The winning bidder shall be the

one who pays all balance of the

subscription plus cost and

expenses, if any, for the least

number of shares. (3 bidders, A-

505k for 990k shares; B-505k

for 980k shares; C-505k for

970k shares. The winning

bidder will be C because he

tendered the full amount of the

unpaid subscription + cost and

expenses for the least number

of shares) (970k shares will be

l isted under the name of C in

the books of the Corporation. X

will sti l l be a SH to the extent of

the difference between the bid

of C and 1M subscription of X,

30k shares left in his name. the

effect, X paid 505k for only 30k

shares, and C paid 505k for

970k shares)

If no bidders, the corporation may also bid

subject to the provisions of the code. Through

the power of the corporation to reacquire shares

and it should have URE in order that i t may

reacquire its shares.

If the corporation has losses, it has no

URE, thus corporation cannot bid its own

shares

But the corporation may stil l fi le a

collection case to recover payment from

the unpaid portions of the SH because

the unpaid portions is considered debt

of the SH.

Redeemable shares, in case of close corporation.

If the auction sale was irregularly held, the

validity of the sale may be questioned by the SH

subject to the provision of S69.

If SH tenders payment of the acquisition

cost to the winning bidder, and he must

institute the complaint within 6 months

from the date of the sale. Failure to do

so, SH cannot validly question the sale.

(was inserted for the purpose of the

stability of shares)

If the shares are declared delinquent/due and

demandable, and corporation made a call, it will

be the bound duty of the subscriber to pay when

they became due and demandable as provided in

the contract, failure to do so may stil l be subject

to delinquency sale.

Effect of delinquent SH. The delinquent

SH loses his right to vote and be voted

upon and will not be entitled to any

rights of a SH except the right to receive

dividend. (S71)

Delinquent SH may stil l be entitled

to cash dividends. But must be first

be applied to his delinquency + cost

and expenses due him

If it is by way of stock dividend, it

shall be withheld from him

If the SH is also a director, who is

delinquent, he will l ikewise loses his

right to vote and be voted upon and

shall not be entitled to any of the rights

of the SH except the rights to receive

dividends. But he shall not be

disqualified to be a director as long as he

owns at least one share of the stock.

9 CORPORATION LAW


Even if he is delinquent, he is sti l l

qualified to act as a director(Bar) until all

his share is sold in public auction.

If he predeceases to be a SH, he is also

automatically disqualifies to act as a

Director.

Lost or destroyed Stocks Certificates

The SH must execute an affidavit stating:

1. The manner and conditions on how it was

lost/destroyed

2. Number of shares represented by such

certificate

3. Serial number of the certificate and

4. Name of the corporation which issued the

same

The replacement will be issued after 1

year from the date of the last

publication. But may be issued earlier

than 1 year if the owner fi les a bond

satisfactory to the owners.

Purpose is to avoid duplication of

certificates of stock and the avoidance

of fictitious and fraudulent transfers.

The BOD has the authority to decide the

amount and the kind of surety bond.

Corporate Books and Records (S74, S75)

The following shall be kept and maintained by the

corporation:

1. Every corporation registered under this

provisions to keep a record of all business

transactions (S74)

2. Minutes of meetings of both the SH and Directors

3. The Stock and Transfer Book or Membership

Book if non-stock

4. Financial statements (S75)

All this books and records shall be

subject to inspection by members and

SH during reasonable hours on any

business day and either personally or

through his authorize representative,

with or without the presence of the

particular SH concerned.

W. Philpotts case, inspection may be

done with the SHs representatives

Non-Stockholders, or assuming even the

heirs of the deceased stockholder

cannot inspect the books and records of

the corporation of the SH.

Puno vs Puno Ent. (599S685)

the SHs right to inspection of

the corporate books and

records is based upon his

ownership of shares and the

necessity of self-protection. A

SH has the right to be

intell igently informed about the

corporate affairs and such right

rest upon the underlying

ownership of the corporate

assets and properties. Only the

SH of record are entitled to

receive dividends from the

corporation as an inherit right.

In this case, the SH died, the

heirs wanted to exercise the

ownership over the shares left

by their deceased father. Upon

the death of SH, the heirs do

not automatically become SH of

the corporation and acquire the

rights and privileges of the

deceased SH. The stocks must

first be distributed to the heirs

upon estate proceedings and

the transfer of the stocks

should be recorded in the

books as required under S63.

During the interim period, the

heirs stand as the equitable

owners of the stocks. The

executor/administrator duly

appointed by the court being

vested with the legal title of the

stocks until the settlement and

division of the estate are

effected, the estate of the

decedent are held by the

executor/administrator who

10 CORPORATION LAW


are entitled to exercise the

rights of the deceased SH.

An estate proceeding must first

be effected before the heirs can

exercise ownership over the

shares

A SH of a holding/parent company cannot inspect

the books and records of the subsidiary if he is

not a SH of the subsidiary. The holding company

must own wholly all the shares of the stocks of

the subsidiary before a SH of the holding/parent

company may inspect the books and records of

the subsidiary.

Case of Gokongwei vs. SEC

If wholly owned, even if not a SH of the

subsidiary, the SH of the parent may

inspect the books of the subsidiary.

If the two entities, parent and

subsidiary, are legally being operated as

separated and distinct copy, no right of

inspection on the part of the parent to

inspect the books of the subsidiary.

(rogers vs. Sherman oil)

If a SH/member is refused the right of inspection,

the remedy is mandamus with claim for damages

and/or attorneys fees; or criminal complaint for

the violation of his right under Sec. 144 of

Corporation Code where a fine of 1k-10k or

imprisonment of 30 days 5 years (it is the penal

provision of the Corporation Code)

(S74(2))The defenses of the

officers/directors may advance to avoid

l iability are:

a. Improper use of information

secured through previous

examination

b. Not acting in good faith or for a

legitimate purpose

PNB vs. Gonzales, Gonzales

acquired 1 share of stock of

PNB in order to pry into the

activities of the bank even

before he was a SH. The

bank officers refused. The

court ruled that there was

improper use of

information secured

through previous

examination and not acting

in good faith.

PNB was created by special

law and primarily governed

by law creating them and

supplemented only by

Corporation Code

whenever applicable. A SH

of PNB cannot examine the

financial records of the

bank. The charter of the

bank only allows the

monetary board of the

Central Bank itself and the

result can be divulged to

the President of the

Philippines, Secretary of

Finance and the board

themselves.

c. The right is l imited or restricted by

special law or the law of its creation

S76-80 Mergers and Consolidations

78 and 79 are procedures of mergers and

consolidations

The requirements and procedure necessary to accomplish

a merger or consolidation are as follows:

1. The BOD/Trustees of each constituent

corporation shall approve a plan of merger or

consolidation setting forth the matters required

in Section 76;

2. Approval of the plan by the SH representing 2/3

of the OCS or 2/3 of the member in Non-Stock of

each of such corporations at separate corporate

meetings called for that purpose

3. Prior notice of such meeting, with copy or

summary of the plan of merger or consolidation

shall be given to all SH or members at least 2

weeks prior to the scheduled meeting

4. Execution of articles of merger or consolidation

by each constituent corporations to be signed by

the president or VP and certified by the

corporate secretary or asst. secretary setting

forth the matters required in Sec. 78

11 CORPORATION LAW


5. Submission of articles of merger or consolidation

in quadruplicate to the SEC subject to the

requirement of Sec. 79 that if it involve

corporations under the direct supervision of any

other govt agency or governed by special laws,

the favourable recommendation of the said govt

agency shall be first be secured; and

6. Issuance of the certificate of merger or

consolidation by the SEC at which it shall be

effective. If the plan is contrary to law, the SEC

shall set a hearing to give the corporations an

opportunity to be heard upon proper notice and

the SEC shall proceed as provided.

S80: Effects of Mergers

1. The constituent corporation or the parties to the

mergers and consolidation shall become a single

corporation, in the case of merger would be the

surviving or absorbing corporation; in

consolidation, the consolidated corporation.

2. The separate existence of the corporation shall

cease except that of the surviving or

consolidated.

3. The surviving or consolidated corporation shall

possess all the rights, immunities and powers and

shall be subjected to all the duties and liabilities

of the corporation organized under the code.

4. The surviving or consolidated shall thereupon

and thereafter possess all the rights, privileges,

immunities and franchises of each of the

constituent corporations and any and all

properties and all receivables due and whatever

account including subscriptions to shares and

other choses in action and all and any other

interest of, or belonging to or due to each of the

constituent corporations shall be transferred to

surviving or consolidated corporation without

any further act or deed.

No need to indicate in the contract to

the effect that all rights, properties, or

remedies shall be vested to the

surviving/consolidated corporation. The

law provides for its effect and it is

automatic.

5. The surviving and the consolidated corporations

shall be responsible and liable to all the liabilities

and obligations of the constituent in the same

manner as if the surviving/consolidated

corporation have itself incurred such liabilities

and obligations; and any pending claim brought

by or against any of the constituent corporation

may be prosecuted against the

surviving/consolidated corporation.

Merger union effected by absorbing one or more

existing corporations by another which survives and

continues the combined business.

Consolidation the uniting or amalgamation of two

or more existing corporations to form a new

corporation.

Associated Bank vs CA

F: Associated Bank Corporation and Citizens Bank and

Trust Company merged to form just one banking

corporation by virtue of the Amended AOI. The defendant

Lorenzo Sarmiento executed in favor of AB a promissory

note undertaking to pay the latter P2.5M on or before

March 6, 1978. However, due to failure of Sarmiento to

pay, AB fi led this complaint. The defendant denied all the

allegations and alleged as affirmative and special defenses

that the complaint states no valid cause of action and AB

is not the proper party in interest because the prom note

was executed in favor of CBTC.

The court ruled in favor of AB and ordered Sarmiento to

pay AB his remaining balance + interest and attys fees.

CA set aside the decision of the tc and dismissed the

complaint. Hence, this appeal.

I: W/N the AB may enforce the prom note made by

provate respondent in favor of CBTC, the absorbed

company after merger?

R: Yes. In the merger of two or more existing corporations,

one of the combining corporations survives and continues

the combined business, while the rest are dissolved and all

their rights, properties and liabilities are acquired by the

surviving corporation. Although there is a dissolution of

the absorbed corporations, there is no winding up of their

affairs or l iquidation of their assets because the surviving

corporation automatically acquires all their rights,

privileges and powers, as well as their l iabilities.

12 CORPORATION LAW


The merger, however, does not become effective upon

the mere agreement of the constituent corporati ons.

There should be approval by the SEC of the articles of

merger which, in turn, must have been duly approved by a

majority of the respective SH of the constituent

corporations.

In this case, an agreement of merger with AB and CBTC

was entered on September 16, 1975 and provided that its

effectivity shall be the date when the necessary papers to

carry out this merger shall have been approved by the

SEC. the agreement l ikewise provided for the transfer of

the properties, rights, privileges, powers, franchi ses,

assets, including goodwill and tradename, and all debts

due to CBTC and all other actions belonging to CBTC shall

be vested in AB as the surviving bank without need of

further act or deed.

The records do not show when the SEC approved the

merger, however, assuming that the effectivity date of the

merger was the date of execution, the Court cannot agree

that petitioner no longer has any interest in the

promissory note. The fact that the promissory note was

executed after the effectivity date of merger does not

militate against petitioner. The agreement itself clearly

provides that all contracts irrespective of the date of

execution entered in the name of CBTC shall be

understood as pertaining to the surviving bank AB.

Although the promissory note names CBTC as the payee,

the reference to CBTC in the note shall be construed as a

reference to petitioner bank. The Court holds that

petitioner has a valid cause of action against Sarmiento.

- Consolidated/surviving corporation will not

absorb the employees of constituent corporation

absent specific provision in the merger

agreement because the employees are not

considered assets nor liabilities of the

corporation. Management of the

surviving/consolidated corporation has the

discretion to deny or absorb the employees,

while the employees may likewise refuse to be

absorbed otherwise there will be forced labor.

S81 APPRAISAL RIGHT vs Pre-emptive right

Appraisal right granted to dissenting or

objecting SH uncertain corporate or business

decisions and demand the payment of the fair

value of his share.

Not available in any or all instances

when a SH objects on a particular

corporate act or transactions. Only

available as provided for the corporation

code.

Instances of appraisal right any SH of a

corporation shall have the right to dissent and

demand payment of the fair value of his shares in

the following instances:

1. In case of any amendment of AOI that has

the effect of changing or restricting the

rights of any SH; or class of shares or

authorizing preferences in any respect

superior to those outstanding shares of any

class; or shortening or extending the

corporate term or existence

It is not available in all

instances where there

is an amendment of

AOI under S16 subject

to the appraisal right

or provisions

governing general

amendment. Unless

such appraisal right is

subject to the

preceding paragraph.

2. In case of the sale, lease, transfer, mortgage,

exchange, pledge or other disposition of the

corporate assets

3. In cases of mergers and consolidation

4. May be exercised by dissenting SH in cases

fall ing under S42

5. However, a SH in closed corporation may for

any reason under S105 compel the

corporation to purchase his share at the fair

value effectively granting the SH absolute

right of appraisal, if not denied by AOI and

provided only that the corporation has

sufficient assets to cover debts and liabilities

exclusive of capital. This rule does not apply

in ordinary corporation.

The effect of appraisal right from the time the

demand of payment until the abandonment of

13 CORPORATION LAW


corporate action, all rights accruing to such

shares including voting and dividend right shall be

suspended provided the SH is not paid the value

of the shares within 30 days from the date of the

award, his voting and dividend right shall be

restored

The delinquent SH is entitled to receive

dividends, but a SH exercising his appraisal right

is not entitled to any of it. However, both of them

have no voting rights.

A SH exercising his appraisal right who is also a

director does not lose his right as a director

unless his shares are fully paid for by the

corporation. The shares will sti ll stand and remain

in his name in the books of the corporation.

A SH who does not paid his subscription in full

may exercise his appraisal right under S72.

Subscribers to shares of stocks not fully paid shall

have all the rights of a SH. The annotation of the

Stocks Certificate under S86 in order that

appraisal right may be exercised is not

mandatory; it is in the option of the corporation.

Title 11 Non-stock Corporation

Sec. 3 with 87, one where no part of its income is

distributable as dividends, members, trustees or

officers. The provisions governing stock

corporation when pertinent except may be

covered by specific provisions of title 11.

S89 VOTING RIGHTS

Each member is entitled to one vote, thus

cumulative is not generally allowed in NS.

(Whereas cumulative voting is a matter of right

granted to SH in a Stock Corporation)

Except where the AOI or by-laws of non-

stock may broaden, l imit or deny voting

rights of the members. i .e voting rights

by proxy, honorary members, inactive or

active members, etc.

Doctrine of l imited capacity in the

corporate form of business

Membership in a non-stock is personal in nature

and non-transferable unless the by-laws provide

otherwise.

Membership acquired in a non-stock

corporation

Pursuant to the powers to issue stocks

and admit under S36(6), A non-stock

corporation can provide manner of

admission of its members.

Cebu Country Club vs. Elizagake can

set criteria and standards to admit their

member. The transferee of a

membership certificate does not have

the same right or privilege to compel the

corporation to transfer in his name to

become a member of the non-stock.

However, in this case, it effectively

upholds the non-profit, non-stock

corporation to determine who its

members shall be. It has the right to

approve or disapprove an application for

propriety membership. As long as the

right should not be exercised arbitrarily.

(In this case, Elizagake is a transferee of

Cebu Country Club. He fi led an

application and used the application

form of the club, however, it appears

that that form does not impose or

require a unanimous vote of the

members to admit a member. He did not

know that there was already an

amendment of that provision in the

application form which was amended

more than 19 years ago. He only

presumed that the requirement for the

vote is only the majority. But he was

denied membership because one of the

members objected. One of the defenses

was that the amendment was not

printed due to economic reason. The

Court ruled that the said excuse was

fl imsy and unconvincing. The Court

cannot fathom why such a prestigious

country club whose members are all

affluent did not have enough money to

cause the printing of an updated

application form. The court though

admitted that a non-stock have the right

to set standards and criterias, it should

14 CORPORATION LAW


not be, however, be arbitrary as

provided under Art. 19 of the Civil Code.)

(S93) Place of Meetings

In non-stock corporation, anywhere within the

Philippines, otherwise provided in for the by-

laws.

Board of Directors

GR: in a Stock corporation, BOD is composed of a

5-15 members except in close corporations, or

banks

EXCEPTION in non-stock, BOD can be more than

15 members

Term of Office

In Stock, not more than 1 year; In Non-stock it

can be 3 years

Term of office is fixed by law

Tenure of Office

May be shorter or be longer;

In non-stock, the other corporate officers, i .e

president, secretary or treasurer, may be directly

elected by the members unless provided for in

the AOI

In Stock, the officers are voted by the BOD

DIFFERENT TYPES OF CORPORATIONS ARE

GOVERNED BY THE DIFFERENT PROVISIONS OF

THE CODE

TITLE 12 CLOSE CORPORATION

Close Corporation

Sec. 96 a close corporation is one whose AOI provides

for 3 specific provisions:

1. All of the corporations issued stocks, exclusive of

treasury shares, shall be held of record by not

more than a specified number of persons not

exceeding 20;

2. All of the issued stocks of all classes shall be

subjected to one or more specified restrictions on

transfers permitted by this title;

3. The corporation shall not issue or l ist in any stock

exchange or make any public offering of any of its

stocks of any class

There is exclusivity of stocks ownership in a close

corporation. The three qualifying conditions must be

indicated in the AOI so that it may be considered

legally and technically a close corporation.

The mere fact the H & W owns 99% of a Shares of

Stocks in a corporation will not make it a close

corporation. All of the qualifying conditions required

in Section 96 must be present. (San Juan Structural

Steel vs CA)

In cases of deadlock in a close corporation, what

is the appropriate remedy available? SEC 104

There are corporation or business activities in

which a close corporation may not be organized.

(second paragraph of Sec. 96) i.e mining, oil

companies, stock exchanges, banks, insurance

companies, public util ities, education institutions

and corporations declared to be vested with

public interest.

Close Corporation vs Ordinary Stock Corporation:

Close Corporation Ordinary Stock Corporation

Number of SH are specified persons and

cannot exceed 20

There are no specified SH and no limit as to its

number

Management may be vested with the SH themselves rather by the BOD (97)

Management shall be vested with the SH not the BOD

All of its shares of

stocks of any class are subject to one or more specified restrictions and transfers of shares

There are no

restrictions in the transfer of shares

Shares of stocks

cannot be listed in the stock exchange or offered for sale in

general public

No prohibition; can be

listed in the stock exchange

SH can take an active

participation in the management affairs by vesting

management unto them

management is lodged

with BOD

SH who takes active the management corporate affairs in a

close corporation is personally l iable for

SH is only l iable if they acted in bad faith, fraudulently or gross

negligence

15 CORPORATION LAW


corporate torts unless the corporation has taken adequate

liability insurance (100[5])

The directors, if any, can validly act even without a meeting

(100)

Directors must act as a body at a duly constituted meeting

Agreements between SH regarding the operations and affairs of the corporation can

validly be made

The SH agreement cannot l imit the discretion the BOD the management of the

corporate affairs

The AOI may provide that all officers and even employees shall be elected or

appointed by the SH (97)

The BOD are the ones who are to elect the other officers of the corporation

The AOI may provide for a greater quorum

and voting requirements in meetings of both SH and directors (97[3])

AOI and by-laws can provide for a greater

quorum and voting requirement in directors meeting, but cannot provide for a

greater quorum and voting requirement in SHs meeting, otherwise provided by law

Restriction on transfer

of shares should be indicated in the AOI, by-laws and stock

certificate

Restrictions on

transfers of shares are valid and binding if indicated in the AOI and

stock certificates (102) if pre-emptive

right is not denied, the right of SH to exercise his right to pre-

emption is absolute. (Without exception) extend to all stock to be issued including

reissuance of treasury shares, whether for money, property,

personal services or previously incurred indebtedness, a SH can exercise this right.

(39) Pre-emptive rights

of SH may be denied. Even if it is not denied, A SH cannot exercise his

pre-emptive right if his shares is to be issued in compliance with the requirements of the law

regarding minimum stock ownership of the public or shares to be

issued in good faith with the consent and approval of the SH either in exchange of

property needed by the corporation or payment previously incurred

indebtedness.

A SH can withdraw and compel the corporation to pay the

value of his shares for any reason with the limitation only that the corporation has

sufficient assets to cover its l iabil ities exclusive of capital stock

NO WITHDRAWING SH. Can only exercise to withdraw his shares

through appraisal rights AND MAY DONE ONLY IN SPECIFIED INSTANCES or unless

they sell their shares for a consideration to another person

The proper forum can

interfere in the management of a close corporation in

cases of deadlocks even if the BOD/SH are acting in good faith (104); it may

even appoint a provisional director who may cast the

deciding vote. The business judgment rule will not apply to a close in cases of

deadlocks. It may also order the dissolution; can even compel any SH to pay the

corporation irrespective of the URE.

Courts cannot interfere

in the business judgment of the BOD/SH

Any SH may petition

the SEC for corporate dissolution on the grounds among other provided for in Sec.

105 and includes dishonesty

Dissolution may be had

only on the grounds provided by the provisions of the Code on dissolution and PD

902-A, as amended

A transferee cannot compel the corporation to register

in its books such transfer if it breaches the provisions of the

AOI (99)

A transferee can compel the corporation to register in its book

such transfer by way of writ of mandamus

SAMPLE QUESTIONS:

The corporation issues shares of stocks for

the purpose of payment of its debts and

liabilities, may a SH exercise his pre-emptive

right? [NO. SEC. 39] Will your answer be the

16 CORPORATION LAW


same if it is a close corporation? [NO. SEC.

102]

The AOI of ordinary is amended changing the

principal office from QC to Manila, a SH

objects and compels the corporation that he

be paid the value of shares, is the objection

valid? [NO. cannot exercise right of

appraisal]; Will your answer be the same if it

is a close corporation? [NO can withdraw and

compel to pay the value of his shares for any

reason]

- A close corporation may partake the nature of a

partnership in that the SH take an active role in

the management of the corporate affairs either

as directors, officers or even partners in

management which is akin to the partnership

form of business.

- A corporation is not considered as a close

corporation when at least 2/3 of its voting stocks

is owned or controlled by another corporation

which is not a close corporation. Even if another

corporation owns or controls 2/3 of the voting

stocks of a close corporation, the latter may stil l

be considered as such close corporation if the

corporation owning or controlling the shares is

also a close corporation.

- When the proposed business is affected with

public interest, the formation of a close

corporation may not be possible and the

determination of whether or not it should be

vested with public interest within its domain.

- A sell ing SH may not be able to transfer his shares

if to do so would violate the qualifying conditions

indicated in the AOI unless number 5 Sec. 99 is

made to apply.

- The SH concerned is not, however, left without

any recourse as he may compel the close

corporation to purchase his shares at their fair

value for any reason subject only to the condition

laid down in Sec. 105 of the code.

- The transferee, on the other hand, may rescind

the transaction or to recover from the transferor

under any applicable warranty, express, or

implied.

SECs discretion in respect to management of a close

corporation in the event of a deadlock. It may:

1. Cancel or alter any provision in the AOI, by-laws

or any SHs agreement

2. Cancel, alter or enjoin any resolution or other act

of the corporation or its board of directors,

stockholders or officers

3. Prohibit any act of the corporation or its BOD, SH

or officers or other persons party to the action

4. Requiring the purchase of the par value of the

shares of any SH, either by the corporation

regardless of availability of unrestricted earnings

or by the other SH;

5. Appointment of a provisional director

6. Dissolving the corporation; or

7. Other relief as the circumstances may warrant.

Manuel R. Dulay Enterprises vs. Court of Appeals

[GR 91889, 27 August 1993] Second Division, Nocon (J): 3 concur, 1 took no part

F: Manuel R.Dulay Enterprises, Inc., a domestic, owned a property covered by TCT 17880 4 and known as Dulay Apartment consisting of 16 apartment units on a 689

square meter lot, more or less, located at Seventh Street (now Buendia Extension) and F.B. Harrison Street, Pasay City. The corporation through its president, Manuel Dulay,

obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from Virgil io Dulay to be able to continue the hotel project. As a result of said loan,

Virgil io Dulay occupied one of the unit apartments of the subject property since 1973 while at the same time managing the Dulay Apartment as his shareholdings in the

corporation was subsequently increased by his father. On 23 December 1976, Manuel Dulay by virtue of Board Resolution, of the corporation sold the subject property to spouses Maria Theresa and Castrense Veloso in the

amount of P300,000.00 as evidenced by the Deed of Absolute Sale. Thereafter, TCT 17880 was cancelled and TCT 23225 was issued to Maria Theresa Veloso.

Subsequently, Manuel Dulay and the spouses Veloso executed a Memorandum to the Deed of Absolute Sale of 23 December 1976 dated 9 December 1977 giving Manuel Dulay within 2 years or until 9 December 1979 to

repurchase the subject property for P200,000.00 which was, however, not annotated either in TCT 17880 or TCT 23225. On 24 December 1976, Maria Veloso, without the

17 CORPORATION LAW


knowledge of Manuel Dulay, mortgaged the subject property to Manuel A. Torres for a loan of P250,000.00

which was duly annotated as Entry 68139 in TCT 23225. Upon the failure of Maria Veloso to pay Torres, the subject property was sold on 5 April 1978 to Torres as the highest bidder in an extrajudicial foreclosure sale as

evidenced by the Certificate of Sheriff's Sale issued on 20 April 1978. On 20 July 1978, Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem in

favor of Manuel Dulay assigning her right to repurchase the subject property from Torres as a result of the extrajudicial sale. As neither Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject

property within the one year statutory period for redemption, Torres fi led an Affidavit of Consolidation of Ownership 13 with the Registry of Deeds of Pasay City and TCT 24799 was subsequently issued to Torres on 23 April

1979. On 1 October 1979, Torres fi led a petition for the issuance of a writ of possession against spouses Veloso and Manuel Dulay in LRC Case 1742-P. However, when

Virgil io Dulay appeared in court to intervene in said case alleging that Manuel Dulay was never authorized by the corporation to sell or mortgage the subject property, the trial court ordered Torres to implead the corporation as an

indispensable party but the latter moved for the dismissal of his petition which was granted in an Order dated 8 April 1980. On 20 June 1980, Torres and Edgardo Pabalan, real

estate administrator of Torres, fi led an action a gainst the corporation, Virgil io Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment Unit No. 8-A for the recovery of possession, sum of money and damages with

preliminary injunction in Civil Case 8198-P with the then Court of First Instance of Rizal . On 21 July 1980, the corporation fi led an action against spouses Veloso and

Torres for the cancellation of the Certificate of Sheriff's Sale and TCT 24799 in Civil Case 8278-P with the then Court of First Instance of Rizal. On 29 January 1981, Pabalan and Torres fi led an action against spouses

Florentino and Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with the corporation as intervenor for ejectment in Civil Case 38-81 with the Metropolitan Trial Court of Pasay City which rendered a

decision on 25 April 1985, in favor of Pabalan, et al., ordering the spouses Manalastas and all persons claiming possession under them to vacate the premises; and to pay

the rents in the sum of P500.00 a month from May 1979 until they shall have vacated the premises with interest at the legal rate; and to pay attorney's fees in the sum of P2,000.00 and P1,000.00 as other expenses of l itigation

and for them to pay the costs of the suit. Thereafter or on 17 May 1985, the corporation and Virgil io Dulay fi led an action against the presiding judge of the Metropolitan

Trial Court of Pasay City, Pabalan and Torres for the annulment of said decision with the Regional Trial Court of

Pasay in Civil Case 2880-P. Thereafter, the 3 cases were jointly tried and the trial court rendered a decision in favor

of Pabalan and Torres. Not satisfied with said decision, the corporation, et al. appealed to the Court of Appeals which rendered a decision on 23 October 1989, affirming the trial court decision. On 8 November 1989, the corporation,

et al. fi led a Motion for Reconsideration which was denied on 26 January 1990. The corporation, et al. fi led the petition for review on certiorari. During the pendency of

the petition, Torres died on 3 April 1991 as shown in his death certificate and named Torres-Pabalan Realty & Development Corporation as his heir in his holographic will dated 31 October 1986.

I: Whether the sale of the subject property between

spouses Veloso and Manuel Dulay has no binding effect on the corporation as Board Resolution 18 which authorized the sale of the subject property was resolved without the approval of all the members of the board of directors and

said Board Resolution was prepared by a person not designated by the corporation to be its secretary.

R: Section 101 of the Corporation Code of the Philippines provides that "When board meeting is unnecessary or

improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid i f: (1) Before or after such action is taken, written consent thereto is

signed by all the directors; or (2) All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or (3) The directors are accustomed to take informal action with the express

or implied acquiesce of all the stockholders; or (4) All the directors have express or implied knowledge of the action in question and none of them makes prompt objection

thereto in writing. If a directors' meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly fi les his written

objection with the secretary of the corporation after having knowledge thereof." Herein, the corporation is classified as a close corporation and consequently a board

resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a

close corporation is deemed ratified by the absent director unless the latter promptly fi les his written objection with the secretary of the corporation after

having knowledge of the meeting which, in this case, Virgil io Dulay failed to do. The corporation's claim that the sale of the subject property by its president, Manuel Dulay, to spouses Veloso is null and void as the alleged

Board Resolution 18 was passed without the knowledge

18 CORPORATION LAW


and consent of the other members of the board of directors cannot be sustained. Virgil io E. Dulay's

protestations of complete innocence to the effect that he never participated nor was even aware of any meeting or resolution authorizing the mortgage or sale of the subject premises is difficult to believe. On the contrary, he is very

much privy to the transactions involved. To begin with, he is an incorporator and one of the board of directors designated at the time of the organization of Manuel R.

Dulay Enterprises, Inc. In ordinary parlance, the said entity is loosely referred to as a "family corporation." The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the

individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, 3 children and their father whose name identifies their corporation.

Besides, the fact that Virgil io Dulay on 24 June 1975 executed an affidavit that he was a signatory witness to the execution of the post-dated Deed of Absolute Sale of

the subject property in favor of Torres indicates that he was aware of the transaction executed between his father and Torres and had, therefore, adequate knowledge about the sale of the subject property to Torres. Consequently,

the corporation is l iable for the act of Manuel Dulay and the sale of the subject property to Torres by Manuel Dulay is valid and binding.

NAGUIAT vs. NLRC

F: Sergio Naguiat was the president of Clark Field Taxi, Inc.

(CFTI) which supplied taxi services to Clark Air Base. At the same time, Naguiat was a director of the Sergio F. Naguiat Enterprises, Inc. (SFNEI), their family owned corporation along with CFTI.

In 1991, CFTI had to close due to great financial losses and lost business opportunity resulting from the phase-out of Clark Air Base brought about by the Mt. Pinatubo

eruption and the expiration of the RP-US military bases agreement.

CFTI then came up with an agreement with the drivers that the latter be entitled to a separation pay in the amount of P500.00 per every year of service. Most of the

drivers accepted this but some drivers did not. The drivers who refused to accept the separation pay offered by CFTI instead sued the latter before the labor arbiter.

The labor arbiter ruled in favor of the taxi drivers. The National Labor Relations Commission affirmed the labor

arbiter. It was established that when CFTI closed, it was in profitable standing and was not incurri ng losses. It ruled

that the drivers are entitled to $120.00 per every year of service subject to exchange rates prevailing that time.

The NLRC likewise ruled that SFNEI as well as CFTIs

president and vice president Sergio Naguiat and Antolin Naguiat should be held jointly and severally l iable to pay the drivers. The NLRC ruled that SFNEI actively managed CFTI and its business affairs hence it acted as the employer of the drivers.

ISSUE: Whether or not the ruling of the NLRC is correct.

HELD: It is only partially correct.

1. It is correct when it ruled that the Sergio Naguiat

is jointly and severally l iable to pay the drivers the award of separation pay in the amount so determined. As president of CFTI, Sergio Naguiat

is considered an employer of the dismiss ed employees who is therefore liable for the obligations of the corporation to its dismissed employees. Moreover, CFTI, being a close family

corporation, is l iable for corporate torts and stockholders thereof shall be personally liable for corporate torts unless the corporation has

obtained reasonably adequate liability insurance (par. 5, Section 100, Close Corporations, Corporation Code). Antolin Naguiat is absolved because there was insufficient evidence as

against him. 2. SFNEI is not l iable jointly or severally with CFTI.

SFNEI has nothing to do with CFTI. There is no

sufficient evidence to prove that it actively managed CFTI especially so when even the drivers testified that their employer is CFTI and that their payroll comes from CFTI. Further, SFNEI

was into trading business while CFTI was into taxi services.

SPECIAL CORPORATIONS

2 types:

1. Education corporations governed by

special law (education act) and general

provisions of the corporation code.

2. Religious corporations

Education corporations governed by special law

(education act) and general provisions of the

corporation code. These institutions of learning, once

recognized by the government as such are mandated

by law to be incorporated within 90 days under the

19 CORPORATION LAW


provisions of the corporation code, and must, comply

with the requirements and procedure laid down

thereunder. Their failure to do so will not immune the

education institution from suit as a corporation. The

SEC, however, shall not act on the incorporation of

any educational corporation unless the provisions of

S107 is complied with.

The governing board shall not be less that 5 but not

more than 15; in case of a non-stock educational

institution, the governing board must be divisible by 5

only. (5, 10, or 15 only)

Term of office can be 5 years unless otherwise

provided in the AOI. They shall classify themselves

that at least 1/5 of their membership shall expire

every year.

(Art. 14, sec. 4 of the Constitution) educational

institutions other than those established by religious

order, etc. shall be owned solely by Fil ipino citizens or

60% owned. The control or administration shall be

vested in Fil ipino citizen. A foreign cannot qualify and

act as a governing board in educational institution.

Except: educational institutions established by

religious order, mission board or charitable

institutions or those that are created for the

dependence of other countries, i .e international

school, brent school, etc.

Does this mean that an educational

institution may be formed as stock or NS

educational corporation? No. they can only

be organized under bp 232 as non-stock

corporations and those organized as stock

corporations are being urged to convert itself

as NS corporation.

RELIGIOUS INSTITUTION

1. Corporation sole (110) those formed or organized

by one single individual. But should be organized

by bishop, rabbi, priest or residing elder or head

of any religious denomination, sect or church.

Compare to corporation sole under Sec. 19.

Exception is the corporation sole of religious

institution

Under 112, it commences to exist and vested

with juridical personality upon the fi l ing of

the verified AOI with SEC.

The corporation sole has the same powers,

rights power and authority to acquire, hold

or own properties but no powers to dispose

or alienate its real properties. Unless it

obtains an order by application for leave

from RTC where the property is located for

purposes of disposition and encumberance.

If there is rules to dispose or alienate in the

rules of discipline provides for manner in

how it may dispose or alienated, no need for

court intervention.

2. Religious society organized by not less than 5

and not more than 15.

- The AOI of a corporation sole must be verified

setting forth the following:

1. The he is the chief archbishop, bishop, priest,

minister, rabbi or presiding elder of his

religious denomination, sec or church and

that he desires to become a corporation

sole;

2. That the rules, regulations and discipline of

his religious denomination, sect or church

are not inconsistent with his becoming a

corporation sole and do not forbid it

3. That as such chief archbishop, bishop, etc., is

charged with the administration of the

temporalities and the management of the

affairs, estate and properties of his religious

denomination, sect or church within his

territorial jurisdiction, describing such

territorial jurisdiction

4. The manner in which any vacancy occurring

in the office of the chief archbishop, bishop,

etc., is required to be fi l led, according to the

rules, regulations or discipline of the

religious denomination, sect or church to

which he belongs; and

5. The place where the principal office of the

corporation sole is to be established and

located, which place must be within the

Philippines

- Upon fi l ing the verified AOI along with the

documents required in Sec. 112 wi th the SEC

immediately becomes endowed with corporate

personality. This is an exception to the rule that a

corporation acquires juridical personality only

20 CORPORATION LAW


upon the issuance of a certificate of

incorporation by the said government agency.

- The registration of real property in the name of a

corporation sole will not vest unto the head

thereof ownership of the property which would

devolve upon the church or congregation

acquiring it.

Roman Catholic Apostolic Adm. Of Davao, Inc. v. Land

Registration Commission

Facts: On October 4, 1954, Mateo L. Rodis, a Fil ipino

citizen and resident of the City of Davao, executed a deed of sale of a parcel of land located in the same city in favor of the Roman Catholic Administrator of Davao, Inc., (RCAD) a corporation sole organized and existing in

accordance with Philippine laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent. The Commissioner of the LRC denied RCADs request to

register the parcel of land in its name, holding that in view of the provisions of Sections 1 and 5 of Article XIII of the Philippine Constitution, RCAD was not qualified to acquire

private lands in the Philippines in the absence of proof that at least 60 per centum of the capital, property, or assets of the Roman Catholic Adminis trator of Davao, Inc., was actually owned or controlled by Fil ipino citizens, there

being no question that the present incumbent of the corporation sole was a Canadian citizen.

The RCAD argued that a corporation sole, irrespective of the citizenship of i ts incumbent, is not prohibited or disqualified to acquire and hold real properties. The Corporation Law and the Canon Law are explicit in their

provisions that a corporation sole or "ordinary" is not the owner of the properties that he may acquire but merely the administrator thereof.

The Canon Law also specified that church temporalities are owned by the Catholic Church as a "moral person" or by the dioceses as minor "moral persons" with the

ordinary or bishop as administrator. And elaborating on the composition of the Catholic Church in the Philippines, RCAD explained that as a religious society or organization, it is made up of 2 elements or divisions the clergy or

religious members and the faithful or lay members.

The 1948 figures of the Bureau of Census and Statistics

showed that there were 277,551 Catholics in Davao and

aliens residing therein numbered 3,465. Even granting

that all these foreigners are Catholics, RCAD contends

that Fil ipino citizens form more than 80 per cent of the

entire Catholics population of that area.

Issue: Whether or not the LRC may be compelled to

register the land in RCADs name

Ruling: YES. Lands held in trust for specific purposes may be subject of registration, and the capacity of a corporation sole, l ike RCAD, to register lands belonging to

it is acknowledged, and title thereto may be issued in its name. The bishops or archbishops, as the case may be, as corporation's sole are merely administrators of the church

properties that come to their possession, and which they hold in trust for the church. Through this legal fiction, church properties acquired by the incumbent of a corporation sole pass, by operation of law, upon his death

not to his personal heirs but to his successor in office.Although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in

different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to such artificial being

under the laws of that country, separate and distinct from the personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with the latter

which are governed by the Canon Law or their rules and regulations. When the speci

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