11. Right of Stockholders and Members - 6

CORPORATION LAW REVIEWER (2013-‐2014)

ATTY. JOSE MARIA G. HOFILEÑA

RIGHT OF STOCKHOLDERS AND MEMBERS

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I. What Does “Share” Represent? •

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While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-‐owner of corporate property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). o

“As early as the case of Fisher v. Trinidad, the Court already declared that “[t]he distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well-‐settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts.” Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005).

Atty. Hofileña à Shares of stock is intangible personal property since the shares represent merely an interest in the company.

The registration of shares in a stockholder’s name, the issuance of stock certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).

A. Sources of Shares: 1. Shares acquired from the company itself à these are shares that are sold from the unissued shares of the company. 2. Shares acquired from a stockholder of the company à these are shares sold by a stockholder of the company to another person who may or may not be an existing stockholder. II. Preemptive Rights (Section 39) Section 39. Power to deny pre-‐emptive right. All stockholders of a stock corporation shall enjoy pre-‐emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-‐emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-‐thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)



A. Pre-‐emptive rights defined •

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Atty. Hofileña à Before Mr. X can become a member of the corporation, the existing stockholders must first be allowed to buy whatever stocks the company desires to issue. Where not all the members of the corporation decide not to invest further, the remainder may be offered to Mr. X. o The recognition of the pre-‐emptive right is intended to protect both the proprietary and voting rights of a stockholder in a corporation. The proportionate

when no specific grant or recognition of such right is provided for in statutory law.2 •

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Pre-‐emptive right under Section 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. Although it can validly be withdrawn, it cannot be done in breach of fiduciary duties such as to perpetuate control over the corporation. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).

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SEC Opinion, 11 August 1997, XXXII SEC QUARTERLY BULLETIN 15 (No. 2, Dec. 1997); SEC EAD Memo, dated 29 July 1997.

Atty. Hofileña à Can pre-‐emptive rights be taken away? YES. The right may be denied by the articles of incorporation or by the by-‐laws.

B. Extent of Coverage of Pre-‐emptive Rights •

interests of a stockholder in a corporation determines his proportionate power to vote in corporate affairs when the law gives the stockholders a right to affirm or deny board actions. The proportionate interest of the stockholder to the outstanding capital stock also determines his proportionate share in the dividends declared by the corporation, as well as his proportionate right to the remaining assets of the corporation upon dissolution of the corporation. 1

The pre-‐emptive rights of stockholders in a corporation are not statutory rights, but are common law rights, and exist even

Under the current provision Section 39 of the Corporation Code, the pre-‐emptive right of stockholders is recognized to exist to "all issues or disposition of shares of any class." The use of the terms "issues or disposition" clearly provides that the pre-‐ emptive right should now be available even to issues from the existing unsubscribed portion of the authorized capital stock when the board decides to open them for subscription, and even to re-‐issuance or sale of treasury shares of the corporation.3

C. Exceptions to Pre-‐emptive Rights •

3 exceptions provided in Section 39: (1) debt, (2) in compliance with the required public issuance, and (3) shares to be issued, with approval of the 2/3 of the stockholders, in exchange for property for corporate purposes.

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Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.




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The SEC has ruled that a majority vote of stockholders waiving the pre-‐emptive right in a meeting called for the purpose would not be valid and binding on the individual stockholders since the pre-‐emptive right is a personal right of a stockholder, and accordingly, the waiver should be given individually by the stockholders concerned or he may authorize somebody to execute the same for and in his behalf by way of a special power of attorney.1

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between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35) •

Issue v. Disposition o o

of the corporation – they are owned by the stockholders of record. The corporation whose shares of stock are the subject of transfer transaction (through sale, assignment, donation, or any other mode of conveyance) need not be a part to transaction to be valid; however, to bind the corporation as well as third parties, it is necessary that the transfer is recorded in the books of the corporation. Forest Hills Golf & Country Club v. Vertex

“Issue” à refers to new shares issued to stockholders. “Disposition” à treasury shares owned by the company may be “disposed” by the company by selling such to the stockholders.

III. Right to Transfer or Dispose of Shareholdings (Section 63) Section 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-‐ laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-‐in-‐fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as

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SEC Opinion, 6 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 10 (No. 2, June 1995); SEC Opinion, 12 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 14 (No.2, June 1995); SEC Opinion, 1 October 1981.

Shares of stock of a corporation are not owned or are the assets

Sales and Trading, Inc., 692 SCRA 706 (2013). A. Restriction on Transfers: •

A contractual undertaking on restriction of transfer of shares that has a reasonable business purpose and limited in coverage is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).

Lambert v. Fox Facts: John R. Edgar & Co found itself in such condition financially that its creditors, including Lambert and Fox, agreed to take over the business, incorporate it and accept stock in payment of their respective credits. Eventually, Lambert and Fox became the two largest




terms and considerations which are reasonable, and only when the corporation or the other stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third parties. § Before you can sell your shares you must offer

stockholders in the new corporation, John R. Edgar & Co., Incorporated. A few days after incorporation, Lambert and Fox entered into an agreement where they mutually agreed not to sell, transfer, or otherwise dispose of any part of their shareholdings until after one year from the date of the agreement. A violation thereof would be liable for breach of contract and damages. Fox sold his stock to one of the corporation’s competitors, E.C. McCullough & Co. Issue: Whether or not Fox is liable. Held: YES. Fox contends that the stipulation in the contract suspending the power to sell the stock is an illegal stipulation, is in restraint of trade and offends public policy. The Court sees otherwise. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. But the Court also said that the mentioned doctrine did not mean to cover the suspension of “the right of alienation of stock, limiting ourselves to the statements that the suspension in this particular case is legal and valid.” Doctrine: See above. Requisites for valid restriction on transfer: •

Reasonableness

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Time-‐boundedness

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Valid and Binding

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"Right of first refusal" à which would provide that a stockholder who may wish to sell or assign his shares must first offer the shares to the corporation or to the other existing stockholders of the corporation, under


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them first to the corporation or existing shareholders “Right of first option" à grants to the corporation the right to buy the shares at a fixed price, and would be valid if the terms and consideration are reasonable. "Buy-‐back agreement" à exists in situations when shares are given or assigned to officers or employees under the condition that should they resign or be terminated from employment, the corporation shall be granted the right to buy-‐back the shares. Such stipulations are valid so long as the terms and the consideration are reasonable.

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Void o

"Right of prior consent" à provision would require that any stockholder who may wish to sell, assign or dispose of his shares in the corporation may do so only when he obtains the consent of the board of directors or other stockholders of the corporation. Such stipulations are void since they unduly restrain the exercise of the stockholder of his proprietary interest in the shares, as illustrated in a situation where a stockholder cannot dispose of his shares because of failure to obtain such consent.



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Before you can sell your shares, you must first get the approval of the shareholders. à Atty. Hofileña states that consent rights are not valid because all the person, whose consent you need, has to do is dissent. This is like making the share non-‐transferable.

If the provision states that you can only sell upon the approval of a third person (who may or may not even be a member of the corporation) An absolute prohibition to transfer shares à even when contained in the articles of incorporation, would be void since it would violate the provision of Section 63 of the §

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Corporation Code which treats of shares of stock as personal property of which the stockholder has the inherent right to dispose as incident of his ownership.1 1. RIGHT OF REFUSAL: •

The indication on the face of the stock certificate that it is “Nontransferable” alone does not compel the corporation to buy back the shares from the stockholder, and held that “in the absence of a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude that it would be unjust and unreasonable to compel the corporation to comply with a non-‐existent or imaginary obligation.” Padgett v.

Padgett v. Babcock & Templeton, Inc. Facts: Padgett was an employee of Babcock & Templeton, Inc. (BTI) and bought 35 shares of the corporation. He was given 9 additional shares as Christmas Bonuses. The Certificates of Stock bore the words “Non-‐ transferable” on their faces. Before he left BTI, Padgett proposed to the President that BTI buy his 44 shares at par value plus interest or that he be authorized to sell them to other people. Issue: Whether or not the stocks are transferable. Held: YES. The court held that the notation be held null and void because it is a limitation on the right of ownership and a restraint on trade. Doctrine: Any restriction on a stockholder’s right to dispose of his shares must be construed strictly. Any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable.

Babcock & Templeton, Inc., 59 Phil. 232 (1933).

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SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3, Sept. 1995).


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Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).



Fleishcher v. Botica Nolasco Facts: Manuel Gonzales was the original owner of five shares of stock of Botica Nolasco Inc. Gonzales assigned and delivered said five shares to

be transferred as therein provided. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law.

Henry Fleischer to repay his debt to the latter. Doctor Miciano, who was the secretary-‐treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock invoking Article 12 of the by-‐laws, which states that the corporation had a preferential right to buy from Manuel Gonzalez said shares. Fleischer refused. Thereafter, Fleischer requested Doctor Miciano to register said shares in his name but the latter refused to do so, saying that it would be in contravention of the by-‐laws of the corporation. Issue: Whether or not Article 12 of the by-‐laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act. 1459) Held: YES. Section 13, paragraph 7 of the Corporation Law, empowers a corporation to make by-‐laws, not inconsistent with any existing law, for the transferring of its stock. Section 35 of the same specifically provides that the shares of stock ”are personal property and may be transferred by delivery of the certificate indorsed by the owner, etc.” A stock corporation in adopting a by-‐law governing transfer of shares of stock should take into consideration the specific provisions of Section 13 and 35 of The Corporation Law, and said by-‐law should be made to harmonize with said provisions. It should not be inconsistent therewith. Doctrine: Section 35 defines the nature, character and transferability of shares of stock. Under said section they are personal property and may


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The only limitation imposed by Section 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-‐laws, or the act of its officers, cannot create restrictions in stock transfers, because “Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-‐laws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation.” Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).

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The “right of first refusal” is primarily an attribute of ownership. Conversely, a waiver thereof is an act of ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning its exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988 (unrep.)

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The agreement of co-‐shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected by the capacity of the corporation to own land—that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that



the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). •

to preserve and protect itself by excluding competitors or hostile interests. The provision is made obviously to prevent a stockholder from creating an opportunity to take advantage of the information which he may have acquired as such to promote his individual interest to the prejudice of the corporation and other stockholders. The stockholders have a

In a landholding corporation which by constitutional mandate is

fiduciary relation with their corporation for the collective benefit of the stockholders. Any person who intends to buy stock in a corporation does so with the knowledge that its affairs are governed by the articles of incorporation and by-‐ laws; and with such knowledge, the stockholder may be considered to have consented to the disqualification to engage in the same line of business and thus, it cannot be said that the

limited to 40% foreign equity, and where there exists a right of first refusal agreement between the co-‐shareholders, the fact that the corporations owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). 2. Restraint of Trade: An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of

stockholder’s right is infringed. 2 •

trade and is obligatory on the parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918). •

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The SEC, as a matter of policy, allows restrictions on transfer of shares in the articles of incorporation if the same is necessary and convenient to the attainment of the objective for which the

competition clause may be properly provided for as a condition for being a stockholder in the articles of incorporation or by-‐ laws of the corporation.1

company was incorporated, unless palpably unreasonable under the circumstances. The underlying test as to whether the restriction are valid and enforceable is whether the restriction is sufficiently reasonable as to justify the restriction overriding the general policy against restraint on alienation of personal property. The SEC has ruled that the period of one month is deemed reasonably sufficient for the existing stockholder of

The SEC ruled that such disqualification provision is a valid and

corporation within which to signify their desire to buy the

Non-‐Competition Clause: The SEC has opined that a non-‐

reasonable exercise of corporate authority since a corporation, under the principle of self-‐preservation, has the inherent right

SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June, 1999).

SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June, 1999).

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shares of stock being offered for sale by any stockholder before the same may be offered to third parties.1 B. Remedy If Registration Refused: •

Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the corporate books when the petitioner is not the registered stockholder nor does he hold a power of attorney from the latter. This is under the general rule that as between the corporation one the one hand and its shareholders on other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911).2

the Bryan-‐Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made through the medium of the mandamus of this court. Issue: Whether or not a writ of mandamus will lie under the circumstances of the case to allow the transfer of shares. Held: NO. Petitioner did not have the right to demand the transfer since he was not the stockholder of record. Furthermore, even the Bryan-‐ Landon Company did not demand from Visayan Electric Company the transfer of said shares. Neither did it give by way of a special power of attorney to petitioner the authority to effect such a transfer. Hence, there is no clear and legal obligation upon the respondent that will justify the issuance of a writ to compel the latter to perform a transfer. Doctrine: See above.

Hager v. Bryan

1. Period to Enforce. – Considering that the law does not prescribe

Facts: Hager files a petition for mandamus to compel the company secretary to transfer certain shares of stock of the Visayan Electric Company to a Mr. Levering. The company had refused to do so because

a period within which the registration of purchase of shares should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer.” Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002). o When all the requirements have been complied with, the duty of the corporate secretary to record the

the stocks in question were in the name of Bryan-‐Landon Company. There was no allegation that Hager holds any power of attorney from

transfer in the books of the corporation is ministerial.

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SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3, September 1995). 2 Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).


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A stipulation on the stock certificate that any assignment would not be binding on the corporation unless registered in the



corporate books as required under the by-‐laws and without providing when registration should be made, would mean that the cause of action and the determination of prescription period would begin only when demand for registration is made and not at the time of the assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958). •

The claim for damages of what the shares could have sold had the demand for their registration in the name of the buyer been complied with is deemed to be speculative damage and non-‐ recoverable. Batong Buhay Gold Mines v. CA, 147 SCRA 4 (1987).

Note on Sale of Shares: •

The Corporate Secretary can be held liable for recorded transfers whose tax clearance have not been paid.

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It is only when all these things have been complied that you can really compel the corporate secretary to record your transaction in accordance with his or her ministerial function.

Legal Advice for the transferee: •

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Section 43. Power to declare dividends. The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-‐thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-‐in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial

transferee will be entitled to the transfer of dividends which the transferor may receive from the corporation during the period after the sale but before the name of the transferee is recorded in the books of the corporation.

institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)

When there are board of meetings, you can ask the transferor

To get a declaration of trust from the transferor so that the

to give you a proxy who will vote for you in the meeting. IV. Rights to Dividends (Section 43)


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The term “dividend” in its technical sense and ordinary acceptation is that part of portion of the profits of the enterprise which the corporation, by its governing agents, sets



apart for ratable division among the holders of it capital stock— it is a payment, and the right thereto is an incident of ownership of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). •

Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Section 43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than two-‐thirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).

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When the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic by way of declaring the Republic to be the rightful owner of said shares, that necessarily included

or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-‐par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board

V. Right to Vote and to Attend Meetings (Sections 6 and 89)

of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-‐assessable and the holder of such shares shall not be

Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes

liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a

the reconveyance to the Republic of the dividends and interest accruing thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).




consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-‐par value shares shall be treated as capital and shall not be available for distribution as dividends.

7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Section 89. Right to vote. The right of the members of any class or classes to vote may be

Where the articles of incorporation provide for non-‐voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-‐laws;

limited, broadened or denied to the extent specified in the articles of incorporation or the by-‐laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-‐ laws, a member may vote by proxy in accordance with the provisions of this Code. (n)

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock;

Voting by mail or other similar means by members of non-‐stock corporations may be authorized by the by-‐laws of non-‐stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. A. Who has the right to vote

6. Merger or consolidation of the corporation with another corporation or other corporations;


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General Rule: The person registered in the books of the company has owner of the shares is one who is entitled to vote as shareholder.



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Since the appointment of proxy is purely personal, and the right to vote is inseparable from the right of ownership of stock without the owner’s consent, and therefore a proxy to vote stock, to be valid, must have been given by the person who is the legal owner of the stock and entitled to vote the same at the time it is to

corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004). •

stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil.

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be voted. •

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code. Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation. These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean shares that have passed from the corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216 (2006). o One of the rights of a stockholder is the right to participate in the control and management of the

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SEC Opinion, 3 December 1993, XXVIII SEC QUARTERLY BULLETIN 5 (No. 2, June 1994).


Until challenged successfully in proper proceedings, a registered

707 (1933). •

The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). o The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-‐gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-‐gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court. Nevertheless, the foregoing "two-‐tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public



interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-‐tiered" one, applies. Republic v. COCOFED, 372 SCRA 462 (2001); Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006). B. Instances When Stockholders Entitled to Vote: 1. Amendment of articles of incorporation (Section 16) 2. Election of directors and trustees (Section 24) 3. Investment in another business or corporation (Sections 36 and 4. 5. 6. 7. 8.

42) Increase and Decrease of capital stock (Section 38) Incurring, or increasing bonded indebtedness (Section 38) Sale, disposition or encumbrance of all or substantially all of the corporate assets (Section 40) Declaration of stock dividends (Section 43). Management contracts (Section 44)

necessary, unless there is a written proxy, signed by all the co-‐owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. (n) D. Pledgor, Mortgagors and Administrators (Section 55) Section. 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. (27a) •

9. Adoption, amendment and repeal of by-‐laws (Section 48). 10. Fixing of consideration of no par value shares (Section 62) 11. Merger and consolidation (Section 72)

registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).

C. Joint Ownership (Section 56) Section 56. Voting in case of joint ownership of stock. In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-‐owners shall be


When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does not become the owner thereof simply by the failure of the

•

Although the Rules of Court, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do not prohibit the heirs from representing the



deceased. When no administrator has been appointed, there is all the more reason to recognize the heirs as the proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).

o

E. Treasury Share No Voting Rights (Section 57)

or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner for the cause provided for in the By-‐Law of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11 remaining members, the

Section 57. Voting right for treasury shares. Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n) •

Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA 216 (2006).

quorum in the present case should be 6. therefore, there being a quorum, the annual members’ meeting, conducted with six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006).

F. Voting Rights of Members •

In stock corporation, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent

Under the By-‐Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of the incorporation

G. Conduct of Stockholders' Meetings: 1. Kinds and Requirements of Meetings (Sections 49 and 50);

are held by the administrator or executor. On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-‐transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not “dead members” are entitled to exercise their voting rights (through their executor or administrator) depends

on those articles of incorporation or by-‐laws. Tan v. Sycip, 499 SCRA 216 (2006).

on a date fixed in the by-‐laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees:

Section 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Section 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually




Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-‐laws. Special meetings of stockholders or members shall be held at any time

2. Place and Time of Meeting (Sections 51 and 93); Section 51. Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the

deemed necessary or as provided in the by-‐laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-‐laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein.

Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-‐laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or

All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) Section 93. Place of meetings.

members present have been chosen one of their number as presiding officer. (24, 26)

The by-‐laws may provide that the members of a non-‐stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n)

•

Regular Meetings o o

•

Regular meetings may (1) be provided in the by-‐laws or (2) scheduled by the board in April. The by-‐laws may provide for more than one meeting annually – there is no prohibition to this effect.

Special Meetings o

Held at any time it is called.

Stock Corporation Principal office or city where it is located


Non-‐Stock Corporation Any place in the Philippines, even if it is outside the city or place of



the principal office 3. Quorum (Section 52) Section 52. Quorum in meetings. Unless otherwise provided for in this Code or in the by-‐ laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-‐stock corporations. (n)

Section 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n)

• •

proxies, while proxy validation concerns the validation of such secured and submitted proxies. It is possible that an intra-‐ corporate controversy may animate a disgruntled shareholder to complain to the Securities and Exchange Commission (SEC) a corporation’s violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its

Quorum is based on the totality of the shares which have been subscribed and issued whether it be founders’ shares or common shares. To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. The stock and transfer book cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).

VI. Contracts and Agreement Affecting Shareholdings A. Proxy (Section 58)


Proxy solicitation involves the securing and submission of

investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis. GSIS v. Court of Appeals, 585 SCRA 679 (2009). •

Nature of Proxy Relationship: A proxy is a special form of agency and governed by the Law on Agency. Consequently, being a strictly fiduciary relation, a proxy is essentially revocable in nature; and any attempt or stipulation to render it irrevocably would be to no avail. Generally, proxies, even those with irrevocable terms, have always been considered as revocable, unless coupled with an interest, and their revocation may be by formal notice, orally, or by conduct as by the appearance of the stockholder or member giving the proxy, or the issuance of a subsequent proxy, or the sale of shares.



The SEC has appropriately observed that a person acting as proxy for a stockholder is in the eyes of the law, the latter’s agent and as such, a mere fiduciary who has the duty of acting in strict accord with requirements of a fiduciary relation; and that accordingly, the proxy holder must act in accordance with the instructions given to

it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the Securities and Exchange Commission (SEC) to regulate proxies remains extant and could very well be

him/her by the stockholder and any violation of such fiduciary duty shall be governed by the pertinent laws on Agency, not by the Corporation Code.1 1. Requisites for Valid Proxy: a. The proxy shall in writing b. Signed by the stockholder or member c. Filed before the scheduled meeting with the corporate

exercised when stockholders vote on matters other than the election of directors. GSIS v. Court of Appeals, 585 SCRA 679 (2009).

o

secretary. 2. Who May be Appointed Proxy: Section 58 of the Corporation Code imposes no limitation as to the persons who may be appointed as proxy and by-‐law provisions restricting the right of a stockholder to appoint a proxy would be void. However, in the case of non-‐stock corporation, Section 89 of the Corporation Code the articles of incorporation or by-‐laws may restrict the right of a member to vote by proxy. The SEC has opined that under Section 89 the right of members to vote by proxy may be denied entirely by appropriate provisions in the articles of incorporation or by-‐laws of a non-‐stock corporation.2 •

The SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as

1

SEC Opinion, 15 July 197, XXXII SEC QUARTERLY BULLETIN 4 (No. 2, Dec. 1997). SEC Opinion, 20 September 1994, XXIX SEC QUARTERLY BULLETIN 20 (No.1, March 1995). 2

B. Voting Trust Agreements (Section 59) Section 59. Voting trusts. One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made




pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock.

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) •

the transferor transfers the right to votes, etc. but not the right to own, the transferor remains to be the owner. A transfer of the right to own the shares amounts to a disposition/sale of the shares.

The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code.

o

Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors.

Atty. Hofileña à where, pursuant to a voting trust agreement,

o •

Transferor à transfers the certificates of stock. § Even where the transferor holds only the voting trust certificate, he may sell his shares. What he delivers to the buyer is the VTC. This kind of disposition does not terminate the rights of the trustee. Transferee/Trustee à gives a voting trust certificate

A VTA separates the voting rights and other rights covered of the stock from other attributes of ownership, intended to be irrevocable for a definite period of time and the purpose of which is to give to the trustee to acquire voting control of the corporation. Lee v. CA, 205 SCRA 752 (1992).

Lee v. Court of Appeals Facts: Herein petitioners were served summons in accordance with a third party complaint filed against Alfa Integrated Textile Mills of which Lee and Lacdao was president and vice president respectively. They claim that the summons for Alfa was erroneously served upon them considering that the management of Alfa had been transferred to Development Bank of the Philippines. They claim that the voting trust




agreement between Alfa and DBP vests all management and control of Alfa to the DBP. DBP claimed that it was not authorized to receive summons on behalf of Alfa since DBP had not taken over the company which has a separate and distinct corporate personality and existence.

voting rights of a stockholder from his other rights. This may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other. With the omission of the phrase "in his own right" [in the new corporation code] the election of trustees and other persons

Issue: Whether or not the 5-‐year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to Lee and Lacdao as beneficial owners pursuant to the 6th paragraph of Section 59 of the new corporation code Held: NO. It is manifestly clear from the terms of the voting trust

who in fact are not the beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized. Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation.

agreement between ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. Had the five-‐year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization Trust (APT) as attested to in a Certification dated 24 January 1989 of the Vice

Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).

President of the DBP's Special Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled accounts, which included ALFA's assets pursuant to a management agreement by and between the DBP and APT. Hence, there is evidence on record that at the time of the service of summons on ALFA through Lee and Lacdao on 21 August 1987, the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP. Doctrine: A voting trust agreement results in the separation of the

• •

The trustor has a right to terminate the VTA for breach thereof. Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).

C. Pooling Agreements or Shareholders’ Agreements (Section 100) Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation.




2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. VII. Rights to Inspect and Copy Corporate Records A. Basis of Right

•

The stockholder’s right of inspection of corporate books and records is based on his ownership of the assets and property of the corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership or a quasi-‐ownership. The right of inspection is predicated upon the necessity of self-‐protection on the part of the stockholder. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979). Gokongwei, Jr. v. Securities and Exchange Commission

Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a president and stockholder of Robina Corp. and Consolidated Foods Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice Cream, Poultry and Hog Feeds and many more), filed a petition for declaration of nullity of amended by-‐laws, cancellation of certificate of filing of the amended-‐by laws, injunction and damages against the majority of the members of the Board of Directors of the SMC based on the following grounds: •

Corporations have no inherent power to disqualify a stockholder from being elected as director depriving him of his vested right because he is an officer of a competitor company.

•

The corporation has been investing corporate funds in other corporations and business outside of the primary purpose of the

corporation (This gave rise to the second issue) The second issue arose when, Gokongwei filed a motion to inspect the documents of San Miguel International Inc. (SMI) a subsidiary of, and wholly controlled by, SMC. Gokongwei’S motion was denied by the SECTION When SMC invested in SMI, according to Gokongwei, this was




the demand is made in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).

against the primary purpose clause of SMC, which is a violation of the Corporation Law. Issue: Whether or not the SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San Miguel

•

Summary of Rulings: The right to inspect corporate books and records: o Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919). o Cannot be denied on the ground that the director is on

International Inc., a fully owned subsidiary of San Miguel Corporation Held: YES. Considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of Gokongwei as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation’s possession and control. Doctrine: See above.

o

•

The stockholder’s right of inspection of the corporation’s books

o

and records is based upon his ownership of shares in the corporation and the necessity for self-‐protection. Puno v. Puno Enterprises, 599 SCRA 585 (2009). B. Limitations on Right •

o

The only express limitations on the right of inspection under Section 74 of Corporation Code are: (a) it should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records; and (c)

unfriendly terms with the officers of the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Cannot be limited to a period of ten days shortly prior to the annual stockholders’ meeting, as such would be an unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.” Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).

C. Specified Records (Sections 74, 75 and 141)




Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in

Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to

which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and

examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock

nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director,

and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-‐laws may prescribe. The stock and transfer book shall be kept in the principal office of the

trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director,

corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be

trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this

fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making




transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; B. P. No. 268.) Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-‐up capital of the corporation is less than

may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission. (n) •

business transactions" covers practically all matters of import in a profit-‐seeking corporation. The corporation is in duty bound to expose its records and book for inspection by the shareholders, but it is not always bound to show all of them under all circumstances.1 Summary of Doctrinal Rulings on Right to Inspect The right to inspect by a stockholder, member, director or trustee is subject to the following doctrinal rulings: a. The demand for inspection should cover only reasonable hours on business days; b. The stockholder, member, director or trustees demanding the exercise of the right is one who has not improperly used any information secured through any previous examination of the records of the corporation or any other corporation; c. The demand must be accompanied with statement of the purpose of the inspection, which must show good faith or

P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n) Section 141. Annual report or corporations. Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission

The section is worded in broad language, for "record of all

legitimate purpose; and d. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.




the same. D. Remedies If Denied: Mandamus •

In contrasting the language of the present Corporation Code from the old Corporation Law, the law now provides for express limitation on the right to inspect and now requires as a condition for such examination that one requesting it must not have been guilty of using improperly any information secured through a prior examination, an that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. The stockholder seeking to exercise the right of inspection must set forth the reasons and the purposes for which he desires such inspection. Gonzales v. PNB, 122 SCRA 489 (1983).

•

Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. (190 1/2 a) •

the penal provision under Section 144 of the Corporation Code may be applied in a case of violation of a stockholder or member’s right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). 1. Who May Be Held Liable: The corporate officer who has in his custody the books and paper sought to be inspected, and

Burden of proof to show that examination is for improper purpose is on the part of the corporation. Republic v. Sandiganbayan, 199 SCRA 39 (1999).

refuses to allow inspection. If the refusal is pursuant to a resolution or order of the board of directors or trustees, then the directors or trustees who voted for such refusal shall be held liable.1 2. Defenses Available to Director, Trustee or Officer Held Liable: The following defenses are expressly recognized under Section 74 as defenses available to a director, trustee or officer for

E. Criminal Sanction under Section 144 Section 144. Violations of the Code. Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission:

In the recent case of Ang-‐Abaya v. Ang, 573 SCRA 129 (2008), the Court had the occasion to enumerate the requisites before

refusing to allow a stockholder or member to exercise his right to inspect corporate records: a. The person demanding to examine has improperly used any information secured through any prior examination

1





of the records or minutes of such corporation or for any other corporation; or b. The one requesting to inspect was not taking in good faith or for a legitimate purpose in making his demand. •

o •

Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same — where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the

Exception: o o

In a criminal complaint for violation of Section 74 of the

Atty. Hofileña à take notice of the type of documents The law requires the findings to be made public The findings must be presented as evidence before a court

VIII. Appraisal Right (Sections 81 to 86 and 105) Section 81. Instances of appraisal right.

Section 142. Confidential nature of examination results.

Any stockholder 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 any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to

All interrogatories propounded by the Securities and Exchange Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other official authorized by law to make an examination of the operations, books and records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be

those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and

presented as evidence before any court. (n)

3. In case of merger or consolidation. (n) Section 82. How right is exercised. The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the

shareholder and placed on the corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). F. Confidential Nature of SEC Examinations (Section 142)

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General Rule: The SEC has the authority to inspect all documents submitted to them, but they must keep their findings confidential. As such the public has no entitlement to the findings.




date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of

except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n)

stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be

Section 84. When right to payment ceases. No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission

determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to

determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. (n) Section 85. Who bears costs of appraisal.

cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) Section 83. Effect of demand and termination of right. From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation,

The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)

all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code,

Section 86. Notation on certificates; rights of transferee. Within ten (10) days after demanding payment for his shares, a




shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code. Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the

dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n) Section 105. Withdrawal of stockholder or dissolution of corporation. In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written

purpose of enabling the dissenting stockholder to, have his interest purchased and to retire from the corporation. Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010). •

Appraisal rights ensure the stockholder a way out in certain instances. o Even in the middle of the process of appraisal rights, a stockholder can decide to just sell his shares to another person rather than to the company.

B. Who is Entitled to Exercise •

A prejudiced stockholder may exercise such right. A prejudiced stockholder is one who dissented in the meeting where the proposal or proposed amendment was approved. The stockholder must have voted against the corporation transaction in order to avail of the appraisal right. Mere silence

petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.

or abstention does not entitle such stockholder to the exercise of the right.1 •

The stockholder must be present at the meeting and vote therein to be able to avail of his appraisal rights. o

A. Nature of Appraisal Right •

A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her

Where appraisal rights were availed of on the ground of extension of corporate term, and after which such

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extension was abandoned, the right of the stockholder to exercise appraisal rights ceases also.

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C. Instances When Right is Exercisable: •

of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation is lodged in the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998).

Sections 37, 42 and 81 of the Corporation Code enumerate.

D. Denial of Appraisal Right: May the right be denied in the articles of incorporation? Is a contractual stipulation in the articles of incorporation waiving the appraisal right void? Rights granted by law can be waived individually, unless such waiver would contravene public

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intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation. However, the corporation is the real party in interest in a derivative suit and the suing stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA 645 (2009).

IX. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra-‐ Corporate Controversies) Derivative suits are governed by a special set of procedural rules known as the “Interim Rules of Procedure Governing Intra-‐ Corporate Controversies under Republic Act No. 8799” (A.M. No. 01-‐2-‐04-‐SC; effective 01 April 2001). Section 1, Rule 1 thereof expressly lists derivative suits among the cases covered by it. Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009). A. Derivative Suit Must Be Effected When Board Cannot Properly Exercise Business Judgment


While questions of policy and management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the Board of Directors; yet where the corporate directors are guilty of breach of trust — not of mere error of judgment or abuse of discretion — and

policy. Therefore, when it is waived without the dissenting stockholder's consent, such as when it is defeated by provisions in the articles of incorporation, then it will be violative of public policy. But when an individual, who is already a stockholder, who is not constrained to waive because he is already a stockholder enters into a contract knowingly, intelligently waiving his appraisal right, such waiver is not void.

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General Rule: In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf

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Under Section 36 of the Corporation Code, in relation to Section 23, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation



as the real party in interest. Chua v. Court of Appeals, 443 SCRA 259 (2004).1

is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

Chua v. Court of Appeals

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Issue: Whether or not the criminal complaint is in the nature of a derivative suit Held: NO. It was not stated that the criminal complaint was filed by Hao in behalf and for the benefit of the corporation. Doctrine: In a derivative suit, the plaintiff must allege that he is suing in

allow the stockholders/member to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005).2 •

suing stockholder is regarded as the nominal party, with the corporation as the party in interest. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).

B. Nature of the Power to File Derivative Suit A stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA

C. Requisites of Derivative Suit •

In the case of, we enumerated the foregoing requisites before a stockholder can file a derivative suit: (a) the party bringing suit should be a shareholder during the time of the act or transaction complained of, the number of shares not being material; (b) the party has tried to exhaust intra-‐corporate remedies, relief, but the latter has failed or refused to heed his

588 (2009). •

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation-‐in such actions, the

behalf and for the benefit of the corporation and all other stockholders who may wish to join him. The corporation must be impleaded as a party and must be served with process.

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The whole purpose of the law authorizing a derivative suit is to

A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It

plea; and (c) the cause of action actually devolves on the corporation; the wrongdoing or harm having been or being

Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).

Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).

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caused to the corporation and not to the particular stockholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).1 •

Section 1, Rule 8 of the Interim Rules of Procedure Governing

the institution by a stockholder of a derivative suit. Yu v. Yukayguan, 589 SCRA 588 (2009). D. Who May Bring the Suit

Intra-‐Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit: A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at

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the events constituting the cause of action and at the time of the filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911); Gochan v. Young, 354 SCRA 207 (2001). o Atty. Hofileña à Once you file an action, any disposition of your shares may only be made under permission of

the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-‐laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. Yu v. Yukayguan,

the Court. •

The fact that it is a family corporation does not in any way exempt a stockholder from complying with the clear requirements and formalities of the rules for filing derivative suit — there is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-‐a-‐vis other types of corporations, in

Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-‐in-‐interest. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).

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Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007)Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009). 2 Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. Chua v. Court of Appeals, 443 SCRA 259 (2004).3 o Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner

589 SCRA 588 (2009).2 •

The relators must be stockholders both at time of occurrence of

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A minority stockholder and member of the board has no power or authority to sue on the corporation’s behalf. Nor can we

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Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).




uphold this as a derivative suit, since it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the

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a derivative suit. The Court held that where the director of the corporation permitted the fraudulent transaction to go unpunished by allowing the importation of finished textile instead of raw cotton for the textile mill, and nothing appears to have been done to remove the erring purchasing managers, the appointment of receiver may have been thought of by the court so that the dollar allocation for raw material may be reviewed and the textile mill placed on an operating basis, because it is

foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009). o A minority stockholder can file a derivative suit against the president for diverting corporate income to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991). •

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possible that a receiver in which the Central Bank may have confidence is appointed, the dollar allocation for raw material may be restored.

The status of heirs as co-‐owners of shares of stocks prior to the partition of the decedent’s estate does not immediately and necessarily make them stockholders of the corporation – unless and until there is compliance with the Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).

Violation of Laws à Reyes v. Tan 3 SCRA 198 (1961) also gave a valid basis the violation of laws allowed by the board as basis for

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Wastage and Diversion of Corporate Funds à It may be considered a wastage or diversion of corporate funds to hire officers and appoint directors whose main purpose is to shield the chairman from criminal prosecution.

F. Exhaustion of Intra-‐Corporate Remedies: •

party has tried to exhaust inta-‐corporate remedies, i.e., has made a demand on the Board of Directors for the appropriate relief, but the latter has failed to or refused to heed his plea. Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937).

A lawyer engaged as counsel for a corporation cannot represent

members of the same corporation’s board of directors in a derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is prohibited by the Code of Professional Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003). E. Grounds for Derivative Suit


A condition precedent to the filing of a derivative suit is that the

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A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed without prior demand upon the Board of Directors where the legality of the



constitution of the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993). •

benefit or interest of the corporation. When the relief prayed for do not pertain to the corporation, then it is an improper derivative suit. Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453 (2012), 1 citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.

Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his grievances within the corporation, except when such remedy is complete control of the person against whom the suit is being filed. The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have been useless and an exercise in futility. Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 557 (2009).

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pertaining to the corporation, and does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207 (2001).

The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert all reasonable efforts to exhaust all remedies available under the articles of incorporation, by laws, laws or rules governing the corporation

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or partnership to obtain relief he desires is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought had failed. Yu v. Yukayguan, 589 SCRA 588 (2009). •

The complaint cannot demand for the defendants to pay the •

Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation

Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 (1961). Since it is the corporation that is the real party-‐in-‐interest in a derivative suit, then the reliefs prayed for must be for the

Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966).

suing stockholders the value of their respective participation in the assets that have been damaged, for a derivative suit must have cause of action for the benefit of the corporation. Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v.

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In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation. Lim v. Lim-‐Yu, 352 SCRA 216 (2001).

G. Nature of Relief or Remedies Prayed For: •

The allegations of injury to the relators can co-‐exist with those

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Also R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005).




and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003).

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business judgment consideration are not applicable since in such a conflict situation it can hardly be expected that the board or its culprit members would be in a position to exercise proper business judgment to protect the interest of the corporation. In such situation, not even the exhaustion of intra-‐corporate remedy is necessary for a stockholder to bring a derivative suit in behalf of the corporation.

H. Venue for Derivative Suit •

Under Section 5, Rule 1 of the Interim Rules, the proper venue for derivative suit would be in the RTC which has jurisdiction over the principal office of the corporation. Hi-‐Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).

J. Nuisance Suits2 •

I. Business Judgment Rule1 •

Sometimes in may be better for the corporation not to seek

Under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-‐Corporate Controversies, one of the conditions for filing a derivative suit is that the “suit is not a nuisance or harassment suit;” otherwise, the court is authorized to “forthwith dismiss the case.”

relief for a wrong done to it. Since the primary duty of the directors is to increase the net asset value of the corporation, by deriving profits, certain remedies may actually cost the corporation more in terms of future profits. Therefore, when wrong is committed against the corporation, whether to bring a suit for the corporation or not primarily lies within the discretion and exercise of business judgment of the board. And consequently, when the board has in the exercise of its business judgment, decided in good faith that it will not pursue remedies on behalf of the corporation, then the use of the derivative suit mechanism by the stockholder would be improper.

It is only when the board itself has the be author of the wrong being done or having been done to the corporation, where

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Under Section 1(b)(4), Rule 1 of the said Interim Rules, the availability of appraisal right for the act or acts complained of is an important factor in intra-‐corporate suits for the courts to determine whether the suit is a nuisance suit or one brought for harassment.

X. Right to Proportionate Share of Remaining Assets Upon Dissolution (Section 122) Section 122. Corporate liquidation.



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Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting

and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)


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In the liquidation of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon liquidation is what is known as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).

11. Right of Stockholders and Members - 6

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